3 pages essay

Harley-Davidson in 200 4 John E. Gambl e University of South Alabam a

H arley-Davidson's management had muc h to be proud of as the company wrappe d up its Open Road Tour centennial celebra-

tion, which began in July 2002 in Atlanta, Georgia , and ended on the 2003 Memorial Day Weekend i n Harley's hometown of Milwaukee, Wisconsin . Th e 14-month Open Road Tour was a tremendous suc- cess, drawing large crowds of Harley owners in eac h of its five stops in North America and additional stop s in Australia, Japan, Spain, and Germany. Each sto p along the tour included exhibits of historic motor- cycles, performances by dozens of bands as divers e as Lynyrd Skynyrd, Earl Scruggs, and Nickelback , and brought hundreds of thousands of Harley enthu- siasts together to celebrate the company's products . The Ride Home finale brought 700,000 biker-guest s from four points in the United States to Milwaukee for a four-day party that included concerts, factor y tours, and a parade of 10,000 motorcycles throug h downtown Milwaukee. The company also used the Open Road Tour as a platform for its support of the Muscular Dystrophy Association (MDA), raisin g $7 million for the MDA during the 14-month tour. Photos from the Open Road Tour and Harley's ne w V-Rod model are presented in Exhibit 1 .

Harley-Davidson's centennial year was also a year to remember for the company's being name d to Fortune's annual list "The 100 Best Companie s to Work For" and judged third in automotive qual- ity behind Rolls-Royce and Mercedes-Benz by Harris Interactive, a worldwide market researc h and consulting firm best known for the Harris Poll . Consumer loyalty to Harley-Davidson motorcycle s was unmatched by almost any other company . As

Copyright © 2004 by John E . Gamble and Roger Schafer. Al l rights reserved .

Roger Schafe r University of South Alabam a

a Canadian Harley dealer explained, " You kno w you've got strong brand loyalty when your custom- ers tattoo your logo on their arm"' The company's revenues had grown at a compound annual rate o f 16 .6 percent since 1994 to reach $4 .6 billion i n 2003 marking its 18th consecutive year of recor d revenues and earnings. In 2003, the company sol d more than 290,000 motorcycles, giving it a com- manding share of the market for motorcycles in the 651+ cubic centimeters (cc) category in the Unite d States and the leading share of the market in th e Asia/Pacific region. The consistent growth had al- lowed Harley-Davidson's share price to appreciat e by more than 15,000 percent since the company' s initial public offering in 1986 . In January 2004, th e company's CEO, Jeffrey Bleustein, commented o n the centennial year and the company's prospects fo r growth as it entered its second century.

We had a phenomenal year full of memorable once- in-a-lifetime experiences surrounding our 100th An- niversary . As we begin our 101st year, we expect t o grow the business further with our proven ability to deliver a continuous stream of exciting new motor - cycles, related products, and services . We have set a new goal for the company to be able to satisfy a yearl y demand of 400,000 Harley-Davidson motorcycle s in 2007 . By offering innovative products and ser- vices, and by driving productivity gains in all facet s

of our business, we are confident that we can delive r

an earnings growth rate in the mid-teens for the fore-

seeable future . '-

However, not everyone was as bullish o n

Harley-Davidson 's future, with analysts pointin g

out that the company's plans for growth were to o

dependent on aging baby boomers . The company had achieved its record growth during the 1990s an d

C-356

Case 20 Harley-Davidson in 2004

Exhibit 1 Photos from Harley-Davidson's Open Road Tour and Its VRSC V-Rod

C-35 7

t know :ustom- npany's rate o f lion in record

ny sold a corn- s in the United in the

had ai- )reciate npany's 104, the Zted o n ects for

le once- 10th An - xpect to bility to , motor- we set a a yearl y orcycle s and set-

facet s u deliver the fore-

ish on p ointin g 'ere to o )mpany 90s and

Source : Harley-Davidson Web site .

early 2000s primarily through the appeal its image held for baby boomers in the United States . Som e observers wondered how much longer boomer s would choose to spend recreational time touring th e country by motorcycle and attending motorcycl e rallies . The company had yet to develop a motorcycle

that appealed in large numbers to motorcycl e riders in their 20s or cyclists in Europe, both o f whom preferred performance-oriented bikes ove r cruisers or touring motorcycles . Another concer n of analysts watching the company was Harley - Davidson's short-term oversupply of certain models

C-358

Part 2 Cases in Crafting and Executing Strateg y

Exhibit 2 Summary of Harley-Davidson's Financial Performance, 1994-200 3 (in thousands, except per share amounts )

Income statement data

Net sales

Cost of goods sol d

Gross profi t

Operating income from financial service s

Selling, administrative and engineerin g

Income from operation s

Gain on sale of credit card busines s

Interest income, net

Other income (expense), ne t

Income from continuing operations before provision fo r income taxes and accounting change s

Provision for income taxe s

Income from continuing operations before accountin g change s

Income (loss) from discontinued operations, net of ta x

Income before accounting change s

Cumulative effect of accounting changes, net of ta x

Net income (loss) Weighted average common shares :

Basic

Dilute d

Earnings per common share from continuing operations :

Basic

Dilute d

Dividends pai d Balance sheet data

Working capital

Current finance receivables, ne t

Long-term finance receivables, net

Total asset s Short-term finance deb t

Long-term finance debt

Total deb t

Shareholders' equit y

Source : Harley-Davidson Inc . 2003, 2002, and 1998 10-K reports .

brought about by the 14-month production run fo r its 100th anniversary models . The effect of th e extended production period shortened the waitin g list for most models from over a year to a fe w months and left some models on showroom floors for immediate purchase . The combined effects of a market focus on a narrow demographic group, the

$4,624,274

$4,090,970

$3,406,786

2,958,708

2,673,129

2,253,81 5

1,665,566

1,417,84 1

167,873

104,227

(684,175)

(639,366 )

1,149,264

882,702

302,271 302,297 302,50 6 304,470 305,158 306,24 8

$ 2 .52 $ 1 .92 $ 1 .45

2 .50 1 .90 1 .4 3

0 .195 0 .135 0 .11 5

$1,773,354 $1,076,534 $

949,15 4

1,001,990 855,771 656,42 1

735,859 589,809 379,335

4,923,088 3,861,217 3,118,495 324,305 382,579 217,05 1

670,000 380,000 380,000

$ 994,305 $

762,579 $

597,05 1

$2,957,692 $2,232,915 $1,756,283

difficulty experienced in gaining market share i n

Europe, and short-term forecasting problems led to a

sell-off of Harley-Davidson shares going into 2004 .

Exhibit 2 presents a summary of Harley-Davidson 's financial and operating performance for 1994-2003 . Its market performance for 1994 through January 2004 is presented in Exhibit 3 .

1,152,97 1 61,27 3

(551,743 ) 662,50 1

23,088

16,541

17,47 8 (6,317)

(13,416)

(6,524 )

1,166,035

885,827

673,44 5

405,107

305,610

235,70 9

Case 20 Harley-Davidson in 2004

C-35 9

$2,943,346 $2,482,738 $2,087,670 $1,762,569 $1,531,227 $1,350,466 $1,158,88 7

1,979,572 1,666,863 1,414,034 1,176,352 1,041,133 939,067 800,54 8

963,774 815,875 673,636 586,217 490,094 411,399 358,33 9

37,178 27,685 20,211 12,355 7,801 3,620

(485,980) (427,701) (360,231) (328,569) (269,449) (234,223) (204,777 )

514,972 415,859 333,616 270,003 228,446 180,796 153,56 2

18,91 5

17,583 8,014 3,828 7,871 3,309 96 1,68 2

(2,914) (3,080) (1,215) (1,572) (4,133) (4,903) 1,19 6

548,556 420,793 336,229 276,302 227,622 175,989 156,44 0

200,843 153,592 122,729 102,232 84,213 64,939 60,21 9

347,713 267,201 213,500 174,070 143,409 111,050 96,22 1

22,619 1,430 8,05 1

347,713 267,201 213,500 174,070 166,028 112,480 104,27 2

$

347,713 $

267,201 $

213,500 $

174,070 $

166,028 $

112,480 $

104,27 2

302,691 304,748 304,454 151,650 150,683 149,972 150,44 0

307,470 309,714 309,406 153,948 152,925 151,900 153,36 5

$

1 .15 $ 0 .88 $ 0 .70 $

1 .15 $ 0 .95 $ 0 .74 $ 0 .6 4

1 .13 0 .86 0 .69 1 .13 0 .94 0 .73 0 .6 3

0,098 0,088 0,078 0,135 0,110 0,090 0,07 0

$

799,521 $

430,840 $

376,448 $

342,333 $

362,031 $288,783 $189,358

530,859 440,951 360,341 293,329 183,808 169,61 5

234,091 354,888 319,427 249,346 154,264 43,82 9

2,436,404 2,112,077 1,920,209 1,598,901 1,299,985 980,670 676,663 89,509 181,163 146,742 90,638 8,065

