Indian Institute of management Kozhikode

2009

Interdependence of Resource, Capabilities and Competencies in

determining Company’s Strategy and Performance

A case of “HERO HONDA”Submitted byDerrick Vijayan

CONTENTS

Abstract...................................................................................................................................................3

1. Hero Honda and Hero Group..........................................................................................................4

2. Three Phases of Strategic Intent in Hero Honda.............................................................................4

3. Indian Automotive industry............................................................................................................5

5. Resource based View of Strategy Development:............................................................................6

6. Resources and capability Built within manufacturing Organisation................................................7

7. Classification of Resources..............................................................................................................8

8. Resource Under VRIO Framework (Barney, 1986)..........................................................................8

9. Strategic Implication and Performance..........................................................................................9

10. Phase 2:1994-1999...................................................................................................................10

11. Phase 3: 1999-2009..................................................................................................................13

12. Sales and Revenue Performance..............................................................................................13

13. Porter five forces analysis........................................................................................................14

14. Strategic Shift...........................................................................................................................16

15. Porter’s Five Business level strategies......................................................................................18

16. Sales and Financial Performance..............................................................................................18

Conclusion.............................................................................................................................................19

References............................................................................................................................................20

ABSTRACT

In this report, we have discussed here the interdependence between resource, capability and Competency of an organization and the result of such interdependence on the company’s Strategy and Performance. A company can achieve sustainable competitive advantage in dynamic environment by such interlinking only.

We have taken the case of Hero Honda. Hero Honda started its motorcycle business in 1984 after collaboration with Honda, Japan. They started with the production of CD-100 first 4 stroke bike in India. In the last three decades they have undergone sea change in their strategy. We will study the change management in an agile firm like Hero Honda.

The Last three decades have been divided in three phases. During first phase of 1984-1994, they stressed on resource view of Strategic development. During the phase two of 1994-1999, they made their Business strategy as market penetration and Consolidation. During this phase they launched their most successful Bike “Splendor”. During third phase of 1999-2009, they have strategic focus on market and Product Diversification in the wake of increasing competition from external market.

The study carried out in this report comprises of views from various Literature including Firm resources and Sustained competitive advantage (1986,’91) by jay Barney, Competitive strategy (1980), Competitive Advantage (1985) Why are firms Successful? (1990) by Michael Porter, Resource based view of manufacturing strategy (2002) by Roger R. Shroeder, Kimberley A. bates and The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation by Robert M. Grant.

1. HERO HONDA AND HERO GROUP

"Hero", the brand name symbolizes the steely ambition of i t s founders the Munjal brothers. Hero came into being in the year 1956 c h a n g i n g i t s e l f from a modest manufacturer of bicycle components during early 1940's to the world's largest bicycle & two-wheeler manufacturer today (Hero Honda Motors Ltd, started in the year 1984 as a JV between Hero Group & Honda Motors, Japan). Such a Journey was propelled by one vision - to build long-lasting relationships with everyone, including workers, dealers and vendors. This philosophy has paid rich dividends for Hero Honda through the past three decades.

Hero, now a name synonymous with two-wheelers in India is a multi-unit, multi-product, geographically diversified Group of companies under the flagship of Hero Group. The group rolls its own steel, through fully integrated operations, which makes critical components such as free wheels for their bicycles. They have the vision to simultaneously diversify into many varieties of ventures, including product designing, ITES, finance and insurance.

The prime motive of the Hero Group is "Engineering Satisfaction" and it has become a way of life and a part of the work culture of the Group.

From now on, we would mean Hero Honda Motors Ltd. whenever we state either “Hero Honda” or “HHML” and the Hero Group in totality when we state simply “Hero”.

2. THREE PHASES OF STRATEGIC INTENT IN HERO HONDA

We have divided the whole duration of 1984-2009 in three phases for understanding the relationship between their resources, capabilities and Competencies in developing their strategy.

Phase 1: 1984-1994

During this Period, they launched first 4-stroke bike CD-100. They stressed more on Developing dealer and supplier network, they had focussed on operational efficiency. They followed market diversification strategy as their Business strategy with campaign “Fill it, Shut it, Forget it”.

