case analysis

I

Case 7

For us and for our loyal Customers, the motorcycles we build aren't just.motor-

cycles.They are living pieces of American history mystique on two wheels.They are

the vehicle with which our riders discover the power, the passion, and the people

that define the Harley-Davidson Experience'

-HARLEy-DAVrDsoru, rr.ic.r

On May '!.,201.5, Matt Levatich""took over as CEO of Harley-Davidson, Inc.. Levatich

was 48 years old and had joined Harley as a management trainee in 1994.He held an engineering degree from Rensselaer Polytechnic Institute and an MBA from Northwestern. The company he was taking charge of was not among the world's big-

gest motorcycle companies-it shipped 270,726 bikes in 201,4 compared to Honda's iZ *illiorr. However, it was the world's most financially successful motorcycle manu- facturer: it earned a higher sales margin-and a higher return on equity than any of its rivals. n

Levatich's predecessor was Keith !7andell, who had stabilized Harley after the financial crisii of 2OO&-20O9 and returned the c6mpany to its growth path' During 'W'andell's six-year tenure, Hadey's cuniulative total return to shareholders was 280y%

compared to 172o/o for the S&P 500 as a whole. The road ahead, however, looked distinctly bumpy. On Levatich's first day as

CEO, investment advisorJames Berman published a newsletter that asked the ques-

tion: "Is the long, classic American love affair with Harleysia thing of the pas0"2 Harley's profit growth depended on its ability to keep expanding the sales of its high-pricld, heavyweight motorcycles. \fhile no other company could replicate the emotional attachment of riders to the "Harley Experience," thefe was always the risk

that motorcycle riders might seek a different type of experience and become more attracted to the highly engineered models produced by EuropeanandJapanese man-

ufacrurers. Equally worrying was the fear that motorcycles might lose their appeal

both as a leisure activity and as a male status symbol. Such concerns were fueled by demographic trends. Harley's core market was the baby-boomer generation- and this cohort was moving more toward retirement homes than outdoor sports. '$rould the next cohorts-Generation X and Generation Y-have the same affiniry for noisy, hearryweight motorcycles and the cultural values that Harley-Davidson

This case was prepared by Robert M. Grant. @2075 Robert M. Grant

Inc., May 2015

I

CASE 7 HARLEY.DAVIDSON,INC.,MAY2OI5 608

represented? Moreover, with consumer spending weak in both North America and Europe-Harley's tv,ro biggest markets-the demand for luxury leisure products costing berv,reen $zooo and $38,000 was likely to be subdued'

The History of Harley-Davidsou

From Birth to Maturity' 1903-1981 Harley-Davidson, Inc. was founded in7903 by Villiam Harley and the three Davidson brothers: 'rVilliam, Arthur, and \falter. In 1909, Harley introduced its two-rylinder, V-twin engine with its deep, rumbling sound: this engine rype would be the charac- teristic feature of Harley-Davidson motorcycles for the next hundred years. At that time there were about 150 US motorcycle producers in the US; by 1953, Harley- Davidson was the sole survivor.

The postwar affluence and the rise of youth culture created a growing demand for

motorcycles. This was satisfied primarily by imports: first the British (BSA, Triumph, and Norton) and then the Japanese (led by Honda). Harley benefitted from the rebirth of motorcycling as a leisure activity. However, its acquisition by the leisure conglomerate AMF in 1969 was followed by quality problems and financial losses.

Rebirth, 1981-2008 In 1981, Harley's senior managers led a leveraged buyout of the company. Despite a perilous financial condition, the management team embarked upon rebuilding production methods and working practices. Managers visited Japanese automobile plrr6 and introduced their own version of Toyota's just-in-t1ms (JIT) system called ;'MAN" (materials-as-needed). Harley's manufacturing plants adopted collaborative

processes of quality management. The 1986 initial public offering of Harley-Davidson's shares fueled investment in

new models, plants; and dealerships. Harley's share of the market for heavpveight mororcycles (over 500cc) grew steadily. During the 1990s, Harley's biggest challenge

was satisfying the surging demand for its products. In 1,996, Harley announced its plan ZOO3 to dramatically increase production capacity in the period preceding its 100th anniversary in 2003. In 2004, Harley sold more than 300,000 motorcycles, a tenfold increase on 1983. From 1984 to 2008, Harley's output a'hd revenue had grown in every single year (Figure 1).

Downturn and Readjustment, 2OO8-2O14 The financial crisis of 2008 put an abrupt end to growth. After decades of customer

waiting lists and a shortage of production capacity, Harley faced plummeting sales, excess inventory, and problems of bad debts as customers defaulted on their loan

repayments. In the shrinking motorcycle markets of North America and Europe, Uarley-with the highest a.verage retail price of any major manufacturer-suffered disproportionately. Amidst the credit crunch, Harley-Davidson Financial Services (UbfS), which supplied credit, insurance, and extended warranties to Harley deal-

ers and customefs, was unable to securitize its customer loans and was forced to retain them on its own books.