355,000 280,000 280,000 280,000 250,000 164,33 0

$ 444,509 $

461,163 $ 426,742 $

391,572 $

285,767 $185,228 $ 10,452

$1,405,655 $1,161,080 $1,029,911 $

826,668 $

662,720 $494,569 $433,232

care i n led to a

2004 . idson 's -2003 . anuary

Harley-Davidson's history began in Milwaukee , Wisconsin, in 1903 when 20-year-old Arthu r Davidson convinced his father to build a small she d in their backyard where Arthur and 21-year-old

William Harley could try their hand at building a motorcycle . Various types of motorized bicycles ha d been built since 1885, but the 1901 development of a motorcycle with an integrated engine by a French company inspired Davidson and Harley to develo p their own motorcycle. The two next-door neighbors built a two-horsepower engine that they fit onto a

C-360

Part 2 Cases in Crafting and Executing Strateg y

Exhibit 3 Yearly Performance of Harley-Davidson Inc .'s Stock Price , 1994 to January 2004

(a) Trend in Harley-Davidson Inc .'s Common Stock Pric e $6 0

3 0

2 5

2 0

1 5

1 0

95 96 97 98 99 00 01

02 0 3 Year

addin g comp<

I r powe r keep i to de l the ne angle desi g potat( One A whe n The rior d firing an u r Neve a H a earl y in thi

5 5

5 0

4 5

40

35 Stock Pric e

5

+1000 %

+900 %

+800 %

+700 %

+600 %

+500 %

+400 %

+300 %

+200 %

+100 %

+0 %

-100%

Percent Change (1994 = 0 )

(b) Performance of Harley-Davidson Inc .'s Stock Pric e versus the S&P 500 Index

S&P 50 0

95 96 97 98 99 0 0 Year

01

02 03

duce in g prod in 6 " Har i inc h and wa s the ( ly in ; th e wi n it s des i the Day can fo u the pan 19 4 U . Smodified bicycle frame . At first the motorcycle coul d

not pull itself and a rider up a steep hill, but afte r some additional tinkering, the first Harley-Davidso n motorcycle could run as fast as 25 miles per hour . Milwaukee residents were amazed as Harley and Dav- idson rode the motorcycle down local streets, and b y the end of the year the partners were able to produce and sell three of their motorcycles . Walter Davidson

joined his brother and William Harley during the year to help assemble and race the company's motor- cycles . In 1905, a Harley-Davidson motorcycle won a 15-mile race in Chicago with a time of 19 :02, and by 1907 the company had developed quite a reputatio n in motorcycle racing with numerous wins in Milwau- kee-area races . In 1907, another Davidson brother, William, joined the company and the company began

ma m o Da inc in GI

Case 20 Harley-Davidson in 2004

C-36 1

the otor- von a id b y atio n wau- rther, iegan

adding dealers . Harley-Davidson's dealers helped th e company sell 150 motorcycles in 1907 .

In 1909, Harley-Davidson developed a mor e powerful seven-horsepower motorcycle engine to keep its edge in racing, an innovation that turned ou t to define the look of the company's motorcycles fo r the next century. Twin cylinders joined at a 45-degre e angle became a trademark Harley-Davidson engin e design characteristic and created a distinctive "potato- potato-potato" sound . Harley designed his V-twin en - gine with two pistons connected to a single crankpin, whereas later designs used crankpins for each piston . The single-crankpin design had been called an infe- rior design because it caused the pistons to come int o firing positions at uneven intervals, which produce d an uneven cadence in sound and excessive vibrations . Nevertheless, the vibrations and distinctive rumble of a Harley engine were accepted by the market in the early 1900s and continued to appeal to motorcyclist s in the early 2000s .

The stronger engine allowed the company to pro- duce 17,000 motorcycles for the U .S . military dur- ing World War I and become the largest motorcycle producer in the world in 1920, with 2,000 dealers in 67 countries . A number of features that make u p Harley-Davidson's image originated during the 1920s, including the teardrop gas tank, the `'Hog" nickname , and the "Flathead" engine design . Harley-Davidso n was one of two U.S . motorcycle companies to survive the Great Depression the other being Indian—by re - lying on exports and sales to police departments an d the U.S . military. The 1930s saw Harley-Davidso n win more races and develop additional elements o f its differentiated image, including the art deco eagl e design painted on its gas tanks, three-tone paint, and the "Knucklehead" engine rocker boxes . Harley - Davidson's 1936 EL model, or "Knucklehead," be - came its first highly styled motorcycle and formed th e foundation of style elements that remained present in the highly demanded 2004 Softail Fat Boy. The com- pany suspended production of civilian motorcycles i n 1941 to produce almost 90,000 motorcycles for the U.S . military during World War 11 .

The recreational motorcycle market grew dra- matically after World War It, as ex-GIs purchased motorcycles and led enthusiasm for riding . Harley- Davidson introduced new models for enthusiasts , including the Hydra-Glide in 1949, the K-mode l in 1952, the Sportster in 1957, and the Duo- Glide in 1958 . The combination of racing success

(Harley-Davidson riders won 18 of 24 races and se t six new racing records in 1950 alone) and innovativ e new Harley-Davidson models led to rival compan y Indian's demise in 1953 . Harley-Davidson would re - main the sole U.S . manufacturer of motorcycles unti l 1998, when the Indian brand was revived .

Harley-Davidson continued to win races through - out the 1960s, but its reputation began to erod e soon after its acquisition by American Machine an d Foundry Company (AMF) in 1969 . Harley-Davidso n under AMF was known for its leaking engines, un- reliable performance, and poor customer service . A t one point during AMF's ownership of the company , more than one-half of its bikes had to be repaired before leaving the factory. The company attempted to offset its declining sales of road bikes with th e introduction of dirt bikes and snowmobiles in th e early 1970s, but by the late 1970s AMF lost faith in the acquisition and slated it for divestiture . When no buyers for the company emerged, 13 executive s engineered a leveraged buyout of Harley-Davidso n in 1981 . Harley-Davidson struggled under the heav y debt load and came within four hours of bankruptcy in 1985, before then-CEO Richard Teerlink was abl e to convince new creditors to step in and restructure Harley with less costly financing terms . Teerlink also launched a restructuring program that updated man- ufacturing methods, improved quality, and expande d the model line .

U .S . tariffs imposed on 651+cc Japanese mo- torcycles also aided Harley-Davidson in gainin g financial strength and competitiveness in the heavy - weight segment of the U.S . motorcycle industry . Harley-Davidson completed an initial public offer- ing in 1985 and petitioned the International Trad e Commission to terminate tariffs on Japanese heavy - weight motorcycles in 1987 when its market shar e in the U.S . heavyweight category had improved to 25 percent from 16 percent in 1985 . In 1998, the com- pany purchased Wisconsin-based Buell Motorcycle , a performance brand using Harley-Davidson en- gines that began as a venture between Erik Buell an d Harley-Davidson in 1992 . Harley-Davidson opene d its 358,000-square-foot Kansas City, Missouri, plan t in 1998 to produce Sportster, Dyna Glide, and V-Ro d models and built an assembly plant in Brazil in 199 9 to aid in its Latin American expansion . The ne w capacity allowed Harley-Davidson to set productio n records each year during the early 2000s to reac h 290,000 units by year-end 2003 .

C-362

Part 2 Cases in Crafting and Executing Strateg y

OVERVIEW OF TH E MOTORCYCLE INDUSTR Y

Demand for motorcycles in developed countries suc h as the United States, Germany. France, Spain, an d Great Britain, grew dramatically at the end of Worl d War II as veterans who enjoyed riding motorcycle s during the war purchased their own bikes upon re - turn to civilian life . Groups of enthusiasts began t o form motorcycle clubs that allowed them to socializ e and participate in rallies and races. Two of the earli- est motorcycle rallies in the United States were th e Daytona Bike Week and the Sturgis Rally. The firs t Daytona 200, which occurs during Bike Week, wa s run in 1937 on a 3 .2-mile beach and road course . The first Sturgis, South Dakota, race took place i n 1938 when nine participants raced a half-mile trac k and performed such stunts as jumping ramps an d crashing through plywood walls . These and othe r such events grew dramatically in popularity begin- ning in the 1970s, with both Daytona Bike Week an d the Sturgis Rally each drawing over 200,000 biker s in 2003 . The Sturgis Rally was said to be among th e most raucous motorcycle rallies in the United States , with plenty of public drunkenness and lewd behavior accompanying the seven days of races . Such behavio r was common enough that the Rally Web sit e )tur ) provided the fines and bonds associate d with such offenses as indecent exposure, disorderl y conduct, open container in public, and possession o f controlled substances .

