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HARLEY-DAVIDSON STRATEGIC PLAN

Submitted by

Stacey Wagner

Prepared for

Professor Don Looney

Business Policies and Strategies

Spring 2007 2

TABLE OF CONTENTS

VISION STATEMENT .................................................................................................... 3

MISSION STATEMENT ................................................................................................. 3

EXTERNAL ASSESSMENT ........................................................................................... 3

External Audit ................................................................................................................. 3

Porter’s Five Forces Analysis ......................................................................................... 7

External Factor Matrix .................................................................................................... 8

Table 1 ................................................................................................................ 8

Competitive Profile Matrix ............................................................................................. 9

Table 2 ................................................................................................................ 9

INTERNAL ASSESSMENT .......................................................................................... 10

Key Internal Forces ....................................................................................................... 10

Financial Ratio Analysis ............................................................................................... 12

Table 3 .............................................................................................................. 12

Internal Factor Evaluation Matrix ................................................................................. 16

Table 4 .............................................................................................................. 16

SWOT MATRIX ............................................................................................................. 17

Table 5 .............................................................................................................. 17

SPACE MATRIX ............................................................................................................ 18

Table 6 .............................................................................................................. 18

GRAND STRATEGY MATRIX ................................................................................... 20

Table 7 .............................................................................................................. 20

LONG-TERM OBJECTIVES AND STRATEGIES ................................................... 21

ANNUAL OBJECTIVES ............................................................................................... 21

PRO-FORMA FINANCIAL STATEMENTS .............................................................. 22

Table 8 .............................................................................................................. 23

Table 9 .............................................................................................................. 25

Table 10 ............................................................................................................ 26

BIBLIOGRAPHY ........................................................................................................... 283

VISION STATEMENT

We at Harley-Davidson are a worldwide manufacturer of motorcycles and related

products and focus on providing a unique lifestyle for our customers.

MISSION STATEMENT

At Harley-Davidson, we provide our customers around the world with an

aggressive outdoor lifestyle through superior products and service. Through modern

technology, we provide the latest in safety and environmentally friendly engineering in

our products. We focus on safety and harmony within the workplace. At HarleyDavidson, we do not
simply sell motorcycles; we improve our customers’ lives through

recreational opportunities.

EXTERNAL ASSESSMENT

External Audit

An external audit assesses the industry that Harley-Davidson operates in. The

U.S. motorcycle market value grew 7.7% from 2001-2005. Market volume grew 6.4% in

the same time. The U.S. market accounts for 25% of the global motorcycle market.

Honda and Yamaha are the other leading competitors, next to Harley-Davidson, in the

U.S. market. Market value is expected to grow 7.1% from 2005-2010. Market volume is

expected to grow 7.5% in the same time period.

1

The motorcycle market value in Europe declined .8% from 2001-2005. Market

volume also decreased 1.6% in the same time period. More moped products are sold in

Europe than motorcycles. Honda and Yamaha have the largest market share in Europe.

Harley Davidson is an organisation which had made the consumers to adopt its culture and the
consumers find the organisation as part of their life style. Further, it is a movement that inspires
owner to embrace their own special language. Thus, the organisation success is nothing a short
story of innovation. Harley Davidson has competed successfully with the Japanese rivals such as
Honda, Suzuki, Yamaha, and Kawasaki producing low cost, low quality bikes throughout the
past years. Further the market share declining from 80% to 20% during the period of time.
Therefore, the report shall discuss the concepts of innovation and the change process involved
with Harley Davidson in comparison to the case study provided.

Innovation can be defined as ‘an idea must be replicable at an economical cost and must satisfy
a specific need. Innovation involves deliberate application of information, imagination, and
initiative in deriving greater or different value from resources, and encompasses all processes by
which new ideas are generated and converted into useful products’ (businessdictionery.com,
2007) It is crucial to identify the four elements of innovation. In order to, analyse the concepts
of innovation of Harley Davidson. The four elements are as follows as shown in the Table 01.

The above discussed four elements of innovation are highly relevant for Harley Davidson in
making innovation the key strategy to make the organisation successful. As in 1983 the US
President Ronald Reagan’s decision in increasing tariffs on the Japan’s motorcycle import
helped the motorcycle industry of US which was a positive development for Harley Davidson

(HD). Nevertheless, the new tariff policy was valid only for the five years period which reduced
annually thereafter. Thus, HD had to make successful progress, and improvement in the market
to survive in the long run. HD took up the challenge in been innovative and in order to
implement the strategy of innovation within the organisation to beat the competition of the
Japanese rivals. The innovation became the key tool in improving the performance level of the
organisation at all the levels such as marketing and customer relations, organisational changes,
process and manufacturing practices. (icmrindia.org, 2007)

HD was generating all the innovative ideas in all the areas of the organisation in implementing
the innovative strategy in gaining the positive outcomes. HD had to think and generate the
ideas at each time in competing with the Japanese. As in 1980’s the organisation was not
capable in meeting the production targets on time. Since HD adapted the batch process of
materials in the plant floor. (industryweek.com, 2002)

The materials were tooled in large batches at different locations in the plant and workers had
to make use of forklifts in order to move the materials around the factory which resulted in
high set up times. Meantime, the Japanese adapted Total Quality management in the
organisation. Therefore, HD has to think innovatively another approach in maximising the
benefits therefore the organisation implemented the Just in time approach (JIT). This helped
HD in dropping the cost level significantly. As a result of the JIT production approach the
company only sold 35,000 bikes instead of 53,000 in order to breakeven. Further, the
organisation adapted effective marketing strategies as 75% of Harley customers made repeat
purchases through effective brand campaigns and advertising. The organisation was capable in
gaining the customer loyalty form its customers again.

