Harley Davidson

Manita Punda

Kittipatr

Agenda

Company Background

Situation Analysis

Issues

Recommendation

Financial Justification

Key Success Factors

Conclusion

Company Background

• Began business as independent Harley-Davidson MotorCompany in 1981 (after a successful buyout from AMF) • Returned to public ownership in 1986

• Known for its product quality

•Market Leader in Heavyweight Motorcycle Segment

• Presence in U.S.,Europe, Australia, and Asia

• 3 Divisions: Harley-Davidson Heavyweight Motorcycle Holiday Rambler Buell Performance Motorcycle

Situation Analysis

3 Divisions:Heavyweight Motorcycle

•few competitors•current market share = 55.7%

Holiday Rambler•Intense competition•low market share

Performance Motorcycle •few competitors•acquired 49% of shares in ‘93

After facing with almost bankruptcy in 1980’sAs of 1995, financially sound with gross sales exceeding$ 1.5 billion

However,• Stock price has slumped 7 percent• Inability to meet demand may be jeopardizing relationship with customers

Situation Analysis

Issue Identification

Issue I

Declining Market Share

Strategies:

I. Capacity Expansion

II. Price Increase

DecliningMarket Share

Issue IStrategy:

Managing ResourcesAllocation To Maximize

Overall Performance

Issue II

Strategy:

Portfolio Management

I. Capacity ExpansionII. Price Increase

Issue Identification

I. Harley-Davidson

I. Capacity Expansion

Key Consideration: Quantity WITH Quality

Current Plan

Proposed Plan

Production Capacity

Growth plan = 7% annuallyMarket Growth = 15% annually Decrease in Market Share

Year 1999

• Reduce lead time by 4 months• Reduction in excess demand

Increase Capacity1995-1997 = 20%1998-1999 = 17%

I. Harley-Davidson

II. Price Increase

Justification for Price Increase•Still excess demand after expansion•Demand Inelastic “Capture Opportunity”

Proposed Plan:Price10% IncreasePredicted Demand5% Decrease

Result

• Reduce Lead Time by 1 month• Net Income Increases by 9%

I. Harley-Davidson

Price Increase + Capacity ExpansionGoal: Reduce Lead Time and Increase Market Share

Without Recommendations 45.19%47.30%49.51%51.83%55.70%

Market Share

With Recommendations 65.65%63.94%62.27%58.12%55.70%

1995 1996 1997 1998 1999

Excess Demand

Without Recommendations 190,487163,789140,362119,83096,200

With Recommendations 105,16198,99592,82492,73685,640

1995 1996 1997 1998 1999

Lead Time

Without Recommendations 15.1613.9512.7911.6910.04

With Recommendations 5.766.246.738.0610.04

1995 1996 1997 1998 1999

High Medium Low

Hig

hM

ed

ium

Lo

w

Harley-Davidson

Holiday Rambler

Buell

Market Attractiveness

Com

peti

tive S

tren

gth

II. Portfolio ManagementAnalyzing SBUs

Grow

Hold

Divest

II. Portfolio Management

Divesting Holiday Rambler

1. Not core business2. Large capital Investment3. Low Market Share4. At a disadvantage relative to competitors

• Economies of Scale• Lack of management expertise in market

5. Limited Human Resource Must allocateto best maximize the company’s profitability

Rationale:

Strategy:Divest to use capital and focus management’s attention on more promising projects

Harley Davidson

II. Portfolio Management

Harley-Davidson

“Investment Priority”•Main issue: unmet demand

Trademark Licensing•High Margin•Stimulate Demand For Motorcycles•Lay Ground For International Growth

“Continuous Expansion”

1995 1996 1997 1998 1999 2000Activities

Harley Davidson

Portfolio

Operate At Full Capacity

New Capacity Expansion Plan

Selling Process

Increase Price by 10%

Trademark Licensing

Existing expansion plan

New expansion plan

New Pricing Policy

Holiday Rambler

Trademark Licensing

Capacity @ 115,000

Capacity @ 220,000

NPM increase ~ 9%

Grow @ 20%

Existing Capacity Expansion Plan Complete

$70,000,000

Time Line

Growth Rate

1995F 1996F 1997F 1998F 1999F

17.07% 30.60% -5.98% 17.53% 17.69%

Effect of new pricing policy

Effect of selling Holiday Rambler

1996F

30.60%

1997F

-5.98%


Growth Rate

1994 1995F 1996F 1997F 1998F 1999F

26.64% 17.07% 30.60% -5.98% 17.53% 17.69%

1,541,7961,805,023

2,357,3262,216,418

2,605,025

3,065,905

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1994 1995F 1996F 1997F 1998F 1999F

