Business Strategy

Harley-Davidson

Preparing for the Next Century

COMPANY BACKGROUND

Arthur and Walter Davidson and William Harley founded Harley-Davidson in 1903

to build motorcycles in a garage. By 1918 Harled-Davidson became the wolrd’s largest

motorcycle company by producing 28,000 motorcycles. During the 1920s, despite a

sagging economy, Harley-Davidson invested in R&D, experimented with its now famous

V-twin design, built a new-four-cylinder engine, and focused on improving tha reliability

of its machines With the addition of the firm-developed electric starter, ballon tires, front

brakes, and standardized parts, product quality also improved.Post world war II,

company’s sales declined, and Harley-Davidson experienced pressure from imports from

europe. By the mid-1950s became the undisputed leader of the market with over 60%

market share.

During the late 1950s, the U.S market attracted Japanese motorcycle manufatures,

beginning with Honda. Other Japanese firms, Yamaha, Suzuki, and Kawasak, soon

followed. In 1975, Honda introduced the Goldwing, a 1000-cc motorcycle. Industry

reports during at the time described this motorcycle as the most technologically

sophisticated and complex heavyweight motorcycle available on the market. Soon

Kawasaki followed suit with the introduction of its own heavyweight motorcycle. To

Harley-Davidson horror, its share of the heavyweight segment began to decline.

THE PROBLEM

Despite the company’s record growth and earnings during the last decade, a few analyst

began to question whether Harley could maintain such an impressive track record over

the next decade. Then, a few analyst feared a bike glut amd began to question

WHETHER:

1. Harley could meet its long-range goal of selling 400,000 motorcycles by 2007

given the slowdown in cruiser segments

2. It could continue to achieve annual earnings growth in the mid-teens

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3. It could make greater inroads in attracting younger riders and women riders in the

performance segment of the industry

CORPORATE STRATEGY

A. INTERNAL ASSESSMENT

Culture

Strong market position and brand image (S)

Harley Davidson is the only major American motorcycle manufacturer (S)

Structure

Harley Davidson operates in two principal business segment; motorcycles &

related products and financial service (S)

The top Board of Directors for Harley Davidson are all a men (W)

The Harley Owner Groups (HOG) is the industry largest company sponsored

motorcycle enthusiast organization (S)

Resources

Man

- Difficult to attract and retain talented employee (W)

- Unfunded employee post retirement benefits (W)

Material

- Proven product quality (S)

Machine

Harley Davidson is one of the main manufacturer and user of V-Engine

configuration (S)

- Harley Davidson have a wide variety of products according to standard,

performance, Touring & custom (S)

Method

- Strong relationship built on trust and respect with supplier and dealers (S)

- Harley Davidson has a strong marketing department (S)

- CSR (Breast Cancer Network) (S)

- Harley Davidson offers customers the opportunity to customize their bikers (S)

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- More diverse lifestyle, creating many Harley Davidson Clubs and academies

around the globe like Rider’s Edge(S)

Money

- Robust Cash Flow (S)

- Declining financial performance (W)

- Poor credit rating (W)

- High price category (W)

B. EXTERNAL ASSESSMENT

a. PESTEL

Political-Legal

Legislation effects of Helmets for motorcyclist forcing all riders by

law (T)

Alliances with Ford Motor Company or other automobile

manufacturers are possible (O)

International importing tax (T)

The expiration of U.S. government initiatives to stabilize credit

markets programs could have a negative impact on capital markets and

limit the company’s access to capital market funding (T)

Economics

Global recession is effecting economies world wide therefore HD has

to sustain its position in the market (O)

The increase in prices for many key raw material in manufacturing (T)

GDP per capita trend in the past five years is not severe variation (T)

The international heavy weight market is growing and now is larger

than the U.S. heavyweight market (O)

Asian Economy is booming, China or India is the only place not

effected by global recession (O)

Increasing demand for bikers in U.S. markets (O)

High rise in the oil prices (T)

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Social-cultural

Average purchaser of a U.S Harley Davidson motorcycle is a married

male in his mid-forties. (T)

New interest from different demographic groups outside U.S (O)

Younger riders are increasing becoming interested in bikers (O)

Customer value perception through a good quality parts maintaining

loyalty (O)

Technological

More technological advancements because customer looking for

energy efficient and technologically advanced bikes now a day (T)

b. 5 PORTER’S

Threat of New Entrance– Low (T)

We know that Harley Davidson is a major motorcycle in American.

