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Harley Davidson Case Analysis Essay, Research Paper
In 1903, William Harley-Davidson, Arthur Davidson, Williams Davidson, and Walter Davidson started Harley-Davidson in a 10×15 shed in their backyard in Milwaukee, Wisconsin. Production started with three motorcycles in 1903 and increased to 8 in 1908. In 1969, AMF Incorporated acquired Harley-Davidson Motor Company and expanded capacity from 15,000 to 40,000 motorcycles. Harley-Davidson, Incorporated was formed in 1981, when it was purchased from AMF Incorporated in a management buyout. In 1986, Harley-Davidson, Incorporated became a publicly held company. The new management installed a just-in-time inventory system to reduce inventories and improve total quality. With a new quality focus Harley-Davidson began to invest heavily in research and development. In one year the new Harley-Davidson management reduced the break-even point by 18,000 motorcycles. Management’s focus on efficiency in production and improvements in quality resulted in increased demand and a production capacity of 100,000 motorcycles in 1995. Harley-Davidson operates in two segments Motorcycles and Related Products, and Transportation and vehicles segment. Total net sales for the first nine months of 95 were $1.3 billion, an increase of $174.1 million from the first nine months of 1994. Net sales increased in both the Motorcycles segment and the Transportation Vehicles segment. Demand for motorcycles is continuing to increase at a rate faster than supply for most of the markets in which Harley-Davidson competes. Parts and Accessories market should grow at a rate similar to the annual growth in motorcycle market. From its beginning in a shed at turn of the century, Harley-Davidson has survived the Great Depression, two world wars and a manufacturing revolution to become a company with products so valued and sought after that they are a way of life for many owners (Wheelen).
Organization s Vision, Mission, and Objectives
The Harley-Davidson’s vision is as follows: “Harley-Davidson, Incorporated, is an action-oriented, international company-a leader in its commitment to continuously improve the quality of profitable relationships with stakeholders (customers, dealers, employees, suppliers, shareholders, government, and society). Harley-Davidson believes the key to success is to balance stakeholders’ interests through the empowerment of all employees to focus on value-added activities.”
Harley-Davidson’s mission statement is as follows; “We fulfill dreams through the experience of motorcycling, by providing to motorcyclists and to the general public an expanding line of motorcycles and branded products and services in selected market segments”(Harley-Davidson Home Page). The mission statement shows that the focus of the organization is on customer satisfaction and growth. Harley-Davidson’s statement of company philosophy contains a separate list of the values of the organization. The values listed in this statement are, “Tell the Truth, Be Fair, Keep your Promises, Respect the Individual, Encourage Intellectual Curiosity”(Values).
The objectives of the both the Motorcycle and Transportation Segments are listed below:
+ Double production capacity to 200,000 motorcycles annually by 2003.
+ Increase the number of women who purchase motorcycle-riding apparel.
+ Gain entry in to the performance motorcycle industry and increase the sales of the newly acquired Buell Motorcycle Company.
+ Increase international market share by increasing the number of foreign dealers and improving the foreign channels of distribution.
+ Increase the availability of credit and lower the cost of credit for both the retail customer and the Harley Davidson Dealer.
+ Improve customer satisfaction and improve communication with European stakeholders by increasing dealer service competencies.
The Chief Executive Officer
CEO Value Profile
Mr. Richard Teerlink age 59 joined Harley-Davidson in 1981 and was elected to the board of directors in 1982. In 1988 he was appointed President, and he was named Chief Executive Officer in 1989 (Wheelen). Mr. Teerlink is also on the Boards of Directors of Johnson Controls, Incorporated and Snap-On Incorporated (Rethinking Leadership). Mr. Teerlink has been the leader in developing a value-based culture at Harley. His focus is on the importance of establishing mutually beneficial relationships with all of stakeholders has served the company well in the past. Teeklink believes that top management is responsible for creating an operating environment that can allow continual learning (Harley Davidson Home Page). Unlike the traditional executive leader who is focused on structure and strategy, Teerlink thinks about the operating environment in less tangible ways. Teeklink has a quality focus and has initiated a just in time inventory system along with a value-added approach to manufacturing (Wheelen).