Net Sales


Growth Rate

1994 1995F 1996F 1997F 1998F 1999F

26.64% 17.07% 30.60% -5.98% 17.53% 17.69%

Net Income

104,272 119,463

378,637 373,131

457,498

546,800

0

100,000

200,000

300,000

400,000

500,000

600,000

1994 1995F 1996F 1997F 1998F 1999F


Cost Estimation

1995F 1996F 1997F 1998F 1999F

Capacity Expansion

Factory and machinery

(100,000,000.00)

(100,000,000.00)

(100,000,000.00)

(100,000,000.00)

Human resource and other related costs

(20,000,000.00)

(20,000,000.00)

(20,000,000.00)

(20,000,000.00)

Transport Vehicle Division 70,000,000.00

Total Cost

(50,000,000.00)

(120,000,000.00)

(120,000,000.00)

(120,000,000.00)

Fund needed in total $ 410,000,000

Sources of fundSales of TVD

Internal generated fund


Cost Estimation

1995F 1996F 1997F 1998F 1999F

Capacity Expansion

Factory and machinery

(100,000,000.00)

(100,000,000.00)

(100,000,000.00)

(100,000,000.00)

Human resource and other related costs

(20,000,000.00)

(20,000,000.00)

(20,000,000.00)

(20,000,000.00)

Transport Vehicle Division 70,000,000.00

Total Cost

(50,000,000.00)

(120,000,000.00)

(120,000,000.00)

(120,000,000.00)

Fund needed in total

$ 410,000,000

NPV = $ 3,597,519,000

PBP = 3.23 Years


Key Success Factors

Quality

Efficient Distribution Of Resources

Operational Efficiency

SupplierRelationship

Issues Are Solved

DecliningMarket Share

Managing Resource Allocation To Maximize

Overall Performance

Issue I

Issue II

Current Issues

Strategy I:

I. Increase PriceII. Capacity Expansion• Reduce lead time by 50% by 1999• Market Share Increase by 10% by 1999

Strategy II

Portfolio Management• Divest Holiday Rambler•Heavyweight motorcycle

-Investment Priority- Licensing expansion

THANK YOU

1992 1993 1994Liquidity ratio current ratio (times) 1.57 1.75 1.88 Quick ratio (times) 0.81 0.86 0.94

Leverage ratio Debt ratio (%) 44.30% 68.93% 41.39% Interest coverage (times) -19.79 -84.00 3643.34

Profitability ratio Net Profit Margin (%) 4.87% -0.98% 6.76% Return on asset (%) 10.30% -2.04% 14.11% Return on equity (%) 16.04% -3.66% 24.07%

Activity ratio Account receivable (times) 11.86 14.15 10.75 Average collection period (days) 30.77 25.79 33.95 Inventory turnover (times) 8.57 6.28 6.46 Average sale period (days) 42.61 58.11 56.50 Fixed asset turnover (times) 4.31 4.88 4.62 Total asset turnover (times) 2.12 2.09 2.09

Ratios Analysis

Historical Ratio Analysis

Sales by Division

1994 g 1995F g 1996FMotorcycle unit shipments 95,811 95,811 95,811 Net Sales - - Motorcycles 902.60 15.00% 1,037.99 20% 1,245.59 Motorcycle parts and accessories 256.30 25.00% 320.38 25% 400.47 Recreational vehicles 274.50 17.00% 321.17 15% 369.34 Commercial vehicles 95.10 17.00% 111.27 111.27 Others 13.30 7.00% 14.23 15% 16.37 Total 1,541.80 17.07% 1,805.03 18.73% 2,143.03

g 1997F g 1998F g 1999F95,811 95,811 95,811

- - - 20% 1,494.71 15% 1,718.91 15% 1,976.75 25% 500.59 25% 625.73 25% 782.17

- - - - - -- - - - - -

20% 19.64 20% 23.57 20% 28.28 -5.98% 2,014.93 17.53% 2,368.21 17.69% 2,787.19

1994 Avg.%of sales Avg.%changed 1995 1996 1997 1998 1999COGS 1,120,332.00 72.72% 18.05% 72.50% 72.00% 71.50% 71.00% 71.00%Selling, admin, & enginner exp. 261,157.00 17.41% 14.87% 16.90% 16.35% 16.00% 15.70% 15.40%Income from operations 160,307.00 8.31% 50.73% - - - - -Interest expense (net) 44.00 -0.17% -94.19% -0.17% -0.17% -0.17% -0.17% -0.17%Other income (exp.) net 1,718.00 -0.20% -113.25% -0.20% -0.20% -0.20% -0.20% -0.20%Provisions for income tax 57,797.00 3.61% 29.51% 3.61% 3.61% 3.61% 3.61% 3.61%

