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Posted on June 8th, 2012, by

Nowadays, strategic operations management plays the key role in the successful development of a company. It is extremely important to develop an effective system which could provide a company with an ample opportunity to increase productivity, quality and sales of its products. This is especially important to companies operating in developing countries such as Hero Honda Motors which is one of the largest producers of two-wheeler vehicles. At the same time, typically to a company from a developing country, Hero Honda Motors has certain problems with the development of its own production that indicates at the necessity of the improvement of the process of production and development of new technologies in particular.

The impact of external forces

Hero Honda Motors is one of the largest two-wheeler vehicles in the world. Naturally, the company had a long road to go to achieve such a status and international recognition. During its development the company faced a lot of difficulties and problems that were successfully solved and nowadays when it is targeting one billion dollars revenues the company faces a new obstacle that is probably as serious as it has never had before. After a long period of cooperation, which actually was not ideal, Hero Honda Motors has eventually become very close to find its main partner Honda among its main competitors in the market.

Obviously, it is quite a strange situation but at the same time, it is quite a typical situation and Hero Honda Motors is rather a company representing a developing country which significantly depends on its partners from abroad, notably from well developed industrial countries. This is why it is particularly important to trace the development of relations between Hero and Honda in order to better understand what difficulties may face both companies originating from developing and developed countries, what kind of relationship exists between them, and what actually make or made such companies to closely cooperate worldwide at large and in India, in particular.

It is an undeniable fact that Hero Honda Motors is one of the largest producers of two-wheelers vehicles in the world, and one of the most popular brands in India operating in this industry. The reason of such popularity and the leading position of the company among the producers of two-wheelers is basically explained by the size of Indian market and its specific characteristics.

At this respect, it is quite noteworthy that India has the second largest population in the world, which is actually not very rich but as the rest of the world Indian people also needs some means of transportation. As a result of such a combination of large number of consumers and their low level of income the production of two-wheelers is most perspective industry for this country because Indians couldn’t and often still cannot afford to buy automobiles.

Consequently, the development of this industry is naturally retarded compared to the industry of two-wheelers.

Furthermore, another very important fact is that initially India did not have technological opportunities to produce two wheelers, as well as automobiles, of a good quality that made their product less competitive, if competitive at all, compared to other world producers. As a result, Indian government attempted to support local producers of two wheelers and restricted significantly access of foreign companies on the national market, especially during 1940s, when the industry actually started to develop, till 1980s (Viardot 2001).

However, even when Indian government permitted foreign companies to enter the local market in mid-1980s, it was still necessary for them to cooperate closely with local companies in order to make their products cheaper, otherwise Indian consumers couldn’t simply afford two-wheelers for a high price (Viardot 2001).

Honda was on of the first and the most powerful foreign companies that attempted to profit from such a shift in the policy of Indian government and, as soon as restrictions were lessened Honda entered the Indian market of two-wheelers. It should be pointed out that Honda’s entering the market was the part of the company’s international strategy. Honda, being specialised mainly on the production of engines, aimed at the global expansion. Not surprisingly that by 2002 this company had 100 plants in 33 countries. One of the main strategies the company used in the international arena was a so-called ”˜glocalization’, which implied the development of local plants that could match the local demands (Howard 2000).

As a result, Honda traditionally entered into the joint ventures in order either to overcome certain fiscal restrictions or to get easier access to the local market. The latter is actually one of the main reasons for Honda initially to choose Hero as its partner in production of motorcycles in India. Hero was quite popular company in India and possessed a well developed net of dealers and Honda supposed to contribute technologically to the development of Hero Honda Motors and quickly gain a lion share of the market using Hero’s loyal dealers.

Eventually, the deal was done in June 1984 when the joint venture was created and named Hero Honda Motors that opened new perspectives for the cooperation of two companies.

The key operational issues

The conditions of the creation of the joint venture and its further operation in the Indian market, to a significant extent, defined further relationship between Hero and Honda. Speaking about the structure of Hero Honda Motors, it should be said that both Hero and Honda possessed 26% of the equity and another 26% were sold to the public and the rest was held by financial institutions (Howard 2000). In the company administration Honda was presented by four key appointees, including the Joint Managing Director, while Hero, being represented by four family members, could appoint the chairman of the company. Honda basically contributed technologically to the development of Hero Honda Motors, notably the company’s experts ran engineering and quality support functions while Hero’s representatives were responsible for the rest of functions, including marketing.

