C-Team 10 1

Marketing Management

Professor Dawn Iacobucci

Harley-Davidson Case Study

May 16, 2015

Reggie Crenshaw

Arlie Haddix

Erin Raccah

Patrick Willcox

AMBA C-Team 10

Reggie Crenshaw

Arlie Haddix

Erin Raccah

Patrick Willcox

C-Team 10 2

1. Warm-up, don’t write-up: Do any of you own or know someone who owns a Harley? What is your

impression of the brand, the motorcycles, the people who ride them, or those who ride sports bikes?

We used a social media survey to find people in our networks that either ride Harleys or know of

someone who rides a Harley. We received a 1.4% response rate from an 800-person survey. The

consensus is a love-hate relationship.

For those in love with Harley-Davidson, it represents the following: 1) You feel a sense of

achievement or arrival; 2) You feel like you own a piece of history; 3) You feel like you are part of a

brotherhood; 4) You feel that all other bikes are substandard; 5) You feel that are you are cream of the

crop. For those who hate Harley-Davidson, it represents the following: 1) Owners that largely appear

to be middle-aged, conservative, once divorced, and white males; 2) Harley image is a fraud; 3) Guys

who ride them are posers or weekend warriors -- lawyers/engineers/desk job guys; 4) Harley owners

seem to want to ride from bar to bar on poker rides; they do not enjoy the art of riding. Those who are

blue collar see it as the ultimate motorcycle and those who are white collar see it for its sub-culture or

as a way to escape.

C Team-10 has one member that has owned a motorcycle store and another who owns

motorcycles; they have varying direct and indirect experiences with Harley-Davidson bikes and sports

bikes. Another member has ridden motorcycles but not owned one while the fourth member has

never ridden or owned. The team's impressions of the brand ranged from high to the poser comment

above.

2. What are Harley-Davidson’s strengths? (5Cs/SWOT)

The company's primary strength is its very strong brand appeal with a very strong brand loyalty;

this brand appeal has enabled the capture of 47% of the North American heavyweight market (and

33% of the overall North American market), 22.5% of the overall motorcycle market in Japan and

China, and 8.2% of the overall motorcycle market in Europe (Roese 3). The company's primary focus

is the heavyweight portion of the motorcycle market. Its closest competitors in the North American

heavyweight market are Suzuki and Honda with 13.7% and 13.5% respectively (Roese 10).

The most important part of the Harley-Davidson brand appeal is the tie to the male baby boomers

(Caucasian males ages 43-61). Male baby boomers, the company's primary customer, are significant

because of their relative affluence (median income in 2007 was $84.3K while U.S. average was

$52.7K -- Roese 5). Male baby boomers are also important because their culture drives them to

overwhelmingly prefer Harley-Davidson heavyweight motorcycles. Heavyweight motorcycles have a

35% gross margin compared to a 5% gross margin for sports bikes (the other primary type of

motorcycle -- Roese 7). The combination of high gross margin, boomer affluence, and boomer

culture has made Harley-Davidson very profitable (2006 was the firm's most profitable year with a net

income of $1.04B on revenue of $6.18B -- Morningstar 31).

The heart of this brand appeal is the Harley-Davidson lifestyle/sub-culture that reinforces the ties

between boomer lore and Harley-Davidson. Boomer lore is tied to Harley-Davidson via the lone

outlaw legacy (cruising is a key part of the legacy and cruising requires heavyweight vice sport bikes)

that arose from the 1950s/1960s bike gangs and clubs that rode Harley-Davidsons and used the brand

as their symbol. This lone outlaw ideal and its corresponding Harley-Davidson tie were solidified into

boomer culture by the 1969 movie Easy Rider (Roese 2). Harley-Davidson subsequently aligned its

efforts to support the connection between baby boomers, the loner image, and its brand. It further

C-Team 10 3

strengthened the connection by forming a nationwide owner's group in 1983 to better sustain and

further expand this lifestyle/sub-culture (Roese 3). The Harley-Davidson image received another

boost in 1991 with the movie Terminator 2 (Roese 2). Thus, the movie industry and motorcycle

gangs/clubs became unwitting collaborators in the creation of a lifestyle/sub-culture that is centered

on Harley-Davidson's product (heavyweight bikes). The Harley-Davidson bike and its sub-culture

equate to virtual self-actualization for male baby boomers and sustain the brand's very strong appeal.

