STRATEGIC MANAGEMENT - I

Project Report on
HERO MOTOCORP

Submitted by,
Group 6,
Nivetha M - ABM10015
Madan - PGP28382
Indu Rani Wary - PGP29141
Anandaraj S - PGP29145
Goutham K - PGP29171

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EXECUTIVE SUMMARY
The project on Hero Motocorp focuses on the complete Industry analysis of two
wheeler Industry and the present status of Hero Motocorp in the same. Two wheeler
Industry in India is one of the largest in the World and one of the fastest growing
Industry where the motorcycle segment accounts for over 70% of industry volumes.
The project focuses on various External analysis of the Two Wheeler Industry and
Internal analysis of Hero MotoCorp. For external analysis PESTEL analysis is done to
scan the general environment pertaining to two wheeler Industry and Porters Five
forces Model is used in order to get an overview of the competitive Environment of the
Industry. For internal analysis Value-chain Analysis is used to assess the chain of
activities that Hero Motocorp performs to deliver valuable and competitive product for
the two wheeler market. Along with Value-chain analysis, VRIO framework is used to
assess the importance of various resources owned by the company and how they can
be leveraged to achieve optimum competitive advantage. To assess various options to
create and to sustain competitive advantage in the two wheeler Industry Value-Net and
PARTS frameworks are used. After various analysis and findings and keeping in view
the present strategic implementation of the company and oligopolistic nature of the
Industry, a few recommendations are given which will enable Hero Motocorp to sustain
its current position as a Market leader in Motorcycle segment and strengthen its
position in scooter segment against its close competitors.

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Contents

EXECUTIVE SUMMARY ........................................................................................................................2

INTRODUCTION .................................................................................................................................4
COMPANY BACKGROUND ....................................................................................................................4
VISION ...........................................................................................................................................4
MISSION .........................................................................................................................................4
POSITIONING .................................................................................................................................5
STRATEGY ......................................................................................................................................5
MANUFACTURING ............................................................................................................................5
DISTRIBUTION ................................................................................................................................5
AUTOMOBILE INDUSTRY IN INDIA ......................................................................................................5
PESTEL ANALYSIS ...........................................................................................................................5
PORTERS 5 FORCES OF THE INDUSTRY ...........................................................................................7
INTERNAL ANALYSIS ..........................................................................................................................8
Critical Success Factors ....................................................................................................................8
VRIO ANALYSIS ...............................................................................................................................8
VALUE CHAIN ANALYSIS ..................................................................................................................9
COMPANY ANALYSIS ...........................................................................................................................9
Business Level Strategy ..................................................................................................................... 10
VALUE NET ANALYSIS .................................................................................................................... 10
PARTS Framework ......................................................................................................................... 12
RECOMMENDATIONS ........................................................................................................................ 13
Exhibit 1: Two-wheelers Player-wise RoCE trends (standalone) ......................................................... 15
Exhibit 2: Two-wheelers Player-wise operating margin trends (standalone) ....................................... 15
Exhibit 3: Two-wheelers Player and segment-wise production ........................................................... 16
Exhibit 4: Estimated two wheeler distribution network (October 2013) ................................................. 16
Exhibit 5: Two-wheeler replacement period rates ................................................................................ 17
Exhibit 6: Economy sub-segment player-wise market share ................................................................. 17
Exhibit 7: Executive sub-segment player-wise domestic market share .................................................. 18
Exhibit 8: Premium sub-segment player-wise domestic market share ................................................... 18
Exhibit 9: Premium sub-segment model-wise domestic market share ................................................... 19
Exhibit 10: Penetration of two-wheelers in rural and urban India ......................................................... 19
Exhibit 11: Trends in Raw Material Localizations ................................................................................. 20
REFERENCES .................................................................................................................................... 20

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INTRODUCTION

The automotive Industry in India is one of the largest in the World and one of the
fastest growing globally. It manufactures over 11 million vehicles and exports about 1.5
million each year. The dominant products of the industry are two-wheelers with a
market share of over 75%. About 91% of the vehicles sold are used by households and
only 9% for commercial purpose. The industry has a turnover of more than USD $35
billion and provides direct and indirect employment to over 13 million people. Hero
MotoCorp occupies over 46% market share in India and shares 26% of the two-wheeler
market in India with Bajaj Auto.