The development of Hero Honda Motors may be considered quite successful and the company showed a constant growth of production and sales. As a result, the joint venture agreement was renegotiated and extended until 2004.

This new agreement was even more profitable for Hero. For instance, its royalty payments decreased form 4% to 0.5%. After the renegotiation the growth continued. For instance, between 1997-2001 Hero Honda Motors showed the growth for 18 consecutive quarters (8).

However, in 2000s the relations between the companies has started to deteriorate dramatically despite positive results of their cooperation, basically because Honda got to be less and less interested in the cooperation with Hero who had nothing but use Honda’s old technology without real perspectives for modernization.

The recent problems Hero faced is the result of its high level of dependence on foreign technologies, notably that of Honda. Actually, Hero’s problems are typical for companies from developing countries. In the case of Hero Honda motors the situation was deteriorated because representatives of Honda controlled engineering and technological process. Moreover, Honda supplied engines the main components of the Hero Honda Motors’ two-wheelers but, as soon as Honda actually lost its interests in the venture joint and get prepared to launch a new 100% subsidiary Honda Motorcycle and Scooter India, a direct competitor of Hero Honda Motors, the latter lost the last chances to get more or less advanced and contemporary engines and technologies for their two-wheelers.

As a result, the company gradually becomes technologically backward and unable to lead a normal competition in the market that puts under a threat the further existence of Hero Honda Motors.

In addition to the problems with the main technological supplier, i.e. Honda, Hero faced another very serious problem that retarded the company’s development and that actually was the direct consequences of the Honda’s unwillingness to modernize production in Hero Honda Motors. This problem was the company’s competitors that grew in power and gain larger share of Indian markets because of the use of more advanced technologies and more attractive prices. The latter concerns in particular Chinese companies and import of two-wheelers from China. In fact, Chinese two-wheelers are significantly cheaper than those produced in India.

By the way, Chinese expansion in the Indian market is, to a significant extent, the result of liberalization of international trade and Indian international policy, which opened the local market for foreign companies.

Moreover, Indian companies are also very serious competitors for Hero, which production gets more and more out of date, while the competitors implement new technologies, even though often they are also up brought from abroad.

As a result, Hero gradually loses its share of the market.

In such a situation, the company’s strategy of ”˜Operation One Billion’ becomes practically an unattainable goal.

Consequently, the objectives of the company have to be much more pragmatic and one of the main goals will be to sustain its positions in the market and prevent the company from degradation or even a complete ruin.

In such a way, it is possible to say that the major operational issues the company fulfils are quite wide. As it has been just said above, the company uses Honda’s technologies and developments to produce its own two-wheeler vehicles.

 

Obviously, this is one of the key processes since technologies grow more and more complicated and the company needs to develop its own technologies in order to minimize its dependence on external forces. At the same time, the company has a great potential of production of two-wheeler vehicles within India since it has plants and personnel whose potential provide an opportunity to increase the productivity and effectiveness of work of the company.

Furthermore, on producing its products, the company also has ample opportunities to sell them in India. In this respect, the existing network may be quite helpful. At any rate, at the present moment it functions effectively. On the other hand, it is possible to remind that the company can potentially increase its export potential that will need the development of the international network of distribution of its products.

The current operation management capability

On analyzing the current management capability, it is possible to estimate that at the present moment the company has a potential to become one of the world’s leaders producing two-wheeler vehicles but the dependence on foreign technologies substantially deteriorates perspectives of the company.

Nevertheless, it is necessary to underline that Hero Honda Motors pays a lot of attention to the quality management and it is one of the strategic directions of the development of the company. At the present movement, the company can benefit from its cooperation with Honda since the latter has provided the company with the basic standards of the quality of products the company produce. It should be pointed out that the company uses the standards developed by Honda to measure the quality of its products. To put it more precisely, there exists an electronic system of the control of the quality of the two-wheelers produced by the company due to which any vehicle can be selected for a serious of tests to verify the quality of the product. These tests include the safety of the vehicle to the driver, its technological characteristics, such as CO2 emission. Furthermore, the share of manual work in the production process is minimized and the production is basically controlled by electronics. At the same time, it is necessary to underline that the company is concerned not only on the quality of its products but also on the quality of services targeting at the total satisfaction of its customers (Schmitt 1997). It is worthy of mention that customers have an opportunity to express their opinion about the quality of services and products of the company as they receive a leaflet along with the instructions to vehicles which customers may fill in and asses the quality of services and products and send the leaflet to the company where the reactions of customers are evaluated. It should be said that the company pays particular attention to sales and distribution of its products and emphasizes the importance of the customers’ loyalty to its brand.

