Unformatted Attachment Preview
Guriqbal Cheema
Joel Cunningham
Pallavi Daliparthi
John Klostermann
Brian Rabe
Texas A&M University
“It’s more than a brand. It’s a culture.”1
Kent Grayson
Professor of Marketing, Northwestern University
Introduction
Harley-Davidson is an American cultural and business icon on the level of Levi Strauss and Coca-Cola.
Often imitated, but never duplicated, Harley-Davidson has managed to survive, and has, at times,
thrived for many decades. Through depression, recessions, world wars, high technology developments,
Japanese competition, and increasing government regulation, Harley-Davidson has maintained
operations where over a dozen other U.S. motorcycle firms have failed. Harley-Davidson has even
survived over a decade as a subsidiary of a bowling alley service firm. It has achieved this by essentially
relying on designing, manufacturing, selling, and servicing a relatively static product: two wheels, a 45°
V-Twin engine, and a set of handlebars.
How has Harley-Davidson managed to survive through these and other hardships in a motorcycle
market that is dominated by leisure riders? How has it kept the doors open while its historic U.S. rival,
Indian Motorcycles, is currently in its fourth incarnation? How has it maintained its attractiveness with
outlaw bikers, investment bankers, and those who appear to be experiencing a “mid-life crisis” and who
sometimes turn to the firm’s products as a result? More importantly, what is this firm selling that keeps
it as the industry leader in full-size motorcycles? The answer to these questions is not a 526-pound
batch of steel with 250 feet of wiring, but rather the fact that Harley-Davidson is selling the American
dream of freedom. How it is able to do this is a fascinating story.
The Challenge
With over 6,000 employees, 1,400 franchises, and nine production facilities, Harley-Davidson has
managed to survive the economic downturn that was in full force in late 2007 and for the next few
years; but the firm is not out of the woods yet. In fact, Harley-Davidson is struggling with three pivotal
issues, the first of which is that the firm’s products are viewed as leisure items. The other two issues are
similar in nature in that they deal with the fact that managing the firm’s target market is challenging,
particularly as demand for its products is changing. Individually and collectively these issues pose a real
challenge to the company’s long-term success. Without addressing these issues, Harley-Davidson may
lose its ability to create value for customers and to serve stakeholders’ needs as a result.
As noted, the first issue Harley-Davidson must successfully address is the fact that consumers see the
firm’s products primarily as leisure items. This means that in many consumers’ eyes, purchasing
motorcycles, performance parts, and high-dollar apparel is a luxury rather than a necessity. Because of
this, Harley’s products must compete for funds from what at least sometimes can be volatile
discretionary budgets for consumers. When economic conditions are challenging, the motorcycle
market tends to experience difficulties in terms of generating adequate sales. While Harley-Davidson’s
revenue streams originate from several sources, very few of them appeal to a cost-sensitive consumer
base.
Second, Harley-Davidson is challenged to effectively specify its target market as a first step to
appropriately serving that market’s needs. Historically, the firm’s target market has been males between
the ages of 29 and 55. However, in the last decade, Harley-Davidson has pursued younger riders and
women as a means of expanding its target customer segments. But expanding the segments the firm
serves with its products is not a risk-free decision or choice for the firm to make in that serving others
might cause the firm to lose its ability to effectively serve the specific needs of the 29- to 55-year-old
male (again, the historical target customer). This matter is considered more fully later in the case.
Third, demands and cost drivers for the motorcycle market are ever changing. Overseas competitors
have shifted their focus from being the least expensive to being affordable and to providing a wider
variety of motorcycles to customers as options to purchase. This competitive shift has put pressure on
Harley-Davidson’s key markets and has forced the firm to respond. With over 12 percent and 55 percent
of the European and U.S. heavyweight motorcycle market respectively, Harley-Davidson has a
substantial territory to defend.
History.2
Harley-Davidson, Inc. has been a publicly traded firm since 1987. It has two primary divisions:
Motorcycles and Related Products and Financial Services. The Financial Services Division provides credit
to motorcycle buyers and dealerships as well as risk management and insurance services for all parts of
the firm. The Motorcycles and Related Products Division currently operates through eight primary
segments:
•
Parts & Accessories (17.5 percent of net revenue in 2011)
•
General Merchandise (5.9 percent of net revenue in 2011)
•
Licensing ($43.2 million of net revenue in 2011)
•
Harley-Davidson Museum
•
International Sales (32 percent of net motorcycle revenue in 2011)
•
Patents and Trademarks
•
Other Services
•
Marketing
In 1903, William S. Harley and Arthur Davidson founded Harley-Davidson Motor Company, known by
enthusiasts as “the Motor Company,” in order to fund their racing pursuits. Accordingly, their first
motorcycles were merely contemporary bicycles with small engines retrofitted to the frame. It was
Harley-Davidson’s early success in motorcycle racing that fueled the demand for its early models, which
were sold in dealerships as early as 1904. Because these turn of the century races were as much about
endurance as speed, Harley-Davidson acquired invaluable knowledge pertinent to practicality and
robust design. After significant success in road and endurance races, Harley-Davidson broke fresh
ground with the introduction of the V-Twin engine design. Superior to large single-cylinder engines, the
lighter V-Twin design allowed similar displacement in a lighter package with a shape that fit naturally
into the bicycle-inspired frames of the early 1900s. Few suspected that this design would become so
integral to modern motorcycles.
Having dedicated over a third of its production to the U.S. Army, Harley-Davidson sales exploded during
World War I. With the advent of motorized warfare, the motorcycle proved itself to be far more than
just a novel invention. In addition to proving itself to the Army, Harley-Davidson also proved itself to
soldiers. After the war, soldiers returned home and became a loyal customer base for the young firm.
Through the 1920s, Harley-Davidson continued to focus on design improvement and racing. It spent
much of this decade fighting for market share with multiple medium and small competitors. During this
time, firms producing automobiles, airplanes, bicycles, and industrial machinery also tried their hand at
building motorcycles.
The 1930s were a unique time for the motorcycle industry. In the wake of the Great Depression, the
public was looking for inexpensive, simple transportation. At the same time, unemployment and
inflation shrank potential customers’ purchasing power. It was during this time that many of the smaller
motorcycle manufacturers dropped out of the industry. Most of these firms were subsidiaries of
companies in related industries. These failed motorcycle firms had many of the capabilities needed to
produce motorcycles, but lacked the corporate focus and support to continue production during such a
difficult economic time. It was during this time that the U.S. domestic market shrank, with only Indian
and Harley-Davidson remaining. With the market divided between only two domestic producers, HarleyDavidson’s production held steady.
With the onset of World War II, Harley-Davidson found itself to be a major supplier for the Allied war
effort. Again, war vaulted Harley-Davidson into a position of higher volume, improved reputation, and
deeper loyalty with owners and soldiers. As the war came to an end, the United States was flooded with
a surplus of Army WL45 motorcycles. Suddenly, this country was full of prospective riders who
understood Harley-Davidson’s 177178product and appreciated how motorcycles could provide
inexpensive, dependable transportation. At this point, only Indian Motorcycles was a competitor for
Harley-Davidson. But in 1956, at the height of an economic recession, Indian Motorcycles declared
bankruptcy and stopped producing motorcycles altogether, leaving only Harley as a major producer and
seller of motorcycles.
As the sole U.S.-based motorcycle power, Harley-Davidson enjoyed great success. Nevertheless, the lack
of competition nearly became its undoing. This market condition allowed Harley-Davidson to take more
risk in the form of acquisitions, causing the firm to lose its tight focus on a single market. It began
branching out to other leisure and motorized products such as off-road motorcycles, ski boats, and golf
carts. At the same time, the bulk of Harley-Davidson’s revenue stream was still coming from the sale of
its heavy motorcycles. Many of the acquisitions the firm completed in the latter part of the 1950s and
the early 1960s, such as the Tomahawk Boat Manufacturing Company in 1962, were in similar industries,
but a poor fit with Harley nonetheless. The acquired companies were often in deep trouble when
Harley-Davidson purchased them. In the end, Harley-Davidson was hobbled with losing ventures that
diluted its focus and did not fit well with its core competencies. In 1969, the American Machine and
Foundry Company (AMF – a longtime producer of leisure products such as tile bowling pins and ball
returns) purchased the financially distressed Harley-Davidson.3
Most enthusiasts consider the AMF years as the “dark ages” of Harley-Davidson’s history. AMF operated
Harley-Davidson as a profit center, reducing allocations to the unit’s marketing and research and
development (R&D) functions as a result. For the next 13 years, Harley’s aging product line remained
essentially unchanged. In fact, its line was so static over the years that many of the parts from a 1937
model fit on the 1969 design. Harley-Davidson had just two motorcycles with different trim packages:
the low-budget sportster, the sport bike of its day, and a full-size motorcycle available in two different
models. In light of Honda and Kawasaki’s entrance into the U.S. market, Harley-Davidson’s stale product
line was even more disappointing. Many did not see these imports as a threat given the prestige and
heritage of the Harley-Davidson name. However, the Harley-Davidson image was deteriorating. Even
with its products in desperate need of a facelift, AMF relied on Harley-Davidson’s reputation to defend
its competitive position; AMF plastered Harley-Davidson’s name on products like snowmobiles and golf
carts. While trying to capitalize on the value of Harley-Davidson’s brand name, quality became a serious
problem; customers would have to return new motorcycles to a dealership multiple times to fix
manufacturing problems. It was during this time that owners coined the saying “a Harley always marks
its spot,” a phrase referring to the machine’s nearly universal oil leaks. This turned off many prospective
customers, as they believed a Harley-Davidson would require constant owner maintenance. All the
while, Japanese motorcycle companies enticed more and more riders looking for inexpensive,
dependable transportation.
