Case Harleydavidson Final

Jeniel Z. Pascual Strategic Management August 28, 2012

MBA Student Atty. Chelin Dayrit

Harley Davidson Case Analysis

Introduction

Harley-Davidson is probably the most famous motorcycle manufacturer in the world and is based in the United States, Milwaukee, Wisconsin. Even tough they consider 1903 as their starting year, they could just as well consider 1901, because it was then when Bill Harley completed the first blueprint of a Harley engine. In 1903, the same Bill Harley and Arthur Davidson revealed their first motorized effort, calling it the first Harley motorcycle. It was a racing bike, built in a wood shed that had Harley-Davidson Motor Company scrawled on it. That same year, Arthur's brother - Walter Davidson - joined the company. In a very short time, the first Harley-Davidson dealer opens shop (1904) and manages to sell three Harley bikes. In true American style, a Harley model wins a 15 mile race in Chicago in 1905 and the same year Harley Motor Company hires its first employee. A year later, they open up a bigger factory and hire five more people. The same year (1906), they produce the first motorcycle catalog in the world.

In 1909, Harley-Davidson introduces its first V-twin bike with an 1000cc engine which developed 7 horsepower and three years later the Bar & Shield logo is used for the first time and patented as a trademark. The construction of the main factory building and what was to become the six stories headquarters of Harley-Davidson starts in 1912, facility located on Juneau Avenue in Milwaukee. The same year, the company starts exports to Japan and the US dealer network extends to 200 branches. 1913 sees the founding of the Harley-Davidson racing department and one year later the company releases sidecars. Harley was becoming very successful, its contract with the US military being one of the reasons. By the time 1917 came, one third of all Harley Davidson production went to the US army and the same year the sale of Harley-Davidson bicycles. After almost 20 years of existence, Harley Davidson becomes the largest motorcycle manufacturer in the world as their models can be purchased in 67 countries worldwide by 1920. Eight later, in 1928, the public sees for the first time two cam engines on the JD series models, which can reach speeds up to 100 mph at the same time providing front wheel brakes for all their bikes. An important moment in Harley history comes in 1929 when the 45 cubic inch V-twin engine (also known as flathead) is made available on the D model. In 1936, Harley-Davidson introduces the EL model which had a 61cc engine and was later nicknamed Knucklehead and used a year later (1937) by Joe Petrali to set a new land speed record of 136.183 mph. He did not use the stock

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version, he altered it a little bit in order to set the new speed record. The same year, the production of the first WL models begins. In 1941 America joins World War II and Harley stops making civilian bikes and focuses all its efforts on vehicles for the military. During the second World War which ends in 1945 Harley made a lot of new models for the army, but the most successful army model was the WLA, Harley producing almost 90,000 units. In 1946 the 45ci flathead WR racing motorcycle is introduced and one year Jimmy Chann wins the first of three consecutive AMA Grand National Championships. 1953 means that Harley-Davidson celebrates its 50th anniversary and in 1957 they introduce the Sportster, one of the Harley legends. A little known fact, Harley-Davidson also produced scooter called Topper in 1960, but that was their first attempt in this regard. The same year, the company buys half on Aeronatica-Macchi, which will later produce single cylinder bikes. In 1961 the Sprint model is introduced and in 1962 Harley buys 60% of Tomahawk Boat Manufacturing Company and starts making fiberglass components there. The first FL available with electric start is Electra-Glide in 1965 and the Sportster model also receives an electric starter. In 1969 Harley-Davidson and American Machine and Foundry Company (AMF) merge and a few years later (1971) the FX 1200 Super Glide is introduced, a combination between the XL and the FL series. In the same year, the first Harley-Davidson snowmobile is produced and a year later the aluminium allow XR-750 is made available. In 1977, Harley presents to the public the FXS Low Rider, an unique vehicle which had drag style handlebars and a very low position of the seat. FXEF Fat Bob is introduced in 1979, a bike nicknamed Fat because of its dual gas tanks and in 1980 another model called FXWG Wide Glide is released. In 1982 it is the perfect time for a new model, the FXR/FXRS Super Glide II and in 1983 the Harley Owners Group is founded. This club is for all Harley-Davidson bikes owners around the world and grows extremely quick, reaching more than 90,000 members in just six years. 1984 is an important year in Harley history as they unveil a new engine, the 1340cc V Evolution present at that time on five of their models. This is the result of seven years of development, but one model equipped with this engine stands out, the Softail. Two years later, Softail is updated and dubbed Heritage Softail at the same time the company is listed on the American Stock Exchange. In 1987, Harley Davidson starts the Buy Back Program for the XLH 883 Sportster model. Through this program, those who owned such a model could trade it for two years for its full value, or they could choose a FL or FX model. The FLSTF Fat Boy is introduced in 1990 and in 1991 the Dyna line of motorcycles makes it debut with the FXDB Dyna Glide Sturgis. In 1993, 90 years of Harley-Davidson history are celebrated by 100,000 people riding in a parade in