As part of the innovative strategy HD developed ‘Harley Owners Group’ which is stated as one
of the creative and innovative strategies that had helped in creating an excellent experience for
the product. The management of HD generated ideas in converting their product into an
experience. Further, organisation organised rallies in order to strengthen the bond or the
relationship with dealers, members, and the employees and at the meantime promoting Harley
experience to the consumers. Consequently, Harley Owners Group become immensely famous

by making the owners feels as their part of the Harley family. Thus, currently Harley group has
more than 450,000 members.

Further, organisation made changes to the working environment as the HD developed a healthy
relationship with its employees. The culture of the organisation adapted innovation as the
employees were given the opportunity participates and it was more open. HD communicated
and interacted with employees more effectively in the shop floor as it helped the organisation
in practising new strategies. Further, the work unions were based on harmony and trust.
Further, HD eliminated the positions of senior vice president in marketing in operations as
these positions didn’t add value to the final product. The people were auditors, the checkers.
The organisation has teams who are in charge of producing having a product supported team.
(webpronews.com, 2005)

Accordingly as part of innovation HD focused on new product development. HD focuses on new
product developed resulted on new product such as V-Rod. Further company adopted new
technology such as CPPDM methodology in achieving the new product developed. Also, the
organisation spent more financial resources on research and development in order to be
innovative and flexible towards the volatile business environment.

Consequently, the above discussed innovative procedures were implemented by HD to beat the
excessive competition in the US market.

Moreover, the company focused on cost effective approaches comparing to HD as Honda
concentrating on smaller, faster, and less expensive bikes. Honda adapted a step by step
approach where the company moved from one region to another and from light motorcycles (50
cc) to heavy motorcycles (250 cc). As, a new organisation to the US volatile and highly
competitive environment the organisation become successful through the sales level as one out
of every two cycles sold during the particular year was from Honda. (scribd.com, 2006)

The successful beginning of the Japanese rival Honda allowed the other Japanese competitors to
enter the market such as Yamaha, Suzuki, and Kawasaki. All these competitors followed the
same concepts and strategies used by Honda. This helped the organisation to attract the younger

riders, women, and the older riders. Further, most importantly the riders who could not afford the
expensive HD motorcycles.

Consequently, the Japanese competitors changed the motorcycle industry in US specially the size
of the motorcycles. The Japanese competitors were able to increase the annual sale rate of 33%.
Moreover, the Japanese competitors were skill full in producing the products mass fully. The
Japanese were also innovative as they were constantly producing the innovative products as
response to the existing marketing threats. Further, the companies had the best technologies in
producing the new products and launching the new models at the shortest possible time period.
Further, the companies were able to manage the financial resources of the organisation
effectively as the funds were generated appropriately in been innovative. Also, the consumers
were provided with customised products with the technological advancement in making it more
effective.

The strong performance level of Japanese competitors lead the fall down in HD as the shares
and the profit of the organisation reduced at a higher volume. Since HD was transferred in to
‘niche’ player. Even though HD was transformed from private ownership to public it was not
capable in driving enough funds to continue the organisation successful as the company faced
immense competition and pressure from the Japanese competitors. However, HD was able to
survive with the takeover of AMF.

The Japanese competitors notice that HD was imitating its techniques and recovering the
pressure and the competition of the Japanese companies. As a result the organisation targeted
HD. Honda use innovative strategy at its best by producing new motorcycle named as
Goldwing. At that period the product was named as one of the technologically sophisticated
and complex heavy weighted motor cycle. Since expected HD heavy weight motorcycle
segment started to decline. Further, at the meantime the economy was falling down by
reducing the demand for motorcycles. The Japanese kept on competing effectively with HD
through introduction of new products each time. Therefore the Japanese were using all the
competitive approaches and strategies in order to maintain the achieved market share in the
US. As John Bleustein the senior vice president stated that ‘the Japanese … were just better
managers…. and they understood how to do manufacturing a hell of a lot better, with less
inventory and high quality.’

1

“Motorcycles in the United States,” DataMonitor, November 2006. 4

Future market value is expected to increase 4.4% from 2005-2010. Market volume is

expected to increase 4.5%.

2

From 2001-2005, market value for motorcycles in the Asia/Pacific region grew

9.2%. Market volume grew 8.3%. Two-thirds of products sold there are motorcycles;

one-third are mopeds. Honda has the largest market share. It is expected that market

value will increase 13.2% from 2005-2010, while market volume increases 9%.