By 1981, Japanese motorcycles were established in the U.S. market not only as dependable
transportation, but also as performance machines. Harley-Davidson’s sales were in free-fall as its tired
designs appealed to a narrowing market segment. It was selling to customers who liked classic style and
dated functionality, and all for a high price. Finally, the employees and management of Harley-Davidson
led a managed buyout of the company from AMF.4 The new owners immediately took stock of the firm’s
strengths and vulnerabilities and increased its R&D and marketing budgets significantly. Because
negative effects of AMF’s past business decisions still hampered the new management team, sales
remained low. In 1985, Harley-Davidson’s top management team struggled to restructure the firm and
divested itself of most of its unrelated assets. In 1987, Harley-Davidson became a publicly traded
company, and none too soon as Harley-Davidson had revamped its product line into four motorcycle
styles that were united by the introduction of a new engine. This was the turning point for HarleyDavidson. From this point forward, the firm’s quality control was exponentially more effective. In
addition, Harley-Davidson focused more on efforts to operate efficiently and effectively. Following the
precepts of just-in-time techniques and enhancement to the logistics function were critical to the firm’s
attempts to enhance efficiency and effectiveness. At the same time, Harley shifted to three major
initiatives:5
•
•
•
Improved manufacturing process, leveraging technology, robotics, and employee
involvement
Restructuring business management to a modern system
Aggressive management of its brand name through dealership management, patenting
activities, and careful licensing of related products
The modern Harley-Davidson fought back from the brink several times, each time seeming to evolve and
adapt. What appears to be universal to each evolution of the company is that quality, promotion, and
market focus have always been a priority.
How Harley Does It6
Harley-Davidson focuses on a subset of the motorcycle market featuring customers who value heritage,
style, reputation, durability, and adaptability. Until 2000, Harley-Davidson’s motorcycles sold at nearly a
25 percent premium. In the last decade, that premium has dropped to 5 to 10 percent, depending on
the class of motorcycle. This is due to Japanese motorcycle manufacturers shifting to marketing and
selling somewhat unique motorcycles for a better than average price. In comparison, Harley-Davidson
uses the Sportster© line as an introductory product, but most of its motorcycles sell for over $15,000,
with the average sale price of just over $16,893.7 Harley-Davidson motorcycles provide a unique product
at a price that its target customers deem acceptable or reasonable. While its competitors may have
attempted to cut costs, Harley-Davidson has continued to invest in its products in ways that protect the
quality of its brand image. Harley-Davidson’s market focus is primarily males between the ages of 29 and
55. However, this has been changing.8 Recently, it has targeted female customers.
What It Does Best9
In its modern incarnation (1987 to present), Harley-Davidson achieved success by doing what it does
best. Granted, multiple firms make great motorcycles, and many of these firms have a dedicated
following. However, through the actions the firm has taken over the years, Harley-Davidson has
developed and maintained what is a unique position in the U.S. motorcycle market. Effectively managing
its brand name, production or manufacturing simplicity, and a dedicated product following are the key
sources of the firm’s competitive strength.
Harley-Davidson’s brand name is its most important asset. Cultivated through good times and bad, its
brand name is a powerful motivator for current and prospective customers. For many Americans,
Harley-Davidson is the American motorcycle. This belief is no accident. After being separated from AMF,
Harley-Davidson’s top management team decided to significantly increase the amount of resources
being allocated to marketing and R&D. This appears to have been a wise decision in that HarleyDavidson now holds 55 percent of the entire U.S. motorcycle market, and an even higher share in the
U.S. heavy motorcycle market. Strict protection of its brand name permeates every decision the firm
makes. Its motorcycles, while occasionally deviating in style, generally follow traditional themes. HarleyDavidson only makes a design change after witnessing a strong market trend.10 For example, the custom
portion of the motorcycle market has been designing machines with wide rear tires for nearly two
decades; in 2007, Harley-Davidson launched a single model with a wide rear tire.
Harley-Davidson is also very selective about its franchise (dealership) opportunities, another method
through which the firm protects its brand. Due to free-trade laws, Harley-Davidson is no longer able to
insist that its dealerships sell only Harley products. However, it utilizes price incentives to encourage
dealerships to stay “Pure-Harley.”11 Harley-Davidson is especially protective of its name and logo when it
comes to licensed products, most of which are sold in its dealerships. If it is not the best quality, the
product’s license is revoked. Retailers can sell ladies’ shirts at a 100 percent premium because they are
of excellent quality and cannot be found anywhere. This aura of exclusivity is embedded in the very DNA
of Harley-Davidson Inc., from the headquarters to the dealerships. This aspect of culture is an asset in
that the notion of wanting to be seen as providing products that are somewhat “exclusive” in nature
permeates the firm’s decision processes as it seeks to serve its target customers’ needs.
Harley-Davidson’s production process is another important firm-specific asset. The key elements of the
process are the melding of a JIT supply chain with team production management and part interchangeability.12 When combined, the elements of Harley’s production process are unique. Japanese
manufacturers have used the same JIT concept for years, but have not stressed a limitation of key
components. After 1987, Harley-Davidson updated its production facilities and design process. Its
production facilities in Kansas City, Missouri and York, Pennsylvania are the best examples of modern
robotics combined with team enablement. Interchangeable parts are the most important component of
this asset. This concept simplifies all areas of the motorcycle production process; but it is perhaps most
evident in the production of Harley’s frames and engines. Harley-Davidson produces five unique frames
for each motorcycle family: Sportster©, Dyna, Softail©, V-Rod©, and Touring. Even with 28 different
models and seemingly limitless options, Harley-Davidson produces only three engines. Internal
machining, displacement, and color coating are the only differences across the engines. The Sportster©
line comes in two displacements: 883 and 1204 cubic inches. The Dyna, Softail©, and Touring lines all
share the same Twincam© engine, available in 96 and 103 cubic inches. The V-Rod’s© engine is only
produced in one version.13 This production approach with respect 179180to interchangeable parts
appears to be a competitive advantage in that it allows Harley to produce several models, subdividing its
target market segments even further, while keeping production costs lower than if it produced 28
different frames and engines.
Loyalty to the brand is another important asset for Harley-Davidson. While its brand name protection
applies primarily to prospective customers, its product following centers on existing customers, many of
whom are repeat buyers of the firm’s products. There are multiple examples of Harley’s dedicated
following. At the extreme for example, consider the fact that some private riding clubs only grant
membership to those willing to tattoo the bar and shield logo on multiple locations of their body. For
others, remaining committed to the firm’s mantra that owning a Harley “is a journey, not a destination”
and participating in company-sponsored events with others sharing this belief accounts for their loyalty.
Regardless of the reason for it, customer loyalty to the Harley brand appears to influence these
individuals to purchase Harley products other than motorcycles such as clothing and a wide range of
product accessories. Historically, loyalty to the brand has resulted in a large percentage of Harley
customers choosing to buy another Harley when it is time for a new motorcycle. However, the “graying”
of Harley’s customer base is potentially a problem as at some point, this group of customers will no
longer be purchasing new products.14
Keeping It Simple15
In 2011, Harley-Davidson generated 88 percent of its revenues from a single business area (Motorcycles
and Related Products) and 12 percent from its second primary segment (Financial Services). This
composition of sales revenue is consistent with previous years and suggests that Harley may continue
business as usual to help the firm reduce its idiosyncratic risk. It will also try to expand its business in
other countries with a primary focus on providing quality product and services. Harley-Davidson has
been able to earn positive returns while focusing on just two businesses because it has developed
strengths that allow it to create value for customers. Moreover, there are fewer challenges in managing
only two businesses. This approach allows Harley-Davidson to not only gain economies of scale, but also
use its resources efficiently.
Marketing
Historically, males between the ages of 29 and 55 have been Harley-Davidson’s target customer.
However, this is changing.16 Recently for example, the firm is also targeting female customers with
motorcycle models that have a lower seat height and pink, purple, and light blue color schemes. Its
marketing has also reflected an effort to attract more female riders. It has even tailored its riding classes
(the Riders Edge Program©) to have all-female sessions and to make new women riders feel more
comfortable. A woman could walk into a Harley-Davidson dealership having never sat on a motorcycle
and within an hour purchase a motorcycle for as little as $8,000. She could then join a riding class that
would grant a motorcycle endorsement on her driver’s license.
Thus, Harley-Davidson is beginning to market to a multi-generational and multi-cultural audience. In this
regard, the firm is working to attract a more diversified audience in terms of age, gender, and
ethnicity.17 Harley-Davidson is a market leader in the U.S. heavyweight segment. The average median
household income of a Harley-Davidson purchaser is $89,000.18 Harley-Davidson primarily uses
advertising and promotional activities via television, print, radio, direct mailings, electronic advertising,
and social media to market its product. Moreover, local marketing efforts in conjunction with dealers
are highly encouraged. Harley-Davidson uses its customers’ experience to continuously develop and
introduce innovative products. The market is flooded with high quality, low price Japanese bikes.
However, Harley-Davidson does not seek to imitate these bikes. Instead, it uses direct input from its
customers to improve its product. Harley-Davidson modifies its product based on input generated
through customer surveys, interviews, and focus groups. Thus, some believe that “The real power of
Harley-Davidson is the power to market to consumers who love the product.”
In 2010, the company introduced “Creative Model” – a Web-based method for marketing its product. In
this model, passionate fans are enabled for the purpose of helping Harley develop creative approaches
for targeting new customers. Customer experience has traditionally been the main source of HarleyDavidson’s marketing strategy. It all started in 1983, when the company introduced Harley Owners
Group (H.O.G),20 which has now grown to more than 1 million members worldwide.21
Harley-Davidson distributes its products through an independent dealer network that almost exclusively
sells Harley-Davidson motorcycles. These dealerships are licensed dealers and fully authorized to sell
and service new motorcycles. They can have secondary locations to provide additional service to the
customers. These non-traditional outlets are an extension of the main dealership and consist of
Alternate Retail Outlets (ARO) and Seasonal Retail Outlets (SRO). AROs are 180181generally located in
high traffic areas such as airports, vacation destinations, tourism spots, and malls and only sell parts,
accessories, and general merchandise. SROs are also located in high traffic areas, but operate only on a
seasonal basis. AROs and SROs are not allowed to sell new motorcycles. The parts and apparel orders
from the dealer are not taken at face value. Harley-Davidson’s forward-looking, market-driven allocation
system restricts the number of units a particular dealer is able to order. In Canada, the company sells its
products to one wholesale dealer, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd., which in
turn sells to independent dealers.22
The European, the Middle Eastern and African (EMEA) region is managed from regional headquarters in
Oxford, England. Harley-Davidson distributes its products through subsidiaries located in Austria, Dubai,
Czech Republic, France, Germany, and Italy. In the EMEA region, Harley-Davidson distributes all products
sold to independent dealers through its subsidiaries located in Austria, Czech Republic, United Arab
Emirates, France, Germany, Italy, South Africa, Spain, Switzerland, Netherlands, Russia, and United
Kingdom. A headquarters in Singapore manages the Asia Pacific regions with the company distributing
its product to independent dealers in China, India, Australia, and Japan. The rest of Asia Pacific is
managed through the U.S. operations.
