Harley-Davidson External Environment & Strategic Analysis

Introduction to External Environment Analysis

The external business environment encompasses an array of comprehensive forces that relate to an organization. External environment analysis facilitates an understanding of an organization's position relative to other organizations in the same industry (Worthington & Britton, 2006). An awareness of the external forces operating across industry players plays an important role in strategic planning. It also helps an organization identify its relative opportunities and threats, allowing it to plan according to its capabilities while focusing on available resources (Worthington & Britton, 2006).

Understanding the external environment works to improve an organization's competitive advantage and potential for sustainable growth within the industry (Peng, Wang, & Jiang, 2008). External environmental forces can influence management decisions in running an organization. The effects of such influence produce ripple effects on organizational culture, business performance, leadership style, and the organization's general response to market conditions (Worthington & Britton, 2006).

Major Driving Forces in the Motorcycle Industry

Industry external environment forces are formally defined as the important factors that prompt reorientation of an organization's operations toward objective attainment (Peng et al., 2008). The U.S. motorcycle industry has seen major transformations over the years in its evolutionary growth. Among the external environmental factors that significantly impact the motorcycle industry are political trends, sociocultural changes, and economic dynamics. Each is discussed in turn.

The motorcycle industry faces a likely change-inducing force in the form of lower trade tariffs that allow and encourage competitors from European and Asian industries to enter the U.S. market. The global motorcycle industry has grown to incorporate countries with advanced technology and cheaper automobile production methods. This growth, combined with the lowering of trade tariffs, threatens the continued existence of established motorcycle firms in the U.S. market (Peng et al., 2008).

Over the years, people's lifestyles have been changing with increasing exposure to global trends. The diversity in lifestyles creates the potential for shifts in consumer preferences for the brands and products produced in the U.S. motorcycle industry. Loyalty to the industry's products is slowly declining, with only a few dedicated customers keeping their preferences constant. This lifestyle change has seen consumers shifting their preferences toward new automobiles and technologically and environmentally friendly choices (Peng et al., 2008).

Changes and advancements in production technology are forcing major players in the motorcycle industry to consider relocating their production sites. These changes work in tandem with consumer preference for fairly priced products, creating pressure on firms to lower production costs. The awareness that cheaper and highly advanced production technology is available in other regions — such as East Asian countries — is prompting this relocation. The U.S. motorcycle industry is facing an increasing number of firms moving to regions where production costs are lower. These companies then sell their final products back to the U.S. market, making their products more price-competitive (Peng et al., 2008).

Porter's Five Forces Analysis of the Motorcycle Industry

Porter's Five Forces model provides a framework for analyzing the influence of external and internal forces on an industry's competitiveness and profitability. The model gives organization managers a better understanding of the industry context and the firm's position and potential within it. The five forces are: rivalry among existing firms, potential entrants, substitute products, bargaining power of suppliers, and bargaining power of buyers (Porter, 2008). Together, these forces assess competitive pressures influencing potential profitability in an industry; any one of them can reduce profitability or increase earnings (Porter, 2008).

Over the last few decades, the motorcycle industry has had a few major players, with Harley-Davidson being the dominant firm holding a market share exceeding 55%. In recent years, this share has slowly declined to below 50%. The decline is attributed to changes competitors have made to expand their product lines, producing motorcycles that closely resemble Harley-Davidson models. The unique design that identifies a Harley-Davidson motorcycle is now reflected in Japanese motorcycles, making those products equally competitive in the U.S. market. Additionally, motorcycle consumers now have little concern for quality differences between Japanese and Harley-Davidson motorcycles, as was the case in the past (Porter, 2008).

The rivalry and poaching of Harley-Davidson customers by Japanese manufacturers serves as a threat to Harley-Davidson's market dominance. Despite these pressures, Harley-Davidson relies on customer loyalty and continued preference for its brand. However, even given this loyalty, a declining trend in demand for Harley-Davidson's products is observable.

In the motorcycle industry, there are only four major players: Harley-Davidson, Honda, Suzuki, and Yamaha. The capital-intensive requirements and production efficiencies needed to build a product line comparable to the four major players serve as significant barriers to entry. Despite decreasing production costs brought about by technological advancements and assembly-line production, the level of economic efficiency required to rival existing players remains substantially high. Although small and emerging motorcycle producers exist, their scale of operations is insufficient to threaten the four major players. These smaller producers concentrate on custom-made motorcycles, which nonetheless helps keep the general public's interest in motorcycles alive.

The market for motorcycles has few substitutes capable of seriously distorting demand. Given that heavyweight motorcycles such as those Harley-Davidson produces are luxury items, easy substitution is unlikely. The closest substitutes to Harley-Davidson's products are the smaller, faster brands produced by Yamaha, Honda, and Suzuki, followed by scooters and passenger vehicles. Consumers of heavyweight motorcycles overlook these substitutes, preferring the image associated with Harley-Davidson ownership. The riding comfort afforded by Harley-Davidson motorcycles also plays a significant role in sustaining demand for heavyweight models.

Since heavyweight motorcycle consumers are not primarily motivated by transportation needs, they are less likely to substitute their motorcycles with passenger cars. Consumers who purchase a motorcycle for transportation, efficiency, and maneuverability reasons will be inclined toward a lighter, smaller motorcycle — the opposite of the heavyweight models Harley-Davidson produces.

The primary complement to motorcycles is gasoline. It is expected that demand for Harley-Davidson motorcycles will fall when gasoline prices are high, given that heavyweight motorcycle use is largely discretionary rather than driven by transportation convenience. It is worth noting, however, that a customer willing to pay between $8,000 and $25,000 for a luxury item is unlikely to be deterred by steeper fuel prices. This implies that any decline in demand for heavyweight motorcycles due to rising fuel costs may be modest.

The raw materials used in assembling Harley-Davidson motorcycles are sourced from multiple suppliers. Since the company handles assembly itself and distributes final products through an extensive network of independent dealers, no single supplier holds significant leverage. The availability of numerous supply sources means no supplier can charge excessive prices. Any attempt to do so would simply prompt the company to switch suppliers with little or no disruption to production operations.

Harley-Davidson's customer base comprises individual end users, making coordinated buyer action difficult. As a result, the company's financial performance is unlikely to be meaningfully compromised by individual customer behavior. A more plausible source of buyer pressure is the company's worldwide dealership network. If dealers were to demand higher commissions on motorcycles sold, they could potentially disrupt the company's ability to reach its markets. This scenario is considered unlikely, however, since dealers operate on individual contract arrangements.