3

Other external factors that may affect Harley-Davidson include the economy.

Economic factors include the stock market, interest rates, inflation, and unemployment

levels. In the past year, the Dow Jones Industrial Average has risen 16%.

4

Interest rates

increased only marginally in the same amount of time.

5

Unemployment remained

unchanged at 4.4% in the last year. Inflation was up 2%.

6

Overall, these factors indicate

a fairly strong U.S. economy and based on recent trends, this expected to continue.

Other external factors affecting Harley-Davidson include social, cultural, and

demographic changes. The average Harley owner is 47 years old and makes over

$80,000 per year.

7

The U.S. population increased 1% from 2004 to 2005, while the

population over age 62 increased more than 2.5%. The median age of the U.S.

population increased from 36.2 to 36.4 in the same time period. The number of married

couples without children under the age of 18 stayed constant. The mean household

income increased over 4% to $62,556.

8

As aging couples with excess income are Harley-

2

“Motorcycles in Europe,” DataMonitor, November 2006.

3

“Motorcycles in Asia-Pacific,” DataMonitor, November 2006.

4

CNN Money, <http://money.cnn.com>, accessed on April 17, 2007.

5

Federal Reserve, <http://federalreserve.gov>, accessed on April 17, 2007.

6

Bureau of Labor Statistics, <http://www.bls.gov>, accessed on April 17, 2007.

7

Harley-Davidson Investor Relations, <http://investor.harley-davidson.com>, accessed on March 13,
2007.

8

U.S. Census Bureau, <http://factfinder.census.gov>, accessed on April 17, 2007. 5

Davidson’s target market, the aging population growth and income growth are good signs

for the company.

The U.S. veteran population has increased by 1.1%.

9

Veterans tend to be

motorcycle owners, and an increasing veteran population may be sign of market segment

growth for Harley.

10

Another area of untapped segment of growth for Harley is women.

Over four million women have owned a motorcycle in the past, but only 635,000

currently do.

11

Only 11% of Harley’s current buyers are female, but they are increasing

by .5% per year.

12

Political, governmental and legal changes are important as well. The

Environmental Protection Agency (EPA) regulates automobile and motorcycle emissions.

These regulations were most recently revised in 2004.

13

Future revisions could

negatively impact the motorcycle industry. Another concern is the price of raw materials

for motorcycles. Steel prices increased 57% from 2003 to 2004, and aluminum increased

by 24% in the same time period.

14

Further increases could force motorcycle companies

to pass the cost increases on to consumers, thus raising the price of the product.

Technology is constantly evolving. The widespread use of the Internet has

changed the way business is done. Communication across continents is easier and

cheaper than ever before. Computer-based inventory control systems could play a role in

managing motorcycle inventories. Currently Harley does not allow for transfer of

product between dealers, but a centralized computer system could make for an easy

HD was did not give up its operation rather took the competition of the Japanese as a
challenge. HD was strong in meeting the challenge through effective approaches in beating the
completion of the Japanese. Firstly, HD started to imitate the Japanese. As the organisation
clearly identified the loop wholes and where the organisation went wrong and how the
organisation can be back in the tracks. HD was taken over by AMF where AMF provided the
necessary financial resources in increasing the production. There were drawbacks of this
procedure as less skilled employees were part of production resulting to low quality products as
it was identified by Richard Teerlink Firm’s CFO where the reputation of HD for quality was
declined and the domestic market share dropped to 23%.

HD adapted different methods of production such as craft method in reaching the best quality.
However, few employees were able to achieve the quality but it was not successful overall. HD
found out in order to be successful it had to benchmark the performance of Honda in relation
to HD. Senior managers had tour in Honda plants in US and identified where the company need
to change in order to be successful.

9

U.S. Census Bureau, <http://factfinder.census.gov>, accessed on April 17, 2007.

10

Jim Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27,

2007.

11

Sheila Seger (Lehman Trikes), personal interview, April 20, 2007.

12


2007.

13

Environmental Protection Agency, <http://www.epa.gov>, accessed on April 17, 2007.

14

“Company Spotlight: Harley-Davidson Motor Company,” DataMonitor, October 2006. 6

transition.

15

Technology also impacts design. Today’s motorcycles are more reliable

because of technological change. Modern motorcycles also are relatively free of oil

leaks, vibration, and are more comfortable than those of the past.

16

Although Harley-Davidson has many competitors, its main competitors are Honda

and Yamaha based on their world-wide market share. Because Harley’s competitors are

more diversified, they are less vulnerable to industry changes. Honda and Yamaha also

offer products that sell well in the international markets compared to Harley.

17

Harley

products are more expensive than its competitors, but are known for service and

salability.

18

Models of motorcycles available include custom, touring, performance, and

standard models. Custom is the largest market segment in the U.S., with 53.9% of all

motorcycles on the road. However, touring bikes have increased in popularity with each

year, now comprising 27.2% of registered bikes. From 2004 to 2005, this increase was

over 30%.

19

Touring motorcycles are the most luxurious and easiest to ride of all models.

