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SECTION E International Issues in Strategic Management
Case 9 Harley Davidson: An Overreliance on Aging Baby
Boomers
Alan N. Hoffman
Bentley University
Natalia Gold
Northeastern University
The authors thank Barbara Gottfried, and Bentley University
MBA students Cristina Montalvo, Robert Bondy, Michael
Ferriero, and John O’Rourke for their research and
contributions to this case. Printed by permission of Dr. Alan N.
Hoffman. Please address all correspondence to: Dr. Alan N.
Hoffman, Dept. of Management, Bentley University, 175 Forest
St Waltham, MA 02452, [email protected].
Company Background
In 1903, William S. Harley and Arthur Davidson produced the
first Harley-Davidson motorcycle in a 15’ x 10’ wooden shed
with the words ‘Harley-Davidson Motor Company’ etched into
the door. The warehouse was located in Milwaukee, Wisconsin,
the company’s headquarters to this day. They were soon joined
by Arthur’s brother Walter, and by 1910, the company had
begun to establish itself, using its current “bar and shield” logo
for the first time; the logo that it trademarked with the U.S.
Patent Office In 1911. In 1981, Harley-Davidson, Inc.
purchased the Harley-Davidson Motorcycle Company from AMF
Incorporated via a management buyout, incorporated, then went
public in 1986. Over the years, Harley-Davidson had made a
name for itself as the most well known producer of heavyweight
motorcycles in the North American market; and, although its
international sales were not significant until the late 1990s, the
company then quickly became the most renowned brand in the
world.
Harley-Davidson, Inc., a publicly traded company listed on the
New York Stock Exchange as “HOG,” divided its operations
into two segments: Motorcycles & Related Products, and
Financial Services. The Motorcycles & Related Products
segment designed, manufactured, and sold wholesale
heavyweight motorcycles, motorcycle parts, accessories, and
general Harley-Davidson merchandise to retail customers
through a network of independent dealers in North America,
Europe, Middle East, Africa, Asia Pacific, and Latin America
(Exhibit 1). The Financial Services segment, known as Harley-
Davidson Financial Services (“HDFS”), provided wholesale and
retail financing as well as insurance-related services. HDFS
customers were primarily end-users from the Harley-Davidson
retail stores, drawn from its networks primarily in the United
States and Canada.
Exhibit 1
Harley-Davidson’s U.S. and International Dealerships
FULL SERVICE DEALERSHIPS AND SRL’S
2012
2011
2010
2009
2008
2007
2006
USA
695
706
729
758
787
788
679
Canada
73
74
74
74
74
76
75
Europe region
371
370
364
369
381
370
354
Asia Pacific region
281
274
272
254
200
194
178
Latin America region
47
44
40
40
45
49
31
Totals
1,467
1,468
1,479
1,495
1,487
1,477
1,317
Strategic Direction
Harley-Davidson’s mission was to design and manufacture
premium motorcycles for the heavyweight market. As of 2013,
the company offered seven different models: Sportster, Dyna,
Softail, V-Rod, Touring, CVO, and Trike. Each model was
highly customizable, made to order to customer specifications,
creating a Harley-Davidson mystique. As the company’s motto
so aptly put it:
The company’s vision promoted a comprehensive motorcycling
experience across a wide demographic through events, rides,
and rallies. Its rallies, a crucial part of Harley-Davidson culture,
were a way for motorcycle enthusiasts to come together at
different locations and tour with each other. Ideally, Harley-
Davidson wanted every motorcycle owner to wear a Harley vest,
a Harley helmet, and Harley boots, then meet up with other
Harley motorcycle owners wearing the same attire—the events,
rides, and rallies made this vision come true.
Harley-Davidson’s main objectives were: (1) to provide a
quality and reliable product; and (2) to allow for highly
customized, stylish products. The company was so sure of the
quality of its products that it offered a two-year warranty on
new motorcycles, and let customers know they came first:
At Harley-Davidson, customers not only purchased a
motorcycle, they bought the “rebel” lifestyle Harley signified.
This rebel image took a long time to develop and constituted a
major competitive advantage for Harley. Nothing promised the
same excitement as being on the open road on a Harley, its
engine roaring, the wind whipping, the great open spaces of
America just down the road. The company also considered the
availability of a line of motorcycle parts, accessories, and
general merchandise and of financing through HDFS part of its
competitive advantage. No other motorcycle company offered
its own financing under the same company umbrella.
Harley-Davidson specifically targeted a narrowly defined
market of middle-aged males with disposable income. However,
as U.S. baby boomers got older, the company recognized that it
must look to new markets and demographics to expand sales.
Competition
Harley-Davidson’s main competitors were Honda, Suzuki,
Yamaha, Ducati, Kawasaki, BMW, and Polaris. Most of
Harley’s competition was international in focus unlike Harley’s
more U.S. domestic presence. Other than Honda, most of the
other competitors focused on lightweight, sporty, speed bikes.
Harley historically targeted the larger, luxury motorcycle
market.
