Harley Davidson's competitive advantages and strategic management analysis

Harley Davidson

Strategic Management -- Harley Davidson

This work examines the strategic management of Harley Davidson Company and seeks to answer specific questions relating to this company's management through conduction of a Porter's Five Forces analysis and a review of the literature on this company.

The specific research questions examined in this study are those as follows: (1) What are the primary competitive forces impacting U.S. motorcycle producers in general and producers like Harley Davidson? (Porter's 5 forces analysis) (2) What are the driving forces in this industry and are they likely to impact the industry's competitive structure favourable or unfavourable? (3) What type of Strategy has Harley Davidson followed? Which of the 5 generic strategies is Harley Davidson employing? Is there any reason to believe that Harley Davidson has achieved a sustainable competitive advantage over its competitors or over many of motorcycle industry rivals? If so, what type of competitive advantage does Harley Davidson enjoy? (4) What are the specific factors accounting for why Harley Davidson has been successful over the past decades? Do these factors have more to go with great strategy execution or great leadership? (5) What recommendations would you make to Keith Wandell?

Introduction

The Harley Davidson Company began in 1909 when William S. Harley and his two brothers, Walter and Arthur, built their first three motorcycles in a shed in Milwaukee, Wisconsin. The company introduced its trademark bike described as a "2-cylinder, v-twin engine, able to reach speeds of 60 mph." (Nariman, nd) During World War I, more than 90,000 cycles were built for the military "which elevated their production to record levels and earned them the coveted Army-Navy 'E' award for excellence in war time production." ( ) Following the war, the company shifted from the production of military to recreational bikes. (Nariman, nd, paraphrased)

I. Porter's Five Force Analysis

Conduction of a Porter's Five Force analysis includes examination of: (1) The bargaining power of suppliers; (2) The bargaining power of customers; (3) The threat of substitutes; (4) The threat of new entrants; and (5) Competitive rivalry within the industry. (Recklies, 2001) The following is an illustration of the conception of the five forces analysis of Porter.

Figure 1

Porter's Five Forces analysis

A. Competitive Rivalry

It is reported that the market for heavyweight motorcycles is "fair concentrated" as there are "only four major firms producing these motorcycles" which includes "Honda, Suzuki and Yamaha" all of which are Japanese companies. (Melief, Bundagaard, and Hathaway, 2006) Harley Davidson has been the traditional leader in the market with a 50% market share. Harley Davidson company traditionally held a larger share of the market however, less differentiation of its product is attributed as the reason for the fall in Harley Davidson's market share.

B. Threat of Entry

The heavyweight motorcycle industry is described as "very capital intensive" since there are "significant economies of scale involved in building motorcycles." (Melief, Bundagaard, and Hathaway, 2006) While there are small-scale producers of motorcycles with a business formulated on the basis of reputation, these primarily completely customized motorcycle producers do not have a high enough production to threaten the market position of Harley Davidson. (Melief, Bundagaard, and Hathaway, 2006, paraphrased)

C. Threat of Substitutes

There are few substitutes for heavyweight motorcycles that pose a serious threat for Harley Davidson company. The other three companies, Yamaha, Suzuki and Honda, are manufacturers of smaller and quicker bikes and these are the closest possible substitutes followed by passenger cars. The smaller bikes require a different riding style in which the rider is hunched over while riding rather than sitting straight up. Passenger cars are reported to be "weak substitutes for heavyweight motorcycles" since customers rarely if ever purchase heavyweight motorcycles to "satisfy transportation requirements." (Melief, Bundagaard, and Hathaway, 2006)

Fuel price is highly relevant in view of heavyweight motorcycles in that when the price of fuel is high then consumers are less likely to purchase a heavyweight bike. However, it is reported that when consumers pay between $8,000 and $25,000 for a luxury items such as a heavyweight motorcycle then they are likely not worried about a slightly higher gasoline price. (Melief, Bundagaard, and Hathaway, 2006, paraphrased)

