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 wolrds 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, companys 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 companys 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 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 1 feared a bike glut amd began to question

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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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B.

More diverse lifestyle, creating many Harley Davidson Clubs and academies around the globe like Riders Edge(S) Money Robust Cash Flow (S) Declining financial performance (W) Poor credit rating (W) High price category (W)

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 companys 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 PORTERS 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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Business Strategy 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 Davidsons 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. 2. Product development (differentiation) Overall cost leadership

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Business Strategy Table 3 QSPM

From the result from table 3, we choose product development or differentiation. Syndicate 7 8

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FINANCIAL ANALYSIS 1. Company Highlights Highlights (in $millions, except per share amounts and other operating data) 2004 2003 Total revenue 5.015.190 4.624.274 cost of revenue 3.115.655 2.958.708 Gross Profit 1.899.535 1.665.566 Operating Income 1.361.491 1.149.264 Income Before tax 1.379.486 1.166.035 Income After tax 889.766 760.928 Total Current Assets Total Assets Working capital Total Current Liabilities Long term liabilities Total Liabilities Total Equity 2. Liquidity ratios a. Current Ratio Value 2003 Value 2004 Definition : 3,09 : 2,44 (decrease) : Harley Davidson has a great amount of assets, it makes their 1.207.124 5.483.293 2.093.576 495.441 800.000 1.295.441 3.218.471 1.001.990 4.923.088 1.773.354 324.305 670.000 994.305 2.957.692

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.

4 3 2 1 0 current ratio 2003 2004

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2. Leverage Ratios a. Debt to Equity Value 2003 Value 2004 Definition : 34% : 40% (increase 3%) : 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 theyre a less-levered corporation, because the ratio is still below 100%.

40% 2003 35% 2004

30% debt to equity

3. Activity Ratios a. Total Assets Turnover Value 2003 Value 2004 Definition : 0,94 : 0,91 (decrease) : 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 Value 2004 Definition : 0,20 : 0,24 (increase) : 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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5. Profitability Ratio a. Gross Profit Margins Value 2003 Value 2004 Definition : 36% : 38% (increase) : 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 Value 2004 Definition : 45,7% : 46,8% (increase) : Harley Davidson has a success sale, the net profit margin show us

that the company have a great value of sales remaining after its all cost and expenses. The value is also increasing from 2003 to 2004. c. Operating Profit Margin Value 2003 Value 2004 Definition : 25% : 27% (increase) : 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 Value 2004 Definition : 26% : 28% (increase) : 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 Value 2004 Definition : 15% : 16% (increase) : Harley Davidson has an increasing Rate of return on assets used

in the company from 2003 to 2004

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50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Gross Profit Margin Net profit margins Operating profit margin Return on equity Return on investment

2003 2004

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%. Thats mean theyre 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, thats 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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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 Market Penetration. Increase amount of dealer or after sales service. Differentiation or product development. Develop brand community to increase brand awareness. 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. Financial a. 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. Operational a. 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 Resources a. 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. a. b. c. d. e.

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Stage I INTRODUCTION Market growth rate Number of segments Intensity of competition Overall objective Corporate Strategy Business Strategy Likely structure Major functional area(s) of concern Emphasis on product design
Low Very few Low Increase market awareness Concentration in a niche Differentiation Entrepreneur dominated R&D Low Very large Some Increasing Create consumer demand Horizontal Growth Vertical Growth Differentiation Functional management emphasized Sales and marketing Low to moderate

Stage II GROWTH

Stage III MATURITY

Low to moderate Many Very intense Defend market share and extend PLC Concentric Diversification Conglomerate Diversification Differentiation Overall Cost Leadership Decentralization into profit or investment centers Production High Negative Few Changing

Stage IV DECLINE

Stage V DEATH

Consolidate, maintain, harvest or exit Profit strategy followed by Retrenchment Overall Cost Leadership Focus Structural Surgery General management and finance Low

Liquidation or Bankruptcy

Dismemberment of structure

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:
FUNCTIONAL STRATEGY
Objective
Marketing Strategy Increase Sales Increase Brand Awareness Increase Financial Performance Financial Strategy Increase Credit Rating Increase Financial Performance

Strategy

Program

Market penetration Increase amount of dealer or after sales service Diferentiation or Product Development M arket research to next trend from Develop brand community Expand market Debt Strategy Assets management strategy Selective to long-term debt Strategic alliances Buttress business related product and financial service to support R&D Closing the Financial Service Safety Helmet Campaign

Increase Brand Awareness Operational Strategy Reducing raw material cost Reducing raw material cost Continous improvement quality Human Resources To handle legislation effect Increasing Financial performance

CSR

Consolidated Sourcing strategy Control Supply Chain Management

Proposed "Special" Price with the consolidated supplier Vertical Integration

Compensation Strategy Recruitment Strategy

Reward system for talented employee Outsourcing for R&D for employee post retirement benefits

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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.
Objective
Increase Sales

Program

Timeline
1-5 years 3-6 Months 3 Months 6-12 Months 1-5 Years 1 Year 3-12 Months 1 Year 6 Months 1 Months 2-4 Weeks 1-2 Years 1-2 Years

Staffing
Marketing, Operational, HR & Finance Marketing Marketing Marketing & Finance Marketing & Finance Finance & Operational Finance & HR Finance & R&D Human Resources Finance Operational Operational & Finance Operational & Finance

Increase amount of dealer or after sales service Market research to next trend from men's view Increase Brand Awareness Develop brand community Safety Helmet Campaign Increase Financial Performance Expand market Strategic alliances Closing the Financial Service Buttress business related product and financial service to support R&D Outsourcing for R&D for employee post retirement benefits Increase Credit Rating Selective to long-term debt Proposed "Special" Price with the consolidated Reducing raw material cost supplier Vertical Integration Continous improvement quality Vertical Integration

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 Syndicate 7 16

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

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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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