These models often include radios and cruise control. Victory, Honda, Suzuki, and

Harley have expanded their touring line of motorcycles to cater to the aging market.

Harley offers eight variations of the touring motorcycle.

20

Victory entered into an agreement with Lehman Trikes to produce three-wheeled

motorcycles under the Victory brand. These products will be fully supported by Victory

warranty, and will be marketed to aging adults as a safer way to ride. The “Pit Boss” was

15


2007.

16


17

“Company Spotlight: Harley-Davidson Motor Company,” DataMonitor, October 2006.

18


19


2007.

20

Sheila Seger (Lehman Trikes), personal interview, April 20, 2007. 7

released for sale on July 31, 2006. Harley entered a similar agreement with Lehman

Trikes on September 1, 2006.

21

Porter’s Five Forces Analysis

The overall attractiveness of the motorcycle industry is average. The threat of

new competitors or supplier power is low, but consumers have the power to switch

brands and substitute products easily. There is also competition for market share among

rivals in the motorcycle industry.

22

Rivalry among competing firms is fairly high in the motorcycle industry. Brand

image is very important in the industry and products frequently compete directly with a

product of another manufacturer. Potential entry of new competitors is somewhat low in

motorcycle manufacturing because of start-up costs and loyalty already established by

existing firms. It would be a difficult task to gain market share from the existing giants in

the motorcycle business. The bargaining power of suppliers is a relatively small threat as

there are more suppliers than manufacturers.

Potential development of substitute products is a threat to the motorcycle industry.

Replacement products for motorcycles include boats, snowmobiles, and RVs because

these are all luxury recreational items. Motorcycle consumers are likely to weigh a

purchase decision against a substitute product. Motorcycle consumers tend to fit a

specific demographic profile and have discretionary income; therefore, the entire

population is not a potential buyer. Thus, the bargaining power of consumers is also a

threat to motorcycle companies.

23

21


22


23

Ibid. 8

External Factor Matrix

Table 1

EFE Matrix

Key External Factors Weight Rating Weighted Score

Opportunities

1. Aging U.S. Population .20 4 .80

2. Strong U.S./Canadian market growth .20 4 .80

3. Increasing number of women riders .10 2 .20

4. Very strong growth in Asia .03 1 .03

5. Very strong growth in Mexico .03 1 .03

Threats

6. Aging U.S. Population .04 2 .08

7. Competitors are more diversified .10 1 .10

8. Union relations .05 2 .10

9. Declining European growth .05 2 .10

10. Availability of substitute products .20 1 .20

Total 1.0 2.44

Harley-Davidson excels at focusing on the baby-boomer motorcycle market

segment in the U.S.; however there are several opportunities that Harley is not using to its

full advantage. Very strong growth in the motorcycle industry is occurring in Asia and

Mexico, yet Harley-Davidson has not fully taken advantage of this market.

24

Increasing

numbers of women ride motorcycles and yet only ten percent of Harley riders are

women.

25

These could be areas of potential growth for Harley.

Threats to Harley-Davidson include an aging U.S. population. While this factor is

considered an opportunity as well, it is a threat as the population ages and is eventually

unable to operate a motorcycle, thus extinguishing Harley’s largest market segment. The

contract with Lehman Trikes could counteract some of this effect. Though not a

significant threat because of Harley’s limited market share, the European motorcycle

24


25

“Company Spotlight: Harley-Davidson Motor Company,” DataMonitor, October 2006. 9

industry is suffering from declining growth. Harley-Davidson competitors are more

diversified into markets other than motorcycles, which makes them less vulnerable to

fluctuations in the motorcycle industry.

26

Also, relations with union workers are a threat

to the industry.

27

The readily available substitute products to motorcycles are the biggest

threat to the industry and to Harley-Davidson.

Competitive Profile Matrix

Table 2

Competitive Profile Matrix

Harley-Davidson Honda Yamaha

Critical Success Factors Weight Rating Weighted

Score

Rating Weighted

Score

Rating Weighted

Score

Market share .15 3 .45 3 .45 3 .45

Financial position .05 4 .20 3 .15 3 .15

Price competitiveness .10 1 .10 3 .30 3 .30

Customer loyalty .20 4 .80 2 .40 2 .40

Global expansion .20 2 .40 4 .80 4 .80

Product quality .10 3 .30 4 .40 3 .30

Product selection .15 2 .30 4 .60 4 .60

Management .05 4 .20 4 .20 4 .20

Total 1.0 2.75 3.30 3.20

Customer loyalty is Harley-Davidson’s strongest competitive advantage. In

product quality and financial position, Harley is also strong. However, Harley is not as

strong as its competitors in some critical areas. Harley falls far behind Honda and

Yamaha in global market share of motorcycle products. In addition, Harley motorcycles

are not as competitively priced as other brands. Product selection is another area of

26


27


2007. 10

weakness at Harley. While offering many products in the 1000cc+ category of

motorcycles, Harley lacks an array of smaller bikes. Also, Harley is not diversified into

other recreational lines such as watercraft and ATVs as many of its competitors are and is

thus more susceptible to fluctuations in the motorcycle market.

