No one can accurately predict the future. What I can predict with the utmost confidence are the things that won't

change at Harley-Davidson - namely, our commitment to providing more great motorcycles; to enhancing the

unparalleled Harley lifestyle experience; and to continuing to provide excellent financial performance.

- Jeffrey L. Bleustein, Harley-Davidson CEO1

Harley-Davidson: Evolution of Marketing Strategy Introduction August 31, 2003 marked Harley-Davidson’s (H-D) 100th anniversary. H-D was one of the leading motorcycle manufacturers in the world. Forbes Magazine had named H-D as the Company of the Year2 in 2001 for its record sales growth and earnings, and strong overall financial performance. The year 2002 marked the 17th consecutive year of record revenue and net income for H-D. US consumers often waited as long as six to eighteen months to purchase a new H-D bike. In addition to its line of motorcycles marketed under the H-D and Buell3 brand names, the company also offered a complete line of aftermarket parts, accessories and general merchandise. Background Note Founded in 1903, H-D was the only major American player in the global motorcycle market. It had served in every major war of the past 100 years and received four Navy ‘E’ awards4 for excellence in wartime production. It was the war veterans who started the H-D biker culture. Veterans returned home from war and bought H-D because they had fallen in love with the bike and the company when they were at war. They started riding H-D with strong American pride. To some it was a remembrance of their fellow soldiers who had perished for the freedom of Americans. From these bikers evolved the rough and tough breed of bikers with their leather jackets, tattoos, and long hair. H-D built up a distinctive brand image and dominated the US motorcycle industry for many decades. In 1969, H-D was taken over by the American Machine and Foundry (AMF). During the 1970s, Japanese manufacturers flooded the market with high quality, low priced bikes. A reputation for shoddy products, combined with an onslaught of Japanese competitors, nearly destroyed H-D. Its market share fell from 77.5% (1973) to 23.3% (1983).5

1 “Organizational Innovations in Harley Davidson Inc. – Transformation by Interactive stakeholder relationships,”

Working paper, Helsinki University of Technology, 2001. 2 Forbes Magazine, one of the world’s leading business publications. The honor and accompanying article entitled

‘Love Into Money’ appeared in the 7th January 2002 edition of the magazine. 3 In 1993, H-D purchased a 49% stake in Buell Motorcycle Company to gain access to the performance motorcycle

category and provided consumers with a lower cost entry point. In 1998, the company acquired the remaining

Buell stock and began to consolidate operating results. 4 Navy 'E' award was put into effect by the Navy Bureau of Ordnance on July 1941as a recognition to push forward

more swiftly with production of defense materials to arm Navy in all eventualities. 5 “The Harley Davidson Story,” Case Study, College of Business and Public Administration, University of

Louisville, Website: http://cbpa.louisville.edu

2

In 1981, thirteen members of the H-D management team purchased the company from AMF in a leveraged buy-out6. But, within the first year, overall demand for motorcycles dropped dramatically. H-D's market share dropped and a large inventory of unsold products piled up. H-D was aware it could no longer continue business at its current production level and operating cost. It cut costs drastically, asking more than 1,800 of the 4,000 employees to leave. In 1983, in a move to help the floundering US motorcycle industry, the US government, increased tariffs on Japanese motorcycles from 4.4% to 49.4%. Minutes away from bankruptcy, Richard Teerlink (who became President and CEO in 1988) convinced lenders to accept a restructuring plan. Using management principles adopted from the Japanese, new marketing strategies, and manufacturing techniques, H-D improved quality and began the long battle to regain its market share. Teerlink believed people were the only sustainable competitive advantage. He put in place an innovative system called Circles of Management to bring both workers and dealers into the fold by involving them in key decisions. H-D also changed its strategy from selling products to selling community. H-D owners were a diverse bunch, from CEOs to construction workers. To build emotional bonds with them, the Harley Owners Groups (HOG) was created in 1983. The company emphasized that customers could buy any brand of motorcycle, but if they bought from competitors, riders would not get the rallies and events. They would not have the camaraderie that came with a H-D motorcycle. H-D developed a new marketing philosophy based on customers’ desires and positioned itself as a lifestyle product rather than a mere motorcycle. By 1986, H-D had regained 25% of the US motorcycle market. In the same year, it went public on the New York Stock Exchange. After one year, the company announced it no longer needed special tariffs to compete with the Japanese. From 1988 to 1995, annual shipments of H-D motorcycles more than doubled. Although H-D generated more than $1.3 billion revenues in 1995, it spent less than $2 million in advertising. H-D considered7 its customers as its real sales force, and the bikes, accessories and clothing served as calling cards. From 1995 to 2000, the company invested more than $1 billion to maintain its leadership in motorcycle design and increase production capacity. In 2001, Harley started expanding its product development centers in Milwaukee, Tomahawk and York. Figure (i) H-D: Revenue and Profit in Different Business Segments