Harley Davidson has a high technology involvement. Harley Davidson

also always produces their product in small scale, so the Harley Davidson

looks exclusive product. And also the switching cost is moderate to high,

so threat of new entrance is so difficult.

Bargaining Power of Buyers– Low (O)

Because Harley Davidson is the luxury product so low power of customer

as they are individual. The dealer of Harley Davidson was not enough. So,

there are high of differentiation and customer loyalty to Harley Davidson.

Threat of Subtitute Product or Service– Low (T)

Very low the bike look like a Harley-Davidson because the Harley

Davidson is a luxury bike so, there are very few substitutes.

Bargaining Power of Suppliers– Medium (O)

The Harley Davidson has consolidated supplier.The Harley Davidson

made by steel, mean that is easy for Harley Davidson to switching

suppliers.

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Rivalry Amongst Competing Firms– High (T)

The Competitor of Harley Davidson is high. We knowa lot of competitor

of Harley Davidson like as Honda, Yamaha, Suzuki, as we know that all

product was produced by Japanese.

IFAS, EFAS and QSPM

IFAS and EFAS that summary showed on Table 1 and Table 2

Table 1 IFAS

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Table 2 EFAS

From the result above (table 1 and 2), we can see that the IFAS method total score

3.36 and the EFAS total score is 2.20 we can plot this result to the directional strategic

matrix, showed on Picture 1.

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Picture 1

From this result we can conclude that the Harley Davidson is a diversification

company. We choose the concentric diversification because the Harley Davidson have a

strong brand and the company was famous although trend suggest that the market for the

Harley Davidson’s products may be maturing. Beside that, the new product is more

competitive.

BUSINESS STRATEGY

In concentric diversification, we can choose the alternative for the Harley Davidson

using QSPM, that are:

1. Product development (differentiation)

2. Overall cost leadership

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Table 3 QSPM

From the result from table 3, we choose product development or differentiation.

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FINANCIAL ANALYSIS

1. Company Highlights

Highlights(in $millions, except per share amounts and other operating data)

2004 2003Total revenue 5.015.190 4.624.274cost of revenue 3.115.655 2.958.708Gross Profit 1.899.535 1.665.566Operating Income 1.361.491 1.149.264Income Before tax 1.379.486 1.166.035Income After tax 889.766 760.928

Total Current Assets 1.207.124 1.001.990Total Assets 5.483.293 4.923.088

Working capital 2.093.576 1.773.354Total Current Liabilities 495.441 324.305Long term liabilities 800.000 670.000Total Liabilities 1.295.441 994.305Total Equity 3.218.471 2.957.692

2. Liquidity ratios

a. Current Ratio

Value 2003 : 3,09

Value 2004 : 2,44 (decrease)

Definition : Harley Davidson has a great amount of assets, it makes their

current ratio is above 1. Even though the amount is decreasing from 2003 to 2004,

but their curret ratio is above 1 its mean company is able to pay their liability.

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current ratio0

0.51

1.52

2.53

3.5

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Business Strategy

2. Leverage Ratios

a. Debt to Equity

Value 2003 : 34%

Value 2004 : 40% (increase 3%)

Definition : Harley Davidson has a great amount of assets, it makes their debt

to equity ratio is below 100%. Even though the amount is increasing from 2003 to

2004, but still they’re a less-levered corporation, because the ratio is still below

100%.

3. Activity Ratios

a. Total Assets Turnover

Value 2003 : 0,94

Value 2004 : 0,91 (decrease)

Definition : Harley Davidson shows the decreasing value of total asset

turnover from 2003 to 2004, this shows indicates maybe the company not

efficiency uses their assets to generate sales.

4. Debts Ratio

a. Debt Ratio

Value 2003 : 0,20

Value 2004 : 0,24 (increase)

Definition : Harley Davidson has a great amount of assets, it makes their debt

ratio is below 1. Even though the amount is increasing from 2003 to 2004, but still

they might not have a liquidity problem, because the ratio is still below 1.

