Description
The Japanese success in conquering and creating new
markets has become a real challenge to numerous
industries throughout the globe, with a diversification
strategy for penetrating the hardest markets and their
segments. This paper discusses the successful penetration
of the American luxury car market by the Japanese
automakers.The Japanese achieved their enviable position through
the use of a diversification and pricing strategy at the entry
and penetrating stages and a product strategy at the line
stretching stage to acquire, hold and expand its market
share.
97sma228
THE JAPANESE MULTI-STAGED DIVERSIFICATION
AND PRICING STRATEGIES, RELEVANT
TO THE LUXURY CAR MARKET
Allen S. Marber, Roosevelt University
Syrous K. Kooros, Nicholls State University
ABSTRACT
This paper discusses the successful penetration into the
American luxury car market by the Japanese automakers,
Honda, Toyota and Nissan, and the pricing strategies that
enabled them to "unlock the keys" and open a market
heretofore considered the exclusive territory of the
American and German automobile companies.
INTRODUCTION
The Japanese success in conquering and creating new
markets has become a real challenge to numerous
industries throughout the globe, with a diversification
strategy for penetrating the hardest markets and their
segments. This paper discusses the successful penetration
of the American luxury car market by the Japanese
automakers.
The U.S. luxury car market seemed impregnable,
whereas, each major automotive group appeared so
entrenched that many experts, even the most optimistic
ones had very little to say about the Japanese opportunities
for profit and success. Yet, the Japanese auto industry has
been so successful that it caused the German car
manufacturers to vacate the $30-50,000 segment. Shortly
thereafter Mercedes-Benz (M-B) introduced the "S" class
luxury sedans starting at $50-60,000. It is only recently
that the Germans are making a push in the lower ranges of
the luxury market which have been dominated by the
Japanese since their introduction of the Acura, Lexus and
Infiniti brands.
The Japanese achieved their enviable position through
the use of a diversification and pricing strategy at the entry
and penetrating stages and a product strategy at the line
stretching stage to acquire, hold and expand its market
share.
The Japanese were able to embellish their products
with what consumer behaviorists call a "tangible value."
Later on, once they were entrenched, they were able to
convey to their products those "intangible values" that
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enabled them to further expand their share of the U.S.
luxury car market.
DIVERSIFICATION STRATEGY
Diversification strategy can be subsumed into three
categories: related, unrelated, and mixed. In related
diversification strategy, complement goods (or service)
come to mind. For example, the production of steel by an
automobile company is related diversification. Our
imagination can be expanded to include vertical integration
and or the production and distribution of different classes
of the same product, such as an automobile, especially
when this is accomplished by different divisions such as
General Motors. Such a divisional structure, so long as it
does not duplicate the economies of scale and scope can be
very beneficial since decentralization of decision making
improves effectiveness and long term performance.
Product diversification is usually recommended when
the firm has reached its stage of maturity (Kooros 1996).
It is at this stage that the firm can undertake new
acquisitions, divest itself from "weak performing
business", become a multinational, and initiate vertical
integration (Thompson and Strickland 1995). However,
"diversification doesn't need to become a strategic priority
until a company begins to run out of growth opportunities
in its core business" (Thompson and Strickland 1995). In
the auto industry forward integration may entail the
creation of owned distributorship, repair shops, financing,
and parts stores. Generally, diversification makes a
strategic sense, especially when it fills a void, reinforces
the company's core business, and contributes to the growth
and profitability of the organization. The danger of not
diversifying is enormous: superior performance is much
harder to achieve; new technological innovation can
drastically reduce the demand for the product; and the
probability of the business cycle adversely affecting the
business is high. Diversification in a product class
provides the opportunity to cover all customer's segments.
General Motor's product diversification ranging from
Chevrolet Cavalier to Cadillac Fleetwood and Limousine
is a good example of such a diversification. Alvin Toffler
attributes this diversification to entail over 300
combinations of options only in the Buick Division.
Diversification begins to make sense when competitive
forces and market growth rate considered in combination
is both strong and rapid, respectively.
Related diversification, especially in the automobile and
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similar industries have several advantages:
1. It utilizes the same resources, and thus gains both
economics of scale and scope.
2. It utilizes similar technologies except at varying
degrees of quality; capitalizes on the existing
know-how, and is a case of know-how, transfer;
and thus...
3. The business expands the use of common core,
and the firm's competencies.
Related diversification in the case of automobile
industry is tantamount to horizontal integration and
expansion within the firm, whereas product configuration
remains intact, but its size, quality, performance and thus
price varies to serve or meet the needs of vertically
different income and preference groups, that is different
market segments.
This paper provides an analysis of how this quasi-
diversification strategy has been adopted by the Japanese
automakers.
FROM THE TANGIBLE TO THE INTANGIBLE
Theoretically, price represents the value of a good or
service for both the seller and the buyer. Consumer
behavior states that the value of a good or service can
involve both tangible and intangible factors.
An example of a tangible factor is the cost saving a
consumer can get from buying a new, high quality car; an
example of an intangible factor is a consumer's pride in the
ownership of a BMW, for example, rather than a Toyota or
another similar car. Therefore, in order for a consumer to
choose the latter, the lack of an intangible value has to be
offset by tangible values, such as price, performance,
customer service or future status appreciation from holding
onto the merchandise.
A key determinant of the future price of a product is
the consumer demand for that good. Through product
research, the manufacturer is informed of the specific
commodities needed for the market and of their respective
prices. It is also true that, producers do not always target
consumers, in general, rather, they select specific social
groups, or segments who would be most interested in the
merchandise, and would be willing and able, of course, to
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pay the price tag. For the luxury market, one can identify
status seekers, brand loyal customers, service/features
shoppers, and price shoppers as target groups.