Phase 2:

They launched “Splendor” during this period which is a multi segment targeted Robust vehicle. With this product which is largest selling bike in the world

they focused on market consolidation across country. The market punch line of their business strategy of market consolidation was “Desh ki dhadkan”

Phase 3:

In the wake of outside competition from Bajaj, TVS, Honda, they started with Business strategy of Aggressive Marketing and Market Diversification. Their campaign during this period was “Har Gaon – Har Aangan”. At Resource development level, they stressed upon Product Innovation and Product Diversification

3. INDIAN AUTOMOTIVE INDUSTRY

Indian Automotive sector deals with four forces working on It.

1. Government policies: Overall Economic Growth has driven this market in recent time. Policy impact on Oil Prices as well as Lower duties and taxes on auto parts have direct effect on this sector

2. New Product launches: Contemporary products to satisfy various levels of need of Indian consumers have filled the market.

3. Cost Competitiveness: Although the variety is enough in market, yet the sub 125cc vehicle segment is very much cost competitive. Also India is fast becoming low cost manufacturing hub.

4. Increasing consumer demand: It has been mainly driven from high Income of Indian market. Other factors are easier financing, Lower interest rates, urbanization, Poor public Transportation system.

5. RESOURCE BASED VIEW OF STRATEGY DEVELOPMENT:

Phase 1: 1984-1994During This period resources developed by hero Honda can be seen from various frameworks point of view.5.1 Internal AnalysisStrength:1. Operational: They stressed upon Six sigma, Just in time, ERP. Through

Anciliarization, they achieved close virtual Integration with suppliers. They developed very good Distribution and after sales Network.Some of the companies they collaborated with to develop in house production units are: Showa, Puch, Kawasaki.

2. Cost Competitiveness through development of In-house production of completely knocked down kits (CKDs).

3. Marketing: they started with Fill it shut it Forget it campaign which showed the robustness of their bike. They had complete knowhow of Indian Consumer Behavior from past experience of cycle business and they had a well established Distribution Method in entire India.

4. Financial Strength: with Zero debt, They had their say in decision making capability. Also they have shown double digit growth till date.

5. HR Strength: They had no organized labour Union. The higher management wanted the employees to grow with Hero Honda. They had internal employee philosophy of “ Hero is growing Grow with Hero”

Weakness:1. In the 1st phase they had over dependence on Honda.2. The no of Product launched were very less3. They didn’t cater to all the segment of Market4. Customers were left with very few options.5. R&D expenditure was low.

6. RESOURCES AND CAPABILITY BUILT WITHIN MANUFACTURING ORGANISATION

The manufacturing Capability and resources of Hero Honda can be seen under the framework developed by (St. John and Harrison, 1999). The resources and Capabilities are divided under three categories namely proprietary Process and Equipment, Internal learning and External learning.

7. CLASSIFICATION OF RESOURCES

The Resource of Hero Honda can be classified under three heads namely Physical capital (Williamson, 1975), Human Resources (Becker, 1964), Organisational (Tomer, 1987).

8. RESOURCE UNDER VRIO FRAMEWORK (BARNEY, 1986)

Resource based view developed by jay Barney (1986, 91) take the assumption of Firm resource heterogeneity and Firm resource Immobility. To achieve sustainable competitive advantage, an organisation should have its resources as Valuable, rare, Imperfectly Inimitable and Organisational capability.

8.1 Resources as seen under VRIO frame work:1. Value

Highly fuel efficient, even though Medium powered

Robust Bike for Rural environmentGood relationship with Customer Increased loyalty Resulted in High revenue

2. RareAnciliarization Vertical and Virtual integration First mover advantageConsistent Double digit growth since InceptionMarket growth by 22% but it grew by 35%

3. InimitableDistributor networkBrand value due to Honda “It’s the Honda that makes it Hero” Legendary campaign of “Fill it, shut it, forget it”

4. OrganizationStrategic Market leadership Effective Operational EfficiencyGood HR policy Inclusive Growth targetCSR activity

8.2 Competencies:

The competencies developed based on these Resources were:

1. Technical Superiority2. Manufacturing Excellence3. Sales and Marketing 4. Brand Image5. Visionary Leadership

9. STRATEGIC IMPLICATION AND PERFORMANCE

StrategyBased on These resources and Competencies, The strategy developed was to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of its customers and to maintain the highest standards of ethics and social responsibilities.

Impact on performanceThe sales in terms of number of Motorcycle grew from around 40000 in 1985-86 to around 180,000 per annum in 1994.

10. PHASE 2:1994-1999

Business strategy

• Hero Honda Update of Honda contract for another 10 yrs in 1992.• They planned for more R&D support from Honda in two wheelers.

