MANAGEMENT DEVELOPMENT INSTITUTE Business Strategy Formulation Term Project Project Report on Hero Honda Megha Jain 11PGHR28 1 Acknowledgement I would like to express sincere thanks to our guide Prof. Harsh Wardhan Mishra , for providing us an opportunity to do such a project. I would also like to thank him for his invaluable guidance, excellent supervision throughout the course of this report. Also the pragmatic and invaluable advice of my guide kept me motivated & enthusiastic to go through critical learning of the subject and timely complete our report. Lastly I would like to thank all our colleagues and friends for their direct or indirect support and appreciation. 2 Index 1. Executive Summary 4 2. Firm’s Strategic Intent 5 a. Vision 5 b. Firm's Mission 5 c. Firm's Strategy 5 3. External or Environmental Analysis 5 a. General Environment of your firm 5 i. Economic 5 ii. Political & Legal 6 iii. Socio-cultural 6 iv. Technological 6 b. Industrial/Competitive Environment of your firm 6 i. Bargaining Power of the consumer 6 ii. Threat of new entry 7 iii. Threat from Rivals 7 iv. Bargaining power of the supplier 7 v. Threat from Substitute Products 7 4. Internal Analysis: 8 a. Critical Success Factors (CSFs) 8 b. Value-Chain activities 8 c. Resource based View 9 d. SWOT Analysis of the firm 10 5. Strategic Performance 10 6. Financial Analysis. 11 7. Strategy recommendation 13 8. Conclusion. Limitations & Future Research. 14 9. References 15 10. Annexure 16 i. Critical Success Factors 16 ii. Value Chain Analysis 17 iii. Resources Based View 18 a. Resources and Capabilities 18 b. Classification of Resources 18 c. VRIO frame work 19 iv. SWOT Analysis 20 v. Financial Analysis 21 a. Current year ratios 22 b. Ratio Analysis (2007-2010) 23 c. Competitive Ratio Analysis 25 d. Financial Statements of HeroMotoCorp 26 3 1. Executive Summary Hero Honda Motors Ltd. is the world's largest manufacturer of two - wheelers, based in India. In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a calendar year. In December 2010, the Board of Directors of the Hero Honda Group decided to terminate the joint venture between Hero Group of India and Honda of Japan in a phased manner. The Hero Group would buy out the 26% stake of the Honda in JV Hero Honda. Under the joint venture Hero Group could not export to international markets (except Sri Lanka) and the termination would mean that Hero Group can now export. Since the beginning, the Hero Group relied on their Japanese partner Honda for the technology in their bikes. So there are concerns that the Hero Group might not be able to sustain the performance alone. However, Hero MotoCorp had declared its financial results for the quarter ended September 2011, the first full quarter without Honda as a shareholder, which showed that sale as well as profit had hit at an all-time high. The company is undergoing a strategic change with the termination of joint venture and thus changed availability of resources at its disposal. Hero MotoCorp invested a huge amount in rebranding exercise and resource development and it paid off. Hence it would be interesting to analyse the strategy of this company that underwent a huge change from a successful joint venture to running the business on its own now. The organization’s Vision, Mission and Strategy are studied to determine its strategic intent. The other activities pursued to research on the strategic analysis of Hero involved studying the financial performance of the firm in the current scenario and compare it with the past and also with its competitors. Basically all the analysis done was tried to fit into various frameworks of strategic analysis like resource based view and value chain analysis. The organization’s Internal and external environment analysis is also done to ascertain potential threats and opportunities. Its strategic performance in post 2000’s are analysed in terms of both implications of strategy adopted & financial performance. The phased dissolution of the alliance between Honda and Hero group of India means that the technology pact between the two would continue till 2014 and Honda would sell its complete stake in Hero by March 2012. Hence analyses and evaluation of the performance of Hero Honda or Hero MotoCorp (now) is done and future recommendations to Hero Group of India are also presented. Its competencies and competitive advantage was arrived at by analysing its strategies in these frameworks. Also the limitations of this research project and avenues for future research are discussed. 