604 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANAIYSIS

FIGLTRE 1 Annual shipments of motorcycles by Harley-Davidson

Sources: Harley Davidson annual reports and Harley-Davidson archives'

E sooc : 2so o € zooc $ rso oF 100

0-{- 1 900

\7hen Keith'Wandell took over as Harley's CEO in May 2009, his priorities were to restore funding for Harley's consumer lending, align production and employ- ment with lower demand, and refocus on the core Harley-Davidson brand-which involved closing Buell Motorcycles3 and selling ltalian subsidiary MV Agusta.4 In

ZO19,Harley poited a net loss for the year-its first as a public company. (Appendix

Table A1 provides details of Harley-Davidson's financial performance.)

During 201,0-20L4, \Tandell established "a bold, clear strategic direction that would maximize our opportunities going forward and restore the company as a

strong business that could consistently grow over the long haul."5 The resulting transformation of Harley included: r

Rethinking and restructuring of manufacturihg oPerations including reduc-

ing capacity and increasing flexibility to allow a wider range of models to be

produled and to match production to seasonal fluctuations in demand-what Harley called its "surge production system."

Expanding international sales. The primary focus for Harley's overseas sales

had been Europe-the world's biggest market for heavyyeight motorcycles. 'With Europe mired in recession, emphasis shifted to building distribution and growing sales in the emerging markets of Asia and Latin America. In 20L1, Harley opened an Asia-Pacific regional headquarters in Singapore, and an assembly plant in India.6 Expanding the customer base. To reestablish growth in North America, Harley needed to broaden its customer base from its core demographic of white males of 45 years or more. Targeted Sroups included: women riders, ,,Harlistas,,(Latino ridero, "Iron Elite" (African-American riders), "Harley's

Heroes" (military and veteran riders), and, most of all, younger riders through

new models. The result was a major investment in new product development. During 2073,Harley launched its "Pr{ect Rushmore" motorrycles: "The first to

Come through our new, world-class product development pipeline and intro-

duce major innovation and design improvements. They were developed with

CASE 7 HARI,EY-DAVIDSON,INC., MAY 2015 606

a level of consumer input that brought the voice of the customer to product design in an unparalleled way for ss."7 They were folowed by the "Street" models-lighter, sports motorcycles featuring new, liquid-cooled 500cc and 750cc engines.

Until the financial crisis of 2008-2009, the heavyweight segment had been the most rapidly growing part of the world motorcycle market, with the US accounting for a major portion of this growth. t0forldwide sales of heavyweight motorcycles trebled between 1990 and2008. However, during 2OO&I20'|O, sales dropped sharply in North America and Europe and the subsequent recovery has been slow.

In North America, Harley was the leader in heavyweight bikes, with over half the market (Table 1). Overseas, Harley had been unable to replicate this market domi- nance, despite strong sales in a few markets. Harley achieved the remarkable feat of becoming heavyweight market leader inJapan.It held similar leadership in Australia andBrazi. The European market was more fragmented, with Harley one among a leading group that included Honda, BMW, Suzuki, Yamaha, Kawasaki, and Triumph, each with market shares in,heavyweight motorcycles of between 8 and t5o/o.

The heavyweight motorcycle market comprised three segments:

o Cntiser motorcycles, Th.r. were "big, noisy, low riding, unapologetically macho cycles,"8 typically with V-tvrin, large displacement engines and an

IABIJ 1 Retail sales (registrations) of heavyweight motorcycles (601+ cc),2005-2074 (thousands of units) i

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 North America Totalmarket Harley-Davidson

Market share (%)

Europe Totalmarket Harley-Davidsonb Market share (70)

Asia-Pacific Harley-Davidson

Latin America Harley Davidson

554 579 265 282 47.8 48.6

351 377 30 34 8.5 9.1

555 477 267 235 48.7 493

301 293 300 282 320 41 44 36 36 39 12.7 13.7 12.1 12.8 12.0

21 21' 25' 27' 3Cr

304 174

53.2

314 40

12.0

23

260 271a 299 306. 154 152u 161u 168a 54.9 s5.7 53.8 54.9

.t l.

11

31 6. 167u

52.8

372 3U 42 45

1 1 .3 11.7

251311

n:o' 12

Arotes.'

"US only. blncludes Middle East and Africa for 2005-201 1.

'ln each year, sales in Japan were between 10,000 and I 1 ,000. n.a. = not available. Source: Harley-Davidson 1 0-K reports.

