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This senior paper report examines the Harley-Davidson (H-D) phenomenon. From near bankruptcy to double-digit growth every year, H-D has something working for them. That something is called”strategic planning and development.” With the growing global economy, companies are looking for ways to improve their market share. Many excellent firms have learned how to beat their competitors through then implementation of new management, marketing, and/or manufacturing techniques (Hitt, Ireland Hoskisson). H-D is one of those excellent companies whom have challenged traditional ideas. This report will identify those strategies that have worked and brought the company and its shareholders success each year.

Today, Harley-Davidson Inc., an employer of 8,100 workers, consists of H-D Motor Company based in Milwaukee and Eaglemark Financial Services Inc. based in Chicago, Illinois. These are strategic business units are they are managed separately based on the fundamental differences in their operations, products and services. In addition, there are nearly 1,500 dealerships worldwide. Harley’s commitment toward continuous improvement is exemplified in their financial statements.

II. Vision, Mission of Harley Davidson

H-D has realized since the 80’s an impressive marketing strategy was giving H-D a brand name that more recognized than any other company. Indeed, the strategy was not to focus on reducing the costs, or on the distribution improvement, but the main element was to create customer value. In other words, H-D’s will was to give more credibility, trust, safety, desires, quality of product and service, and thus fidelity to its brand. In order to reach that goal, H-D centralized its marketing on these topics, for example creating a Harley Owners’ Group who rallies more than 900,000 members worldwide (www.harley-davidson.com). The main interest of this group is to ensure members to know each other, and become a second family who share the same interests, wills, and thoughts. This strategy also ensures H-D to maintain a strong relationship with its customers, and thus a strong brand name all over the world. According to customers, the owners of H-D say that this brand understands them and their needs, and also that they are always there if a problem appears. These remarks can be linked with H-D’s values. According to H-D “Our values are the heart of how we run our business. They guide our actions and serve as the framework for the decisions and contributions our employees make at every Respect the Individual, and Encourage Intellectual Curiosity (www.harleydavidson.com).

This strategy can also be linked with the mission statement of H-D:

“We fulfill dreams through the experience of motorcycling by providing to motorcyclists and to the general public an expanding line of motorcycles and branded products and services in selected market segments (www.harleydavidson.com).”

In order to be successful, organizations must determine clear financial and strategic objectives. (Hitt, Ireland, Hoskisson) H-D focused on gaining a greater market share, achieving higher product quality than rivals, maintaining a stronger reputation and a better branding strategy than its competitors, increasing levels of customer satisfaction and finally attaining stronger customer loyalty.

In the 60’s and 70’s Harley’s strategic intent was based on “going shoulder-to-shoulder against the predominantly Japanese companies”. Harley could not compete on the price level, and the Japanese products were of superior quality, Harley decided to compete in other areas. Their new strategy was to connect with people on an emotional level. They are not selling a product but a way of life, a way of thinking. Harley changed its strategy from selling products to selling community (Mitchell). And the fact that H-D has developed a Brand stretching strategy can also be an element of Harley’s success in developing relationships with customers. Indeed, owners can buy other Harley’s products than bikes; it means that they can be more than a biker, they can join Harley’s group buying leather accessories or clothes, and even cosmetics.

III. Industry/External Analysis

Porter’s Five Forces Analysis

Threat of New Entry: Low

Requiring high capital investment to enter the business because of the scale economies in production, research, marketing and service of this industry is high.

Brand Identification of Harley Davidson has been strongly established for years. The entrants will face a big barrier to overcome customer loyalty of Harley.

Harley has developed its limited distribution channels via licensed private dealer and distributor. The new entrant of this industry most probably has to create its own distribution channel and make another investment which causes a barrier to entry this industry become high.

Powerful Buyers: Low

The product is targeted to individual buyer rather than large-volume buyer therefore buyers will have only small power to force the price down.

The product is differentiated or targeted for niche market therefore the buyer will not easily find the alternative product.

Harley also produces parts and accessories as proprietary components for their bikes which are not produced by other company.

There is quite a small number of this industry in the same market.

Since the product is differentiated, the customer tends not to price sensitive.