1,994 Avg.%of sales Avg.%changed 1995 1996 1997 1998 1999A/R 143,396.00 8.27% 29.50% 9.50% 9.50% 10.00% 10.00% 10.00%Inv. 173,420.00 10.43% 36.08% 11.25% 11.25% 11.25% 11.25% 11.25%Prepaid expense 9,424.00 0.76% -1.01% 0.76% 0.76% 0.76% 0.76% 0.76%Other current asset 20,111.00 1.72% -8.38% 1.72% 1.72% 1.72% 1.72% 1.72%Liabilities & Equity 0.00%A/P 63,988.00 4.68% 5.35% 4.10% 4.00% 4.00% 3.90% 3.90%Salaries Payable 62,882.00 3.26% 56.75% 3.00% 3.00% 3.00% 3.00% 3.00%ST debt/current LTD 18,303.00 1.49% 5.81% 1.00% 1.00% 1.00% 1.00% 1.00%Other CL 71,105.00 5.57% 1.81% 4.00% 4.00% 4.00% 4.00% 4.00%

Assumptions (with recommendations)Statement of Operations

Balance Sheet

Assumptions

1994 1995F 1996F 1997F 1998F 1999FNet sales 1,541,796 1,805,023 2,357,326 2,216,418 2,605,025 3,065,905 COGS 1,120,332 1,308,642 1,542,977 1,440,671 1,681,425 1,978,902 Selling, admin, & enginner exp. 261,157 305,049 350,384 322,388 371,808 429,227 Income from operations 160,307 191,332 463,965 453,358 551,792 657,776Interest expense (net) 44 (3,067) (3,642) (3,424) (4,024) (4,737) Other income (exp.) net 1,718 (3,635) (4,316) (4,058) (4,769) (5,613)

1,762 -6,703 -7,958 -7,482 -8,794 -10,350Income from op. bf ext. item and acct. change 162,069 184,630 456,007 445,876 542,998 647,426Provisions for income tax 57,797 65,167 77,370 72,746 85,500 100,627 Net income (loss) 104,272 119,463 378,637 373,131 457,498 546,800

Statement of operations (with pricing effect)

Pro Forma Financial Statement

1994 1995F 1996F 1997F 1998F 1999FAssetsCash 59,285 127,315.17 429,866.24 669,344.73 1,054,845.86 1,474,874.80 A/R 143,396 146,470.62 171,477.22 214,302.36 201,492.51 236,820.43 Inv. 173,420 173,452.05 203,065.12 241,090.15 226,679.07 266,422.98 Prepaid expense 9,424 11,653.38 13,642.93 16,197.64 15,229.43 17,899.63 Other current asset 20,111 26,486.79 31,008.82 36,815.39 34,614.76 40,683.80

Total CA 405,636 485,378 849,060 1,177,750 1,532,862 2,036,702PPE 262,787 262,787.00 297,787.00 377,787.00 457,787.00 537,787.00 Other Asset 70,792 80,792.00 90,792.00 95,792.00 100,792.00 105,792.00

Total Asset 739,215 828,957 1,237,639 1,651,329 2,091,441 2,680,281Liabilities & Equity - - - - - A/P 63,988 63,213.64 72,200.93 85,720.94 78,582.08 92,359.97 Salaries Payable 62,882 46,253.88 54,150.70 64,290.71 60,447.75 71,046.13 ST debt/current LTD 18,303 15,417.96 18,050.23 21,430.24 20,149.25 23,682.04 Other CL 71,105 61,671.84 72,200.93 85,720.94 80,597.00 94,728.17

Total CL 216,278 186,557 216,603 257,163 239,776 281,816L-T debt 29,422 29,422.00 29,422.00 29,422.00 29,422.00 29,422.00 Deffered tax 0 - - - - - Postretirement health care benefit 60,283 60,283.00 60,283.00 60,283.00 60,283.00 60,283.00

Total Liabilities 305,983 276,262 306,308 346,868 329,481 371,521Common stock, net 772 772.00 772.00 772.00 772.00 772.00 Additional paid in capital 150,728 150,728.00 150,728.00 150,728.00 150,728.00 150,728.00 Rettained earnings 283,010 402,472.51 781,109.11 1,154,239.71 1,611,737.36 2,158,536.93 Unrealized foreign exchange GN/LOS 303 303.00 303.00 303.00 303.00 303.00