The Heavpreight Motorcycle Market

I

606 CASES TO ACCOMPANY CONTEMPORARY STRATEGYANA],YSIS

ditional Harley design. . Touring rnotorcycles: These included cruisers especially equipped for longer-

distance riding and bikes especially designed for comfort over long distances (including the Honda Goldwing and the bigger BM!7s). These tourers fea- tured luxuries such as audio systems, two-way intercoms, and heaters. \7hile Harley led this segment on the basis of style and image, Honda and BM\7 had engineered their motorcycles for greater smoothness and comfort over long distances through the use of multi-cylinder, shaft-drive engines and advanced suspension systems.

o Performance rnotorcycles: These were based on racing bikes, with high- technology, high-rewing engines offering speed, acceleration, race-track styl- ing, and minimal concessions to rider comfort. The segment was the most important in the Europeap and Asia-Pacific markets, representing 62 and 55o/o of total heavyweight bike sales respectively. The segment was dominated by Japanese motorrycle companies, with a strong representation of European specialists, such as Ducati and Triumph, Harley had competed in this seg- ment during 1993-201.0 through Buell Motorrycles.

Unlike its Japanese competitors, Harley was highly market focused: its Harley's models were concentrated on the "super-heavyweight" segment (over 850cc) and within this on cruiser and touring motorcycles. :

The Brand Harley-Davidson's image and the loyalty the comparr, ..rg..rjered among its cus- tomers were seen as its greatest assets. The famed spread eagle signified not just the brand of one of the world's oldest motorcycle companies but also an entire lifestyle with which it was associated. Harley has been described as "the ultimate biker status symbol ... a quasi religion, an institution, a way of life."e Hadey had a unique relationship with American culture. The values that Harley represented- individualiry freedom, and adventure-could be traced back to the cowboy and frontiersman of yesteryear, and before that to the quest that brought people to America in the first place. As the sole surviving indigenous motorcycle company, Harley-Davidson represented a manufacturing.

The Harley brand was central not just to the company's marketing but also to its strategy as a whole. The central thrust of the strategy was reinforcing and extending the relationship between the company and its consumers. Harley-Davidson had long

upright riding position. Their design reflected the dominance of styling over either. comfort or speed. For the urban males (and some females) in con- gested cities such as Los Angeles, New York, Paris, and Tokyo, the cruiser motorcycle, while a practtcal mode of transportation, was primarily a state- ment of style. The cruiser segment was practically created by Harley and represented over two-thirds of the heavyweight market in the US. Most of Harley's competitors in this segment had imitated the main features of the tra-

once-great tradition of American engineering and

E----_l

Ilarley-Davidson in 2015

-

CASE 7 IIARIEY.DAVIDSON, INC., MAT

recognized that it was not selling motorcycles: it was selling the Harley Experience, which formed the central theme in almost all its external communicarions:

A chill sweeps through your body, created by a spontaneous outburst of pure, unadulterated joy. You are surrounded by people from all walks of life and every corner of the globe. They are complete strangers, but you know them like your own family. They were drawn to this place by the same passion-the same dream. And they came here on the same machine. This is one place you can truly be your- self. Because you don't just fit in. You belong.10

Customers and Customer Relations If the appeal of the Harley motorrycle was the image it conveyed and the lifestyle it represented, the company's challenge was to ensure that the experience matched the image. Harley's involvement in its consumers'riding experience was through the Harley Owners' Group (HOG), which organned social and charity events. Employees, from the CEO down, were encouraged to take an active role in attending HOG shows, rallies, and rides. "The feeling of being out there on a Harley-Davidson motor- rycle links us like no other experience can. It's made HOG like no other organization in the world ... more family reunion than organized meeting."rl Customer loyalty led to their continuing reinvesting in Harley products: Harley-branded accessories and apparel, customizing their bikes, and eventually trading them in for a new (typically more expensive) model. About half of bike sales were to repeat customers.

Financial success involved Harley's repositioning from blue-collar youngsters to middle-aged and upper-income buyers, many of whom had never ridden a motorcycle before. Harley's core demographic was Caucasian males aged35 and over. The average age of Harley's custorhers was believed to be 47.12 ln his final letter to shareholders, retiring CEO Keith \Tandell reportedguccess in expanding Harley's customer base:

For the third straightyear, Harley-Davidson grew U.S. retail sales to outreach cus- tomers, which includes young adults, women, African Americans and Hispanics, at more than twice the rate of the growth in sales to core customers. International retail sales of new Harley-Davidson motorrycles grew more than 5 percent and accounted for more than 36 percent of total retail Harley-Davidson motorcycle sales, with dealers in the Asia Pacific, EMEA dpd Latin America regions posting their highest new retail motorrycle sales on record for each region.l3

The Products Broadening Harley's market appeal had major implications for product policy and design. Ever since its disastrous foray into small bikes during the AMF years, Harley had recognized that its competitive advantage lay with super-heavyweight bikes. Here it stuck resolutely to the classic styling that had characterized Harleys since the company's early years. At the heart of the Harley motorcycle was the air-cooled V-twin engine that had been HArley's distinctive feature since 1909. Harley's frames, handlebars, fuel tanks, and seats also reflected traditional designs.