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Milwaukee. This thing is called the Family Reunion. One year after their 90 years anniversary, in 1994, Harley enters Superbike racing as they introduce the VR100, but two years later (1996) a new Parts and Accessories Distribution Center is opened in Franklin, a place which will be used later on to store all inventory. The new facility has over 250,000 square feet. At Harley's 95 years anniversary (1998) even more bikers show up, some 140,000 and they ride the streets of Milwaukee as a tribute to the manufacturer. The same year, Harley-Davidson opens its first operations outside the US, in Manaus, Brazil. The first bike presented in the new century (2000) is the FXSTD Softail Deuce and fuel injection is unveiled on the 2001 Softail line. In 2001 the VRSCA V-Rod is presented, a bike inspired by the VR-1000 motorcycle and one year later (2002) the Buell Firebolt makes its way onto the stage. In 2003, Harley celebrates 100 years of existence and the city of Milwaukee welcomes more than 250,000 people as the final stop of the Open Road Tour. The latest model from Harley-Davidson is the FLHZ/I Street Glide, a lower profile touring motorcycle in 2006. In the same year Beijing Feng Huo Lun becomes the first authorized Harley dealer in China.

CURRENT SITUATION

A. Performance Despite the company’s strong financial outlook the stock price has not been performing well over the past year. The stock price fell dramatically in April 2005 when Harley Davidson management lowered guidance of new motorcycle shipments to the network of independent dealers. Wall Street analysts proceeded to predict doom for the company as it appeared that it would be unable to continue its trend of strong growth. Although the company actually produced results that were in the upper bound of its guidance and within the guidance from before April the stock price has yet to recover to its earlier levels. It seems that Harley Davidson management’s strategy of under promising and over-delivering has backfired, especially because analysts remain wary of the company’s prospects despite Harley exceeding their expectation Another reason for analysts’ pessimism about Harley Davidson is that recently the company seems to be resting on its laurels, content with its current market position and doing little to attract new, younger customers or to offer new motorcycle designs to appeal to previous customers. One sign of this is that Harley Davidson’s dollar amount spent on advertising and research and development has actually been decreasing over 4the past couple of years. To some it might seem that management is sacrificing the

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future of the company by not attracting new riders in order to boost financial performance today.

B. Strategic Posture1. Current Vision

The Harley-Davidson's vision is as follows: "Harley-Davidson, Incorporated, is an action-oriented, international company-a leader in its commitment to continuously improve the quality of profitable relationships with stakeholders (customers, dealers, employees, suppliers, shareholders, government, and society). Harley-Davidson believes the key to success is to balance stakeholders' interests through the empowerment of all employees to focus on value-added activities."2. Current Mission

Harley-Davidson's mission statement is as follows; "We fulfill dreams through the experience of motorcycling, by providing to motorcyclists and to the general public an expanding line of motorcycles and branded products and services in selected market segments"(Harley-Davidson Home Page). The mission statement shows that the focus of the organization is on customer satisfaction and growth. Harley-Davidson's statement of company philosophy contains a separate list of the values of the organization. The values listed in this statement are, "Tell the Truth, Be Fair, Keep your Promises, Respect the Individual, Encourage Intellectual Curiosity"(Values).

3. Current ObjectiveThe objectives of the both the Motorcycle and Transportation

Segments are isted below:Double production capacity to 200,000 motorcycles annually by

2003.Increase the number of women who purchase motorcycle-riding

apparel.Gain entry in to the performance motorcycle industry and

increase the sales of the newly acquired Buell Motorcycle Company.Increase international market share by increasing the number of

foreign dealers and improving the foreign channels of distribution. Increase the availability of credit and lower the cost of credit

for both the retail customer and the Harley Davidson Dealer.Improve customer satisfaction and improve communication with European stakeholders by increasing dealer service competencies.

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4. Current Strategies

Harley Davidson has always been known for its differentiated products that have ontinuously stood out from the norm. This has a lot to do with strategies Harley uses to promote its products and services. Some of the key strategies used throughout 2003 was the promotion of its 100th Anniversary Special Edition Motorcycles and the worldwide Open Road Tour used to advertise their current production line. The stunning 2003 model 100th Anniversary Harley-Davidson motorcycles, which feature rich new paint schemes and special 100th Anniversary identification has been an instant success. Every 2003 motorcycle in the line-up has been designated a 100th Anniversary model. The company has extended the model year to 14 months to give even more customers the opportunity to own a piece of Harley-Davidson history. The Anniversary celebrations began back in late 2002 as the Open Road Tour made its way to Atlanta, Baltimore, Los Angeles, Toronto and Dallas/Fort Worth. The festivities then traveled overseas to Sydney, Tokyo, Barcelona and Hamburg. Billed as the world’s largest rolling birthday party, the Open Road Tour brought the HarleyDavidson experience full throttle to riders and enthusiasts around the world. Receiving worldwide exposure at minimal advertising costs, the Open Road Tour has been a complete success, thus allowing Harley’s unique and differentiated products to be seen up close around the world.

