7065751-Harley-Davidson_2

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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 MotorcycleHoliday RamblerBuell Performance Motorcycle



Situation Analysis

3 Divisions:Heavyweight Motorcycle•few competitors•current market share = 55.7%

Holiday Rambler•Intense competition

•low market sharePerformance Motorcycle

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



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

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

Situation Analysis



Issue Identification Issue I

DecliningMarket Share

Strategies:

I. Capacity Expansion

II. Price Increase




Issue I Strategy:

Managing Resources

Allocation To MaximizeOverall 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 Capacity

1995-1997 = 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% Increase

Predicted Demand5% Decrease

Result • Reduce Lead Time by1 month

• Net Income Increases

by 9%



I. Harley-Davidson

Price Increase + Capacity Expansion Goal: Reduce Lead Time and Increase Market Share

WithoutRecommendations 45.19% 47.30% 49.51% 51.83% 55.70%

Market Share

WithRecommendations 65.65% 63.94% 62.27% 58.12% 55.70%

1995 1996 1997 1998 1999

Excess Demand Without

Recommendations 190,487 163,789 140,362 119,830 96,200 With

Recommendations 105,161 98,995 92,824 92,736 85,640

1995 1996 1997 1998 1999

Lead Time Without

Recommendations 15.16 13.95 12.79 11.69 10.04 With

Recommendations 5.76 6.24 6.73 8.06 10.04

1995 1996 1997 1998 1999



High Medium Low

H i g h

M e d i u m

L o w

Harley-Davidson

Holiday Rambler

Buell

Market Attractiveness

C o m

p e t i t i v e S t r e n g t h

II. Portfolio Management Analyzing SBUs

Grow

Hold

Divest



II. Portfolio Management

Divesting Holiday Rambler

1. Not core business2. Large capital Investment

3. Low Market Share4. At a disadvantage relative to competitors• Economies of Scale

• Lack of management expertise

in market

5. Limited Human Resource Must allocate

to best maximize the company’s profitability

Rationale:

Strategy: Divest to use capital and focusmanagement’s attention on more promisingprojects



Harley Davidson II. Portfolio Management

Harley-Davidson ―Investment Priority‖

•Main issue: unmet demand

Trademark Licensing•High Margin•Stimulate Demand For Motorcycles•Lay Ground For InternationalGrowth

“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

104,272119,463

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 fund Sales 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

EfficientDistribution

Of Resources

OperationalEfficiency

Supplier

Relationship



Issues Are Solved


Managing Resource

Allocation To MaximizeOverall 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 1994

Liquidity 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 1996F

Motorcycle 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 1999F

95,811 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 1999

COGS 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 1999

A/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 1999F

Net 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 160,307 191,332 463,965 453,358 551,792 657,776

Interest 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 162,069 184,630 456,007 445,876 542,998 647,426

Provisions 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 1999F

Assets

Cash 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 2,036,702

PPE 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 2,680,281

Liabilities & 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 216,278 186,557 216,603 257,163 239,776 281,816

L-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 305,983 276,262 306,308 346,868 329,481 371,521

Common 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 2,310,340

Less: 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 2,308,759 Total 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 1999F

Liquidity 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 1999F

Investment Outlay -100000 -100000 -100000 -100000

OCF 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 1999F

Net 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 2,787,186Net 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) 104,272 119,463 143,009 161,094 178,835 198,878

Net income (loss) (with recommendation) 104,272 119,463 164,334 171,638 220,677 268,081

Net 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 1999F

Market 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 5.76

Total 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 A l i



SWOT Analysis Strengths

- 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 WithThe Labor Union



Marketing Analysis Product

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 I International Expansion

Where?

? Focus on EuropeAnd Australia

Asian MarketNot Promising

Management’s Misunderstanding Asian Marketi.e. Thailand

Taiwan #’s of motorcyclist

=Potential Customers

Purchasers = 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 II Attracting non-lover customers

Secondary market • Market Research

– Existing Customer – Potential Customer

• New Marketing Scheme

– PR, Licensing

h ll?



Why Keep Buell? • Correlates to Core Business• Leverages Main Business

– R&D

– Economies of Scale – Distribution

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

• Expected Increase in Demand



Average sale period (days) 42.61028 58.11305 56.49959

DECREASING



GE Matrix

J tifi ti f Di ti



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 isallocated away from corebusiness (more potential)

Keep Brand

(continue expansion)

-attempt in capturing a portionof several vehicle markets

-high investment cost thatmay not give profitable returns

-take away managementfocus on core business

- requires a lot of marketingexpenses in order to competewith existing market leaders

Divest from Portfolio-funding for more brand with

higher potential

-more focused portfolio

-let go opportunities to

capture several marketsBUT,

with INTENSE competition,SMALL market share, and

LACK of expertise, chance ofSuccess is very LOW

Holiday Rambler Alternatives

S f l



Summary of Management PlanHarley-Davidson

I. 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 Management

I. 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



Why Not Increase Capacityto Fully Match Demand?

Quality Issue

If increase too fast, can jeopardize

quality of product.

20% represents highest practical rate

7065751-Harley-Davidson_2

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