MG495 Case Study 9

Case 9: Harley Davidson: An Overreliance on Aging Baby Boomers (International Issues in Strategic Management

 Prepare and submit a three-page executive summary that discusses what strategic alternatives are available and provide a recommended strategy.  

*********SEE ATTACHED FILES*********

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Writinga Textbook Business Case Analysis Executive Summary

Comment by : To be eligible for grading:
the assignment must follow APA formatting,
Incorporate all prior feedback of APA/grammar errors
provide an opening,
employ discussion about the topics identified in the Syllabus by using the to the headings provided (Synopsis of the Case, Relevant Factual Information about the problem/decision the organization faced, Explanation of relevant concepts, theories and applications derived from the course materials, Recommendations and alternative recommendations),
end with a conclusion,
Supply an APA formatted reference page
Contain appropriate in-text citation throughout
The length of the paper should not exceed three pages.

Student Name

Park University

Writing a Textbook Business Case Analysis Executive Summary Comment by : This should be a restatement of your paper’s title. See the sample page at p. 41 of the Publication Manual

Only provide the page number in the right hand corner. Do not provide a running header unless the item is for publication APA rule 8.03. See the sample paper starting at p. 41 of the Publication Manual
Double space, indent the first word of each paragraphs and use 12 point Times new Roman font justified to the left margin. See rule 8.03 (APA, 2009).

APA does not permit the use of the word introduction as a level heading (APA, 2009, Rule 3.03 p. 63) In fact, the opening does not even carry a heading, except for a restatement of the paper’s title. One is assumed by its placement at the beginning. Your opening should provide specific and meaningful information relevant to the business issue of the case. Appropriate in-text citation must be provided. The executive summary should be analytical in nature encompassing a forward thinking view. Comment by :

Synopsis of the Case Comment by : Us the topic headings and descriptions provided to draft the case analysis.

The content of the synopsis should present relevant background facts about the case under examination. The information provided should be supported by APA in-text citation. Provide only facts related to the business aspects of the case. Discussion of the background should be minimal (i.e., a paragraph, two at most), but still analytical.

Relevant Factual Information about the Problem or Decision the Organization Faced

State the precise problem or decision the organization faced. The section should include information that addressed the business issue under examination. This section should be no longer than a single paragraph.

Explanation of Relevant Concepts, Theories and Applications Derived from Course Materials

This section should be the bulk of your paper. Analysis of the business problem or decision in light of the course concepts must be presented, as well as the business lesson another organization could learn from this situation. Besides citation to the text, learners must conduct research in the University library related to the top. Citing the textbook only is not enough to demonstrate you understand and can apply the course objectives. Here is where comparative and contrasting positions should be considered and examples and illustrations provided.

Recommendations

Provide logical recommendations to address the business lesson identified above. The recommendations need not to be specific to the organization examined, but should consider how other organizations, if similarly situated, could lessen the impact of the problem or decision identified. Recall, that the organization under examination has already moved pasted this problem so any recommendations made, at this point, are fruitless. The focus of this section should be on what other companies should be aware of to address similar problems or decisions. Citation to the textbook alone is insufficient for analysis in this section. Learners should conduct research in the University’s library to support their positions. Depth of scholarship is not demonstrated by providing personal opinions alone, but by using examples, analogies, comparison and illustrations from the academic literature. Not only does this synthesize the material to assist the reader’s understanding, it is an effective way to present the academic sources and extend the discussion of your ideas. This section should be a paragraph or two.

Alternative Recommendations

This section is not a continuation of the prior. Provide suggestions for how to avoid the problem or decision the examined organization faced. Analysis here should be may be forward- thinking, predictive or, most likely, preventative in nature but tied to the thesis statement. Again, opinion is insufficient to provide the required academic analysis. Sources, other than the text, must be provided to sustain the statements made. This section should be a paragraph, at most.

Conclusion

End the assignment with a summary of the important points made in the document. No new information may be presented. Writing a conclusion can be done by rewording the opening or reformulation the topic sentences of each paragraph to make a summary for the reader. This section should be a paragraph, at most.

References Comment by : Please review reference list format starting at page 180 of the Publication Manual. Like the other portions of the paper, references should be double spaced; however, second and subsequent lines of a source are indented. The first line is not.