Harley's commitment to traditional design features may be seen as making a vir- tue out of necessity. Its smaller corporate size and inability to share R & D across cars

608 CASES TO ACCOMPANY CONIEMPORARY STBATEGY ANALYSIS

a sl{r UJt-(rI =IEI:(} ."-r

TABII 2 Harley-Daviclson shipments of motorcycles, 2003-2074

and bikes (unlike Honda and BMW) limited its ability to invest in technology and

new products. As a result, Harley lagged far behind its competitors in the applica-

tion of automotive technoiogies: not only did its motorcycles look old-style' much of

their technology was old-style. Since the Evolution engine launched in 1984, Harley

has introduced just four entirely new engines' Yet, even in its 2015 models, Harley's commitment to tradition was clear' Long

after other manufacturers had moved to multiple valves per cylinder, overhead cam-

shafts, liquid cooling, and electronic ignition, most Harley bikes featured air-cooled

push-rodengines *itt t*o valves per rylinder. In suspension systems, braking sys- tems, and transmissions, Harley was also a laggard'

Nevertheless, Harley was engaged in constant upgrading-principally incremen-

tal refinements to its engines, frarnes, and gearboxes-aimed at improving power

delivery and reliability, Increasing braking power, and reducing vibration' Harley

automotive technology alliance partnefs included Porsche, Ford, and Gemini Racing'

Although technolog-ical innovation was limited, Harley was very active in new prod-

uct development. By i}t5,tlarley offered 38 different models' Its Product Development

Center and Prototyping Lab were among the most important units within the com-

pany. Most of Harley's froduct development efforts were limited to style changes, new

paint designs, and'engineering improvements; however, after 2000, Harley acceler-

,t a t .t riological d.r!lop*"it. tutil"ttottes included the V-Rod model introduced in october 2001, which feanrred innovative styling and anall-new liquid-cooled

engine;

the Twin cam 95 engine in 2006, which featured electronic ignition and a six-speed

gearbox; the Street .rroaat n 2015; and Harley's prototyPe all-electric motorcycle' L-orrg the 218 US patents awarded to Harley during 2000-201'4, a large proportion

rehteJto the design-of peripheral items: saddlebag mounting systems, footpegs, seats,

backrests, electrical ,rr.-bii"r, and motorcycle music systems' Over the same period

Honda was awarde d \O,982US patents, Kawasaki 2OO2' and Suzuki 625' Central to Harley's product strategy was the pelief that every Harley

rider should

own a unique, p..rorrlir"d motorcycle-hence'the offer of a wide range of pre-sale

and post-sale customization opportunities. NeW bikes offered multiple options for

seats, bars, pegs, controls, and paint jobs, with over 7000 accessories, and special

services such as "Chrome Consulting'"

2OO3 2OO4 2OO5 2006 2AO7 2OO8 2OO9 2OtO 2011 2012 20"t3 2014

US"

lnternationalu Product mixb Sportstef Custom

Touring

Buell

Company tota!'

237.7 260.6 266.5 273.2 s3.5 56.7 62.5 76.0

19.7

52.0

28.4

10.0

301.2

22.0

48.6

29.4

9.9

327.2

21.3

45.2

33.s

11.2

340.2

18.5

46.2

35.4

12.5

361.6

241.5

89.1

21.8

43.7

34.5

1 1.5

342.1

206.3

?7.2

20.0

46.4

33.6

13.1

3164

144.4 131.6 152.2 78.s 78.8 80.9

21A 19.5 21.3 40.9 41.4 39.2 37.7 39.0 39.5 9.5 2.6 0.2

232.4 213.0 233,2

160.5 167 .0 174.0 87.1 93.4 967

20.5 19.3 21.0 39.1 39.5 33.8 40.4 41.2 45.2

247.6 260.5 270.7

Note.' ,Thousands of units. bPercentage of total shipments.

'lncludes sales of Street motorcycles for 201'4,

Source: Harley-Davidson'l 0-K reports.

I

I

I

t

t

l,

CASE 7 HARIJY-DAVIDSON, INC., MAY 2015 609

Reconciling product differentiation with scale economies was a continuing challenge

for Harley. The solution was to offer a wide r^nge of customization options while san-

dadidngkey components. Thus, Harley's broad model range involved "permutations of

fout'': four englne types, four basic frames, four sryles of $as tank, and so on'

The Harley product line also covered a wide price range. The Street 500 model was

priced ",

,n "rrt

y-level bike, beginning at $5799,1ess than one-fifth of the price of the

CVO Limited,, at $39,349.Tab\e 2 shows Harley's motoicycle output by product type'

Distribution Upgrading Harley,s distribution network was central to its resurSence dulng the fgsbs and 1990s. At the time of the buyout, rrany of Harley's 6ZO US dealerships

were operated by enthusiasts, wffi erratic opening hours, a poor stock of bikes and spares, and indifferent customer service. If Harley was in the business of selling a Ufestyte and an experience, then dealers played a pivotal role in delivering that

experience. Moreover, if Harley's lafget market had shifted toward mature, upper-

iniome individuals, Harley needed to provide a retail experience commensurate with the expectations of this group.

