Harley-Davidson: Big Toys For Big Boys

This is an edited version of a long case study written by Richard Schoenberg, Imperial College Management School

Harley-Davidson, the US motorcycle maker, has had to ride through some rough patches in its history. It was owned by the industrial and leisure conglomerate AMF between 1969 and 1981. AMFs early strategy had been to expand production accompanied by a marked deterioration in product quality.

From 1973, however, conditions in Harleys market became far more competitive. Overall motorcycle sales declined and Japanese manufacturers entered the heavyweight segment of the market where Harley-Davidson had been dominant.

Although Harley-Davidson had remained profitable its share of the US heavyweight motorcycle market fell from 99 per cent in 1972 to 30 per cent in 1981.

 

Uncomfortable with AMF, 13 members of Harley-Davidsons then management purchased the company from AMF in spring 1981 for around $80m. The majority of the new owners were keen motorcyclists and celebrated the independence of the company by organising a mass Freedom Ride to proclaim their vision of providing motorcycles by the people for the people.

The early 1980s were not easy for the newly independent Harley-Davidson. The world economic situation was worsening and motorcycle markets continued to decline. The company responded aggressively, bringing its capacity into line with demand and reducing costs. In autumn 1981 the York assembly plant was cut to one shift from two and 200 clerical jobs were lost. The following spring 1,600 of the remaining 3,800 employees were laid off. The company reported operating losses of $15m for 1982 on a turnover of $210m. Annual production of motorcycles fell 25 per cent to 30,000. Press reports that Americas oldest motorcycle manufacturer was close to bankruptcy began to appear.

In November 1982 Harley-Davidson filed a petition with the US International Trade Commission (ITC) requesting protection from alleged unfair foreign competition in essence alleged dumping by Japanese manufacturers. It maintained that protection would give it breathing space to improve production efficiency and develop more competitive products. The ITC upheld the case and imposed additional import tariffs on Japanese-manufactured machines over 700cc for a five-year period.

Production improvements

Even before the ITC hearings the buy-out team had begun implementing production changes. A significant step was the introduction of a materials as needed inventory system where parts were delivered to the assembly line just in time. Action was also taken to reduce machine tool set-up times.

In addition, Harley-Davidson began to view suppliers as partners in profit, awarding long-term contracts to those that consistently met stringent quality and delivery requirements. The assembly line was reorganised into a series of work cells and employee involvement was further encouraged through a new pay scheme.

The combined benefits of these changes was significant. The companys 1987 annual report boasted that since 1981 manufacturing had achieved a 50 per cent improvement in productivity, a 68 per cent reduction in scrap and considerable improvements in product quality.

The buy-out team also moved quickly to enhance research and development capability, raising expenditure to 5 per cent of sales. A significant pay-off was the introduction in 1984 of a new engine, for which much of the early design work is said to have been undertaken during AMFs ownership.

The new Evolution engine was soon fitted to all but the Sportster models and showed marked improvements in reliability, performance and maintenance. Product development has continued but in incremental rather than radical steps.

Image and charisma

Harley Davidsons product has to be viewed in context. Its main attraction is not as a means of transport but rather in terms of image, charisma and style.

In the mid-1980s Harley-Davidson began actively marketing this style to young professionals while being careful not to alienate its traditional customer base of blue-collar workers.

The company made great efforts to involve purchasers with the culture associated with its products. Each motorcycle purchased came with a years automatic membership of the Harley Owners Group (Hog), renewable thereafter for a small fee. Members received regular publications informing them of both club and product news as well as invitations to local Hog chapter events such as bike runs, dealer open evenings and pub meetings. Each chapter was sponsored by the local Harley-Davidson dealer.

In addition to local chapter events there were larger national Hog rallies. The presence and active participation of top company executives was always a feature of these gatherings.

Hog was first established in 1983 and membership grew by about 30 per cent annually. By 1994 there were 250,000 members in 800 chapters worldwide.

Riders of Harley-Davidsons had long been customising their machines. In 1986, the company responded by considerably expanding its parts and accessories range in three separate brands, each marketed via its own lavish brochure.

The mid-1980s also saw moves into the licensing of the Harley-Davidson brand names and trademarks. A MotorClothes line was introduced featuring tough but stylish motorcycle leathers through to childrens socks, all manufactured under licence. MotorClothes were sold exclusively though dealers, thereby increasing dealer revenue and attracting new customers into the showrooms.

In other cases the name alone was licensed: Harley-Davidson hi-fis, a Harley-Davidson cafe in New York City and even a range of mens toiletries. Not only did the licensing bring in additional revenue it also further promoted the brand name and image.

Harley-Davidson also made considerable efforts to build strong relationships with its direct customers, motorcycle dealers, and to help them improve their own performance.

In 1987 a Designer Store programme was launched under which dealers were encouraged to redesign their showrooms to provide an improved shopping environment in which almost as much emphasis was placed on displays of accessories and MotorClothes as on the bikes themselves.

Financial performance

The initial turnround was largely complete by 1986. Not only had profitability been restored but turnover, profits and market share were all beginning to show steady increases. The opportunity was taken to float the company in June 1986 with a public offering of 2m shares at $11 a share, together with $70m of 12.5 per cent unsecured subordinate loan notes.

In addition in 1986 the company diversified away from motorcycles. Holiday Ramblers Corp, a manufacturer of premium motor homes and travel trailers, was acquired for $157m. Holiday Rambler was run as an autonomous operation after the acquisition with separate management from the motorcycle business.

In a further demonstration of growing strength the buy-out team went to the US government in March 1987 to request that tariff protection against imported Japanese motorcycles be lifted one year before it was due to expire. It was the first company in US history to take such action.

The companys share of the US heavyweight motorcycle market continued to rise steadily from 31 per cent in 1986 to 55 per cent by 1989 despite the fact that the overall motorcycle market was declining by almost 10 per cent a year over the same period.

The early 1990s saw a revival of growth worldwide in motorcycle registrations and Harley-Davidson maintained its share comfortably in all major markets. At the end of 1993 it held 58 per cent of the US, 10 per cent of the European and 21 per cent of the Japanese/Australian heavyweight motorcycle markets.

This success was reflected in the loyalty of Harley-Davidson customers. As many as 96 per cent of Harley owners claimed they intended to buy another a figure thought to be one of the highest loyalty levels of any industry.

This loyalty was also illustrated by the attendance of 100,000 people at a reunion party in Milwaukee organised by Harley-Davidson to mark its 90th anniversary.

Harley riders spent more than $10m on food, goods and services in Milwaukee during the reunion and raised over $1m in sponsorship for the muscular dystrophy association a charity heavily supported by Harley-Davidson.