Harley-Davidson Inc, July 2009

Post-session notes

Dr. Amanda Cowan

Learning objectives
1. Application of many concepts/tools about
differentiation-based strategy:
Identification of a firms competitive strategy
Identification of the R&C on which the competitive advantage has
been based
Consideration of differentiation advantage and its cost
disadvantage relative to rivals
Value chain analysis for differentiation and cost

2. How to establish a competitive advantage against

bigger, better-resourced rivals through a strategy that
exploits few critical resource strengths while protecting
against resource weaknesses (small scale, lack of
technology, lack of global distribution)

Learning objectives
3. Importance of an integrated strategy: product design,
manufacturing, mktg, distribution, customer support
policies ALL built around the need to exploit and project
the unique Harley image
4. Practice with diagnosis and formulation of
recommendations:

Do Harleys recent woes point to emerging longer term

problems?

Harley-Davidson: exemplary case

Worlds most profitable motorcycle manufacturer
Built a clearly focused, tightly-integrated, brilliantly
executed strategy that provides its customers with a
unique experience (focus on differentiation)
Establishment of uniqueness to avoid direct competition
with bigger, technologically superior rivals
Clear exploitation of existing resources (image and
tradition) while developing capabilities in design,
manufacturing, marketing, and distribution
Declining performance

Questions
1. What is Harley-Davidsons strategy?
2. Compare Harley-Davidsons resources and capabilities to
those of Honda.
3. What are the bases of its differentiation advantage? And
what about its costs?
4. What threats does Harley-Davidson face?
5. How can Harley-Davidson sustain and enhance its
competitive position?
Imperial College Business School

1) Identifying Harley-Davidsons strategy

Strategy can be described in terms of:
Where it is competing (the industry it is in, the segments it
serves, the geographical scope, etc.).
How it is competing, i.e. the basis on which it seeks to
establish competitive advantage.

In this case, these two dimensions are inextricably linked.

1) Identifying Harley-Davidsons strategy: WHERE

Focus on narrow segment of the motorcycle industry:
super-heavy cruiser and touring bikes
Range of other products and services:
spares, repair and maintenance, and financial services
(consumer credit and insurance)
community activities (owners meetings, rides, charity
events) through the HOG
trademark licensing business (clothing etc.)

1) Identifying Harley-Davidsons strategy: HOW

Unremitting quest for differentiation advantage: it is
supplying an experience, not motorcycles.
IMAGE that appeals strongly to the American male
psyche and links todays urban professional with
lonesome cowboy of the Wild West.
Shifted its focus from the traditional younger, blue-collar to
the affluent, older, professional segment capable of
affording the $20,000 and more for a leisure item.

1) Identifying Harley-Davidsons strategy: HOW (cont)

Strategy is implemented through a full range of functional
strategies (design, marketing, customer support, etc.) to exploit
and enhance the image for the chosen segment
Repositioning many functional strategies:
Incorporation of luxuries
Manufacturing: more quality focused
Marketing: maintain elements of rebellion AND adding image of social
responsibility (e.g. charity rides);
Distribution: upgrading dealers to build a retail environment welcoming
dentists and investment bankers; improve after sale service; etc.

2) Compare HDs R&C with those of Honda

R&C

Harley

Honda

Technology
development
(C)

Little investment in R&D

Only selective application
of modern automotive
technology
Only 90 patent
applications between 2001
and 2009

R&D budget $5.7bn.

Leader in automotive technology with
one of the largest patent portfolios.
3971 patent applications between
2001 and 2009
Able to spread its R&D investments
over both motorcycle and autos

Design (R; C)

Strong understanding
within the main segment;
Mainly traditional design
concepts;
Customization

Innovative design;
Fast at identifying, adapting and
introducing competitors design
concepts (Harley hog, Ducati naked
styling);
Diversity of design styles/concepts

2) Cont.
R&C

Harley

Honda

Purchasing
(C)

400,000 units offer limited

bargaining power
Close collaborative relations
with small suppliers.

10m. motorcycles and 3.6m. cars,

it has a global purchasing function
with huge bargaining power.

Manufacturing Well developed capabilities in

(C)
total-quality management, justin-time production, and team
production.
Automation and scale
economies limited by the low
annual output.
Efficiency limited by
production spread across 6
geographically-dispersed US
plants.

World leader in high volume

production. Most of Hondas
motorcycles produced in plants
with annual capacity over 1m. units
Advanced automation

2) Cont.
R&C

Harley

Honda

Distribution
(R)

Very strong dealer network in

US
Patchy elsewhere
Good at managing dealer
relations

Worldwide dealer network

Brand and
branding
(R;C)

Unrivalled image in heavyweight

bikes
Brand linked to a tradition, a
way of life
Conventional advertising is
limited ($89m.)
Brand reputation supported and
reinforced by promotional events
and direct customer contacts

Strong reputation for quality,

performance, reliability, and
value for money
Reputation based on
functionality of product
Brand supported by advertising
($2.8bn.) and racing
Economies of scope in using a
single brand across a wide
product range

2) Cont.
R&C

Harley

Honda

Customer
service (C)

Direct linkage with customers

Almost entirely through dealers

Financial
resources
(R)

Revenues $5.6bn.
Net profit 0.7bn.

