Harley Davidson
Introduction
For more than 100 years, Harley Davidson has had one mission: to ‘fulfil dreams trough the experience of motorcycling’. The emotional attachment to the brand and the recent strategies following by Harley Davidson leaded to real success the year 2007 with remarkable record of profit growth and consolidation of its image of a strong archetype of American style. Nevertheless, in a continuously changing world, each company has to be proactive in order to remain competitive and sustainable. Faced with a range of issues that obviously will impact on the organisation, what could be the next steps for Harley Davidson to achieve its new objectives of growth in the motorcycling industry? Analysing first the micro-environment and the industry, we will try to draw a general trend about the stakes this industry is facing. Then, the internal analysis would give us the opportunity to identify the gaps Harley Davidson is suffering and to make recommendations about the best way for this company to be successful the next few years.
Macro-environment analysis
As actor in the motorbike industry, Harley Davidson is faced with different trends that definitely have to be taken into consideration in order to better understand the external environment and to deal with it in the most sensitive way. Before introducing the macro environment analysis, we first have to determine the industry we are talking about: to the large bikes, we also add the faster ‘scooter’ type bikes that enable us to analyse more broadly and to include important trends.
The first issue to consider is the economy that is defined by a global increase in the cost of oil, a decrease in the purchasing power and increasing expensive public transports. Faced with this situation, the motorbike appears as a good alternative way of transport since it becomes the cheapest option in term of individual transport and its small size enables fuel saving. Moreover, the current low-rated dollar offers good opportunities for American companies to make business but put in difficulty some other regions such as Europe, Canada or Asia.
The technological advancements with Just in Time production and the use of systems such as CAD (Computer Aid Design) or CAE (Computer Aid Engineering) help to reduce production time and costs by providing more efficient product development. In addition, information technology and software use are a source of high performance and safety for the motorbike.
If these two first points are rather positive for the future of the industry, the political aspect is more tendentious. The motorbike manufacturing industry is widely regulated by the government concerning issues such as safety, licensing, registration, circulation…with fines against motor bikers. The biggest problem is that these regulations vary from a country to another and put the industry in a difficult situation to effectively target the different markets. Another issue is the deregulation with a move towards a decrease in protectionism from big countries. For example, Japanese manufacturers were active in the automobile sector and had developed their operations in the ASEAN market under protectionism policies. But since the 90s, the WTO and the AFTA have eroded the system that protected the Japanese-affiliated automakers from the European and American competition, which is a good thing for the exportation but a bad news for new products launch in its own market.
The cultural aspect is maybe the most important trend to consider for this industry. We are witnessing a change in the global society that definitely has an impact on the motorbike industry. The last decades, there has been an emergence of the need for leisure and new experience, which is illustrated by a growing number of people that ride bikes for recreation rather than transportation. There is also a change in urban mobility with linear transfers replaced by multi-purposed and multi destination routes- in business or leisure. People want to enjoy their life as much as they can by making the best use of their time. The current issue of traffic congestion is an opportunity for the raise of motorbikes that avoid stationary or low traffic. This new trend is also exploited for women who are more and more numerous for using motorbikes, and represent a new segment to satisfy, with beside the development of clothes for women and new activities such as ‘garage parties’. Nevertheless, the industry suffers various trends: the demographic one consisting of an aging population moving towards retirement homes more than outdoors sports, the safety issues linked to the motorbike and the subcultures generated by the motorbike industry that can be associated with notion of drug or crimes.
Finally, considering the environmental perspective, there is no denying that the motorbike industry has to make efforts in this area to remain a main actor. Indeed, the environmental preoccupation, coupled with the scarcity of oil’s reserves and the anti noise pollution movement doesn’t seem favourable for the industry. But this industry has all the keys to develop products that are environmentally friendly and will be able to develop these concepts the coming years.
To conclude on the macro-environment analysis, in 2007, the motorbike industry is on a globally good trend and seems to be on the way to continue growing above the average industry growth rate.
Industry analysis
If we put into practice the Porter analysis in order to determine the factors that affect the profitability of the industry, we must work on 5 forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, substitutes, and industry rivalry.
To begin with the suppliers, we can talk about an average power but which is on a positive trend to increase. Indeed, on the one hand, the large buying power of manufacturers and the sheer size of Bikes Company, as well as the large number of suppliers and the various substitute inputs confer low power to suppliers. But on the other hand, the current trend is about to give an increasing power to suppliers. The beginning of a partnership between the motor vehicle equipment manufacturer and the builder is illustrated by technical cooperation between the subcontractors specialised in a particular part and the builder-consumer that certify the building and the assembling of the components, and leads to increasing switching costs of suppliers. Equally, the start of production outsourcing and transfer of component design responsibility from the manufacturer to the supplier involve increasing power of suppliers.