Substitute Products: High

Customers’ taste is shifted into Japanese motorbike.

Products with the sophisticated features, high quality and new design have been available in the market to adopt the trend-shifting.

Other means of transportation which are less season restrictive.

Powerful Suppliers: Low

The supplier’s customer are not fragmented so they have a high bargaining power

Switching cost of changing suppliers is not too high since it doesn’t require to invest heavily to be a supplier.

Competitive Rivalry: High

Lack of products differentiation or narrow product line.

Industry growth is slow, precipitating fights for market share that involve expansion minded members

Exit barriers are high. Harley has a high loyalty to keep the business survive.

The rivals, for example Honda, are diverse in strategies, origins and ‘personalities’ to compete and continually run head-on into each other.

Competitor Analysis/Strategic Issues

There are four strategic issues that H-D has to face with. The most important is the European market where H-D has to increase its sales, then, linked with the first issue, there is a fierce competition with the Japanese firms such as Honda and Yamaha. The other issues are the women’s market and the accessories which are in decline.

Harley-Davidson is not very famous in Europe where Harley’s market share of 650 cc plus motorcycle is less than 7% (6.6%), while in North America Harley-Davidson has a huge market share (46.4%), 21.3% for the Asian market. The main industry competitors are Honda, Suzuki, Yamaha, Kawasaki and BMW. Harley-Davidson is the market leader in the U.S. market with 46.4% market share (Woodyard). Their domestic position is quite secure however the rival companies are all aiming to increase their impact on the North American market.

Honda remains the main competitor with a 20.2% market share in North America. Even though they trail behind Harley in the high profit market for heavy bikes, Honda sells more bikes worldwide than H-D. Honda provides a wider selection of products ranging from super sport bikes, cruisers, scooters and motor cross bikes. The popularity of cruiser bikes is increasing and last year the registrations for heavy weight motorcycles rose by 22%, but Harley’s share fell from 50.2% in 1997 to 46.4% in 2002 (Woodyard). This means that companies like Honda are quite successful in taking customers away from Harley.

Rival manufacturers such as Kawasaki or BMW have all made a serious attempt to establish them at the heart of Harley’s market. The Japanese bikes were often considered to be ‘sissy’ cycles by Harley lovers (Mitchell). This image is slowly changing and the Japanese companies are trying to ‘out Harley’ the Harley models. Yamaha motor USA is starting to improve its position in its various markets. The U.S. sales have increased for 47% since 1998.

Despite these successes, companies have had a tough time in creating an image for themselves particularly in the cruiser markets. Harley continues to dominate the U.S, market and is also the leader in the Asian/Pacific markets with 21.3% market share.

So, compared with Honda, its main competitor, H-D is better in North America and in Asia-Pacific, but certainly not in Europe. There is not too much gap between all the competitors, especially between H-D and Honda (21.3% against 19.1%). But, this is totally different in Europe for Harley-Davidson who has only 6.6% of market share; this market is the most promising. That’s why Harley-Davidson has to focus especially its marketing in the European market in order to win market shares, and reduce the gap between its competitors. Moreover, Harley net revenue in Europe is the second behind the U.S. So, if Harley succeeds in increasing its market share in Europe, its net revenue could be in high growth.

Then, in order to fully understand its market, and in order to compete in a more serious way its competitors, H-D must identify the distinct segments that their competitors focus on and what distinctive product service benefits they offer.