COMPANY BACKGROUND

Hero Motocorp Ltd., formerly known as Hero Honda is an Indian motorcycle and
scooter manufacturer based in New Delhi, India. It started in 1984 as a joint venture
between Hero cycles of India by the Munjal brothers and Honda of Japan. Munjal family
and Honda group both owned 26% stake in the Company.
During the 1980s, the company introduced motorcycles that were popular in India for
their fuel economy and low cost. A popular advertising campaign based on the slogan
'Fill it Shut it Forget it' that emphasized the motorcycle's fuel efficiency helped the
company grow at a double-digit pace since inception. In 2001, the company became
the largest two-wheeler manufacturing company in India and globally. It maintains
global industry leadership till date with 46% market share in India in two-wheeler
category.
In December 2010, Hero Group bought the shares held by Honda when Honda decided
to move out of the joint venture. Subsequently, in August 2011 the company was
renamed Hero MotoCorp with a new corporate identity. In June 2012, Hero Motocorp
approved a proposal to merge the investment arm of its parent Hero Investment Pvt.
Ltd. into the automaker. The decision comes after 18 months of its split from Honda
Motors.

VISION
The story of Hero Honda began with a simple vision - the vision of a mobile and an
empowered India, powered by its two wheelers. Hero MotoCorp Ltd., 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.

MISSION
Hero MotoCorps 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.
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POSITIONING

Hero motocorp uses need based positioning where it serves most or all the needs of a
particular group of customers with tailored set of activities which can best serve those
different needs of group of customers.

STRATEGY

Hero MotoCorps 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.

MANUFACTURING

Hero MotoCorp two wheelers are manufactured across 3 globally benchmarked

manufacturing facilities. Two of these are based at Gurgaon and Dharuhera. The third
and the latest manufacturing plant is based at Haridwar, in the hill state of
Uttarakhand.

DISTRIBUTION

Hero MotoCorps extensive sales and service network now spans over to 6000 customer
touch points. These comprise a mix of authorized dealerships, service & spare parts
outlets, and dealer-appointed outlets across the country.

AUTOMOBILE INDUSTRY IN INDIA

PESTEL ANALYSIS:
Political
Auto policy 2002 formulated by the Indian Government aims to promote
integrated, phased, enduring and self-sustained growth of the Indian automotive
Industry.
Automotive mission plan 2006-2016 by Ministry of Heavy Industries & Public
Enterprises, Government of India has an optimistic vision to make India as the
destination of choice in the World for design and manufacture of automobiles
and auto components with output reaching a level of US$ 145 billion
Proposal to set up Auto city to promote auto clusters in Tamil Nadu and NCR
region.
Economic
The level of inflation employment level per capita is right in India. There is
increase in per-capita income.
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 To encourage export financing there are several concessions such as reduced

interest rates. In addition to this there is weighted tax deduction of up to 150%
for in-house and R&D activities.
Ease of financing to purchase commercial vehicle is increasing in almost 3-fold.
According to the latest data almost 90% commercial vehicle purchase is on
credit.
Social
Perpetual change in lifestyle and increasing inclination towards the trend of
owning private vehicles is a welcome symptom for this Industry
Upward migration of household income levels and Indian customers are price
sensitive
Technological
Promotion of National Automotive Testing and R&D Infrastructure project
(NATRIP) by the Indian Government to support the growth of the auto Industry
There is weighted tax deduction of up to 150% for in-house and R&D activities.
With increasing entry of global companies in the Indian market, there is
tremendous proliferation of technology. Major global players like Audi, BMW, and
Hyundai etc. have set up their manufacturing units in India.
Environmental
Increased connectivity in Rural areas along with urban areas has enabled
penetration into rural markets
Development in infrastructure such as roads and bridges
Legal
Legal provision relating to environmental population by automobiles and also
relating safety measures
The motor vehicles act (1988) focuses on various important aspects such as
concern for road safety standards, pollution-control measures, the need for
encouraging adoption of higher technology in automotive sector etc.

