Harley

Case Study - Harley-Davidson, Inc.

By

Vijaya K Ganapathy - 3/1/2008

Wayne State University

7080 - Strategic Management

The Company

Harley-Davidson, Inc. was established in 1903 by William Harley and brothers William Davidson, Arthur Davidson, and Walter Davidson. Together they built their first motorcycles with a three horsepower engine in a shed in Milwaukee. In 1909, the company introduced its trademark bike; a 2 cylinders, v-twin engine (the fastest motorcycle at that time), able to reach speeds of 60 mph. However, a few years later the competition was becoming stiffer. During World War I, the demand for United States motorcycles overseas grew tremendously. As a result, Harley-Davidson became a leader in innovative engineering in the 1920's. With the introduction of the front brake and "teardrop" gas tanks, Harley was quickly developing its mystic appearance. The industry was thriving with the growing affluence and rise of youth culture that created a growing demand for motorcycles. Importing motorcycles from Britain and later from Japan satisfied the growing demand. With its technically advanced bikes Honda became a direct competitor to Harley-Davidson while Harley's product quality diminished. Soon Honda had replaced Harley as market leader in heavyweight motorcycles in the US.

In 1981, Harley's senior managers organized a leveraged buyout of American Machine and Foundry's Harley-Davidson division from AMF Company that owned it. Harley emerged as an independent, privately owned company, heavily laden with debt. The buyout coincided with a severe recession but Harley somehow managed to survive by producing motorcycles for the army. Management team also devoted itself to finding better production methods and improving quality of its motorcycles. Soon management started focusing on reducing inventory costs and the manufacturing operations were being converted to Just In Time system. The revolution in production methods and new spirit of cooperation between workers and management along with the help from US government in the form of temporary 49% tariff on imports of Japanese motorcycles helped Harley get back the market share it had lost.

The Strategy

Harley-Davidson followed a product differentiation strategy over its competitors and was able to separate itself from its competitors. A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price. Differentiation advantage occurs when a firm is able to obtain a price premium in the market that exceeds the cost of providing the differentiation. Harley looked at both the firm itself and its customers and found a way to create uniqueness and value for its customers. It was able to crate a value for itself that exceeded the cost of differentiation. Harley was successful in implementing differentiation strategy more efficiently and effectively than its competitors.

It is interesting to note that Harley-Davidson focused more on Intangible differentiation in the beginning and later reaped the benefit of tangible differentiation. In Intangible differentiation the perceived value of the product is determined by social, emotional, psychological considerations and Harley was able to associate its products emotionally with its customers. The overall image of status, exclusivity, and individuality acted as powerful motivational force to its consumers. Once the Intangible differentiation is achieved it is easy for firms to focus on Tangible and focused differentiation by offering better service and quality products.

Product differentiation means Harley-Davidson has a strategy of value over price. Harley-Davidson had recognized somewhere in between its long history that its not just selling a motorcycle its selling the Harley experience. This was established by not producing more than the demand, which made customers to wait in line to buy Harley-Davidson bikes. Along with that such a strategy of producing less than demand also created good resale value for the old bikes. This also means no steep inventory costs for storage, financing and other expenses.

The image and loyalty it engendered among its customers were its greatest assets. With its famed spread eagle logo, it created an American life style associated with its motorcycle. Harley has a unique relationship with American culture that very few American companies enjoy. Harley has been described as the "ultimate biker status symbol.. a quasi religion, a institution a way of life." The values that Harley represented - individuality freedom and adventure - could be traced back to the cowboy and the frontiersmen of yesteryear.

This appeal of the Harley brand was central not just to the company's marketing, but also to its strategy as a whole. The central thrust of this strategy was reinforcing and extending the relationship between the company and its customers. To increase Harley's involvement in its consumers riding experience it formed the Harley Owners Group in 1983. Through HOG the company became involved in organizing social and charity events. All the Harley employees were encouraged to take an active role in HOG activities. HOG organizes an annual rally in Sturgis South Dakota; a tradition that started in 1983 and continuing is to Harley riders what the Mecca is to Islam. This rally attracts around 400,000 riders from around the world annually, which explains the success of Harley as a quasi religion. Most of the top managers try to attend many of Harley-Davidson rallies held around the country, where they will get a chance to talk to the customers and get direct feedback from them. These rallies are product development centers for Harley, they can see thousands of bikes and how customers are using them and get new ideas by interacting with them. That explains why Harley-Davidson does not spend too much in advertising promoting their product.

Another key part of Harley-Davidson's growth strategy was expanding its sales outside the US. A critical issue was the extent to which Harley needed to adapt its products, image, and customer approach to conditions in overseas markets. US and Harley are tied together since Harley's images are rooted in American culture, to repeat this success Harley had to change its marketing strategy so that Asians and Europeans will buy into the US mystique. Harley had to carefully place its product so that it matches the demand and customer profile of the overseas market.