Hero cycles: operating breakevens
Authors: Singhania Monica , Sharma Navendu , J. Yagnesh Rohit , Mehra Nimit 
Published: August 2014

Subject area

Bicycle industry, emerging markets, competitor analysis, financial forecasting.

Study level/applicability

This case can be used as a teaching tool in the following courses: MBA/post-graduate programs in management in management accounting, management control systems and strategic cost management; executive training programs for middle and senior level employees; and under-graduate/post-graduate programs in entrepreneurship. It can be used to explain and test the concepts of SWOT analysis, Porter's five forces model and PEST analysis. It introduces the technique of breakeven analysis and its relationship with operating leverage. Moreover, it demonstrates the application and analyses of the Du Pont equation.

Case overview

Hero Cycles Ltd was established by the four Munjal brothers in pre-independence India. It started off as a business of bicycle spare parts, but quickly expanded in post-independence India, with Ludhiana as its base. The company later joined with foreign firms like Honda Motors, Japan to become the largest manufacturers of bicycles in the world. It dominates domestic markets with a market share of around 40 percent. Ananth Munjal, a learned, ambitious and cautious individual, is the next generation, ready to take over the reins of the company. Being someone who believes in learning from past mistakes, he forms a team to critically examine the decisions made by his predecessors. This team is also directed to utilize forecasting techniques for determining the expected profitability given the existing state of affairs that prevail. Additionally, Du Pont analysis is to be performed for studying the efficiency of the company on the facets of operating performance, asset turnover and associated financial leverage. Also, Ananth's risk-averse nature compels him to study the past with regard to the relationship between operating leverage, breakeven sales and corresponding margin of safety. Furthermore, he wishes to inspect the historical cost structure of the firm, and its influence on company performance.

Expected learning outcomes

These include the use of: SWOT analysis to identify the strengths, weaknesses, opportunities and threats to a company; PEST analysis to identify the political, economic, social and technological factors that affect the operations of a company; Porter's five forces model to analyse an industry. The case also helps students: by identifying fixed costs and variable costs that are a part of operating expenditure of a business; in the use of forecasting the financials of a company for the sake of predicting the future outcomes of certain business strategies; by application of Du Pont analysis to examine the efficiency of the various processes and strategies; in determining quantitative terms like contribution margin, breakeven sales, operating leverage, margin of safety, their significance, and the relationship between these terms.

Supplementary materials

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