Chapter 7 Japanese motorcycle companies to become the global

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CASE 7

Harley-Davidson, Inc., May 2015

TEACHING NOTE

■ SYNOPSIS ■

Since its rebirth as an independent company in 1981, Harley-Davidson has experienced a remarkable

renaissance, taking market share from the once-dominant Japanese motorcycle companies to become the

global market leader in heavyweight motorcycles and generating the highest rate of profit in the industry.

By early 2015, Harley bounced back from the downturn that accompanied the financial crisis of 2008-9.

However, unit sales are still well below their pre-crisis levels and Harley’s faces the challenge of

rekindling growth. The central problem is that the US baby-boom generation that has formed Harley’s

core customer group is now beginning to forsake motorcycling in favor of more leisurely activities.

■ TEACHING OBJECTIVES ■

I use Harley-Davidson as a case study in the analysis of resources and capabilities. Despite its small size,

and weaknesses in cost efficiency and technology relative to its competitors, Harley has one key strength:

its unique image and heritage. The key lesson form Harley is that by focusing strategy around this key

strength, Harley has been able to build a position of unassailable differentiation advantage. Hence,

However, the strategic issues that the case raises and the learning potential for students go beyond the

application of specific tools for analyzing resources and capabilities and differentiation advantage. Key

learning objectives for the Harley case include:

 How a company can establish competitive advantage against bigger, better-resourced rivals

through a strategy that exploits a few critical resource strengths (namely, the Harley image and

■ POSITION IN THE COURSE ■

I teach this case in the section of the course that deals with the analysis of resources and capabilities and

the nature of competitive advantage (Chapters 5 and 7 of Contemporary Strategy Analysis).

■ ASSIGNMENT QUESTIONS ■

1. What is Harley-Davidson’s strategy? How successful has this strategy been?

2. What resources and capabilities are needed to compete within the motorcycle industry? In relation

■ READING ■

R. M. Grant, Contemporary Strategy Analysis (9th edn.), Wiley, 2016, Chapter 5: “The Analysis of

Resources and Capabilities; also Chapter 7, especially the section on “Differentiation Analysis” (pages

186-197).

■ CASE DISCUSSION AND ANALYSIS ■

Identifying Harley-Davidson’s Strategy

There are two reasons why I ask students to describe Harley-Davidson’s strategy. First, to gain practice in

Using the approach outlined in “Describing a Firm’s Strategy” (Chapter 1 of Contemporary Strategy

Analysis), Harley’s strategy can be described in terms of where it is competing (the industry in which it

competes, the market segments it serves, the geographical scope of its markets, etc.) and how it is

competing (the basis on which it seeks to establish competitive advantage):

 Where? Harley’s strategy is distinguished by its focus – it concentrates on a narrow segment of the

 How? Harley’s competitive strategy is distinguished by an unremitting quest for differentiation

advantage. This strategy is implemented by a full range of functional strategies – from design through

Perceptive students will observe that these two dimensions of Harley’s strategy are inextricably linked:

how Harley competes also defines where it competes. This unity is expressed in the company’s explicit

statement that what it is supplying is not motorcycles, but an experience. Hence, we need to look beyond

Harley-Davidson’s Performance

How well is the strategy working? This question should elicit the following information:

 HD has displayed remarkable long-term growth. From 1983 to 2014, output grew from

Harley’s Resources and Capabilities

To understand why Harley’s strategy has led to outstanding performance, we need to see its linkage to the

firm’s underlying resources and capabilities.

This typically elicits lists such as:

RESOURCES CAPABILITIES

Plant(s) Purchasing/supply chain management capability

Skilled employees R&D/technological capability

I then go a step further by asking the class to quantify the strategic importance of these resources and

capabilities. How do we do this? First, by (subjectively) assessing the extent to which a resource or

capability can establish a competitive advantage (e.g. by linking with a customer’s choice criteria);

second, how far that resource or capability can sustain a competitive advantage (i.e. how difficult is it for

a competitor to acquire or replicate it).

Putting together these two assessments: strategic importance and relative strengths allows us to display

Harley’s resources and capabilities using the framework shown in figure 5.8 of Chapter 5 (page 131). The

resulting display should resemble the slide below:

The Match between Harley’s Strategy and its Resources and Capabilities

We can then see how Harley’s strategy fits with the strengths and weaknesses of its resource and

capability base:

 Segment focus: Harley produces almost exclusively heavyweight bikes. It is this segment where

differentiation advantage is most important and cost advantage least important.

Delivering the Harley experience has required an upgrading of resources and capabilities. Key features of

HD’s strategy from 1981 to 2015 have been: improving product quality, upgrading dealerships,

developing customization (including a state-of the art paint shop), and incremental technical and design

improvements aimed at increasing the accessibility and usability of Harley bikes: electric starters, radios,

heaters, improved transmission, reduced vibration etc..

Differentiation Advantage

The Harley case offers powerful illumination of a number of the concepts in differentiation advantage

(see Chapter 7 of Contemporary Strategy Analysis, particularly pp.186-197 of the 9th edition). These

include:

 The role of social and psychological factors in intangible differentiation

 The concept of product integrity—in integrating different aspects of differentiation into a lifestyle

Threats to Harley’s Future Success

For all Harley’s success in recovering from the financial crisis of 2007-8, the case points to a number of

clouds on Harley’s horizon. I ask my students: “What do you see as the major threats to Harley’s future

prosperity?”

Problems include the following:

 The motorcycle market. In all of Harley’s major markets—the US, Canada, Europe, and Japan—

consumer discretionary expenditure shows slow growth—a key constraint for leisure items

costing in excess of $10,000. Moreover, Table 1 shows declining sales of heavyweight

motorcycles in both North America and Europe—is motorcycling a declining leisure activity?

 Competition. Competition is intensifying on two fronts. On one side, there are the Japanese

manufacturers all of which produce Harley-style V-twin cruisers but typically with more

advanced technologies and lower prices. On the other is a set of small producers (Excelsior,

Polaris, Enfield, and Indian) that have imitated Harley by producing retro bikes.

How is Harley-Davidson Responding to These Threats and What More Can It Do?

Harley’s previous CEO, Keith Waddell embarked upon three main initiatives:

 Cutting costs through restructuring manufacturing operations.

 Expanding international sales—especially in Asia.

 Expanding the customer case in North America—especially targeting younger riders with lighter

weight bikes (the “Street” range introduced in 2014).

Doubts concerning the Harley’s potential for success in smaller bikes are reinforced by the failure of

Harley’s subsidiary Buell Motorcycles that was closed in 2009, and the limited success of Harley’s V-rod

model which embodied new technologies (such as a liquid-cooled engine).

In terms of international expansion, the key questions are:

There may also be the potential for Harley to extend and reinforce its existing differentiation advantages.

By revisiting the value chain framework, it may be possible to identify further linkages between Harley’s

value chain and that of owners. Harley has recently begun offering vacation services: vacation packages

that include the rental of a Harley in a different location.

Finally, if Harley is effectively locked within its existing market and there are limited growth prospects,

■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■