Editor’s note: Harley-Davidson Inc. is at a crossroads. In this report, BizTimes Milwaukee asked several acclaimed business consultants and authors to analyze Harley’s troubled business model and provide their recommendations for how the iconic Milwaukee company can survive.
Harley-Davidson Inc. is not only one of Milwaukee’s most important companies, it is one of the most iconic brands in the world.
The company’s motorcycles, the classic growl of their pipes and the Harley logo are known worldwide. It’s Milwaukee metal.
Harley enjoyed a long track record of growth since the mid-1980s by selling its motorcycles and soft goods as more than just products. The company sold a lifestyle. And the baby boom generation bought it.
By marketing that lifestyle, Harley enjoyed success and loyalty that most companies could only envy. The brand loyalty of its customers is so fierce that many riders have the company’s logo tattooed on their bodies.
However, Harley-Davidson has been adversely affected by the Great Recession.
The company is facing challenges on multiple fronts:
- How will it increase its sales by maintaining its existing relationships with its core customers, primarily baby boomers, while reaching new audiences, primarily younger motorcycle riders?
- How can it lower its production costs while not sacrificing the quality of its iconic product?
- How can the Milwaukee-based company maintain its legacy and identity if it decides to move production elsewhere?
The company’s problems are not only dramatic. They are tangible. Harley’s sales fell 18.2 percent during the first quarter of 2010, compared with the first quarter of 2009. The company’s annual sales were down 22.7 percent in 2009 after falling 7.1 percent in 2008.
Harley incurred a net loss of $55.1 million in 2009. The company’s net revenues fell 2.3 percent and net income fell 29.9 percent in 2008.
The company is not sitting idly by. Harley is closing its Wauwatosa plant and consolidating its operations into its Menomonee Falls plant. The company also is closing its Franklin distribution facility by consolidating parts, accessories and other merchandise distribution to a third party.
Harley has already won concessions from its unionized employees in York, Pa., and it will soon enter negotiations with its unionized production workforce in Wisconsin, where the company has said it needs to achieve a lower cost structure to continue manufacturing here.
Keith Wandell, Harley’s chief executive officer, has raised the prospect of moving production elsewhere if the company is not able to lower its Wisconsin production costs. The company has 1,450 employees in the state.
Customer connection
Connecting with a new generation of customers is one of the most difficult challenges for any business, especially for companies such as Harley that have a well-defined brand that appeals to baby boomers but has not struck a chord with younger riders.
“Harley-Davidson does have a tremendous heritage, and it’s got a brand that anybody views as authentic,” said Joe Pine, co-author of “Authenticity: What Consumers Really Want.”
“I don’t think it needs to reinvent itself completely, but it certainly needs to appeal to this next generation, but do so in a way that still is authentic that isn’t going to tick off the older generation – the core,” Pine said.
Dean Metropoulos, president C. Dean Metropoulos & Co., an investment firm based in Greenwich, Conn., that recently acquired Pabst Brewing Co., agreed that Harley needs to tread carefully as it makes this generational transition.
“I would never forget the baby boomers because I think they are going to have a fair amount of cash availability to buy these motorcycles,” said Metropoulos, a master marketer known for building some of the best-known brands, such as Chef Boyardee, Swanson, Vlasic and Ghiradelli Chocolate. “So many companies and brands get into trouble (when they) do not reinvent themselves for the next challenge, the next generation. They probably already know the financial demographics of their customers. Maybe they want to expand beyond that demographic. Maybe they want to reduce (price) and appeal to a different customer. I would target a product line, capitalizing on the technology … and modify that line and reach out to the next generation. I would listen very carefully to them as to what are the types of things that are important to them, and I would design my bikes with that flexibility in mind.”
Harley-Davidson needs to make a direct, personal connection with its next generation of riders, said Matthew May, author of “The Elegant Solution: Toyota’s Formula for Mastering Innovation.”
“I spent a lot of time with Toyota, and one of the things I learned there was that you can’t reach a buyer, a potential customer without living their life,” May said. “They did it with Lexus. They did the same thing with Scion. They spent times at raves, at extreme sporting events, at urban art shows just to figure out what the 18- to 25-year-old buyer might want, or what that person wants out of life. They walked away with one thing – personal expression. So they built a nice spare car that you could customize. I think Harley has to do the same thing.”
To actively engage with younger riders, Harley-Davidson also needs to effectively use social media applications such as Facebook, Twitter and others, May said.
“They don’t really trust the old establishment, and they’re going to get most of their stuff from the folks they hang out with,” May said. “And there might be a surprise or two that the designers could get simply by peeking over the shoulder of people in that age group that happen to have a Harley. But most importantly, they could be figuring out why they aren’t buying a Harley.”
The product
To attract younger customers, Harley-Davidson should consider making more customizable motorcycles, smaller and more fuel-efficient models or styles that incorporate more technology, both May and Pine said.
“The older generation is an incredibly social animal when it comes to their Harleys,” Pine said. “The coming generation, they often connect through technology. They may drive more alone, but they might connect with and through digital technology. They may Tweet from their motorcycles where they are. It’s got to be hands-free but if you’ve got a helmet with earphones and a place for a microphone…”
Designing motorcycles for the next generation of customers is full of potential pitfalls for Harley-Davidson because of the brand’s history and iconic image. The company must be careful with its steps along the journey, experts say.
