Harley Davidson

Manita Punda Kittipat

Agenda Company Background Situation Analysis Issues Recommendation Financial Justification Key Success Factors Conclusion

Company Background • Began business as independent Harley-Davidson Motor Company 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 Analysi

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

Situation Analysi

fter facing with almost bankruptcy in 1980’s s of 1995, financially sound with gross sales exceedin 1.5 billion

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

Issue Identificatio Issue I Strategies:

Declining Market Share

I. Capacity Expansion II. Price Increase

Issue Identificatio Issue I

Declining Market Share

Strategy:

• •

Capacity Expansion Price Increase

Issue II Managing Resources Allocation To Maximize Overall Performance

Strategy:

Portfolio Management

I. Harley-Davidson I. Capacity Expansion

Production Capacity

Year 1999

Current Plan Growth plan = 7% annually Market Growth = 15% annually

 Decrease in Market Share Proposed Plan Increase Capacity 1995-1997 = 20% 1998-1999 = 17%

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

Key Consideration: Quantity WITH Quality

I. Harley-Davidson II. Price Increase

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

Proposed Plan: Price 10% Increase Predicted Demand 5% Decrease

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

I. Harley-Davidson Price Increase + Capacity Expansion Goal: Reduce Lead Time and Increase Market Share

Excess Demand Without Recommendatio ns With Recommendatio ns

1995

1996

1997

1998

1999

96,200

119,830

140,362

163,789

190,487

85,640

92,736

92,824

98,995

105,161

Lead Time Without Recommendatio ns With Recommendatio ns Without Recommendatio ns With Recommendation s

1995

1996

1997

1998

1999

10.04

11.69

12.79

13.95

15.16

10.04

8.06

6.73

6.24

5.76

Market Share 1995

1996

1997

1998

1999

55.70%

51.83%

49.51%

47.30%

45.19%

55.70%

58.12%

62.27%

63.94%

65.65%

II. Portfolio Managemen

Analyzing SBUs

Market Attractiveness

High

Low

Grow

Medium

Harley-Davidson

Medium

Buell

Low

Competitive Strength

High

Holiday Rambler

Hold

Divest

II. Portfolio Managemen Divesting Holiday Rambler Rationale: 1. 2. 3. 4.

Not core business Large capital Investment Low Market Share 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 Strategy: Divest to use capital and focus management’s attention on more promising projects

II. Portfolio Managemen Harley Davidson

Harley-Davidson

“Investment Priority”

•Main issue: unmet demand

Trademark Licensing •High Margin •Stimulate Demand For Motorcycles •Lay Ground For International Growth “Continuous Expansion”

Time Line Activities

1995

1996

1997

1998

1999

2000

Harley Davidson Existing expansion plan Expansion Plan Complete Existing Capacity

Capacity @ 115,000

Operate At Full Capacity New expansion plan New Pricing Policy

Portfolio Holiday Rambler Trademark Licensing

Capacity @ 220,000 New Capacity Expansion Plan Increase Price~by9% 10% NPM increase

$70,000,000 Selling Process

Grow @ 20% Trademark Licensing

Financial Justificatio 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

Financial Justificatio Growth Rate 1994

1995F

1996F

1997F

1998F

1999F

26.64%

17.07%

30.60%

-5.98%

17.53%

17.69%

Net Sales 3,500,000 3,065,905

3,000,000

2,605,025

2,500,000

2,357,326

2,000,000 1,500,000

2,216,418

1,805,023 1,541,796

1,000,000 500,000 0 1994

1995F

1996F

1997F

1998F

1999F

Financial Justificatio Growth Rate 1994

1995F

1996F

1997F

1998F

1999F

26.64%

17.07%

30.60%

-5.98%

17.53%

17.69%

Net Income 600,000 546,800 500,000 457,498 400,000

378,637

373,131

300,000 200,000 100,000

104,272

119,463

0 1994

1995F

1996F

1997F

1998F

1999F

Financial Justificatio Cost Estimation  

1995F

Capacity Expansion

1996F

1997F

1998F

1999F

 

 

 

 

 

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

 

(20,000,000.0 0)

(20,000,000.0 0)

(20,000,000.0 0)

(20,000,000.0 0)

Transport Vehicle Division

 

70,000,000.00

 

 

 

Total Cost

 

(50,000,000.0 0)

(120,000,000. 00)

(120,000,000. 00)

(120,000,000. 00)

Fund needed in total

Sources of fund

$ 410,000,000 Sales of TVD Internal generated fund

Financial Justificatio Cost Estimation  

1995F

Capacity Expansion

1996F

1997F

1998F

1999F

 

 

 