Financial Services Segment
Harley believes that its Harley-Davidson Financial Services unit (HDFS) provides sufficient financing to
independent distributors, dealers, and retail customers. HDFS provides financing to dealers and retail
customer’s in the U.S. and Canada, but not in the EMEA, Asia-Pacific, and Latin America regions,
although these regions do have access to financing through other financial services companies.
Competition
As is the case for many leisure and transportation industries, the U.S. motorcycle market is extremely
competitive. Currently, Harley-Davidson competes with four classes of competitors with each group
competing in a different market and in different ways. The four competing groups are commonly
classified as Metric Cruiser, Metric Sport, U.S. Cruisers, and Custom Cruisers.
Metric Cruiser Competitors.
The industry uses the term Metric Cruiser to denote motorcycles made outside the United States with
traditional styling. Traditional styling is commonly reflected through an exposed engine and nonintegrated body panels. Japanese motorcycle makers such as Honda, Star (Yamaha), Suzuki, and
Kawasaki dominate these models. It is important to note that not all metric cruiser competitors are
considered to be heavy motorcycles (over 650 cubic centimeter displacement). These competitors
compete with Harley-Davidson on price, but also use the individual model’s unique features to garner a
competitive advantage. Honda introduced the Fury©,23 a regular production chopper based on the 1300
VTX power plant in 2009. In 2004, Kawasaki introduced the Vulcan© 200024 with a 2,053 cubic
centimeter engine, the largest mass-produced V-Twin motorcycle ever. Most of these competitor
models of similar size are comparable in features to Harley-Davidson models. The presence of smaller
competitor models forces Harley-Davidson to keep entry-level models like the 883 cubic centimeter
Sportster©. Smaller metric cruisers like the Suzuki Boulevard 40©, retailing at $2,600 less25 than HarleyDavidson’s least expensive model, keep downward pressure on introductory model prices.
Metric Sport Competitors.
Metric Sport motorcycles are made outside the United States, mostly in Japan, and are race-inspired,
high performance motorcycles with full body panels and excellent aerodynamic characteristics.
Motorcycles like the Suzuki Hayabusa© and the Kawasaki Ninja© are examples of this competitor class.
While these motorcycles do not directly compete with most Harley-Davidson models, they do appeal to
younger prospective customers because of their breathtaking performance and relatively low prices. In
general, metric sport customers are not attracted to most Harley-Davidson models.
Harley-Davidson has taken two key actions to attract young, performance-oriented riders from its sport
motorcycle competitors. It introduced the V-Rod© line in 2002 with a high performance, liquid-cooled
motor. Harley-Davidson also purchased Buell,26 a sport motorcycle company using Harley-Davidson
motors, in 1993. In 2003, Buell sport motorcycles became a full subsidiary with its models being sold
through Harley-Davidson dealerships. Neither of these actions has resonated with the younger riders
Harley sought to reach by taking them. As a result, Harley-Davidson opted to discontinue Buell in 2009
after slumping sales.27 The V-Rod© still exists, but with a median price tag of $15,300 it has not done
much to lower the age of the average Harley-Davidson rider.
U.S. Cruiser Competitors.
Victory Motorcycles and Indian Motorcycle are the only U.S. Cruiser style 181182motorcycle
manufacturers. Victory, a subsidiary of Polaris and a relative newcomer to the motorcycle market,
started production in 1998.28 Polaris is best known for its high quality all-terrain vehicles and personal
watercraft. In the last five years, Victory models have been selling at prices more closely comparable
with Harley-Davidson. At the same time, Victory increased the number of models and styles; it even
brought in famous motorcycle customizers Arlen and Corey Ness29 to add style and street credibility to
its entire product line. In 2009, Indian Motorcycle began its fourth incarnation in an effort to leverage its
famous name and art-deco styling. After a shaky start, Indian was recently purchased by Polaris. This
move is likely part of a strategy to position Victory and Indian in separate parts of the U.S. motorcycle
market and to fulfill the needs of different types of customers. This approach is similar to the strategy
General Motors used for decades of offering different products to different types of customers. The
median price for an Indian motorcycle is $28,000. Its current tag line is, “Your great grandfather would
be proud. Jealous, but proud.”30 Indian is targeting high-income earners with a love for classic
motorcycle styling.
This class of competitors is comprised of small and medium firms that build highly customized
motorcycles with large displacement motors. Firms such as Big Dog Motorcycles,31 Big Bear Choppers,32
and American IronHorse are the dominant competitors in this space.33 These competitors have become
far less of an issue for Harley-Davidson since the economic downturn of 2008. With their high levels of
customization, these competitors’ models come with a high price tag. As their target market shrunk in
the recession, these firms thinned significantly; an estimated 60 percent have gone out of business or
changed their core function to components production. Others, such as Darwin Motorcycles, now offer
custom motorcycles for as little as $18,600.34 These competitors will always pose a threat to HarleyDavidson. They force Harley-Davidson to continually innovate and customize its product. It is ironic that
most of these motorcycle manufacturers use Harley-Davidson style or actual Harley-Davidson
components in their production.
Strategic Leaders
“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.”
– Jeff Bleustein
Annual Report 1997 35
Although the strategic intent of Harley-Davidson has not changed much since 1997, the way it operates
and leads has certainly adapted to reflect new ways of doing business.
Keith Wandell–Chairman and CEO.
When Keith Wandell joined Harley-Davidson in 2009, many people were skeptical of his leadership due
to his lack of motorcycle experience. However, his fresh perspective has allowed Wandell the
opportunities and relationships needed to steer the company toward a sales gain for the first time in
nearly five years. Wandell attributes this success to his dear colleague and now CEO at Ford, Alan
Mulally. Wandell took some tough measures such as cutting labor contracts, closing plants, and overall
“trimming the fat.”36 He has sold old investments and is trying to making Harley-Davidson more
attractive to women and the younger generation. And, of course, Wandell is now an avid HarleyDavidson rider.
Executive Suite.
Each member of the C-suite is highly qualified for his role. Each leader serves multiple roles within the
organization and is an individual contributor as well as a team leader.37 The CFO and Senior VP, John A.
Olin, joined Harley-Davidson in May 2009 with over 25 years of leadership experience in finance.
President and COO of Buell Motorcycle Company, Jon R. Flickinger, has grown within Harley-Davidson
where he began his leadership role as a Director of Field Operations in January 1995. With over 30 years
of experience in the commercial finance industry, it is appropriate that Lawrence G. Hund should serve
as the President and COO of the Harley-Davidson Financial Services division. At 46, nearly 10 years
younger than the other executive members, President and COO of Harley-Davidson Motor Company,
Matthew S. Levatich, has made significant contributions at Harley-Davidson for the past 15 years.
Each member of Harley-Davidson’s board brings different experiences to the boardroom. This eclectic
set of experiences facilitates the firm’s efforts to position itself in the ever-growing market of the
motorcycle business. Information regarding the age, title, and other boards each member serves on is
provided in Exhibit 1.
Exhibit 1: Board of Directors
Board
Member
Barry K. Allen
Age Title
62
Senior Advisor to Providence Equity Partners President,
Allen Enterprises, LLC
Other Boards
Fiduciary Management
BCE Inc.
John Anderson 60 Former President and CEO, Levi Strauss & Co.
Richard L.
Beattie
71 Chairman of Simpson Thacher & Bartlett LLP
Heidrick & Struggles
International Inc.
Evercore Partners Inc.
Martha F.
Brooks
George H.
Conrades
51 Former President and COO, Novelis Inc.
Bombardier Inc.
Akamai Technologies, Inc.
73 Chairman, Akamai Technologies, Inc.
Oracle Corporation
Board
Member
Age Title
Other Boards
Ironwood
Pharmaceuticals, Inc.
Donald A.
James
67
Co-founder, equity owner, Chairman and CEO of Deeley
Harley-Davidson Canada/Fred Deeley Imports Ltd.
Sara L.
Levinson
60 Former Non-Executive Chairman of ClubMom, Inc.
Macy’s Inc.
Thomas
Linebarger
48 Chairman and CEO, Cummins Inc.
Cummins Inc.
American International
Group Inc.
George L.
Miles Jr.
69 Executive Chair, Chester Engineers, Inc.
EQT Corporation
HFF, Inc.
WESCO International, Inc.
James A.
Norling
69 Chairman of the Board, GlobalFoundries Inc.
Keith Wandell
60 Chairman, President and CEO, Harley-Davidson, Inc.
Constellation Brands, Inc.
Dana Holding Corporation
Jochen Zeitz
48
Chairman of PUMA CEO of PPR Sport & Lifestyle Group
and Chief Security Officer of PPR
Puma AG PPR
Source: Harley-Davidson Inc (HOG: New York). Insiders at Harley Davidson Inc. Bloomberg Businessweek.
The current size of the Harley-Davidson board is slightly large when compared to the advised board size
of six to seven.38 However, each member brings significant diversity and experience to the board
meetings.
Richard Beattie provides Harley-Davidson with several years of legal and military experience. His
background helps Harley-Davidson deal with any corporate law or governance issues. Barry Allen serves
the role of financial advisor at Harley-Davidson as well as that of a decision-maker at other corporations.
Other board members incorporate their knowledge from the financial, retail, and technological boards
they serve on to help the company gain strategic competitiveness in the industry.
International Growth
Any discussion of Harley-Davidson’s future would not be complete without examining its expansion into
India and China, the two BRIC economies with a strong history of motorcycle ownership and enough
income growth to ensure viable target markets.39 After all, moving from Harley-Davidson’s current
position of 32 percent of revenue from international sales to its stated goal of 40 percent by 201440,41
will be challenging. Doing so will require a delicate balance in order to maintain the ethos of HarleyDavidson while simultaneously adapting to local customs and consumer preferences. Nevertheless, it
could be argued that Harley-Davidson is already well on its way in this regard.
For example, just four months after officially entering the Indian market in July 2010, Harley announced
it would build an assembly plant in northern India in order to reduce import tariffs by as much as 80
percent.42 Previously, high tariffs resulted in its models costing twice as much as their U.S. equivalents.43
By only assembling the motorcycles in India, Harley-Davidson is able to satisfy the desire of its
customers in India to purchase an “American” motorcycle by sourcing all the parts from the United
States while significantly increasing its competitive position through lower pricing.