28

INTERNAL ASSESSMENT

Key Internal Forces

To determine Harley-Davidson’s strengths and weaknesses, an internal

assessment is required. Areas to be evaluated include: management, marketing, finance,

production and operations, research and development, and management information

systems (MIS).

Harley-Davidson offers a broad selection of 32 product models, has 650 dealers in

the U.S., and has the largest market share in the U.S. However, Harley only has 7.7% of

European market share (the second largest motorcycle market in the world), and 25.3%

of the Asia/Pacific region.

29

Clearly, Harley-Davidson’s strengths are in the U.S. market,

as 80% of Harley’s net revenue comes from U.S. sales.

30

Harley worked to improve its image over the years. In the 1960s, Harley was

viewed as sub-par when compared to British motorcycles. In the modern market, Harley

has a reputation for style and quality. Credit for this is due to the research and

development department, who implemented the trend towards quality for the company.

HD spend fund on R&D to become more competitive in introducing innovative products to the
market faster. The market share of the company increased to 97% after implementing the
successful approaches. The organisational structure changed as teams were introduced in
completing a product. The teams were effective for the organisation to improve. Further,
organisation focused on treating its employees at the very best through pay for performance
schemes. The employees were given necessary training if they require and the employees were
highly motivated in the organisation. Further the line workers were exposed to the company
sales and profitability. Moreover the employees were given the understanding on the how cash
flow and production affect the financial success. There were many changes implemented on
the employee’s job descriptions, responsibilities, and on the production processes.

Also, HD was much more effective as it valued the stakeholders of the organisation which made
huge difference between the Japanese competitors. HD provided many different serviced to
the social groups as HOG was formed. Accordingly, the organisation kept on becoming
innovative as the organisation introduced a new product name as V- Rod. HD focused on the
young and the women segments in attracting them to HD products through effective marketing
campaigns.

28


29

Ibid.

30


2007. 11

Harley-Davidson also introduced water-cooled engines, fuel injection, and catalytic

converters to improve exhaust emissions.

31

Brand image is critical in the motorcycle industry, and Harley’s strength in this

area is largely due to its marketing abilities in the U.S. market. Harley customers are

extremely loyal to their brand and 90% of Harley owners intend to purchase another

Harley. The production and operations department at Harley-Davidson has consistently

built reliable motorcycles for Harley customers. This consistency has helped sustain

brand image.

32

Harley’s internal management and finance department is strong. Harley is a

financially sound company, largely due to effective management.

33

Management information systems could be used to more effectively manage

inventory at Harley. Instead of allotting a certain number of products to each dealer,

Harley could use an enterprise-wide system to match inventory levels to demand. This is

currently one of Harley-Davidson’s few internal weaknesses.

34

31


2007.

32


33


2007.

34

Ibid. 12

Financial Ratio Analysis

Table 3

Financial Ratio Analysis

Ratio HarleyDavidson

2006

HarleyDavidson

2005

HarleyDavidson

2004

Honda

2006

Industry

Average

Liquidity Ratios

Current Ratio 2.23 3.6 2.79 1.07 2.04

Quick Ratio 1.56 2.18 1.37 .81 1.45

Leverage Ratios

Debt to Equity Ratio .62 .39 .40 .87 .45

Long Term Debt to Equity Ratio .32 .32 .25 .39 .32

Times Interest Earned Ratio N/A N/A N/A 2.37 7.15

Activity Ratios

Inventory Turnover 24.29 25.31 24.42 10.69 8.26

Fixed Assets Turnover 6.08 5.57 5.12 5.83 N/A

Total Assets Turnover 1.15 1.06 1.02 1.00 1.25

Accounts Receivable Turnover 3.09 3.67 4.34 4.90 10.56

Profitability Ratios

Gross Profit Margin 39.50 N/A N/A 28.60 41.82

Operating Profit Margin 25.91 N/A N/A 8.70 15.60

Net Profit Margin 16.86 N/A N/A 4.89 10.17

Return on Total Assets 19.34 17.87 17.05 4.87 12.28

Return on Stockholders’ Equity 35.72 30.45 28.73 15.29 23.72

Price Earnings Ratio 15.81 N/A N/A 12.36 20.30

Growth Ratios

Sales 9.02 N/A N/A 14.95 5.67

Earnings Per Share 15.25 N/A N/A 36.18 14.30

Dividends Per Share 1.33 N/A N/A .76 1.84

Source: <http://www.reuters.com>, accessed on March 13, 2007. 13

Liquidity Ratios

0

0.5

1

1.5

2

2.5

3

3.5

4

2004 2005 2006

Current Ratio

Quick Ratio

Liquidity ratios measure a firm’s ability to turn short-term assets into cash.

35

Harley-Davidson is doing better than the industry average in this category and

significantly better than its main competitor, Honda.

Leverage Ratios

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004 2005 2006

Debt to Equity Ratio

Long Term Debt to

Equity Ratio

35

Fred R. David, Strategic Management: Concepts and Cases, 11

th

ed., Pearson Prentice Hall, New Jersey,

2007. 14

Leverage ratios measure how much a firm is financed by debt.