Concerning the power of buyers, it appears relatively high because of different factors. We can of course enumerate the large number of substitutes in the market, the large number of competitors or the large number of vehicles sold that definitely gives a high power to the buyers since they have a lot of alternatives to buy their motorbike. Nevertheless, the most interesting point is the buyer information about the industry output. In fact, the motorbike industry is an industry that gathers buyers who are in general passionate about the motorbikes and know very well what they are buying, which definitely reduce the industry power against the buyer one. But to piggyback on the idea, we can underline one element that is in favour of the industry. Indeed, the impact of outputs such as the brand on buyer differentiation is really important: even if there are a lot of similar products, if the customer is attracted by a particular brand, he will be ready to pay more for having this brand.
The importance of brand identity is also relevant to determine the power of new entrants in the industry which would be defined as high. But this emphasis on brand identity seems contradictory with propriety product differences which is low since existing products are easy to imitate and to reproduce. It is essential here to define which aspect is the most relevant. Because on the one hand, products are easy to imitate but on the other hand, the brand identity is significant. New entrants can imitate but if they don’t have a strong brand, can they survive? The threat particularly comes from Chinese new entrants that benefit from collaboration of hundreds of different companies on motorcycle design and manufacturing. The decentralisation and the mass collaboration offer them rapidity, experimentation and informal networking, as well as shared knowledge and economies of scales. New entrants in general can benefit from a large access to distribution possible trough the automobile industry and develop the advantage of sharing technology, engineering capabilities, marketing and distribution knowledge across different vehicles divisions. But the current actors are already trying to counter this trend by forecasting mergers, acquisitions and alliances in the manufacturing industry in order to block the global competition.
If there are some actions forecasting by the existing competitors to deal with future events that could threat them, it is still true that they also have to deal with the average current rivalry. There is no denying that the industry is growing fast and is not concentrated, that leave room for at least 14 players to prosper. The rivalry comes with the will of these organisations to increase their position in the industry, and their tendency to work on imitation, that leads to an increasing intensity of the competition.
To finish, it remains to talk about the threat of substitutes, which is low in this industry. Indeed, if we consider the motorbike industry as 1) personal transportation from a point to another and 2) sport entertainment / leisure, we can analyse three aspects of the threat. Firstly, the excellent relation price/performance that offers the motorbike in comparison to other way of transport: cars are cheaper and cheaper and can carry more people but are less rapid and not synonymous of leisure, public transports are very well developed in big cities and less dangerous but don’t fit the individual need for sensation, planes are cheaper and offer larger rides without fatigue but miss the sensation feeling. Then, we can considerate that substitutes are not replacing the motorbike but just completing the range of customer needs. And finally, bikers are in general very attached to their motorbike and will favour this at least as leisure.
Given all this information, and to conclude on the industry analysis, with only two high forces, this industry will remain reasonably profitable in the future. Nevertheless, it doesn’t have to forget that everything is passing in an industry and the different actors really have to be proactive. Since a model is successful, the vehicle company has to think about the development of another motorbike to succeed. The anticipation is fundamental in order to meet the future expectations of the market concerning the design, the technology or even the accessories.
Internal analysis
An interesting point to start with the internal analysis is to first have a look at the results for Harley Davidson in 2005 comparing to its competitors. Indeed, if its revenue is of $5 342 million against $80 446 million for example for Yamaha, on the other hand Harley Davidson has the highest return on equity with 31, 10 % against for example 11, 86 % for Honda. It appears that Harley Davidson is a good business to be in, with a particular strength of being not diversified and appearing as a niche player compared with big companies that make a lot of money but that also have to invest a lot in R&D.
If the financial results give us an idea of the success of Harley Davidson, maybe the most relevant proof of that success is its reputation. The brand name appears as key factor of success for Harley Davidson which sells not a product but an experience. The emotional attachment to the brand built the firm’s reputation with values of individuality, freedom and adventure. The tradition and institution linked to this brand are transformed in a real sense of community where style and image are predominant and enabled to build customer’s loyalty. Harley Davidson well knew how to make the best profit of its situation by developing auxiliary merchandises (‘general merchandise’) that now contributes to 20% of total revenue.
