Victory motorcycles headquarters

This case was written by Michelle L. Stotts, Dr. Charles B. Shrader and Dr. Samuel M. DeMarie, all of the Department of Management, College of Business, Iowa State University, January 6, 2011. It is intended to be used as a basis for classroom discussion rather than as a demonstration of either effective or ineffective management of a situation. Some of the opening and closing managerial situations included in the case are fictional and are for illustrative purposes only.

Michelle L. Stotts, Charles B. Shrader and Samuel M. DeMarie

Victory: The New American Motorcycle Celebrates Its First Decade on the Road

Now that we are in our 10th year and have a fairly complete line of premium cruiser and touring motorcycles, it is clear what we stand for, and who we appeal to most. Victory stands for class-leading quality, innovation and style. Victory is American and new- always looking forward. We are all about the future of American motorcycles.

- Mark Blackwell, Victory Vice President1 Mark Blackwell, vice president in charge of Victory Motorcycle at Polaris Industries, glanced up at company headquarters in Medina, Minnesota as he pulled his gleaming cruiser into the parking lot. An accomplished rider himself, winning the national 500cc motocross championship and being inducted into the American Motorcycle Association’s Hall of Fame, he knew his company’s bikes had come pretty far since they were first introduced to the riding public in 1998. With the development of the new Vision, a luxury touring bike, and the steady release of aggressively-styled cruisers, the company had continually innovated throughout its first decade in business. Yet Blackwell pondered the recurring questions facing Victory Motorcycles and Polaris. He wondered if the initial decision to diversify into heavyweight motorcycles was the right road to take. He realized Polaris took a big risk by moving into motorcycles and going up against the recognized powerhouses in the industry. He questioned if Victory could continue successfully competing against the Japanese giants, new energetic and innovative motorcycle companies, and their closest rival Harley-Davidson. Victory began making motorcycles in 1998. From 1998 to 2006 Polaris had invested over $100 million in motorcycle development and by 2006 the division was profitable for the first time. Victory sales were $113 million, 7 per cent of company sales for that year.2 In 2009 Victory Motorcycles celebrated its first decade in the motorcycle business, but a global recession led to poor sales, corporate restructuring, and company-wide layoffs. In that year Polaris, Victory’s parent company, announced a new ‘on-road’ vehicle division of which Victory would be part.

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Mike Jonikas was appointed as vice president of the new division and Blackwell as vice president of Polaris’ present and future motorcycle business.3 Both Jonikas and Blackwell reported directly to Polaris Chief Operating officer, Bennett Morgan. Jonikas and Blackwell knew Victory needed to maintain the high level of quality engineering throughout their production processes. If Victory was to be a successful brand with high demand, it needed to be able to meet customer expectations and not fall behind in terms of innovation like its main heavyweight competitor- Harley-Davidson. Victory mangers also needed to consider whether it was a good decision to limit sales of Victory motorcycles to Polaris dealerships. Their intent was to monitor quality; but were they simultaneously losing potential business?

At ten years Victory could still call itself a new motorcycle brand. The challenge was how to continue to innovate and grow in a difficult market segment. The need to examine the motorcycle division’s strategy seemed imperative. POLARIS INDUSTRIES, Inc. Polaris Industries, Inc. designed, engineered and manufactured snowmobiles, all terrain recreational and utility vehicles (ATVs), motorcycles and personal watercraft (PWC), on and off- road vehicles, and low emission vehicles; and marketed them, together with related replacement parts, garments and accessories (PG&A) through dealers and distributors principally located in the United States, Canada and Europe.

4 The garment and accessory items included helmets,

boots, T-shirts, sweat pants, touring luggage and trailers. 5 The company was widely known as

the world's largest manufacturer of snowmobiles and one of the biggest makers of all-terrain vehicles and personal watercrafts in the United States.

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In 1954 Polaris produced its first snowmobile under co-founder and former CEO Alan Hetteen.

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Textron, Inc. bought Polaris from its original Roseau, Minnesota ownership group in 1968. 7

Then in 1981, Textron, Inc. sold the Polaris division to a group of private investors led by W. Hall Wendel Jr., a Textron division head.