THE U.S. LUXURY CAR MARKET: MID 1980s
A study of the 1986 U.S. luxury car market allowed the
Japanese to make several general observations that might
be relevant to this paper. The 1986 luxury market was
dominated by the American brands such as Cadillac,
Lincoln, Buick and Oldsmobile, which comprised of up to
70% of all car sales. The German automakers Mercedes-
Benz, BMW, Audi and Porsche, known for their long
tradition of producing top luxury and performance cars,
accounted for the other 28%, leaving a tiny share to the
British and the rest of Europe. (Wall Street Journal 1989).
These European brands carried huge intangible values
built in as their status and prestige, as well as, tangible
values such as excellent performance. Producers of these
cars were mainly involved in non price competition, and
emphasized their cars' distinctive attributes, rather than
their prices. They mostly targeted the first two groups of
customers, and were enjoying almost 100,000 units of sales
annually.
The success of the German automakers was even felt in
Japan. The triumph of BMW came in the early 1980's
when after several years of losses, it managed to gain
control of almost 80% of the Japanese luxury imported car
market, and tripled its sales by 1986.
Unusual Revealed Preference in Demand Curve
With the westernization (or adoption of western
paradigms of behavior and values) of Japan, as well as, the
eventual success of the Germans, and the oil crises in the
1970's (the American cars becoming less popular due to
their heavy gas consumption), made the Japanese
automakers such as Honda, Toyota and Nissan seize the
opportunities in the U.S. upscale market. Prior to this
event, the underlying Japanese automakers proved
themselves to be perfect high quality small car producers,
with a large share of the U.S. market, through well
established owned distribution systems with numerous
dealerships.
Honda research revealed that, while transgressing to the
lower end of the price range, the demand for luxury cars in
the U.S. turned out to be more and more elastic. This
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meant consumers sensitivity to price changes and thus, the
amount of cars purchased. This phenomenon revealed new
possibilities for price competition and the expansion of this
market segment. The evidence of this estimation was
proved by the existence of something called a "close-to-
luxury" car market where the Japanese were competing
successfully against the American producers. For the
situation just described, pricing theory suggests a
penetrating strategy that might be employed by a
newcomer, endeavoring to command its own share of the
market. Basically, the strategy entails setting the lowest
possible price for a product supplied in large quantities.
Such a strategy discourages potential competitors, and
reduces per unit production and distribution costs as sales
rise, and thus it, enables the company to attract many more
potential buyes.
Honda Challenges Upscale Market Through Penetration Strategy
The first challenge to the U.S. upscale market was
made by Honda in 1986 when it opened its new division
called Acura (Ad Week's Marketing Week 1986). The
new division introduced two luxury models, Legend and a
sports coupe Integra. The Legend with a $19,298 price in
the lower end of the upscale market, was selected as the
flagship. Prices were set at least $13,000 below the
German's, and $6,000-8,000 below the American cars in
order to offset their initially low intangible value. The ads
claiming that to purchase a Legend was almost the same as
buying a BMW, because the new V6 had the same
performance features (Automotive Industries 1986).
Honda targeted the consumers who were moving up from
small cars, although they were still unable to afford
German or American prices. For the young status seekers,
Acura introduced the Integra sports model. It was
emphasized that Integra contained the characteristics of its
German or American versions, which at the price of
$9,300 to $10,400 was quite affordable (Automotive
Industries 1986). It took Acura awhile to advance its cars
to the image and status of a European luxury car.
To accomplish its penetrating strategy, Acura kept
building more dealerships, where its number increased
from 150 on the day of entry in 1986 to nearly 300 by
1988. The success did not stay away for too long for
Acura. After a slow start, Acura almost reached its
targeted sales of 55,000 during its first year, (52,869 cars
was sold in 1986). This amount was doubled in 1987,
reaching its peak of 143,708 units sold in 1991. In order to
satisfy the American customers, Acura used a 'price
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haggling" approach, giving room for some price
negotiations. It also attempted to vary the price even in the
narrow range ($19,200-21,400 for the Legend, and
$9,200-11,000 for the Integra). This included replacing
additional luxury elements like CD players, types of seats
and bonuses, to name a few.
Acura's Skimming Pricing Strategy
Acura's management realized that their new products
had already obtained a strong foothold by the end of 1986,
and a slight increase in price would not hurt the demand.
Another argument was that higher price tags would
contribute to the image of luxury. It was further learned
that low prices compared to German prices undermined the
status the customers were seeking. Therefore, Acura
started in 1987 with a 2.3% price increase on its cars. By
1988, Integra had been selling for $10,915 (+3.5%), and
the flagship Legend carried the price of $23,675 (+2.5%).
However, sales data indicate that this price increase did not
push the sales down. In fact, through the entire period of
the late 1980's, prices kept rising, bringing new revenues
to Acura. At the end of 1989, after some modifications,
Legend carried the nominal price of $30,840 but,
nevertheless, was still able to keep up with the pace of
sales. By undertaking the described measures, Acura
management gradually began to move from a penetrating
pricing strategy to a market share strategy. By 1988,
Acura already had a 7.2% share of the regular luxury car
segment (Wall Street Journal 1989). The end of the
penetrating strategy characterized Honda's start.