• Product were launched in sub125cc segment

• “Splendor” launched in 1994 for office going middle class people

• It is the largest selling bike in the world till date

Marketing strategy

• Focused on Market Consolidation across country with punch line “Desh ki dhadkan”

• Sub125cc became Star (BCG matrix)

BCG Matrix:

• Splendor launched in this phase became star and till date they are reaping maximum benefits from it.

• CD 100 had crossed breakeven phase and it got the position of Cash-Cow from star, now it was profiting the company without any investment required.

• Street that was launched in last phase became famous in overseas market but it was not liked in domestic market and so they had to divest this brand which got position of question mark in BCG matrix.

• Sleek was the dog in matrix and hence they had to kill it.

Value Chain Analysis

Value Chain Analysis

Primary Activities

1. Inbound logistics

Close Integration with suppliers JIT ,Tight control and reduction of logistic cost Vendor supply through conveyors ( at Haridwar with 100 ancillary

unit) Reduction of Inventory, 3rd party logistics Virtual Integration through Working with vendors in developing their

production facilities2. Operations

Lean manufacturing (JIT) Inventory cost less, Working capital less, Transaction cycle less Fully automatic Robotic operations plant hence Production per unit

employee very high 1000 motorcycle per employee per year

3. Outbound Logistics Approx 1,00,000 exports Delivery Channels through three Plants Focus on minimum waiting period (Customer satisfaction) Wide and deep distribution Network

4. Marketing and Sales “Fill it, shut it, forget it” - To show value for money “Desh ki dhadkan” – Expanding and market consolidation “Har Gaon har Aangan” – To reach villages further (2007) Brand Popularity through Cricketers and Popular stars like Hrithik

Roshan, Virender sehwag, Harbhajan singh, Priyanka Chopra Hero Honda passport programme For customer loyalty Launch of Newer range of Bikes in 125cc+ range, Electric vehicles

5. Service One of the best after sales service in Industry Cheap but quality rich spare parts Benefit of inbound logistics (Network) transferred to customers Mobile service stations for rural Areas

6.

11. PHASE 3: 1999-2009

This phase witnessed a strategic shift from earlier operational core competencies to the addition of other core competencies which is marketing, after the transition phase –II. This phase was much more competitive than first or second phase. Number of competitors increased manifold, apart from its regular competitors Honda also became the direct competitor in this phase.

Competitors are

– Honda, Bajaj. TVS-Suzuki, Kinetic, Yamaha etc.

Strategy Adopted:

Product diversification: In this phase Hero Honda has launched 5-7 new models almost every year. They diversified their product based on target customers groups

Aggressive Marketing: They have extended their core competency from operational efficiency to marketing efficiency, added new advertisement strategy and customer base.

Branding strategy: They have launched new bikes keeping in mind needs of various segments of customers like family, office-goers, youths, girls etc.

Even after change in strategy they maintained leadership position in market in revenue as well as number of unit sells which is evident from the following data.

12. SALES AND REVENUE PERFORMANCE

13.PORTER FIVE FORCES ANALYSIS

• Threat of new entrants • Phase I

Bike Sales trend

Company

Apr-Jun Apr-Jun Growth (%)

Market Share

%

2008-09 2009-10

Hero Honda 8,77,089 10,94,996 24.84 51.26

Bajaj Auto 3,91,100 3,31,731 -15.18 15.53

TVS Motors 2,92,530 3,15,785 7.94 14.78

Honda 2,26,068 2,84,890 26.01 13.33

Others 78,980 1,08,467

Total Market 18,65,767 21,35,869 14.48 -

Joint Ventures like Bajaj-Kawaski, Kinetic, and TVSCompetition on volume basis

Strong• Phase III

Rivals from India two-wheeler companies like Bajaj, Kinetic and TVSPotential competitors like HMSI, Chinese (low cost) and other foreign companies, Competition on Quality and Power for niche segments

Strong• Threat of substitutes

• Phase I • There were very few number of competitors named Scooters and

Mopeds only Weak• Phase III

• Motorcycles had replaced scooters and mopeds • High Earning has driven market towards High-end Bikes• Introduction of low cost four wheelers (e.g. Tata Nano)• Efficient Public Transport Medium

• Intensity of rivalry among competitors • Phase I

• Meager no. of competitors • Demand growth higher than Supply growth (space for all)