Furthermore, it recently the company has implemented a new and quite effective IS based on the use of new IT. In fact, the company is really concerned about the development of its information infrastructure which contributes to the high effectiveness of work and provides the company with an opportunity to control the production at all stages and guarantees the high quality of its products. In such a way, service operations and introduction of effective information systems increasing effectiveness of operations within the company is one of the major goals of the company.

Also, it is worthy of mention the fact that Hero Honda motors pays a particular attention to the planning and development of all processes that influence the functioning of the company (Viardot 2001). To put it more precisely, the company has a strategic plan, which has the major strategic goal of ”˜Operation One Billion’, and the company attempts to improve all processes to realize its strategic goals, among which are the construction ad sales of a billion of vehicles per year, expansion on foreign markets, improvement of quality of products and services, independence from foreign suppliers. In fact, the improvement concerns practically all processes from the process of development and production of new products, i.e. implementation of innovations in the company’s products, to their sales. This fact is particularly important in the context of the growing competition and the company’s plans to start expansion in international markets.

This is why it is possible to estimate that BPR is one of the key elements of the current strategy of the company which can increase its capabilities as the world leader in the production of two-wheeler vehicles (Newel 2001). It should be said that the company constantly attempts to increase the effectiveness and productivity of its work as well as improve the sale rates in order to achieve possibly better results in the competitive struggle in Indian as well as international markets.

Thus, briefly speaking the company is currently facing the problem of dependence on foreign suppliers, the growing competition and the necessity to enter the foreign markets that imply the realization of the strategic goal of the production of a billion vehicles per year.

Conclusion and recommendations

Obviously, taking into consideration the current situation and the nearest perspectives, it will be very difficult for Hero to achieve the basic goals, which have been just mentioned above. Nonetheless, it is necessary to underline that the company has great capabilities and potential that can help Hero Honda Motors achieve positive results. It seems to be obvious that the company’s strategy to constantly improve all essential processes and increase their effectiveness is really important. To put it more precisely, the company targets at the getting rid of its dependence of the foreign suppliers, namely Honda which supplies the company with engines. Furthermore, it is necessary to develop its own facilities where constructors could develop their ideas and create new vehicles as well as develop engines independently from Honda, or any other foreign company. Also, the company needs to pay attention to customers’ satisfaction that means that the control over the quality of the products should be also expanded on the control over the quality of services. This means not only sales but post-sale services if a warranty repair, for instance, is needed.

At the same time, it is necessary to realize that the real improvement of the situation and realization of the major strategic goals of the company can be done primarily through the modernization of the production. Naturally it would be easier to continue the cooperation with Honda, but such cooperation seems to be quite doubtful and not very perspective. To put it more precisely, the cooperation with Honda makes the company dependent on foreign technologies while it is vitally important to the company to build the full cycle of production and distribution of its own products. Practically, it means that the company should avoid the use of foreign technology whatever progressive they are. Instead, it is necessary to develop its own technological capabilities and create products independently from foreign supplies. In this respect, the creation of its own constructor departments which could cover the needs of the full cycle of production may be quite helpful. Naturally, such a reorientation on Hero Honda Motors’ internal potential and capabilities will be quite expansive but, in a long-term perspective, it can make the company the world leader in its segment of the market independent from any external supplier. Alternatively, it is possible to recommend finding a new supplier of engines and contemporary technologies that could make the Hero’s two-wheelers competitive and not expansive that are traditional characteristics of the company’s product. It is necessary to do in possibly shorter terms and as soon as possible because nowadays the company still has a widely spread net of dealers and it remains to be quite a popular brand but if the time is lost Hero will have to build up practically a new company, a new brand. On the other hand, such alternative will not solve the problem but rather delay its final solution which actually does not have any real alternative in a long-term perspective but the development of its own full cycle of production based on the development of its own technologies.

As a result, being independent from foreign suppliers, the company can successfully realize its strategic goal of the construction of one billion vehicles, which, due to the thorough technological control, should be of the highest quality and due to the localization of the production in India they would be of a low price. Consequently, it will be possible to produce and sell a billion of vehicles not only in India but also in foreign markets.

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