TEXTBOOK SEQ CHAPTER \h \r

1

CASE ANALYSIS GUIDANCE (CAG)

This supplement to the syllabus is provided to assist you;
HOWEVER
, it is also a directive on how to adequately accomplish a case analysis. The case format guidelines
MUST
be followed.

CRITICAL THINKING AND ANALYSIS – As a business/management major, or other major for that matter, and soon to be college graduate, one of the most important skills/abilities you should possess is the ability to engage in critical thinking and analysis (using the skills and knowledge you have learned throughout your education and applying them). You will never have everything presented to you when you are a junior manager/executive, but you are expected to take what you have and use your knowledge and skills to make decisions and to arrive at valid and accurate conclusions, which may and should include “thinking outside the box”.

The information provided below is designed to assist you in case analysis.

Don’t make anything up; just take information from the case and the time frame of when the case was written. You are required to use problem solving and critical thinking skills in this analysis. If something isn’t specifically stated, then consider the likelihood of it being a possibility for this given firm considering the timeframe that the case is taking place in, and the type of industry that the firm operates in.

Also,
DO NOT
go on the Internet and look at where the firm is today. The only information about the company that I want you to use in your case analysis is what is contained in the textbook or in any approved outside sources specifically listed.

a. The case analysis will be based on the time frame of the case. For example, if the case was written in

2

006, then students will use information from 2006 or earlier publications.

b. Students
will use
for references other sources of information as well as the textbook. These sources should include business magazines and professional journals. Online sites such as Wikipedia, Portable MBA, Quick MBA are not acceptable references for case analysis in this course.

c. Students should use any of the following magazines and publications as references:

Barron’s, Business Week, Fast Company, Forbes, Fortune, Harvard Business Review, Wall Street Journal. However, these aren’t the only outside sources that might be applicable, so don’t limit yourself to just these few. Using Google or other Search Engines can certainly assist you.

d. Make sure that you cite and reference the Case Authors, and NOT the Textbook authors when giving credit for information obtained from the case.

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SECTION E International Issues in Strategic Management

Case 9 Harley Davidson: An Overreliance on Aging Baby Boomers

Alan N. Hoffman

Bentley University

Natalia Gold

Northeastern University

The authors thank Barbara Gottfried, and Bentley University MBA students Cristina Montalvo, Robert Bondy, Michael Ferriero, and John O’Rourke for their research and contributions to this case. Printed by permission of Dr. Alan N. Hoffman. Please address all correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 1

75

Forest St Waltham, MA 02

45

2, 

ahoffman@bentley.edu

.

Company Background

In 1903, William S. Harley and Arthur Davidson produced the first Harley

–

Davidson motorcycle in a 15’ x 10’ wooden shed with the words ‘Harley-Davidson Motor Company’ etched into the door. The warehouse was located in Milwaukee, Wisconsin, the company’s headquarters to this day. They were soon joined by Arthur’s brother Walter, and by 1910, the company had begun to establish itself, using its current “bar and shield” logo for the first time; the logo that it trademarked with the U.S. Patent Office In 1911. In 1981, Harley-Davidson, Inc. purchased the Harley-Davidson Motorcycle Company from AMF Incorporated via a management buyout, incorporated, then went public in 1986. Over the years, Harley-Davidson had made a name for itself as the most well known producer of heavyweight motorcycles in the North American market; and, although its international sales were not significant until the late 1990s, the company then quickly became the most renowned brand in the world.

Harley-Davidson, Inc., a publicly traded company listed on the New York Stock Exchange as “HOG,” divided its operations into two segments: Motorcycles & Related Products, and Financial Services. The Motorcycles & Related Products segment designed, manufactured, and sold wholesale heavyweight motorcycles, motorcycle parts, accessories, and general Harley-Davidson merchandise to retail customers through a network of independent dealers in North America, Europe, Middle East, Africa, Asia Pacific, and Latin America (

Exhibit 1

). The Financial Services segment, known as Harley-Davidson Financial Services (“HDFS”), provided wholesale and retail financing as well as insurance-related services. HDFS customers were primarily end-users from the Harley-Davidson retail stores, drawn from its networks primarily in the United States and

Canada

.

