More than a motorcycle the leadership journey at harley davidson

212 Part 2 Strategy Content and Formulation for Multinational Companies
United States and overseas, this program puts riders on factory-maintained Harleys for guided tours. Included in the tour are some meals, lodging, and a support vehicle to carry the heavy luggage and take care of any mechanical malfunctions. A lot of develop­ ment ideas come from bike-riding employees and from employee attendance at the Harley rallies that are held around the country. Harley riders traditionally custom­ ize their bikes, and this practice led H-D to offer cus­ tom bikes in 1998. This ongoing product group allows buyers to alter their factory bikes with a wide range of accessories and paint. With an average of $9,000 in extras, these bikes go for more than $27,000 and carry a 40 percent profit margin. Delivery time for the factory-custom bikes can run up to year. The com­ pany's marketing efforts were recognized when H-D was inducted into the 2001 Marketing Hall of Fame. Their selection was based on "an outstanding job of building and sustaining their brand through smart marketing" (http://proquest.umi.com). The honor rec­ ognized what Harley followers have known for years: Brand equity plus superior manufacturing has positioned H-D as the elite manufacturer in the North American motorcycle market.

H-D Distribution H-D products are sold through a

network of 686 independently owned full-service deal­ erships in the United States. The company maintains a European headquarters in England. Dealerships can be found in 36 European, Middle Eastern, and African countries, in 8 Asian countries, and in 15 Latin America countries. Most dealerships sell only H-D and Buell products.

Uke's H-D/Buell dealership in Kenosha, Wisconsin, is fairly typical of Harley dealers. Uke's recently com­ pleted a new 54,000-square-foot facility alongside 1-94. What may be unique to Uke's is a six-story glass tower that displays custom bikes like jewels in a show­ case. The new building features a 15,000-square-foot showroom and a 10,000-square-foot service area. The basement is given over to the winter storage of custo­ mer's bikes, while the second-floor mezzanine houses a museum and art gallery. The architectural firm of Kubala Washatko of Cedarburg, Wisconsin, designed the new facity. Kubala Washatko has designed doz­ ens of Harley dealerships around the United States.

H-D Research and Development H-D believes

research and development is a key component of its ability to lead the touring bike market. The company maintains a 409,000-square -foot product develop­ ment center and a separate 79,000-square-foot development center for the Buell product line. The product development centers are staffed with

Harley-Davidson Dealership ocations in 2007
( Country/Region United States Canada Europe All other Total ) ( H-D/Buell Dealerships 684 74 370 240 1,368 )

employees from styling, purchasing, and manufactur­ ing, as well as supplier representatives. The practice is consistent with H-D's commitment to quality manage­ ment and results in seamless product development. Due to the increasing prevalence of environmental and safety regulations, the product development cen­ ters are staffed with professionals specializing in the regulatory process. The company has sought to be proactive in meeting environmental and safety regula­ tions in both its products and facilities. The company spent $163.5 million in 2008, $185.5 million in 2007, and $177.7 million in 2006 on product development.

The company's products are in compliance with all current federal and state emission and noise stan­ dards. H-D has made the investment necessary to comply with the Environmental Protection Agency's tailpipe emission standards that became effective in 2010. A more pressing problem for H-D may come from more stringent noise standards in the European Union and Japan. Such standards may interfere with one of Harley's most sacred traditions: the bike's dis­ tinctive, and loud, exhaust.

H-D Motorcycle Unit According to H-D:

The total on-highway motorcycle market, including the heavyweight portion of the market, is com­ prised of the following four segments:

· standard (emphasizes simplicity and cost)

· performance (emphasizes handling and accel­ eration)

· custom (emphasizes styling and individual owner customization)

· touring (emphasizes comfort and amenities for long-distance travel) (2008 Form 10-K)

The company currently addresses all categories with its offerings from the MV Agusta line in the per­ formance segment, with the Buell lineup in the stan­ dard and performance segments, and with H-D offerings in the standard, performance, touring, and

Chapter 5 Strategic Management in the Multinational Company 213
custom segments. The larger displacement custom and touring models are the most profitable for the company.

The company's motorcycle unit consists of H-D

Motor Company, the Buell Motorcycle.Company, and MV Agusta. The motorcycle unit designs, manufac­ tures, and markets primarily heavyweight bikes, as well as motorcycle parts, accessories, and merchan­ dise. The company is the only major U.S. manufacturer of motorcycles and has led the heavyweight market since going public in 1986. The Motorcycle Industry Council figures give H-D a 45.5 percent share of the domestic heavyweight market for 2008. For some years the motorcycle unit generated about 80.0 percent of the total net sales of Harley-Davidson, Inc.