With the introduction of the new model in 199 1, Acura
moved away from a market share pricing strategy to a
skimming pricing strategy. It is positioned as the
"ultimate" luxury car, and uses TV ads depicting ultra
luxury to back up its claim. Acura becomes the number
one imported luxury car in the U.S. surpassing M-B. Thus,
Acura in its pricing and promotion strategy attempted to
convey those intangible consumer behavior values of
prestige, status and pride. Acura further moved to
introduce a sports model NSX at the price of $70,000 plus.
THE U.S. MARKET IN THE 1990s
Toyota and Nissan Entry Strategy
The success and substantial profits of Acura on the
upscale car market could not be left without due analysis
and attention of its competitors Toyota and Nissan. Before
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entering the market, these automakers had done a thorough
market research, which showed the possibility of large
profits and decent market share. For the next ten years,
Infiniti (Nissan's brand) projected a 60% increase in
$50,000 and up households, while Lexus (Toyota's brand)
was looking for a 90% increase in those households, which
at that time numbered ten million. Therefore, the
$30,000+ market was expected to grow about 14% over
the first half of the decade (Advertising Age 1 989).
Recession, strong dollar, and changing consumer tastes
had already walloped the Europeans at that time. Their
market share of the U.S. car market had dropped from
4.5% in 1986 to 3.2% in 1989. Mercedes-Benz lost over
one billion dollars in revenues during the previous three
years. The Japanese were entering the automarket at a time
when buyers were already ridiculing the price value
relationship of German cars (Ad Week's Marketing Week
1990). The auto luxury segment demand analysis
suggested an almost perfect strategy for Toyota and Nissan,
marketing high performance cars presumably equal in
quality to Mercedes and BMW, but priced somewhere
between those and such luxury U.S. models Cadillac and
Lincoln. The combination of price and quality was
supposed to attract the loyal owners of the cheaper Nissan
and Toyota models who were ready to trade up, as well as,
the affluent buyers put off by the higher prices for
Mercedes and BMW brought on by the strong German
mark (Business Week 1990).
In other words, Toyota and Nissan believed that the
American consumer would react to their entries in the same
manner they did to Honda's Acura. So, they delivered the
tangible factors of price, quality, and performance. After
a short while, the American consumer would relate to the
intangible factors as they had to the German cars.
The Lexus Launch
The Toyota managers had announced that they expected as
many as half of the Lexus buyers would be their move up
customers and/or individuals between 40-45 years of age with
a household income of $100,000 a year (Economist 1989).
In order to fulfill its goals, Lexus came up with two models
in September 1989: the flagship LS400 priced in the range of
$35,000-40,000, depending on the accessories included. The
base price of $35,000 was about $10,000 less than the
competitive BMW 535i and Mercedes 300E, and some $6,000 higher
than the Lincoln Continental. Another model, a sports sedan
ES250, carried the price tag of $21,050. This amount was
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close enough to Acura's Legend that they could compete in
the $20,000+ range. Toyota realized, however, that
competition would be indirect as the underlying cars
belonged to different classes (Fortune 1989; Wall Street
Journal 1989).
Because of the lack of experience in the given market
segment the ES250 sales did not go well. Among other
factors, the price was believed to be accountable for the
stagnation in sale. It was argued that the image of luxury
created by Toyota was undermined by the low price. The
consumers did not perceive the model as it was thought
they would, because the price tag did not look "luxury" at
all. Taking these facts into account, Lexus had to cut its
projected 1990 sales from 75,000 units to 60,000. The
flagship was also facing similar problems. Many buyers
were opting for pricier, fully loaded versions of the LS400,
where the dealers had waiting lists for cars with leather
upholstery and CD changers. At the same time, the
$35,000 stripped down, cloth seat model was collecting
dust in the dealers lots (Business Week 1990). By means
of applying price haggling deals and model variations,
Lexus eventually managed to fulfill its 16,000 units task in
1989 and sell 63,534 versus the 60,000 which was
expected in 1990. The sales reached a peak in 1992 with
92,890 sold. It was a success that even BMW, with all its
prestige and experience, never managed to attain.
The expansion of Lexus dealerships and the necessity
to pay off its loans compelled Toyota to enter into the
phase of higher profit margins, which were then followed
by gradual increases in price. With the division earned
sufficient credibility, it was believed that higher prices
would not push the demand down, but, on the contrary, as
was suspected, they would contribute to the image of
"luxury". In May 1990, Lexus announced a 2.9% base
price increase ($1,000) on the flagship LS400, while
leaving the ES250 price unchanged. The $36,000 price tag
even after its raise, still separated Lexus from its closest
competitor, the M-B300E, by almost $10,000. Upon
examining the data, one will notice that by 1994 the LS400
model carried the approximate price of $55,000.
However, the gained popularity and image, that is the
intangible values, helped Lexus to prevent a drop in sales.
"We introduced the U.S. car at $35,000 in 1989, and now
it sells at $51,500", a Toyota official said, "Our job was to
make it worth the additional $16,500."
The Infiniti Launch
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Three months following the Lexus' launch in the U.S.,
another Japanese automaker Nissan introduced its own
models on the upscale market under the Infiniti label.
Infiniti attempted to define "Japanese luxury," with Zen
like advertisements featuring rocks and pussy willow buds,
and rice paper screens in its showrooms. It entered the
market with two models, a flagship Q45, and a sports
coupe M-30, priced at $38,000 and $23,500 respectively
(Advertising Age 1989). Infiniti set fixed prices, thus
avoiding the previous (Toyota) tactics of price haggling
deals and model variations. At these prices, the cars looked
like bargains next to the M-B 420SEL which had a smaller
V8 engine than the Q45 and had a list price of more than
$60,000. The Jaguar XJ6 had a price tag starting at
$48,000. The BMW 3 series that competed with the M-30
had a start at $24,650 and ranged up to $30,000. It was
believed that one price deals made customers feel more
confident when making a purchase, and it removed the
need to negotiate with salespeople (Wall Street Journal
1988).