One of the other big strengths of Harley Davidson that enables the company to be successful is its organizational and human resources. The Harley Davidson Operating System is a philosophy and a methodology for continuous improvement. Management structures and working methods with non hierarchical and teamed based structures are designed to promote employee commitment and involvement. This definitely supports the idea of a familial company in which the relationship between management and employees is primordial. With a CEO working for 37 years in the company and employees that are ‘impressed by the product they make’, Harley Davidson is a model of Human Resource Management that promotes and acknowledges the role of the workforce in the firm’s success. Moreover, beyond the Human Resources aspect, the management in Harley Davidson is in general pragmatic since they were able to react and change their strategy in order to cut costs and improve quality when they were faced with a crisis in production. They also know when to make alliances, with Buell for example, with the goal of enlarging the product range and of broadening the customer base.
Harley Davidson appears as a good student since it is continuously trying to improve itself when confronted to the gaps between its strategy and the environment. The company invested a lot in physical resources in order to respond the increasing demand and to improve production capacity. Harley Davidson is now equipped with an industrial park that enables the firm owning an effective capacity to introduce advanced process technologies and to expand capacity. Strength of Harley Davidson is its product and design quality compared with competitors. The company prides itself on offering differentiated and individualised quality bikes that really fit the needs of its particular customers. Then, to be consistent with its philosophy of individualisation and quality, Harley Davidson adopted a particular strategy of giving the same distribution experience everywhere in the world with higher standards of pre and after-sales service and with the introduction of new services to its customers such as test ride facilities, rider instruction classes, motorcycle rental, assistance for customizing, or insurance services.
The principal weakness of Harley Davidson is its lack in innovation and technology that restrains the company to be lack behind its competitors in its domain. They have been leaders in new technology before 1987 but the current small corporate size and the inability to share research expenditure across cars and bikes limit its ability to invest in technology and new products. Promoting its classic styling and traditional design features, Harley Davidson surprisingly makes profit of a key disadvantage of old style technology and technological backwardness. The small sales volume doesn’t enable the company to earn enough money to invest in R&D and to be at the same level of its competitors. Nevertheless, they stand up for and are engaged since 2000 in constant upgrading, new product development and launch of new models.
Identification of gaps from the analyses
Analysing the gaps between the macro-environment and the business strategy is a good way to see how the strategy fits with the major trends projected for the environment. Harley Davidson’s international strategy matches the economical situation of a low rated US$ since it’s easier for American companies to export in such a context, but the question is until when the $ will remain weak? If the cultural aspect of an increasing need for leisure is a good opportunity for Harley Davidson to continue to sell its experience, on the contrary, the aging population is an issue for this company who is targeting a new younger population to develop its sales. Finally, the environmental preoccupation is forecasted to grow in the next few years and Harley Davidson doesn’t have enough R&D capabilities to make research on new engines less polluting.
Faced to the different actors involved in the motorbike industry, Harley Davidson’s strategy is globally consistent or at least never inconsistent. Harley Davidson suffers its lack of volume sales to counter the power of suppliers but is strong enough to retain its customers and to block the threat of substitutes, new entrants and current competitors thanks to a great brand name. However, the backwardness technology and the threat of the ‘imitation / low prices / capacity to sell more volume’ combination developed by competitors put in jeopardy the durability of the firm.
Compared with its major competitors, Harley Davidson is performing quite well thanks to two key factors: its financial performance that presents the best return on equity and its service performance that is acknowledged for being one of the best. The weaknesses here rest with its poor technological performance and market position.
Then, if we compare the business strategy to the organisation performance, we can notice three major trends. The gaps are negative concerning the goals of increasing overseas sales and recruiting new younger customers since Harley Davidson only performed modest success in this two areas. The major objective of achieving 11 to 17% earnings per share growth per year doesn’t reveal a gap because Harley Davidson has had currently good success in this area until now but in fact it was particularly due to several favourable trends that are not sure to be reached for the coming years. However, a positive gap is witnessed concerning the development of individualised products and the increase of margins since products are acknowledged to be significantly good quality and personalised and Harley Davidson managed a good expansion of production capacities.
Finally, trying to see how well the organisation’s capabilities are sufficient to carry out its business strategy, we can conclude that except concerning the issue of innovation and R&D, Harley Davidson is relatively strong in its industry.
The most important strengths relative to its competitors are its capacity for building an image and for gathering people around its brand, whatever employees or customers.
Consideration of current strategy
HD’s core competence/s?