Weak• Phase III

• Intense rivalry among the competitors vying for the No. 1 spot• Aggressive marketing strategy by competitors• Companies like Bajaj, TVS, Kinetic, HMSI are trying to enter

into new segments• Rivalry from low cost Chinese bikes and Yo bikes (Electrical )• Very less competition in sub125cc segment (Splendor and

Passion) Strong

• Bargaining power of buyers • Phase I

• First Mover Advantage • Meager options available with buyers

Weak • Phase II

• Uniqueness of CD100 shaded by introduction of feature-rich models by competitors

• Launch of splendor in response to competition was huge strategic success

• Phase III• The customers have high bargaining power as there are lot of

choices to choose from• The customers are searching for features in addition to price

and fuel efficiency like style, pickup etc Strong

• Bargaining power of suppliers

• Phase I & III • Suppliers are mostly companies owned by the Hero family.• Hence, HHM wouldn’t be facing much threat from the

bargaining of the suppliers Weak

Porter 5-Forces Conclusion

• Phase I • Industry was highly attractive, • High entry barrier due to lack of technical know-how

• Phase III • Highly competitive • Moderately attractive Urban industry• Highly attractive Rural market for sub125cc bikes• No technology barrier for sub-125CC vehicle (Entry barrier for higher

cc)

14. STRATEGIC SHIFT

Product DiversificationThey launched on an average 6-7 models per yr for last 5 yrs (2004-09). Some

of the Successful models are Hunk, Glamour, Karizma, Pleasure, Hunk, and Glamour. They cater to various 125cc+ Range.

With changing scenario in international market, they have come up with collaboration with Ultra to produce Electric Vehicle named “Hero Ultra”.

R&D Expenditure Increased In this phase, R&D base has been developed for “Hero Honda” in India in

collaboration with “Honda”. Now the engineers collaborate in bringing out better products to suit Indian condition for different segments.

Market Diversification They have now started targeting to High End Niche segment also, which means

that they have moved from sub125cc segment. They have also launched first Scooter for Women

Branding

During December 2007, They came up with campaign Har Gaon – Har Aangan to cover 25000 villages. They have found that sub125cc segment market is there in villages.

They have roped in cine stars Hrithik Roshan, Priyanka Chopra as Brand ambassador. These efforts have given them better Brand visibility than earlier phase. They have even roped pulled in Cricketers like Virender Sehwag, Harbhajan singh for advertising.Positioning for Different Segment

• Young ladies - Pleasure ad “Why should boys have all the fun”

• Young and Brash - MTV Roadies - Brand Association • Family oriented segment – “SA RE GA MA PA” Association

In the first phase they have mainly targeted only the office-goers middle class customers and they were mainly emphasized the technical efficiency of Honda and robustness of CD-100 bike through fuel efficiency.

Shift in strategy from First Phase (above) to Third Phase (below):

They have launched “Pleasure” for youth girls. They also associated their brands with different TV Soaps for family oriented customers. Apart from that they have launched “Karizma” with ‘Macho-man’ image and associated with young energetic youth.

15. PORTER’S FIVE BUSINESS LEVEL STRATEGIES

• Differentiation• Uniqueness• Broad target

• Differentiation Strategy• For each range separate products• Hunk, Ambition, Splendor NXG, Karizma, CD100, Pleasure• Differentiation based on Quality and features• No cost leadership• Positioning for each segment done separately

16. SALES AND FINANCIAL PERFORMANCE

Financial performance

Sales performance

CONCLUSION

Through above discussion we have seen that three is Strong Interdependence

between Resources, Capability, Competency, Strategy and performance.

While in Phase 1 &2, Hero Honda adopted the Resource driven strategy to

have sustainable competitive advantage. During phase 3, its strategy was Environment

Driven Strategy. Hence, we see that as these variables changed, Hero Honda changed

its strategy. Which shows agility in Strategic approach of Hero Honda?

Despite change in Environment External as well as Internal collaborations,

Hero Honda has been able to maintain the market leadership, this shows that such an

approach towards interlinking variables provides them long term sustainable

Competitive Advantage.

REFERENCES

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5. R G Shroeder, K A bates & M A Juntilla 2002, A Resource base view of manufacturing Strategy and the relationship to manufacturing Performance, Strategic management Journal, 23: 105-117

6. Hero and Honda — Fill it, shut it, forget it? By Raghuvir Srinivasan Business Line

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