In contrast to Lexus, Infiniti advanced its prices very
little, endeavoring to emphasize "more luxury" built into its
models and correct the mistakes of the ES250. The
number of dealerships on the day of entry was limited to
65, in contrast to Acura which had more than double that
figure and was adding to that number on a daily basis.
Although, the strategy looks exactly identical to the one
undertaken by Lexus, Infiniti sales were lagging 25% to
35% behind the estimates of Nissan's goals and the
expected units sold had been changed to 15% less of the
35,000 to 40,000 cars projected (Business Week 1990).
The reason for the weak sales at Infiniti was not due to
the pricing strategy of Nissan, but it was attributed to the
type of advertising pursued in the early years. Another
factor that contributed to weak sales was its resemblance in
the front and side view to a Ford Taurus. Why pay twice as
much for an Infiniti! In 1991 Infiniti raised its price on the
Q45 for the first time by 2.6% to $39,000, where 31,890
units were sold compared to 23,960 in 1990. As was
expected, a large proportion of the customers were the
Nissan's move up owners or those who selected the Q45
when trading it off against Mercedes-Benz or BMW.
Acura, Lexus, and Infiniti Pricing Strategies
Now, let us compare the pricing strategies undertaken
by each individual division, Acura, Lexus and Infiniti. The
analysis made in this paper allows us to name two general
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strategies that the Japanese automakers employed to
succeed in that upscale market. They were a penetration
pricing strategy employed by Acura, and the demand-based
pricing strategy used by Lexus and Infiniti. The difference
between the two is apparent. Honda came up with the
lowest possible prices and the largest possible distribution
system of 150 dealerships, when its Acura models hit the
market, speculating on more mass sales and the possible
intangible value appreciation that would lead to higher
profit margins in the future.
Lexus and Infiniti, on the other hand, started with a
limited number of dealerships (80 and 65 respectively),
and more advanced and upscale prices. Their prices fell
into the range between the U.S. Cadillac and the German
BMW 500 series and Mercedes 300 series models. The
two Japanese divisions speculated on the changing tastes in
the American society, and the devastating effect that the
newly introduced "gas-guzzler" tax had on the German
models. This gasoline tax was one of the important factors
that made the Japanese cars more attractive to consumers.
Unlike Acura with its mass invasion, Lexus and Infiniti
started very carefully, just "nibbling" the market and
establishing marketing relationships with potential
consumers.
Although Lexus and Infiniti started approximately in
the same price range, they used different approaches when
promoting their models. Advertising its Q45, Infiniti tried
to create the Japanese image of luxury by exhibiting rice
paper screens and rocks with plants in its showrooms.
Lexus, on the contrary, emphasized excellent performance,
showing the superior handling of the LS400 on highways
and sand roads, as well as wealthy couples enjoying the
comfort and luxury of the LS400. Toyota also allowed for
more price variation, using price haggling deals and
equipping the models with additional luxury accessories,
whereas Infiniti stuck to a one price strategy with no price
haggling.
A step that made the strategies of the three, Acura,
Lexus and Infiniti, look similar was their gradual
transformation from market-share-oriented policies to
higher profit margins, exhibiting a skimming strategy. The
earlier success of Acura and Lexus enabled them to start
moving in this direction after they had been on the market
for 3-4 months, whereas Infiniti dared to raise the Q45
price only one year after its entry into the market.
Eventually, all the divisions increased the base prices of
their flagships an average of $13,000 to $16,000 in the
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four-five years of selling history in the U.S.
CONCLUSION
The Japanese were able to penetrate the U.S. luxury car
market through the use of pricing and diversification
strategy as well as an understanding of American consumer
behavior. Their market research confirmed a heretofore
unrecognized elasticity at the lower end of the U.S. luxury
car market which had been considered by all producers to
be inelastic. In addition, their studies confirmed the
existence of a "close to luxury" segment.
This "glitch" in the demand curve enabled Honda's
Acura to use a penetrating pricing entry strategy coupled
with an intensive dealership program (150 vs. 80 & 65)
which allowed for maximum distribution. Toyota's Lexus
and Nissan's Infiniti introduced a few years after Acura,
chose a more selective distribution pattern, as well as, a
more upscale pricing strategy.
Once the market was entered and established, all three
exhibited a similar skimming pricing strategy. They were
all successful with this strategy, because they understood
American consumer behavior. The Japanese Big Three
gave the luxury car buyer an excellent value. They
translated this advantage first into the tangible consumer
behavior relevant to factors of price and performance, and
then into the tangible consumer behavior, factors of pride
and status.
REFERENCES
"Upscale Stretching to Infiniti," Advertising Age,
(July 24, 1989), S8+.
"A Pricey Approach: Honda's Acura Line," Ad Week's
Marketing Week, (February 24, 1986), 56.
"Euro-imports Hit a Speed Bump Called Lexus," Ad
Week's Marketing Week, (January 1, 1991), 14-15.
"Acura: A New Dawn for American Honda," Automotive
Industries, (April 1986), 31-33.
"No Joyride for Japan," Business Week, (January 15,
1990), 20-21.
"Actually, I Drive a Lexus," The Economist, (June 3,
1989), 66.
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"Toyota's Lexus-New Luxury Car," Fortune, (August 14,
1989, 62-66.