Additionally, Harley-Davidson established the Harley Owners Group (HOG) in 1983 in response to a growing desire by Harley riders for an organized way to share their passion and show their pride. By 1985, 49 local chapters had sprouted around the country, with a total membership of 60,000. Now in 2003, the promotion of the 100th Anniversary has allowed the membership to include over 1200 chapters and close to 800,000 members. HOG has played a major role in the success of the 100th Anniversary celebration. This one of a kind, unique strategy which started 20 years go by Harley and its members, has grown tremendously and will continue to play an important role in the future success of the company. Strategies such as these implemented by internal management and carried out by dedicated customers and members are one of the most precious assets a company can ever dream of. That is the Harley way!!

Furthermore, the key strategies relating to the distribution channels have allowed Harley Davidson the world-wide exposure needed to market its product with tremendous success and

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demand that has always seemed to exceed supply. To date, there are more than 1300 independent dealers worldwide. Over 630 are within the United States alone. Recognizing that to grow sales will take more than just an increase in capacity, the company’s aim has been to add 20-30 dealers per year to grow the dealer network, with an increase of roughly 5-10 domestically and the balance internationally. In addition to its dedicated dealer network, the company also uses smaller, occasionally temporary retail outlets in high-traffic areas, such as airports, to sell accessory products like apparel, collectibles, and licensed products. This gives Harley the additional exposure needed without having to spend millions on other forms of advertising. In order to effectively analyze Harley Davidson, we wanted to present a breakdown of the different price ranges offered based on the current list of the five classes of heavyweight motorcycles produced under the Harley Davidson name.

II. CORPORATE GOVERNANCE

A. Board of Directors

NameAge

Term expires

Barry Allen 61 2010

Richard Beattie 70 2010

Judson Green 57 2010

N. Thomas Linebarger 47 2010

George Conrades 71 2011

Sara Levinson 59 2011

George Miles Jr. 68 2011

Jochen Zeitz 46 2011

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Martha Brooks 50 2012

Donald James 66 2012

James Norling 68 2012

Keith Wandell 60 2012

B. Top Management

Excellent Corporate Governance has been a long standing business practice at Harley-Davidson, because it makes good business sense. The Harley-Davidson Management and Board of Directors is composed of accomplished leaders from a range of industries who meet regularly to review Company objectives and plan for future growth. These individuals draw on their diverse backgrounds and experiences. They are proud Harley-Davidson enthusiasts, and they work to ensure that the decisions made by Harley-Davidson promote fairness, financial transparency and accountability to all our shareholders Jeffrey BleusteinChairman and CEO In December 1998, Mr. Bleustein was elected Chairman of the Board of the Harley Davidson, Inc. He has served as President and Chief Executive Officer of the Company and Chief Executive Officer of the Motor Company since June 1997. Mr. Bleustein served as President and Chief Operating Officer of the Motor Company from 1993 to May 2001. He was Executive Vice President of the Company from 1991 to June 1997. He is also a director of Brunswick Corporation.

John Hevey President and COO of Buell Motorcycle Company Mr. Hevey became the President and Chief Operating Officer of Buell Motorcycle Company in January 2001 prior to that he served as Vice President, General Manager Asia/Pacific and Latin America Regions of the Motor Company since January 1998. From June 1997 to December 1997, Mr. Hevey served as General Manager Asia/Pacific and Latin America of the Motor Company.

Donna Zarcone

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President and COO, Harley-Davidson Financial Services, Inc. Ms. Zarcone has served as President and Chief Operating Officer of Harley Davidson Financial Service since August 1998. From June 1994 to August 1998, Ms. Zarcone served as Vice President and Chief Financial Officer of Harley Davidson Financial Service.

James McCaslinPresident and COO, Harley-Davidson Motor Company. Mr. McCaslin joined Harley-Davidson Motor Company in 1992 as Vice President and General Manager, York Operations. He was appointed Vice President, Continuous Improvement in 1997. In 1999, he became Vice President, Dealer Services and in 2001 he was named President and COO of Harley-Davidson Motor Company. He has a Bachelor of Science degree in Industrial Engineering from General Motors Institute and a Master of Science in Industrial Engineering from Virginia Polytech. He also attended the Advanced Management program at Harvard University.