Harley's heavyweight bikes are, by the company's own definition, more than 650 cc of engine displace­ ment. The company currently markets 33 models of performance, touring, and custom bikes with sug­ gested retail prices up to $29,999 for a limited­ edition factory-customized model. These bikes are built on five basic chassis designs (Softail, Sportster, Dyna Glide, Touring, and the VRSC, or V-Rod) and are powered by one of four 45-degree V-twin air-cooled engines ranging from 883 cc to a huge 1803-cc brute (the V-Rod utilizes a liquid-cooled engine). The com­ pany pioneered the touring heavyweight motorcycle, and this segment includes well-equipped bikes with fairings, windshields, and luggage carriers. The custom segment includes the retro-look bikes that are typically highly customized through the use of chrome, paint, and accessories. These bikes sell for prices that are about 50 percent higher than competitors' compara­ ble models.

The V-Rod or VRSC model is the first in a new series of bikes aimed at the performance cafo racer market. The VRSC shares nothing with existing .bikes and is equipped with the Porsche-designed, liquid­ cooled, 60-degree V-twin, 1130-cc, 110+-hp, Revo­ lution engine. It is the most expensive development project in the company's history, but H-D has not revealed the numbers. The VRSC model has met grudging acceptance at best with H-D's traditional buyers, but has done well with nontraditional buyers and the international market. Harley's previous foray into the performance segment with its Buell line of motorcycles has met with only limited success.

H-D manufactured and shipped 303,479 motor­ cycles in 2008 down from 330,619 in 2007. About half of all bikes on the road are Harley's big street cruisers, like the Softail, that sell for about $18,000 . Around 30 percent are the true heavyweight touring

machines; equipped with fiberglass saddlebags, CD players, radios, and cruise control, these bikes sell for $20,000 or more. The remaining bikes are mostly the $7,000-or-more Sportsters; with ongoing cos­ metic upgrades, the Sportster remains Harley's oldest and most affordable model.

H-D Parts and Accessories Parts and accesso­ ries include genuine H-D replacement parts and cos­ metic bike accessories. Parts and accessories comprised 15.4 percent of sales in the motorcycle segment in 2008. This segment includes general mer­ chandise, an area encompassing such items as clothes and collectibles. Around the country are

80 dealerships with shops that feature H-D clothes and collectibles, as well as an additional 52 Harley stores in malls, airports, and vacation destinations and another 20 seasonal shops. General merchandise constitutes 5.6 percent of sales in the motorcycle seg­ ment. While general merchandise· is a small entry on H-D's income statement, it is an important form of advertising and a major player in the company's quest to turn the brand into a lifestyle. H-D licenses its name and logo for such items as T-shirts, jewelry, and toys. The company believes that licensing is a useful tool for promotion and routinely polices the unauthorized use of its name and logo. Royalty reven­ ues totaled $45.4 million in 2008. While royalties are not great, the margins are high.

H-D Financial Services Unit The 700 employees

of HDFS engage in the financing of dealer inventories and retail consumer installment sales contracts. The growth area in this market appears to be in the financ­ ing of new motorcycles. During 2008, 53.5 percent of all new H-D motorcycles retailed in the United States were financed by HDFS, up from 40 percent in 2004. H-D also reports that it provided financing to 95 per­ cent of its dealers in 2008. Operating income from financial services was $82,765,000 in 2008, down

61 percent from 2007. While most of its business is directed at H-D dealers and the dealer's customers, Financial Services also provides financing for noncom­ mercial aircraft, as well as broker's insurance and ser­ vice contracts for motorcycle owners.

H-D Financial Statements

In the face of the 2008-2009 recession, H-D's net profit remained strong but significantly off the 2006 high of $1,043,153. Profits in 2008 were $654,718, down 37 percent from 2006. The company has rela­ tively little debt. Needless to say, H-D is no longer the darling of investors and the financial press. The board