36

HarleyDavidson is fairly close to the industry average on this measure, and is doing better than

Honda.

Activity Ratios

0

5

10

15

20

25

30

2004 2005 2006

Inventory Turnover

Fixed Assets

Turnover

Total Assets Turnover

Accounts Receivable

Turnover

Activity ratios measure how well a firm uses its resources.

37

Harley is doing

especially well in inventory turnover, but falls below average in accounts receivable.

36


th


2007.

37

Ibid. 15

Profitability Ratios

0

5

10

15

20

25

30

35

40

2004 2005 2006

Return on Total

Assets

Return on

Stockholders’ Equity

Profitability ratios measure the effectiveness of management.

38

Again, Harley is

doing much better than the industry and Honda in almost all of these measures with the

exception of the price earnings ratio and the gross profit margin, which fall a bit below

industry standards, although still ahead of Honda.

Growth ratios measure growth over a period of time.

39

Harley is doing better than

the industry average in sales and earnings per share growth, but Honda is doing even

better. In dividends per share growth, Harley beats Honda, but both fall below industry

average. Clearly Harley-Davidson has financial strengths, but there are some areas to be

targeted for improvement.

38


th


2007.

39

Ibid. 16

Internal Factor Evaluation Matrix

Table 4

IFE Matrix

Strengths Weight Rating Weighted Score

1. Customer retention .20 4 .80

2. Number of domestic dealers .15 4 .60

3. Domestic market share .15 4 .60

4. Product selection of +1000 cc motorcycles .10 4 .40

5. Financial position .10 4 .40

Weaknesses

6. International market share .10 1 .10

7. Number of international dealers .03 2 .06

8. Product selection in other segments .10 1 .10

9. Dealer inventory system .05 2 .10

10. Product cost .02 1 .02

Total 1.0 3.18

Harley-Davidson has a large number of repeat buyers. Harley has a large volume

of dealers in the U.S. and a large share of the U.S. market of motorcycle sales. The

company also offers several different products to suit different needs in the over 1000cc

category. However, Harley is much weaker in both Europe and Asia in number of

dealers and market share. One of the likely reasons for this is Harley’s limited offering

of smaller bikes that are more popular in international markets. Also, Harley’s brand

image in the U.S. is much more powerful to consumers than it is internationally. 17

SWOT MATRIX

Table 5

SWOT Matrix

Strengths – S

1. Customer retention

2. Financial position

3. Product selection

4. U.S. market share

5. U.S. dealer network

Weaknesses – W

1. Dealer inventory system

2. International market

share

3. Expensive product

4. Product selection

5. International dealers

Opportunities – O

1. Increasing # of women riders

2. U.S. industry growth

3. Aging population

4. Mexico industry growth

5. Asian industry growth

SO Strategies

1. Continue to expand

U.S. market share (S4,

O2)

2. Expand marketing to

female riders (S1, O1)

3. Expand marketing to

baby boomers (S1, O3)

WO Strategies

1. Balance inventory levels

to meet demand (W1, O2)

2. Pursue foreign markets

more aggressively (W2,

O4, O5)

3. Expand product line to

cater to female and aging

riders (W4, O1, O3)

Threats – T

1. Union relations

2. Aging U.S. population

3. Competitor diversification

4. Declining European growth

5. Availability of substitutes

ST Strategies

1. Focus on securing

new markets as baby

boomers age (S4, T2)

2. Focus market growth

in the U.S. rather than

European markets (S4,

T4)

WT Strategies

1. Expand product line to

compete directly with

competitors (W4, T3)

2. Open foreign factory to

gain international market

share and lessen reliance on

unions (W2, T1) 18

SPACE MATRIX

Table 6

SPACE Matrix

Ratings

Financial Strength (FS)

Leverage +6

Liquidity +4

Return on investment +3

Working capital +4

Industry Strength (IS)

Growth potential +5

Profit potential +4

Capacity utilization +4

Ease of entry +5

Environmental Stability (ES)

Competitive pressures -4

Risk -2

Price range of competing products -5

Demand fluctuations -2

Competitive Advantage (CA)

Market share -2

Loyalty -1

Product life cycle -1

Product quality -1

Conclusion

ES Average (-13/4) -3.25

CA Average (-5/4) -1.25

IS Average (18/4) +4.50

FS Average (17/4) +4.25

x-axis (CA + IS) +3.25

y-axis (ES + FS) +1.00 19

Conservative FS Aggressive

+6

+5

+4

+3

+2

+1 X

CA -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 IS

-1

-2

-3

-4

-5

-6

Defensive ES Competitive

Harley-Davidson falls into the aggressive quadrant of the SPACE Matrix.

Aggressive strategies include market penetration and development, product development,

backward, forward, and horizontal integration, related and unrelated diversification, and

combination strategies.