3. What is the problem? (5Cs/SWOT)

Threats (problems) are often driven by a change in one of the 5Cs (Iacobucci, Chap 4, Slide 8);

Harley-Davidson fits this model. Its primary root problem is that has one primary customer segment

(male baby boomers) and that segment is quickly aging, which means it needs to find ways to target

other segments. Harley-Davidson has had very limited success with the young adult (18-34),

Caucasian women (35+), African-American men and women (35+) and Hispanic men and women

(35+) segments.

Harley-Davidson's immediate problem is also due to a 5C delta; in this case, it is context

(macroeconomic conditions). The company has potentially insufficient credit to sustain sales

operations due to the economic recession of 2008-2009. 25% of the loans Harley-Davidson issued in

2007 and 2008 were sub-prime (Harley-Davidson was attempting to expand the number of male baby

boomers with Harleys -- Hamner 2). These loans defaulted due to the recession, and Harley-Davidson

had to write-off substantial amounts which made investors unwilling to lend additional money.

Harley-Davidson has a current credit shortfall of $400M (Hamner 3) and without sufficient credit bike

sales and cash flow will cease.

While profitable in 2009 ($654M), Harley-Davidson's profits have been declining since 2006

(Hamner 3). Profits fell 10% in 2007 due to shrinking customer base followed by the 2008 recession

resulting a 30% decline in 2008. Furthermore, the company's stock value declined 70% in 2008; this

is twice the S&P 500 average of 36% (Hamner 3). This trend of declining sales and profits if unhalted

will threaten the company's survival.

4. How should they attract new customers (“outreach”) without upsetting their current customers

(“core”)? (STP)

Two assumptions underlie this case study. The first is that actions to target young adults and

minority groups may result in sufficient image change such that the company may lose its core

customers. The second assumption is that the company must focus on heavyweight bikes, what it is

known for, or move into sports bikes but that it cannot do both.

We recommend Harley-Davidson pursue a multi-pronged strategy. Within this framework,

Harley-Davidson should continue its focus on heavyweight bikes and not look to expand into the

sports bike market (22% of the overall North American market -- WBW 1). Harley-Davidson does

heavyweight bikes very well, hence its lock on much of that market. Rather than re-invent itself,

Harley-Davidson should play to its strength (competitive advantage) and look to bring other

customers into the heavyweight market.

The first prong is to expand into other segments that may also be attracted to the typical Harley

image such as women and minority boomers ages 43-61. Expanding into same age segments allows

Harley-Davidson to maintain a consistent image and marketing approach without having to potentially

C-Team 10 4

compromise its core lifestyle/sub-culture. Based on the garage party efforts, we believe Harley-

Davidson has sufficient information to create a program to attract women into the heavyweight

motorcycle market. However, the company will need to adjust its bikes to fit the typically smaller

frames of women; according to the C-Team 10 members with extensive motorcycle experience, this

size differential is a major issue for women who wish to ride the company's bikes. Harley-Davidson

will want to approach the African-American and Hispanic markets in a similar fashion -- by

introducing the image and forming a cultural connection with these customers.

The second prong is to expand into the younger riders aged 35-42 years. The effort to expand to

the 35-42 age bracket should focus on the 1991 movie Terminator 2 as Terminator 2 is a large part of

millennial lore (Roese 2). The relative closeness in age of the millennials to the boomers should

enable preclude alienation of the primary customer base.

The third prong is expansion into the young adult market of 18-34 years. Harley-Davidson has

22% of the young adult heavyweight market (Roese 5) and can build on this vice expanding into the

young adult sports market. We recommend Harley-Davidson split the young adult segment into two

pieces (ages 18-25 and 26-34) and focus its efforts on the 26-34 age bracket due to the significant

differences in maturity (and changes in preferences/attitudes) between these age brackets (and the

closer alignment of 26-34-year olds with 35-42-year olds). Much of the differences between the 18-

25 and 26-34 age brackets are due to natural life events such as completing college, getting the first

true job, getting married, buying a house, and starting a family. Harley-Davidson should create a

natural path into its lifestyle/sub-culture that emphasizes the maturation of a teenager/young 20-

something into a responsible adult and align that path with natural life events such as buying the first

house (i.e., make the transition from a sports bike to a heavyweight bike a natural rite of passage that

is coincident with more responsibility and being part of the proverbial American dream).