According to Popular Mechanics magazine, the top 10 best buys
for bikes in 2103 were:
1. 2013 Kawasaki Ninja 300
2. 2013 BMW S1000RR HP4
3. 2013 Victory Judge
4. 2013 Harley-Davidson Seventy-Two
5. 2012 Honda NC700X
6. 2013 Ducati Monster 696 Anniversary
7. 2012 Yamaha Super Tenere
8. 2013 Moto Guzzi V7 Racer
9. 2013 Suzuki SVF 650
10. 2013 Zero S
The Japanese company Honda was always Harley’s biggest
competitor: Harley-Davidson had the greater domestic market
share but Honda had the largest international market share in
the entire motorcycle industry, with a history of providing
quality products at cheaper prices than comparable American
made products. Honda’s best selling motorcycle in the United
States was the GoldWing. The Harley management was very
much aware of Honda as its biggest competitor and consciously
strove to stay ahead of Honda in the industry.The Motorcycle
Industry
As with all motorcycle companies, Harley-Davidson operated in
a highly regulated industry and had to ensure that it complied
with U.S. EPA standards and the National Highway Traffic
Safety Administration’s National Traffic and Motor Vehicle
Safety Act. In most states, motorcyclists had to have a separate
license. Some promoters of motorcycles worried that consumers
might not want to go through the process of getting a special
license to use a motorcycle, which they considered a threat
given that any laws implemented against the use of motorcycles
could directly affect the acquisition of a motorcycle.
Motorcycle safety regulations were also historically created and
implemented at the state level. Each state had a set of individual
requirements for motorcycles including: helmet requirements,
state funded rider education, eye protection, passenger
regulations, and lighting. Even though states had safety
regulations in place, trends evidenced an increasing number of
motorcycle accidents. A study conducted by the University of
Southern California (USC) attributed this increase to two major
factors—lack of detection of motorcycles by passenger vehicle
drivers and uneducated motorcycle riders. According to the
USC study, 92% of motorcyclists who were involved in
accidents had no certified training and had not participated in a
rider education program. Although some states offered state
funded rider education, many did not. Beginning in the 1990s,
the rate of motorcycle-related accidents steadily increased, from
61,451 in 1997 to 79,000 in 2003; and fatalities increased from
2,116 to 3,661. This increased risk, it was feared, could deter
consumers from purchasing a motorcycle and push them to a
safer option such as a small car.
In addition, as baby boomers, Harley-Davidson’s main target
audience, aged, their concerns about the safety risks of riding a
motorcycle grew, which was seen as potentially detrimental to
the motorcycle industry as the federal government could then
decide to mandate increased safety requirements. Most bikers, it
was believed, chose to ride a motorcycle for the cool image;
thus, being forced to wear protective gear, helmets, and use
extra safety features could hurt the industry’s image and sales.
If this trend continued, many felt, there could be a potential
threat to Harley’s ability to retain current customers and attract
new ones. The industry could lose profitability, and sales of
motorcycles could decrease.
On the other hand, industry leaders argued, rising fuel prices
might prompt consumers to switch to motorcycling and
bicycling to save money on transportation costs, a trend
underpinned by a consumer shift toward eco-friendly practices
requiring less (or no) fuel consumption. Thus, demand for these
products was expected to rise. By capitalizing on these trends
and opening up to a broader consumer market, the industry was
expected to grow at an annualized rate of 1.3% to $7.1 billion in
the five years leading up to 2018 (IBIS World, 2013).
By the same token, however, the loud vroom Harley-Davidson
motorcycles made, once seen as an advantage, became a threat
for the brand. While once that noise was seen as a sign of
power, customers began to find it both annoying and a sign of
conspicuous consumption. Harley needed to see customer
dissatisfaction as an opportunity to design new motorcycles that
minimized sound to decrease the perception of loud noise and
promote a more eco-friendly image.
Finally, while technological enhancements enabled Harley-
Davidson to produce a constant stream of appealing
technological innovations such as video cameras, GPS, airbag
systems, and increased fuel efficiency for its bikes, adding new
tech often resulted in higher manufacturing costs, thus higher
prices for consumers.Marketing
One of the primary reasons for Harley-Davidson’s success over
the past few decades was the positioning of its brand as an
American icon. That iconic status was crucial to creating
tremendous brand recognition and a strong reputation
throughout the world for producing the highest quality bikes in
the marketplace. Owners of Harley-Davidson motorcycles swore
by them and were extremely unlikely to seek a competitor
brand. The brand was so strong the company was even able to
generate significant sales of non-motorcycle branded
merchandise, including hats, t-shirts, and other household items.
Harley was seen as a true “American” brand, something baby
boomers supported and were willing to stand behind.
Additionally, a sense of community and culture contributed to
Harley’s brand strength. The company promoted motorcycle
rallies, where Harley owners could meet and ride with other
Harley owners; and encouraged riders to share their positive
experiences through word-of-mouth or online forums set-up for
that purpose.
Through all this, the main challenge Harley-Davidson faced
from a marketing standpoint was its inability to generate
interest and sales from demographics other than its traditional
target market: middle-aged men. In 2012, over 65% of sales
were made to Caucasian men over 35 (Research and Markets,
2013). The baby-boomer generation had been the main driver of
Harley-Davidson sales for more than 20 years, but as boomers
aged and lost their desire to purchase and ride, Harley needed to
find ways to attract new customers. The younger generation was
more attracted to colorful, lightweight bikes, similar to those
sold by Kawasaki and Suzuki, two of Harley-Davidson’s main
competitors, and on top of that, they saw Harleys as appealing
to an older demographic, something their fathers would ride but
they wouldn’t. Thus, the best way for Harley to attract the
younger generation was to continue to improve its
customization and technological options to appeal to a
generation committed to customizing or altering a product to
best suit its own needs and desires. Harley-Davidson had been
offering customization options for some time, and this allowed
potential buyers on its website to build their own Harleys to
whatever specifications they desired. Adding yet more
customization options in the form of colors and styles, it was
hoped, could benefit Harley and increase its chances of
attracting new riders. However, some of Harley’s competitors
such as Kawasaki and Honda were already “on it,” offering
technological features such as high-quality sound systems, rear-
viewing cameras, and GPS system add-on availability for their
bikes, a sure-fire way to appeal to younger consumers.
