6. Natural selection: the case of Honda

This is a draft from a forthcoming book ‘Out-Think, Out-Move: Real-Time Strategy & Execution in an Uncertain World’. It focuses on business in Russia but the insights should be applicable to a much wider audience. Feedback and comments are welcome (marcus@powermaps.net). Earlier sections are here:

  1. Forget Strategic Plans!
  2. Adapt or Die
  3. Pal’chinskii’s Principles
  4. Ashby’s Law of Requisite Diversity
  5. Surviving collapse in your core market: the FujiFilm case

Success stories about the organisations in the east dont appear to be popular in the west. This may be due, in part, to the eastern approach to strategy being baffling to those educated in the western tradition. This is why many eastern successes are retold in western terms. Nowhere is this more evident than in the story of Honda’s success in the US motorcycle industry (below). However, this ‘translation’ results in the loss of important insights about the eastern approach to strategy that could be beneficial for western-educated audiences.

British companies, like BSA, used to dominate the lucrative US motorcycle market. But in the 1960s the fortunes of British firms endured a dramatic decline in the face of competition from a new rival, the Japanese firm Honda. The UK government responded by commissioning a report from the Boston Consulting Group (BCG) to provide them with ‘strategic alternatives’ for its national champions. This 120 page report detailed how the upstart Japanese rival had outcompeted its more illustrious British rivals. Honda, they surmised, had leveraged its position as the leading ‘low price producer’ in Japan to “force entry into the US market” and, after establishing this bridgehead, Honda aggressively expanded by targeting new market segments. So compelling was this narrative that it was eventually written up as Harvard Business School (HBS) case and has been taught in western business schools since. It epitomised a “best practice” business strategy.

Some years later, the six Japanese executives who had led Honda’s success in the US market accepted an invitation to discuss what happened from an American management consultant, Richard Pascale. Pascale was something of a rarity at the time. He believed US companies should “look at what it was that Japanese companies were doing better than them, and to learn their lessons”. His invitation to the Honda executives was an attempt to do just that. His published findings — in what would later become known as the ‘Honda B’ paper — were revelatory. Far from having the “streamlined strategy” described by BCG, Honda didn’t appear to have a strategy at all — not in the western sense of the word. Their success, according to Pascale, was more the result of “miscalculation, serendipity, and organisational learning”.

In the 1950s Honda had become the market leader in the Japanese motorcycle industry with a reputation for making powerful motorbikes. But the lessons of Japan’s chaotic post-war years taught Honda to continually seek out new niches to exploit. One of these was a growing need amongst small businesses for a lighter, less expensive motorcycle to make deliveries on. To meet this need Honda launched the 50cc Supercub in 1958 and was “engulfed by demand”. Their success in a new segment encouraged them to try and break into the lucrative US motorcycle market. So the following year two Honda executives made an exploratory visit to the US after which the decision to enter the US market was made. But “in truth”, one of the executives revealed to Pascale, we “had no strategy other than the idea of seeing if we could sell something in the United States”.

Honda’s entry to the US went badly as they were hit by a series of major setbacks. They had difficulties obtaining a currency permit from the Japanese Ministry of Finance. This meant the funds available for the venture turned out to be only a fraction of what they needed. To save money the executives had to share an apartment, with two of them sleeping on the floor, and could only afford to rent a run-down warehouse at the edge of town (so had to commute there on their Supercubs) and had to stack all the motorcycles themselves in order to save on labour costs. Then their problems got worse. The powerful motorbikes they had been selling developed mechanical failure. Americans, it turned out, drove further and faster than the Japanese and were driving Honda’s flagship motorbikes into the ground. The Executives had no choice but to halt further sales until the R&D team back in Japan found a solution to the mechanical problem.

Then, at their lowest point, the Honda team received a phone call out of the blue. A buyer for a large retailer was interested in selling their bikes. Not the powerful (but flawed) flagship motorbikes Honda were trying to sell, but the little 50cc Supercubs the Honda Executives had been riding around on. At first they hesitated. They believed Americans loved powerful motorbikes and didn’t want to contradict their market by selling the Supercubs. But they were desperate. Eventually, they reasoned that the large retailer, as a sporting goods chain, represented a different segment so this would reduce the risk of tarnishing their brand image amongst the core market. So they agreed to the deal. Then, to their surprise (and delight) they watched as sales of their motorbikes rocketed. Just five years later nearly one out of every two motorcycles sold in the US was a Honda.

Honda’s success, as the six Executives freely admitted, didn’t come from the ‘focused strategy’ attributed to it by BCG. Honda’s focus had been to sell their powerful flagship motorbikes but this had broken down due to unexpected mechanical failures. They never had the intention of selling the Supercubs. Instead, they merely had the good sense to take advantage of an opportunity that arose when they needed it. Even their hugely successful ad campaign lauded in the HBS business case — “You Meet the Nicest People on a Honda” — turned out to be a happy accident. The slogan had been created by a local university student for a course assignment, whose teacher had sent it to the advertising agency working with Honda. The Executives, again, had merely had the good sense to adopt it.

Some modern commentators argue that “Honda has been too successful too often for accident and serendipity to provide a persuasive explanation of its success”. Yet what Pascale’s conversations with the Honda Executives’ revealed was an approach to strategy which has been completely ignored by western business schools. As Pascale concluded, the “Japanese are somewhat distrustful of a single “strategy” … for any idea that focuses attention does so at the expense of peripheral vision”. Honda had entered the US market with the intent to “sell something” but they were not going to follow a plan prepared in advance. Instead, the Executives had the freedom to make the next best move in front of them, whatever they decided that was. Their strategy was to adapt. This was one of the key lessons Pascale wanted US firms to learn: “how an organisation deals with miscalculations, mistakes and serendipitous events [is] crucial to success over time”:

“Rarely [in Japanese firms] does one leader (or a strategic planning group) produce a bold strategy that guides a firm unerringly. Far more frequently, the input is from below. It is this ability of an organisation to move information and ideas from the bottom to the top and back again in continuous dialogue that the Japanese value above all things. As this dialogue is pursued, what in hindsight may be [seen as] “strategy” evolves”. — The Honda Effect. R.Pascale. (1996)

Honda’s approach to strategy is a particularly eastern approach. A broad direction is set but the moves they make will depend more on adapting to local conditions in real-time than sticking to a plan. The eastern approach to strategy is succinctly demonstrated by Honda’s successful entry to the US market echoes and it echoes ‘Pal’chinskii’s Third Principle’ — where we must:

Create effective feedback loops between decision-makers and those closest to the action in order to learn quickly and adjust as you go.

The Honda Executives were comfortable with the idea of using their ‘peripheral vision’ to discover opportunities along the way and adapt when the situation demanded it. And Honda’s HQ — after setting the direction (to enter the US) — would have recognised that sitting thousands of miles from the frontline meant they had to trust their Executives to take the decisions locally. This approach to strategy — setting a direction and adapting along the way — can appear baffling to those raised in the strong strategic planning traditions of the west. But do Russians, sitting at the intersection between the west and the wast, find it too baffling as well? Or, can the historical Russian paradox of looking both east and west provide it a competitive advantage over their western counterparts, by learning the lessons from the east more effectively?

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Govern the state by being straight-forward; wage war by being crafty. — Laozi