434,813 554,276 932,912 1,306,043 1,763,540 2,310,340Less: treasury stock 1,581 1,581.00 1,581.00 1,581.00 1,581.00 1,581.00

Total shareholder's equity 433,232 552,695 931,331 1,304,462 1,761,959 2,308,759Total liabilities and shareholder's equity 739,215 828,957 1,237,639 1,651,330 2,091,440 2,680,280

Balance sheet (with pricing effect)

Pro Forma Financial Statement

1994 1995F 1996F 1997F 1998F 1999FLiquidity ratio current ratio (times) 1.88 2.60 3.92 4.58 6.39 7.23 Quick ratio (times) 0.94 1.47 2.78 3.44 5.24 6.07

Leverage ratio D/E ratio (%) 70.63% 33.33% 24.75% 21.01% 15.75% 13.86% Interest coverage (times) 3643.34

Profitability ratio Net Profit Margin (%) 6.76% 6.62% 16.06% 16.83% 17.56% 17.83% Return on asset (%) 14.11% 14.41% 30.59% 22.60% 21.87% 20.40% Return on equity (%) 24.07% 21.61% 40.66% 28.60% 25.97% 23.68%

Activity ratio Account receivable (times) 10.75 12.32 13.75 10.34 12.93 12.95 Average collection period (days) 33.95 29.62 26.55 35.29 28.23 28.19 Inventory turnover (times) 6.46 7.54 7.60 5.98 7.42 7.43 Average sale period (days) 56.50 48.38 48.04 61.08 49.21 49.14 Fixed asset turnover (times) 4.62 5.25 6.07 4.68 4.66 4.76 Total asset turnover (times) 2.09 2.18 1.90 1.34 1.25 1.14

Ratios Analysis (with pricing effect)

Ratio Analysis

1994 1995F 1996F 1997F 1998F 1999FInvestment Outlay -100000 -100000 -100000 -100000OCF with recom. 119,462.51 378,636.61 373,130.60 457,497.65 546,799.57 OCF w/o recom. 119,462.51 119,462.51 143,009.03 161,094.25 178,835.47 OFC - - 259,174.10 230,121.56 296,403.40 367,964.10 Terminal Value 75,000.00 4,313,986.91 CF - - 234,174.10 130,121.56 196,403.40 4,581,951.00

NPV Analysis (with pricing effect)

wD 41.39%kD 7.00%Tax 40.00%wE 58.61%kE 15.00%WACC 10.53%

NPV ฿3,597,519.00

WACC (at present)

NPV Analysis

1994 1995F 1996F 1997F 1998F 1999FNet sales (w/o recommendation) 1,541,796 1,805,023 2,160,800 2,434,060 2,702,121 3,004,958 Net sales (with recommendation) 1,541,796 1,805,023 2,143,024 2,014,925 2,368,204 2,787,186 Net sales (with pricing effect) 1,541,796 1,805,023 2,357,326 2,216,418 2,605,025 3,065,905 Net income (loss) (w/o recommendation) 104,272 119,463 143,009 161,094 178,835 198,878Net income (loss) (with recommendation) 104,272 119,463 164,334 171,638 220,677 268,081Net income (loss) (with pricing effect) 104,272 119,463 378,637 373,131 457,498 546,800

Net Sales and Net Income

Rationales

1994 1995F 1996F 1997F 1998F 1999FMarket growth rate 15% 15% 12% 12% 12%Production growth rate (existing plan) 7% 7% 7% 7% 7%Production growth rate (recommendation) 20% 20% 20% 15% 15%Demand (without pricing effect) 211,200 242,880 272,026 304,669 341,229 Demand (with pricing effect) (5% drop) 211,200 230,736 258,424 289,435 324,167 Domestic demand (without pricing effect) 152,064 174,874 195,858 219,361 245,685 Domestic demand (with pricing effect) (5% drop) 152,064 166,130 186,066 208,393 233,401 Supply (existing plan) 115,000 123,050 131,664 140,880 150,742 Supply (recommendation) 115,000 138,000 165,600 190,440 219,006 Domestic supply (existing plan) 82,800 88,596 94,798 101,434 108,534 Domestic supply (recommedation) 82,800 99,360 119,232 137,117 157,684 Excess Demand (without recommendation) - 96,200 119,830 140,362 163,789 190,487 Excess Demand (with recommendation) - 96,200 92,736 92,824 98,995 105,161 Lead time (without recommendation) 10.04 11.69 12.79 13.95 15.16 Lead time (with recommendation) 10.04 8.06 6.73 6.24 5.76Total market demand 148,653.50 170,951.53 191,465.71 214,441.59 240,174.59 Market share (without recommendation) 55.70% 51.83% 49.51% 47.30% 45.19%Market share (with recommendation) 55.70% 58.12% 62.27% 63.94% 65.65%