Harley Davidson’ brand name helps to create firm’s reputation and is recognized as an important source of competitive advantage. It informs customers of the product’s performance characteristics, attributes and value. It has such a cachet that it holds the sales of parts, accessories and ‘general merchandise’ (clothing and collectibles) that represented 20% of total revenue in 2000. Lots of these products are licensing of the Harley name and trade marks to third party manufacturers. Harley Davidson’s brand name appears as an intangible resource that generates an identifiable stream of earnings over time and gives the product an identity that inspires loyalty and passion: value of individuality, freedom and adventure. This is the first core competence of Harley Davidson.
The other core competence of Harley Davidson is its original organizational culture in which employees are held together tightly by their belief in it: employees bring their heart more than their brain. There is no denying that knowledge management has a big role in this company with employees and associates who definitely are an important source of competitive advantage. The mystification of the firm also comes from the strong leadership exerted since 37 years with only one man leading the company. Finally, the historical origins, values and beliefs are valuable, rare, costly to imitate, and non substitutable, that enable Harley Davidson to rely on this core competence to build its competitive advantage.
With only two core competencies, Harley Davidson is under the average of 3 or 4 core competencies to build a competitive advantage. If on the one side, it is a risky situation, on the other side, that really enables the company to develop the focus it needs to fully exploit its competences in the market place.
Assessment of Harley Davidson’s strategy?
To date, the key part of Harley Davidson’s growth strategy is to expand sales outside the United States. The target market is Europe with 70% concentrated on performance bikes (instead of riding bikes in the United States). Harley Davidson still has modified some of its models to enter the European market and is convinced about the importance of building a dealer network all around the world. The dealer relations are one of the strategic priorities in order to give the same retail experience everywhere in the world. The company created the Harley Davidson University in order to “enhance dealer competences in every area, from customer satisfaction to inventory management, service proficiency and front-line sales’. This creation enabled growing sales of financial services, parts and accessories, and general merchandise. Finally, the quality of the dealer network appears as a key element of the strong demand for the products.
The competitive advantage of Harley Davidson rests on super heavyweight bikes and its product strategy is to propose unique and personalised product for each rider. The disadvantage of low production volumes involves for Harley Davidson a cost disadvantage in the purchasing of components and so a lack of buying power. To counter this fact, Harley developed close relations with key suppliers by placing purchasing managers at senior levels that was a good way to improve purchasing efficiency and to share information, ideas and strategy. The problem of imitation and the lack of diversification among different vehicles for Harley Davidson is a real issue faced with the new competitive world. The new challenges of the company are to sell more bikes and to reduce costs in order to increase margins, and to adapt the ‘Harley experience’ to new and younger customers.
Synthesis of findings into overall recommendations for the future of HD
The organisation plans to reach 17% earnings per share growth over each of the next 3 years.
It plans to produce motorbikes but also to continue with ‘general merchandise’ and financial services in order to sell solutions that address all customer needs. To achieve this goal, Harley Davidson relies on two business strategy options, the one of related products for existing market which is about adding features or refinements, expanding product line, new generation products and new products. And the strategy of existing products into related market which consists on targeting new customer segments (younger), and expanding geographically. Harley Davidson also plans to follow a generic strategy of differentiation based on its brand name, product quality, service levels, and distribution channel. Finally, the position whished by Harley Davidson for its future is to remain the ‘seller of experience’ competing against the other ‘sellers of products’.
With all these elements in mind, there is no denying that Harley Davidson has to work on its strategy if it wants to remain competitive and even sustainable. The first issue to consider is the differentiation strategy of Harley Davidson. The risk here rests in the increasing threat of imitation in the motorbike industry. It may be difficult in the coming years to maintain the degree of differentiation, and then emerges the following question: until when customers will be disposed to pay premium price for that product? Harley Davidson should try to increase even more the image of quality and tradition of its products that would enable the company to remain different compared to mass competitors.
Concerning the globalisation matter, we know that Harley Davidson still does export. One good option for the firm would be to export more widely in order to test the European market and see if it should go further. This allows a tight product control from home market and a low need of coordination between the two continents, without too many risks. One advanced option would be to build another plant in Europe in order to reduce the costs of transport. Asia would be cheaper but the quality would suffer it, and the reputation of the firm to. Nevertheless, the direction of Harley Davidson has to keep in mind that the main market of the firm would remain America, which is the cradle of its brand image.