Revenues $121.2bn.
Net profit $5.1bn.

Honda has an overwhelming superiority across most

resources and capabilities, with the exception of brand
image, customer services, and US distribution.
To understand why Harley is more profitable than
Honda we need to look more closely at Harleys
differentiation strategy.

Potential of differentiation from

the demand side

3) Differentiation advantage and cost position

Basis for differentiation:
Role of social and psychological factors (textbook, pp.
252-253) and product integrity (pp. 255-256).
Recognizing its role as a lifestyle product, Harley has built
its differentiation advantage not just into its products but
also into the company as a whole and in its relationships
with customers (e.g. identification of managers/
employees with Harley owners).

Potential of differentiation from

the firms side: Value Chain
analysis

3) Differentiation advantage
Application of the value chain to identifying opportunities for
differentiation:
Outline a value chain for both HD and the motorcycle customer
Consider every activity that the motorcycle customer engages in:
information seeking, visiting a dealer, test-driving, financing, insuring,
customizing, riding, servicing, repairing, and re-selling the motorcycle

Harley has differentiated many aspects of its design, production

process, and dealer and customer support activities in order to
make the value chain activities of the customer easier, cheaper,
or more satisfying:
offers test-drives, customizing services, driving instructions for new riders,
insurance, social activities through HOG riders group.

SERVICE
&REPAIR
RIDING
CUSTOMER SERVICES

ACCESSORIES

DEALER SERVICES

LEARNING TO RIDE

MKTG

INSURANCE

PAINTING

FINANCING

ASSEMBLY

CUSTOMIZATION

COMPONENT
MANUFACTURING

SELECTION (model,
features)

DESIGN ENGINEERING

DEALER VISIT

R&D

INITIAL INFORMATION

HARLEY-DAVIDSON
www.imperial.ac.uk/business-school

CUSTOMER OF MOTORCYCLE

3) Cost position
Cannot neglect its cost position (as a low-volume
producer, it is at a major disadvantage to others)
Evidence: price premium
This reflects higher margins
Likely to be indicative also of higher unit costs

Value Chain for cost

analysis

3) Cost position
To analyze the sources of its cost disadvantage, follow
the approach outlined in chapter 9 (Using the value chain
to analyze costs):
a) Identify the cost drivers at each activity of HDs value
chain
b) Show how it has attempted to minimize the cost
disadvantages associated to low-volume production:
Standardized components across models
To keep R&D low, it has concentrated on the technology of
yesterday emphasizing heritage and authenticity above
innovation
To save marketing costs: free publicity from promoting events

4) Threats: How serious do you consider the downturn?

Likely longer term problems due to:
a. Demography: average customer age of 49 is older than
for the average motorcycle brand. This demographic
group is in decline.
b. Risk of over-expanding capacity: from 50,000 to
400,000 bikes a year. Yet, still unable to keep up with
demand. All that changed in 2008 (cut production, and
layoff). Problems of over-expansion:

Higher fixed cost base;

Shortage of new Harleys helped maintain the second-hand value of Harleys;
Expanding market presence undermines its image of exclusivity.

4) Threats
c. Appeal of Harley image: all lifestyle products run the risk that
change in lifestyle will upset their appeal.

If a Harley is a big-boys toy, competition may come from other costly toys (boats,
personal watercraft, other outdoor sports). One possibility is that the appeal of heavy,
noisy cruisers may wane relative to stylish, high-performance sports bikes (Ducati, etc.) or
the smooth-riding, highly engineered touring bikes (Honda and BMW).

d. Competition even within its core segment (superheavyweight

cruiser and touring bikes):
Honda and others produce Harley-style V-twin cruisers with more
advanced technologies and lower price;
Small producers producing retro-style bikes that compete more
directly with HD.

4) Threats
e. International market: does it appeal internationally?
Difficult to judge.

In a few countries, there is significant demand based on the image appeal.

However, this implies questions of opportunity of adaptation to national taste
(based on the different meanings and interpretation of the symbolic value of
Harleys) and capacity to do so.

f. Entrapment in a narrow niche market: whenever it

expands out of its core market either overseas or into
smaller bikes- it meets limited success.

Buell has been far from successful; attempt to update styling and technology
with the V-rod had a luke-warm response.

5) Sustain and enhance competitive position?

1. Opportunities for strengthening differentiation
advantage.

Possible to identify further linkages between HDs value chain and that of
owners?
E.g. Vacation services?

2. Opportunities for improving cost competitiveness. E.g.:

further standardization of components across models;

consolidation of plants to improve coordination and access to scale
economies;
increased outsourcing of components and technology;
efforts to improve productivity

5) Sustain and enhance competitive position? (cont)

3. Opportunities for product extension

Pros: expand market presence overseas.

However, we need to ask: is it that it cannot compete in the sports
market? Or does it need to take the lessons from Buell and come back
with a better product?
However, even more modest attempts to expand beyond traditionally
styled models have encountered modest success.

4. Acquisitions/diversifications

If it is locked into its narrow niche and there are limited opportunities for
growth, then consider leveraging on its management capabilities in
another business (Acquisition of MV Augusta)
And why not then others based on similar iconic resource?