HARLEY DAVIDSON CASE

PROBLEM STATEMENT: Harley Davidson’s stock fell from $36 to $34 (5% decline) a share on news of declining profits & sales. We need to find out what’s going on and how to fix it while maintaining market share. (P&L CASE)

DATA POINTS:

• Harley lost 2% market share at a span of 3 years
• market share is measured in units not dollars
• Harley’s revenue dropped 8% last year
• 3 yr ago = profits down by 5%
• 2 yr ago = profits down by 8%
• 1 yr ago = profits down by 6%

What Constitutes Success (WCS): Stop the downfall, 5% increase every year for the next 5 years.

FRAMEWORK: E(P=R-C)M

where E=external conditions, P=profit, R=revenue, C=costs, M=market conditions.

EXTERNAL CONDITIONS

• US unemployment low
• US dollar fairly weak against Asian currencies, strong in Europe
• Interest rates are low
• Corona virus had an effect on production & sales in China
• Reasonable gas price in US

·       INDUSTRY INFORMATION:

• Last year industry grew by 5%
• Harley shrunk by 6%
• Small, less expensive scooters grew by 8%
• Female riders were up by 12% (10% of overall motorcycle riders, but only 2% of Harley’s riders)
• Harley has only one model Harley Hog
• Market leaders:

Honda	27
Harley	24
Yamaha	17
Suzuki	10
Kawasaki	8
BMW	6
Vespa, Suzuki (scooter co)	9

INFERENCE: It’s a Harley problem because:

• Current customer base is ageing out
• Has few female riders
• Current trend is headed towards smaller, lighter, more gas efficient bikes

MAJOR REVENUE STREAMS OF HARLEY

REVENUE STREAMS	Y1 (%)	Y2 (%)
Domestic motorcycle sales	45	35
International motorcycle sales	40	40
Replacement parts	10	15
Garb merchandise	5	10

INFERENCE: Harley’s customer base is investing less in newer bikes, fixing old bikes and buying garbs as accessories.

COST ANALYSIS

·    Cost of steel likely to fluctuate, as a steel contract shall expire in 24 months, steel costs are likely to increase in 24 months

SHORT TERM STRATEGIES (18 MONTHS >)

REVENUE BASED	COST BASED
Raise the prices of garb and replacement parts, cause people will buy them anyway Start learn-to-ride programs to get new customers interested Offer a rental program Increase international distribution channels Since interest rates are low, we can offer financing packages and give high trade-in values to encourage customers to buy new bikes.	Since interest rates are low, we can refinance corporate debt. Consider laying off people

3 SITUATIONS ON PRICE CHANGE:

SITUATION	PRICE	NO. OF MOTORCYCLE	NET PROFIT (EACH) ($)	NET PROFIT ($)
I	Same	330,000	10,000	3.3 billion
II	Discount	440,000	7,000	3.08 billion
III	Raise	275,000	12,000	3.3 billion

WHICH OPTION IS BEST?

OPTION I (Best)

We should keep the price same because market share was a key objective and if we raise the price we are going to sell 55,000 fewer bikes that’s about a 17% drop which will probably lower our market share. By selling more bikes we can sell more garb and eventually more replacement parts.

OPTION II (impossible to achieve in a short span of 18 months.)

• If we raise the price, we will have lower labor cost because we will be able to lay off people.
• The higher price will enhance the brand.
• International distribution channels where the dollar is still weak, any extra inventory can be shipped overseas and sold at new higher price.
• Garb sales tend to be higher when you enter a new territory, so market share won’t be an issue.

2 LONG TERM REVENUE BASED STRATEGY

• New bike not only geared towards women but also younger man, mostly electric bike.
• Acquire a scooter company.

2 LONG TERM COST BASED STRATEGY

• Buy steel futures to hedge against a steel increase.
• Stockpile some steel at current price.
• Make more parts from composites instead of steel.
• Modernize plants with new tech and increase production operations overseas.
• Manufacture bikes in Asia.

CASE SUMMARY:

Our client is Harley-Davidson. Its stock dropped around 5% on news of declining profits and sales. We looked at external factors first and determined that it was more of a Harley problem rather than an industry problem.

Harley is out of step with the two fast growing segments of the industry woman and scooters. So, we came up with short-term and long-term strategies on both the revenue and cost side. An example of a short-term revenue-based strategy is offering low financing to customers. On the cost side we could refinance our debt.

In the long term we could produce a new bike geared towards women and younger men and acquire scooter maker (revenue aspect). Also, on the cost side we could hedge steel prices and have certain new parts made out of composite instead of steel.

If Harley follows these strategies as well as some of the others we talked about, it should be on its way to higher profits in 24 to 36 months.

	SHORT TERM	LONG TERM
REVENUE STRATEGY	offering low financing to customers	produce a new bike geared towards women and younger men and acquire scooter maker co.
COST STRATEGY	refinance debt	Hedge steel prices and have certain new parts made out of composite instead of steel.

Fig: Solution Matrix