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debt to equity30%

32%

34%

36%

38%

40%

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Business Strategy

5. Profitability Ratio

a. Gross Profit Margins

Value 2003 : 36%

Value 2004 : 38% (increase)

Definition : Harley Davidson shows the increasing value of gross profit

margins. The gross profit margin show us that the company increasing of revenue

from 2003 to 2004.

b. Net Profit Margins

Value 2003 : 45,7%

Value 2004 : 46,8% (increase)

Definition : Harley Davidson has a success sale, the net profit margin show us

that the company have a great value of sales remaining after it’s all cost and

expenses. The value is also increasing from 2003 to 2004.

c. Operating Profit Margin

Value 2003 : 25%

Value 2004 : 27% (increase)

Definition : Harley Davidson has an increasing value of operating profit. This

shows us that the company have a great the operating income.

d. Return On Equity

Value 2003 : 26%

Value 2004 : 28% (increase)

Definition : Harley Davidson has a decreasing rate of return/book values of

shareholder's investment from 2003 to 2004. The return on equity shows us that

the company increasing of profit margin from 2003 to 2004.

e. Return On Investment

Value 2003 : 15%

Value 2004 : 16% (increase)

Definition : Harley Davidson has an increasing Rate of return on assets used

in the company from 2003 to 2004

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CONCLUSION FROM FINANCIAL ANALYSIS

Current ratio at Harley Davidson is OK because it has a value above 1. This

shows that the company is able to pay all its debts. And Harley Davidson also has a great

amount of assets, it makes their debt to equity ratio is below 100%. That’s mean they’re a

less-levered corporation, because the ratio is still below 100%.

Total asset turnover at Harley Davidson is not good. Harley Davidson shows the

decreasing value of total asset turnover. Maybe the company not efficiency uses their

assets to generate sales.

Debt Ratio at Harley Davidson is increasing from 2005 to 2006, that’s mean the

company is unable to pay their debts. This shows indicates the company has a great

amount of assets, it makes their debt ratio is below 1. But even though the company's

debt ratio less than 1, the company still had to raise it.

Overall for profitability ratio is increase from 2003 to 2004. This shows, it might

be the increase in profit margin from 2003 to 2004 resulting in an increase profit.

In our opinion Harley Davidson has a great financial. If we look the financial

statement of Harley Davidson, then the company should expand their business to

preparing for the next century. And moreover that Harley Davidson also should to retain

their customer and focus on American market.

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Gross Profit Margin

Net profit margins

Operating profit margin

Return on equity

Return on investment

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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Business Strategy

FUNCTIONAL STRATEGY

We make functional strategy through TOWS Matrix. TOWS matrix showed on

Table 4.

Table 4 TOWS Matrix

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After analysis strategies according to TOWS Matrix, the functional strategy generates

from the TOWS matrix, as follows:

1. Marketing

a. Market Penetration.b. Increase amount of dealer or after sales service.c. Differentiation or product development.d. Develop brand community to increase brand awareness.e. Market research according to The Men's View for the next product

development.f. Expand market to increase financial performances.g. Increase service in dealers.

2. Financiala. Carefully consider financing method using long-term debt.b. Closing Financial Service Unit.c. Strategic alliances with other company.d. Buttress business related product and financial service to support R&D.e. Safety Helmet Campaign.

3. Operationala. Proposed "Special" Price to the consolidated supplier.b. Sustain improvement quality to compete with import.c. Vertical integration approach for Supply Chain management.

4. Human Resourcesa. Reward system for talented employee (especially to handle legislation

effect)b. Outsourcing method for R&D for employee post retirement benefits.

Implementation Organizational Life Cycle

Just like a living being progresses through growth stages, organizations and businesses

advance through predictable stages of development. A leader who wants to grow an

organization or business can have a better understanding of his organization's needs by

knowing his company's stage of development. According to the analysis we conduct

before using external and internal analysis of Harley Davidson. The result indicates that

Harley Davidson is in the Stage II Growth phase.

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Implementation of Planning

After choosing the best business strategy planning, and the allocation of the functional

strategies to provide this plan, next step is explanation about the implementation of the

planning. Harley Davidson implementation of planning is as the table show:

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Stage I Stage II Stage III Stage IV Stage VINTRODUCTION GROWTH MATURITY DECLINE DEATH

Market growth rate Low Very large Low to moderate Negative

Number of segments Very few Some Many Few

Intensity of competition Low Increasing Very intense Changing

Horizontal Growth Concentric DiversificationVertical Growth Conglomerate Diversification

Differentiation Overall Cost LeadershipOverall Cost Leadership Focus

Emphasis on product design Low Low to moderate High Low

Liquidation or Bankruptcy

Dismemberment of structureDecentralization into profit or investment centers

Structural Surgery

Major functional area(s) of concern

R & D Sales and marketing ProductionGeneral management and finance

Business Strategy Differentiation Differentiation

Likely structure Entrepreneur dominated Functional management emphasized

Corporate Strategy Concentration in a niche Profit strategy followed by Retrenchment