One of the greatest risks Harley-Davidson could take would be introducing a sport bike or line of sport bikes designed to compete with Japanese and European motorcycles, said Jeremy Anwyl, chief executive officer of Edmunds.com, a website devoted to the automotive industry. Anwyl has worked previously as a consultant to several large automotive manufacturers.
“The existing customers are going to look at that, and it’s not going to make any sense,” Anwyl said. “To the new customers, it’s not going to seem authentic because it’s not a Harley. What is that going to accomplish? It seems like an obvious thing – we’ll bring out a new product and appeal to a new market. But when you’ve got a brand that is really as powerful and as defined as Harley, it’s not as easy as perhaps it is when you’re dealing with other brands that don’t really stand for much.”
If Harley-Davidson were to introduce a lower-cost line of products for young riders, it would run similar risks, said Dantar Oosterwal, author of “The Lean Machine: How Harley-Davidson Drove Top-Line Growth and Profitability with Revolutionary Lean Product Development” and a former director of product development at Harley-Davidson.
“If you’re looking at going to a lower cost product, the question becomes, ‘What is the value proposition?'” Oosterwal said. “If you just reduce cost or price, you really have to look at what that does to the image of that vehicle. The question then becomes, ‘How can you create a product which comes in a lower price point that still provides the value proposition you want to maintain for the brand?'”
Production
Harley-Davidson is closing its Wauwatosa plant and consolidating its operations into the company’s Menomonee Falls plant. In the process, the company is reducing its Wisconsin workforce.
Harley has never been known for tightly adhering to the tenets of lean manufacturing, which focuses on efficiency, elimination of waste, inventory reduction and quality control.
However, Wandell, who was named CEO of Harley in April of 2009, has an extensive background in lean manufacturing and continuous improvement from his former career at Glendale-based Johnson Controls Inc.
Experts believe that it is possible for Harley-Davidson to implement lean manufacturing in its operations, but they say it will be a difficult journey.
“Harley has gone in and out of the lean concept at various times,” Oosterwal said. “If you go back to the mid-80s, they didn’t call it lean then, but a lot of the same principles and ideas were brought in. It’s difficult as the company has tremendous growth to keep those lean ideals in place, and I think Harley-Davidson got away from that for some time.”
Harley’s talented, proud workforce is likely capable of the mindset shift required to effectively implement lean manufacturing, Oosterwal said, but it will take some time.
“Harley is a proud, and rightfully so, organization. They have very strong, ingrained beliefs,” he said. “The question is not necessarily eliminating the beliefs that they have, but modifying them in such a way that recognizes the current economic climate.”
The company could actually have an easier time implementing lean manufacturing now, while it is producing fewer motorcycles and consolidating operations, than it would during a time of expanded production, Anwyl said.
“I find in companies that when they’re in some sort of distress, employees respond very well to a lucid plan of action rather than sitting there doing nothing,” Anwyl said. “If you’re feeling like the company is in peril and the CEO is saying, ‘Here is the solution, let’s go do it,’ people feel a sense of relief.”
Location
Harley-Davidson is expected to enter negotiations with its Milwaukee-area labor unions in the next several weeks. The company has previously said it needs concessions from its Wisconsin workforce. Earlier this year, the firm received concessions from its York, Pa., production workers.
Wandell has said previously that the company has received proposals from other states to relocate and that an outside consultant was reviewing other sites.
Experts say Harley’s brand would not be significantly damaged by moving to another state, but it could suffer if the company moved work offshore. However, many say the company is likely to win concessions from its local employees, which could help keep Harley’s production in the Milwaukee area.
“I suspect that they’ll get some concessions – the balance there is how you go about getting those concessions,” Oosterwal said. “What I have always appreciated in my experience with Harley-Davidson is that everything I’ve seen from the leadership perspective has always been about trying to get a win-win relationship (with labor). I think that everyone understands that there needs to be changes.”
If Harley is unable to win concessions from its Milwaukee area unions and decides to move some or all of its production to another state, the company would likely be able to avoid large damage to its brand as long as it kept most production in the United States, Pine said.
“I think that it could be done, probably in stages, and that it would still come off as being authentic,” he said.
However, Oosterwal and Anwyl both say that if Harley moves some production offshore, the impact to its brand may only be short term, especially for younger buyers.
“For today’s consumer, the motorcycle buyer we’re talking about didn’t grow up in the era of Easy Rider – they don’t even know what you’re talking about,” Anwyl said. “When you’re talking about trying to be authentically American, what does that even mean today? The country of origin, at least in the car world, has gotten so opaque. A Toyota today, where is it even made? Kentucky? Japan? It’s on the window sticker, but I’m not sure if people actually read that stuff.”
Resiliency
In its 107 years, Harley has been through multiple generations of riders, countless trends in the marketplace, several recessions and more. Oosterwal said the company is, at its core, capable of long-term growth and stability.
“Harley has been there before and has reinvented itself,” he said. “From a business perspective, it’s a phenomenal company with tremendous capabilities. Harley is capable and poised to be able to exploit the next upturn in the economy. I don’t think it’s an issue of the aging baby boomers. There are many other people that have an interest in motorcycles.”