Kooros, Syrous K. (1996), "Matching Globalization
Strategies with Nation-States," in Business Research
Yearbook: Global Business Perspectives, A. Alfakhaji,
ed. New York: University Press of America.
Thompson, Arthur A. Jr. and A. J. Strickland, III (1995),
Strategic Management: Concepts and Cases.
Homewood, IL: Irwin 1995.
"Auto Dealers to Sell Toyota's New Lexus in Their
Japanese Style," The Wall Street Journal, (July 19,
1988), B4-5.
"Try to Crack the Luxury Car Market," The Wall Street
Journal, (August 7, 1989), B4-3.
Page 12
doc_786263561.pdf
The Japanese success in conquering and creating new
markets has become a real challenge to numerous
industries throughout the globe, with a diversification
strategy for penetrating the hardest markets and their
segments. This paper discusses the successful penetration
of the American luxury car market by the Japanese
automakers.The Japanese achieved their enviable position through
the use of a diversification and pricing strategy at the entry
and penetrating stages and a product strategy at the line
stretching stage to acquire, hold and expand its market
share.
97sma228
THE JAPANESE MULTI-STAGED DIVERSIFICATION
AND PRICING STRATEGIES, RELEVANT
TO THE LUXURY CAR MARKET
Allen S. Marber, Roosevelt University
Syrous K. Kooros, Nicholls State University
ABSTRACT
This paper discusses the successful penetration into the
American luxury car market by the Japanese automakers,
Honda, Toyota and Nissan, and the pricing strategies that
enabled them to "unlock the keys" and open a market
heretofore considered the exclusive territory of the
American and German automobile companies.
INTRODUCTION
The Japanese success in conquering and creating new
markets has become a real challenge to numerous
industries throughout the globe, with a diversification
strategy for penetrating the hardest markets and their
segments. This paper discusses the successful penetration
of the American luxury car market by the Japanese
automakers.
The U.S. luxury car market seemed impregnable,
whereas, each major automotive group appeared so
entrenched that many experts, even the most optimistic
ones had very little to say about the Japanese opportunities
for profit and success. Yet, the Japanese auto industry has
been so successful that it caused the German car
manufacturers to vacate the $30-50,000 segment. Shortly
thereafter Mercedes-Benz (M-B) introduced the "S" class
luxury sedans starting at $50-60,000. It is only recently
that the Germans are making a push in the lower ranges of
the luxury market which have been dominated by the
Japanese since their introduction of the Acura, Lexus and
Infiniti brands.
The Japanese achieved their enviable position through
the use of a diversification and pricing strategy at the entry
and penetrating stages and a product strategy at the line
stretching stage to acquire, hold and expand its market
share.
The Japanese were able to embellish their products
with what consumer behaviorists call a "tangible value."
Later on, once they were entrenched, they were able to
convey to their products those "intangible values" that
Page 1
97sma228
enabled them to further expand their share of the U.S.
luxury car market.
DIVERSIFICATION STRATEGY
Diversification strategy can be subsumed into three
categories: related, unrelated, and mixed. In related
diversification strategy, complement goods (or service)
come to mind. For example, the production of steel by an
automobile company is related diversification. Our
imagination can be expanded to include vertical integration
and or the production and distribution of different classes
of the same product, such as an automobile, especially
when this is accomplished by different divisions such as
General Motors. Such a divisional structure, so long as it
does not duplicate the economies of scale and scope can be
very beneficial since decentralization of decision making
improves effectiveness and long term performance.
Product diversification is usually recommended when
the firm has reached its stage of maturity (Kooros 1996).
It is at this stage that the firm can undertake new
acquisitions, divest itself from "weak performing
business", become a multinational, and initiate vertical
integration (Thompson and Strickland 1995). However,
"diversification doesn't need to become a strategic priority
until a company begins to run out of growth opportunities
in its core business" (Thompson and Strickland 1995). In
the auto industry forward integration may entail the
creation of owned distributorship, repair shops, financing,
and parts stores. Generally, diversification makes a
strategic sense, especially when it fills a void, reinforces
the company's core business, and contributes to the growth
and profitability of the organization. The danger of not
diversifying is enormous: superior performance is much
harder to achieve; new technological innovation can
drastically reduce the demand for the product; and the
probability of the business cycle adversely affecting the
business is high. Diversification in a product class
provides the opportunity to cover all customer's segments.
General Motor's product diversification ranging from
Chevrolet Cavalier to Cadillac Fleetwood and Limousine
is a good example of such a diversification. Alvin Toffler
attributes this diversification to entail over 300
combinations of options only in the Buick Division.
Diversification begins to make sense when competitive
forces and market growth rate considered in combination
is both strong and rapid, respectively.
Related diversification, especially in the automobile and
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similar industries have several advantages:
1. It utilizes the same resources, and thus gains both
economics of scale and scope.
2. It utilizes similar technologies except at varying
degrees of quality; capitalizes on the existing
know-how, and is a case of know-how, transfer;
and thus...
3. The business expands the use of common core,
and the firm's competencies.
Related diversification in the case of automobile
industry is tantamount to horizontal integration and
expansion within the firm, whereas product configuration
remains intact, but its size, quality, performance and thus
price varies to serve or meet the needs of vertically
different income and preference groups, that is different
market segments.
This paper provides an analysis of how this quasi-
diversification strategy has been adopted by the Japanese
automakers.
FROM THE TANGIBLE TO THE INTANGIBLE
Theoretically, price represents the value of a good or
service for both the seller and the buyer. Consumer
behavior states that the value of a good or service can
involve both tangible and intangible factors.