D. Buyer and Supplier Power

Since there are so many suppliers for Harley Davidson company "there is very little that any single supplier can do to exact rents from Harley." (Melief, Bundagaard, and Hathaway, 2006) The customers of Harley Davidson are reported to be "largely individual consumers, making it difficult for them to seriously affect Harley Davidson's financial situation by refusing to cooperate." (Melief, Bundagaard, and Hathaway, 2006) In addition, the Harley Davidson dealerships are owned independently and the customers its licensed dealers however, "the sheer number of dealers that Harley Davidson has throughout the world makes the situation for dealers not much better than individual riders." (Melief, Bundagaard, and Hathaway, 2006)

II. Three Success Factors

There are three success factors reported for the Harley Davidson Company, which include those of: (1) management; (2) Continuous improvement; and (3) management involvement. (Nariman, nd) In relation to management as a success factor, it is reported that the new owners of Harley Davidson Company came to the realization that if they were to make the improvements required that they had to come to a determination of what had gone wrong.

III. List of Practices -- Reasons Company Experienced Problems

The following list of practices was developed by the management team as being the primary reasons that the company experienced previous problems: (1) Corporate management's focus was on short-term returns; (2) Management failed to list to the company's employees or to give the employees responsibility for the quality of items they produced; (3) High inventories of parts diminished productivity greatly; (4) Quick fixes were used for problems including such as "throwing in computers and state-of-the-art machinery to improve productivity; (5) High break-even point that left the company vulnerable to fluctuations in a market characterized by unpredictability; and (6) Management that was too late to realize the threat of foreign competition. (Nariman, nd)

IV. Lifelong Learning

It was the realization of the new management team of Harley Davidson Company that the company had a new to become "a perpetual learning and improving organization." (Nariman, nd) There was a need for open communication and for all employees to understand their role and most importantly, the employees needed to understand the business environment of the corporation better. The Harley Davidson Company desired the capacity to develop "processes and people, which would ensure that employees would have the capability for rapid, effective change based on an understanding of the whole business environment in which they operated." (Nariman, nd)

Other realizations of management included that "individuals need to have a shared vision of the company values: tell the fact, be fair, keep your pledge, respect the individual, and encourage brilliant curiosity." (Nariman, nd) Management further needed to earn the employees respect and trust. The company created the Harley-Davidson Learning Centre dedicated to lifelong learning for the purpose of serving employees who desire to keep their skills current. (Nariman, nd, paraphrased)

In terms of productivity, the Harley Davidson Company uses the following: (1) just-in-time inventory (JIT); (2) employee involvement (EI); and (3) statistical operator control (SOC). (Nariman, nd) It is reported that Just-In-Time Inventory was the "driving force of Harley's quality improvement program. Very simply, as you operate with lower and lower inventories, it becomes essential that all your inventory is usable." (Nariman, nd)

It is reported that Harley Davidson previously used a complex inventory system, which was inefficient as it failed to address the manufacturing process problems. JIT exposed these problems and after renaming JIT to MAN or 'materials as needed to differentiate from ineffective) the processes of JIZT implemented by other companies concentrate on setup reduction, focus flow processing containerisation, parts control and operator preventive maintenance" there was impressive improvement noted by the Harley Davidson Company including the following improvements: (1) Inventory turn up from 5 to 20; (2) Inventory levels down 75%; (3) Percentage of motorcycles coming off the line complete dup form 76% to 99%; (4) Scrap and rework reduced by 68%; (5) Productivity up by 50%; (6) Space requirements down by 25%. (Nariman, nd)

Continuous improvement is stated to demand employee involvement and the Harley Davidson Company employees are reported to "take part in a gain-sharing program and paid cash incentives for attaining and maintain quality, profitability and product delivery goals"…which serve to "foster employee's personal growth and develo9pment." (Nariman, nd) Included in this initiative is teambuilding at all levels of the Harley Davidson Company including team building for "union leaders, negotiation committees and stewards." (Nariman, nd) Management must necessarily demonstrate "continuous improvement of quality and efficiency as a way of life, not just another 'program'. (Nariman, nd)

