Harley Davidson Case

Harley Davidson (HD): Preparing for the Next Century

Q1 How would you characterize HD's primary challenge(s) as of the end of 2005?

Stock prices dropped 17% due to lower forecasts, in spite of positive trending financials. Lower forecasts were due to growing saturation within their target market. Saturation was occurring due to fewer younger buyers replacing aging buyers. Fewer younger buyers was occurring because HD did not have a highly successful plan to win them over, noting pointed attempts with Buell and the V-Rod. Therefore:

* their issues are not cyclical, but structural

* their issues are not urgent in the sense that creditors will force bankruptcy in the immediate future

* however, they must be addressed to maintain long-term strength as an organization

* further, this is more of a strategic issue than it is tactical

* and, HD may be approaching the upper limits of their current business model

Stock analysts were seeing that HD stock was inflated as a strong working solution did not appear to be in place to address these issues. All things being equal, past performance did not appear to be sustainable.

Q2 Deconstruct HD's macro environment (PEST) and industry (Porter's 5).

Economic: Given that HD is a big ticket discretionary consumer luxury product, the strength of the economies in their principle markets is very important. An economic downturn would have a downward pressure on sales. Conversely, further economic growth would create a more positive revenue and profit picture.

Given that, the primary economies in which HD competed had experienced a long period of economic growth with a brief blip from 2000 to 2002. Unemployment was low, housing prices were rising, stock portfolios were rising and consumers were spending - they were optimistic.

Given that, home prices historically appreciated 4.5% annually. High appreciation rates leading into 2005 far exceeded increases in wages, suggesting a housing bubble, notwithstanding the growing evidence of speculation and over-building. HD strategists should have been mindful of this, along with growing consumer debt.

Another consideration is exchange rates. The US dollar was strong vis-à-vis most foreign currencies in which HD exported. This made their bikes relatively expensive in other markets, including Canada at the time. Conversely, competitors from Europe and Japan were experiencing an advantage in the US with respect to currency rates.

All things being equal, HD was operating in a best-case economic scenario leading up to 2005.

Social: The leading edge of the baby boomer-bubble was in retirement by 2005. Notwithstanding HD's ability to attract follow-on generations, the population following the baby-boomers was notably smaller in number. All things being equal, HD's market was about to decline in numbers.

Threat of New Entrants: The industry was in the mature stage of the product lifecycle. Barriers-to-entry were high due to very expensive start-up costs, and the very competitive industry had consolidated down to a small number of major players. (Indian and Triumph had re-entered the market but did not appear to be a significant threat to HD as they were more boutique players, Indian in particular.)

Victory was a more real threat to HD. With Polaris (snowmobiles, ATVs, et al.) being the parent company, Victory had the financial support to build well engineered bikes and had an established dealer network required to gain rapid market penetration. They positioned themselves as direct competitors to HD in the heavy V-twin cruiser market - also highly customizable bikes made in America. Although Victory was not explicitly noted in the case, one can deduce that any lucrative niche market of size will attract competitors.

Threat of Substitutes: The motorcycle industry competes indirectly for disposable consumer dollars with the boating industry, luxury vacations, vacation homes, and any number of other luxury industries. Many of these options are safer, are equally exciting and adventure-filled and typically have more breadth of appeal across family units - less of an individual luxury.

Clients & Bargaining Power: Consumers had many options in the motorcycle industry, and more specifically in the cruiser market. HD was at the higher end of the price spectrum. Therefore value needed to be continually well choreographed.

Competitors & Rivalry Power: Japanese cruisers were relatively strong competitors to HD. Relatively few HD owners defected to Japanese brands, but, Japanese brands attracted many new bikers and bikers getting back into the sport. Competitors provided equal or superior technology and reliability at lower prices, but, did not equal HD's customer service or brand cache. They did not provide the opportunity to express individualism through bike customization. Nor did they provide the sense of community that owning an HD afforded.

Q3 Deconstruct HD's sustainable competitive advantage and product relevance.

Cost Leadership: HD does not enjoy 'cost leadership' with their motorcycle line. However, the vast majority of their accessories are manufactured in low-cost foreign markets. As a premium brand HD charges high prices and makes huge mark-ups on their accessories which comprise a significant portion of their profit formula.

Operational Efficiency: By 2005 HD had largely closed the gap on advantages Japanese competitors previously enjoyed. Further, HD was leveraging relatively standardized engine configurations across their product line, providing economies of scale that competitors did not have.

Brand Supremacy: HD dominated competitors in brand supremacy in the cruiser market. Virtually no other brand held the same 'felt ownership' by customers. This allowed HD to charge a premium for their products. Conversely, it required HD to be very careful about alienating customers by 'messing with their brand'.

Innovation Leadership: With respect to 'product' innovation, HD collaborated with Porsche to create the V-Rod engine, thereby accessing R&D skills and technology equal to that of Japanese competitors. However, this bike was not well embraced by hard-core HD enthusiasts as they preferred that the brand stay close to its heritage, the relatively primitive air cooled V-twin. Innovation limitations at HD probably had more to do with 'not alienating core customers'