A further challenge for Harley-Davidson was promoting the
safety of its bikes versus those of its competitors. Motorcycle
riders had become much more safety-conscious than those of
previous generations, and as motorcycles were traditionally
considered one of the most dangerous forms of transportation,
Harley had to meet the challenge of potential buyers’ resistance
on the grounds of safety in its bid to increase sales.Operations
By the end of 2012, Harley had over 695 full service
dealerships in the United States and 73 in Canada, and another
700 full service dealerships in Europe, the Middle East, Asia,
and Latin America (Exhibit 1). The availability of full service
dealerships was considered the best way to promote sales as it
allowed customers to come into a local shop, test drive a bike,
look at options, and understand their financing options before
actually making a purchase, all of which were crucial for an
investment as expensive as a Harley.
Harley-Davidson also believed that flexible manufacturing
processes and supply chains combined with cost-competitive
and flexible labor agreements were critical to allowing the
company to respond to customers in a cost effective manner,
restructuring its U.S. manufacturing plants accordingly to
maximize efficiency, cost saving, and customer satisfaction.
The company also fostered long-term, mutually beneficial
relationships with its suppliers. Through these collaborative
relationships, the company gained direct access to technical and
commercial resources for product design, development, and
manufacturing initiatives greatly improving product quality,
technology integration, and faster new-vehicle introductions
(Research and Markets, 2013).
One of Harley’s weaknesses from an operational standpoint was
its inability to generate revenue streams from product lines
other than motorcycles. Harley had attempted to market various
supplemental products in the past, including motorcycle-related
parts, Harley-branded trucks, Harley branded snowmobiles and
all-terrain vehicles, but all of these ventures proved only
marginally successful. Harley also had to face the difficulty that
in some regions of the country, especially the Northeast, its
products could only be used for a limited number of months per
year. As the Northeast was a very large market, critics noted
that it would be helpful for Harley to have supplemental
products available for sale during the winter months, when
riding a motorcycle was not particularly feasible.Restructuring
Plan
Between 2009 and 2014, Harley undertook a number of different
restructuring initiatives with the goal of streamlining operations
and reducing production costs while maximizing efficiencies. A
major restructuring project within its U.S. holdings was the
consolidation of its motorcycle production into a single line at
the company’s motorcycle manufacturing facility in York,
Pennsylvania. Additionally, the company ratified a new, more
flexible labor agreement at all of its U.S. manufacturing
locations. In the first half of fiscal year 2013 the company
began implementing “flexible” production capabilities at its
York facility by adding flexible workers. By doing this it
increased manufacturing production in the first half of 2013 to
more closely mirror retail demand for its products.
The company also restructured operations internationally to
reduce costs and maximize output, closing one of its major
international manufacturing facilities in New Castalloy,
Australia, a plant that manufactured the majority of the wheels
for the company’s products. Instead, the company decided to
source these components through existing suppliers, as that
would be more efficient and cost effective (Research and
Markets, 2013).Finance
For 2014, Harley-Davidson’s main financial objective was to
find ways to increase sales and profits and expand sales to new
market segments. The company continued to see strong year-
over-year growth in sales and net income (Exhibits 2 and 3). It
also maintained a strong commitment to research and
development expenditures, indicative of its drive to continue to
search for ways to improve and expand through R & D. While
some companies used net profits to pay dividends to investors,
Harley-Davidson, like many successful companies, determined
that the key to continued success and longevity was
reinvestment of profits in the company to fund new product
development and improve established products. Another
financial strength for Harley was its return of sales and revenue
to strong positions after temporary downturns in 2011,
following the reorganization and restructuring plans. Finally,
the company generally maintained strong cash positions,
enabling it to stay liquid and pay down debt balances, should
high debt ever become an issue.Exhibit 2
Income Statement
Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
Unaudited
Year Ended December 31, 2013 (In Thousands. Except Per
Share Amounts)
Q1
Q2
Q3
Q4
TOTAL
Motorcycles and related products revenue
$ 1,414,248
$ 1,631,466
$ 1,180,284
$ 4,225,998
Gross profit
519,442
601,870
416,315
1,537,627
Selling, administrative and engineering expense
239,743
249,502
240,198
729,443
Restructuring expense
2,938
(5,297)
646
(1,713)
Operating income from motorcycles and related products
276,761
357,665
175,471
-
809,897
Financial services revenue
156,965
162,841
163,434
483,240
Financial services expense
85,420
88,685
87,366
261,471
Operating income from financial services
71,545
74,156
76,068
-
221,769
Operating income
348,306
431,821
251,539
1,031,666
Investment income
1,615
1,770
1,161
4,546
Interest expense
11,391
11,238
11,369
33,998
Income (loss) before income taxes
338,530
422,353
241,331
-
1,002,214
Provision (benefit) for income taxes
114,401
150,314
78,615
-
343,630
Income (loss) from continuing operations
224,129
271,739
162,716
-
658,584
Income (loss) from discontinued operations, net of tax
-
-
-
-
Net income (loss)
$ 224,129
$ 271,739
$ 162,716
$ -
$ 658,584
Earnings (loss) per common share from continuing operations:
Basic
$ 1.00
$ 1.22
$ 0.73
Diluted
$ 0.99
$ 1.21
$ 0.73
Weighted-average common shares:
Basic
224,429
223,052
221,936
Diluted
226,148
224,470
223,486
Cash dividends per common share
$ 0.21
$ 0.21
$ 0.21
Exhibit 3
Balance Sheet
Harley-Davidson, Inc.