Exhibit 1

Harley-Davidson’s U.S. and International Dealerships

FULL SERVICE DEALERSHIPS AND SRL’S

74

74

74

370

40

2012	2011	2010	200 9	2008	2007	2006
USA	695	706	729	758	787	788	679
Canada	73				74	76	75
Europe region	371		370	364	369	381	354
Asia Pacific region	281	274	272	254	200	194	178
Latin America region	47	44		40	45	49	31
Totals	1,467	1,468	1,479	1,495	1,487	1,477	1,317

Strategic Direction

Harley-Davidson’s mission was to design and manufacture premium motorcycles for the heavyweight market. As of 2013, the company offered seven different models: Sportster, Dyna, Softail, V-Rod, Touring, CVO, and Trike. Each model was highly customizable, made to order to customer specifications, creating a Harley-Davidson mystique. As the company’s motto so aptly put it:

The company’s vision promoted a comprehensive motorcycling experience across a wide demographic through events, rides, and rallies. Its rallies, a crucial part of Harley-Davidson culture, were a way for motorcycle enthusiasts to come together at different locations and tour with each other. Ideally, Harley-Davidson wanted every motorcycle owner to wear a Harley vest, a Harley helmet, and Harley boots, then meet up with other Harley motorcycle owners wearing the same attire—the events, rides, and rallies made this vision come true.

Harley-Davidson’s main objectives were: (1) to provide a quality and reliable product; and (2) to allow for highly customized, stylish products. The company was so sure of the quality of its products that it offered a two-year warranty on new motorcycles, and let customers know they came first:

At Harley-Davidson, customers not only purchased a motorcycle, they bought the “rebel” lifestyle Harley signified. This rebel image took a long time to develop and constituted a major competitive advantage for Harley. Nothing promised the same excitement as being on the open road on a Harley, its engine roaring, the wind whipping, the great open spaces of America just down the road. The company also considered the availability of a line of motorcycle parts, accessories, and general merchandise and of financing through HDFS part of its competitive advantage. No other motorcycle company offered its own financing under the same company umbrella.

Harley-Davidson specifically targeted a narrowly defined market of middle-aged males with disposable income. However, as U.S. baby boomers got older, the company recognized that it must look to new markets and demographics to expand sales.

Competition

Harley-Davidson’s main competitors were Honda, Suzuki, Yamaha, Ducati, Kawasaki, BMW, and Polaris. Most of Harley’s competition was international in focus unlike Harley’s more U.S. domestic presence. Other than Honda, most of the other competitors focused on lightweight, sporty, speed bikes. Harley historically targeted the larger, luxury motorcycle market.

According to Popular Mechanics magazine, the top 10 best buys for bikes in 2103 were:

1. 2013 Kawasaki Ninja 300

2. 2013 BMW S1000RR HP4

3. 2013 Victory Judge

4. 2013 Harley-Davidson Seventy-Two

5. 2012 Honda NC700X

6. 2013 Ducati Monster 696 Anniversary

7. 2012 Yamaha Super Tenere

8. 2013 Moto Guzzi V7 Racer

9. 2013 Suzuki SVF 650

10. 2013 Zero S

The Japanese company Honda was always Harley’s biggest competitor: Harley-Davidson had the greater domestic market share but Honda had the largest international market share in the entire motorcycle industry, with a history of providing quality products at cheaper prices than comparable American made products. Honda’s best selling motorcycle in the United States was the GoldWing. The Harley management was very much aware of Honda as its biggest competitor and consciously strove to stay ahead of Honda in the industry.

The Motorcycle Industry

As with all motorcycle companies, Harley-Davidson operated in a highly regulated industry and had to ensure that it complied with U.S. EPA standards and the National Highway Traffic Safety Administration’s National Traffic and Motor Vehicle Safety Act. In most states, motorcyclists had to have a separate license. Some promoters of motorcycles worried that consumers might not want to go through the process of getting a special license to use a motorcycle, which they considered a threat given that any laws implemented against the use of motorcycles could directly affect the acquisition of a motorcycle.