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PORTERS 5 FORCES OF THE INDUSTRY:

Buyer Power:
In developed markets, two wheelers are seen as a luxury rather than a necessity. The
reverse is true for developing/emerging economies. India is one of the lowest
penetrated markets for two wheelers even amongst emerging economies. According to
OECD, as per capita income and penetration levels increase, there is a shift in consumer
preference toward high end/premium motorcycles. India is at an inflexion point where
penetration is low and per capita income is rising. Although income distribution is
skewed, the potential demand opportunity for two wheelers is large.
Bargaining power of Suppliers:
Dependence of OEMs for revenue, reduces bargaining power of suppliers. Contracts
have limited escalation clauses. Trying maintain long term relationships leaves them at
mercy of OEMs. While most components being manufactured within India for OEMs is
an advantage.
Rivalry among existing competitors:
Increasing Competition, New Players Entering the Market and Lack of Revenue
Diversification shows increasing Rivalry. In addition to that margins are low and
therefore the pressure between rivals is high.
Threat of New Entrants:
The initial investment to set up a new plant isn't very large. But the time taken can be
anywhere between 18-24 months. Brownfield investments are faster and less capital
intensive as compared to Greenfield. At the same time, existing players have a large
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dealership network enhancing their brand recognition. While investment and time is not
very high, access to a distribution network make entry difficult.
Threat of Substitutes:
The addressable market for two wheelers is 4x larger than four wheelers. Lower
running costs, larger addressable market and lack of public transport make two
wheelers attractive.

INTERNAL ANALYSIS
Critical Success Factors:

The important success factors for Indian Automobile Industry are:

Increased per capita income - The general trend of increase in per capita income
of the country has led to more people buying vehicles in executive and premium
segments thus increasing the profit margins.
Sales and Distribution network - A widespread distribution network penetrating
most of the rural areas. Hero has almost 6000 touch points across India and
about 50 % of those lies in the rural areas.
Access to new technologies - Most of the domestic players in this industry remain
updated to the current trends with their own technology or obtain them through
Acquisitions / Joint Ventures / Mergers with the global players.
Government/ Regulatory Support - Launch of Automotive Mission Plan,
Formation of Auto City clusters in many states.

VRIO ANALYSIS:
Brand Reputation
Hero is one of the most trusted brands in this segment and it has a very loyal customer
base. This is mainly because of its longer years of association with this industry.
Distribution Network
This proves as a temporary competitive advantage as the company has a widespread
distribution network with over 6000 touch points.
Quality Management
Hero has taken quality management initiatives like Sunrise Quality Circle and other
initiatives. But, the other players are known for their better quality practices.

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Marketing
Hero is known to have produced some of the best marketing and advertising campaigns
like Dhak Dhak, Hum Mein Hai Hero campaign. Hero is known to have worked with
brand consulting major Wolff Olins in the rebranding of its Hero logo and slogan after
the end of the merger.
Technology
Hero got its technology from Honda during the Joint Venture. But post Honda, Hero is
partnering with new firms for R&D. Hero also has 49 percent stake in Erik Buell racing.

VALUE CHAIN ANALYSIS

COMPANY ANALYSIS

From Exhibit 1, the Return on Capital Employed for Hero Honda is the highest
which suggests that Hero has efficiently utilized the capital employed.

Exhibit 2 shows that Hero lacks in terms of operating margin when compared to
Bajaj Auto which has 19.1% operating margin which means that hero can still
improve its operations and effectively be able to pay for its fixed cost.

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We can find from Exhibit 3 that Hero MotoCorp has significant advantage in
terms of production which is nearly 61% more than Bajaj which ranks second in
terms of production.

Exhibit 4 the replacement rate of motorcycles is the highest within 5 years which
suggests that we need to get more loyal customers in order to get repeat
business from them.

From Exhibit 6, 7 and 8 we can see that Hero is clearly the market leader in the
Economy and Executive sub-segments but lost its leadership to Bajaj in the
Premium segment due to Bajaj Pulsar which enjoys 38.2% market share as
shown in Exhibit 9. Hence, Hero should produce more hit bikes in this segment
and try to capture market share.

Business Level Strategy

VALUE NET ANALYSIS

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Substitutors:
Players: Bajaj, Yamaha, TVS
Value Captured:
The Value is captured in the form of a positive feedback loops by
developing hit bikes with new technology and fuel efficiency
Gaining more experience and loyal customers
loyal customers in turn buy new bikes that hero launches making them a hit
Complementors:
Players: Hero MotoCorp has already forged alliances with the Italian based Magneti
Marelli, US-based Erik Buell Racing LLC, Austrian engine developer AVL List GmbH and
Italys Engines Engineering Srl to enhance its R&D capabilities, Spare parts
manufacturers.
Value Captured:
They captured the value by leveraging spare parts and accessories manufactured by
3rd parties for hero bikes and ensuring easy availability of spare parts and accessories
for hero bikes in the market which would influence the customers purchase decision
into buying hero bikes.
Suppliers
Players: Associate companies, Munjal Showa, AG Industries, Sunbeam Auto, Rockman
Industries and Satyam Auto Components, that supply a majority of its components
Value Captured:
There were 50 quality improvement projects over the years with its suppliers. Hero also
introduced Green Vendor Development Programme covering 130 vendors across the
country. These programmes help in improving the quality of the final product and
reduce the wastes at supplier levels as well. This enables the company to maintain high
standards of quality which improves the customer perception about the company.
Customers
Players: Direct Consumers and dealers
Value Captured:
They have produced fuel efficient bikes and excellent distribution and service networks
which helped gain customer loyalty. Hence, the customers are willing to wait in order to
purchase a hero bike.
Hero Advantage programme gives customers the means to service their motorcycles at
select Hero service centers. This has increased the sales of Hero spares which
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contributes to around 6% of the companys revenues. Also, the programmes gives