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The snowmobile business kept the Roseau, Minnesota plant busy six months out of the year but company managers wanted to figure out how to fill the other six months, so they extensively surveyed their snowmobiler customer base and decided in 1985 to diversify and produce all terrain vehicles (ATVs).

7 The company once again diversified by manufacturing personal

watercrafts (PWC) in 1992, and eventually became a world leader in both ATV and PWC production and sales. In 1987 Polaris became a publicly traded company.

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To facilitate its operations, Polaris owned these properties: 5

• Minneapolis, Minnesota - 92,000 square feet leased headquarters and warehouse plus 13,000 square foot of office space.

• Roseau, Minnesota - 509,000 square feet facility on 100 acres for principal engineering and manufacturing. This is the place where the company was founded in the 1950s. Polaris broke ground for a 58,000 square feet plastic injection molding facility at this site.

• Osceola, Wisconsin - 190,000 square feet on 38 acres for fabricating facility and 90,000 square feet for engines

• Spirit Lake, Iowa - 223,000 square feet on 24 acres to assemble PWCs, certain ATV models and motorcycles

• Winnipeg, Manitoba - 42,000 square feet leased office and warehouse space • Vermillion, South Dakota - 259,000 square feet on 50 acres for parts, garments and

accessories distribution center As a result of its diversification strategy, Polaris was able to manufacture products all year. Snowmobile manufacturing took place in the spring through late autumn or early winter and personal watercraft were manufactured during the fall, winter and spring months. Polaris has had the ability to manufacture ATVs year round since May 1993. ATV production starts in late autumn and continues through early autumn of the following year.

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Because of the seasonality of the Polaris products and associated production cycles, total employment levels varied throughout the year. Approximately 3,000 individuals were employed by the company. Polaris' employees have not been represented by a union since July 1982. The company announced layoffs in their Osceola, Wisconsin plant in early 2011 due to the recession.9

EXPANSION INTO MOTORCYCLES7,10

Matt Parks joined Polaris in 1987 as a district sales manager for California, Nevada, and Arizona to develop the dealer network. He was named ATV product manager in 1992 and earned a spot at the company's headquarters. W. Hall Wendel Jr. asked him to do research on prospective acquisitions or expansions. Parks, with the additional title of general manager of new products, considered such things as go-karts, golf carts, lawn-and-garden products, chain saws, and Hula- Hoops by investigating the various industries in terms of competition, size, level of service, and new trends. Parks and others studied the off-road motorcycle market when two dirt bike companies were put up for sale. Then a European motorcycle company asked to distribute their bikes through Polaris. "That sparked a study of the motorcycle business that uncovered signs of a promising market. Along with the dirt bike research, we did a quick study of the street bike business at that time, and we were kind of interested. We thought, 'You know, this makes some sense," recalls Parks.

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In 1993, Polaris distributed over 300,000 surveys through the company's Spirit magazine for Polaris vehicle owners to measure the readers' interest in buying a wide variety of products from Polaris. "Motorcycling did really, really well [in the survey]," said Matt Parks.

12 The survey

results were personally interesting to Parks since he was a lifetime motorcycle rider and owned several motorcycles, including a '74 Norton, '66 and '91 BMWs, a '77 Harley XLCR and an '81 Ducati. Motorcycles also caught the interest of Wendel who at the time owned a Harley- Davidson.

In pursuing the possibility of motorcycle production, Victory became the project's confidential codename. Parks came up with the name because it was a nonsensical name with positive connotations. "It's 'V' for victory. It's nostalgic; it has World War II connotations."