An example of a tangible factor is the cost saving a
consumer can get from buying a new, high quality car; an
example of an intangible factor is a consumer's pride in the
ownership of a BMW, for example, rather than a Toyota or
another similar car. Therefore, in order for a consumer to
choose the latter, the lack of an intangible value has to be
offset by tangible values, such as price, performance,
customer service or future status appreciation from holding
onto the merchandise.
A key determinant of the future price of a product is
the consumer demand for that good. Through product
research, the manufacturer is informed of the specific
commodities needed for the market and of their respective
prices. It is also true that, producers do not always target
consumers, in general, rather, they select specific social
groups, or segments who would be most interested in the
merchandise, and would be willing and able, of course, to
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pay the price tag. For the luxury market, one can identify
status seekers, brand loyal customers, service/features
shoppers, and price shoppers as target groups.
THE U.S. LUXURY CAR MARKET: MID 1980s
A study of the 1986 U.S. luxury car market allowed the
Japanese to make several general observations that might
be relevant to this paper. The 1986 luxury market was
dominated by the American brands such as Cadillac,
Lincoln, Buick and Oldsmobile, which comprised of up to
70% of all car sales. The German automakers Mercedes-
Benz, BMW, Audi and Porsche, known for their long
tradition of producing top luxury and performance cars,
accounted for the other 28%, leaving a tiny share to the
British and the rest of Europe. (Wall Street Journal 1989).
These European brands carried huge intangible values
built in as their status and prestige, as well as, tangible
values such as excellent performance. Producers of these
cars were mainly involved in non price competition, and
emphasized their cars' distinctive attributes, rather than
their prices. They mostly targeted the first two groups of
customers, and were enjoying almost 100,000 units of sales
annually.
The success of the German automakers was even felt in
Japan. The triumph of BMW came in the early 1980's
when after several years of losses, it managed to gain
control of almost 80% of the Japanese luxury imported car
market, and tripled its sales by 1986.
Unusual Revealed Preference in Demand Curve
With the westernization (or adoption of western
paradigms of behavior and values) of Japan, as well as, the
eventual success of the Germans, and the oil crises in the
1970's (the American cars becoming less popular due to
their heavy gas consumption), made the Japanese
automakers such as Honda, Toyota and Nissan seize the
opportunities in the U.S. upscale market. Prior to this
event, the underlying Japanese automakers proved
themselves to be perfect high quality small car producers,
with a large share of the U.S. market, through well
established owned distribution systems with numerous
dealerships.
Honda research revealed that, while transgressing to the
lower end of the price range, the demand for luxury cars in
the U.S. turned out to be more and more elastic. This
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meant consumers sensitivity to price changes and thus, the
amount of cars purchased. This phenomenon revealed new
possibilities for price competition and the expansion of this
market segment. The evidence of this estimation was
proved by the existence of something called a "close-to-
luxury" car market where the Japanese were competing
successfully against the American producers. For the
situation just described, pricing theory suggests a
penetrating strategy that might be employed by a
newcomer, endeavoring to command its own share of the
market. Basically, the strategy entails setting the lowest
possible price for a product supplied in large quantities.
Such a strategy discourages potential competitors, and
reduces per unit production and distribution costs as sales
rise, and thus it, enables the company to attract many more
potential buyes.
Honda Challenges Upscale Market Through Penetration Strategy
The first challenge to the U.S. upscale market was
made by Honda in 1986 when it opened its new division
called Acura (Ad Week's Marketing Week 1986). The
new division introduced two luxury models, Legend and a
sports coupe Integra. The Legend with a $19,298 price in
the lower end of the upscale market, was selected as the
flagship. Prices were set at least $13,000 below the
German's, and $6,000-8,000 below the American cars in
order to offset their initially low intangible value. The ads
claiming that to purchase a Legend was almost the same as
buying a BMW, because the new V6 had the same
performance features (Automotive Industries 1986).
Honda targeted the consumers who were moving up from
small cars, although they were still unable to afford
German or American prices. For the young status seekers,
Acura introduced the Integra sports model. It was
emphasized that Integra contained the characteristics of its
German or American versions, which at the price of
$9,300 to $10,400 was quite affordable (Automotive
Industries 1986). It took Acura awhile to advance its cars
to the image and status of a European luxury car.
To accomplish its penetrating strategy, Acura kept
building more dealerships, where its number increased
from 150 on the day of entry in 1986 to nearly 300 by
1988. The success did not stay away for too long for
Acura. After a slow start, Acura almost reached its
targeted sales of 55,000 during its first year, (52,869 cars
was sold in 1986). This amount was doubled in 1987,
reaching its peak of 143,708 units sold in 1991. In order to
satisfy the American customers, Acura used a 'price
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haggling" approach, giving room for some price
negotiations. It also attempted to vary the price even in the
narrow range ($19,200-21,400 for the Legend, and
$9,200-11,000 for the Integra). This included replacing
additional luxury elements like CD players, types of seats
and bonuses, to name a few.
Acura's Skimming Pricing Strategy
Acura's management realized that their new products
had already obtained a strong foothold by the end of 1986,
and a slight increase in price would not hurt the demand.
Another argument was that higher price tags would
contribute to the image of luxury. It was further learned
that low prices compared to German prices undermined the
status the customers were seeking. Therefore, Acura
started in 1987 with a 2.3% price increase on its cars. By
1988, Integra had been selling for $10,915 (+3.5%), and
the flagship Legend carried the price of $23,675 (+2.5%).