Harley Davidson Third-Quarter 2010 Earnings

The third quarter 2010 earnings of the Harley Davidson company showed that the company is continuing in its progress. The earnings were reported at $93.7 million compared to $56.4 million from the same quarter last year. It is reported that the third quarter earnings were "drive by continued performance improvement at the Company's financial services unit, Harley Davidson Financial Services as the company recorded operating income from financial services of $50.9 million, compared to a loss of $31.5 million in last year's third quarter. (Harley Davidson Company Report, 2010) Wandell is noted to have stated as follows:

"Despite the continued challenges in the economy, we are making solid, steady progress at transforming our business. With our strategic focus on future growth initiatives and continuous improvement, we are positioning Harley-Davidson to succeed at today's volumes, as well as to grow and restore greater profitability longer term. The results we are seeing stem directly from the actions we are taking to restructure the business, driven by the creativity and extraordinary efforts of our entire team. From manufacturing and product development to marketing, international operations, dealer capabilities and across the entire enterprise, we are transforming Harley-Davidson with a focus on delivering unparalleled customer experiences and value." (Harley Davidson Company Report, 2010)

Wandell also stated that the Harley Davidson brand "…has remarkable strength globally. Few products or brands rank as highly in terms of awareness and affinity on the part of customers and non-customers alike. We have continued to gain market share in the U.S. And Europe. Since 2008, we also have been the U.S. leader in new motorcycle sales to young adults for the entire on-road motorcycle category. Going forward, we will continue to build on this brand strength and leadership position." (Harley Davidson Company Report, 2010)

It is reported that Harley Davidson "…is narrowing its guidance for full year 2010 shipments and now expects to ship 207,000 to 212,000 Harley-Davidson motorcycles to dealers, a decrease of approximately five to seven percent from 2009. Prior shipments guidance was 201,000 to 212,000 motorcycles. The Company is also refining its guidance for capital expenditures, which are now expected to be $190 million to $210 million for the full year, compared to prior guidance of $235 million to $255 million. Capital expenditures guidance for 2010 includes $75 million to $90 million to support restructuring activities, a revision from prior guidance of $95 million to $110 million for restructuring activities in 2010. Harley-Davidson continues to expect gross margin to be between 32.5% and 34.0% for the full year." (Harley Davidson Company Report, 2010) The cost estimate has been lowered by Harley Davidson for completion of its restructuring activities stating that they expect to save $150 to $165 million in 2010 form restructuring activities and that the company continues to expect "annual ongoing savings of $290 million to $310 million, beginning in 2013 upon completion of the restructuring activities." (Harley Davidson Company Report, 2010) It is reported that Harley Davidson's ability to meet the targeted expectations is dependent upon the ability of the company to: (1) execute its business strategy and divest certain company assets, (2) effectively execute the Company's restructuring plans within expected costs and timing, (3) successfully achieve with our labor unions flexible and cost-effective agreements to accomplish restructuring goals and long-term competitiveness, (4) manage the risks that our independent dealers may have difficulty obtaining capital, and adjusting to the recession and slowdown in consumer demand, (5) manage supply chain issues, (6) anticipate the level of consumer confidence in the economy, (7) continue to have access to reliable sources of capital funding and adjust to fluctuations in the cost of capital, (8) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (9) continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead, (10) manage production capacity and production changes, (11) provide products, services and experiences that are successful in the marketplace, (12) develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace, (13) sell all of its motorcycles and related products and services to its independent dealers, (14) continue to develop the capabilities of its distributor and dealer network, (15) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (16) adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (17) adjust to healthcare inflation and reform, pension reform and tax changes, (18) retain and attract talented employees, (20) detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation, and (21) implement and manage enterprise-wide information technology solutions and secure data contained in those systems.( Harley Davidson Company Report, 2010)

Summary and Conclusion

This work has examined the historical and financial data for Harley Davidson Company and the initiatives used by Wandell to address the problems that the company has been experiencing. Wandell is doing a fantastic job with the company and appears to have the necessary goals clearly in his sight range for the company in the near future.