40

40


th


2007. 20

GRAND STRATEGY MATRIX

Table 7

Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

X

Weak Strong

Competitive Competitive

Position Position

Quadrant III Quadrant IV

Slow Market Growth

Harley-Davidson is in Quadrant I of the Grand Strategy Matrix because of its

strong competitive position in the motorcycle market as well as the market’s strong

growth. The motorcycle industry is growing world-wide, and in some markets, growth is

quite strong. Harley has a very strong competitive position in North American markets,

and has a presence in international markets. According to this matrix, Harley would be 21

wise to pursue market development strategies, market penetration, product development,

forward, backward, and horizontal integration, as well as related diversification.

41

LONG-TERM OBJECTIVES AND STRATEGIES

Long-term objectives will attempt to sustain Harley-Davidson’s competitive

advantage and keep it a viable competitor in the motorcycle industry.

42

For the next three

years, Harley should use its current strengths to expand its U.S. market share through

market penetration, expand sales to female riders through market development, revise the

U.S. dealer network to allow for transfer of units between dealers to improve market

penetration and expand its product line to cater to aging riders through product

development.

Market penetration seeks to increase market share for present products in present

markets through greater marketing efforts. Market development introduces present

products into new markets. Product development increases sales by developing or

improving products.

43

ANNUAL OBJECTIVES

To ensure Harley-Davidson’s long-term objectives are achieved, annual

objectives are matched to long-term objectives.

44

To expand U.S. market share through

market penetration, Harley will set an annual objective to grow U.S. sales by 15% by

May 31, 2008. Also, $5,000,000 will be allocated to marketing efforts to ensure

attainment of this goal. Although this is an annual objective, it is anticipated this

41


th


2007.

42

Ibid.

43

Ibid.

44

Ibid. 22

objective could be modified slightly for each of the next three years as needed to achieve

U.S. market penetration.

To expand sales to female riders through market and product development, Harley

will set an annual objective to double the number of female Harley buyers in the U.S. to

20% of total buyers by May 31, 2008. Also, Harley’s marketing budget for targeting

female riders will be increased by $5,000,000. Again, this is an annual objective, but it is

anticipated this objective could be modified slightly for each of the next three years as

needed to strengthen Harley’s number of female buyers.

Harley will aim to improve its U.S. dealer network to allow for transfer of units

between dealers to improve market penetration. The date for this objective to be

complete is by December 31, 2007. Enhancements will be made to the current inventory

management system as needed until this goal is reached. Input will be largely based on

dealer and management input.

To expand its product line to cater to aging riders through product development,

Harley will set an annual objective of introducing one new product for aging riders by

May 31, 2008. This product may be built through the contract with Lehman Trikes.

PRO-FORMA FINANCIAL STATEMENTS

In order to implement objectives, Harley-Davidson will need to determine the cost

of implementation for each objective. Expanding its U.S. market share will increase

gross profit by approximately $400,000 annually. Repairing the U.S. dealer network will

result in $50,000 less inventory on hand each year. Expanding the product line to cater to

aging riders will contribute to increased operating expenses of about $90,000 but will

also contribute to the increase in gross profit. 23

Table 8

Pro Forma Balance Sheet

2006 12/31/2007 12/31/2008 12/31/2009 (Values in Thousands) 12/31/

Assets

Current Assets

Cash and Equivalents 238,397 250,000 250,000 250,000

Short Term Investments 658,133 660,000 660,000 660,000

Net Receivables 143,049 145,000 145,000 145,000

Finance Receivables held for sale 547,106 550,000 550,000 550,000

Finance Receivables held for investment 1,554,260 1,500,000 1,500,000 1,500,000

Inventory 287,798 250,000 200,000 150,000

Other Current Assets 121,890 120,000 120,000 120,000

Total Current Assets 3,550,633 3,475,000 3,425,000 3,375,000

Long Term Investments

Finance Receivables held for investment 725,957 750,000 750,000 750,000

Other Long-Term Assets 1,255,560 1,250,000 1,250,000 1,250,000

Total Non-Current Assets 1,981,517 2,000,000 2,000,000 2,000,000

Total Assets 5,532,150 5,475,000 5,425,000 5,375,000

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts Payable 763,186 760,000 760,000 760,000

Current Portion of Finance Debt 832,491 1,000,000 1,100,000 1,200,000

Total Current Liabilities 1,595,677 1,760,000 1,860,000 1,960,000

Non-Current Liabilities 24

Finance Debt 870,000 870,000 870,000 870,000

Postretirement Health Care Benefits 201,126 200,000 200,000 200,000

Other Long-Term Liabilities 108,610 100,000 100,000 100,000

Total Non-Current Liabilities 1,179,736 1,170,000 1,170,000 1,170,000

Total Liabilities 2,775,413 2,930,000 3,030,000 3,130,000

Total Shareholders’ Equity 2,756,737 2,545,000 2,395,000 2,245,000

Total Liabilities & Shareholders’ Equity 5,532,150 5,475,000 5,425,000 5,375,000

short-term funds to increase es will increase by borrowing e new inventory adjustment system is
implemented. Liabiliti Notes: Inventory on hand will decrease by $50,000 per year when th

sales and marketing efforts in the U.S. at $100,000 per year.