Honda’s activities are forcing H-D into a niche market. The company is known for its flexibility and is progressively introducing bigger and better bikes. The Japanese manufacturer is starting to increase its competitive pressure by applying some of the strategies implemented by Harley. Honda is beginning to improve its relations with its customers and is also trying to build a sense of community among its customers. The Honda Rider Club of America is Honda’s attempt to achieve the same sense of belonging Harley bikers have with their beloved brand (www.honda.com). The club allows customers to gain 24-hour emergency roadside services. The club also organizes a number of events and rallies for the Honda fans. Honda is also trying to create the next generation of loyal Honda bikers. Honda organizes a number of “Motor-Cross Camps” for young riders. Some of the main activities include riding courses races and riding trips and family activities, the main way to gain the loyalty of young bikers who will hopefully stay loyal to the brand, as they get older. These community-building strategies are proving to be extremely beneficial for the Japanese firm. The Honda new models such as the Shadow 750, the VTX 1300S are Honda’s attempts to steal some of Harley’s market share by recreating the Harley feel. Superior technology is the main strategy to achieve this goal. Yamaha is also trying to outperform Harley and is improving its mass customization skills. The Yamaha website offers a section that allows customers to design their own bike and choose the look and functionality they desire. The interface ensures customers to choose from 75 Yamaha accessory items and makes it easy for the customer to purchase the bike online. The Yamaha V Max model, the Drag Star, and the Road Star models attract customers with their slick design and technological tweaks (www.yamaha.com). The Yamaha sports models are also very successful and the company is still maintaining a strong position in world markets.

European rivals are also trying to make an impact on this lucrative market. Italy’s Moto Guzzi recently introduced the V11 EV custom cruiser. BMW introduced 3 models of its R1200C cruiser and thanks to clever advertising is beginning to improve its position in the U.S. and Asian markets (www.bmw.com).

According to the website, only 10% of the Harley’s customers are females. But female bikers are more and more interested by bikes (www.moto-station.com). Yamaha and Kawasaki are trying to take advantage of this growing interest of female bikers and many of their ads feature women on motorcycles. Harley has already understood this new opportunity.

Another key issue for the future is the problem of the accessories. Indeed, those products such as perfumes or cosmetics are decreasing a lot. So, Harley-Davidson should take a decision about this unsuccessful strategy of brand stretching. But, this strategy has a lot of success regards to the leatherwear and fashion area. According to me, Harley-Davidson should continue to improve this brand stretching and not leave the market of cosmetics and perfumes.

V. Financial Assessment of Industry & Harley Davidson

Past & Current Financial Performance

Year 2003

$ 4.6 billion total revenue (up 13% from ’02)

$ 761 million net income (up 31% from ’02)

$650 million free cash flow (up 59% from ’02)

Repurchased 2.3 million shares of stock

Return an average equity >20%

291,000 H-D units shipped (up 10% from’02)

36% Gross Profit margin (up from ’02)

Gross profit margin 37.87% of revenue

Year 2004

$5.0 billion total revenue (up 8.5% from’03)

$889 million net income (up 16.9% from ’03)

Repurchased 10.6 million shares of stock

Return on average equity >25%

317,289 motorcycle units shipped (up 9% from ’03)

EPS 3.0 (20% increase form last year)

(Hoovers Online)

Trends & Forecasts

Pushed by an increase in female riders, wider age group, and the broadening appeal of motor scooters and other small, less-expensive two-wheelers, motorcycles sales rose 4.7% to top 1 million for the second-consecutive year (Woodyard). However a market slowdown is looming due to the weak dollar, costs of steel and other materials are rising; this will cause makers to rises prices or take a hit on profits. Currently all segments in the market are increasing, however scooters and classically styled so-called cruiser bikes are of the most heavily increasing and popular segments (Woodyard).

Business Models of Firms in the Motorcycle Industry

Firms in the motorcycle industry operate in two modes of the business model; Just-In-Time and Built-To-Order. Companies such as Honda and Harley primary focus are on supplying motorcycles through licensed distributors and dealers. Smaller dealers focus on built-to-order where riders can customize performance and style designed to complement their style, size, and skill level.

Profit Pools

Harley’s primary sources of profits come from the initial motorcycle sale, finance contracts, licensing agreements, product upgrades, and accessory goods. Based on this information we can conclude that Harley does a good job of extracting the most margins from its customer base.

Key Financial Performance Metrics of Major Players *

Market share figure in 2004 ( %)

North America Market share 2004 (%)

Harley Davidson 48.1

Honda 18.6

Suzuki 10.3

Yamaha 9.1

Kawasaki 7.1

BMW 2.8

Other 4.0

(WoodYard)

Key Valuation Metrics of Major Players *

Harley Davidson Financial Performance

2004

Market Cap 13,638.01

Earning Rate 20.3%

Growth Rate 5.3%

P/E 15.10

(Standard & Poor’s NetAdvantage)

*S&P considers Harley-Davidson to have no competitors hence no competitor metrics are available.