Motorcycle safety regulations were also historically created and implemented at the state level. Each state had a set of individual requirements for motorcycles including: helmet requirements, state funded rider education, eye protection, passenger regulations, and lighting. Even though states had safety regulations in place, trends evidenced an increasing number of motorcycle accidents. A study conducted by the University of Southern California (USC) attributed this increase to two major factors—lack of detection of motorcycles by passenger vehicle drivers and uneducated motorcycle riders. According to the USC study, 92% of motorcyclists who were involved in accidents had no certified training and had not participated in a rider education program. Although some states offered state funded rider education, many did not. Beginning in the 1990s, the rate of motorcycle-related accidents steadily increased, from 61,451 in 1997 to 79,000 in 2003; and fatalities increased from 2,116 to 3,661. This increased risk, it was feared, could deter consumers from purchasing a motorcycle and push them to a safer option such as a small car.

In addition, as baby boomers, Harley-Davidson’s main target audience, aged, their concerns about the safety risks of riding a motorcycle grew, which was seen as potentially detrimental to the motorcycle industry as the federal government could then decide to mandate increased safety requirements. Most bikers, it was believed, chose to ride a motorcycle for the cool image; thus, being forced to wear protective gear, helmets, and use extra safety features could hurt the industry’s image and sales. If this trend continued, many felt, there could be a potential threat to Harley’s ability to retain current customers and attract new ones. The industry could lose profitability, and sales of motorcycles could decrease.

On the other hand, industry leaders argued, rising fuel prices might prompt consumers to switch to motorcycling and bicycling to save money on transportation costs, a trend underpinned by a consumer shift toward eco-friendly practices requiring less (or no) fuel consumption. Thus, demand for these products was expected to rise. By capitalizing on these trends and opening up to a broader consumer market, the industry was expected to grow at an annualized rate of 1.3% to $7.1 billion in the five years leading up to 2018 (

IBIS World, 2013

).

By the same token, however, the loud vroom Harley-Davidson motorcycles made, once seen as an advantage, became a threat for the brand. While once that noise was seen as a sign of power, customers began to find it both annoying and a sign of conspicuous consumption. Harley needed to see customer dissatisfaction as an opportunity to design new motorcycles that minimized sound to decrease the perception of loud noise and promote a more eco-friendly image.

Finally, while technological enhancements enabled Harley-Davidson to produce a constant stream of appealing technological innovations such as video cameras, GPS, airbag systems, and increased fuel efficiency for its bikes, adding new tech often resulted in higher manufacturing costs, thus higher prices for consumers.

Marketing

One of the primary reasons for Harley-Davidson’s success over the past few decades was the positioning of its brand as an American icon. That iconic status was crucial to creating tremendous brand recognition and a strong reputation throughout the world for producing the highest quality bikes in the marketplace. Owners of Harley-Davidson motorcycles swore by them and were extremely unlikely to seek a competitor brand. The brand was so strong the company was even able to generate significant sales of non-motorcycle branded merchandise, including hats, t-shirts, and other household items. Harley was seen as a true “American” brand, something baby boomers supported and were willing to stand behind. Additionally, a sense of community and culture contributed to Harley’s brand strength. The company promoted motorcycle rallies, where Harley owners could meet and ride with other Harley owners; and encouraged riders to share their positive experiences through word-of-mouth or online forums set-up for that purpose.

Through all this, the main challenge Harley-Davidson faced from a marketing standpoint was its inability to generate interest and sales from demographics other than its traditional target market: middle-aged men. In 2012, over 65% of sales were made to Caucasian men over 35 (

Research and Markets, 2013

). The baby-boomer generation had been the main driver of Harley-Davidson sales for more than 20 years, but as boomers aged and lost their desire to purchase and ride, Harley needed to find ways to attract new customers. The younger generation was more attracted to colorful, lightweight bikes, similar to those sold by Kawasaki and Suzuki, two of Harley-Davidson’s main competitors, and on top of that, they saw Harleys as appealing to an older demographic, something their fathers would ride but they wouldn’t. Thus, the best way for Harley to attract the younger generation was to continue to improve its customization and technological options to appeal to a generation committed to customizing or altering a product to best suit its own needs and desires. Harley-Davidson had been offering customization options for some time, and this allowed potential buyers on its website to build their own Harleys to whatever specifications they desired. Adding yet more customization options in the form of colors and styles, it was hoped, could benefit Harley and increase its chances of attracting new riders. However, some of Harley’s competitors such as Kawasaki and Honda were already “on it,” offering technological features such as high-quality sound systems, rear-viewing cameras, and GPS system add-on availability for their bikes, a sure-fire way to appeal to younger consumers.