6 A buyout using borrowed money; the target company's assets are usually security for the loan. 7 “Harley-Davidson: Marketing an American Icon, ” Corporate Design Foundation, website: www.cdf.org

3

2002 Revenue Mix ($ 4.091 billion)

2002 Operating Income ($ 0.895 billion) by Segment

Source: H-D Annual Report 2002.

4

0

1000

2000

3000

4000

5000

Million $

Revenues 2064 2452.9 2906 3363.4 4091

Net Income 213 267 347 437 580

1998 1999 2000 2001 2002

Figure (ii) H-D: Revenues & Net Income Source: www.bloomberg.com H-D produced 263,653 motorcycles in 2002, a 12.5% increase over 2001. In the US, H-D retail sales climbed nearly 18% and in Europe by 2.7%. In Japan, H-D achieved its 18th consecutive year of growth, outselling all other manufacturers in the heavyweight category for the third straight year.8 The same year, H-D introduced its 2003 series of motorcycles, which featured rich new paint schemes and special 100th anniversary identification. Every 2003 motorcycle in the line-up was designated a 100th anniversary model, and it extended the model year to 14 months to enable more customers to own a piece of H-D history. Buell also did its part to make 2002 a historic year in motorcycling. Buell shipped the first of its revolutionary Firebolt XB.R models to dealers, followed by the new 2003 Lightning XB.S sport bike. H-D also invested $324 million in capital improvements in 2002, to increase production capacity and strengthen its competitive position in the global marketplace. Segmentation and Targeting H-D had four major marketing objectives9. First, it wanted to expand its potential customer base to include both enthusiast and non-enthusiast affluent males in the 35-44 age group. This was partly accomplished by introducing the V-ROD model to the younger demographic. Second, H-D wanted to enhance its market share by targeting the first time buyers of motorcycles. Third, it wanted to set the appropriate pricing strategy, which appealed to the target customers, through market research. Lastly, H-D wanted to meet the market demand in order to optimize the revenue potential, by setting the correct production schedules, and picking strategic partners.

8 H-D Annual Report 2002. 9 Final Marketing Plan, H-D Corporation, 10th December 2001.

5

When H-D was formed, it only offered one color of motorcycle - gray and three basic styles. Later, the company began to offer a variety of models, including Sportsters, Super Glides, Low Riders, Softails, Sport Glides, Tour Glides and Electra Glides, in numerous vivid colors. Many of these models were developed when H-D realized its customers were customizing the bikes but these additional revenues were not coming to the company. In 1999, H-D introduced the Custom Vehicle Operations (CVO) program, which offered a limited quantity of H-D motorcycles, which had been uniquely customized at the factory with H-D accessories. The limited edition motorcycles were produced at the York, Pennsylvania facility on a separate, low volume assembly line that was formerly used for military contract production. About 2,700 vehicles representing three different motorcycles were sold through this program during 1999. A fourth custom cycle was introduced in 2000. In 2002, the company offered 24 models of H-D touring and custom heavyweight motorcycles, with retail prices ranging from roughly $5,595 to $18,980. H-D tried to attract younger riders through a number of programs. Among other things, it started offering, under the Buell nameplate, a line of smaller, easier-to-drive bikes that were less costly, and less daunting, than H-D’s famous hogs. It sold several models of Buell motorcycles, including a 492cc Buell Blast motorcycle. The Blast was targeted at new riders. Its retail price of $4,395 was about half the price of the next lowest-priced Buell motorcycle. H-D realized that competing with the foreign manufacturers on price would be difficult. So it attempted to create scarcity value by keeping the production of its motorcycles well below the demand. People waited six to eighteen months for a new motorcycle. The price of a year-old H-D was typically 25% to 30% higher than a new one. H-D had started as a sport bike manufacturer. The company was fully involved in motorcycle racing and soon dominated the sports segment. During World War I & II, H-D had supplied war motorcycles to the US Military. In 1941, civilian production of motorcycles was suspended, as the company targeted war requirements. In 1957, H-D introduced Sportster, the fastest ever vehicle, which marked H-D’s reentry into the sports segment. With this introduction, H-D embarked upon an image change from War motorcycle to the sports and leisure segment. During the 1980s, to consolidate its market share, the company put in place an innovative positioning strategy of selling community and lifestyle to its customers. H-D targeted free spirited people who embodied American values of freedom and liberty and were avid long distance riders. Exhibit: I H-D: Demographic Profile Of Customers