To enable this third prong, Harley-Davidson must revamp the dealership (sales) experience for

young adults. According to information available to the company, young adults find the dealership

experience intimidating and consistently over-estimate the price of Harley-Davidson motorbikes

(Roese 5). The dealerships need to be directed to modify their approaches (and provided with

supporting protocols and incentives) and become inclusive rather exclusive to young adults. Harley-

Davidson should also implement an internet sales program tailored to young adults as an additional

mechanism to facilitate changes in its dealerships and create an alternative sales environment free of

dealership issues. This same internet program can also be used to communicate pricing information to

young adults to correct their misconceptions on the prices of heavyweight bikes. Lastly, Harley-

Davidson must use its information on young adult preferences and modify its motorcycles accordingly

(such as having a model without chrome -- Roese 5).

These three prongs need to be tied together by an overarching strategic communications campaign;

this campaign must target the current customer base and each of the segments in the above prong

discussions. The first central theme should focus on sustainment and improvement of the Harley-

Davidson lifestyle/sub-culture and how expansion of the customer base accomplishes this (i.e., more

people make the sub-culture stronger and how differences can make a group stronger). The second

central theme must set the stage for the passing of the Harley-Davidson torch to the next generation

(and hence ensure the sub-culture's continuation). This theme should emphasize a moral

responsibility to pass the brand and culture for the next generation (this theme should play upon the

boomers being parents and grandparents and emphasize the passing of the brand and the culture to the

children and then grandchildren).

C-Team 10 5

We have identified three prongs so far in this strategy. The customer segments in prongs one and

two do align with the Harley-Davidson lifestyle by virtue of age (primarily) and common life

experiences (secondary). These segments hold profit potential as they have $752M and $1.5B

respectively in buying power (male baby boomer buying power is $1.05B -- BLS 7, Abstract 455).

The overall customer segment in prong three does not share an age/life experience alignment with

Harley-Davidson; however, by focusing on a specific part which does share a similarity for

heavyweight bike use, we believe we can overcome the age/life experience gap. The current buying

power of this prong is $1.6B (BLS 7, Abstract 455); given their age, their power will increase, and we

feel that efforts to attract this segment into the Harley-Davidson lifestyle/sub-culture will pay long-

term dividends. Overall, we believe we have a proper a top-down strategic fit and a bottom-up

profitability fit with this proposed way ahead (Iacobucci, Chap 4, Slide 5).

Harley-Davidson should consider an additional prong and this is further expansion into the

heavyweight markets of Europe and Japan. The company's 13.8K sales in Japan constitute 26% of the

heavyweight market of 53.1K motorcycles while the company's 38.9K sales in Europe are 9.6% of the

403K European heavyweight market (Morningstar 35/36, Weber 2). Harley-Davidson should conduct

additional research on how best to better align the Harley-Davidson lifestyle/sub-culture with

European and Japanese cultures; however, the current penetration into both markets indicates a

strategic fit between the heavyweight market, cultures and the Harley-Davidson brand. The relatively

small percentages of the market captured indicate the company has opportunity for profit growth.

Harley-Davidson is a very visible aspect of American culture overseas and the company should

leverage this visibility. However, the success of this avenue will have long-term dependencies on the

first three prongs because there is a direct tie between the popularity of a good in America and its

appeal in a foreign market (i.e., if the prongs fail and Harley-Davidson does not succeed in the United

States, the appeal to the overseas classes will evaporate).