Harley's iealer development program increased support for dealers while impos-

ing higher standards of pre- "t d ,ft..-tales service, and requiring better dealer

facilities. Dealers were obiiged to carry a full line of Harley replacement parts and

accessories and to offer,an expanding range of services: in addition to traditional

services such as service and repair and financing, dealers offered test ride facilities,

rider instruction classes, motorcycle rental, consulting services for customizing bikes

through dealer-based design centers and Chrome Consultants, and insurance ser-

vices. Harley-Davidson Authorized Tours offered vacation packages with bikes sup-

plied by Harley dealers. Over 9Oo/o of Harley dealerships in the US were exclusive:

most other motorrycle manufacturers sold through multi-brand dealerships.

Dealer relations were a continuing strategic priority for Harley. Its Retail Environments Group established a meticuloiis set of performance standards and guidelines for dealers that covered every aspect of managing the showroom and

interacting with actual and potential customers. Harley-Davidson University was

established to "enhance dealir competencies in every area, from custorner satisfac-

tion to inventory management, service proficiency, and fronrline sales."14 Expanding intemational sales required Harley to exterld its_ dg2ler network into

countries where it had little or no distribution presence. As Table 3 shows, emerging

TABLE 3 Harley-Davidson's dealership netu'ork, 2008-2074

US Canada EMEA Asia-Pacific Latin America

2014 2014 2014 2014 2014

3227320138371Full-service dealerships

Note: ln addition, there were

'l 52 non-traditional dealerships in 2014: U5 96' Canada 4' EMEA I 1' Asia-Pacific I 2' and Latin America 29'

Source: Harley Davidson 10-K reports.

55

-ta

610 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

TABLE 4 Harley-Davidson's non-motorcycle sales, 2005-2074 ($million)

2oo5 2006 2oo7 2oo8 2009 2010 2011 2012 2013 2014

Parts and accessories

General merchandise Financial services

815.7 862.3 247.9 277.5 331.6 384.9

868.3

305.4 416.2

858.7 767.2 313.8 282.2 377.0 494.7

749.2

259.1

682.7

816.5

274,1

649.4

836.7

282.5

650.1

873.1

295.9

641.6

875.0

2U.B 660.8

Source: Harley Davidson 10-K reports.

apparel.

Manufacturing

markets accounted for the whole of the increase in Harley's dealerships between

2008 atd 20'14.

Other Products and Services

Sales of parts, accessories, "genetal merchandise" (clothing and colleqtibles), and

financial services represented-28o/o of Hatley's total levenue in2014 (Table 4)-much

higher than for other motorrycle companies. Clothing sales included not just tradi-

tional riding apparclbut also a wide range of men's, women'S,.and children's leisure

"iloli'orrrr..general merchandising" business represented licensing of the Harley- : - . - -- -f ^l^.L:-^ -:€*,^-^

Davidson name ".rai.rJ.-arks'io

,lnitd-put y manufacturers of- clothing, giftware,

jewelry toys, and other products. Most oi these were sold throrigh channels other

than the Harley dealership nefwork. To expand sales of licensed products, Harley

op"rr.a "non-traditional" Sealerships: retail outlets selling clothing, accessories, and

giftvrare but not motorcycles.

As already noted, Harley-Davidson's developmdnt during the 1980s and 1990s

focused heavily on upgrading its manufacturing operations: capacity expansion

permitted investment i., ,e* ptrnts and equipment and the introduction of more advanced process technologies. Particular emphasis was placed on

developing

manufacruring capabilities fhrough total quality management, JIT scheduling,

CAD/CAM , and the devolution of responsibility and decision making to the shop floor.

Despite the constant development of its manufacturing facilities and opera- rional capabilities, Harley's low iroduction volume lelalive to

Honda and the other

lapanese manufacturers'imposed significant cost disadvantages, especially in the

prr.hase of compon"rr,r. D.rpite this lack of bargaining muscle, Harley sought

close, collaborative relations *itt k.y suppliers' Its Supplier Advisory Council (SAC) served

,,not only to improve purchasing efficiency, but also to provide a forum to

share information, ideas, and strategy'"ls Harley,s capactty for efficiency was also limited by its dispersed manufacturing

operations: engine manufacture in Milwaukee, wiqconsin and assembly in York, fennsylvania ind Kansas City, Missouri' Du'ring 2009-20L4, Harley reorganized its

manufacturing plants and manufacturing systems. A program of plant consolida-

tion involved combining the two Milwaukee-area powertrain plants into a single

facility and merging the separate paint and frame operations at York, Pennsylvania'

CASE 7 HARLEY-DAVIDSON,INC.,MAY2OI5 5II

New agreements negotiated with unions allowed for more flexible employrnent

,or.rg*.rrts and working pfactices, which supported the introduction of 2 new enterprise resource planning (ERP) system at the York _Plant.