on.com>, accessed on March 13, 2007. <http://investor.harley-davids Source:Table 9

Pro Forma Income Statement

2006 12/31/2007 12/31/2008 12/31/2009 (Values in Thousands) 12/31/

Total Revenue 5,800,686 6,670,000 7,670,000 8,821,000

Cost of Revenue, Total 3,567,839 4,102,000 4,717,000 5,424,000

Gross Profit 2,232,847 2,568,000 2,953,000 3,397,000

HDMC Operating Expenses 818,490 900,000 990,000 1,090,000

Corporate Operating Expenses 22,561 23,000 24,000 25,000

Total Operating Expenses 841,051 923,000 1,014,000 1,115,000

HDMC Operating Income 1,414,357 1,668,000 1,963,000 2,307,000

HDFS Operating Income 210,724 217,000 223,000 230,000

Operating Income 1,602,520 1,885,000 2,186,000 2,537,000

Total Other Income/Expenses Net 21,720 22,000 22,000 22,000

Earnings Before Interest and Taxes 1,624,240 1,907,000 2,208,000 2,559,000

Income Tax Expense 581,087 680,000 788,000 913,000

Net Income from Continuing Operations 1,043,153 1,227,000 1,420,000 1,646,000

Net Income 1,043,153 1,227,000 1,420,000 1,646,000

of revenue. Operating expenses will increase 10% to cover new R&D e of 15%. COGS will stay fixed at
61.5% crease by 15% because of sales volume increas Notes: Anticipated total revenue will in

tax rate will stay fixed at 35.7%. per year to cover inflation. Income to cover inflation. HDFS will
increase 3% expenses. Corporate expenses will increase 3%

on.com>, accessed on March 13, 2007. <http://investor.harley-davids Source:Table 10

Balanced Scorecard

Objectives Measure or

Target

Time

Expectation

Primary

Responsibility

Customers

Increase number of female buyers 20% of total

Harley sales

May 2008 Sales/Marketing

Increase U.S. market share 15% sales

increase


Pursue foreign markets 10% sales

increase

July 2009 Sales/Marketing

Managers/Employees

Improve management/union relations Complete

negotiations

before contract

expiration

By end of

next

contract

expiration

Management

Conduct an employee benefits review

and add programs currently not offered

but desired by employees

Review current

benefits offerings

with employees

May 2008 Human

Resources

Form a team to evaluate foreign factory

locations

Formation of

team

December

2007

Management

Operations/Processes

Negotiate supplier contracts to gain

favorable terms and exclusivity where

possible (if not already in place)

Set up contracts

with current

suppliers and

renegotiate

existing contracts

July 2010 Procurement

Conduct an operations process analysis

to look for efficiency improvements

Document each

functional

process

July 2009 Operations

Supervisors

Improve U.S. dealer network by

implementing a computerized inventory

system

Allow for

transfer of

product between

dealers

December

2007

Management/MIS

Community/Social Responsibility

Offer volunteering opportunities for

employees

Implement

volunteering

program

December

2007

Human

Resources

Donate percentage of profits to

community charities

Determine

charities in cities

of operations

December

2007

Management

Implement corporate recycling of all

materials

Institute bins for

products not

currently being

recycled

December

2007

Human

Resources 27

Business Ethics/Natural Environment

Meet or beat all emissions standards Comply with all

current and future

emissions

standards

May 2008 Research and

Development

Comply with noise regulations Comply with all

noise ordinances

July 2009 Research and

Development

Conduct annual audits in accordance

with the Sarbanes-Oxley Act of 2002

Conduct yearly

audit

December

2007

Finance

Financial

Increase U.S. sales 15% sales

increase


Increase sales to female riders 20% of total

Harley sales


Increase international sales 10% sales

increase

July 2009 Sales/Marketing

The Balanced Scorecard allows for a balance of priorities between short and long term

goals, as well as among stakeholders and management.

45

A copy of the scorecard is distributed

to every department to ensure accountability for each department’s goals. Progress meetings will

be conducted every quarter with all accountable parties in attendance. Executive management

will be responsible for ensuring that all goals are implemented in a timely manner.

45


th

ed., Pearson Prentice Hall, New Jersey, 2007. 28

BIBLIOGRAPHY

Bureau of Labor Statistics, <http://www.bls.gov>, accessed on April 17, 2007.

CNN Money, <http://money.cnn.com>, accessed on April 17, 2007.



th

ed., Pearson Prentice Hall,

New Jersey, 2007.

Environmental Protection Agency, <http://www.epa.gov>, accessed on April 17, 2007.

Federal Reserve, <http://federalreserve.gov>, accessed on April 17, 2007.

Harley-Davidson Investor Relations, <http://investor.harley-davidson.com>, accessed on March

13, 2007.

Jim Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March

27, 2007.


“Motorcycles in Europe,” DataMonitor, November 2006.

“Motorcycles in the United States,” DataMonitor, November 2006.

Motorcycle Industry Financials, <http://www.reuters.com>, accessed on March 13, 2007.


U.S. Census Bureau, <http://factfinder.census.gov>, accessed on April 17, 2007.

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