The rowdy and rebellious image of bikers i s traced to some of the motorcycle clubs that began after World War 11 . The outlaw image of cyclist s first developed in 1947 when Life magazine pho- tographers captured images of an impromptu rall y at Hollister, California, by a motorcycle group call- ing themselves the Boozefighters . The group becam e quite rowdy during their motorcycling exhibition , but Life reporters embellished the story significantly , claiming the Boozefighters descended on the tow n and proceeded to terrorize its residents by drag - racing down the main street, tossing beer bottles, an d riding motorcycles through the front doors of th e town's saloon . The imagery of the drunken Fourt h of July attack on the town became etched deepe r into the minds of the world when the story becam e the subject of The Wild One, a 1954 movie starrin g Marlon Brando . When asked by a local resident what

he was rebelling against, Brando's character, Johnn y replied, "Whaddya got?" 3 The general public cam e to dislike bikers because of incidents like the one i n Hollister and because of the Hollywood treatment o f the event, but the Hells Angels made many peopl e fearful of bikers and put motorcycle gangs under the close scrutiny of law enforcement at local, state, an d federal levels .

The Hells Angels were established in 1948 i n Fontana, California, by a group of young cyclists who had read of the Hollister rampage and wishe d to start their own outlaw biker group . The Hells An - gels, who took their name and symbols from variou s World War 11 flying units, became notorious durin g the 1960s when they became linked to drug traf- ficking and other organized crime activities . Sonn y Barger, a founder of the Oakland, California, chap - ter in the late 1950s, became the United States' mos t infamous biker after organizing a disastrous secu- rity effort for the 1969 Rolling Stones concert i n Altamont at which one concertgoer was stabbed an d killed by Hells Angels members . Barger, who ha d been convicted of attempted murder, possession o f narcotics with intent to sell, and assault with a deadl y weapon, commented in an interview with the Britis h Broadcasting Corporation (BBC) that he pressed a pistol into Keith Richards' ribs and ordered him t o continue to play after the Rolling Stones' guitarist threatened to end the show because of Hells Angels ' rough tactics with fans . '

The Hells Angels and rival motorcycle club s like the Pagans, the Banditos, and the Outlaws, rod e only Harleys, which hurt Harley-Davidson's imag e with the public in the 1960s . Honda successfully exploited Harley-'s outlaw image with the sloga n "You meet the nicest people on a Honda" to becom e the largest seller of motorcycles in the United State s during the late 1960s and early 1970s . 5 The image of the Hells Angels had spilled over to the entire industry and contributed to declines in motorcycl e demand in the United States and Europe during th e 1960s before a new Hollywood film resurrected in- terest in motorcycles . East/ Rider (1969) portraye d

bikers as less villainous rebels and appealed greatl y

to young people in the United States and Europe .

The movie eventually gained cult status and helpe d

charge a demand for motorcycles that began in th e 1970s and continued through 2003 . The red-white- and-blue 1951 Harley "Captain America" choppe r ridden by Peter Fonda's Wyatt character helped

1948 i n cyclist s wishe d

ells An - various

s durin g ug traf-

Sonn y a, chap - es' most as secu- ncert i n bed an d vho ha d ssion o f 'deadl y

Britis h -essed a I him to ;uitaris t Angels '

e club s vs, rod e s imag e essfull y

sloga n become d State s

imag e e entir e torcyc le ring the cted in- jrtraye d greatly

Europe . l helpe d n in the I-white- choppe r helped

Harley-Davidson break the outlaw image and come to represent less malevolent rebellion .

Industry Conditions in 2003 In 2003, more than 950,000 motorcycles were sol d in the United States and 28 million motorcycles were in operation worldwide . The industry was expecte d to grow by approximately 5 percent annually throug h 2007 with light motorcycles, Mopeds, and scooter s accounting for most of the expected growth . A gen- eral increase in incomes in such emerging markets as China, India, and Southeast Asia was the primar y force expected to drive industry growth . Deman d growth for the heavyweight motorcycle categor y had outpaced smaller motorcycles in the Unite d States during the 1990s and into 2003, but analyst s projected that demand for larger motorcycles woul d decline as the population aged and became les s able to travel on two-wheelers . In 2002, demand fo r heavyweight motorcycles in the United States gre w by 17 percent compared to an industrywide growt h rate of 10 percent .

The industry was segmented into various groups on the basis of engine size and vehicle style . Mo- peds, scooters, and some small motorcycles wer e equipped with engines having displacements of 5 0 cubic centimeters (cc) or less . These motorbikes were best suited for urban areas where streets wer e narrow and parking was limited or for developin g countries where personal incomes were limited an d consumers could make only small investments i n transportation . Motorcycles used for basic trans- portation or for motocross events were typically equipped with engines ranging from 125cc to 650cc . Larger street bikes required more power and usuall y had engines over 650cc . Large motorcycles with en- gine displacements greater than 65Ice accounted fo r the largest portion of demand in North America an d Europe as riders increasingly chose motorcycle s with more horsepower and better performance . Exhibit 4 presents registrations of 651 +cc motorcy- cles in the United States, Europe, and Asia-Pacific fo r 1998-2003 . Even though Europe had fewer registra- tions of 65 1 +cc motorcycles than the United States , it was the world's largest market for motorcycles , with 1 .1 million registrations of f25+cc motorcy- cles in 2002 . Registrations of motorcycles with en- gine displacements greater than 125cc in the larges t European markets are presented in Exhibit 5 .

Case 20 Harley-Davidson in 2004

C-36 3

Segmentation withi n the 651+cc Category Motorcycles in the 651 +cc segment were referre d to as heavyweights and were grouped into four cat- egories . Standard heavyweight motorcycles were de- signed for low-cost transportation and lacked man y of the features and accessories of more expensive classes of heavyweights. Performance bikes ha d streamlined styling, low-profile fairings, and seat and handlebar configurations that required the ride r to lean forward ; they were characterized by respon- sive handling, rapid acceleration, and high top-en d speeds . Custom motorcycles ranged from motorcy- cles with a custom paint scheme to highly person- alized bikes painted with murals or other designs , chromed frames and other components, and acces- sories not found on stock motorcycles . The chopper, among the more unusual custom styles, was limite d only by designers' imaginations but typically had ex - tended forks, high handlebars, a narrow front tire , and a rigid "hardtail" frame design that lacked rea r shocks and was stretched longer than normal motor - cycles . Another notable feature of custom chopper s was that they were almost always built from stoc k Harley-Davidson motorcycles, sometimes retainin g only the engine .

Custom bikes were the largest segment of th e U.S . heavyweight market for motorcycles and had become a curiosity for noncyclists . The Discovery Channel regularly aired two programs dedicated to the topic of choppers and other custom vehicles . The names of two custom motorcycle shops, Wes t Coast Choppers (WCC) and Orange County Chop- pers, frequently made the Internet search engin e Lycos's list of 50 most-searched terms . Jesse James , a descendent of the famous American Old West out - law and owner of West Coast Choppers, also made Lycos's list of most-searched terms . WCC charged between $60,000 and $150,000 for its custom mo- torcycles, which were usually sold to celebritie s such as movie stars, professional athletes, and roc k musicians .