1997 1998 1999 2000 2001 Gender Male 93% 93% 91% 91% 91%

6

Female 7% 7% 9% 9% 9% Median age Years 44.6 44.4 44.6 45.6 45.6 Median income ($000's) Household 74.1 73.6 73.8 77.7 78.3

Source: www.harley-davidson.com H-D’s research revealed that the demographic profile of H-D’s target customer in the early 2000s was a married male in his mid-40s, with a household income of about $78,300, who purchased a motorcycle for recreational purposes, and who was an experienced motorcycle rider. 41% of H-D’s buyers were its old customers, 31% of the buyers had changed loyalty from H-D’s competitors and 28% were new motor riders. H-D targeted exclusively the heavyweight (engine displacement of 651cc or more) motorcycle market, which was generally subdivided into four major categories: 1) standard, which emphasized simplicity and cost; 2) performance, which emphasized handling and acceleration; 3) touring, which emphasized comfort and amenities for long-distance travel; and 4) custom, which emphasized styling and individual owner customization. Bulk of H-D’s revenues was derived from touring and custom motorcycles. Exhibit: II H-D: Types of Motorcycles

Unit Shipments 2001 2002

H-D Touring Motorcycles 65,403 70,713

H-D Custom Motorcycles 118,244 141,769

H-D Sportster Motorcycles 50,814 51,171

Buell Motorcycles 9,925 10,943

Total 244,386 274,596

Source: H-D Annual Report 2002 Competitive conditions in the industry guided H-D’s segmentation efforts. H-D’s major competitors were Honda, Yamaha, Suzuki, Kawasaki and BMW. Honda, which accounted for one third of all US motorcycle sales, was the largest company in terms of size, financial muscle, and reputation. It offered the widest selection of styles, classes and sizes within the heavyweight category. Honda focused on fuel efficiency and lower emissions. Yamaha targeted the low-end of the market, by providing a variety of products at affordable prices. Yamaha’s core competencies were small engines, electronic control, and fiberglass-reinforced plastic. Analysts felt that Yamaha produced H-D clones but lacked H-D's image. Suzuki was one of the leading motorcycle makers, offering a complete range of advanced street, off-road and racing- machines. It had positioned itself as heavyweight luxury at a lightweight price,

7

targeted at middle-class families. Kawasaki's products included a full line of motorcycles, all terrain vehicles, jet skis and others. It was the leader in superbikes manufacturing, but US legislation limited the import of sports bikes because of safety reasons. BMW was famous for its quality products, but its high prices held it from expanding sales. Exhibit: III H-D: Market Share

Year

North America

Europe

Asia /Pacific

2002 46.40% 6.60% 21.30%

2001 43.90% 6.70% 20.40%

2000 44.60% 6.80% 19.50%

1999 47.70% 5.80% 18.50%

1998 47.20% 5.80% 14.80%

1997 48.20% 6.00% 16.40%

1996 47.20% 6.80% 21.90%

1995 47.20% 7.40% 20.10%

1994 46.20% 7.10% 19.40%

H-D Vs. Competitors in 2002

Company

North America

Europe

Asia /Pacific

H-D 46.40% 6.60% 21.30%

Honda 20.20% 21.00% 19.10%

Suzuki 9.80% 14.80% 10.10%

Kawasaki 7.10% 8.50% 15.80%

Yamaha 9.30% 17.70% 13.60%

BMW 2.50% 15.10% 7.30%

Others 4.70% 16.30% 12.80%

Total 100.00% 100.00% 100.00%

Source: H-D Annual Report 2002.