customer the guarantee of a quality product which helps in higher resale value. This
means the customers are willing to pay more for the two wheeler.

PARTS Framework
Players

Hero has been involved in several improvement projects with its suppliers thus
developing several new players in the NCR region. After the Honda split, the company
has several joint ventures with firms like Magneti Marelli for better engine
performances. These players help Hero in maintaining its firm hold on the Indian two
wheeler market by providing reduced consumption and efficiency in the products.
Added Value
Hero Advantage - This unique programme which can be registered online -- is the
most competitively priced in the two-wheeler industry. It covers the longest distance
(70,000 km), provides the longest warranty (up to five years) and encompasses the
largest number of components. The programme is tailored to help Dealers / SSPs retain
customers, and in the process, help them improve revenue from the sale of spares and
services. Hero Advantage was launched in 2009, and went national during 2012-13.
Over 9.5 million policies have been sold, with over 45% retail conversions.
High resale value - By expanding across the country with over 6000 customer touch
points, Hero bikes offer higher resale value than its competitors. The quality of service
and access to spares are much above the industry standard.
Rules
Hero Honda CBZ - Indian bikers were subjected to 100 cc bikes, until Hero Honda
launched the CBZ in 1999. At that time, there was nothing in India which was as
powerful on 2-wheels as the CBZ. The Hero Honda CBZ was way ahead of other bikes
at that time.
Hero Impulse - The first product from Hero Motocorp, the impulse ushers in a new
class of motorcycles with its charming adventure bike poise matched by an equally
competent off-road friendly dynamics. Unveiled amidst a lot of fanfare at the brand
launch in London, Hero MotoCorp ensured that Hero Impulse has what it takes to be
the center of attraction, since it has no competition in the Indian market currently.
Tactics
While Hero is the market leader in the two wheeler industry, providing services for the
large number of motorcycles across the country will be difficult. The absence of a good
service network can become the worst nightmare for the giant. To achieve this, Hero
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encouraged production of spares by other players. This ensured higher service level and
helped to increase customer satisfaction. The quality and life of the motorcycles were
also better. This in turn increased the resale value of Hero products. Thus Hero created
this complexity of an extensive service network and won over its rivals.
Scope
Hero being one of the leaders in the market brings new technology into their production
line with speed and agility, producing hit bikes which the customers prefer.

RECOMMENDATIONS

Based on the extensive analysis of the worlds largest 2 wheeler company, we arrived at
the following recommendations:
Export Market:
The dynamics of most markets (except Africa) are similar to India where two wheelers
are predominantly used for transportation rather than lifestyle products. Among African
countries, Nigeria accounts for 40% of all two wheelers sold with annual demand of
1.2mn. Since these markets are at a nascent stage where two wheelers are used mostly
for commercial purposes, they are skewed towards low cost products. This provides
huge export opportunity for Indian OEMs as economy and affordability levels grow.
While Indian OEMs face stiff competition from Chinese counterparts, Indian products
are perceived to be of a better quality at the same time, though slightly higher priced.
Among South-East Asian countries, Indonesia, Thailand and Vietnam are the fastest
growing markets with dynamics very similar to India. Both Bajaj Auto and TVS Motors
have opened subsidiaries in Indonesia to tap the third largest two wheelers market.
Companies here face stiff competition from established Japanese brands such as Honda
and Yamaha. India products enjoy a price advantage over the Japanese two wheelers
with similar levels of quality. Though these countries offer new opportunities, Hero will
be late to enter such markets.
Brazil is a key market amongst Indian OEMs, but they command a very small share.
Other important markets include Colombia and Central America. Products exported are
mostly premium bikes. Moreover, the market is dominated by 100-150cc bikes which is
a positive for Indian players. Again, Japanese players (Honda and Yamaha) control 90%
of the market with Honda having 75% market share.
Rural Markets in India:
While Indian OEMs are looking for export opportunities, the local sales still account for
most of their revenues. While there has been a decreasing trend in two wheeler sales in
metros and tier I cities, the companies have started exploring the rural markets. Strong
rural demand and rising popularity of scooters helped two wheeler makers increase
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sales even as commercial vehicle sales plummeted in a slowing economy. This is so