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Parks along with Bob Nygaard, Snowmobile Division General Manager, proceeded with investigating the motorcycle production possibility by hiring two outside firms to assist them in conducting further confidential research on motorcycles. They chose McKinsey and Company, one of the largest and most prestigious consulting firms in the world, and Jerry Stahl, an advertising executive who was very familiar with recreational motorsports and the motorcycle business. Stahl also had experience with Harley-Davidson's advertising campaigns. From May through August of 1993, Parks & Nygaard assessed the Polaris infrastructure, including the company's sales force, dealer network, service and warranty operation, and parts and accessories division. They also looked at Polaris’ current customers to see what types of things they were interested in and whether they would buy a motorcycle from Polaris. Polaris analysts and consultants also analyzed statistics from the Motorcycle Industry Council (MIC) in terms of the location, displacement, and types of bikes sold in the industry. The research showed there was industry capacity for another manufacturer in the cruiser business. The research also revealed that Polaris dealers would like to have on-road motorcycles to sell. Consultants believed that a functionally superior cruiser built in America could find competitive space between Harley-Davidson and the Japanese producers. "We focused in on Harley and the Japanese manufacturers and said to ourselves, 'Is Harley vulnerable from any standpoint?' We thought that their costs were high," Nygaard said. "We thought that, based on re-engineering the Harley bike, we could build it for less money. We felt that customers were waiting too long to take delivery of their Harleys, and they (Harley-Davidson) were vulnerable from that standpoint. We could get to market with a bike that we could make money, and the heavy cruiser end of it was certainly what we wanted to target because that's where the (sales) numbers were, and that's where the (profit) margin was. It was the best fit for us, in that the Japanese were vulnerable there. They really hadn't been able to tackle Harley, because it might look like a Harley, but the real rider knew that it wasn't an American-made bike from an American manufacturer. We were close (at the time) to being in the domestic engine business,

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and we could build our own U.S. engine, and that gave us a major leg up on the Japanese. We were an American company."

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"The result of the study was, believe it or not, yes, there was a tremendous opportunity in the motorcycle market," Parks said. "It's not the off-road motorcycle market; it's the on-road motorcycle market, and the entry point, the best entry point, would be in the cruiser market."14 Cruisers were defined as stripped-down versions of heavyweight touring bikes that were intended for leisurely travel. Research showed that many cruiser owners immediately replaced many components, such as brakes, seats, wheels, vibration-adsorption devices, frame stiffeners, and intake systems on their brand-new motorcycles. This was interpreted as an opportunity to fulfill demand created by undershot customers in the market. Polaris had experience producing recreational vehicles for over 44 years. It had the engineering talent and production capabilities to design and produce distinctly different vehicle lines – snowmobiles, ATVs, and personal watercraft - and produce its own engines for many of those vehicles. Parks said the study showed “the manufacturing capabilities and technological know- how required to produce cruisers seemed within Polaris' grasp.”14 “My biggest concern was: Let me sell against price, let me sell against features and benefits, let me sell against more advertising, and I can find ways to do that," Nygaard said. "Help me to sell against the lifestyle, with loyalty that is as passionate as I've ever seen on any product (Harley-Davidson). To sell against an image is very, very difficult, and that was my biggest concern."

15 In August 1993, the

officer group gave the okay to continue with the study to see if it fit with existing manufacturing systems and if it could make money. VICTORY MOTORCYCLE DEVELOPMENT7,10

An early decision was to determine which parts to make or buy. Dapper and Klancher explained that “they bought a Honda Shadow and a Harley-Davidson FXRS, took them completely apart, weighed, measured and estimated the cost of every single part, and determined for each part whether they would make it or buy it.”15 After figuring manufacturer, dealer, profits and sales volumes, the consultants and managers felt there was a good opportunity in the motorcycle business, and in February 1994 the officers group gave the okay to move forward and build a prototype. A major boost to the motorcycle development occurred in September 1994 when Geoff Burgess agreed to lead the Victory team. His extensive motorcycle industry experiences and his emphasis on thorough analysis and design work set the direction for the Victory development. The Victory team took a very thorough, methodical, and analytical approach to research and development so the program didn't waste time, money, or valuable resources. Extensive

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computer-aided design was employed in building a prototype. "A lot of up-front thinking has saved us a lot of time on the back end," explained Matt Parks.