2013 Quarterly Condensed Consolidated Balance Sheets
Unaudited (In thousands)
ASSETS
March 31,2013
June 30, 2013
Sept 29, 2013
Current assets:
Cash and cash equivalents
$1,018,759
$1,300,690
$1,029,955
Marketable securities
135,246
133,631
122,234
Accounts receivable, net
259,673
253,819
290,158
Finance receivables held for investment net
2,074,036
2,010,974
1,829,612
Inventories
416,050
307,717
401,199
Restricted cash held by variable interest entities
197,025
212,004
194,329
Other current assets
232,190
235,636
225,188
Total current assets
4,332,979
4,454,471
4,062,675
Finance receivables held for investment net
3,959,903
4,214,612
4,355,278
Other long-term assets
1,042,239
1,038,115
1,036,055
$ 9,335,121
$ 9,707,198
$ 9,484,008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable & accrued liabilities
824,335
794,670
885,940
Short-term debt
687,705
525,745
394.460
Current portion of long-term debt
715,143
776,274
721,316
Total current liabilities
2,227,183
2,096,689
1,981,716
Long-term debt
3,892,469
4,234,352
4,067,733
Pension liability and postretirement! healthcare benefits
426,729
420,096
412,482
Other long-term liabilities
131,692
134,822
140,230
Total shareholders’ equity
2,657,048
2,821,239
2,881,847
$9,335,121
$9,707,198
$9,484,008
Harley-Davidson’s main weakness from a financial, and
company-wide, perspective was its dependence on a single
customer demographic: middle-aged men, its’ primary customer
base. As boomers aged out of the motorcycle market Harley had
to meet an enormous challenge: how to maintain its high sales
and revenue volume and grow and diversify its base to replace
those boomers. Another challenge was the company’s debt to
equity ratio, which continued to rise over the five years from
2009 to 2014 as the company took on more and more debt from
its restructuring. The high debt balance undercut company
flexibility and, it was feared, could present serious problems in
the future. Inventory levels also increased at a rate slightly
higher than sales, which suggested that sales were not meeting
projected levels, resulting in excess inventory. Finally, in recent
years, more and more customers chose to pay for their
motorcycles through the company’s financing program rather
than purchase them outright, suggesting that buyers were
struggling to afford Harley-Davidson’s steep price tag, and
perhaps indicating a weakness in the buyer market for Harleys.
Nevertheless, Harley-Davidson sales increased from $5.3 billion
in 2011 to $5.6 billion in 2012 while net income increased from
$599 million to $624 million during the same time period. Thus,
both sales and net income appeared to be trending positively, a
good financial sign. Harley also saw some strong percentage
sales increases in its international markets during 2012. The
units sold in the United States increased 6.6% from 2011 to
2012, compared to a 39% increase in the Latin America region,
and a 19.9% increase across the Middle East and Africa.
International sales turned out to be a significant growth and
expansion opportunity for Harley-Davidson as long as it found
ways to participate in international markets without driving
costs and related expenses of doing business up too much.
Harley-Davidson’s leading position in the U.S. motorcycle
market was further attributable to its commitment to research
and development. Harley always had a reputation in the industry
for its continued investment in research and development. The
company even maintained a secret Product Development Center
in Milwaukee where it spent hundreds of millions of dollars
focusing on the Harley sound, the Harley engine, and various
avenues for future motorcycles:
Total research and development expenses were $143.1 million,
$136.2 million, $145.4 million and $137.3 million for 2009
through 2012, respectively (sec.gov). Significantly, these
research and development figures stayed relatively consistent on
a year-over-year basis, even during the recession of 2009 when
plagued by sluggish sales and increasing debt,, underscoring the
company’s unwavering dedication to intracompany investment
in research and design, and in the improvement and expansion
of its business and product offerings. The hope was that R & D
would lead to new models of bikes, new styles, new ways to
control emissions, new metals or materials to use on bikes to
make them lighter, new ways to improve the safety of the bikes,
and any number of other possible improvements that would only
strengthen the brand, the product, and the company. The
company understood that the lack of the necessary R & D
expenditures would quickly be exposed by the competition, as
its products would rapidly become outdated.Ethics: A Priority at
Harley Davidson
As a longstanding, well-known American corporation, Harley-
Davidson felt it had a responsibility to its shareholders and to
the public to maintain a strongly ethical corporate culture. Its
human resources and ethics policies were based on five main
practices: diversity and inclusion, safety in the work
environment, accurate advertising, employee attainment and
retention, and environmental awareness.Diversity and Inclusion
As Harley-Davidson continued to expand its business
internationally, the company understood that it was critical to
maintain a reputation of diversity and inclusion in its work
force. From an external perspective as well, it was important to
maintain a public image as a company that promoted diversity,
and was not biased in any way with regard to any particular
minority group or cause.Safety in the Work Environment
Maintaining a safe work environment was particularly important
for Harley-Davidson as it expanded internationally. Although in
the United States there were strict laws governing workplace
safety, foreign expansion countries did not necessarily have
similarly stringent guidelines, making it even more important
that Harley held itself to the same strict regulations
internationally as it did nationally.Accurate Advertising
Harley’s success was heavily dependent on its marketing
strategies and word-of-mouth buzz. To uphold and build upon
this success, Harley recognized that it was imperative to
continue to maintain high standards of accurate advertising, as
inaccurate advertising was widely regarded as creating negative
brand connotations that could deter customers, thus affecting
sales and operations.Employee Attainment and Retention
Employee attainment and retention was a particular concern for
the company following the restructuring plans of 2010–2011.