Touring bikes were set apart from other cat- egories by creature comforts and accessories tha t included large fairings, storage compartments, C D players, cruise control, and other features typicall y found on cars rather than on motorcycles . Tourin g bikes were popular in the United States since many baby boomers wished to enjoy biking, but with som e

Johnny, is cam e e one i n tment o f

peopl e nder the :ate, and

C-364

Part 2 Cases in Crafting and Executing Strateg y

Exhibit 4 Market Shares of the Leading Producers of Motorcycles by Geographi c Region for the Heavyweight Segment, 1998-2003 (engine displacemen t of 651+cc )

New U .S . registrations (thousands of units )

Total market new registrations 461 .2 442 .3 394 .3 340 275 .6 227. 1

Harley-Davidson new registrations 228 .4 209 .3 177 .4 155 .1 134 .5 109. 1

Buell new registrations 3 .5 2 .9 2 .6 4 .2 3 .9 3. 2

Total company new registrations 231 .9 212.2 180 .0 159 .3 138 .4 112. 3

Percentage market share 49 .5% 47.5% 45 .0% 45 .6% 48 .8% 48.1 %Harley-Davidson motorcycle s

Buell motorcycles 0 .8 0.7 0 .7 1 .2 1 .4 1 . 4

Total Harley-Davidson 50 .3% 48 .2% 45 .7% 46 .8% 50 .2% 49.5 %

Honda 18 .4% 19 .8% 20 .5% 18 .5% 16 .4% 20 .3% s i

Suzuk i

Kawasaki

9 . 8

6 .7

9 . 6

6 .9

10 . 8

8 .0

9 . 3

9 .0

9 . 4

10 .3

10 . 0 10 .1

c

Yamaha 8 .5 8 .9 7 .9 8 .4 7 .0 4 . 2

Other 6 .3 6 .6 7 .1 8 .0 6 .7 5 .9 P c

Total 100 .0% 100 .0% 100 .0% 100 .0% 100 .0% 100 .0 %

New European registration s (thousands of units )

Total market new registrations 323 .1 303 .5 292 .1 293 .4 306 .7 270 .2

C

Total Harley-Davidson new registrations 26 .3 20 .1 19 .6 19 .9 17 .8 15 .7 1

Percentage market share

Total Harley-Davidson 8 .1% 6 .6% 6 .7% 6.8% 5 .8% 5.8 %

Honda 16 .7 21 .0 17 .4 21 .8 22 .2 24 . 1

Yamaha 16 .0 17 .7 16 .4 17 .3 18 .0 16 . 3

BMW 15 .3 15 .1 15 .1 13 .0 13 .0 13 . 4

Suzuki 15 .5 14 .8 16 .5 14 .3 15 .4 17 . 2

Other 28 .4 24 .8 27.9 26 .8 25 .6 23 . 2

Total 100 .0% 100 .0% 100.0% 100 .0% 100 .0% 100 .0 %

New Asia-Pacific registration s (thousands of units )

Total market new registrations 58 .9 63 .9 62 .1 62 .7 63 .1 69 . 2

Total Harley-Davidson new registrations 15 .2 13 .0 12 .7 12 .2 11 .6 10 . 3

Percentage market share

Total Harley-Davidson 25 .8% 21 .3% 20 .4% 19 .5% 18 .5% 14 .8%

Honda 17 .8 19 .1 17 .3 20 .4 22 .4 28 . 0

Kawasaki 13 .8 15 .8 15 .6 18 .9 19 .0 22 . 1

Yamaha 11 .4 13 .6 15 .8 17 .0 19 .0 16 . 0

Suzuki 10 .7 10 .1 12 .8 10 .4 9 .3 7 . 9

Other 20 .5 20 .1 18 .1 13 .8 11 .8 11 . 2

Total 100 .0% 100 .0% 100 .0% 100.0% 100 .0% 100 .0%

Source: Harley-Davidson Inc . 10-K reports and annual reports .

Case 20 Harley-Davidson in 2004

C-36 5

Exhibit 5 Registrations of New Motorcycles in Major Europea n Markets, 1998-2003 (engine displacement of 125+cc )

Country 1998 1999 2000 2001 2002 2003

Germany 175,937 187,192 170,636 158,270 145,369 138,71 2

Italy 79,400 103,800 122,085 126,400 129,261 130,22 4

France 88,500 109,105 103,900 106,802 113,852 N/ A

Great Britain 84,500 98,186 93,634 91,543 93,557 N/ A

Spain 35,600 39,200 38,052 31,829 35,252 N/A

N/A = Not available .

Sources : Association des Constructeurs Europeens de Motocycles, Brussels ; Industrieverband Motorra d Deutschland e .V.

comfort. Comfortable saddles, upright riding po- sitions, and other features found on touring bike s were especially welcomed by those who took cross - country or other long-distance journeys on their mo- torcycles . Custom and touring motorcycles were les s popular outside of the United States since cyclists in other countries were more likely to travel only shor t distances and did not necessarily identify with th e individualist or outlaw image associated with heavy- weights in the United States . The largest segmen t of the heavyweight motorcycle category outside th e United States was the performance bike categor y since most riders in other countries preferred sleek styling and were more interested in speed and han- dling rather than in comfort and tradition . In addi- tion, motorcyclists in Europe and Asia tended t o choose performance bikes over motorcycles in the custom and touring categories because of the hig h relative prices of such motorcycles . Exhibit 6 present s a regional comparison of motorcycle registrations b y heavyweight category for 1998 through 2002 .

Competition in the Globa l Motorcycle Industry Rivalry in the motorcycle industry centered on per- formance, styling, breadth of product line, image an d reputation, quality of after-the-sale service, and price . Most motorcycle manufacturers had good reputation s for performance and styling with the greatest vari- ance between brands occurring in pricing, variety o f models, and quality of dealer service . Most cyclists

preferred not to purchase specific brands, even if they were attracted to specific models, if the company's dealers did not have trained mechanics or had a repu - tation for shoddy workmanship or poor parts availabil - ity. There was also a great degree of price variability in the industry with comparable models of Japanese motorcycles typically carrying retail prices far belo w that of U.S .- or European-made motorcycles .

Exhibits 7 and 8 illustrate the difficulty U .S . an d European manufacturers had experienced in attract- ing price-sensitive buyers in Europe . The Japanese producers were able to offer high-performance motorcycles at prices below those of Harley - Davidson, Ducati, Triumph, or Moto Guzzi . BMW had achieved considerable success in Europe , especially in Germany, because of exceptiona l performance and reputation, a strong dealer network , and regional loyalty to the brand .

Motorcycle manufacturers, like automobile man- ufacturers, maintained relationships with suppliers t o produce or assemble components such as upholstery, tires, engine parts, brake parts, wiring harnesses , shocks, and rims . Almost without exception, th e manufacturer designed and manufactured its engine s and frames . Design and assembly of motorcycle s took place in the manufacturers' home country, and completed motorcycles were exported to countr y markets where dealer networks had been established .

Consumers typically evaluated brands by talk- ing to other cyclists, reading product reviews, perus- ing company Web sites, noting ads in print and othe r media, and noting a manufacturer's performance i n competitive events . Typically, consumers had some

C-366

Part 2 Cases in Crafting and Executing Strateg y

Exhibit 6 Regional Comparison of the 651+cc Motorcycl e Market by Segment,* 1998-2002 (percent of unit s registered )

United State s

Custom 58 .4% 57 .7% 56 .6% 58 .9% 60 .3 % Touring 20 .4 21 .7 21 .1 20 .3 20 . 2 Performance 19 .4 18 .9 20 .4 19 .1 17 . 3 Standard 1 .8 1 .8 2 .0 1 .7 2 . 2

100.0% 100.0% 100 .0% 100 .0% 100 .0%

Europ e

Custom 22 .8% 20 .2% 17 .6% 17 .8% 13 .8 % Touring 5 .3 5 .5 5 .2 5 .2 4 . 8 Performance 59 .8 58 61 .7 59 .8 61 . 2 Standard 12.1 16 .3 15 .5 17 .2 20 .2

100 .0% 100 .0% 100 .0% 100 .0% 100 .0%

Asia-Pacifi c

Custom 18 .3% 28 .6% 26 .7% 23 .9% n/a Touring 3 .9 4 .7 3 .7 7 .2 n/a Performance 76 .1 64 .5 66 .2 65 .5 n/a Standard 1 .7 2 .2 3.5 3 .4 n/a

100 .0% 100 .0% 100 .0% 100 .0% n/a

* Category definitions : Custom Characterized by "American styling ." Often personalized by accessorizing .

Touring: Designed primarily for long trips, with an emphasis on comfort, cargo capacity, an d reliability. Often have features such as two-way radios (for communication with passenger), stereo ,

and cruise control .

Performance: Characterized by quick acceleration, top speed, and handling . Commonly referred to as "sport bikes ."

Standard: A basic, no-frills motorcycle with an emphasis on low price .

Source : Harley-Davidson Inc . 2003 and 2002 10-K reports .

ability to negotiate prices with dealers, but mos t preferred to buy from dealers with good servic e departments, large parts inventories, and attractive financing programs . Similarly, strong motorcycl e dealers preferred to represent manufacturers wit h good reputations and strong consumer demand, re- sponsive customer service and parts delivery, for- mal training programs for service technicians, and financing divisions that offered competitive rate s and programs .

Consumers purchased motorcycles for various reasons . Some individuals, especially in developing countries, were looking for low-cost transportation . Lightweight motorcycles, mopeds, and scooters were priced inexpensively compared to cars and used far

less gasoline . However, motorcycles provided no protection from the elements and were used only fo r fair-weather transportation by most riders who als o

owned a car . In the United States and Europe, mos t consumers who purchased a motorcycle also owne d a car and preferred to travel by motorcycle on week- ends or other times they were not working . Some i n Europe did choose to commute to and from wor k on motorcycles when weather permitted because o f limited parking available in large European citie s and the high cost of fuel . Many motorcycle owners , particularly so in the United States, looked at ridin g as a form of recreation and had given up other sport s

or hobbies to spend time touring on motorcycles .