4 2. Hero Honda Strategic Intent a. Vision - The story of Hero Honda began with a simple vision - the vision of a mobile and an empowered India, powered by its bikes. Company's new identity, reflects its commitment towards providing world class mobility solutions with renewed focus on expanding company's footprint in the global arena. b. Mission - Hero's mission is to become a global enterprise fulfilling its customers' needs and aspirations for mobility, setting benchmarks in technology, styling and quality so that it converts its customers into its brand advocates. The company will provide an engaging environment for its people to perform to their true potential. It will continue its focus on value creation and enduring relationships with its partners. c. Strategy - Hero's key strategies are to build a robust product portfolio across categories, explore growth opportunities globally, continuously improve its operational efficiency, aggressively expand its reach to customers, continue to invest in brand building activities and ensure customer and shareholder delight. 3. Enviornmental Analysis a. General Environment – Economic . Share of motorcycles was 17% in the year 2006-2007 and is growing at 44.8%, Hero has 57% market share in Indian two wheeler markets. One of its most famous models like Splendour, sells more than 1 million units per year . Weighted Tax Deductions up to 150% for in house R&D activities. Reduced Interest rates for export financing. Economy has grown over 8.5% per annum for last 5 years. Slow down and Economic recession impacts the sales drastically . After the split up with Honda, hero is free to explore export opportunities Political & Legal . Auto policy of Indian government promotes self sustained growth, 100% foreign direct investment and revised tariff structure to facilitate development of manufacturing capabilities as opposed to mere assembly without giving undue protection, ensure balanced transition to open trade; promote increased competition in the market and enlarge purchase options to the Indian customer. 5 . Auto Fuel Policy – promotes auto fuel quality consistent with the required levels of vehicular emissions norms and environmental quality, ensuring availability of appropriate auto fuel/fuel mixed at minimum social costs across the country. Environmental regulations - extensive governmental regulations regarding vehicle emission levels, noise, safety and levels of pollutants generated by its production facilities are likely to become more stringent. The country adopted the BS 3 emissions standards in April 2010, which are more stringent than the previous norms. Such regulations in the future increase the company's compliance costs which may have an adverse impact on the profitability. Socio-cultural . Life style change – Daily life involves more travelling, people also buy motorcycles for passion and drive. This leads to increased sales . Purchasing power - 4th largest economy on purchasing parity index. There is an increase in per capita income levels Indian Customers . Education – People are highly educated and aware today, hence they are becoming more price sensitive as well. They look for fuel efficient and low maintenance vehicles . Brand conscious – Brand and technological image also affects the buying process of consumers. Technological . Focus on R & D - Hero has been doing constant improvement in technological features coming up with cutting edge technology with every new model of Splendour . Hero leveraged the technological edge it got from Honda. But after the split up, it would take some time for hero to build its own technological edge. Now, hero is free to acquire technology from other players . Bajaj is giving tough competition on some of the features like electric start and trademark DTS-si Engine. b. Industrial/Competitive Environment Bargaining Power of the consumers - Bargaining power of customers is very high, due to availability of options. Hero Honda was able to control bargaining power of customers by its affordable pricing along with best quality in its products. Hero Honda has done very good job in order to satisfy customers. Pricing, customer service and quality is maintained. Importantly in post buy service Hero Honda is NO.1 in world. 6 Threat of new entry - Suzuki, Honda and TVS have come up with their own bikes which were previously Hero Splendor’s playground. Mahindra and Mahindra after buying out Kinetic motors is also entering this segment. Honda motorcycles ltd has expanded its facility in Manesar in Gurgaon and has also operationalized its brand new facility in Alwar in Rajastan. These developments bode tough times for Hero MotoCorp as it would now lack the advance technology of Honda. New entrants are coming up with bikes which are good in the looks segment. This will help to attract young customers among whom Hero’s time tested quality are not that popular. Today, with the prices of fuel spiraling to scary heights, there's unwieldy pressure on corporate as well as business groups to ease the stress on the environment. E-Bikes are here as a natural consequence. Threat from Rivals - The main rivalry is from Bajaj Auto, TVS Motor and Honda motorcycles. The Indian two wheeler industry’s growth rate remains intact in spite of so many negative factors like fuel price hike, increase in prices of two wheelers etc.