A further challenge for Harley-Davidson was promoting the safety of its bikes versus those of its competitors. Motorcycle riders had become much more safety-conscious than those of previous generations, and as motorcycles were traditionally considered one of the most dangerous forms of transportation, Harley had to meet the challenge of potential buyers’ resistance on the grounds of safety in its bid to increase sales.

Operations

By the end of 2012, Harley had over 695 full service dealerships in the United States and 73 in Canada, and another 700 full service dealerships in Europe, the Middle East, Asia, and Latin America (
Exhibit 1
). The availability of full service dealerships was considered the best way to promote sales as it allowed customers to come into a local shop, test drive a bike, look at options, and understand their financing options before actually making a purchase, all of which were crucial for an investment as expensive as a Harley.

Harley-Davidson also believed that flexible manufacturing processes and supply chains combined with cost-competitive and flexible labor agreements were critical to allowing the company to respond to customers in a cost effective manner, restructuring its U.S. manufacturing plants accordingly to maximize efficiency, cost saving, and customer satisfaction. The company also fostered long-term, mutually beneficial relationships with its suppliers. Through these collaborative relationships, the company gained direct access to technical and commercial resources for product design, development, and manufacturing initiatives greatly improving product quality, technology integration, and faster new-vehicle introductions (
Research and Markets, 2013
).

One of Harley’s weaknesses from an operational standpoint was its inability to generate revenue streams from product lines other than motorcycles. Harley had attempted to market various supplemental products in the past, including motorcycle-related parts, Harley-branded trucks, Harley branded snowmobiles and all-terrain vehicles, but all of these ventures proved only marginally successful. Harley also had to face the difficulty that in some regions of the country, especially the Northeast, its products could only be used for a limited number of months per year. As the Northeast was a very large market, critics noted that it would be helpful for Harley to have supplemental products available for sale during the winter months, when riding a motorcycle was not particularly feasible.

Restructuring Plan

Between 2009 and 2014, Harley undertook a number of different restructuring initiatives with the goal of streamlining operations and reducing production costs while maximizing efficiencies. A major restructuring project within its U.S. holdings was the consolidation of its motorcycle production into a single line at the company’s motorcycle manufacturing facility in York, Pennsylvania. Additionally, the company ratified a new, more flexible labor agreement at all of its U.S. manufacturing locations. In the first half of fiscal year 2013 the company began implementing “flexible” production capabilities at its York facility by adding flexible workers. By doing this it increased manufacturing production in the first half of 2013 to more closely mirror retail demand for its products.

The company also restructured operations internationally to reduce costs and maximize output, closing one of its major international manufacturing facilities in New Castalloy, Australia, a plant that manufactured the majority of the wheels for the company’s products. Instead, the company decided to source these components through existing suppliers, as that would be more efficient and cost effective (
Research and Markets, 2013
).

Finance

For 2014, Harley-Davidson’s main financial objective was to find ways to increase sales and profits and expand sales to new market segments. The company continued to see strong year-over-year growth in sales and net income (

Exhibits 2

 and 

3

). It also maintained a strong commitment to research and development expenditures, indicative of its drive to continue to search for ways to improve and expand through R & D. While some companies used net profits to pay dividends to investors, Harley-Davidson, like many successful companies, determined that the key to continued success and longevity was reinvestment of profits in the company to fund new product development and improve established products. Another financial strength for Harley was its return of sales and revenue to strong positions after temporary downturns in 2011, following the reorganization and restructuring plans. Finally, the company generally maintained strong cash positions, enabling it to stay liquid and pay down debt balances, should high debt ever become an issue.