8

Figure (iii) H-D Potential Customers: US Population Projection

Source: U.S. Census Bureau estimates Advertising & Promotion H-D’s marketing communications mix had evolved over time. In the early 1990s, dealer promotions, customer events, magazine and direct mail advertising, public relations and cooperative programs drove H-D’s marketing efforts. The company started advertising in magazines targeted at the general public. Fashions and Collectible catalogs were produced with various H-D merchandise twice a year. Clothes sold in stores such as Bloomingdale and J.C. Penny exposed H-D to people who might not have thought about visiting a dealership. The company was able to promote the sale of its motorcycles by the financial services offered by Eaglemark10. The dealerships became a one-stop shop for bikes, accessories, clothing and financing. In the early 1990s, H-D promoted its lifestyle experience through designer store dealerships that had either been completely remodeled or built from scratch to provide a warm and inviting retail environment. Floor plans and display counters were laid out to draw customers in and surround them with motorcycles. Parts and accessories were attractively displayed in user-friendly packaging. There was a separate area for H-D’s line of Motor Clothes, complete with dressing rooms. Many stores also featured customer lounges and rider meeting rooms with H-D pinball machines, antique bikes and rally videos.

10 In 1993, H-D had taken a minority stake in Eaglemark, a finance business that the company subsequently acquired

and renamed Harley-Davidson Financial Services (HDFS). HDFS supported and augmented the company’s North

America motorcycles business, providing credit to dealers and customers.

9

Figure (iv) H-D: Advertisement in 1913

Source: www.amps.co.nz Figure (v) H-D: Advertisement in the late 1990s & Early 2000s

10

Source: www.davidcohen.co.nz

11

Figure (vi) H-D: Advertisement in 2002

Source: www.davidcohen.co.nz In 1983, the Harley Owners Group (HOG) was established to build a community of customers, who could share their H-D experiences. A person buying a H-D motorcycle received a free one-year membership of the HOG. Customers joined local, dealer-sponsored HOG chapters each with unique activities and personalities to customize their HOG experiences. HOG chapters conducted national rallies, touring rallies and state rallies. These rallies encouraged people to share the excitement of riding. The people (taking demonstration rides) had the opportunity to ask questions, register their bikes and buy merchandise. In 2001, HOG continued to sponsor motorcycling events at local, regional, national and international levels, including US National Rallies in Worcester, Maine, and Milwaukee, as well as a special touring rally that took participants on a journey through the US on the legendary Route 66 from Chicago, Illinois, to Santa Monica, California. According to Michael D. Keefe, director of HOG, these rallies were an occasion for customer bonding. If people used the motorcycle, they were likely to stay involved. “What the Harley management crew, who are masters of marketing, do well is listen to their customers. The result is that Harley cannot keep

12

up with demand at current production levels.”11 Company officers spent almost every weekend from April through October at motorcycle events and dealerships accumulating these information. They maintained a database to track consumer desires. The Buell Riders Adventure Group (BRAG), a club for Buell owners, was created in 1995 to bring Buell motorcycle enthusiasts together to share their on-road experiences and create new ones. In its inaugural year, BRAG had just a handful of members. In 2001, it had more than 10,000 members from 55 local clubs among its ranks. In 1999, Ford and H-D teamed up in a five-year marketing partnership to take advantage of their brand-name recognition. After Ford’s success in co-brand partnering with Eddie Bauer,12 it was trying to repeat the success with H-D, in their limited edition H-D F-150 pickup truck. The customized version was restyled, all-black, with distinctive H-D orange pinstriping and chrome accessories. Both companies also planned to sell dual-logo apparel. H-D had 1,065 dealers worldwide and 75% of them sold H-D motorcycles exclusively. In the US, there were about 620 independently owned full-service H-D dealerships, which included over 220 combined H-D and Buell dealerships. All authorized dealers stocked and sold the genuine replacement parts, accessories, motor clothes apparel and collectibles, and performed service for the motorcycles. They got a certain quota of bikes every year on the basis of previous year's sales. The company had an agreement with American dealers not to sell more than 30% of the bikes overseas, if the domestic demand was not met. H-D also sold a smaller portion of its parts and accessories and general merchandise through non-traditional outlets. These were extensions of dealerships, consisting of service shops, called Secondary Retail Locations, Alternate Retail Outlets (ARO) and Seasonal Retail Outlets (SRO). Service shops were satellites of the main dealership and were developed to meet the service needs of the customers. In addition, service shops were authorized to sell new motorcycles. AROs were located primarily in high traffic areas such as airports or popular vacation destinations and focused on selling Motor Clothes apparel and collectibles and licensed products. Leveraging The Brand H-D believed its key strength lay in its brand image rather than technology. It had built its brand image by expressing the emotional bonding of American Youth. H-D's Ex-President and CEO, Richard Teerlink said13,

“The bike represents to America, the adventurous pioneer spirit, the wild west, having your own horse, and going where you want to go - the motorcycle takes on some attributes of