 

 

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

 

(20,000,000.0 0)

(20,000,000.0 0)

(20,000,000.0 0)

(20,000,000.0 0)

Transport Vehicle Division

 

70,000,000.00

 

 

 

Total Cost

 

(50,000,000.0 0)

(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 Factor Quality

Operational Efficiency

Efficient Supplier Distribution Relationship Of Resources

Issues Are Solved Current Issues Issue I

Declining Market Share

Strategy I:

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

Issue II Managing Resource Allocation To Maximize Overall Performance

Strategy II

Portfolio Management • Divest Holiday Rambler •Heavyweight motorcycle -Investment Priority - Licensing expansion

THANK YOU

Historical Ratio Analysi Ratios Analysis 1992 Liquidity ratio current ratio (times) Quick ratio (times)

1993

1994

1.57 0.81

1.75 0.86

1.88 0.94

Leverage ratio Debt ratio (%) Interest coverage (times)

44.30% -19.79

68.93% -84.00

41.39% 3643.34

Profitability ratio Net Profit Margin (%) Return on asset (%) Return on equity (%)

4.87% 10.30% 16.04%

-0.98% -2.04% -3.66%

6.76% 14.11% 24.07%

11.86 30.77 8.57 42.61 4.31 2.12

14.15 25.79 6.28 58.11 4.88 2.09

10.75 33.95 6.46 56.50 4.62 2.09

Activity ratio Account receivable (times) Average collection period (days) Inventory turnover (times) Average sale period (days) Fixed asset turnover (times) Total asset turnover (times)

Sales by Division

Motorcycle unit shipments Net Sales Motorcycles Motorcycle parts and accessories Recreational vehicles Commercial vehicles Others Total g

20% 25% -

1994 95,811

g

902.60 256.30 274.50 95.10 13.30 1,541.80

15.00% 25.00% 17.00% 17.00% 7.00% 17.07%

1997F 95,811 1,494.71 500.59

g

20% -5.98%

20% 17.53%

g

15% 18.73% g

1999F 95,811 1,976.75 782.17

15% 25% -

23.57 2,368.21

1996F 95,811 1,245.59 400.47 369.34 111.27 16.37 2,143.03

20% 25% 15%

1998F 95,811 1,718.91 625.73

15% 25% -

19.64 2,014.93

1995F 95,811 1,037.99 320.38 321.17 111.27 14.23 1,805.03

20% 17.69%

28.28 2,787.19

Assumptions

COGS Selling, admin, & enginner exp. Income from operations Interest expense (net) Other income (exp.) net Provisions for income tax

A/R Inv. Prepaid expense Other current asset Liabilities & Equity A/P Salaries Payable ST debt/current LTD Other CL

Assumptions (with recommendations) Statement of Operations 1994 Avg.%of sales Avg.%changed 1995 1996 1997 1998 1999 1,120,332.00 72.72% 18.05% 72.50% 72.00% 71.50% 71.00% 71.00% 261,157.00 17.41% 14.87% 16.90% 16.35% 16.00% 15.70% 15.40% 160,307.00 8.31% 50.73% 44.00 -0.17% -94.19% -0.17% -0.17% -0.17% -0.17% -0.17% 1,718.00 -0.20% -113.25% -0.20% -0.20% -0.20% -0.20% -0.20% 57,797.00 3.61% 29.51% 3.61% 3.61% 3.61% 3.61% 3.61%

1,994 143,396.00 173,420.00 9,424.00 20,111.00 63,988.00 62,882.00 18,303.00 71,105.00

Balance Sheet Avg.%of sales Avg.%changed 8.27% 29.50% 10.43% 36.08% 0.76% -1.01% 1.72% -8.38% 4.68% 3.26% 1.49% 5.57%

5.35% 56.75% 5.81% 1.81%

1995 9.50% 11.25% 0.76% 1.72% 0.00% 4.10% 3.00% 1.00% 4.00%

1996 9.50% 11.25% 0.76% 1.72%

1997 10.00% 11.25% 0.76% 1.72%

1998 10.00% 11.25% 0.76% 1.72%

1999 10.00% 11.25% 0.76% 1.72%

4.00% 3.00% 1.00% 4.00%

4.00% 3.00% 1.00% 4.00%

3.90% 3.00% 1.00% 4.00%

3.90% 3.00% 1.00% 4.00%

Pro Forma Financial Statemen Statement of operations (with pricing effect) 1994 1995F 1996F Net sales 1,541,796 1,805,023 2,357,326 COGS 1,120,332 1,308,642 1,542,977 Selling, admin, & enginner exp. 261,157 305,049 350,384 Income from operations 160,307 191,332 463,965 Interest expense (net) 44 (3,067) (3,642) Other income (exp.) net 1,718 (3,635) (4,316) 1,762 -6,703 -7,958 Income from op. bf ext. item and acct. change 162,069 184,630 456,007 Provisions for income tax 57,797 65,167 77,370 Net income (loss) 104,272 119,463 378,637