The restructuring plans involved letting go thousands of
employees both domestically and internationally, which, it was
feared, would be detrimental to employee morale, motivation,
and production. After the implementation of restructuring,
Harley made it a priority to emphasize the importance of
employee retention and attainment, increasing efforts to boost
employee morale and encourage long-term
employment.Environmental Awareness
As with automobile manufacturers, it was especially important
for Harley-Davidson to be aware of and abide by environmental
emission regulations. Harley prided itself on the fact that its
products constantly met or exceeded all emission laws and …

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SECTION E International Issues in Strategic ManagementCase.docx

  • 1. SECTION E International Issues in Strategic Management Case 9 Harley Davidson: An Overreliance on Aging Baby Boomers Alan N. Hoffman Bentley University Natalia Gold Northeastern University The authors thank Barbara Gottfried, and Bentley University MBA students Cristina Montalvo, Robert Bondy, Michael Ferriero, and John O’Rourke for their research and contributions to this case. Printed by permission of Dr. Alan N. Hoffman. Please address all correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest St Waltham, MA 02452, [email protected]. Company Background In 1903, William S. Harley and Arthur Davidson produced the first Harley-Davidson motorcycle in a 15’ x 10’ wooden shed with the words ‘Harley-Davidson Motor Company’ etched into the door. The warehouse was located in Milwaukee, Wisconsin, the company’s headquarters to this day. They were soon joined by Arthur’s brother Walter, and by 1910, the company had begun to establish itself, using its current “bar and shield” logo for the first time; the logo that it trademarked with the U.S. Patent Office In 1911. In 1981, Harley-Davidson, Inc. purchased the Harley-Davidson Motorcycle Company from AMF Incorporated via a management buyout, incorporated, then went public in 1986. Over the years, Harley-Davidson had made a name for itself as the most well known producer of heavyweight motorcycles in the North American market; and, although its international sales were not significant until the late 1990s, the company then quickly became the most renowned brand in the
  • 2. world. Harley-Davidson, Inc., a publicly traded company listed on the New York Stock Exchange as “HOG,” divided its operations into two segments: Motorcycles & Related Products, and Financial Services. The Motorcycles & Related Products segment designed, manufactured, and sold wholesale heavyweight motorcycles, motorcycle parts, accessories, and general Harley-Davidson merchandise to retail customers through a network of independent dealers in North America, Europe, Middle East, Africa, Asia Pacific, and Latin America (Exhibit 1). The Financial Services segment, known as Harley- Davidson Financial Services (“HDFS”), provided wholesale and retail financing as well as insurance-related services. HDFS customers were primarily end-users from the Harley-Davidson retail stores, drawn from its networks primarily in the United States and Canada. Exhibit 1 Harley-Davidson’s U.S. and International Dealerships FULL SERVICE DEALERSHIPS AND SRL’S 2012 2011 2010 2009 2008 2007 2006 USA 695 706 729 758 787 788 679 Canada
  • 3. 73 74 74 74 74 76 75 Europe region 371 370 364 369 381 370 354 Asia Pacific region 281 274 272 254 200 194 178 Latin America region 47 44 40 40 45 49 31 Totals 1,467 1,468 1,479 1,495
  • 4. 1,487 1,477 1,317 Strategic Direction Harley-Davidson’s mission was to design and manufacture premium motorcycles for the heavyweight market. As of 2013, the company offered seven different models: Sportster, Dyna, Softail, V-Rod, Touring, CVO, and Trike. Each model was highly customizable, made to order to customer specifications, creating a Harley-Davidson mystique. As the company’s motto so aptly put it: The company’s vision promoted a comprehensive motorcycling experience across a wide demographic through events, rides, and rallies. Its rallies, a crucial part of Harley-Davidson culture, were a way for motorcycle enthusiasts to come together at different locations and tour with each other. Ideally, Harley- Davidson wanted every motorcycle owner to wear a Harley vest, a Harley helmet, and Harley boots, then meet up with other Harley motorcycle owners wearing the same attire—the events, rides, and rallies made this vision come true. Harley-Davidson’s main objectives were: (1) to provide a quality and reliable product; and (2) to allow for highly customized, stylish products. The company was so sure of the quality of its products that it offered a two-year warranty on new motorcycles, and let customers know they came first: At Harley-Davidson, customers not only purchased a motorcycle, they bought the “rebel” lifestyle Harley signified. This rebel image took a long time to develop and constituted a major competitive advantage for Harley. Nothing promised the same excitement as being on the open road on a Harley, its engine roaring, the wind whipping, the great open spaces of America just down the road. The company also considered the availability of a line of motorcycle parts, accessories, and general merchandise and of financing through HDFS part of its competitive advantage. No other motorcycle company offered its own financing under the same company umbrella.