11 “The Harley Davidson Story,” Case Study, College of Business and Public Administration, University of

Louisville, Website: http://cbpa.louisville.edu 12 Eddie Bauer, Inc. was a leading international retail brand, offering casual lifestyle products for adults. In 1983

Eddie Bauer began a partnership with Ford to produce Eddie Bauer Edition Ford vehicles. Both the company

put more than 1 million Eddie Bauer Edition vehicles and surpassed the industry standards with their distinctive

style, high performance and many exclusive features. 13 “The Harley Davidson Story,” Case Study - College of Business and Public Administration, University of

Louisville, http://cbpa.louisville.edu

13

the iron horse. It suggests personal freedom and independence. Brand loyalty for H-D is emotional. The H-D’s symbol is based on a pattern of association that includes the American flag and the eagle; reflective of the passion for freedom Americans enjoyed.”

H-D measured brand loyalty14 by the percentage of men and women who tattooed the company’s logo on their body. By that measure, H-D had the highest loyalty of any brand in the world. The most popular tattoo in the US was the H-D shield. Many H-D owners, even those who did not have tattoos, saw H-D as an important part of their identity. The experience of riding an H-D, or even an association that came from wearing H-D clothing, was a way for some to express their individuality. H-D had a vigorous global program of trademark registration and enforcement. It attempted to create awareness of the H-D brand among the non-riding public by licensing the name and numerous related trademarks. The H-D trademark had been in use since 1903. H-D had licensed the production and sale of a broad range of consumer items, including T-shirts, jewelry, small leather goods, toys and numerous other products. It also licensed the use of its name to two cafes located in New York and Las Vegas. These two Cafes represented another opportunity for riders and non-riders to experience H-D's culture. These cafes were among the most visible brand-building tools, and they generated licensing income for H-D even as they created a dining experience for customers. Figure (vii) H-D: Licensed Products

The Fisher-Price, Power Wheels Ride-On let even the youngest children share in the H-D experience.

H-D Toys

H-D apparel, licensed by The Haddad Apparel Group, built brand awareness among moms and kids. It had become one of the leading children's apparel programs in upscale

distribution channels. H-D Children's Apparel

The H-D Roadmaster Bicycle was part of a broad-based playthings program targeted to inspire future H-D consumers.

Targeted at women, the H-D Barbie Collector Doll Series by Mattel was the most successful limited edition of its kind in history.

14 According to Daryl Travis, in his book “Emotional Branding.”

14

H-D Bicycles The H-D Barbie

The H-D Cafe in New York and Las Vegas attracted hundreds of thousands of visitors and extended the H-D experience to families from around the world.

The H-D Cafe

A beautifully crafted refrigerated nostalgic coke soda machine served two favorite beverages in cans or bottles, was a licensed version of H-D. H-D Coke Machine

Source: www.beanstalk.com H-D’s licensing program generated annual retail sales of approximately $1 billion. With 80 licensees across 18 product categories in the US and abroad, the program had grown steadily since its inception. H-D believed licensing had helped to transform the company's image, broaden the brand's appeal and further elevated H-D as an American icon. But some doubts remained about how far the H-D brand could be stretched. Charles E. Brymer, CEO of Interbrand Group, a New York based branding consultancy, commented:15

“Harley-Davidson values are strong, masculine, very rugged. For Harley-Davidson to go into a sector that doesn't live up to what those values are would be disastrous.”

Joe Hice, Director of corporate communications for H-D commented:16

“Over the years, we've tried a number of different approaches to merchandising and put the Harley-Davidson brand on some things that, in retrospect, we may not have been well-advised to do. The company is much more selective today about who we work with and how we go about extending the brand.”

Looking Ahead H-D's ambitious vision was to more than double its production for the company's 100th anniversary. The company had decided17 on a 9.6 percent annual increase in motorcycle

15 “ The Blind Reach,” Across the Board, www.conference-board.org, March 2001. 16 “ The Blind Reach,” Across the Board, www.conference-board.org, March 2001.

15

production to 289,000 in 2003. H-D planned to start a new plant in York, Pennsylvania to increase the production capacity. Bleustein expected to ensure leadership in this attractive market by increasing production capacity and introducing exciting new products combined with targeted marketing strategies that appealed to a diverse and growing motorcycle enthusiast population.

17 Alan Ohnsman, “Harley-Davidson's Bleustein Comments on 2003 Production Target,” www.bloomberg.com, 6th

February 2003.

16

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