Time will be required to see if Harley-Davidson’s approach in India will achieve the success the firm
seeks. Indeed, Harley-Davidson sold only about 1,000 bikes in India in its first 18 months of operations.44
This level of sales should be considered though within the context of the fact that Harley’s local
assembly plant in India has only been operational for the past 12 months.45 Accordingly, the Indian
market has not been exposed to the lower pricing model for very long and may need some time to
overcome the stigma associated with previously higher prices. For example a mid-level bike used to cost
$27,000, prior to tariff reduction; now, the cost of this product is around $20,000.46, 47 These prices,
while still high by local standards, show that Harley-Davidson is making a concerted effort to cater to the
needs of customers located in developing countries. Such a strategy is essential for long-term viability
given global growth trends and the inevitable shift of income away from Harley-Davidson’s more
traditional western markets. In response to such growth, it has even committed to opening dealerships
in cities like Jaipur and Kochi – cities outside the larger Indian metropolises.48 In this manner, HarleyDavidson will be able to appeal to India’s rural landowners who would like to ride Harley-Davidson’s in
the countryside.49
Unfortunately, Harley-Davidson’s venture into China, the world’s largest motorcycle market, has been
less smooth and illustrates what can happen when a company enters a foreign market without sufficient
background preparation. For example, China currently restricts the use of motorcycles on elevated
highways and major thoroughfares in about 100 cities.50 Import duties can also add as much as 30
percent to the price of a Harley-Davidson, resulting in high-end models costing the equivalent of a luxury
sedan such as the Audi A4.51 Perhaps more troubling is the admission by most in China that motorcycles
are associated with utilitarian tasks like transportation to work, not leisure riding as is the case in
developed economies such as the United States.52 These realities increase the difficulty Harley-Davidson
faces as the firm seeks to establish the level of success in China that is similar to what the firm has been
able to accomplish in India.53
Regulation
Safety must always be at the forefront of Harley-Davidson’s mind to avoid any unwanted attention. For
example, when taking Harley-Davidson’s “Rider’s Edge” operation courses, all riders are required to
wear protective gear, including a helmet, that meets Department of Transportation (DOT) regulations.54
Skeptics might say that Harley-Davidson is merely trying to minimize its liability. However, most would
agree that increased injury rates from not wearing protective gear only serve to vilify motorcycle use.
Indeed, Harley-Davidson even periodically issues communications to its customers encouraging riders to
check the condition of their helmets.55 Still, motorcycle riders in general have been affected by the
recent loosening of helmet laws throughout the United States. “Two decades ago, 47 states required
helmets for all riders. Today, 20 do. Twenty-seven states require helmets only for younger riders. Three
— Illinois, Iowa and New Hampshire — don’t require helmets at all.”56 Another safety-related concern is
the fact that “in 1996, 5.6 motorcyclists were killed for every 10,000 registered motorcycles,” according
to DOT statistics. However, by 2006, the most recent data available, the rate had risen to 7.3…”57 To be
fair, such a study does not prove causality. Still, such studies can bring unwanted negative attention to
the motorcycle industry and reinforce cultural stereotypes that motorcycle riders are risk-seeking
freewheelers. To make its motorcycles appealing to a broader target market, Harley-Davidson must
continue to espouse a culture of safety,58 even in the face of decreasing safety regulations.
New EPA emission regulations could also affect Harley-Davidson’s growth. Still, the last revision of
motorcycle emission standards in 2003 did little to alter Harley-Davidson’s growth trajectory and
prompted the following promise.
Jim McCaslin, President of Harley-Davidson Motor Company, has stated that Harley-Davidson “plans to
meet the requirements of the proposed EPA standards and still make the motorcycles true to the look,
sound, and feel that you know and love” and that “the air-cooled V-Twin will continue to be the core of
the Harley-Davidson motorcycle lineup for many years to come.”59
The latter was especially welcome news to Harley-Davidson purists, but nevertheless is indicative of the
regulation challenges facing Harley-Davidson’s predominately air-cooled (as opposed to cleaner burning
water-cooled) engines. If Harley-Davidson wishes to continue to operate in an increasingly
environmentally sensitive market, it must continue to hone its ability to meet stricter pollutant
regulations.
Financial Analysis
Harley-Davidson is currently climbing its way out of what were likely the worst financial times the
company had faced since its inception in 1903. It peaked with 184185nearly $6.2 billion in revenue in
2006, and then witnessed its revenue fall nearly 30 percent between 2007 and 2009.60, 61 HarleyDavidson is in the recreation vehicles industry, making its products arguably among the most expensive
of consumer discretionary items. As noted earlier, individuals find it difficult to justify purchases of these
types of products when encountering challenging economic conditions. To compound the financial crisis
in the United States between 2007 and 2010, Harley-Davidson’s units-sold figures peaked at over
349,000 in 2006. Does the reduced number of units sold since 2006 potentially suggest that the overall
demand for Harley-Davidson’s products is declining?62 Right now in its rebound, Harley-Davidson has
managed to grow its revenue over 11 percent from its 2009 lows and bring its operating margin back up
to 16 percent from a disappointing 4 percent in 2009.63
Going forward, work remains for Harley-Davidson to return to a strong financial position. To start,
Harley-Davidson is currently highly leveraged as suggested by the firm’s debt-to-equity ratio of 1.6.
Historically, it has operated with this ratio well below 0.5.64 Much of this new debt resulted from a
decision to create capital for the firm’s financing division. More specifically, this capital was to be used
as a way of helping customers purchase a Harley-Davidson motorcycle. Because most of this debt is in
the form of medium-term notes that do not require repayment until after 2014, and because HarleyDavidson has the necessary current free cash flow to pay its current liabilities, this debt is not a huge
immediate concern. Even so, it is something the firm’s leaders should monitor to make sure it does not
get out of control
Furthermore, Harley-Davidson will have to make a concerted effort to control costs to get back to the
25+ percent operating margins it experienced during the boom years of 2004-2007. It is the case that
part of the difference between Harley’s current operating margin of 16 percent and the highly desirable
operating margin of 25 or more percent is a factor of its fixed costs being allocated across fewer sales
units. Nonetheless, keeping variable costs under control will be crucial to the firm’s efforts to strengthen
its operating margin until the number of units sold increases. Detailed financial data concerning HarleyDavidson is shown in Exhibits 2 through 6.
Exhibit 2: HOG Income Statement
Consolidated Statements of Operations (USD $)
12 Months Ended
In Thousands, except Per Share data, unless otherwise
specified
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
Revenue:
Motorcycles and related products
Financial services
Total revenue
$4,662,264[ii] $4,176,627[ii] $4,287,130[ii]
649,449
682,709
494,779
5,311,713
4,859,336
4,781,909
3,106,288
2,749,224
2,900,934
229,492
272,484
283,634
Costs and expenses:
Motorcycles and related products cost of goods sold
Financial services interest expense
Consolidated Statements of Operations (USD $)
12 Months Ended
In Thousands, except Per Share data, unless otherwise
specified
Dec. 31,
2011
Financial services provision for credit losses
Selling, administrative, and engineering expense
Restructuring expense and asset impairment
Dec. 31,
2010
17,031
93,118
169,206
1,060,943
1,020,371
979,384
67,992
163,508
224,278
Goodwill impairment
Total costs and expenses
Dec. 31,
2009
28,387
4,481,746
4,298,705
4,585,823
Operating income
829,967
560,631
196,086
Investment income
7,963
5,442
4,254
Interest expense
45,266
90,357
21,680
Loss on debt extinguishment
9,608
85,247
Income before provision for income taxes
792,664
390,469
178,660
Provision for income taxes
244,586
130,800
108,019
Income from continuing operations
548,078
259,669
70,641
Income (loss) from discontinued operations, net of tax
51,036
−113,124
−125,757
Net income (loss)
$599,114
$146,545
($55,116)
Earnings per common share from continuing operations:
Basic
$2.35
$1.11
$0.30
Diluted
$2.33
$1.11
$0.30
$0.22
($0.48)
($0.54)
Earnings (loss) per common share from discontinued
operations:
Basic
Consolidated Statements of Operations (USD $)
12 Months Ended
In Thousands, except Per Share data, unless otherwise
specified
Dec. 31,
2011
Diluted
Dec. 31,
2010
Dec. 31,
2009
$0.22
($0.48)
($0.54)
Basic
$2.57
$0.63
($0.24)
Diluted
$2.55
$0.62
($0.24)
Cash dividends per common share
$0.48
$0.40
$0.40
Dec. 31,
2011
Dec. 31,
2010
Earnings (loss) per common share:
Exhibit 3: HOG Balance Sheet
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31,
2009
Current assets:
Cash and cash equivalents
$1,526,950 $1,021,933 $1,630,433
Marketable securities
153,380
140,118
39,685
Accounts receivable, net
219,039
262,382
269,371
Finance receivables, net
1,168,603
1,080,432
1,436,114
Variable interest entities’ restricted finance receivables, net
591,864
699,026
Inventories
418,006
326,446
Restricted cash held by variable interest entities
229,655
288,887
Deferred income taxes
132,331
146,411
179,685
Other current assets
102,378
100,991
282,421
4,542,206
4,066,626
4,341,949
Total current assets
323,029
Consolidated Balance Sheets (USD $)
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
Finance receivables, net
1,754,441
1,553,781
3,621,048
Variable interest entities’ restricted finance receivables, net
2,271,773
2,684,330
Property, plant and equipment, net
809,459
815,112
906,906
Goodwill
29,081
29,590
31,400
Deferred income taxes
202,439
213,989
177,504
Other long-term assets
64,765
67,312
76,711
9,674,164
9,430,740
9,155,518
Accounts payable
255,713
225,346
162,515
Accrued liabilities
564,172
556,671
514,084
Short-term debt
838,486
480,472
189,999
Current portion of long-term debt
399,916
Variable interest entities’current portion of long-term debt
640,331
751,293
2,698,618
2,013,782
2,268,224
Long-term debt
2,396,871
2,516,650
4,114,039
Long-term debt held by variable interest entities
1,447,015
2,003,941
Pension liability
302,483
282,085
245,332
Postretirement healthcare liability
268,582
254,762
264,472
Other long-term liabilities
140,339
152,654
155,333
In Thousands, unless otherwise specified
TOTAL ASSETS
Current liabilities:
Total current liabilities
TOTAL LIABILITIES
1,332,091
Consolidated Balance Sheets (USD $)
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
3,391
3,382
3,368
968,392
908,055
871,100
Retained earnings
6,824,180
6,336,077
6,324,268
Accumulated other comprehensive loss
(476,733)
(366,222)
(417,898)
Stockholders equity before treasury stock
7,319,230
6,881,292
6,780,838
In Thousands, unless otherwise specified
Shareholders’ equity:
Series A Junior participating preferred stock, none issued
Common stock, 339,107,230 and 338,260,456 shares issued in
2011 and 2010, respectively
Additional paid-in-capital
Less: Treasury stock (108,566,699 and 102,739,587 shares in
2011 and 2010, respectively), at cost
(4,898,974) (4,674,426) (4,672,720)
Total shareholders’ equity
2,420,256
Total liabilities and shareholders’ equity
$9,674,164 $9,430,740 $9,155,518
2,206,866
2,108,118
Exhibit 4: HOG Statement of Cash Flows
Consolidated Statements Of Cash Flows (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
Consolidated Statements Of Cash Flows [Abstract]
Net cash provided by operating activities of continuing
operations (Note 2)
$885,291
$1,163,418
$609,010
(189,035)
(170,845)
(116,748)
Cash flows from investing activities of continuing operations:
Capital expenditures
Origination of finance receivables
(2,622,024) (2,252,532)
(1,378,226)
Consolidated Statements Of Cash Flows (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31,
2011
Collections on finance receivables
2,760,049
Dec. 31,
2010
2,668,962
Collection of retained securitization interests
Purchases of marketable securities
Sales and redemptions of marketable securities
607,168
61,170
(142,653)
(184,365)
130,121
84,217
Other, net
Net cash provided/used by inv. activities of cont. oper.