III. EXTERNAL ENVIRONMENT

The recreational vehicle industry is one that is particularly fragile. Companies in this industry can be at the mercy of such an unpredictable economic factor as the weather (such as Polaris Industries, which sells both snowmobiles and water craft). And while other companies in this industry may perform rain or shine, all companies are sensitive to the whim of the consumer. Generally speaking, this industry is nearing the end of the growth stage of its life cycle. Companies are beginning to control their market shares and high growth rates are more difficult to find. We predict that the next ten years will see the maturity of the industry, evidenced most prominently by the reduction of growth rates (for example, we predict Harley-Davidson’s net sales growth rate to shrink from 21.63% in 2002 to just over 7.5% in 2012).

External Trends- GovernmentRecent years have seen a dramatic increase in state regulations

concerning public land use, allowable amounts of noise, age and other restrictions put on recreational vehicles, as well as state regulations concerning emissions. The amount of public land available for use can be an important determinant in consumer decision making concerning recreational vehicles (especially off-road and water-sports vehicles). Some states have started programs to ban recreational

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vehicles from certain areas. This creates a damper on demand for the consumers that live near those public areas, and potentially harms the industry. Currently, there are no national standards for recreational vehicles regarding noise, age, or pollution emissions (although, as described above, they have been proposed). Each state (and, in some cases, each city) can impose its own standards in these areas. This patchwork of regulation creates 17 problems for manufacturers who have to decide whether to manufacture only products that would pass the most stringent state regulations, to manufacture slightly different products for sale and use in different states, or to ignore certain state markets where the cost of modifying the product to obey the laws of the state would be prohibitive. While regulations are certainly an important consideration for any purchaser of a recreational vehicle, many of these regulations are less likely to affect Harley-Davidson purchasers than customers of other firms in this sector. Harley-Davidson motorcycles are generally driven on the highways or back-roads, and do not generally fall under the guise of the aforementioned regulations. Even if there are potential problems with a regulation (helmet or noise limit laws, for example), we do not expect any decrease in the production or demand of Harley-Davidson motorcycles.

External Trends SocialSocial factors are among the most important of the

noneconomic factors affecting the recreational vehicle industry. This is an industry that combines a high degree of brand loyalty with products that are often used in social settings. Motorcycle enthusiasts are among the most loyal customers in the market. Harley-Davidson reports that 660,000 owners of its motorcycles have formed chapters of the Harley Owners. Group. (HOGs) throughout the country. Many of these individuals sport Harley-Davidson apparel, and in some cases, tattoos . perhaps the ultimate expression of customer loyalty.

External Trends DemographicsThe demographics of America are clearly changing and the

recreational vehicle industry needs to be prepared for the effects that change will bring. The most important change is the new age distribution of the population. The socalled .Baby Boom. generation (people born between 1946 and 1964) has driven the increase in consumer spending throughout much of the past thirty years. However, as this group ages, the recreational vehicles industry has to be weary of the possibility that this group will no longer be as interested in recreation. The aging of the Baby Boomers is going to cause a dramatic increase in the percentage of the population that is at or near retirement age. Indeed, as this generation shifts its

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spending focus toward retirement, Harley-Davidson will need to identify and cultivate a new market to replace former customers who are have lost the enthusiasm or the ability to ride a motorcycle.

External Factors-Demand

Most of the companies within this industry produce products that will be used directly by the consumer. The exceptions to this rule produce products for use by customer-service institutions. However, this does not necessarily mean that the customer has a great deal of power. As described earlier, there is a heavy emphasis on brand names and a great deal of brand loyalty for many companies within this industry. This leads to repeat customers, and not a great deal of switching. Additionally, several of the companies in this industry control their level of output to ensure that the market never becomes saturated. This combination of loyalty by consumers and a limited amount of production by the companies allows for the companies to ensure that their products remain in high demand.

External Factors- Supply

The recreational vehicle industry is not especially concentrated at the present time. Many of the companies competing in this industry can count their competitors on one hand. However, this may be in part because of the barriers to entry for this industry. For example, if a company wanted to compete with HarleyDavidson, not only would they have to come up with several billion dollars in capital and a high caliber distribution network, they would also have to establish themselves as an important piece of Americana. This is something that Harley has done over the past 100 years, and it can not easily be duplicated. One major concern for most companies in this industry is the volatile price of inputs. Those companies that use a great deal of steel are going to be hurt by the U.S. restrictions put on the import of that product, which serve to raise its cost. Additionally, all of these companies are sensitive to the price of oil rising, both in the shipping of parts and finished products throughout the country, as well as using petroleum based products in production. The price of oil has risen over $8 per barrel over the last four months due to concerns over the Venezuelan oil workers strike and the war with Iraq, although most of the increase has been given back.