  • 5. Harley-Davidson specifically targeted a narrowly defined market of middle-aged males with disposable income. However, as U.S. baby boomers got older, the company recognized that it must look to new markets and demographics to expand sales. Competition Harley-Davidson’s main competitors were Honda, Suzuki, Yamaha, Ducati, Kawasaki, BMW, and Polaris. Most of Harley’s competition was international in focus unlike Harley’s more U.S. domestic presence. Other than Honda, most of the other competitors focused on lightweight, sporty, speed bikes. Harley historically targeted the larger, luxury motorcycle market. According to Popular Mechanics magazine, the top 10 best buys for bikes in 2103 were: 1. 2013 Kawasaki Ninja 300 2. 2013 BMW S1000RR HP4 3. 2013 Victory Judge 4. 2013 Harley-Davidson Seventy-Two 5. 2012 Honda NC700X 6. 2013 Ducati Monster 696 Anniversary 7. 2012 Yamaha Super Tenere 8. 2013 Moto Guzzi V7 Racer 9. 2013 Suzuki SVF 650 10. 2013 Zero S The Japanese company Honda was always Harley’s biggest competitor: Harley-Davidson had the greater domestic market share but Honda had the largest international market share in the entire motorcycle industry, with a history of providing quality products at cheaper prices than comparable American made products. Honda’s best selling motorcycle in the United States was the GoldWing. The Harley management was very much aware of Honda as its biggest competitor and consciously strove to stay ahead of Honda in the industry.The Motorcycle Industry As with all motorcycle companies, Harley-Davidson operated in a highly regulated industry and had to ensure that it complied
  • 6. with U.S. EPA standards and the National Highway Traffic Safety Administration’s National Traffic and Motor Vehicle Safety Act. In most states, motorcyclists had to have a separate license. Some promoters of motorcycles worried that consumers might not want to go through the process of getting a special license to use a motorcycle, which they considered a threat given that any laws implemented against the use of motorcycles could directly affect the acquisition of a motorcycle. Motorcycle safety regulations were also historically created and implemented at the state level. Each state had a set of individual requirements for motorcycles including: helmet requirements, state funded rider education, eye protection, passenger regulations, and lighting. Even though states had safety regulations in place, trends evidenced an increasing number of motorcycle accidents. A study conducted by the University of Southern California (USC) attributed this increase to two major factors—lack of detection of motorcycles by passenger vehicle drivers and uneducated motorcycle riders. According to the USC study, 92% of motorcyclists who were involved in accidents had no certified training and had not participated in a rider education program. Although some states offered state funded rider education, many did not. Beginning in the 1990s, the rate of motorcycle-related accidents steadily increased, from 61,451 in 1997 to 79,000 in 2003; and fatalities increased from 2,116 to 3,661. This increased risk, it was feared, could deter consumers from purchasing a motorcycle and push them to a safer option such as a small car. In addition, as baby boomers, Harley-Davidson’s main target audience, aged, their concerns about the safety risks of riding a motorcycle grew, which was seen as potentially detrimental to the motorcycle industry as the federal government could then decide to mandate increased safety requirements. Most bikers, it was believed, chose to ride a motorcycle for the cool image; thus, being forced to wear protective gear, helmets, and use extra safety features could hurt the industry’s image and sales. If this trend continued, many felt, there could be a potential
  • 7. threat to Harley’s ability to retain current customers and attract new ones. The industry could lose profitability, and sales of motorcycles could decrease. On the other hand, industry leaders argued, rising fuel prices might prompt consumers to switch to motorcycling and bicycling to save money on transportation costs, a trend underpinned by a consumer shift toward eco-friendly practices requiring less (or no) fuel consumption. Thus, demand for these products was expected to rise. By capitalizing on these trends and opening up to a broader consumer market, the industry was expected to grow at an annualized rate of 1.3% to $7.1 billion in the five years leading up to 2018 (IBIS World, 2013). By the same token, however, the loud vroom Harley-Davidson motorcycles made, once seen as an advantage, became a threat for the brand. While once that noise was seen as a sign of power, customers began to find it both annoying and a sign of conspicuous consumption. Harley needed to see customer dissatisfaction as an opportunity to design new motorcycles that minimized sound to decrease the perception of loud noise and promote a more eco-friendly image. Finally, while technological enhancements enabled Harley- Davidson to produce a constant stream of appealing technological innovations such as video cameras, GPS, airbag systems, and increased fuel efficiency for its bikes, adding new tech often resulted in higher manufacturing costs, thus higher prices for consumers.Marketing One of the primary reasons for Harley-Davidson’s success over the past few decades was the positioning of its brand as an American icon. That iconic status was crucial to creating tremendous brand recognition and a strong reputation throughout the world for producing the highest quality bikes in the marketplace. Owners of Harley-Davidson motorcycles swore by them and were extremely unlikely to seek a competitor brand. The brand was so strong the company was even able to generate significant sales of non-motorcycle branded merchandise, including hats, t-shirts, and other household items.
  • 8. Harley was seen as a true “American” brand, something baby boomers supported and were willing to stand behind. Additionally, a sense of community and culture contributed to Harley’s brand strength. The company promoted motorcycle rallies, where Harley owners could meet and ride with other Harley owners; and encouraged riders to share their positive experiences through word-of-mouth or online forums set-up for that purpose. Through all this, the main challenge Harley-Davidson faced from a marketing standpoint was its inability to generate interest and sales from demographics other than its traditional target market: middle-aged men. In 2012, over 65% of sales were made to Caucasian men over 35 (Research and Markets, 2013). The baby-boomer generation had been the main driver of Harley-Davidson sales for more than 20 years, but as boomers aged and lost their desire to purchase and ride, Harley needed to find ways to attract new customers. The younger generation was more attracted to colorful, lightweight bikes, similar to those sold by Kawasaki and Suzuki, two of Harley-Davidson’s main competitors, and on top of that, they saw Harleys as appealing to an older demographic, something their fathers would ride but they wouldn’t. Thus, the best way for Harley to attract the younger generation was to continue to improve its customization and technological options to appeal to a generation committed to customizing or altering a product to best suit its own needs and desires. Harley-Davidson had been offering customization options for some time, and this allowed potential buyers on its website to build their own Harleys to whatever specifications they desired. Adding yet more customization options in the form of colors and styles, it was hoped, could benefit Harley and increase its chances of attracting new riders. However, some of Harley’s competitors such as Kawasaki and Honda were already “on it,” offering technological features such as high-quality sound systems, rear- viewing cameras, and GPS system add-on availability for their bikes, a sure-fire way to appeal to younger consumers.
