Harvard Case - Harley-Davidson, Inc.--1987
"Harley-Davidson, Inc.--1987" Harvard business case study is written by W. Carl Kester, Julia Morley. It deals with the challenges in the field of Finance. The case study is 17 page(s) long and it was first published on : Mar 10, 1992
At Fern Fort University, we recommend that Harley-Davidson pursue a strategic shift towards growth and diversification through a combination of organic initiatives and strategic acquisitions. This strategy should focus on leveraging existing strengths in manufacturing processes, brand image, and customer loyalty to expand into new product lines, geographic markets, and customer segments. The company should also prioritize financial discipline and risk management to ensure long-term sustainability and shareholder value creation.
2. Background
The case study focuses on Harley-Davidson in 1987, a time when the company was facing significant challenges. Declining sales, increased competition, and a changing consumer base threatened the iconic motorcycle manufacturer's future. The company's CEO, Vaughn Beals, was tasked with leading a turnaround effort, grappling with a financial strategy to address the company's declining profitability and stagnant growth.
3. Analysis of the Case Study
This case study can be analyzed through the lens of Porter's Five Forces framework:
- Threat of New Entrants: While the motorcycle industry had high barriers to entry due to manufacturing complexity and brand loyalty, the threat of new entrants was increasing with the rise of Japanese manufacturers like Honda and Yamaha.
- Bargaining Power of Buyers: Harley-Davidson faced significant bargaining power from buyers due to the limited number of motorcycle manufacturers and the availability of alternative transportation options.
- Bargaining Power of Suppliers: Harley-Davidson had a moderate bargaining power with suppliers, as the company relied on a limited number of specialized parts and components.
- Threat of Substitutes: The threat of substitutes was high, as consumers could choose from other modes of transportation, including cars, trucks, and even bicycles.
- Competitive Rivalry: The competitive rivalry within the motorcycle industry was intense, with Harley-Davidson facing competition from both domestic and international players.
Financial Analysis:
Harley-Davidson's financial statements revealed several key issues:
- Declining profitability: The company's profitability ratios, such as gross profit margin and operating margin, were declining due to increasing competition and rising costs.
- High debt levels: Harley-Davidson had a significant amount of debt financing, which increased its financial risk and limited its ability to invest in growth opportunities.
- Limited financial flexibility: The company's cash flow was constrained, limiting its ability to invest in research and development, marketing, and expansion.
4. Recommendations
To address these challenges, Harley-Davidson should implement the following recommendations:
- Product Diversification: Expand beyond traditional heavyweight motorcycles into new product lines, such as smaller motorcycles, scooters, and even electric vehicles. This would attract new customer segments and increase market share.
- Geographic Expansion: Target new international markets, particularly in emerging economies with growing middle classes and a rising demand for motorcycles. This would reduce dependence on the mature US market and unlock new growth opportunities.
- Strategic Acquisitions: Consider acquiring smaller, niche motorcycle manufacturers or related businesses to gain access to new technologies, product lines, or distribution channels. This would allow Harley-Davidson to quickly enter new markets and expand its product portfolio.
- Financial Discipline: Implement a strict capital budgeting process to prioritize investments in high-return projects. This would improve return on investment (ROI) and enhance shareholder value.
- Debt Management: Reduce debt levels through a combination of debt refinancing and cash flow management. This would lower financial risk and provide more flexibility for future investments.
- Marketing and Brand Management: Invest in marketing initiatives to attract new customer segments and maintain the brand's iconic image. This would involve leveraging digital marketing channels and engaging with younger audiences.
- Operations Optimization: Implement activity-based costing to identify and eliminate inefficiencies in manufacturing processes. This would improve cost control and enhance profitability.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: Harley-Davidson's core competencies in manufacturing, brand image, and customer loyalty can be leveraged to successfully expand into new markets and product lines.
- External Customers: The recommendations address the evolving needs of customers by offering a wider range of products and targeting new markets.
- Competitors: The recommendations aim to counter the competitive threat from Japanese manufacturers by offering a more diverse product portfolio and expanding into new markets.
- Attractiveness: The recommendations are expected to generate positive financial returns, as evidenced by the potential for increased sales, market share, and profitability.
6. Conclusion
By implementing these recommendations, Harley-Davidson can successfully navigate the challenges of the 1980s and position itself for long-term growth and success. The company's iconic brand, strong manufacturing capabilities, and loyal customer base provide a solid foundation for expansion and diversification. By embracing a strategic shift towards growth and innovation, Harley-Davidson can ensure its future as a leading motorcycle manufacturer.
7. Discussion
Alternative approaches to the recommendations include:
- Focusing solely on core products: This would involve maintaining the status quo and focusing on improving efficiency and profitability within the existing product portfolio. However, this approach risks losing market share to competitors and failing to attract new customer segments.
- Merging with a competitor: This could provide access to new resources, technologies, and markets. However, it would require careful consideration of potential cultural clashes and regulatory hurdles.
The recommendations presented in this case study solution carry the following risks:
- Execution risk: Successfully implementing the recommendations requires effective leadership, organizational change management, and a commitment to innovation.
- Market risk: The success of the recommendations depends on factors beyond the company's control, such as economic conditions, consumer preferences, and competition.
8. Next Steps
To implement these recommendations, Harley-Davidson should:
- Develop a detailed strategic plan: This plan should outline specific objectives, timelines, and resource allocations for each recommendation.
- Establish a dedicated team: This team should be responsible for overseeing the implementation of the strategic plan and monitoring progress.
- Communicate the strategy to stakeholders: This includes employees, investors, and customers, ensuring alignment and support for the proposed changes.
- Continuously monitor and adjust: The company should regularly review the progress of the implementation and make necessary adjustments to ensure that the strategy remains relevant and effective.
By taking these steps, Harley-Davidson can successfully navigate the challenges of the 1980s and emerge as a stronger and more diversified company, ready to compete in the evolving motorcycle market.
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Case Description
After an LBO and near bankruptcy in the early 1980s, Harley-Davidson makes an astonishing recovery, going public in 1986. Its listing on the New York Stock Exchange in 1987 provides the occasion of an equity analyst to publish a research report in which she must issue a buy, sell, or hold recommendation for Harley's stock. Complicating her analysis is the fact that Harley still faces vigorous Japanese competition and, therefore, has a significant operating exposure to the yen/dollar exchange rate. Stimulates discussion about operating exposure to real exchange rate changes.
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