IV. INTERNAL ENVIRONMENT

A. Corporate Culture 10



CultureHarley Davidson s culture fulfills the important functions that

are necessary for an organization to survive. The company lives by their worldwide mission, which states: Preserve and perpetuate the Harley-Davidson institution through continuous improvement in the quality of their products and services and achievement of their financial goals. Provide the general public brand identified products/services to enhance Harley-Davidson s image and attract new customers. Engage in manufacturing or service ventures that can add value (not only profit) to the motorcycle business.

In order to fulfill their mission, Harley is constantly searching for ways to do things better. They focus on the importance of relationships between management and other employees. By doing so, employees convey a sense of identity, that in turn, helps them generate commitment to the company. Education programs that take place at Harley-Davidson s learning center help employees to become compatible with the company s culture. The idea of never being satisfied with the company status leads to continuous improvement and keeps the company consistent with its current objectives, strategies, policies and programs.

B. Corporate Resources

Marketing

Brand loyalty for Harley-Davidson is emotional for management and the customers. Harley promotes a mystique appearance, individualism, the feeling of riding free, and the pride of owning a legend. With Harley, you can live out your fantasies, as well as experience camaraderie with fellow bikers (the thing from Scott). Harley-Davidson has been trying to increase brand recognition among the non-riding public and provide a wide range of products by licensing its trademark "Harley-Davidson-Registered Trademark"(Wheelen). Harley-Davidson currently has licensed the production and sale of a broad range of items, including clothing, jewelry, small leather goods and numerous other products, and is

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expanding its licensing activity in the toy category. Licensing has also been an effective means of enhancing Harley-Davidson's image.

Harley-Davidson s motorcycles are sold through a network of 1,065 dealers worldwide. Harley-Davidson's basic channel of domestic distribution consists of approximately 600 independently owned full-service dealerships. Approximately 75% of the dealerships sell Harley-Davidson motorcycles exclusively. All dealerships carry Harley-Davidson replacement parts, after market accessories, and perform servicing of Harley-Davidson motorcycle products. Marketing efforts are divided among dealer promotions, customer events, magazine, public relations, and cooperative programs with Harley-Davidson dealers (Financial Web). They own 54 percent of the market share in the USA, 16 percent in Japan, 10 percent in Europe, and 38 percent in Australia. The foreign markets could be larger, but the company has an agreement with American dealers not to sell more than 30 percent of the bikes overseas, if the domestic demand is not met. The dealers are considered to be business partners and the headquarters plays an active role in developing programs, financing improvements, implementing support and management consultants. Harley has developed a very effective marketing strategy, but it is the responsibility of manufacturing to produce high quality and reliable motorcycles.

When a person buys a Harley-Davidson motorcycle, they receive a free 1-year membership to the Harley Owners Group (HOG), which was developed in 1983 as a program to keep people active with their Harley. HOG also keeps the company close to its customers. HOG has 295,000 worldwide members, 900 local chapters and is the largest company-sponsored motorcycle enthusiast group. They conduct four US national rallies, two touring rallies and 44 state rallies. These rallies are the primary promotional tool for Harley-Davidson by improving customer relations and are an excellent way to showcase and demonstrate new products.

Harley-Davidson is not able to compete with the foreign competitors in the area of price. Harley-Davidson has developed a strategy of value over price. Harley-Davidson was careful not to exceed demand in production of their motorcycles. Sometimes, people must wait six to eighteen months for a new motorcycle. By not being able to meet demand, a must-have attitude has developed by many of the customers, and in fact the price for a year-old Harley is 25% to 30% higher than a new one.

Harley-Davidson uses the Internet and their website to provide complete information on the company, the products, and on regional and national events. During 1996, 1995, and 1994, Harley-Davidson had domestic marketing, selling, and advertising expenses of

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approximately $75.4 million, $71.5 million, and $65.6 million, respectively (Harley-Davidson Home Page).

Research and DevelopmentMotorcycle manufactures must utilize technology in developing

their product as well as in the process of manufacturing them. More powerful motors and lighter, stronger structural components led to an increase in performance, while new brake and suspension systems help to make riding safer. Technology also plays an important part in the manufacture and distribution of motorcycles. Computer programs allow designs to be tested in a virtual environment without having to pay for expensive prototypes. Computers are also used in manufacturing, distribution and delivery systems. Motorcycle manufactures must use all available technology resources to be successful.

Technology has been put to use throughout Harley-Davidson in order to design and produce the finest motorcycle possible. In 1997, the Willie G. Davidson Product Development Center (PDC) was opened to provide research and development facilities for product development. Employees from various functional units within the organization meet regularly with material suppliers to come up with new designs and processes. The PDC has been responsible for the successful launch of many new product innovations. The research and development teams are constantly working to find ways to make new motors with more power and durability. Harley-Davidson has several upgrade performance packages that were designed, tested, and perfected at PDC.Harley-Davidson technology is also being incorporated into Buell motorcycles. These motorcycles combine cutting-edge performance with the sport motorcycle design that has become so popular with the young riders throughout the world.