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The Victory team began an in-depth benchmarking study by obtaining and extensively road- testing a fleet of the competitors’ cruisers in Minnesota, Tennessee and Arizona. The Yamaha Royal Star and Virago, Honda Shadow ACE and Valkyrie, Harley-Davidson Road King, Ducati Monster and BMW R1100RS were evaluated, compared, and ranked. The goal was not to copy the competition but to find the benchmarks for building a superior cruiser. The cost of producing the best features was also analyzed to ensure they could produce the motorcycle within their target price range. The Victory team contacted Dunlop, manufacturer and tire supplier of Polaris ATVs, to obtain information about motorcycle tires. Steve Paulos, a Dunlop test technician with an impressive motorcycle industry background, assisted the Victory team by sharing competitors' development and production process information. He accompanied the Victory team to Arizona and shared valuable insights about the benchmarked bikes. In the early stages of the motorcycle project, the Victory staff determined the bike must excel in two key performance areas - handling and power. Marketing studies told Matt Parks that the engine had to be a big V-twin, and it had to be U.S.-made; an American company like Polaris couldn't import the engine for a bike whose targeted buyers represented the red, white, and blue image of the cruiser culture. The group felt that the motorcycle needed to have its own signature engine. Talks with consulting firms with power-plant expertise convinced the Polaris team that designing an engine would provide experience curve benefits that would become valuable when Victory Motorcycles broadened its model line to include other classes of bikes in the future. This fit well with Polaris' considerations of starting its own engine manufacturing operation. Geoff Burgess first laid out the parameters for the Victory V92C engine in November 1994. Victory engineers refined the design, and in February 1995 a concept drawing was created. In March 1995 Polaris engineering department visited England's Lotus, Cosworth and Triumph plant, Italy's Ducati and Aprilia plant, and Germany's BMW operation. The team also benchmarked engines made by Fuji, Kawasaki motorcycles and the Dodge Neon for manufacturing and assembly ideas. From the Arizona test, the Victory team determined it should build a bigger engine than the competition. This would also give it bragging rights for the biggest cruiser engine with the most horsepower on the market. The Arizona tests helped define handling goals as a top priority, so much so that chassis’ and frames were designed as desired, then the engine was reconfigured to fit in the available space in the frame.

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The Arizona tests also convinced the team that the Victory engine should be oil-cooled. Since rows of cooling fins are an essential part of the cruiser look, the idea of using liquid cooling was rejected. Instead a system was designed that circulates extra volumes of oil to enhance the fins' cooling effect. Steve Weinzierl, who has deep knowledge of aircraft-engineering history, strapped a Czech-built Velorex sidecar onto a prototype Victory bike and took it to Death Valley, California, for worst-case cooling trials. At temperatures of 121 degrees Fahrenheit, he pulled within ten inches of the Victory going 90 miles per hour, and handed the rider in the sidecar the wires from the thermocouple to test the cooling data. This method was used to test and enhance engine thermal stability. Once the team had collected and analyzed loads of chassis data, "Francis the Mule," a crude prototype was created in May 1995. It was built with interchangeable clamps and drilled metal brackets so selected components, such as its wheel base, steering-head angle, and rear- suspension geometry, could be mounted in varied positions and adjusted accordingly. The team could test one thing at a time and meticulously evaluate the changes subsequent test rides. They also used the Mule to focus on the chassis because it was a priority to achieve the Victory ride and handling. After hundreds of hours riding around on Frances and obtaining some assistance from Polaris engineers on the frame and chassis, the team agreed on a chassis design. Their analysis helped reduce the weight of the frame by 20 pounds over the original prototype. In addition, the Victory team sought larger suspension forks to ensure that the chassis would have the desired rigidity and earn bragging rights for the biggest forks on the market. Some elements of the V92C design were dictated by customer demand. It had to have some traits that are popular with, and familiar to, cruiser enthusiasts. Styling dictated a triangular rear swing-arm that mocked the "hard-tail" look of the unsuspended bikes of the 1940s. A single shock mounted underneath the seat included an aluminum sub-frame supporting the seat and rear fender. They determined that a high-quality Fox shock was to be a standard feature. Polaris still owns several rear suspension patents as a result. In May 1995, Mark Bader, who was familiar with compact, high-performance engines, was hired to lead the engine design staff. One of the first engine mock-ups was made from paper. Created from CAD drawings using the Victory rapid-prototyping machine, it was made of thousands of precisely cut pieces of paper glued together. These computer-generated mock-ups allow parts to be generated and test-fit without excessive costs. The first engine prototype via computer-aided- design consisted of a tall, 1,507-cc V-twin with a 55-degree angle between its cylinders. This was too big to fit the frame so the angle was narrowed to 50 degrees. After the frame and chassis was developed, the engine had to be shrunk. It seemed backwards to fit the engine to the frame and chassis, but Burgess felt it was appropriate for the V92C in order to deliver the ride and handling they wanted instead of the engine size determining the bike's size and layout. In addition, they decided to solid-mount the engine and utilize it as a stressed member or supportive