Many middle-aged bikers in the United States ha d

Case 20 Harley-Davidson in 2004

C-36 7

Exhibit 7 Market Shares of the Leading Sellers o f Motorcycles in Germany, 2001-200 3 (engine displacement of 125+cc )

Sources : Kraftfahrtbundesamt Industrieverband Motorrad Deutschland e .V.

BMW 16 .0% 18 .1% 19 .5 %

Suzuki 21 .7 20 .3 19 . 2

Yamaha 16 .3 16 .0 15 . 9

Honda 16 .8 17 .3 15 . 5

Kawasaki 11 .1 10 .7 10 . 6

KTM 3 .1 3 .8 4 . 4

Harley-Davidson 3 .6 3 .7 4 . 2

Ducati 2 .8 2 .8 2 . 9

Triumph 2 .5 1 .8 2 . 0

Aprilia 1 .7 1 .5 1 .4

Moto Guzzi 0 .6 0 .7 0 . 9

Buell 0 .4 0 .3 0 . 6

MV/Cagiva 1 .2 0 .8 0 . 6

MZ 0 .5 0 .4 0 . 3

Sachs 0 .3 0 .2 0 . 2

Other 1 .4 1 .6 1 . 9

Total 100 .0% 100 .0% 100 .0%

ided n o

only fo r

vho als o le, mos t

a owne d in week- Some i n

.m wor k

cause o f

in citie s owners ,

at ridin g

er sports

>rcycles .

aces had

Exhibit 8 Best-Selling Motorcycle Models in Germany, November 200 3

Sources : Kraftfahrtbundesamt ; Industrieverband Motorrad Deutschland e.V .

Manufacturers'

Year-to-Date Recommended

2003

Heavyweight Rank

Brand

Model -

Price ($ US)

Registrations

Classificatio n

BM W

Suzuk i

BM W

Suzuk i

Yamah a

Suzuk i

Suzuk i

Kawasaki

BM W

BMW

R 1150 G S

GSF 1200 (KL)

F 650 G S

SV 65 0

FZS 60 0

GSF 600

GSX-R 100 0

Z1000

R 1150 R T

R 1150 R

$14,500

7,399

8,190

6,299

6,499

6,29 9

10,59 9

8,49 9

16,29 0

9,990

6,24 2

4,02 3

3,52 4

3,44 4

3,29 4

3,182

2,836 2,825

2,607

2,539

Enduro/Tourin g

Performance

Enduro/Tourin g

Standar d

Standar d

Standar d

Performanc e

Performanc e

Tourin g

Performanc e

C-368

Part 2 Cases in Crafting and Executing Strateg y

purchased motorcycles after giving up sports an d activities requiring more athleticism or endurance .

REGULATION AND LEGA L CHALLENGE S The motorcycle industry was subject to laws an d regulations in all countries where motorcycles wer e operated . The European Parliament and the Europea n Council included motorcycles in their agreemen t to reduce exhaust gas values during their Marc h 2002 meeting . The agreement required producer s of motorcycles and scooters to reduce pollutants b y 60 percent for all new cycles produced after Apri l 2003 . A further 60 percent reduction would be re- quired for motorcycles produced after January 2006 . Demand for motorcycles in Europe was impacted t o a great degree by the implementation of the euro i n 2002 : prices of motorcycles increased substantiall y in some countries when the currency exchange too k effect . For instance, because Germany's currenc y was much stronger than that of many other Europea n Union countries, prices of most products and serv- ices increased in Germany after the change to the euro since the euro attempted to equalize the differ- ences between currencies . The difficulty in obtainin g a driver's license for motorcycles in some Europea n countries also affected demand for motorcycles . German laws required separate automobile and mo- torcycle licenses for riders of motorcycles larger tha n 125cc, and France required those applying for motor - cycle licenses to have first held an automobile license for two years . Austria's licensing laws were the mos t restrictive, requiring applicants to first hold an auto - mobile license for five years and to complete six train - ing sessions prior to obtaining a motorcycle license . Motorcycles that produced excessive noise were als o under attack in most European countries .

In the United States, motorcycle producers wer e subject to certification by the Environmental Protec- tion Agency (EPA) for compliance with emission an d noise standards, as well as agencies in some state s imposing more stringent noise and emission stan- dards . The California Air Resources Board (CARB ) had outlined new tailpipe emission standards tha t would go into effect in 2004 and 2008 . The EPA de- veloped new emission standards that would go int o effect in 2006 and 2010 to match national standards

with those in California . Motorcycle producers in th e United States were also required to meet the produc t safety standards imposed by the National Highway Traffic Safety Administration (NHTSA) .

Also in the United States, many motorcyclist s found that their health insurance providers exclude d coverage for any injuries sustained while on a mo- torcycle . The American Motorcyclists Associatio n (AMA) had successfully petitioned the U .S . Senate to pass a bill in October 2003 that would prohibit insur- ance companies from denying coverage to someon e hurt while riding a motorcycle, a snowmobile, or an all-terrain vehicle . Insurance companies had based their policies on NHTSA statistics that found motor- cycling to be much more dangerous than travelin g by car. While traffic fatalities per 100 million vehicl e miles traveled hit a historic low in 2002, motorcycl e fatalities had increased for a fifth consecutive year , to reach 3,244 deaths . There were 42,815 traffi c fatalities in 2002 involving occupants of automo- biles . Fatalities involving motorcyclists ages 50 an d older increased by 26 percent during 2002 a higher rate of increase than any other age demographic . State legislatures in some states where helmets wer e optional had attempted to force motorcyclists wh o chose not to wear helmets to become mandator y organ donors . However, the AMA and its member- ship had successfully stopped all such attempts t o pass mandatory organ donor laws .

HARLEY-DAVIDSON' S STRATEGY FO R COMPETING IN TH E MOTORCYCLE INDUSTR Y Harley-Davidson was reincorporated in 1981 afte r it was purchased from AMF by 13 of its manager s through a leveraged buyout (LBO) . The managemen t team's main focus at the time was to preserve jobs , but its members soon realized the company woul d

need to be rebuilt from the ground up to survive . The

company's market share in the United States ha d

fallen to 3 percent, primarily because its product s

were unreliable and had poorer performance relativ e

to less-expensive Japanese motorcycles . In addition,

its n that Up o me n Har i onl y beg ; tim e we r qua shit to pr e H a cu s mo fo r 20 1 fo r di e wt im

1

Case 20 Harley-Davidson in 2004

C-369

-s in th e aroduc t ighway

cyclist s cclude d amo-

)ciatio n mate to t insur- nneon e

or a n l base d motor- avelin g vehicl e arcycl e e year, traffi c

utomo - 50 an d highe r raphic . ts were ts wh o idator y ember- npts t o

1 afte r nager s ement e jobs , woul d ie . The es ha d oduct s elative dition,

its network of dealers ran greasy, run-down shop s that many people didn't feel comfortable visiting . Upon assessing the company's situation, the manage- ment team concluded that a strong allegiance to th e Harley brand by many bikers was the company' s only resource strength . However, when manager s began to meet with customers, they found that long - time Harley riders felt cheated by the company an d were angry about the lack of attention to produc t quality and customer service under AMF owner- ship . Some of the most loyal Harley riders refuse d to call models produced in the 1970s Harleys , preferring to label them as AMFs . After the LBO , Harley management tried to win over previou s customers by attending any function at whic h motorcyclists congregated . The company's direc- tor of communications at the time commented in a 2003 interview with a trade publication . "At first we found that our customers didn't like us, and the y didn't trust us "' However, the distrust subside d when Harley owners saw their suggestions bein g implemented by the company.

Harley-Davidson's turnaround strategy includ- ing improving product quality by adopting Japa- nese management practices, abandoning a relianc e on advertising in favor of promotions at motorcycl e rallies, and improving its dealer network to broade n its appeal to new customers . After hearing com- plaints about dealers from Harley riders at rallie s and other bike events, Harley-Davidson conducte d a pilot program with two dealers in Milwaukee tha t called for the dealers to build clean, attractive stores to showcase the company's improved motorcycle s and display apparel and other merchandise that cy- clists might wish to purchase . The two dealerships recaptured their investments within 18 months , while other dealers struggled . The pilot progra m led to new or remodeled dealerships across th e Harley-Davidson network and helped the compan y enter into a new product category . Harley showroom s offered a large assortment of clothing items an d accessories--for example, leather jackets, T-shirts , helmets, and boots in addition to new motorcycles . In 2003 Harley-Davidson introduced 1,200 ne w clothing items and licensed its name to more tha n 100 manufacturers making everything from Harley - Davidson Edition Ford F-150 pickups to Harley Bar- bie dolls . Apparel and accessories were so important

to the company and its dealers that in 2003 ever y dealer had a fitting room .