5. Should H-D proceed strategically as a house of brands (like P&G) or as a branded house (like

Nike)? (STP)

For the customer, a Harley-Davidson is a specialty purchase which involves a high degree of

customer involvement in the shopping process (Iacobucci, Chap 2, Slides 6 & 8). This requires a

corresponding involvement level from Harley-Davidson. The post-purchase phase of buying is also

critical to Harley-Davidson because that is when customers determine overall satisfaction with the

product and image and image is critical to the Harley-Davidson lifestyle/sub-culture (Iacobucci, Chap

2, Slide 4). Thus, Harley-Davidson must support high levels of customer involvement/interaction and

is better served focusing on one or few vice many market segment(s). We recommend Harley-

Davidson continue using a depth strategy (serving one/few segment(s) well -- Iacobucci, Chap 3,

Slide 14).

Harley-Davidson however needs to transform from niche marketing focused on male baby

boomers to segmentation marketing (Iacobucci, Chap 3, Slide 6). The company needs to appeal to the

female, minority, and age segments discussed in the proposed strategy. Due to the high level of

customer involvement, the communications must provide information to the consumers (and let them

reach our desired conclusions) vice trying to capture audience attention (Iacobucci, Chap 2, Slide 10).

Therefore, we think Harley-Davidson should stay as a branded house rather than create multiple

brands (tailored strategy -- Iacobucci, Chap 3, Slide 15). The Harley-Davidson brand is strong and is

a product of multiple years. The brand is built around the heavyweight motorbike. Since we are

recommending Harley-Davidson remain focused on the heavyweight motorbike market and bring

C-Team 10 6

other segments to the heavyweight bike, the creation of another brand seems unnecessary.

Furthermore, we recommend Harley-Davidson drop its Buell line and disengage from the sports bike

market as it is inconsistent with Harley-Davidson lifestyle/sub-culture. Keeping one brand allows

Harley-Davidson focus which is consistent with the depth strategy (Iacobucci, Chap 3, Slide 14).

Brand creation typically involves substantial time and resources; we assess Harley-Davidson would

do better to use those resources to make the current brand appeal to more customers.

C-Team 10 7

Appendix A: 2007 10K: Retail Unit Sales and Motorcycle Registration Data

The Company sells its motorcycles at wholesale to an independent network of distributors and dealers

who in turn sell the Company’s products at retail. Worldwide retail sales of Harley-Davidson

motorcycles decreased 1.8% during 2007 relative to the same period last year. Retail sales of Harley-

Davidson motorcycles decreased 6.2% in the United States while growing 13.7% internationally

including a 15.0% increase in Europe. On an industry-wide basis in 2007, the heavyweight (651+cc)

portion of the market was down 5.0% in the United States while growing 5.4% in Europe when

compared to 2006 (Morningstar 35/36).

C-Team 10 8

Appendix B: Calculations of Market Segment Buying Power

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C-Team 10 9

Appendix C: Income of Families by Race, Ethnicity, and Age

C-Team 10 10

Appendix D: Earnings by Race, Ethnicity, and Age

C-Team 10 11

Works Cited

Form 10K: Harley-Davidson Inc., HOG. Morningstar Document Research, 31 December 2007

Form 10K: Harley-Davidson Inc., HOG. Morningstar Document Research, 31 December 2008

Hamner, Susana., "Harley, You're Not Getting Any Younger," New York Times, 21 March 2009

Iacobucci, Dawn., Marketing Management Slides Chapter 2 Customer Behavior, Chapter 3:

Segmentation, Chapter 4: Targeting

"Income, Expenditures, Poverty, and Wealth," Statistical Abstract of the U.S., U.S. Census Bureau,

2012

Roese, Neal J. and Mohan, Kompella. "Harley-Davidson: Chasing a New Generation of Customers,"

Kellogg School of Management. Northwestern University 2013.

"Usual Weekly Earnings of Wage and Salary Workers First Quarter 2015," Bureau of Labor Statistics,

21 April 2015

"U.S. Motorcycle Sales 1992-2014," Web Bike World, 10 Feb 2015

Weber, Joseph., "Harley Just Keeps on Cruising," Bloomberg Businessweek, 5 November 2006

C-Team 10 12

Works Consulted

"American Fact Finder: 2011-2013 American Community Survey 3-Year Estimates," U.S. Census

Bureau, S0201, May 2015

Iacobucci, Dawn., Marketing Management., South-Western, Cengage Learning, Mason, Ohio 2013

Madson, Bart., "Motorcycle Sales Down 40.8%," MotoUSA, 21 January 2010