However, sales data indicate that this price increase did not
push the sales down. In fact, through the entire period of
the late 1980's, prices kept rising, bringing new revenues
to Acura. At the end of 1989, after some modifications,
Legend carried the nominal price of $30,840 but,
nevertheless, was still able to keep up with the pace of
sales. By undertaking the described measures, Acura
management gradually began to move from a penetrating
pricing strategy to a market share strategy. By 1988,
Acura already had a 7.2% share of the regular luxury car
segment (Wall Street Journal 1989). The end of the
penetrating strategy characterized Honda's start.
With the introduction of the new model in 199 1, Acura
moved away from a market share pricing strategy to a
skimming pricing strategy. It is positioned as the
"ultimate" luxury car, and uses TV ads depicting ultra
luxury to back up its claim. Acura becomes the number
one imported luxury car in the U.S. surpassing M-B. Thus,
Acura in its pricing and promotion strategy attempted to
convey those intangible consumer behavior values of
prestige, status and pride. Acura further moved to
introduce a sports model NSX at the price of $70,000 plus.
THE U.S. MARKET IN THE 1990s
Toyota and Nissan Entry Strategy
The success and substantial profits of Acura on the
upscale car market could not be left without due analysis
and attention of its competitors Toyota and Nissan. Before
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entering the market, these automakers had done a thorough
market research, which showed the possibility of large
profits and decent market share. For the next ten years,
Infiniti (Nissan's brand) projected a 60% increase in
$50,000 and up households, while Lexus (Toyota's brand)
was looking for a 90% increase in those households, which
at that time numbered ten million. Therefore, the
$30,000+ market was expected to grow about 14% over
the first half of the decade (Advertising Age 1 989).
Recession, strong dollar, and changing consumer tastes
had already walloped the Europeans at that time. Their
market share of the U.S. car market had dropped from
4.5% in 1986 to 3.2% in 1989. Mercedes-Benz lost over
one billion dollars in revenues during the previous three
years. The Japanese were entering the automarket at a time
when buyers were already ridiculing the price value
relationship of German cars (Ad Week's Marketing Week
1990). The auto luxury segment demand analysis
suggested an almost perfect strategy for Toyota and Nissan,
marketing high performance cars presumably equal in
quality to Mercedes and BMW, but priced somewhere
between those and such luxury U.S. models Cadillac and
Lincoln. The combination of price and quality was
supposed to attract the loyal owners of the cheaper Nissan
and Toyota models who were ready to trade up, as well as,
the affluent buyers put off by the higher prices for
Mercedes and BMW brought on by the strong German
mark (Business Week 1990).
In other words, Toyota and Nissan believed that the
American consumer would react to their entries in the same
manner they did to Honda's Acura. So, they delivered the
tangible factors of price, quality, and performance. After
a short while, the American consumer would relate to the
intangible factors as they had to the German cars.
The Lexus Launch
The Toyota managers had announced that they expected as
many as half of the Lexus buyers would be their move up
customers and/or individuals between 40-45 years of age with
a household income of $100,000 a year (Economist 1989).
In order to fulfill its goals, Lexus came up with two models
in September 1989: the flagship LS400 priced in the range of
$35,000-40,000, depending on the accessories included. The
base price of $35,000 was about $10,000 less than the
competitive BMW 535i and Mercedes 300E, and some $6,000 higher
than the Lincoln Continental. Another model, a sports sedan
ES250, carried the price tag of $21,050. This amount was
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close enough to Acura's Legend that they could compete in
the $20,000+ range. Toyota realized, however, that
competition would be indirect as the underlying cars
belonged to different classes (Fortune 1989; Wall Street
Journal 1989).
Because of the lack of experience in the given market
segment the ES250 sales did not go well. Among other
factors, the price was believed to be accountable for the
stagnation in sale. It was argued that the image of luxury
created by Toyota was undermined by the low price. The
consumers did not perceive the model as it was thought
they would, because the price tag did not look "luxury" at
all. Taking these facts into account, Lexus had to cut its
projected 1990 sales from 75,000 units to 60,000. The
flagship was also facing similar problems. Many buyers
were opting for pricier, fully loaded versions of the LS400,
where the dealers had waiting lists for cars with leather
upholstery and CD changers. At the same time, the
$35,000 stripped down, cloth seat model was collecting
dust in the dealers lots (Business Week 1990). By means
of applying price haggling deals and model variations,
Lexus eventually managed to fulfill its 16,000 units task in
1989 and sell 63,534 versus the 60,000 which was
expected in 1990. The sales reached a peak in 1992 with
92,890 sold. It was a success that even BMW, with all its
prestige and experience, never managed to attain.
The expansion of Lexus dealerships and the necessity
to pay off its loans compelled Toyota to enter into the
phase of higher profit margins, which were then followed
by gradual increases in price. With the division earned
sufficient credibility, it was believed that higher prices
would not push the demand down, but, on the contrary, as
was suspected, they would contribute to the image of
"luxury". In May 1990, Lexus announced a 2.9% base
price increase ($1,000) on the flagship LS400, while
leaving the ES250 price unchanged. The $36,000 price tag
even after its raise, still separated Lexus from its closest
competitor, the M-B300E, by almost $10,000. Upon
examining the data, one will notice that by 1994 the LS400
model carried the approximate price of $55,000.
However, the gained popularity and image, that is the
intangible values, helped Lexus to prevent a drop in sales.
"We introduced the U.S. car at $35,000 in 1989, and now
it sells at $51,500", a Toyota official said, "Our job was to
make it worth the additional $16,500."