Operations and LogisticsMotorcycle Segment

Since Harley-Davidson s dramatic turnaround in 1985, the company has been continuously committed to achieving low cost efficiencies without sacrificing quality, and maintaining close relations with suppliers, customers, and distributors. Further evidence of this commitment exists in Harley s formal written operating policy, which is as follows:1. Foster a retail customer satisfaction culture throughout the organization.2. Enhance two-way customer communications.3. Offer choices of higher quality, lower complexity products.

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4. Improve control and support of distribution channels by strengtheningpartnerships with dealers.

Demand for Harley-Davidson motorcycles has been so great, that the company is unable to keep up with customer orders through its existing manufacturing facilities. Because of this, the company recently adopted a comprehensive motorcycle manufacturing strategy, that is designed for, among other things, to increase their production rate to 100,000-units-per-year by 1996. This strategy called was designed to reach the new production rate goal without expanding existing manufacturing facilities. Harley implemented a number of key operating strategies in order to meet this new production goal and further their commitment to satisfying customers through quality products.

Harley-Davidson realized that in order to increase production efficiencies, improve quality, and meet their production goal, their workforce needed some additional training. A tremendous amount of time, effort, and resources were expended to train the manufacturing workforces in analytical problem solving techniques, and statistical quality control methods in order to enhance the quality of their motorcycles and increase efficiencies.

Furthermore, the company adopted just-in-time inventory principles to minimize inventories of raw materials and work in process. By forming close partnership like alliances with a few quality conscious suppliers, Harley has been able to successfully implement the just-in-time inventory system. Harley frequently holds in-house training sessions, and plant evaluations with its key suppliers to ensure that suppliers share the same commitment to quality and production efficiencies. Overall, the new system has allowed Harley to react quicker to engineering design changes, quality improvements, and marketing demands within its existing manufacturing facilities. Although the close relationships with suppliers, and reliance with only a few key suppliers has been successful so far, there is a risk of significant interruptions in production if a particular supplier failed to provide the needed materials, or ceased operations. This gives the suppliers a relatively large amount of bargaining power, and is something Harley should be keenly aware of.

Harley began implementing the aforementioned strategies in 1993 and estimated that they would be able to reach their production goal by 1995, a full year ahead of schedule. Not only did they beat their estimated time for the new production goal, they went on to exceed the previous goal by producing 115,000 units-per-year in 1997.

Transportation Vehicle Segment

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Harley-Davidson s transportation vehicles segment, Holiday Rambler, principally manufacturers recreational vehicles such as motor homes, travel trailers, and specialized commercial vehicles. These products are built using an assembly line process utilizing specialized fabricating and assembly equipment designed and built by Holiday Rambler. The company believes that its commitment to efficient manufacturing systems and utilization of the latest technological advancements enable it to produce high quality products.

A number of the secondary plastic component parts, used in the production of motor homes and travel trailers are actually produced by Holiday Rambler. However, principle raw materials such as, aluminum, plywood, fiberglass, and chassis are purchased from third party suppliers. Automobile and truck manufacturers such as Ford and Chevrolet provide the chassis.

The assembly lines, manufacturing processes, and equipment used to make the recreational vehicles are all interchangeable. This allows the company to utilize the same facilities to produce its complete line of motor homes, travel trailers, and specialty commercial vehicles. Employee skills are applicable to the production of either type of vehicle. This allows a smooth transition from one process to the next.

Human ResourcesMotorcycle Segment

In order to survive in the competitive motorcycle industry and to continue to strive toward their commitment to quality improvement and production efficiencies, Harley-Davidson s management realized they needed to foster a perpetual learning and improving organization. The management believes that open communication between all levels of employees is essential to the success of the organization. In order to foster an organizational environment made up of employees who share the same vision and values as the company, Harley saw that it was necessary to communicate the company s high moral values, and educate the employees about the whole business environment. This quest for incorporating the company s vision and high moral values into the organizational structure and expecting the employees to believe in and carryout this same vision and moral values, could have been extremely difficult since Harley s workers are unionized. However, Harley s relationship with the unions is excellent. Both the company and the unions have stuck by each other during good and bad times. Because of this, the unions trust Harley s management and realize that their efforts toward continuous improvement and quality consciousness are in the best interest of the employees (Vroom, Vroom). Collective bargaining

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agreements between the company and the unions are expected to expire during the first quarter of 1997, but company and union relations are strong and there are no concerns about future agreements.