214 l?art 2 Strategy Content and Formulation for Multinational Companies
of directors has authorized the company to repurchase shares of the company's common stock. Under these plans, large blocks of stock have been repurchased by the company in recent years and have helped to keep H-D's stock price up in an often down market. None­ theless, the company's stock value has declined markedly. The high value in the first quarter of 2007 was $74.03 per share, which may be contrasted against a low value of $11.54 per share in the fourth quarter of 2008.
H-D has taken steps to reduce its exposure to fluc­ tuations in the international financial markets. The company made $95 million on foreign exchange adjustments in 2008, largely due to the decline in the dollar. The company expects to lose on foreign exchange adjustments in 2009. To reduce foreign exchange risks, the company selectively uses financial instruments. Forward foreign exchange contracts are used to hedge the effect of earnings fluctuation on the dollar. H-D is also exposed to loan defaults and inter­ est rate fluctuations through its financial services divi­ sion. To minimize its risk, HDFS packages and resells most of its loans. Harley's pension and SERPA benefit obligation has increased from $963,824 in 2005 to

$1,178,283 in 2008. The postretirement health care liability went from $298,340 to $372,631 in 2005 and 2006, respectively. These liabilities will need to be closely monitored in the years to come.

C A S E D I S C U S S I O N Q U E S T I O N S

1. Which of Porter's generic strategies is H-D using? Will this strategy work for all of the countries described in the case? Why or why not?
2. What does a Porter's five forces analysis reveal about the strategies H-D has employed in recent years?

3. How does H-D compare to its competitors?

C A S E C R E D I T

Harley-Davidson, Inc., 3700 West Juneau Avenue, Milwaukee, Wisconsin 53208. httpJ/www.harley-davidson.com. SIC: 3751- Motorcycles, bicycles & parts.

C A S E N O T E S

1 Barrett, R. 2oog, 'New Harley CEO brings the chops.' Milwaukee Journal Sentinel, April 12.

2 Barrett, R. 2009. "Job cuts, outsourcing questioned at Harley shareholders meeting.' Milwaukee Journal Sentinel, April 26.

3 Barrett, R. 2oog. 'Job auction services, tent sales market repos­ sessed bikes.' Milwaukee Journal Sentinel, April 26.

4 Carpenter, S. 2008. 'Bumpy road ahead for industry.' Los Angeles Times, January 23.

5 Conten T. 2003. "Harley looks to a new breed of bike for growth.'

Milwaukee Journal Sentinel, August 24.

6 Half-yearly report of Ducati Motor Holding S.p.A. as of June 30, 2008.

7 Hamner, Susanna. 2oog. "Harley, you're not getting any younger.'

New York Times, March 22.

8 Harley Davidson, Inc., Form 10-K, December 31, 2004.

9 Ibid., 2005.

10 Ibid., 2006.

11 Ibid., 2007.

12 Ibid., 2008.

13 PR Newswire, "Harley-Davidson and Staples elected to the 2001 Marketing Hall of Fame.' April, p. 1.

14 Journal of Business and Design. 2002. "Harley-Davidson: Marketing an American icon.' January 05. http://www.cdf.org/cdf/at issue

/vol2_ 1/harley/harley .html.

15 Economist. 2004. "Luxury's new empire,' June 17. http://www

.economistcom/business/ displaystory.cfm?story_id=2771531 .

16 Narayan, S. 2006. "India's lust for Luxe.' Time: A sia, April. http:/I www.time.com/time/asia/magazine/printouVO, 13675,501. 060410

-117g415,00.html.

17 O'Connell, V. 2009. "Sales of luxury goods seen falling by 10 percenl" WSJ.com, April 11.

18 Spivak, C. 2oog. "Earning their keep?' Milwaukee Journal Sentinel,

May 24.

19 Steverman, B. 2oog. 'Harley-Davidson: Cruising on recovery road.'

Business Week Online, April 20.

20 Teerlink, R., and L Ozley. 2000. More than a motorcycle : The leadership journey at Harley-Davidson. Harvard Business School Press Boston, MA: Harvard Business School Press.

21 Teerlink, R. 2000. 'Harley's leadership U-turn.' Harvard Business Review, July-August, pp. 43-48.

22 Tortoiella, R., S. Kessler, E. Kolb, C. Montevirgen, and M. Basham. 2oog. "S&P picks and pans: GE, Google, Harley-Davidson, AMO, Microsemi, Chipotle.' Business Week Online, January 26.

23 Weisman, K. 2005. 'America's take on new luxury.' International Herald Tribune, December 5.

24 Windle, C. 2005. 'China luxury industry prepares for boom.' BBC News, September 27. http//news.bbc.co.uk/2/hi/business/ 4271g70

.stm.

25 http://www.harley-davidson .com.

26 http://www.hoovers .com.

27 Zielinski, G. 2003. "Milwaukee gears up for motorcycle mania'

Milwaukee Journal Sentinel, August 24.