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of the frame and relatively more integral to the bike as a whole. The handling was greatly increased. To develop the crankshaft, the team also benchmarked the performance of competitors' bikes. The Polaris team also considered using Harley-style cylinder heads with push rods operating the valves, but they decided on a more modern overhead-camshaft design. The Victory team found that it could eliminate virtually all traces of that vibration, but it refused to do so because they felt it was a trademark of a cruiser. They had to determine the proper balance of vibration. Cruisers are supposed to have vibration. As described by Dapper and Klancher, "In the perfect world, there is imperfection. Without it, things just don't seem right. Motorcycles need to have personality; a little rumble here and tingle there lets you know that the machine underneath you is alive and kicking."

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The braking system was a concern of the Victory team and they set out to develop braking similar to high-performance sport bikes, rather than what's typically on cruisers. They chose Brembo hardware and worked with Brembo technicians to develop the desired feel and responsiveness. In addition, the Victory team decided to make its own master brake cylinder. The Victory motorcycle team continued with numerous rigorous tests of the engine, chassis, and other components. The first prototype bikes with Victory engines were known as C bikes and an early prototype cost approximately $250,000 to build. On November 7, 1996, the Victory concept bike C-1 (engine and chassis together for its first test ride) was first ridden at the Osceola, Wisconsin municipal airport. Eighteen people witnessed the event. VICTORY BECOMES A REALITY7,10 Finally, on February 19, 1997, Polaris issued a press release announcing that it would be entering the motorcycle market. On June 26, 1997, the Victory was rolled out to the press at Planet Hollywood in the Mall of America in Bloomington, Minnesota. Al Unser Jr. rode a preproduction bike into the restaurant, and Victory team members fielded questions about the new bike. The next day, editors from several motorcycle magazines met the Victory staff in Osceola, Wisconsin to learn more about the new American motorcycle. Since the announcement the Victory motorcycle has received universally positive reviews in the motorcycle press. It has also received coverage in newspapers such as the Wall Street Journal, New York Times, and USA Today. Matt Parks has appeared on CNN and CNBC television networks promoting the bike. In August 1997, Victory made an appearance at the 57th annual Sturgis Rally & Races in South Dakota. Demonstration rides sponsored by dealers were given for the first time during January 1998 in Palm Springs, California. Over 200 motorcyclists received demo rides on preproduction prototypes of Victory motorcycles during Daytona Bike Week in March 1998. After taking the bikes for a ride, experiencing street speeds, corners and

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brakes, riders were given a questionnaire and interviewed by the Victory marketing staff. The riders' feedback indicated the bikes delivered outstanding handling and power. The Victory staff also made a few adjustments to the motorcycle based on customer feedback.

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The Victory team felt the bike was ready to roll and named the first model the V92C. "V" stood for the V-twin engine, "92" for the engine's 92-cubic inch displacement, and "C" indicated cruiser. The V92C had the stiffest frame of any cruiser on the market (as stiff as some sport bikes), and utilized the engine as a stressed member (fundamental component) of the frame for increased strength and rigidity. Complementing the stiff frame were its large 45mm diameter fork tubes with a rear suspension incorporating a stiff triangulated swing-arm controlled by a single shock absorber under the seat. The Victory V92C delivered up to 50% more horsepower than any of its direct competitors. Victory motorcycles were first produced in “Knock-Your- Socks-Off Blue” or “Antares Red.” "The first Victory V92C motorcycles rolled off the assembly line at the Polaris plant in Spirit Lake, Iowa on the Fourth of July, 1998 just over a year after unveiling the prototype."

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Previously, in May 1998, Cycle World, the largest motorcycle magazine in North America, selected the Victory motorcycle as the "Best Cruiser of 1998" before the first bike was available to consumers.