Cultivating Loyalty Throug h HOG Membership After Harley-Davidson's product quality issues ha d been resolved, the company focused on cultivatin g the mystique of Harley ownership . The company formed Harley Owners Groups (HOGs) in 1983 t o provide Harley owners with local chapters throug h which they could socialize and ride with other own- ers . Harley-Davidson established HOGs in citie s where dealers were located, but did not interfere wit h HOG operations or try to use the organization in a self-serving way. The company's primary interest i n setting up the chapters was to give motorcycle buy- ers a sense of community . Management understoo d that once new owners came to feel they belonged to the Harley community, they would bring new buy- ers to the company without any encouragement fro m Harley-Davidson .

The company provided each new Harley buye r with a free membership to a HOG where they coul d not only meet other area bikers but also learn the in s and outs of the biker world . HOGs also organized rides, raised money for charities, and participated i n nationwide HOG events . Owners were required to re - new their free memberships each year to ensure tha t only active participants would be on chapter roles . The HOG organization started with 33,000 member s in 1983 and had grown to 793,000 members in 1,200 chapters in 2003 . The company sponsored about 10 0 HOG rallies in 2003, with thousands of additional events organized by local chapters .

Harley's Image and Appeal wit h Baby Boomers Even though Harley sold many motorcycles to con- struction workers, mechanics, and other blue-colla r workers, Harley riders included a great many account - ants, lawyers, bankers, and corporate executives . In 2003, Harley-Davidson's typical customer was a 46 - year-old male earning $78,000 per year . The company had successfully added upscale consumers to its list o f customers without alienating traditional bikers. Some of the more traditional bikers did complain about the

Part 2 Cases in Crafting and Executing Strategy

point out t :i citiz~ trios( not 1 tore ) thei r ley s Cal i on e co m on AI- con the } nu a ers rem and

C-37 0

new breed of "bean counter Harley owners," some - times calling them "rubbers"—rich urban bikers . Such concern had been calmed to some degree by Willia m G . Davidson's continuing involvement with the com- pany. "Willie G" was the grandson of the company's cofounder and, as chief designer, had designed ever y motorcycle for the company since the 1960s . Willi e

G . was an "old-school " biker himself and rational- ized the company's alliance with upscale baby boom- ers with comments such as "There's a lot of beaners , but they're out on the motorcycles, which is a beauti- ful thing" '

Part of the appeal of HOG membership was tha t new motorcyclists could experience freedom of the open road, much like a Hells Angel might, if onl y during occasional weekends when the weather was nice . Some middle-aged professionals purchase d Harleys because riding was an opportunity to recre- ate and relax without being reminded of their dail y responsibilities . Belonging to a HOG or other rid- ing group was different from joining a country clu b or other club dominated by upper-income families ; as the CEO of a Fortune 500 company explained , "Nobody cares what anybody else does . We shar e a common bond of freedom on a bike" This sam e Harley owner claimed that after a few hours o f riding, he forgets he's a CEO .' Another affluen t Harley owner suggested that Harley owners fro m all walks of life shared the brotherhood of the ope n road : "It doesn't matter if you make $10,000 a yea r or $300,000" 9 Others suggested that Harley own- ership gave you an identity and provided you wit h a close group of friends in an increasingly anony- mous culture .

However, other Harley owners were lured b y the appeal of Harley-Davidson's outlaw image . The editor of AARP Magazine believed that baby boomers purchased Harleys because of a desire to feel "forever young" L0 The AARP Magazine edito r said that riding a Harley helped take boomers bac k to a time when they had less responsibility . "You saw `Easy Rider .' As a kid, you had a bit of a wild period in the '70s and you associate the motorcycle wit h that . But you got married . You had kids and a career. Now you can afford this . It's a safe way to live out a midlife crisis . It's a lot safer than running off wit h a stewardess °' In fact, many of Harley-Davidson 's competitors have claimed that Harley sells lifestyles , not motorcycles . Harley-Davidson CEO Jeffre y Bleustein commented on the appeal of the com- pany's motorcycles by stating, "Harley-Davidso n stands for freedom, adventure, individual expression

and being a little on the edge, a little bit naughty. People are drawn to the brand for those reasons" , '

The desire to pose as a Hells Angel, Peter Fonda' s Wyatt character, or Brando's Johnny helped Harley - Davidson sell more than 290,000 motorcycles an d over $200 million in general merchandise in 2003 . Many of Harley-Davidson 's 1,400 dealers dedicate d as much as 75 percent of their floor space to apparel and accessories, with most suggesting that betwee n 25 and 40 percent of their annual earnings came fro m the sale of leather jackets, chaps, boots, caps . helmets , and other accessories . One dealer offered her opinion of what drove merchandise sales by commenting , "Today's consumer tends to be a little more affluent , and they want the total look." L3 The dealer also said that approximately 5 percent of the dealership's ap- parel sales were to non—bike owners who wanted th e biker image . Even though some high-income bab y boomers wanted to be mistaken from a distance for Hells Angels' "1 percenters" the most rebellious I percent of the population for most it was all show. When looking out at the thousands of leather-clad bikers attending Harley-Davidson's 2003 Memorial Day centennial celebration in Milwaukee, a Harley owner said, "The truth is, this is mostly professiona l people . . . People want to create an image . Everybody has an alter side, an alter ego . And this is a chance t o have that" 7

Another Harley owner who had ridden his Heri- tage Softail from his home in Sioux Falls, Sout h Dakota, to attend the centennial event commente d on his expectations for revelry during the four-day celebration by pointing out, "Bikers like to part y pretty big . It's still a long way to go before you for - get the image of the Hells Angels ."' However, week- end bikers were quite different from the image they emulated . The Hells Angels continued to be linke d to organized crime into 2003, with nine Hells Angel s members being convicted in September 2003 of dru g trafficking and murdering at least 160 people, most

of whom were from rival gangs .'" Similarly, Hell s

Angels organizations in Europe had been linke d

to drug trafficking and dozens of murders ." Fifty- seven Angels in the United States were arrested i n December 2003 for crimes such as theft of motor - cycles, narcotics trafficking, and firearms and explo- sives trafficking following a two-year investigatio n of the motorcycle club by the Bureau of Alcohol , Tobacco, Firearms and Explosives . "

Harley-Davidson balanced its need to promot e

freedom and rebellion against its need to distanc e

the company from criminal behavior. Its Web site

Case 20 Harley-Davidson in 2004

C-37 1

n aughty. ons ."1 2 Fo nda's Harley-

:lies and n 2003 . edicated apparel

betwee n ne from lelmets, opinio n nenting , affluent , lso said lip's ap- nted the ne baby 1.nce for illious 1 11 show. her-clad emoria l Harley

essional Nrybody lance to

is Heri- , Sout h tmented bur-day o party 3ou for- r, week- ge the y

linke d Angel s of drug e, most

)f, Hells linked

' Fifty- sited i n motor-

I explo- tigatio n dcohol ,

Iromot e listanc e Ieb site

pointed out that "the vast majority of riders through - out the history of Harley-Davidson were law-abidin g citizens," and the company archivist proposed, "Eve n those who felt a certain alienation from society were not lawless anarchists, but people who saw the mo- torcycle as a way to express both their freedom an d their identity ."'`' When looking at the rows of Har- leys glistening in the sun in front of his Souther n California roadside cafe, the longtime proprietor o f one of the biggest biker shrines in the United State s commented, `There used to be some mean bastard s on those bikes . I guess the world has changed ."' " A Harley-Davidson dealer commented that dealer s considered hardcore bikers "1 percenters" because they made up less than 1 percent of a dealer's an- nual sales . The dealer found that very affluent buy- ers made up about 10 percent of sales, with th e remainder of customers making between $40,00 0 and $100 .000 per year. '- '