Transportation Vehicles SegmentDiscussion of human resources and employee relations, within

the transportation vehicle segment is limited. The segment employs approximately 2,400 people. The employees have no union representation and there is no discussion of any future efforts to unionize. The Holiday Rambler segment is committed to the continuous training and skills improvement of its current workforce, as is evident by the company s requirement that manufacturing employees maintain the flexibility to work on the production of any of its line of vehicles. Part of each employee s compensation package consists of production group incentives. These incentives allow an employee to increase their total compensation by meeting production goals and quality standards.

Information SystemsHarley-Davidson s commitment to manufacturing efficiencies,

quality improvement, and technological advancements, provide evidence of the company s investments in information systems. By utilizing just-in-time inventory techniques through close, continuous, contact with key suppliers the company was required to expend a substantial amount of effort and resources towards the allocation of advanced communication systems. Management s earlier investments in Computer-Aided Design (CAD) systems in the early 1980s drastically increased production efficiencies and reduced the break-even point from 53,000 motorcycles in 1982 to 35,000 in 1986. Harley-Davidson seems to be making the necessary commitments in capital and other resources to stay competitive in this area.

V. ANALYSIS OF STRATEGIC FACTORS

Five Forces Analysis

INTERNAL RIVALRYThe market for heavyweight motorcycles is fairly concentrated:

there are only four major firms producing these motorcycles. In addition to Harley Davidson the other three are Honda, Suzuki, and Yamaha, all Japanese companies. Over the last ten to fifteen years the market for heavyweight motorcycles has seen double digit annual

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growth, but many experts predict that the market is maturing and growth will slow down in coming years, perhaps falling to low single digits. Harley Davidson has traditionally been the dominant player in this market with a market share well in excess of 50% in the past. Today this market share has fallen to about 50% due to the other companies expanding their heavyweight motorcycle production and stepping up marketing, especially to American consumers. One of the reasons that Harley Davidson’s market share has been falling is that the different products from the different companies are becoming less differentiated. In the past it was easy to recognize the distinctive style of a Harley Davidson motorcycle, but the Japanese manufacturers have begun to incorporate popular design features into their products. Any differences in the quality of the products are also less of a concern today than it might have been in the past. The result is that motorcycles from each of the manufacturers are becoming less differentiated over time. As this happens Harley Davidson is relying more and more on their brand name to maintain and build its customer base. This is still a major factor when purchasing a heavyweight motorcycle 9 for many people. Many people would rather own a Harley than a Honda, but the number of these people has been falling, due in no small part to the improvements that Honda has made in its products.

ENTRY

The heavyweight motorcycle industry is very capital intensive. Like most other manufacturing industries there are significant economies of scale involved in building motorcycles. Even ignoring the falling marginal costs as production increases, the capital requirements for manufacturing a similar product are extremely high, even on a small scale. Such significant economies of scale is the major reason that there are only four major players in the market.

There are some small scale motorcycle builders whose business is based heavily on reputation and appeal to serious motorcycle enthusiasts, mainly focused on completely custom bikes. These small custom builders do not produce enough motorcycles to threaten Harley Davidson’s market position, but they do help the industry as a whole by helping to increase interest in motorcycles in the general public

SUBSTITUTE OF COMPLEMENTS

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Heavyweight motorcycles are a luxury item for the vast majority of consumers so there are few close substitutes for heavyweight motorcycles that could serious affect the market. Honda, Yamaha, and Suzuki all also manufacture smaller, quicker motorcycles, which are the closest substitute followed by passenger cars and scooter bikes. However, for most people considering purchasing a heavyweight motorcycle are not also seriously considering one of these options. Heavyweight motorcycles project a certain image which is part of the consumer’s decision to purchase a motorcycle. Also smaller motorcycles require a different riding style, more hunched over the bike as opposed to sitting upright on a heavyweight motorcycle. Passenger cars are weak substitutes for heavyweight motorcycles because consumers rarely purchase them to satisfy transportation requirements. These bikes are more of a luxury item than a necessity for traveling from point A to point B. Even though motorcycles may be better through traffic and use less gasoline than a car a consumer purchasing a motorcycle for these reasons would be more inclined to purchase a lighter motorcycle, which would be more maneuverable and fuel-efficient than a heavyweight bike.The most obvious complement for heavyweight motorcycles is gasoline. If the price of fuel is high then consumers will be less likely to purchase a heavyweight bike due to the fact that most trips taken on such a motorcycle is largely discretionary and taken for pleasure rather than through a need for transportation. However, if consumers are willing to pay between $8 thousand and $25 thousand for a luxury item like a heavyweight motorcycle then they are probably not troubled by paying a slightly higher price for gasoline.