1997F 2,216,418 1,440,671 322,388 453,358 (3,424) (4,058) -7,482 445,876 72,746 373,131

1998F 2,605,025 1,681,425 371,808 551,792 (4,024) (4,769) -8,794 542,998 85,500 457,498

1999F 3,065,905 1,978,902 429,227 657,776 (4,737) (5,613) -10,350 647,426 100,627 546,800

Pro Forma Financial Statemen Balance sheet (with pricing effect) 1994 1995F 1996F Assets Cash A/R Inv. Prepaid expense Other current asset Total CA PPE Other Asset Total Asset Liabilities & Equity A/P Salaries Payable ST debt/current LTD Other CL Total CL L-T debt Deffered tax Postretirement health care benefit Total Liabilities Common stock, net Additional paid in capital Rettained earnings Unrealized foreign exchange GN/LOS Less: treasury stock Total shareholder's equity Total liabilities and shareholder's equity

59,285 143,396 173,420 9,424 20,111 405,636 262,787 70,792 739,215 63,988 62,882 18,303 71,105 216,278 29,422 0 60,283 305,983 772 150,728 283,010 303 434,813 1,581 433,232 739,215

127,315.17 146,470.62 173,452.05 11,653.38 26,486.79 485,378 262,787.00 80,792.00 828,957 63,213.64 46,253.88 15,417.96 61,671.84 186,557 29,422.00 60,283.00 276,262 772.00 150,728.00 402,472.51 303.00 554,276 1,581.00 552,695 828,957

1997F

1998F

1999F

429,866.24 669,344.73 1,054,845.86 1,474,874.80 171,477.22 214,302.36 201,492.51 236,820.43 203,065.12 241,090.15 226,679.07 266,422.98 13,642.93 16,197.64 15,229.43 17,899.63 31,008.82 36,815.39 34,614.76 40,683.80 849,060 1,177,750 1,532,862 2,036,702 297,787.00 377,787.00 457,787.00 537,787.00 90,792.00 95,792.00 100,792.00 105,792.00 1,237,639 1,651,329 2,091,441 2,680,281 72,200.93 85,720.94 78,582.08 92,359.97 54,150.70 64,290.71 60,447.75 71,046.13 18,050.23 21,430.24 20,149.25 23,682.04 72,200.93 85,720.94 80,597.00 94,728.17 216,603 257,163 239,776 281,816 29,422.00 29,422.00 29,422.00 29,422.00 60,283.00 60,283.00 60,283.00 60,283.00 306,308 346,868 329,481 371,521 772.00 772.00 772.00 772.00 150,728.00 150,728.00 150,728.00 150,728.00 781,109.11 1,154,239.71 1,611,737.36 2,158,536.93 303.00 303.00 303.00 303.00 932,912 1,306,043 1,763,540 2,310,340 1,581.00 1,581.00 1,581.00 1,581.00 931,331 1,304,462 1,761,959 2,308,759 1,237,639 1,651,330 2,091,440 2,680,280

Ratio Analysis Ratios Analysis (with pricing effect) 1994 1995F 1996F Liquidity ratio current ratio (times) Quick ratio (times)

1997F

1998F

1999F

1.88 0.94

2.60 1.47

3.92 2.78

4.58 3.44

6.39 5.24

7.23 6.07

Leverage ratio D/E ratio (%) Interest coverage (times)

70.63% 3643.34

33.33%

24.75%

21.01%

15.75%

13.86%

Profitability ratio Net Profit Margin (%) Return on asset (%) Return on equity (%)

6.76% 14.11% 24.07%

6.62% 14.41% 21.61%

16.06% 30.59% 40.66%

16.83% 22.60% 28.60%

17.56% 21.87% 25.97%

17.83% 20.40% 23.68%

10.75 33.95 6.46 56.50 4.62 2.09

12.32 29.62 7.54 48.38 5.25 2.18

13.75 26.55 7.60 48.04 6.07 1.90

10.34 35.29 5.98 61.08 4.68 1.34

12.93 28.23 7.42 49.21 4.66 1.25

12.95 28.19 7.43 49.14 4.76 1.14

Activity ratio Account receivable (times) Average collection period (days) Inventory turnover (times) Average sale period (days) Fixed asset turnover (times) Total asset turnover (times)