Dec. 31,
2009
(39,685)
2,834
(63,542)
145,437
(863,487)
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium term notes
447,076
Repayment of medium term notes
(59,211)
496,514
(200,000)
Proceeds from issuance of senior unsecured notes
595,026
Repayment of senior unsecured notes
Proceeds from securitization debt
Repayments of securitization debt
Net +/− in credit facilities & unsecured commercial paper
Net repayments in asset-backed commercial paper
(380,757)
1,082,599
598,187
(1,754,568) (1,896,665)
237,827
(483)
30,575
2,413,192
(263,083)
(1,083,331)
(845)
(513,168)
77,654
(167,667)
Net change in restricted cash
59,232
Dividends
(111,011)
(94,145)
(93,807)
Purchase of common stock for treasury, net of issuances
(224,548)
(1,706)
(1,920)
Excess tax benefits from share-based payments
6,303
3,767
170
Issued common stock under employee stock option plans
7,840
7,845
11
Consolidated Statements Of Cash Flows (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
Net cash provided/used by fin. activities of continuing oper.
(308,944)
(1,856,090)
1,381,937
Exchange rate effect on cash/cash equiv. of continuing oper.
(7,788)
4,940
6,789
Net increase/decrease in cash/cash equiv of continuing oper.
505,017
(542,295)
1,134,249
(71,073)
(71,298)
Cash flows from discontinued operations:
Cash flows from operating activities of disc. oper.
Cash flows from investing activities of disc. oper.
(18,805)
Exchange rate effect on cash/cash equiv. of discont. oper.
(1,195)
(1,208)
Net cash used by discontinued operations, total
(72,268)
(91,311)
505,017
(614,563)
1,042,938
1,021,933
1,630,433
568,894
6,063
24,664
(614,563)
1,042,938
Net increase/decrease in cash/cash equivalents
Cash and cash equivalents.
Cash and cash equivalents – beginning of period
Cash and cash equivalents of disc. oper. - period end
Net increase (decrease) in cash and cash equivalents
505,017
Less: Cash and cash equivalents of disc. oper. – period end
Cash and cash equivalents – end of period
Exhibit 5: HOG Statement of Stockholder’s Equity
Consolidated
Statements Of
Shareholders’
Equity (USD $)
(6,063)
$1,526,950
$1,021,933
$1,630,433
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Beginning Balance
12/31/08
$846,796
Beg. Share Bal.
12/31/08
$3,357
Accumulated
Other Comp.
Income
(Loss)[Member]
$6,458,778 ($522,526)
Treasury
Balance
[Member]
Total
($4,670,802) $2,115,603
335,653,577
Comprehensive
income:
Net income (loss)
(55,116)
(55,116)
Other
comprehensive
income/loss:
Foreign currency
translation
adjustment
30,932
30,932
Amortization of
net prior service
cost, net of taxes
2,679
2,679
Amortization of
actuarial loss, net
of taxes
11,761
11,761
Pension & postretirement plan
funded status adj.,
net of taxes
29,111
29,111
Pension & postretirement plan
settlement &
curtailment, net
taxes
32,197
32,197
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
Change in net
unrealized gains
(losses):
Investment in
retained
securitization
interests, net of
taxes
13,600
13,600
Derivative
financial
instruments, net of
tax benefit
(1,239)
(1,239)
Comprehensive
income
63,925
Adj. to apply
measurement date
provisions of FSP
115–2, net of taxes
14,413
Dividends
(93,807)
Repurchase of
common stock
Share-based
comp. & 401(k)
match made with
Treasury shares
(14,413)
27,363
(93,807)
(1,920)
(1,920)
2
27,365
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
Issued nonvested
1,147,393
stock (in shares)
Issuance of
nonvested stock
11
Tax benefit of
stock options &
nonvested stock
(11)
(3,048)
Ending Balance at
12/31/10
3,368
Ending Share
Balance 12/31/09
336,800,970
871,100
(3,048)
6,324,268
(417,898)
(4,672,720)
2,108,118
Comprehensive
income:
Net income (loss)
146,545
146,545
Other
comprehensive
income (loss):
Foreign currency
translation adj.
9,449
9,449
Net prior service
cost amort, net of
taxes
925
925
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
Actuarial loss
amort., net of
taxes
20,944
20,944
Pension & postretirement plan
funded status adj.,
net of taxes
18,431
18,431
Pension & postretirement plan
settlement &
curtailment, net
taxes
1,549
1,549
(2,972)
(2,972)
(133)
(133)
Change in net
unrealized gains
(losses):
Derivative
financial
instruments, net of
tax benefit
Marketable
securities, net of
tax benefit
Comprehensive
income
Adj. for
consolidation of
194,738
(40,591)
3,483
(37,108)
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
QSPEs under ASC
Topics 810 & 860
Dividends
(94,145)
(94,145)
Repurchase of
common stock
(1,706)
Share-based
comp. & 401(k)
match made with
Treasury shares
Issued nonvested
stock (in shares)
26,961
(1,706)
26,961
823,594
Issuance of
nonvested stock
8
(8)
Exercise of stock
options
6
7,839
7,845
Exercise of stock
options (in shares)
635,892
2,163
2,163
Tax benefit of
stock options &
nonvested stock
Ending Balance at
12/31/10
3,382
908,055
6,336,077
(366,222)
(4,674,426)
2,206,866
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
Ending Balance,
338,260,456
shares at 12/31/10
Comprehensive
income:
Net income (loss)
599,114
599,114
Other
comprehensive
income (loss):
Foreign currency
translation adj.
(5,616)
(5,616)
Net prior service
cost amortization,
net of taxes
(564)
(564)
Actuarial loss
amort., net of
taxes
23,584
23,584
(146,768)
(146,768)
174
174
Pension & postretirement plan
funded status adj.,
net of taxes
Pension & postretirement plan
settlement &
curtailment, net
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
taxes
Change in net
unrealized gains
(losses):
Derivative
financial
instruments, net of
tax benefit
Marketable
securities, net of
tax benefit
18,219
18,219
460
460
Comprehensive
income
488,603
Dividends
(111,011)
Repurchase of
common stock
(224,551)
Share-based
comp. & 401 (k)
match made with
Treasury shares
Issued nonvested
stock (in shares)
Issuance of
(111,011)
49,993
473,240
5
(5)
3
(224,551)
49,996
Consolidated
Statements Of
Shareholders’
Equity (USD $)
In Thousands,
Common
except Share data,
Stock
unless otherwise
[Member]
specified
Additional
Retained
Paid-in
Earnings
Capital
[Member]
[Member]
Accumulated
Other Comp.
Income
(Loss)[Member]
Treasury
Balance
[Member]
Total
nonvested stock
Exercise of stock
options
4
Exercise of stock
options (in shares)
373,534
Tax benefit of
stock options &
nonvested stock
Ending Balance at
12/31/11
7,836
7,840
374,000
2,513
$3,391
$968,392
2,513
$6,824,180 ($476,733)
Ending Balance,
339,107,230
shares at 12/31/11
Exhibit 6: HOG Revenue and Net Income 2002–2011
($4,898,974) $2,420,256
Source: Graph created from information from U.S. Securities and Exchange Commission.
http://www.sec.gov/Archives/edgar/data/793952/000119312512074944/0001193125-12-074944index.htm
The Sum of All Parts
At the end of the day, Harley-Davidson cannot depend on its strong brand name to carry it through the
twenty-first century. Between expanding its target consumer base beyond the stereotypical biker with
his “old lady” sitting behind him, to successfully breaking free of the red tape and increased costs
associated with international expansion, Harley-Davidson is potentially facing a challenging future.
However, as one of the few motorcycle manufacturers focused exclusively on building motorcycles and
without having to worry about cars, scooters, or snowmobiles, it stands to reason it should be able to
lead the pack.
Guriqbal Cheema
Joel Cunningham
Pallavi Daliparthi
John Klostermann
Brian Rabe
Texas A&M University
“It’s more than a brand. It’s a culture.”1
Kent Grayson
Professor of Marketing, Northwestern University
Introduction
Harley-Davidson is an American cultural and business icon on the level of Levi Strauss and Coca-Cola.
Often imitated, but never duplicated, Harley-Davidson has managed to survive, and has, at times,
thrived for many decades. Through depression, recessions, world wars, high technology developments,
Japanese competition, and increasing government regulation, Harley-Davidson has maintained
operations where over a dozen other U.S. motorcycle firms have failed. Harley-Davidson has even
survived over a decade as a subsidiary of a bowling alley service firm. It has achieved this by essentially
relying on designing, manufacturing, selling, and servicing a relatively static product: two wheels, a 45°
V-Twin engine, and a set of handlebars.