BUYER AND SUPPLIER POWER

Harley Davidson operates nearly every stage of the production of a motorcycle, taking raw materials such as steel and basic electrical components and shipping completed motorcycles to its extensive independent dealership network. Because there are many suppliers of all inputs that Harley Davidson requires for its manufacturing operations there is very little that any single supplier can do the exact rents from Harley. If one supplier attempted to increase its profits by charging Harley a higher price it would not 11 be difficult for Harley to switch suppliers without a significant disruption in production. Similarly, Harley Davidson’s customers are largely individual consumers, making it difficult for them to seriously affect Harley Davidson’s financial situation by refusing to cooperate. Since Harley Davidson dealerships are independently owned an operated the companies customers are technically its licensed dealers, but the sheer number of dealers that Harley Davidson has

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throughout the world makes the situation for dealers not much better than individual riders.

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

Overall Harley Davidson is a strong company with excellent margins and constantly growing revenues. In 2005 Harley Davidson recorded its 19th consecutive year of record revenues and record profits. The main concern for Harley is whether or not they can sustain their growth in the face of improvements in their competitors’ products and a maturing market. Some analysts are concern that Harley Davidson is not pushing the envelope in the market anymore and is not on the cutting edge of new styles and motorcycle designs. Even a company as dominant in its market as Harley Davidson can ill afford to sit back and let competitors steal market share because of inaction. One major trend facing Harley Davidson is that average age of a Harley Davidson is getting higher, meaning the company is not as successful now as it has been in the past at attracting new and younger riders. This is also evidenced by the slightly weaker sales in less powerful entry level bikes. These bikes are usually the ones purchased by younger riders when they are just learning to ride a motorcycle, before they can handle a bike with more power. Another concern that many analysts haveis that Harley Davidson’s margins have peaked and will probably fall in the future as stiffer competition from Japanese manufacturers not only puts some price pressure on Harley, but the company will also lose some its economies of scale as certain lines of motorcycles may have to be produced in lower quantities. The main question for Harley Davidson is how does management maintain at least a 50% market share and at the same time keep the market growing at a rate that will allow them to continue to grow their earnings at a rate that will silence the doubters that have recently arisen on Wall Street. The basic solution is to sell more motorcycles. In order to do so Harley Davidson must not only keep making motorcycles that are attractive to consumers faced with a growing number of options but also strengthen its brand name in order to further differentiate its product from those made by its competitors. One reason that analysts predict sales growth will soften in the future is the lack of significant changes between bike model years. Instead of redesigning certain aspects of certain models or completely redesigning whole lines of motorcycles between model years Harley Davidson has recently been content to leave models essentially the same and instead tweak little things like the speedometer design or the radio. By not significantly changing bike

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designs from year to year Harley Davidson is removing incentive for people to buy the latest models. Instead of buying a bike new from a dealer a consumer 19 could by a used bike instead and would be essentially buying the same machine.

Harley Davidson needs to refocus on producing cutting edge bike designs that will continue to be attractive to existing Harley Davidson owners and still bring new riders in the Harley Ownership Group.Another important aspect on which Harley Davidson needs to focus is maintaining the average consumers good opinion of and preference for the Harley Davidson brand. In the past Harley Davidson was the heavyweight motorcycle, but since the expansion of Honda, Suzuki, and Yamaha into the heavyweight segment consumers have more choices without sacrificing quality. Although Harley Davidson has had image problems in the past, such as Hell’s Angels and other biker gangs, recently the weekend pleasure rider has replaced the unattractive images. The problem is that consumers no longer see Harley Davidson at the pinnacle of the industry. Harley needs to make an effort to show consumers that a Harley Davidson is still the best bike you can own and the best bike for the money. Part of the appeal of the Harley Davidson is the image that owning a Harley projects. Some of that image has faded over the past few years and needs to be revived if Harley is to continue its success. One thing that should set off a warning for analysts is the fact that over the past few years the total dollar amount spent on advertising and research and development has actually been decreasing. This has boosted the current financial picture of the firm, but without adequate new product development and a marketing focus to sell that product the future of the company will not live up to its potential. An increase in both product development and advertising spending would be a start for Harley Davidson in keeping its growth going.20 Instead of resting on its laurels Harley Davidson needs to get back to what made it a powerhouse in the first place. Harley Davidson has historically made the highest quality bikes with unique and cutting edge design features and old fashioned American muscle. That is the image that has made Harley successful in the past and hopefully will make the company successful in the future. Harley Davidson needs to refocus on producing new and innovative design elements not only to significantly change motorcycle lines from model year to model year but also to renew the company’s image as one that can still come up with new bikes of the highest quality and design. The other step to helping renew the image is through increased advertising and event promotion. Rallies like the Black Hills Rally in Sturgis do great things to demonstrate and promote Harley’s image, but more could be done in that department. Organizing additional rallies and other

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promotional events would go a long way in demonstrating new products but also helping to stimulate the overall market growth that Harley Davidson will need to continue its growth trends.

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