Harley-Davidson's Produc t Lin e Unlike Honda and Yamaha, Harley-Davidson did no t produce scooters and mopeds, nor did it manufac- ture motorcycles with engine displacements less tha n 651cc . In addition, Harley-Davidson did not produce dirt bikes or performance bikes like those offere d by Kawasaki and Suzuki . Of the world's major mo- torcycle producers, BMW produced bikes that most closely resembled Harley-Davidson's traditional line , although BMW also offered a large number of per- formance bikes . In 2004, Harley-Davidson's tourin g and custom motorcycles were grouped into five fami- lies : Sportster, Dyna Glide, Softail, Touring, and th e VRSC V-Rod. The Sportster, Dyna Glide, and VRS C models were manufactured in the company's Kansas City. Missouri, plant, while Softail and Touring mod- els were manufactured in York, Pennsylvania . Harley - Davidson considered the Sportster, Dyna Glide, an d VRSC models custom bikes, while Softails and Tour- ing models fell into the Touring industry classifica- tion. Sportsters and Dyna Glides each came in fou r model variations, while Softails came in six variation s and Touring bikes came in seven basic configurations . The VRSC V-Rod came in two basic styles . Harley- Davidson produced three models of its Buell perfor- mance bikes in its East Troy, Wisconsin, plant . In 2004 , Harley Sportsters carried retail prices ranging fro m $6,495 to $8,675 ; Dyna Glide models sold at pric e points between $11,995 and $16,580 ; VRSC V-Rods

sold between $16,895 and $17,995 ; Softails were of- fered between $13 .675 and $17,580 ; and the Roa d King and Electra Glide touring models sold at price s between $16,995 and $20,405 . Consumers could als o order custom Harleys through the company's Cus- tom Vehicle Operations (CVO) unit, started in 1999 . Customization and accessories on CVO models coul d add as much as $10,000 to the retail price of Harley - Davidson motorcycles . Images of Harley-Davidson's five product families and CVO models can be viewe d at

Honda, Kawasaki, Suzuki, and Yamaha had all introduced touring models that were very clos e replicas of Harley Sportsters, Dyna Glides, Roa d Kings, and Electra Glides . The Japanese producer s had even copied Harley's signature V-twin engin e and had tuned their dual-crankpin designs in a n attempt to copy the distinctive sound of a Harley - Davidson engine . However, even with prices up to 50 percent less on comparable models, none of' th e Japanese producers had been able to capture sub- stantial market share from Harley-Davidson in th e United States or in their home markets . (Refer bac k to Exhibit 4 for a breakdown of market shares i n the heavyweight segment in the U .S ., European, and Asia-Pacific regions .) Indian Motorcycle Corpora- tion had experienced similar difficulties gaining adequate market share in the U .S . heavyweight seg- ment and ceased its operations for a second time i n September 2003 .

Harley-Davidson's difficulties in luring buyers i n the performance segment of the industry were simila r to challenges that Japanese motorcycle producers had encountered in their attempts to gain market share i n the custom and touring categories of the U .S . heavy - weight motorcycle segment . Harley-Davidson ha d co-developed and later purchased Buell to have a product that might appeal to motorcyclists in th e United States who were in their 20s and did not iden- tify with the Easy Rider or Hells Angels images o r who did not find Harley-Davidson's traditional styl- ing appealing . Harley management also believed that Buell's performance street-racer-style bikes coul d help it gain market share in Europe, where perfor- mance bikes were highly popular . The Buell brand competed exclusively in the performance categor y against models offered by Honda, Yamaha, Kawasaki , Suzuki, and lesser-known European brands such a s Moto Guzzi, Ducati, and Triumph . Buell prices be- gan at $4,595 for its Blast model to better compete with Japanese motorcycles on price as well as on per- formance and styling . Buell's Lighting and Firebolt

C-372

Part 2 Cases in Crafting and Executing Strateg y

models were larger, faster motorcycles and retaile d for between $9,000 and $11,000 . The VSRC V -Rod„ with its liquid-cooled, Porsche-designed engine, wa s also designed to appeal to buyers in the performanc e segment of the industry, both in the United State s and Europe.

As of 2004, Harley-Davidson had not gaine d a significant share of the performance motorcycl e segment in the United States or Europe . Some in- dustry analysts criticized Harley-Davidson's dealer s for the lackluster sales of V -Rod and Buell models

since most dealers did little to develop employees ' sales techniques . Demand for Harleys had e xceed- ed supply since the early 1990s, and most dealers ' sales activities were limited to taking orders an d maintaining a waiting list . In addition, most Harley - Davidson dealers had been able to charge $2,000 t o $4,000 over the suggested retail price for new Har- ley-Davidson motorcycles, although most dealers had begun to sell Harleys at sticker price in 2003 , Harley-Davidson's revenues by product group ar e shown below :

Harley-Davidson Revenues by Product Group (in millions )

Harley-Davidson motorcycles $3,621 .5 $3,161 .0 $2,671 .3 Buell motorcycles 76 .1 66 .9 61 . 7 Total motorcycles $3,697 .6 $3,227 .9 $2,733 .0 Motorcycle Parts and Accessories 712 .8 629 .2 509 . 6 General Merchandise 211 .4 231 .5 163 . 9 Other 2 .5 2 .4 0 . 3 Net revenue $4,624 .3 $4,091 .0 $3,406 .8

Source: Harley-Davidson Inc . 2002 and 2003 annual reports .

The number of Harley-Davidson and Buell mo- torcycles shipped annually between 1998 and 200 3 is presented in Exhibit 9 .

Distribution and Sales in North America, Europe, and Asia-Pacifi c Harley-Davidson's dealers were responsible for op- erating showrooms where motorcycles could b e examined and test-ridden, stocking parts and acces- sories that existing owners might need, operatin g service departments, and selling biking merchandis e such as apparel, boots, helmets, and various Harley - Davidson-branded gift items . Some Harley owner s felt such strong connections to the brand that the y either gave or asked for Harley gifts for birthdays , weddings, and anniversaries . Some Harley owners had even been married at Harley-Davidson dealer - ships or at HOG rallies . Harley-Davidson dealers were also responsible for distributing newsletter s and promoting rallies for local HOG chapters . The

10,000-member Buell Riders Adventure Grou p (BRAG) was also supported by Harley-Davidso n dealers .

Harley mechanics and other dealership person- nel were trained at the Harley-Davidson Universit y (HDU) in Milwaukee, where they took courses in such subjects as retail management, inventory con- trol, merchandising, customer service, diagnostics , maintenance, and engine service techniques . More than 17,000 dealership employees took courses a t the company's university in 2002 . Harley-Davidso n also provided in-dealership courses through its Web - based distance learning program . In 2002, HD U held 665 instructor-led classes, 115 online classes, and had participation in their courses by 96 percent of the company's dealers .

The company also held demo rides in variou s locations throughout the United States, and man y Harley dealers offered daily rentals designed to help novices decide whether they really wanted a

motorcycle . Some dealers also rented motorcycles for

longer periods to individuals who wished to take long - distance trips . Harley-Davidson motorcycles coul d

i p l oyees ' exceed- dealers '

ders an d t Harley- ;2,000 t o few Har- t dealers in 2003 . roup are

Case 20 Harley-Davidson in 2004

C-373

Exhibit 9 Annual Shipments of Harley-Davidson and Buell Motorcycles , 1998-200 3

Harley-Davidso n

Sportster 57,165 51,171 50,814 46,213 41,870 33,89 2

Custom* 151,405 141,769 118,303 100,875 87,806 77,43 4

Touring 82,577 70,713 65,344 57,504 47,511 39,492

291,147 263,653 234,461 204,592 177,187 150,81 8

Domestic 237,656 212,833 186,915 158,817 135,614 110,90 2

International 53,491 50,820 47,546 45,775 41,573 39,91 6

291,147 263,653 234,461 204,592 177,187 150,81 8

Buel l

Buell (exc . Blast) 8,784 6,887 6,436 5,043 7,767 6,33 4

Buell Blast 1,190 4,056 3,489 5,41 6

9,974 10,943 9,925 10,189 7,767 6,334

* Custom includes Softail, Dyna Glide, and VRSC . Source: Harley-Davidson Inc . 2002 and 2003 annual reports .

Grou p )avidson

various id many gned to vanted a ycles fo r ike loner es coul d

person- niversity curses i n Dry con- gnostics , ;s . Mor e p urses a t )avidso n its Web -

2, HD U classes ,

0 percent

also be rented from third parties like EagleRider th e world's largest renter of Harleys, with 29 location s in the United States and Europe . Harley-Davidson's Riders Edge motorcycle training courses were als o offered by quite a few dealers in North America , Europe, and Asia-Pacific. The company had found that inexperienced riders and women were muc h more likely to purchase motorcycles after taking a training course . Harley-Davidson management be- lieved the 25-hour Riders Edge program had con- tributed to the company's increased sales to women , which had increased from 2 percent of total sales prior to the adoption of the program to 9 percent in 2003 .