As we saw during the analysis, Harley Davidson is well lacked behind with a technology that doesn’t enable the company to create value and to achieve competitive superiority. Moreover, Harley Davidson can not afford to develop internally the technology that might lead to competitive advantage in the future. Here the option is to outsource: this way, the firm can catch up and concentrate on others areas in which it can create value. Another solution to fulfil its capabilities gap in term of innovation and R&D would be the diversification. Why not to extend its diversification to a business that enables the company to share the cost of R&D in technology particularly. The backward vertical integration would be a good way to improve capability transfer and to benefit from the supplier’s network and expertise. Like this, Harley Davidson would benefit a size advantage and that could facilitate the investments in R&D.
With the advent of the Internet in all the areas of the world, Harley Davidson is loosing an important part of it capabilities to create a strong link with its customers. There is a necessity for the company to develop value adding knowledge process to compensate for the value and margin that the Internet strips from physical process.
If the current competitive advantage of Harley Davidson rests on its brand awareness, its strong history and its good management, the firm really must be careful considering its future strategic options. Indeed, brand name creates little value for young Internet user who should be one of the future targets of Harley Davidson. Harley Davidson has to work on communicating on product utility that is a source of value for these new customers. Moreover, it is central to keep working on building new competitive advantage because they are time limited. The company has to keep moving since this important competitive advantage could be put in jeopardy due to environmental changes and become obsolete with the new generation. It is quite the same issue concerning the succession planning. Of course, the leadership exerted since 37 years by Jim Ziemer as CEO was successful since 2007. But Harley Davidson has to be vigilant because each leader must have a capacity of renewing itself and of encouraging conflict. Is it still possible when someone is working in the same company for more than 37 years? Harley Davidson has to consider the necessity of recruiting new people with new ideas and methods in order to confront the view points and to improve the management of the company. The solution is not to change the CEO but maybe to ask for external consulting and to try to combine and balance these external advices with the philosophy, the history and the culture of the company and its leader.
Conclusion:
Despite excellent results during the last few years, Harley Davidson definitely has to be careful not to suffer the fall of the rocket. Nowadays, the competition is no more between products or services but between business models and strategy life cycle are getting short imposing the necessity of renewing it often. The biggest issue is no more being efficient but being relevant in the industry and the new challenge is to be able to change more often to last in the industry. Even if the brand name of Harley Davidson and its history are really strong, the company has to anticipate by according more importance to innovation in its business model.
References
Grant R (2008) Cases to accompany Contemporary Strategy Analysis 6th Ed. Blackwell, MA
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Hidetaka Yoshimatsu, 1999. ‘The State, MNCs and the Car Industry in Asia’, Journal of Contemporary Asia, Vol. 29.
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D. Tapscott and Anthony D. Williams, 2007, ‘China’s motorbike industry’s decentralized model holds lessons for all manufacturers’, Globandmail.com: Part 6 – The Global Plant Floor, HYPERLINK “http://www.theglobeandmail.com/servlet/story/RTGAM.20070101.gttapscottsix01/BNStory/Technology” http://www.theglobeandmail.com/servlet/story/RTGAM.20070101.gttapscottsix01/BNStory/Technology
Appendix 1: Macro-environment analysis
Trends Facts Consequences Assessment/ Rank
Economic – Increase in the cost of oil
– Decrease in purchasing power
+ expensive public transport system
– Currency exchange: low-rate $ è advantages of a depreciating US$
– US federal and trade deficits, record levels of consumer debt, falling house prices
– Small mass of motorbike as a vehicle: fuel economical. But large motorbikes have bad aerodynamics è consume more + depends on the utilisation
– Motorbikes are the cheapest option in term of transport
– Good opportunities for American companies to make business + cheap credit for American people
But more difficult for Europe and Asia + the low $ put Canadian suppliers in difficulty to be profitable
– Difficult to sell expensive leisure products +
+
+/-
–
Technological – Development of eco-friendly engines
– Product line efficiencies: development of Just in Time production
– Increasing use of CAD (computer aided design) and CAE (Computer Aided Engineering)
– Technological change in product architecture. Move towards modules (modularisation) = self-contained functional units with standardized interfaces that can serve as building blocks for a variety of different products
– Increasing use of information technology – software- within vehicles (lots of functions are electrical system) – Consequences on the price but attract new customers.
– Reduce the production time and cost
– Aid to create, to fabricate and to test without physical intervention = gain of time from R&D to production
– Cost saving, more efficient product development (at suppliers’)
– Increase the performance and the safety of the ve