How has Harley-Davidson managed to survive through these and other hardships in a motorcycle
market that is dominated by leisure riders? How has it kept the doors open while its historic U.S. rival,
Indian Motorcycles, is currently in its fourth incarnation? How has it maintained its attractiveness with
outlaw bikers, investment bankers, and those who appear to be experiencing a “mid-life crisis” and who
sometimes turn to the firm’s products as a result? More importantly, what is this firm selling that keeps
it as the industry leader in full-size motorcycles? The answer to these questions is not a 526-pound
batch of steel with 250 feet of wiring, but rather the fact that Harley-Davidson is selling the American
dream of freedom. How it is able to do this is a fascinating story.
The Challenge
With over 6,000 employees, 1,400 franchises, and nine production facilities, Harley-Davidson has
managed to survive the economic downturn that was in full force in late 2007 and for the next few
years; but the firm is not out of the woods yet. In fact, Harley-Davidson is struggling with three pivotal
issues, the first of which is that the firm’s products are viewed as leisure items. The other two issues are
similar in nature in that they deal with the fact that managing the firm’s target market is challenging,
particularly as demand for its products is changing. Individually and collectively these issues pose a real
challenge to the company’s long-term success. Without addressing these issues, Harley-Davidson may
lose its ability to create value for customers and to serve stakeholders’ needs as a result.
As noted, the first issue Harley-Davidson must successfully address is the fact that consumers see the
firm’s products primarily as leisure items. This means that in many consumers’ eyes, purchasing
motorcycles, performance parts, and high-dollar apparel is a luxury rather than a necessity. Because of
this, Harley’s products must compete for funds from what at least sometimes can be volatile
discretionary budgets for consumers. When economic conditions are challenging, the motorcycle
market tends to experience difficulties in terms of generating adequate sales. While Harley-Davidson’s
revenue streams originate from several sources, very few of them appeal to a cost-sensitive consumer
base.
Second, Harley-Davidson is challenged to effectively specify its target market as a first step to
appropriately serving that market’s needs. Historically, the firm’s target market has been males between
the ages of 29 and 55. However, in the last decade, Harley-Davidson has pursued younger riders and
women as a means of expanding its target customer segments. But expanding the segments the firm
serves with its products is not a risk-free decision or choice for the firm to make in that serving others
might cause the firm to lose its ability to effectively serve the specific needs of the 29- to 55-year-old
male (again, the historical target customer). This matter is considered more fully later in the case.
Third, demands and cost drivers for the motorcycle market are ever changing. Overseas competitors
have shifted their focus from being the least expensive to being affordable and to providing a wider
variety of motorcycles to customers as options to purchase. This competitive shift has put pressure on
Harley-Davidson’s key markets and has forced the firm to respond. With over 12 percent and 55 percent
of the European and U.S. heavyweight motorcycle market respectively, Harley-Davidson has a
substantial territory to defend.
History.2
Harley-Davidson, Inc. has been a publicly traded firm since 1987. It has two primary divisions:
Motorcycles and Related Products and Financial Services. The Financial Services Division provides credit
to motorcycle buyers and dealerships as well as risk management and insurance services for all parts of
the firm. The Motorcycles and Related Products Division currently operates through eight primary
segments:
•
Parts & Accessories (17.5 percent of net revenue in 2011)
•
General Merchandise (5.9 percent of net revenue in 2011)
•
Licensing ($43.2 million of net revenue in 2011)
•
Harley-Davidson Museum
•
International Sales (32 percent of net motorcycle revenue in 2011)
•
Patents and Trademarks
•
Other Services
•
Marketing
In 1903, William S. Harley and Arthur Davidson founded Harley-Davidson Motor Company, known by
enthusiasts as “the Motor Company,” in order to fund their racing pursuits. Accordingly, their first
motorcycles were merely contemporary bicycles with small engines retrofitted to the frame. It was
Harley-Davidson’s early success in motorcycle racing that fueled the demand for its early models, which
were sold in dealerships as early as 1904. Because these turn of the century races were as much about
endurance as speed, Harley-Davidson acquired invaluable knowledge pertinent to practicality and
robust design. After significant success in road and endurance races, Harley-Davidson broke fresh
ground with the introduction of the V-Twin engine design. Superior to large single-cylinder engines, the
lighter V-Twin design allowed similar displacement in a lighter package with a shape that fit naturally
into the bicycle-inspired frames of the early 1900s. Few suspected that this design would become so
integral to modern motorcycles.
Having dedicated over a third of its production to the U.S. Army, Harley-Davidson sales exploded during
World War I. With the advent of motorized warfare, the motorcycle proved itself to be far more than
just a novel invention. In addition to proving itself to the Army, Harley-Davidson also proved itself to
soldiers. After the war, soldiers returned home and became a loyal customer base for the young firm.
Through the 1920s, Harley-Davidson continued to focus on design improvement and racing. It spent
much of this decade fighting for market share with multiple medium and small competitors. During this
time, firms producing automobiles, airplanes, bicycles, and industrial machinery also tried their hand at
building motorcycles.
The 1930s were a unique time for the motorcycle industry. In the wake of the Great Depression, the
public was looking for inexpensive, simple transportation. At the same time, unemployment and
inflation shrank potential customers’ purchasing power. It was during this time that many of the smaller
motorcycle manufacturers dropped out of the industry. Most of these firms were subsidiaries of
companies in related industries. These failed motorcycle firms had many of the capabilities needed to
produce motorcycles, but lacked the corporate focus and support to continue production during such a
difficult economic time. It was during this time that the U.S. domestic market shrank, with only Indian
and Harley-Davidson remaining. With the market divided between only two domestic producers, HarleyDavidson’s production held steady.
With the onset of World War II, Harley-Davidson found itself to be a major supplier for the Allied war
effort. Again, war vaulted Harley-Davidson into a position of higher volume, improved reputation, and
deeper loyalty with owners and soldiers. As the war came to an end, the United States was flooded with
a surplus of Army WL45 motorcycles. Suddenly, this country was full of prospective riders who
understood Harley-Davidson’s 177178product and appreciated how motorcycles could provide
inexpensive, dependable transportation. At this point, only Indian Motorcycles was a competitor for
Harley-Davidson. But in 1956, at the height of an economic recession, Indian Motorcycles declared
bankruptcy and stopped producing motorcycles altogether, leaving only Harley as a major producer and
seller of motorcycles.
As the sole U.S.-based motorcycle power, Harley-Davidson enjoyed great success. Nevertheless, the lack
of competition nearly became its undoing. This market condition allowed Harley-Davidson to take more
risk in the form of acquisitions, causing the firm to lose its tight focus on a single market. It began
branching out to other leisure and motorized products such as off-road motorcycles, ski boats, and golf
carts. At the same time, the bulk of Harley-Davidson’s revenue stream was still coming from the sale of
its heavy motorcycles. Many of the acquisitions the firm completed in the latter part of the 1950s and
the early 1960s, such as the Tomahawk Boat Manufacturing Company in 1962, were in similar industries,
but a poor fit with Harley nonetheless. The acquired companies were often in deep trouble when
Harley-Davidson purchased them. In the end, Harley-Davidson was hobbled with losing ventures that
diluted its focus and did not fit well with its core competencies. In 1969, the American Machine and
Foundry Company (AMF – a longtime producer of leisure products such as tile bowling pins and ball
returns) purchased the financially distressed Harley-Davidson.3
Most enthusiasts consider the AMF years as the “dark ages” of Harley-Davidson’s history. AMF operated
Harley-Davidson as a profit center, reducing allocations to the unit’s marketing and research and
development (R&D) functions as a result. For the next 13 years, Harley’s aging product line remained
essentially unchanged. In fact, its line was so static over the years that many of the parts from a 1937
model fit on the 1969 design. Harley-Davidson had just two motorcycles with different trim packages:
the low-budget sportster, the sport bike of its day, and a full-size motorcycle available in two different
models. In light of Honda and Kawasaki’s entrance into the U.S. market, Harley-Davidson’s stale product
line was even more disappointing. Many did not see these imports as a threat given the prestige and
heritage of the Harley-Davidson name. However, the Harley-Davidson image was deteriorating. Even
with its products in desperate need of a facelift, AMF relied on Harley-Davidson’s reputation to defend
its competitive position; AMF plastered Harley-Davidson’s name on products like snowmobiles and golf
carts. While trying to capitalize on the value of Harley-Davidson’s brand name, quality became a serious
problem; customers would have to return new motorcycles to a dealership multiple times to fix
manufacturing problems. It was during this time that owners coined the saying “a Harley always marks
its spot,” a phrase referring to the machine’s nearly universal oil leaks. This turned off many prospective
customers, as they believed a Harley-Davidson would require constant owner maintenance. All the
while, Japanese motorcycle companies enticed more and more riders looking for inexpensive,
dependable transportation.
By 1981, Japanese motorcycles were established in the U.S. market not only as dependable
transportation, but also as performance machines. Harley-Davidson’s sales were in free-fall as its tired
designs appealed to a narrowing market segment. It was selling to customers who liked classic style and
dated functionality, and all for a high price. Finally, the employees and management of Harley-Davidson
led a managed buyout of the company from AMF.4 The new owners immediately took stock of the firm’s
strengths and vulnerabilities and increased its R&D and marketing budgets significantly. Because
negative effects of AMF’s past business decisions still hampered the new management team, sales
remained low. In 1985, Harley-Davidson’s top management team struggled to restructure the firm and
divested itself of most of its unrelated assets. In 1987, Harley-Davidson became a publicly traded
company, and none too soon as Harley-Davidson had revamped its product line into four motorcycle
styles that were united by the introduction of a new engine. This was the turning point for HarleyDavidson. From this point forward, the firm’s quality control was exponentially more effective. In
addition, Harley-Davidson focused more on efforts to operate efficiently and effectively. Following the
precepts of just-in-time techniques and enhancement to the logistics function were critical to the firm’s
attempts to enhance efficiency and effectiveness. At the same time, Harley shifted to three major
initiatives:5
•
•
•
Improved manufacturing process, leveraging technology, robotics, and employee
involvement
Restructuring business management to a modern system
Aggressive management of its brand name through dealership management, patenting
activities, and careful licensing of related products
The modern Harley-Davidson fought back from the brink several times, each time seeming to evolve and
adapt. What appears to be universal to each evolution of the company is that quality, promotion, and
market focus have always been a priority.