In 2003, Harley-Davidson motorcycles were sold by 644 independently owned and operate d dealerships across the United States . Buell motor- cycles were also sold by 436 of these dealers . There were no Buell-only dealerships, and 81 percent o f Harley dealers in the United States sold Harley - Davidson motorcycles exclusively. The company also sold apparel and merchandise in abou t 50 nontraditional retail locations such as malls , airports, and tourist locations . The company's apparel was also available seasonally in about 2 0 temporary locations in the United States where ther e was significant tourist traffic . The company also ha d three nontraditional merchandise outlets in Canada , where it had 76 independent dealers and one Buell

dealership . Thirty-two of its Canadian Harley dealer s also sold Buell motorcycles .

Harley-Davidson had 161 independent deal- ers in Japan, 50 dealers and three distributors in th e Australia/New Zealand market and seven other deal- ers scattered in smaller East and Southeast Asia n markets . Only 73 of Harley-Davidson's Asia-Pacific also sold Buell motorcycles . The company also ha d two dealers that sold Buell but not Harley-Davidso n motorcycles. Harley-Davidson motorcycles wer e sold in 17 Latin American countries by 32 dealer- ships . The company did not have a dealer for it s Buell motorcycles in Latin America, but had 1 3 retail stores carrying only apparel and merchandis e in the region .

The company's European distribution divisio n based in the United Kingdom served 32 countries i n Europe, the Middle East, and Africa . The European region had 436 independent dealers, with 313 choos- ing to also carry Buell motorcycles . Buell motorcycle s were also sold in Europe by 10 dealers that were no t Harley dealers . Harley-Davidson also had 26 nontra- ditional merchandise retail locations in Europe .

Exhibit 10 presents the company's revenues b y geographic region, along with the division of asset s in the United States and abroad and a breakdown o f financial services revenues by region . The company's financial services unit provided retail financin g

C-374

Part 2 Cases in Crafting and Executing Strategy

Exhibit 10 Harley-Davidson's Net Revenues and Long-Lived Asset s by Business Group and Geographic Region, 2000-200 3

2003 2002 2001 2000

Motorcycles net revenu e

United States $3,807,707 $3,416,432 $2,809,763 $2,357,972 Europe 419,052 337,463 301,729 285,372 Japan 173,547 143,298 141,181 148,684 Canada 134,319 121,257 96,928 93,352 Other foreign countries 89,649 72,520 57,185 57,966

$4,624,274 $4,090,970 $3,406,786 $2,943,346

Financial services incom e

United States $

260,551 $

199,380 $

172,593 $

132,684

Europe 8,834 4,524 1,214 655 Canada 10,074 7,596 7,738 6,796

$

279,459 $

211,500 $

181,545 $

140,135

Long-lived assets

United States $1,400,772 $1,151,702 $1,021,946 $ 856,746 Other foreign countries 41,804 36,138 33,234 27,844

$1,442,576 $1,187,840 $1,055,180 $ 884,590

Source: Harley-Davidson Inc . 2002 and 2003 10-K reports .

to consumers and wholesale financial services to dealers, including inventory floor plans, real estat e loans, computer loans, and showroom remodeling loans .

CHALLENGE S CONFRONTIN G HARLEY-DAVIDSO N AS IT ENTERED IT S SECOND CENTURY As Harley-Davidson entered its second century i n 2004, the company not only celebrated a success- ful centennial celebration that brought more tha n 700,000 of Harley's most loyal customers to Mil- waukee but also a successful year with record ship- ments, revenues, and earnings . New capacity ha d allowed the company's shipments to increase to mor e than 290,000 units, which drove annual revenues t o $4 .6 billion and net earnings to nearly $761 million . The company's planned 350,000-square-foot expan- sion of its York, Pennsylvania, plant would allow the

company to increase production to 400,000 unit s by 2007 . However, there was some concern that the company might not need the additional capacity .

Some market analysts had begun to believe Harley-Davidson's stock was approaching its ape x because of the aging of its primary baby boome r customer group . Between 1993 and 2003, the aver - age age of the company's customers had increased from 38 to 46 . The average age of purchasers o f other brands of motorcycles in 2003 was 38 . Som e analysts suspected, that within the next 5 to 10 years , fewer baby boomers would be interested in riding motorcycles and Harley's sales might begin to de - cline . Generation X buyers were not a large enoug h group to keep Harley's sales at the 2003 level, which would cause the company to rely on Generation Y (or echo boomer) consumers . However, most Gener- ationY motorcyclists had little interest in the compa- ny's motorcycles and did not identify with the Easy Rider or outlaw biker images that were said to appea l to baby boomers. The company's V-Rod motorcycl e had won numerous awards for its styling and per- formance, but its $17,000-plus price tag kept mos t 20-year-olds away from Harley showrooms . Simi- larly, Buell motorcycles were critically acclaime d in terms of performance and styling but had bee n

Case 20 Harley-Davidson in 2004

C-375

unable to draw performance-minded consumers i n the United States or Europe away from Japanes e street-racing-style bikes to any significant degree .

Europe was the largest market for motorcycle s overall, and the second largest market for heavy - weight motorcycles, but Harley-Davidson had strug- gled in building share in the region . In some way s the company's 6+ percent market share in Europ e was impressive since only 4 .8 percent of motorcycle s purchased in 2002 were touring cycles and custo m cycles accounted for only 13 .8 percent of motorcy- cles sold in Europe during 2002 . The V-Rod's great- est success was in Europe, but neither the V-Rod nor any other HD model had become one of the top-1 0 best-selling models in any major European market .

There was also some concern that Harley- Davidson's 14-month production run had caused a n unfavorable short-term production problem since th e company's waiting list, which required a two-year

wait in the late 1990s, had fallen to about 90 day s beginning in mid-2003 . The overavailability of 2003 models had caused Harley-Davidson's managemen t to adopt a 0 percent down payment financing pro - gram that began at midyear 2003 and would ru n through February 2004 . When asked about the pro - gram during a television interview, Harley-Davidson CEO Jeffery Bleustein justified it by noting, "It's no t zero percent financing, as many people understood it to be, its zero dollars down, and normal financing . The idea there was to get the attention of some o f the people who aren't riding Harleys and are used t o a world of other motorcycles where there's alway s a financing program of some sort going on . We just wanted to get their attention"' By year-end 2003 , dealer inventories had declined to about 2,000 unit s and many dealers again began charging premium s over list price, but not the $2,000—$4,000 premium s charged in prior years .

Endnote s

As quoted in "Analyst Says Harley's Success Had Been to Drive int o Buyers' Hearts," Canadian Press Newswire, July 14, 2003 . 'As quoted in January 21, 2004, press release . 'As quoted in "Wings of Desire," The Independent, August 27, 2003. As quoted in "Born to Raise Hell," BBC News Online, August 14, 2000 .

5"Wheel Life Experiences," Whole Pop Magazine Online . As quoted in "Will Your Customers Tattoo Your Logo?" Trailer/Body

Builders, March 1, 2003, p. 5. 'As quoted in "Will Harley-Davidson Hit the Wall? " Fortune, July 22 , 2002 . 'As quoted in "Even Corporate CEOs Buy Into the Harley-Davidso n Mystique, Milwaukee Journal-Sentinel, August 24, 2003 . 'As quoted in "Harley-Davidson Goes Highbrow at Annual Columbia , S .C ., H.O .G . Rally:' The State, September 26 . 2003 .

0 As quoted in "Even Corporate CEOs ." "Ibid .

As quoted in "Milwaukee-Based Harley-Davidson Rides into Futur e with Baby Boomers Aboard, " The News-Sentinel, August 5, 2003 .

"As quoted in "Harley-Davidson Fans Sport Motorcycle Style," Detroit Free Press, August 28, 2003 . "As quoted in "Bikers Go Mainstream 100 Years On," Global News Wire, September 11, 2003 . "Ibid . ""Nine Montreal Hells Angels Sentenced to 10 to 15 Years in Prison," CNEWS, September 23, 2003 . "'`Hells Angels: Easy Riders or Criminal Gang?," BBC News, January 2, 2004 . ''"Feds Raid Hells Angels' Clubhouses," CBSNews.com, December 4, 2003 . 13As quoted in "Wings of Desire," Global News Wire, August 27, 2003 . "Ibid . 'Interview with Mobile, Alabama, Harley-Davidson dealershi p personnel . "As quoted in a CNNfn interview conducted on The Money Gang , June 11, 2003 .

)0 unit s that th e City. believ e

its ape x boome r 1e aver- crease d isers o f ~ . Some 0 years , i riding i to de - enoug h , whic h ation Y Gener-

compa - le Eas y appea l

orcycl e nd per- )t mos t . Simi - :Iaimed id been