  • 9. A further challenge for Harley-Davidson was promoting the safety of its bikes versus those of its competitors. Motorcycle riders had become much more safety-conscious than those of previous generations, and as motorcycles were traditionally considered one of the most dangerous forms of transportation, Harley had to meet the challenge of potential buyers’ resistance on the grounds of safety in its bid to increase sales.Operations By the end of 2012, Harley had over 695 full service dealerships in the United States and 73 in Canada, and another 700 full service dealerships in Europe, the Middle East, Asia, and Latin America (Exhibit 1). The availability of full service dealerships was considered the best way to promote sales as it allowed customers to come into a local shop, test drive a bike, look at options, and understand their financing options before actually making a purchase, all of which were crucial for an investment as expensive as a Harley. Harley-Davidson also believed that flexible manufacturing processes and supply chains combined with cost-competitive and flexible labor agreements were critical to allowing the company to respond to customers in a cost effective manner, restructuring its U.S. manufacturing plants accordingly to maximize efficiency, cost saving, and customer satisfaction. The company also fostered long-term, mutually beneficial relationships with its suppliers. Through these collaborative relationships, the company gained direct access to technical and commercial resources for product design, development, and manufacturing initiatives greatly improving product quality, technology integration, and faster new-vehicle introductions (Research and Markets, 2013). One of Harley’s weaknesses from an operational standpoint was its inability to generate revenue streams from product lines other than motorcycles. Harley had attempted to market various supplemental products in the past, including motorcycle-related parts, Harley-branded trucks, Harley branded snowmobiles and all-terrain vehicles, but all of these ventures proved only
  • 10. marginally successful. Harley also had to face the difficulty that in some regions of the country, especially the Northeast, its products could only be used for a limited number of months per year. As the Northeast was a very large market, critics noted that it would be helpful for Harley to have supplemental products available for sale during the winter months, when riding a motorcycle was not particularly feasible.Restructuring Plan Between 2009 and 2014, Harley undertook a number of different restructuring initiatives with the goal of streamlining operations and reducing production costs while maximizing efficiencies. A major restructuring project within its U.S. holdings was the consolidation of its motorcycle production into a single line at the company’s motorcycle manufacturing facility in York, Pennsylvania. Additionally, the company ratified a new, more flexible labor agreement at all of its U.S. manufacturing locations. In the first half of fiscal year 2013 the company began implementing “flexible” production capabilities at its York facility by adding flexible workers. By doing this it increased manufacturing production in the first half of 2013 to more closely mirror retail demand for its products. The company also restructured operations internationally to reduce costs and maximize output, closing one of its major international manufacturing facilities in New Castalloy, Australia, a plant that manufactured the majority of the wheels for the company’s products. Instead, the company decided to source these components through existing suppliers, as that would be more efficient and cost effective (Research and Markets, 2013).Finance For 2014, Harley-Davidson’s main financial objective was to find ways to increase sales and profits and expand sales to new market segments. The company continued to see strong year- over-year growth in sales and net income (Exhibits 2 and 3). It also maintained a strong commitment to research and development expenditures, indicative of its drive to continue to search for ways to improve and expand through R & D. While
  • 11. some companies used net profits to pay dividends to investors, Harley-Davidson, like many successful companies, determined that the key to continued success and longevity was reinvestment of profits in the company to fund new product development and improve established products. Another financial strength for Harley was its return of sales and revenue to strong positions after temporary downturns in 2011, following the reorganization and restructuring plans. Finally, the company generally maintained strong cash positions, enabling it to stay liquid and pay down debt balances, should high debt ever become an issue.Exhibit 2 Income Statement Harley-Davidson, Inc. Condensed Consolidated Statements of Income Unaudited Year Ended December 31, 2013 (In Thousands. Except Per Share Amounts) Q1 Q2 Q3 Q4 TOTAL Motorcycles and related products revenue $ 1,414,248 $ 1,631,466 $ 1,180,284 $ 4,225,998 Gross profit 519,442 601,870 416,315 1,537,627 Selling, administrative and engineering expense
  • 12. 239,743 249,502 240,198 729,443 Restructuring expense 2,938 (5,297) 646 (1,713) Operating income from motorcycles and related products 276,761 357,665 175,471 - 809,897 Financial services revenue 156,965 162,841 163,434 483,240 Financial services expense 85,420 88,685 87,366 261,471 Operating income from financial services 71,545 74,156 76,068 - 221,769 Operating income
  • 13. 348,306 431,821 251,539 1,031,666 Investment income 1,615 1,770 1,161 4,546 Interest expense 11,391 11,238 11,369 33,998 Income (loss) before income taxes 338,530 422,353 241,331 - 1,002,214 Provision (benefit) for income taxes 114,401 150,314 78,615 - 343,630 Income (loss) from continuing operations 224,129 271,739 162,716 - 658,584 Income (loss) from discontinued operations, net of tax
  • 14. - - - - Net income (loss) $ 224,129 $ 271,739 $ 162,716 $ - $ 658,584 Earnings (loss) per common share from continuing operations: Basic $ 1.00 $ 1.22 $ 0.73 Diluted $ 0.99 $ 1.21 $ 0.73 Weighted-average common shares: Basic
  • 15. 224,429 223,052 221,936 Diluted 226,148 224,470 223,486 Cash dividends per common share $ 0.21 $ 0.21 $ 0.21 Exhibit 3 Balance Sheet Harley-Davidson, Inc. 2013 Quarterly Condensed Consolidated Balance Sheets Unaudited (In thousands) ASSETS March 31,2013 June 30, 2013 Sept 29, 2013 Current assets: Cash and cash equivalents $1,018,759 $1,300,690 $1,029,955 Marketable securities 135,246 133,631