In addition to the focus on a quality product, Teeklink is also focused on growth and corporate governance, which is reflected in the company s vision. In a speech at Yale University Teerlink said that, “the Motor Company expects its market share to be bolstered by increased production in the next few years. Teerlink stated the company expects to produce 200,000 units annually by the year 2003, compared to about 100,000 in 1995. Teerlink added in his speech, “We have not found any reduction in the demand for Harley-Davidson,”. He said the Milwaukee firm had close to 50 percent of the 651cc-and-above U.S. motorcycle market. Teerlink also said that almost 30 percent of the company’s motorcycles are traditionally sold outside the United States. “Harley-Davidson seeks a patient and careful approach to overseas expansion. It’s our intention to be very successful in all markets,” Teerlink added. “We are taking time to develop markets, rather than just going in and putting a dealer on every corner and have them sell motorcycles. Because we’re capacity-constrained, we’ve been losing some market share, but we’re not losing market share because people don’t want to buy our product.” According to Teerlink, Harley-Davidson now has distributors in Peru, Singapore, Indonesia, South Africa and other emerging markets. He said Harley-Davidson had no immediate plans to diversify beyond its traditional strength in large-displacement motorcycles. Teerlink also noted that women now make up about eight percent of new Harley-Davidson buyers, as opposed to only two percent in the past (Online Magazine).
Philosophical Values of Richard F. Teerlink
Values Conservative Middle of the Road Liberal
This set of values would suggest a CEO who is very much concerned with the physical appearance of high quality products. Current technology would be important to him, because of his need for efficiency and quality. This CEO is concerned with treating dealers, suppliers, and employees with integrity. In addition, he has a middle of the road philosophy regarding government, religion, and the legal system. Capital expenditures will be approximately $110 million. The funding for these expenditures will be with internally generated funds. Financing with internally generated funds is indicative of the conservative economic values of Mr. Teerlink. He would value profitability, but would emphasize customer satisfaction and the quality of the product.
Internal Environment General Discussion (by function)
Harley Davidson s culture fulfills the important functions that are necessary for an organization to survive. The company lives by their worldwide mission, which states: Preserve and perpetuate the Harley-Davidson institution through continuous improvement in the quality of their products and services and achievement of their financial goals. Provide the general public brand identified products/services to enhance Harley-Davidson s image and attract new customers. Engage in manufacturing or service ventures that can add value (not only profit) to the motorcycle business.
In order to fulfill their mission, Harley is constantly searching for ways to do things better. They focus on the importance of relationships between management and other employees. By doing so, employees convey a sense of identity, that in turn, helps them generate commitment to the company. Education programs that take place at Harley-Davidson s learning center help employees to become compatible with the company s culture. The idea of never being satisfied with the company status leads to continuous improvement and keeps the company consistent with its current objectives, strategies, policies and programs.
Brand loyalty for Harley-Davidson is emotional for management and the customers. Harley promotes a mystique appearance, individualism, the feeling of riding free, and the pride of owning a legend. With Harley, you can live out your fantasies, as well as experience camaraderie with fellow bikers (the thing from Scott). Harley-Davidson has been trying to increase brand recognition among the non-riding public and provide a wide range of products by licensing its trademark “Harley-Davidson-Registered Trademark”(Wheelen). Harley-Davidson currently has licensed the production and sale of a broad range of items, including clothing, jewelry, small leather goods and numerous other products, and is expanding its licensing activity in the toy category. Licensing has also been an effective means of enhancing Harley-Davidson’s image.
