Comm 603 – Hero Honda Business and Corporate Strategy

COMM 603 – Business and Corporate Strategy

Hero Honda

Although the Munjals may not be particularly happy with the Hero Honda Motors (HHM) partnership, since the venture formation in June 1984 the company has proved to reap above average returns for decades by providing a superior product to the Indian market at a good price.    The stock price of this venture has also soared upwards.  It may not be wise to let go of a successful partnership amidst influx of foreign competition and changing regulation.  In other words, why mess with a good thing?

It is clear from the case that the external environment of the market has changed with foreign companies like Chinese entering the space and taking market share of the “cost conscious” customer.  The Indian Government is another external factor that is changing the regulations in foreign competitors favour.  HHM must realize that these two factors need to be responded to otherwise they will lose their competitive advantage.

The Munjals have done an excellent job in including diversification in its corporate strategy, over the years they have acquired or “held close” various aspects of the supply chain.  Such examples are Rockman Cycle for parts and steel, Munjal Casting, and Hero Exports for trading which all have operational relatedness and are all value-creating diversifications.   This is an excellent way for the conglomerate to grow, avoid unfavourable pricing adjustments and add resources and core capabilities.  As HHM moves into a market that is very competitive, they will lose their ability to be “price setters”, however, they can still be a leader by providing quality product, fast (due to their supply chain), and at competitive prices (due to economies of scale).

Another external factor to consider is technology and the competition coming from Japan (Yamaha and Suzuki), one of the key reasons why HHM was a success was due to cutting edge technology from Honda, HHM risks to lose its core competency by dismantling the venture.  Instead, HHM can insist on the new agreement to have Honda provide innovation for the current suite of products and offer its customers new products with cutting edge technology (a scooter for example).

It is clear that Honda decided to enter the Indian market on its own by forming the scooter company.  This is an unrelated diversification in attempt to grab market share, Honda is not entirely wrong by doing this and by wanting to diversify it’s product suite.  This gives them more certainly on future cash flows and it increases their market power.  HHM once again to stay in the game must respond to this external environment factor.  My recommendation is to respond by building a “non-competition” clause into the renewed venture agreement and ensure that Honda can not compete in the same product category as HHM.   This would limit the risk of Honda separating and creating its own brand of motorcycles.