  • 16. 122,234 Accounts receivable, net 259,673 253,819 290,158 Finance receivables held for investment net 2,074,036 2,010,974 1,829,612 Inventories 416,050 307,717 401,199 Restricted cash held by variable interest entities 197,025 212,004 194,329 Other current assets 232,190 235,636 225,188 Total current assets 4,332,979 4,454,471 4,062,675 Finance receivables held for investment net 3,959,903 4,214,612 4,355,278 Other long-term assets 1,042,239 1,038,115 1,036,055 $ 9,335,121 $ 9,707,198
  • 17. $ 9,484,008 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable & accrued liabilities 824,335 794,670 885,940 Short-term debt 687,705 525,745 394.460 Current portion of long-term debt 715,143 776,274 721,316 Total current liabilities 2,227,183 2,096,689 1,981,716 Long-term debt 3,892,469 4,234,352 4,067,733 Pension liability and postretirement! healthcare benefits 426,729 420,096 412,482 Other long-term liabilities 131,692 134,822
  • 18. 140,230 Total shareholders’ equity 2,657,048 2,821,239 2,881,847 $9,335,121 $9,707,198 $9,484,008 Harley-Davidson’s main weakness from a financial, and company-wide, perspective was its dependence on a single customer demographic: middle-aged men, its’ primary customer base. As boomers aged out of the motorcycle market Harley had to meet an enormous challenge: how to maintain its high sales and revenue volume and grow and diversify its base to replace those boomers. Another challenge was the company’s debt to equity ratio, which continued to rise over the five years from 2009 to 2014 as the company took on more and more debt from its restructuring. The high debt balance undercut company flexibility and, it was feared, could present serious problems in the future. Inventory levels also increased at a rate slightly higher than sales, which suggested that sales were not meeting projected levels, resulting in excess inventory. Finally, in recent years, more and more customers chose to pay for their motorcycles through the company’s financing program rather than purchase them outright, suggesting that buyers were struggling to afford Harley-Davidson’s steep price tag, and perhaps indicating a weakness in the buyer market for Harleys. Nevertheless, Harley-Davidson sales increased from $5.3 billion in 2011 to $5.6 billion in 2012 while net income increased from $599 million to $624 million during the same time period. Thus, both sales and net income appeared to be trending positively, a good financial sign. Harley also saw some strong percentage sales increases in its international markets during 2012. The units sold in the United States increased 6.6% from 2011 to 2012, compared to a 39% increase in the Latin America region,
  • 19. and a 19.9% increase across the Middle East and Africa. International sales turned out to be a significant growth and expansion opportunity for Harley-Davidson as long as it found ways to participate in international markets without driving costs and related expenses of doing business up too much. Harley-Davidson’s leading position in the U.S. motorcycle market was further attributable to its commitment to research and development. Harley always had a reputation in the industry for its continued investment in research and development. The company even maintained a secret Product Development Center in Milwaukee where it spent hundreds of millions of dollars focusing on the Harley sound, the Harley engine, and various avenues for future motorcycles: Total research and development expenses were $143.1 million, $136.2 million, $145.4 million and $137.3 million for 2009 through 2012, respectively (sec.gov). Significantly, these research and development figures stayed relatively consistent on a year-over-year basis, even during the recession of 2009 when plagued by sluggish sales and increasing debt,, underscoring the company’s unwavering dedication to intracompany investment in research and design, and in the improvement and expansion of its business and product offerings. The hope was that R & D would lead to new models of bikes, new styles, new ways to control emissions, new metals or materials to use on bikes to make them lighter, new ways to improve the safety of the bikes, and any number of other possible improvements that would only strengthen the brand, the product, and the company. The company understood that the lack of the necessary R & D expenditures would quickly be exposed by the competition, as its products would rapidly become outdated.Ethics: A Priority at Harley Davidson As a longstanding, well-known American corporation, Harley- Davidson felt it had a responsibility to its shareholders and to the public to maintain a strongly ethical corporate culture. Its human resources and ethics policies were based on five main practices: diversity and inclusion, safety in the work
  • 20. environment, accurate advertising, employee attainment and retention, and environmental awareness.Diversity and Inclusion As Harley-Davidson continued to expand its business internationally, the company understood that it was critical to maintain a reputation of diversity and inclusion in its work force. From an external perspective as well, it was important to maintain a public image as a company that promoted diversity, and was not biased in any way with regard to any particular minority group or cause.Safety in the Work Environment Maintaining a safe work environment was particularly important for Harley-Davidson as it expanded internationally. Although in the United States there were strict laws governing workplace safety, foreign expansion countries did not necessarily have similarly stringent guidelines, making it even more important that Harley held itself to the same strict regulations internationally as it did nationally.Accurate Advertising Harley’s success was heavily dependent on its marketing strategies and word-of-mouth buzz. To uphold and build upon this success, Harley recognized that it was imperative to continue to maintain high standards of accurate advertising, as inaccurate advertising was widely regarded as creating negative brand connotations that could deter customers, thus affecting sales and operations.Employee Attainment and Retention Employee attainment and retention was a particular concern for the company following the restructuring plans of 2010–2011. The restructuring plans involved letting go thousands of employees both domestically and internationally, which, it was feared, would be detrimental to employee morale, motivation, and production. After the implementation of restructuring, Harley made it a priority to emphasize the importance of employee retention and attainment, increasing efforts to boost employee morale and encourage long-term employment.Environmental Awareness As with automobile manufacturers, it was especially important for Harley-Davidson to be aware of and abide by environmental
  • 21. emission regulations. Harley prided itself on the fact that its products constantly met or exceeded all emission laws and …