Harley-Davidson s motorcycles are sold through a network of 1,065 dealers worldwide. Harley-Davidson’s basic channel of domestic distribution consists of approximately 600 independently owned full-service dealerships. Approximately 75% of the dealerships sell Harley-Davidson motorcycles exclusively. All dealerships carry Harley-Davidson replacement parts, after market accessories, and perform servicing of Harley-Davidson motorcycle products. Marketing efforts are divided among dealer promotions, customer events, magazine, public relations, and cooperative programs with Harley-Davidson dealers (Financial Web). They own 54 percent of the market share in the USA, 16 percent in Japan, 10 percent in Europe, and 38 percent in Australia. The foreign markets could be larger, but the company has an agreement with American dealers not to sell more than 30 percent of the bikes overseas, if the domestic demand is not met. The dealers are considered to be business partners and the headquarters plays an active role in developing programs, financing improvements, implementing support and management consultants. Harley has developed a very effective marketing strategy, but it is the responsibility of manufacturing to produce high quality and reliable motorcycles.
When a person buys a Harley-Davidson motorcycle, they receive a free 1-year membership to the Harley Owners Group (HOG), which was developed in 1983 as a program to keep people active with their Harley. HOG also keeps the company close to its customers. HOG has 295,000 worldwide members, 900 local chapters and is the largest company-sponsored motorcycle enthusiast group. They conduct four US national rallies, two touring rallies and 44 state rallies. These rallies are the primary promotional tool for Harley-Davidson by improving customer relations and are an excellent way to showcase and demonstrate new products.
Harley-Davidson is not able to compete with the foreign competitors in the area of price. Harley-Davidson has developed a strategy of value over price. Harley-Davidson was careful not to exceed demand in production of their motorcycles. Sometimes, people must wait six to eighteen months for a new motorcycle. By not being able to meet demand, a must-have attitude has developed by many of the customers, and in fact the price for a year-old Harley is 25% to 30% higher than a new one.
Harley-Davidson uses the Internet and their website to provide complete information on the company, the products, and on regional and national events. During 1996, 1995, and 1994, Harley-Davidson had domestic marketing, selling, and advertising expenses of approximately $75.4 million, $71.5 million, and $65.6 million, respectively (Harley-Davidson Home Page).
Harley has provided consistent financial performance for the last 10 years, with revenue and earnings both showing double-digit growth. This growth can be expected to continue as long as the responsible strategies are continued.
Harley has also provided long-term shareholder return. Since going public, Harley-Davidson stock has outperformed the S&P 500. This has resulted in a compounded annual return of about 40%.
Keeping debt down, and producing substantial cash flow from continuing operations have established a solid financial position. Standard and Poor s and Duff and Phelps Credit Rating Company have both extended A credit ratings to Harley due to their current financial position. [1997 Annual Report, pg. 37]
Capital expenditures have increased in all but one year since Harley-Davidson went public. A substantial portion of the capital expenditures was for improvements in the manufacturing facilities to increase capacity in order to narrow the gap between supply and demand. Harley has also been spending to expand into new markets, and attract new customers. All of Harley-Davidson’s Capital expenditures are from internally generated funds and all future investments will also be internally funded.
Parts & accessories revenue has been increasing along with the sales of motorcycle, but general merchandise revenue has flattened out over the past 5 years. New branding contracts are expected to increase general merchandise revenue.
The following table contains the key ratios for Harley-Davidson and a comparison to those ratios of the industry.
Ratios Motorcycles Motorcycles
Quick 0.7 1.08
Current 1.8 1.45
Curr Liab to equity 61.3 47.00
Curr Liab to Inv 124.7 2.76
Total Liab to Equity 73.4 33.23
Fixed Assets to Equity 60.7 58.00
Collection Period 41.8 37.00
Sales to Inv 9.5 16.00
Assets to sales 48.7 25.00
Sales to Common Equity 9.3 2.73
A/P to Sales 6.9 7.50
Return on Sales 5.2 8.300
Return on Assets 11.7 12.77
Return on Equity 24.1 23.94
Overall Harley-Davidson has a relatively strong financial position and has the definite ability to generate positive cash flows. Based on the analysis of they key ratios Harley-Davidson is more liquid and profitable then the industry. On the next seven pages are graphs and discussion of various ratios over a three year trend for Harley-Davidson and the motorcycle industry.