Demand and Supply

• Prepare to invest in international market

• Invest in motorcycle industry– Buy more Bruell shares– Vertical intregration esp. suppliers

Cash Cow

SWOT AnalysisStrengths

- Product Quality- Brand Recognition- Cultural Philosophy- Trademark Licensing- Supplier relationship- Designer Store Service- Distribution Channel- Financial Position

Opportunities

Threats

Weaknesses- Length Lead Time- Reliant on few suppliers- Transportation Vehicle Division

- Expansion into Europe and Asia-Pacific-Licensing of Trademarks- Growth in RV market

- Competitors- Ending Contracts With The Labor Union

Marketing AnalysisProduct

Promotion

Place

Price

• Harley-Davidson• Holiday Rambler• Buell Motorcycle

• Presences in U.S., Europe, Australia,and Asia• 1033 Worldwide Dealerships• 600 independently owned

• Harley-Davidson: premium• Holiday Rambler: midrange-

premium• Buell Motorcycle: premium

• Dealer promotions• Customer events• Magazine ad• Public Relations

Long Term Issue IInternational Expansion

Where?

?Focus on EuropeAnd Australia

Asian Market Not Promising

Management’s Misunderstanding

Asian Marketi.e. Thailand Taiwan

#’s of motorcyclist

= Potential CustomersPurchasers = Recreational oriented

Key Considerations•Culture•Income•Vision

International Expansion Criteria

• Mid-High to High Disposable Income• Open to Influences of American Culture• Environmental Factors

- Government Regulations

- Economic Stability- Competition

• Preferences (i.e. purchase intentions)• Demographic factors

Criteria

Long Term Issue IIAttracting non-lover customers

Secondary market

• Market Research– Existing Customer– Potential Customer

• New Marketing Scheme– PR, Licensing

Why Keep Buell?

• Correlates to Core Business• Leverages Main Business

– R&D– Economies of Scale– Distribution

• Has Shown Better Than Expected Results In Just A Period of One Year

• Expected Increase in Demand

Average sale period (days) 42.61028 58.11305 56.49959

DECREASING

GE Matrix

Justification for Divesting

Core Business = Harley DavidsonProfitable NicheStrong Brand PresenceRoom for expansion both domestically and internationallyPremium High-Quality Heavyweight Motorcycle• Management’s focus• Unmet Demand• International Expansion

Should Not Diversify to Other Product Line Yet!Harley-Davidson Still Has A Lot of Room for Growth and isA Profitable Niche

Pros Cons

Status Quo -have presence in RV + commercial vehicle market

-high operating costs- scarce human resource is allocated away from core business (more

potential)

Keep Brand(continue

expansion)

-attempt in capturing a portion of several vehicle

markets

-high investment cost that may not give profitable returns

-take away management focus on core business

- requires a lot of marketing expenses in order to compete with

existing market leaders

Divest from Portfolio

-funding for more brand with

higher potential-more focused portfolio

-let go opportunities to capture several markets

BUT, with INTENSE

competition, SMALL market share, and LACK of expertise, chance of Success is very LOW

Holiday Rambler Alternatives

Summary of Management PlanHarley-DavidsonI. Price Increase- Justification to Consumers - However, not as prevalent because nature of product (recreational oriented + premium)– price relatively inelastic

II. Capacity Expansion- Select optimal location (close to DCs)- Trainings crucial—product known for quality- Work closely with suppliers- Must also expand human resource to ensure high quality

Portfolio ManagementI. Divesting Holiday Rambler- Allocation of fund to other brand (especially Harley-Davidson)- Finding prospective buyers: Existing Play vs. New Entrants

II. Trademark Licensing- Find prospective licensee- Selection very important—portrays brand image- Consider International Market—build ground for entering motorcycle market- Especially useful in countries with no presence of Harley-Davidson selling point of H-D = “American Culture”

Effects of Price Increase and Capacity Expansion

Price Increase• Increase Margin

- inelastic demand- demand greatly > supply

• Reduces Demand - help balance supply and demand

- customer’s willingness to buy at current price exceeds company’s ability to supply

• Reduces Lead Time

Capacity Expansion• Increase Supply to Match Demand

• Increase Market Share

• Reduces Lead Time

• Increase NPM (in value)

Why Not Increase Capacity to Fully Match Demand?

Quality Issue

If increase too fast, can jeopardize

quality of product.

20% represents highest practical rate

Documents

Harley Davidson