because the majority of India lives in the rural masses.
It has also been observed that the rural purchasing power is also growing faster than
the urban in the last six quarters. One of the key factors to succeed in these markets is
to reach out. While Hero has an advantage of having over 6000 customer touch points,
this still is not enough for the huge rural demand. As seen in Exhibit 10, the two
wheeler penetration is still very low at 14% for a large market with over 16 million
households. Hero should extend its current advantage of a strong brand and large
distribution network to tap into this growing market.
Local Suppliers:
As Indian OEMs look to other countries for expansion, one of the attractions towards
these brands are the low price high quality products. This has been possible because of
the low cost of production. Exhibit 11 shows the usage of parts from local suppliers by
various two wheeler companies. While all the Indian OEMs have started importing more
parts for manufacturing, it has been significant for Hero and TVS who are known for
their quality of product.
The rise in imports have been due to the new emission and safety norms by the
regulators. This shows the lack of quality suppliers for some of the parts needed for
manufacturing. Hence, Hero should concentrate on changing this trend positively. This
can be achieved by encouraging local suppliers. The central and state governments
have also started recognizing SMEs in manufacturing sector as important players for the
growth of the country. This move will reduce the costs while also making sure the lead
time of supply is minimal.
Technology:
The Hero Honda split was announced in December 2010. The Hero Group bought 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 Nepal) 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 of
the joint venture alone.
The threat ahead for Hero MotoCorp is to continue their technologically superior
products and upgrade them quickly over time. This can be achieved by investing
extensively in R&D. The company started taking such measures starting the foundation
for a new and exclusive R&D facility that will be complete in 2 years. Hero currently
pays royalty to Honda for using its technology. This agreement ends in FY14 after
which Hero has to rely completely on its own technology.
Meanwhile, Hero has bought a 49.2% stake in Erik Buell Racing, a contender in
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Superbike Championship. This gives them a solid platform to test and use high-end
technology for their premium offerings. Besides, this is also a global marketing
campaign for the company. Also, Italian components giant Magneti Marelli SpA. And
motorcycle major Hero MotoCorp have signed a joint venture agreement aimed at the
production of powertrain systems for the two-wheeler market. As these actions show,
Technology is one area where Hero is currently lagging. Hero has to continue its
investments in this area in order to quickly catch up on its rivals like Bajaj, Honda, and
Yamaha etc. .,

Exhibit 1: Two-wheelers Player-wise RoCE trends (standalone)

Exhibit 2: Two-wheelers Player-wise operating margin trends

(standalone)

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Exhibit 3: Two-wheelers Player and segment-wise production

Exhibit 4: Estimated two wheeler distribution network (October

2013)

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Exhibit 5: Two-wheeler replacement period rates

Exhibit 6: Economy sub-segment player-wise market share

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Exhibit 7: Executive sub-segment player-wise domestic market

share

Exhibit 8: Premium sub-segment player-wise domestic market

share

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Exhibit 9: Premium sub-segment model-wise domestic market

share

Exhibit 10: Penetration of two-wheelers in rural and urban India

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Exhibit 11: Trends in Raw Material Localizations

REFERENCES

Dess, G., Lumpkin, G.T., Eisner, A.B., McNamara, G., Kim, B. (2013). Strategic Management:
Analyzing the External environment of the firm (6th Ed.). McGraw Hill Education (India), 16, pg.

no. 87-109

Dess, G., Lumpkin, G.T., Eisner, A.B., McNamara, G., Kim, B. (2013). Strategic Management:
Assessing the internal environment of the firm (6th Ed.). McGraw Hill Education (India), 16, pg.

no. 118-143

Dess, G., Lumpkin, G.T., Eisner, A.B., McNamara, G., Kim, B. (2013). Strategic Management:
Business-Level Strategy: Creating and Sustaining Competitive Advantages (6th Ed.). McGraw Hill
Education (India), 16, pg. no. 202-236
Retrieved from http://www.crisil.com/index.jsp
Retrieved from www.cmie.com
Retrieved from www.heromotocorp.com

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