How Harley Does It6
Harley-Davidson focuses on a subset of the motorcycle market featuring customers who value heritage,
style, reputation, durability, and adaptability. Until 2000, Harley-Davidson’s motorcycles sold at nearly a
25 percent premium. In the last decade, that premium has dropped to 5 to 10 percent, depending on
the class of motorcycle. This is due to Japanese motorcycle manufacturers shifting to marketing and
selling somewhat unique motorcycles for a better than average price. In comparison, Harley-Davidson
uses the Sportster© line as an introductory product, but most of its motorcycles sell for over $15,000,
with the average sale price of just over $16,893.7 Harley-Davidson motorcycles provide a unique product
at a price that its target customers deem acceptable or reasonable. While its competitors may have
attempted to cut costs, Harley-Davidson has continued to invest in its products in ways that protect the
quality of its brand image. Harley-Davidson’s market focus is primarily males between the ages of 29 and
55. However, this has been changing.8 Recently, it has targeted female customers.
What It Does Best9
In its modern incarnation (1987 to present), Harley-Davidson achieved success by doing what it does
best. Granted, multiple firms make great motorcycles, and many of these firms have a dedicated
following. However, through the actions the firm has taken over the years, Harley-Davidson has
developed and maintained what is a unique position in the U.S. motorcycle market. Effectively managing
its brand name, production or manufacturing simplicity, and a dedicated product following are the key
sources of the firm’s competitive strength.
Harley-Davidson’s brand name is its most important asset. Cultivated through good times and bad, its
brand name is a powerful motivator for current and prospective customers. For many Americans,
Harley-Davidson is the American motorcycle. This belief is no accident. After being separated from AMF,
Harley-Davidson’s top management team decided to significantly increase the amount of resources
being allocated to marketing and R&D. This appears to have been a wise decision in that HarleyDavidson now holds 55 percent of the entire U.S. motorcycle market, and an even higher share in the
U.S. heavy motorcycle market. Strict protection of its brand name permeates every decision the firm
makes. Its motorcycles, while occasionally deviating in style, generally follow traditional themes. HarleyDavidson only makes a design change after witnessing a strong market trend.10 For example, the custom
portion of the motorcycle market has been designing machines with wide rear tires for nearly two
decades; in 2007, Harley-Davidson launched a single model with a wide rear tire.
Harley-Davidson is also very selective about its franchise (dealership) opportunities, another method
through which the firm protects its brand. Due to free-trade laws, Harley-Davidson is no longer able to
insist that its dealerships sell only Harley products. However, it utilizes price incentives to encourage
dealerships to stay “Pure-Harley.”11 Harley-Davidson is especially protective of its name and logo when it
comes to licensed products, most of which are sold in its dealerships. If it is not the best quality, the
product’s license is revoked. Retailers can sell ladies’ shirts at a 100 percent premium because they are
of excellent quality and cannot be found anywhere. This aura of exclusivity is embedded in the very DNA
of Harley-Davidson Inc., from the headquarters to the dealerships. This aspect of culture is an asset in
that the notion of wanting to be seen as providing products that are somewhat “exclusive” in nature
permeates the firm’s decision processes as it seeks to serve its target customers’ needs.
Harley-Davidson’s production process is another important firm-specific asset. The key elements of the
process are the melding of a JIT supply chain with team production management and part interchangeability.12 When combined, the elements of Harley’s production process are unique. Japanese
manufacturers have used the same JIT concept for years, but have not stressed a limitation of key
components. After 1987, Harley-Davidson updated its production facilities and design process. Its
production facilities in Kansas City, Missouri and York, Pennsylvania are the best examples of modern
robotics combined with team enablement. Interchangeable parts are the most important component of
this asset. This concept simplifies all areas of the motorcycle production process; but it is perhaps most
evident in the production of Harley’s frames and engines. Harley-Davidson produces five unique frames
for each motorcycle family: Sportster©, Dyna, Softail©, V-Rod©, and Touring. Even with 28 different
models and seemingly limitless options, Harley-Davidson produces only three engines. Internal
machining, displacement, and color coating are the only differences across the engines. The Sportster©
line comes in two displacements: 883 and 1204 cubic inches. The Dyna, Softail©, and Touring lines all
share the same Twincam© engine, available in 96 and 103 cubic inches. The V-Rod’s© engine is only
produced in one version.13 This production approach with respect 179180to interchangeable parts
appears to be a competitive advantage in that it allows Harley to produce several models, subdividing its
target market segments even further, while keeping production costs lower than if it produced 28
different frames and engines.
Loyalty to the brand is another important asset for Harley-Davidson. While its brand name protection
applies primarily to prospective customers, its product following centers on existing customers, many of
whom are repeat buyers of the firm’s products. There are multiple examples of Harley’s dedicated
following. At the extreme for example, consider the fact that some private riding clubs only grant
membership to those willing to tattoo the bar and shield logo on multiple locations of their body. For
others, remaining committed to the firm’s mantra that owning a Harley “is a journey, not a destination”
and participating in company-sponsored events with others sharing this belief accounts for their loyalty.
Regardless of the reason for it, customer loyalty to the Harley brand appears to influence these
individuals to purchase Harley products other than motorcycles such as clothing and a wide range of
product accessories. Historically, loyalty to the brand has resulted in a large percentage of Harley
customers choosing to buy another Harley when it is time for a new motorcycle. However, the “graying”
of Harley’s customer base is potentially a problem as at some point, this group of customers will no
longer be purchasing new products.14
Keeping It Simple15
In 2011, Harley-Davidson generated 88 percent of its revenues from a single business area (Motorcycles
and Related Products) and 12 percent from its second primary segment (Financial Services). This
composition of sales revenue is consistent with previous years and suggests that Harley may continue
business as usual to help the firm reduce its idiosyncratic risk. It will also try to expand its business in
other countries with a primary focus on providing quality product and services. Harley-Davidson has
been able to earn positive returns while focusing on just two businesses because it has developed
strengths that allow it to create value for customers. Moreover, there are fewer challenges in managing
only two businesses. This approach allows Harley-Davidson to not only gain economies of scale, but also
use its resources efficiently.
Marketing
Historically, males between the ages of 29 and 55 have been Harley-Davidson’s target customer.
However, this is changing.16 Recently for example, the firm is also targeting female customers with
motorcycle models that have a lower seat height and pink, purple, and light blue color schemes. Its
marketing has also reflected an effort to attract more female riders. It has even tailored its riding classes
(the Riders Edge Program©) to have all-female sessions and to make new women riders feel more
comfortable. A woman could walk into a Harley-Davidson dealership having never sat on a motorcycle
and within an hour purchase a motorcycle for as little as $8,000. She could then join a riding class that
would grant a motorcycle endorsement on her driver’s license.
Thus, Harley-Davidson is beginning to market to a multi-generational and multi-cultural audience. In this
regard, the firm is working to attract a more diversified audience in terms of age, gender, and
ethnicity.17 Harley-Davidson is a market leader in the U.S. heavyweight segment. The average median
household income of a Harley-Davidson purchaser is $89,000.18 Harley-Davidson primarily uses
advertising and promotional activities via television, print, radio, direct mailings, electronic advertising,
and social media to market its product. Moreover, local marketing efforts in conjunction with dealers
are highly encouraged. Harley-Davidson uses its customers’ experience to continuously develop and
introduce innovative products. The market is flooded with high quality, low price Japanese bikes.
However, Harley-Davidson does not seek to imitate these bikes. Instead, it uses direct input from its
customers to improve its product. Harley-Davidson modifies its product based on input generated
through customer surveys, interviews, and focus groups. Thus, some believe that “The real power of
Harley-Davidson is the power to market to consumers who love the product.”
In 2010, the company introduced “Creative Model” – a Web-based method for marketing its product. In
this model, passionate fans are enabled for the purpose of helping Harley develop creative approaches
for targeting new customers. Customer experience has traditionally been the main source of HarleyDavidson’s marketing strategy. It all started in 1983, when the company introduced Harley Owners
Group (H.O.G),20 which has now grown to more than 1 million members worldwide.21
Harley-Davidson distributes its products through an independent dealer network that almost exclusively
sells Harley-Davidson motorcycles. These dealerships are licensed dealers and fully authorized to sell
and service new motorcycles. They can have secondary locations to provide additional service to the
customers. These non-traditional outlets are an extension of the main dealership and consist of
Alternate Retail Outlets (ARO) and Seasonal Retail Outlets (SRO). AROs are 180181generally located in
high traffic areas such as airports, vacation destinations, tourism spots, and malls and only sell parts,
accessories, and general merchandise. SROs are also located in high traffic areas, but operate only on a
seasonal basis. AROs and SROs are not allowed to sell new motorcycles. The parts and apparel orders
from the dealer are not taken at face value. Harley-Davidson’s forward-looking, market-driven allocation
system restricts the number of units a particular dealer is able to order. In Canada, the company sells its
products to one wholesale dealer, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd., which in
turn sells to independent dealers.22
The European, the Middle Eastern and African (EMEA) region is managed from regional headquarters in
Oxford, England. Harley-Davidson distributes its products through subsidiaries located in Austria, Dubai,
Czech Republic, France, Germany, and Italy. In the EMEA region, Harley-Davidson distributes all products
sold to independent dealers through its subsidiaries located in Austria, Czech Republic, United Arab
Emirates, France, Germany, Italy, South Africa, Spain, Switzerland, Netherlands, Russia, and United
Kingdom. A headquarters in Singapore manages the Asia Pacific regions with the company distributing
its product to independent dealers in China, India, Australia, and Japan. The rest of Asia Pacific is
managed through the U.S. operations.
Financial Services Segment
Harley believes that its Harley-Davidson Financial Services unit (HDFS) provides sufficient financing to
independent distributors, dealers, and retail customers. HDFS provides financing to dealers and retail
customer’s in the U.S. and Canada, but not in the EMEA, Asia-Pacific, and Latin America regions,
although these regions do have access to financing through other financial services companies.
Competition
As is the case for many leisure and transportation industries, the U.S. motorcycle market is extremely
competitive. Currently, Harley-Davidson competes with four classes of competitors with each group
competing in a different market and in different ways. The four competing groups are commonly
classified as Metric Cruiser, Metric Sport, U.S. Cruisers, and Custom Cruisers.
Metric Cruiser Competitors.