Combined with Harley's *surgl production," the new system meant customer demand would drive manufac-

turirig, .r.ry production line would have the flexibility to build every model, and inventories could be reduced.

f{uman Resorrrce Management central to Harley-Davidson's remarkable growth berween 1981 and 2007 was the

creation of a new relationship between management and employees that was forged

following the buyout from AMF. The new approach to human resource management

was buili on participation, self-management, open coflrmunication, and team-based

organization. Team-based organization extended from eight- to 15-member work grJ.rpr at plant level right up to senior management where three functional teams-

tt. ir."t. Demand Circle- (CDC), the Produce Product Circle, and the Provide support-were coordinated by the strategic Leadership council.l5'Despite

Harley's colnmitment to emPloyee participation and development, the production cutbacks and cost-cutting plessures during 2A09-2012 cte-

ated tensions between thq company and its employees' These were resolved

by the 20L2 labor agreem€nt, which created a new framework for workplace

flexibility.l7

Competition Despite Harley's insistence that it was supplying a unique Harley experience rather

than competing with other. motorcycle mangfacturers, the more it took market share from other manufacturers and expanded its product ranSe and

geographical

Scope, the more it came into direct competitfon with other producers' The clear-

est indication of direct comPetition was imitation: Honda, Suzuki, Yamaha, and

Kawasaki had long been offering V-twin cruisers styled closely along the lines

of the classic HarlJys, but at lower prices and with more advanced technologies (Table 5). In competing against Harley, the Japanese manufacturers' key advan-

tage was the scale economies that derived from vastly-greater volume' However,

dJspite their price premium, Harley-Davidson motorcycles'benefitted from a lower

rate of depreciation than other brands' ,Almost all of Harley's competitofs were, compared to Harley, highly diversified'

Honda, BM$f, and Suzuki were important producers of,automobiles, and-more than

one-third of Yamaha'S turnovef came from boats and snowmobiles' These com-

panies could share technologies, engineering capabilities, distribution, and brand

awareness across their different vehLle divisions. Moreover, sheer size conferred

purchasing power. Imitators of Harley's retro-styled, v-twin cruisers were not only the Japanese

motorcycle companies but also domestic competitors-including new entrants

Excelsior, Polaris (Victory), and t resuscitated Indian' Their heavyweight cruisers typically sold at prices exceeding those of Harley' '^Appendix

tabte A2 compar.i tfr. financial performance of leading motorcycle

companies

612 CASES TlO ACCOMPANT CONTEMPOMBY STR,ATEGY A}'IALYS$

Model Specifications Price ($)

Harley-Davidson Sportster 883 Low VRSCV-Rod Muscle

Fat Boy

Heritage Softail Classic

Honda Shadow 750 Aero

Fury

lnterstate ABS

Suzuki cs0 C9OT

Boulevard C90 8.O.S.5.

Kawasaki Vulcan 900 Classic

Vulcan 900 Custom

Yamaha V-Star Custom

Strykdr Polaris VictoryVegas 8-Ball

Victory Hammer 8-Ball

V-twin, air-cooled, 883cc

V-twin, liquid-cooled, OHC, 1 247 cc

V-twin, air-cooled, 1 690cc

V-twin, air-cooled, 1 590cc

V-twin, liquid-cooled, OHC, 7 45cc

V-twin, liquid-cooled, OHC, I 31 2cc

V-twin, liquid-cooled, OHC, 1 31 2cc

V-twin, liquid-cooled, OHC, 805cc

V-twin, liquid-cooled, OHC, 1462cc

V-twi n, liq uid-cooled, 1 462cc

V-twin, liquid-cooled, 8-valve, OHC, 903cc

,,

V-tv,vin, OHC, 4-valve, air-cooled, 649cc

V-tvUjn OHC, 8-valve, liquid-cooled, 1304cc

V-twi n, 8:valve, air-cooled, 17 31 cc

8,249 16,&9 17,699

18,349

7 A99 9,999

10,999

8,199 12,899

12,389

7,499 8A99

6,990 1 1,690

14,999

17,899

,:

l' N

R

5

Note: OHC = overhead camshaft.

Source; Websites of different motorcycle manufacturers.

motorcycles-including Buell-had not been successful'

!