Overall objective Increase market awareness Create consumer demand Defend market share and extend PLC

Consolidate, maintain, harvest or exit

Objective Strategy Program

Increase Sales Market penetration Increase amount of dealer or after sales service Diferentiation or Product DevelopmentMarket research to next trend from

Increase Brand Awareness Develop brand community Increase Financial Performance Expand market

Increase Credit Rating Debt Strategy Selective to long-term debt Increase Financial Performance Assets management strategy Strategic alliances

Buttress business related product and financial service to support R&D Closing the Financial Service

Increase Brand Awareness CSR Safety Helmet Campaign

Reducing raw material cost Consolidated Sourcing strategy Proposed "Special" Price with the consolidated supplier

Reducing raw material cost Control Supply Chain Management Vertical IntegrationContinous improvement quality Human ResourcesTo handle legislation effect Compensation Strategy Reward system for talented employee Increasing Financial performance Recruitment Strategy Outsourcing for R&D for employee post

retirement benefits

Marketing Strategy

Financial Strategy

Operational Strategy

FUNCTIONAL STRATEGY

Business Strategy

Matching manager to the strategy

Executive type is Executives with a particular mix of skills and experiences. Harley

Davidson needs Dynamic Industry Expert

Action Planning-Estimated Timeline-Staffing

After we conduct the implementation of planning, then we identify the estimated timeline and the functional staff that responsible for each program.

Assessing strategy-culture compatibility

Current Cultures in Harley Davidson:

Strong market position and brand image.

Harley Davidson is the only major American motorcycle manufacturer.

The current culture of the company is still compatible and supported the planned strategy.

Harley Davidson as the only major American motorcycle manufacturer can motivate

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Business Strength/Competitive Position

Ind

ust

ry

Att

rac

tiv

ene

ss

AverageStrong

Growth—Concentration

Dynamic Industry Expert

Stability

Cautious Profit Planner

Retrenchment—Save Company

Turnaround Specialist

Weak

Growth—Diversification

Analytical Portfolio Manager

Objective Program Timeline StaffingIncrease Sales Increase amount of dealer or after sales service 1-5 years Marketing, Operational, HR & Finance

Market research to next trend from men's view 3-6 Months MarketingIncrease Brand Awareness Develop brand community 3 Months Marketing

Safety Helmet Campaign 6-12 Months Marketing & FinanceIncrease Financial Performance Expand market 1-5 Years Marketing & Finance

Strategic alliances 1 Year Finance & OperationalClosing the Financial Service 3-12 Months Finance & HRButtress business related product and financial service to support R&D

1 Year Finance & R&D

Outsourcing for R&D for employee post retirement benefits

6 Months Human Resources

Increase Credit Rating Selective to long-term debt 1 Months Finance

Reducing raw material costProposed "Special" Price with the consolidated supplier

2-4 Weeks Operational

Vertical Integration 1-2 Years Operational & Finance

Continous improvement quality Vertical Integration 1-2 Years Operational & Finance

Business Strategy

Harley Davidson employees to give their best efforts as a commitment for reducing raw

material costs and continuous improvement quality. This action will give positive impacts

and strong market position and brand image of “Harley Davidson” will help increasing

brand awareness in the new and existing market that will lead to increase sale and finally

improvement in financial performance and also fix the company credit rating.

Organizational Structure

Next, those successful at implementing strategy give thought to their organizational

structure. The organization has to consider and ask if the intended strategy fits their

current structure. And ask a deeper question as well, "Is the organization's current

structure appropriate to the intended strategy?".

In Harley Davidson the structure of the organization operates in two principal business

segment; motorcycles & related products and financial service. This structure is not

appropriate anymore because we consider to liquidation the financial service, because the

business inefficiency, the regulatory from the US government that initiatives to stabilize

credit markets programs could have a negative impact on capital markets and limit the

company’s access to capital market funding.

Human Resource Factors

Organizations successful at strategy implementation consider the human resource factor

in making strategies happen. In order to provide this implementation and make it

successfully happen, Harley Davidson using outsources staff for reduce the amount of

potential loss of the unfunded retirement plan. Harley Davidson must be carefully

thinking, because this kind of action can make the company loss, the employee upset and

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lead into intention to do some frauds. Harley Davidson can allocate their employees from

the financing unit to Harley Davidson motorcycle business according to their ability and

trained the key personals to improve their capabilities.

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