Exhibit 2

Income Statement

–

–

       –

       –

       

       –

$    0.73

  Basic

  Diluted

Harley-Davidson, Inc. Condensed Consolidated Statements of Income Unaudited Year Ended December 31, 2013 (In Thousands. Except Per Share Amounts)
Q1	Q2	Q3	Q4	TOTAL
Motorcycles and related products revenue	$ 1,414,248	$ 1,631,466	$ 1,180,284	$ 4,225,998
Gross profit	519,442	601,870	416,315	1,537,627
Selling, administrative and engineering expense	239,743	249,502	240,198	729,443
Restructuring expense	2,938	(5,297)	646		(1,713)
Operating income from motorcycles and related products	276,761	357,665	175,471			–	809,897
Financial services revenue	156,965	162,841	163,434	483,240
Financial services expense	85,420	88,685	87,366		261,471
Operating income from financial services	71,545	74,156	76,068	-	221,769
Operating income	348,306	431,821	251,539	1,031,666
Investment income	1,615	1,770	1,161	4,546
Interest expense	11,391	11,238	11,369			33,998
Income (loss) before income taxes	338,530	422,353	241,331	1,002,214
Provision (benefit) for income taxes	114,401	150,314	78,615	-	343,630
Income (loss) from continuing operations	224,129	271,739	162,716	658,584
Income (loss) from discontinued operations, net of tax				–
Net income (loss)	$    224,129	$   271,739	$    162,716	$ -	$   658,584
Earnings (loss) per common share from continuing operations:
	Basic	$       1.00	$    1.22		$    0.73
	Diluted	$     0.99	$    1.21
Weighted-average common shares:
224,429	223,052	221,936
226,148	224,470	223,486
Cash dividends per common share	$           0.21	$          0.21	$        0.21

Exhibit 3

Balance Sheet

Harley-Davidson, Inc. 2013 Quarterly Condensed Consolidated Balance Sheets Unaudited (In thousands)
ASSETS	March 31,2013	June 30, 2013	Sept 29, 2013
Current assets:
Cash and cash equivalents	$1,018,759	$1,300,690	$1,029,955
Marketable securities	135,246	133,631	122,234
Accounts receivable, net	259,673	253,819	290,158
Finance receivables held for investment net	2,074,036	2,010,974	1,829,612
Inventories	416,050	307,717	401,199
Restricted cash held by variable interest entities	197,025	212,004	194,329
Other current assets	232,190	235,636	225,188
Total current assets	4,332,979	4,454,471	4,062,675
Finance receivables held for investment net	3,959,903	4,214,612	4,355,278
Other long-term assets	1,042,239	1,038,115	1,036,055
$ 9,335,121	$ 9,707,198	$ 9,484,008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable & accrued liabilities	824,335	794,670	885,940
Short-term debt	687,705	525,745	394.460
Current portion of long-term debt	715,143	776,274	721,316
Total current liabilities	2,227,183	2,096,689	1,981,716
Long-term debt	3,892,469	4,234,352	4,067,733
Pension liability and postretirement! healthcare benefits	426,729	420,096	412,482
Other long-term liabilities	131,692	134,822	140,230
Total shareholders’ equity	2,657,048	2,821,239	2,881,847
$9,335,121	$9,707,198	$9,484,008

Harley-Davidson’s main weakness from a financial, and company-wide, perspective was its dependence on a single customer demographic: middle-aged men, its’ primary customer base. As boomers aged out of the motorcycle market Harley had to meet an enormous challenge: how to maintain its high sales and revenue volume and grow and diversify its base to replace those boomers. Another challenge was the company’s debt to equity ratio, which continued to rise over the five years from 2009 to 2014 as the company took on more and more debt from its restructuring. The high debt balance undercut company flexibility and, it was feared, could present serious problems in the future. Inventory levels also increased at a rate slightly higher than sales, which suggested that sales were not meeting projected levels, resulting in excess inventory. Finally, in recent years, more and more customers chose to pay for their motorcycles through the company’s financing program rather than purchase them outright, suggesting that buyers were struggling to afford Harley-Davidson’s steep price tag, and perhaps indicating a weakness in the buyer market for Harleys.

Nevertheless, Harley-Davidson sales increased from $5.3 billion in 2011 to $5.6 billion in 2012 while net income increased from $599 million to $624 million during the same time period. Thus, both sales and net income appeared to be trending positively, a good financial sign. Harley also saw some strong percentage sales increases in its international markets during 2012. The units sold in the United States increased 6.6% from 2011 to 2012, compared to a 39% increase in the Latin America region, and a 19.9% increase across the Middle East and Africa. International sales turned out to be a significant growth and expansion opportunity for Harley-Davidson as long as it found ways to participate in international markets without driving costs and related expenses of doing business up too much.