The profit margin ratio measures the efficiency of the operation and how well an organization is able to maximize profit in terms of its sales. Harley-Davidson has a relatively consistent profit margin. Harley-Davidson is in a favorable position to withstand falling prices or increased costs. In comparison to the industry Harley-Davidson has been able to maintain a favorable profit margin especially in 1996 where the industry as a whole when done significantly.
This ratio is the key indicator of profitability for a firm. It matches operating profits with the assets available to earn a return. Companies efficiently using their assets will have a relatively high return while less well-run businesses will be relatively low. Once again Harley-Davidson was able to keep a fairly consistent ROA, while there was a significant downturn in the ROA for the industry from 1995 to 1996. Harley-Davidson’s ROA has stayed at a constant 11%.
The current ratio measures the degree to which current assets cover the current liabilities. The higher the ratio the more assurance exists that the retirement of current liabilities can be made. The current ratio measures the margin of safety available to cover any possible shrinkage in the value of current assets. The current ratio can be a difficult ratio to interpret for various reasons. The current ratio is one of the best measures of liquidity. Historically Harley-Davidson has had a current ratio lower than the industry, but in 1996 their current ratio has risen, while the industry has fallen. One of the possible reasons for the increase in the ratio is the fact that Harley Davidson has been trying to enter foreign markets and have had to extend collection periods, which has increased accounts receivable collection periods. With increased collection periods accounts receivable will rise and increase the current ratio.
Current liabilities are all the liabilities that fall due within one year. This ratio reveals the protection afforded short-term creditors in cash or near-cash assets. It shows the number of dollars of liquid assets, which are all current assets excluding inventory, available to cover each dollar of current debt. Any time this ratio is 1 or greater the business is said to be in a liquid position. The larger the ratio the greater the liquidity. A ratio above one assures lenders that Harley-Davidson is in a good position to pay its short-term obligations. Just as with the current ratio the increase in the quick ratio is do to the fact that Harley Davidson has been trying to enter foreign markets and have had to extend collection periods, which has increased accounts receivable collection periods. With increased collection periods accounts receivable will rise and increase the quick ratio.
The accounts payable to sales ratio measures how the company is paying it suppliers in relation to the volume being transacted. An increasing percentage, or one larger than the industry norm, indicates the firm may be using suppliers to help finance operations. The ratio is especially important to short-term creditors since a high percentage could indicate potential problems in paying vendors. Harley-Davidson uses internally generated funds provided by operation rather than financing through debt. Without debt financing the accounts payable ratio should be higher than the industry average, because other companies that use debt financing will pay their suppliers using debt funds. The other companies in the industry also have lower liquidity rations which is also an indication of debt financing.
The quality of the receivables of a company can be determined by this relationship when compared with selling terms and industry norms. In some industries where credit sales are not the normal way of doing business, the percentage of cash sales should be taken into consideration. Generally, where most sales are for credit, any collection selling terms is indicative of some slow-turning receivables. When comparing the collection period of one concern with that of another, allowances should be made for possible variations in selling terms. Harley Davidson’s collection period in 1996 went from a little over 30 to almost 40 days per month. Ordinarily an increase of 10 days in collection period would cause concern. Harley-Davidson is in an expansion period both domestic and international. They have relaxed their credit policy, most likely, to increase market penetration. Once the collection period has stabilized, management can determine if the credit policy can remain. Harley has adequate cash flows to support such a market penetration policy.
Inventory control is a prime management objective since poor controls allow inventory to become costly to store, because they could be obsolete or insufficient to meet demands. This relationship is a guide to how fast the merchandise is being moved and the effect on the flow of funds into the business. The company’s figures are only meaningful when compared to the industry norm. Individual figures that are outside the industry norms should be examined carefully. Although low figures are usually the biggest problem, as they indicate excessively high inventories, extremely high turnovers might reflect insufficient merchandise to meet customer demand and result in lost sales. Harley-Davidson has a higher sales to inventory ratio for two major reason first of which is their inability to meet the demand for their motorcycles, and the second is the fact that Harley can charge a premium price for their motorcycles. In addition to the factors that make Harley-Davidson’s ratio higher, the rest of the industry has to charge lower prices to try to gain market share.
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