Meeting the Challenges of Tomorrow-

Harley,s first-half results for 2015 reinforced fears over the sustainability of Harley's

topJine growth. Profits were 8%o lower than in the year-ago period, sales revenue was

6%lowir, and unit sales were down by 1..4o/o. Vandell's strategy had been strongly

o(ientated around expanding sales to "non-core" customer segments. Among these

were younger riders i" tfr. US and potential customers in overseas markets' The need to attfact younger riders was driven by unfavorrillt. us demographic

trends-the aging of the baby boomers and the smaller number of white males entering te t+GiS age band. However, would t[e F'Iarley Experience have the same appeallor Generatibn X and Y as it did for the baby-boomers? As the Neu York il*"t noted, "BMW, Honda and Yamaha ate attacting younger customers who seem less interested in cruising on what their old man rides'"l8

International markets also presented a major challenge: should Harley adapt to the different requirements of these markets or should it remain faithful to the tradi-

tional Harley image? "The US and Harley are tied together," observed Britain's Bike

magazine,"rh. grry who's into Harleys here is also the guy who owns cowboy boots'

Vou get aHarley and you're buying into thsUS mystique"'l Hirley claimed thai its new Street 500 and Street 750 models had met with an

enthusiastic response both in the US and in India (the two countries where this

model was manufacftrred). Hovrever, Harley',s previous incursions into smaller

ll

CASE 7 HARLEY-DAVIDSON, INC., MAY 2OI5 6Ig

A Milwaukee blogger summarized Harley's dilemma:

So what does Harley do? One tack would be to stay focused on what it does best:

big bikes. \7hile that strategy may make sense on some fronts (focus on what

you know, stay loyal to ttre brand identiry etc.), that approach will mean greatly reduced growth prospects and could doom it if the current consumer spending environment holds out long term. And meanwhile its core audience just gets older.

Or it could do what people have been saying what it should do for years: Make

smaller, more affordable bikes. That's harder than it sounds, as it would force Harley to compete against the Japanese manufacturers on their own turf, But if the

market is moving away from Harley, does it have a choice?2o

TAB11 A1 Selected Items from Harley-Davidson financial statements,2005-2014 ($million)

2007 2008 2009 2010 2011 2012 2013 20142005 2006

lncome statement items Net sales R&D Sellihg, administrative, and

engineering expense

Operating income, of which:

-Financial services I nterest income/(eipense) lncome before taxes lncome taxes Net income

Balance sheet items Cash

Finance receivables

Accounts receivable, net

lnventories

Total current assets Property, plant, and equiPment, net

Total assets Current portion of long-term debt Accounts payable

Total current liabilities Long-term debt " Post-retirement healthcare liability

Stockholders'equity

Cash flow items Operating activities Capital expenditures Total investing activities Financing activities

Net increase in cash

5,342 I,801'179 178 762 U6

1A70 1,603 192 211 23 27

1,488 1,624 528 581 960 1,043

141 238 1,943 2,101 122 143 221 288

3,145 3,551 1,012 1 ,024 5,255 5,532 205 832 271 763 873 1,596

1,000 870 61 201

3,0u 2,757

5,594 4,781 164 143 985 979

1,029 197 83 (117) e Q2)

1,034 178 )79 1086ss (ss)

594 1,630 1,378 1,436 296 269 401 323

s,378 4,341 1,094 906 7,829 9,155

01,332 324 162

2,604 2,268 2,176 4,144 274 264

2,116'. Z,iOA

2,685 609 (2,232) (116) (2,3e3) (863) 1,293 1,381 191 1,134

4,859 5,311 rJ6 14s

1,020 1,061

559 829 't81 268 (e0) (4s) 390 792 130 244 146 599

1,021 1,526 1,080 i,168 262 219

'\ 326 418 4,066 4,542 8rs 809

9,430 9,674 0 399

225 255 2,013 2,698 2,516 2,396 254 268

2,207 2420

1,163 885 (170) (18e) 14s (63)

(1,8s6) (309) (s42) (sos)

I

5,581 5,900 6,229 137 152 138

1,111 1,127 1,160

1,000 1,154 1,281 259 283 278 (46) (4s) (4) 961 1,114 1,283 338 380 439 624 734 U5

1,327 1,067 907 1,344 1,774 1,917 255 261 248 428 425 449

4,216 3,989 3,948 819 U2 883

9,513 9,405 9,528 682 1,176 1,01 1 248 240 197

0 2,510 2,389 2,936 3417 3,762 258 216 203

2,558 3,009 2,909

801 977 '1,147 (18e) (208) (232) (261) (s6e) Q4s) (eeo) (3e3) (536) (4se) e) (160)

961 (2,198)

(177)

1,272

2,134

762 (2,220)

(2,3s)

2,637

97

5,727

186

901

1,426

212 22

1,448 514 934

403

1,575

181

350

3,467

1,061

5,657

398 300

1,90s

980 'r93

2,375

798

e)+2) (3,91)

1,038

164

Appendir Financial Data

t

614 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

TABLE A2 Comparative frnancial data for Honda, Yamaha, and Harley-Davidson

201 3 2014

Honda Motor Co." Yamaha Motor Co'b Harley-Davidson

2013 2014 2013 2014

Revenue ($bn)