NPV Analysis

1994 Investment Outlay OCF with recom. OCF w/o recom. OFC Terminal Value CF

-

NPV Analysis (with pricing effect) 1995F 1996F 1997F -100000 -100000 119,462.51 378,636.61 373,130.60 119,462.51 119,462.51 143,009.03 259,174.10 230,121.56 75,000.00 234,174.10 130,121.56

WACC (at present) wD kD Tax wE kE WACC NPV

41.39% 7.00% 40.00% 58.61% 15.00% 10.53% ฿3,597,519.00

1998F -100000 457,497.65 161,094.25 296,403.40 196,403.40

1999F -100000 546,799.57 178,835.47 367,964.10 4,313,986.91 4,581,951.00

Net Sales and Net Income

Net sales (w/o recommendation) Net sales (with recommendation) Net sales (with pricing effect) Net income (loss) (w/o recommendation) Net income (loss) (with recommendation) Net income (loss) (with pricing effect)

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

Rationales

Market growth rate Production growth rate (existing plan) Production growth rate (recommendation) Demand (without pricing effect) Demand (with pricing effect) (5% drop) Domestic demand (without pricing effect) Domestic demand (with pricing effect) (5% drop) Supply (existing plan) Supply (recommendation) Domestic supply (existing plan) Domestic supply (recommedation) Excess Demand (without recommendation) Excess Demand (with recommendation) Lead time (without recommendation) Lead time (with recommendation) Total market demand Market share (without recommendation) Market share (with recommendation)

Demand and Supply 1994 1995F 15% 7% 20% 211,200 211,200 152,064 152,064 115,000 115,000 82,800 82,800 96,200 96,200 10.04 10.04 148,653.50 55.70% 55.70%

1996F 15% 7% 20% 242,880 230,736 174,874 166,130 123,050 138,000 88,596 99,360 119,830 92,736 11.69 8.06 170,951.53 51.83% 58.12%

1997F 12% 7% 20% 272,026 258,424 195,858 186,066 131,664 165,600 94,798 119,232 140,362 92,824 12.79 6.73 191,465.71 49.51% 62.27%

1998F 12% 7% 15% 304,669 289,435 219,361 208,393 140,880 190,440 101,434 137,117 163,789 98,995 13.95 6.24 214,441.59 47.30% 63.94%

1999F 12% 7% 15% 341,229 324,167 245,685 233,401 150,742 219,006 108,534 157,684 190,487 105,161 15.16 5.76 240,174.59 45.19% 65.65%

Cash Cow • Prepare to invest in international market • Invest in motorcycle industry – Buy more Bruell shares – Vertical intregration esp. suppliers

SWOT Analysi Strengths -

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

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

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

Threats - Competitors - Ending Contracts With The Labor Union

Marketing Analysi Product

Place

• Harley-Davidson • Holiday Rambler • Buell Motorcycle

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

Price

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

• Harley-Davidson: premium • Holiday Rambler: midrangepremium • Buell Motorcycle: premium

Long Term Issue

nternational Expansion Where?

Management’s Misunderstanding

Asian Market Not Promising

?

Asian Market i.e. Thailand Taiwan

#’s of motorcyclist

= Potential Customers

Purchasers = Recreational oriented

Focus on Europe And Australia

Key Considerations •Culture •Income •Vision

International Expansion Criter 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

Long Term Issue

ttracting 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 Divestin

ore Business = Harley Davidson rofitable Niche trong Brand Presence oom for expansion both domestically and internationa remium High-Quality Heavyweight Motorcycle

Management’s focus Unmet Demand International Expansion

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

Holiday Rambler Alternative Pros Status Quo

-have presence in RV + commercial vehicle market

Keep Brand (continue expansion)

-attempt in capturing a portion of several vehicle markets

Divest from Portfolio

-funding for more brand with higher potential -more focused portfolio

Cons

-high operating costs - scarce human resource is allocated away from core business (more -high potential) 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 -let go opportunities to capture several markets BUT, with INTENSE competition, SMALL market share, and LACK of expertise, chance of Success is very LOW

Summary of Management Pla

ley-Davidson

rice Increase

Justification to Consumers However, not as prevalent because nature of product (recreational oriented + premium) ce relatively inelastic

apacity 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

tfolio Management

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

rademark 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 elling point of H-D = “American Culture”

Effects of Price Increase and Capacity Expans Capacity Expansion • Increase Supply to Match Demand • Increase Market Share • Reduces Lead Time • Increase NPM (in value)

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

Why Not Increase Capacit to Fully Match Demand?

uality Issue increase too fast, can jeopardize

uality of product.

0% represents highest practical rate