The industry uses the term Metric Cruiser to denote motorcycles made outside the United States with
traditional styling. Traditional styling is commonly reflected through an exposed engine and nonintegrated body panels. Japanese motorcycle makers such as Honda, Star (Yamaha), Suzuki, and
Kawasaki dominate these models. It is important to note that not all metric cruiser competitors are
considered to be heavy motorcycles (over 650 cubic centimeter displacement). These competitors
compete with Harley-Davidson on price, but also use the individual model’s unique features to garner a
competitive advantage. Honda introduced the Fury©,23 a regular production chopper based on the 1300
VTX power plant in 2009. In 2004, Kawasaki introduced the Vulcan© 200024 with a 2,053 cubic
centimeter engine, the largest mass-produced V-Twin motorcycle ever. Most of these competitor
models of similar size are comparable in features to Harley-Davidson models. The presence of smaller
competitor models forces Harley-Davidson to keep entry-level models like the 883 cubic centimeter
Sportster©. Smaller metric cruisers like the Suzuki Boulevard 40©, retailing at $2,600 less25 than HarleyDavidson’s least expensive model, keep downward pressure on introductory model prices.
Metric Sport Competitors.
Metric Sport motorcycles are made outside the United States, mostly in Japan, and are race-inspired,
high performance motorcycles with full body panels and excellent aerodynamic characteristics.
Motorcycles like the Suzuki Hayabusa© and the Kawasaki Ninja© are examples of this competitor class.
While these motorcycles do not directly compete with most Harley-Davidson models, they do appeal to
younger prospective customers because of their breathtaking performance and relatively low prices. In
general, metric sport customers are not attracted to most Harley-Davidson models.
Harley-Davidson has taken two key actions to attract young, performance-oriented riders from its sport
motorcycle competitors. It introduced the V-Rod© line in 2002 with a high performance, liquid-cooled
motor. Harley-Davidson also purchased Buell,26 a sport motorcycle company using Harley-Davidson
motors, in 1993. In 2003, Buell sport motorcycles became a full subsidiary with its models being sold
through Harley-Davidson dealerships. Neither of these actions has resonated with the younger riders
Harley sought to reach by taking them. As a result, Harley-Davidson opted to discontinue Buell in 2009
after slumping sales.27 The V-Rod© still exists, but with a median price tag of $15,300 it has not done
much to lower the age of the average Harley-Davidson rider.
U.S. Cruiser Competitors.
Victory Motorcycles and Indian Motorcycle are the only U.S. Cruiser style 181182motorcycle
manufacturers. Victory, a subsidiary of Polaris and a relative newcomer to the motorcycle market,
started production in 1998.28 Polaris is best known for its high quality all-terrain vehicles and personal
watercraft. In the last five years, Victory models have been selling at prices more closely comparable
with Harley-Davidson. At the same time, Victory increased the number of models and styles; it even
brought in famous motorcycle customizers Arlen and Corey Ness29 to add style and street credibility to
its entire product line. In 2009, Indian Motorcycle began its fourth incarnation in an effort to leverage its
famous name and art-deco styling. After a shaky start, Indian was recently purchased by Polaris. This
move is likely part of a strategy to position Victory and Indian in separate parts of the U.S. motorcycle
market and to fulfill the needs of different types of customers. This approach is similar to the strategy
General Motors used for decades of offering different products to different types of customers. The
median price for an Indian motorcycle is $28,000. Its current tag line is, “Your great grandfather would
be proud. Jealous, but proud.”30 Indian is targeting high-income earners with a love for classic
motorcycle styling.
This class of competitors is comprised of small and medium firms that build highly customized
motorcycles with large displacement motors. Firms such as Big Dog Motorcycles,31 Big Bear Choppers,32
and American IronHorse are the dominant competitors in this space.33 These competitors have become
far less of an issue for Harley-Davidson since the economic downturn of 2008. With their high levels of
customization, these competitors’ models come with a high price tag. As their target market shrunk in
the recession, these firms thinned significantly; an estimated 60 percent have gone out of business or
changed their core function to components production. Others, such as Darwin Motorcycles, now offer
custom motorcycles for as little as $18,600.34 These competitors will always pose a threat to HarleyDavidson. They force Harley-Davidson to continually innovate and customize its product. It is ironic that
most of these motorcycle manufacturers use Harley-Davidson style or actual Harley-Davidson
components in their production.
Strategic Leaders
“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.”
– Jeff Bleustein
Annual Report 1997 35
Although the strategic intent of Harley-Davidson has not changed much since 1997, the way it operates
and leads has certainly adapted to reflect new ways of doing business.
Keith Wandell–Chairman and CEO.
When Keith Wandell joined Harley-Davidson in 2009, many people were skeptical of his leadership due
to his lack of motorcycle experience. However, his fresh perspective has allowed Wandell the
opportunities and relationships needed to steer the company toward a sales gain for the first time in
nearly five years. Wandell attributes this success to his dear colleague and now CEO at Ford, Alan
Mulally. Wandell took some tough measures such as cutting labor contracts, closing plants, and overall
“trimming the fat.”36 He has sold old investments and is trying to making Harley-Davidson more
attractive to women and the younger generation. And, of course, Wandell is now an avid HarleyDavidson rider.
Executive Suite.
Each member of the C-suite is highly qualified for his role. Each leader serves multiple roles within the
organization and is an individual contributor as well as a team leader.37 The CFO and Senior VP, John A.
Olin, joined Harley-Davidson in May 2009 with over 25 years of leadership experience in finance.
President and COO of Buell Motorcycle Company, Jon R. Flickinger, has grown within Harley-Davidson
where he began his leadership role as a Director of Field Operations in January 1995. With over 30 years
of experience in the commercial finance industry, it is appropriate that Lawrence G. Hund should serve
as the President and COO of the Harley-Davidson Financial Services division. At 46, nearly 10 years
younger than the other executive members, President and COO of Harley-Davidson Motor Company,
Matthew S. Levatich, has made significant contributions at Harley-Davidson for the past 15 years.
Each member of Harley-Davidson’s board brings different experiences to the boardroom. This eclectic
set of experiences facilitates the firm’s efforts to position itself in the ever-growing market of the
motorcycle business. Information regarding the age, title, and other boards each member serves on is
provided in Exhibit 1.
Exhibit 1: Board of Directors
Board
Member
Barry K. Allen
Age Title
62
Senior Advisor to Providence Equity Partners President,
Allen Enterprises, LLC
Other Boards
Fiduciary Management
BCE Inc.
John Anderson 60 Former President and CEO, Levi Strauss & Co.
Richard L.
Beattie
71 Chairman of Simpson Thacher & Bartlett LLP
Heidrick & Struggles
International Inc.
Evercore Partners Inc.
Martha F.
Brooks
George H.
Conrades
51 Former President and COO, Novelis Inc.
Bombardier Inc.
Akamai Technologies, Inc.
73 Chairman, Akamai Technologies, Inc.
Oracle Corporation
Board
Member
Age Title
Other Boards
Ironwood
Pharmaceuticals, Inc.
Donald A.
James
67
Co-founder, equity owner, Chairman and CEO of Deeley
Harley-Davidson Canada/Fred Deeley Imports Ltd.
Sara L.
Levinson
60 Former Non-Executive Chairman of ClubMom, Inc.
Macy’s Inc.
Thomas
Linebarger
48 Chairman and CEO, Cummins Inc.
Cummins Inc.
American International
Group Inc.
George L.
Miles Jr.
69 Executive Chair, Chester Engineers, Inc.
EQT Corporation
HFF, Inc.
WESCO International, Inc.
James A.
Norling
69 Chairman of the Board, GlobalFoundries Inc.
Keith Wandell
60 Chairman, President and CEO, Harley-Davidson, Inc.
Constellation Brands, Inc.
Dana Holding Corporation
Jochen Zeitz
48
Chairman of PUMA CEO of PPR Sport & Lifestyle Group
and Chief Security Officer of PPR
Puma AG PPR
Source: Harley-Davidson Inc (HOG: New York). Insiders at Harley Davidson Inc. Bloomberg Businessweek.
The current size of the Harley-Davidson board is slightly large when compared to the advised board size
of six to seven.38 However, each member brings significant diversity and experience to the board
meetings.
Richard Beattie provides Harley-Davidson with several years of legal and military experience. His
background helps Harley-Davidson deal with any corporate law or governance issues. Barry Allen serves
the role of financial advisor at Harley-Davidson as well as that of a decision-maker at other corporations.
Other board members incorporate their knowledge from the financial, retail, and technological boards
they serve on to help the company gain strategic competitiveness in the industry.
International Growth
Any discussion of Harley-Davidson’s future would not be complete without examining its expansion into
India and China, the two BRIC economies with a strong history of motorcycle ownership and enough
income growth to ensure viable target markets.39 After all, moving from Harley-Davidson’s current
position of 32 percent of revenue from international sales to its stated goal of 40 percent by 201440,41
will be challenging. Doing so will require a delicate balance in order to maintain the ethos of HarleyDavidson while simultaneously adapting to local customs and consumer preferences. Nevertheless, it
could be argued that Harley-Davidson is already well on its way in this regard.
For example, just four months after officially entering the Indian market in July 2010, Harley announced
it would build an assembly plant in northern India in order to reduce import tariffs by as much as 80
percent.42 Previously, high tariffs resulted in its models costing twice as much as their U.S. equivalents.43
By only assembling the motorcycles in India, Harley-Davidson is able to satisfy the desire of its
customers in India to purchase an “American” motorcycle by sourcing all the parts from the United
States while significantly increasing its competitive position through lower pricing.
Time will be required to see if Harley-Davidson’s approach in India will achieve the success the firm
seeks. Indeed, Harley-Davidson sold only about 1,000 bikes in India in its first 18 months of operations.44
This level of sales should be considered though within the context of the fact that Harley’s local
assembly plant in India has only been operational for the past 12 months.45 Accordingly, the Indian
market has not been exposed to the lower pricing model for very long and may need some time to
overcome the stigma associated with previously higher prices. For example a mid-level bike used to cost
$27,000, prior to tariff reduction; now, the cost of this product is around $20,000.46, 47 These prices,
while still high by local standards, show that Harley-Davidson is making a concerted effort to cater to the
needs of customers located in developing countries. Such a strategy is essential for long-term viability
given global growth trends and the inevitable shift of income away from Harley-Davidson’s more
traditional western markets. In response to such growth, it has even committed to opening dealerships
in cities like Jaipur and Kochi – cities outside the larger Indian metropolises.48 In this manner, HarleyDavidson will be able to appeal to India’s rural landowners who would like to ride Harley-Davidson’s in
the countryside.49
Unfortunately, Harley-Davidson’s venture into China, the world’s largest motorcycle market, has been
less smooth and illustrates what can happen when a company enters a foreign market without sufficient
background preparation. For example, China currently restricts the use of motorcycles on elevated
highways and major thoroughfares in about 100 cities.50 Import duties can also add as much as 30
percent t...