The Infiniti Launch
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Three months following the Lexus' launch in the U.S.,
another Japanese automaker Nissan introduced its own
models on the upscale market under the Infiniti label.
Infiniti attempted to define "Japanese luxury," with Zen
like advertisements featuring rocks and pussy willow buds,
and rice paper screens in its showrooms. It entered the
market with two models, a flagship Q45, and a sports
coupe M-30, priced at $38,000 and $23,500 respectively
(Advertising Age 1989). Infiniti set fixed prices, thus
avoiding the previous (Toyota) tactics of price haggling
deals and model variations. At these prices, the cars looked
like bargains next to the M-B 420SEL which had a smaller
V8 engine than the Q45 and had a list price of more than
$60,000. The Jaguar XJ6 had a price tag starting at
$48,000. The BMW 3 series that competed with the M-30
had a start at $24,650 and ranged up to $30,000. It was
believed that one price deals made customers feel more
confident when making a purchase, and it removed the
need to negotiate with salespeople (Wall Street Journal
1988).
In contrast to Lexus, Infiniti advanced its prices very
little, endeavoring to emphasize "more luxury" built into its
models and correct the mistakes of the ES250. The
number of dealerships on the day of entry was limited to
65, in contrast to Acura which had more than double that
figure and was adding to that number on a daily basis.
Although, the strategy looks exactly identical to the one
undertaken by Lexus, Infiniti sales were lagging 25% to
35% behind the estimates of Nissan's goals and the
expected units sold had been changed to 15% less of the
35,000 to 40,000 cars projected (Business Week 1990).
The reason for the weak sales at Infiniti was not due to
the pricing strategy of Nissan, but it was attributed to the
type of advertising pursued in the early years. Another
factor that contributed to weak sales was its resemblance in
the front and side view to a Ford Taurus. Why pay twice as
much for an Infiniti! In 1991 Infiniti raised its price on the
Q45 for the first time by 2.6% to $39,000, where 31,890
units were sold compared to 23,960 in 1990. As was
expected, a large proportion of the customers were the
Nissan's move up owners or those who selected the Q45
when trading it off against Mercedes-Benz or BMW.
Acura, Lexus, and Infiniti Pricing Strategies
Now, let us compare the pricing strategies undertaken
by each individual division, Acura, Lexus and Infiniti. The
analysis made in this paper allows us to name two general
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strategies that the Japanese automakers employed to
succeed in that upscale market. They were a penetration
pricing strategy employed by Acura, and the demand-based
pricing strategy used by Lexus and Infiniti. The difference
between the two is apparent. Honda came up with the
lowest possible prices and the largest possible distribution
system of 150 dealerships, when its Acura models hit the
market, speculating on more mass sales and the possible
intangible value appreciation that would lead to higher
profit margins in the future.
Lexus and Infiniti, on the other hand, started with a
limited number of dealerships (80 and 65 respectively),
and more advanced and upscale prices. Their prices fell
into the range between the U.S. Cadillac and the German
BMW 500 series and Mercedes 300 series models. The
two Japanese divisions speculated on the changing tastes in
the American society, and the devastating effect that the
newly introduced "gas-guzzler" tax had on the German
models. This gasoline tax was one of the important factors
that made the Japanese cars more attractive to consumers.
Unlike Acura with its mass invasion, Lexus and Infiniti
started very carefully, just "nibbling" the market and
establishing marketing relationships with potential
consumers.
Although Lexus and Infiniti started approximately in
the same price range, they used different approaches when
promoting their models. Advertising its Q45, Infiniti tried
to create the Japanese image of luxury by exhibiting rice
paper screens and rocks with plants in its showrooms.
Lexus, on the contrary, emphasized excellent performance,
showing the superior handling of the LS400 on highways
and sand roads, as well as wealthy couples enjoying the
comfort and luxury of the LS400. Toyota also allowed for
more price variation, using price haggling deals and
equipping the models with additional luxury accessories,
whereas Infiniti stuck to a one price strategy with no price
haggling.
A step that made the strategies of the three, Acura,
Lexus and Infiniti, look similar was their gradual
transformation from market-share-oriented policies to
higher profit margins, exhibiting a skimming strategy. The
earlier success of Acura and Lexus enabled them to start
moving in this direction after they had been on the market
for 3-4 months, whereas Infiniti dared to raise the Q45
price only one year after its entry into the market.
Eventually, all the divisions increased the base prices of
their flagships an average of $13,000 to $16,000 in the
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four-five years of selling history in the U.S.
CONCLUSION
The Japanese were able to penetrate the U.S. luxury car
market through the use of pricing and diversification
strategy as well as an understanding of American consumer
behavior. Their market research confirmed a heretofore
unrecognized elasticity at the lower end of the U.S. luxury
car market which had been considered by all producers to
be inelastic. In addition, their studies confirmed the
existence of a "close to luxury" segment.
This "glitch" in the demand curve enabled Honda's
Acura to use a penetrating pricing entry strategy coupled
with an intensive dealership program (150 vs. 80 & 65)
which allowed for maximum distribution. Toyota's Lexus
and Nissan's Infiniti introduced a few years after Acura,
chose a more selective distribution pattern, as well as, a
more upscale pricing strategy.
Once the market was entered and established, all three
exhibited a similar skimming pricing strategy. They were
all successful with this strategy, because they understood
American consumer behavior. The Japanese Big Three
gave the luxury car buyer an excellent value. They
translated this advantage first into the tangible consumer
behavior relevant to factors of price and performance, and
then into the tangible consumer behavior, factors of pride
and status.
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