VI. Competitive Analysis

Strengths

Customer Loyalty and Following

Very High Product Demand

Profitable Product Line and Market Mix

Highest Market Share for Motorcycles over 750cc in the United States

Union contract that is beneficial to both the Firm and the Employees

Significant opportunities in the growing worldwide motorcycle market

A proven management team that’s committed to build a beneficial relationship with all of the stakeholders for the long term

Increased capacity with the construction of new plant and distribution center

Increased Segmentation with the purchase of Buell Motorcycle Co.

Weaknesses

Inefficiency due to Large Production Level

More Demand than Supply

Lower Than expected Sales in Motor Clothes

Lingering rebel biker image

Opportunities

Electronic commerce and communications

Opportunities in the female market niche

Threats

Tariffs that might exist in other markets

Imitation of Harley’s products from other competitors.

Loss of market share due to low production capacity

VII. Market/Customer

Harley’s customers are not the “metal bikers” customers who used to be in the past. Indeed, Harley-Davidson attracts now more profession such as lawyers or doctors about 45 years with a medium income level. H-D has developed a brand stretching strategy can also be an element of Harley’s success in developing relationships with customers. Indeed, owners can buy other Harley’s products than bikes; it means that they can be more than a biker, they can join Harley’s group buying leather accessories or clothes, and even cosmetics. Recent trends show there is an increase in the market segment to appeal to women. Roughly 10% of riders in the U.S. are women which offer potential for growth.

Although motorcycles are sold internationally, 3 main geographic markets comprise the bulk of motorcycle sales North America, Asia, and Europe. The largest is the North American Market (USA and Canada account for about 60% of this market) accounting for 60% of worldwide motorcycle sales (Klein). With the baby generation aging, opportunities exist for the penetration of new markets.

The Japanese market accounting for a great chunk of the Asian Market is an untapped one for foreign manufacturers. Government regulations and trade policies make it difficult for foreign manufacturers to enter though. Most Asians consider motorcycles as a basic means of transportation. Major target areas include China, Korea, Taiwan and Vietnam.

The European Market is another market with great potentials since Europeans have a higher disposable income and enjoy a higher standard of living. Eastern Europe is not offering a good deal mainly because of its unstable political and economic environment. To succeed in these markets, firms are to modify products to meet local needs, provide after sales service, expand distribution networks, and create strong customer relationships (Klein).

VIII. Internal Capabilities & Issues

Issues

Exports in Europe are not that easy since the products are going to be acceptable to heavy tariffs, since they come from a country outside the European community. In the future a subsidiary in one of the European community countries would relax the tariffs. Also loss of market share due to low production capacity may also prohibit Harley from gaining potential new customers because of the extended waiting period.

Management Depth

Harley Davidson has a flexible management that encourages employee involvement by having an “open door” policy to allow employee to communicate and contribute his and her idea to senior management or CEO (Teerlink).

Organization Issues

With over 8000 salaried and unionized employees are the key competency to H-D success. Employees are considered as foundation of company success and are the engine to drive company to success, because employee involvement is “strong culture” in H-D where employees are empowered to take initiative to identify and solve problems. (Teerlink).

Value Chain

Marketing & Advertising

Harley Owner Group convoys free advertising

Promotions at motorcycles rallies and improve dealer network to broaden appeals to new customers

Not much spending on advertising

Licensing brand/logo to more than 100 manufacturers thereby increasing exposure to customer

Distributing newsletter and promote rallies

Human resources

Harley Davidson mechanics and dealership personnel were trained at Harley Davidson University. They took course in retail management, inventory control, merchandising, customer service, diagnostics, maintenance, engine service technique.

Provide in -dealership courses through its web based distance learning program

Service

Demo ride in various location through all US

Daily rental to decide whether they want to buy

Providing training course for inexperienced riders in America, Europe and Asia (25 hour Riders Edge Program) contributed to company increased sales from female buyers (increased from 2% total sales before adapting to 9% in 2003). The company found that woman more likely to purchase after taking training course

Financial service to make it more affordable

Operations

The company’s expansion plan of its York and Pennsylvania plants expects to allow the company to increase production to 400,000 units by 2007.