Operating income (Sbn)

Net income after tax ($bn)

Gross margin (06)

Operating margin (%)

Net margin (%)

Operating income/total assets (%)

Return on equity (70)

lnventory turnover DebVequitY ratio

Capital expenditure (5bn)

-of which motorcycles (5bn)

R&Dexpenditure($bn) Advertising expenditure (Sbn)

Motorcycles shipped (thousands of units)

117.8

7.5

5.7

26

6.3

4.8

4.8

9.4

8.5

0.s2

6.4

0.6

6.5

2.7

10,343

1 15.0

.5.9

4.8

25

5.2

4.2

3.9

7.9

8.5

0.53

6.0

0.6

6.1

2.8

10,742

14.9

0.6

0.5

35

3.9

4.0

1.7

1 1.8

5.2

0.31

5.1

3.0

0.8

1.0

6,010

14.1

0.8

0.6

25

5.7.

4.5

3.4

14.3

4.8

0.36

5.5

3.8

0.8

0.9

5,800

6.2

1.3

0.8

40

20.6

13.6

13.4

5.9

1.2

0.7

39

19.6

124 12.3

24.4 29.0 13.9 13.9 1]4 1.29 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 213 233.2

Sources: Company annual reports.

4.

"The Company," http://www.harley-davidson.com,/ content/h-d,/en-GB/comPany/becoming -a- dealer / the-

company.htrnl, accessed July 20, 2015. .Harley-Davidson: Running Out of Road?" http://www' forbes. com,/newsletters/the- berman-value -folio / 2015 / 0 5 / 07 /hatley - dav idson-running-

out-of-road/, accessed July 20, 2015. Buell Motor Company, founded by Harley

engineer Erik Buell, built performance motorcycles using Harley engines and other comPonents' and tar-

g"r"I yorrrrg.. ,id"rr. The Buetl range included a 49Occ single-cylinder bike with a price tag of $4,595-Harley's cheapest motorcycle' However, Buell's sales both in the US and overseas had been disappointing. Harley acquired MV Agustz, an Italian manufacturer of premium, high-performance motorcycles in July 2008'

on August 6,2010, Harley sold it back to its previous owner for €3 ($3.90).

"Letter to Shareholders," Harley-Davidson, Inc' annual

report for 2009.

Ilfotes: gHonda,s data relates to the whole company (motorcycles account for about 14% of Honda!

total sales)' Financial

year 2013 covers 12 monthsto March 31,2014;financial year2Ol4covers 12 monthsto March 31' 2015'

iyamahas data relates to the whole company (motorcycles account for about 65% of Yamahat total sales)'

t4'

fl

i

6. the Indian plant was its second overseas assembly plant; the first was established in Brazil in lW. , :

7. K. Wandell, "Chairman's Annual l,etter," Harley-Davidson 2013 annual rePort.

8. G. Strauss, 'Bom to bJ.Bikers," USA Todalt (November 5,i 1997).

9. M. Ballon, "Born to be rVild," .Izc' (November, 1997): 42' 10. Harley-Davidson, Inc., annual report (2000).

11. "Velcbme I€tter," Blackstone Valley HOG Chapter,

http ://www. blackstonevalleyhog. com,/HTMVwelcome'

php, accessed July 20,2075. i 12. "Analysis: As Boomers Age, Harley Hunts for Younger

Riders," Reuters,June 21, 2013, hfipt / htk.reuters.com/ a:rricle / 20 13 / 06 / 2L / us-hatley davidson-boomers-analysis' idUSBRE95K0GU2O13O62L, accessed July 20, 2075.,

13. "Letter to Shareholders," Harley-Davidson 2014 annual

review. l{ Ylarley-Davidson, Inc., "Knowledge is Horsepower,"

annual report (2003).

i5. K. R. Fitzgerald, "Harley's Supplier Council Helps Deliver Full Value," Purcbasing (September 5, 1996)'

Notes

CASE 7 HARLEY-DAVIDSON, INC., MAY 2015 616

15. C. Fessler,'Rotating Leadership at Harley-Davidson: From

Hierarchy to Interdependence,' Strategjt and Leadersbip

Qrly 17,1997). 17. "Harley-Davidson'Workers Brace for Big Change,"

&xiness Joumal, Milwaukee (Apnl 27, 2012).

18. "Harley, You're Not Getting Any Younger,' Neu York

Times (March 21,2W9).

1!. Reported in Marco della Cava, "Motorrycle Maker Caters to the Continerf," tlSA Today (Lpnl 22, 1998): 88.

20. "Screw it, let's ride is not a strategy," Brew Ci4t Brawler,

lanuary 23, 2009, http://brewcitybrawler.typepad.com/ brew-city-b r a'wler / 2OO9 / 01lscrew-it-lets-ride-is-not-a- strategy.htrnl, accessed July 20, 20L5.

'I l.