Distribution

Through dealerships

Showrooms offer a large assortment of clothing items and accessories in addition to new motorcycles

Dealers are responsible for operating showrooms, stock parts and accessories.

161 dealers in Japan.

50 dealers and 3 distributors in Australia and New Zealand.

7 dealers in South East Asian and East market.

Infrastructure

Public listed company

Quality system

Strategy & planning are not clear

Core Competencies and Competitive Advantage

Customer loyalty and brand image

Valuable? Yes

Rare? Yes

Costly to imitate? Yes

Non substitutable? Yes

A core competence and a sustainable competitive advantage

Large-displacement motorcycles

Valuable? Yes

Rare? Yes (for now)

Costly to imitate? No

Non substitutable? Yes

Yields only a temporary competitive advantage

VIIII. Strategies of Harley Davidson

As stated earlier, strategic issues that H-D has faced is increased segmentation in the motorcycle industry causing them to shift focuses in their strategy. With the purchase of Buell Motorcycle Co. they have been successfully able to increase their market segmentation by offering high quality bikes at competitive price. This allowed H-D to have to opportunity to move from a differentiation strategy to a cost/differentiation strategy.

Harley Davidson’s use of the Cost/Differentiation as a Business Level Strategy has proven highly successful since they have been in business. They have always tried to differentiate themselves from everyone else in the motorcycle industry, by producing a brand image that many competitors have failed to recreate. Harley Davidson has two different companies built into one. The first of the two companies produces motorcycles at competitive prices against their competitors. Harley Davidson demands high standards of quality and efficiency and demand lower costs, which will add to a higher quality less expensive motorcycle. Harley Davidson has done extensive research to find out information about their average customer. Harley Davidson concluded that the average motorcycle consumer is a married, college educated, 38 year-old male earning $44,250 a year and his average income is increasing. Research also shows that females represent 10% of the new purchasers.

The second company that Harley Davidson implemented is the Costume Vehicle Operations or CVO. This company specializes and customizes the motorcycles to suit the individual owner. Harley Davidson also offers genuine parts and accessories so Harley owners can customize their own motorcycles. The CVO tries to use the differentiation strategy to beat out its competitors. The customization of a motorcycle can prove to be very expensive and time consuming, but Harley Davidson knows that what good is a bike if you cannot show people who you really are. The customers are willing to wait an average of 1 year after placing their order to receive their customized motorcycle. Every other motorcycle manufacturer is trying to imitate Harley and their products. Harley has the top of the industry manufacturing process with large state of the art factories, and distribution, with many small and personalized, to market dealers, who sell their products.

Harley Davidson’s Corporate Level Strategy tends to favor the Related Diversification Strategy. Their two primary businesses are related to each other in some manner or another. The two divisions, CVO and the Competitive Price Division, are related by using the same suppliers. Although the two divisions serve two totally different responsibilities to the consumers, they are truly related in their strengths to differentiate themselves from all the other competition. Harley Davidson does not do much promotion at the corporate level. Primarily, the local dealers do their promotion.

Harley Davidson uses many different types of strategies to help them become on of the most dominant motorcycle producers in the world.

X. Assessment & Analysis

The Senior Paper has given an intuitive look into strategies at work and based on the analysis done it is reasonable to assume that H-D will be successful staying competitive. H-D implemented changes in the ’90’s to prepare for the future challenges and stay ahead of competition. They have targeted towards improving and expanding manufacturing and creating new products and services. Thus far, the strategies have been very successful and have built strong relationships with all their shareholders.

H-D has found new ways to extract margins from its customer base through finance contracts, licensing agreements, product upgrades, and accessory goods. It has expanded it product line to the small and mid-size range with the purchase of Buell Motorcycle Co. They know who their customers are, and which markets they need to expand on. They also have happy unionized workers who share the same values as the management team. Most importantly through the decades, H-D motorcycles have had the ability to generate emotion. This emotion and loyal has never been duplicated by any company to date, and probably never will. If H-D continues to innovate there is not question that they continue to gain market share.