Essay on "Corporate Financial Strategy"

Essay 8 pages (2357 words) Sources: 0

[EXCERPT] . . . .

Harley Davidson

Harley-Davidson is one of the most iconic American brands, and the company has been making motorcycles for over a hundred years. However, this has not kept Harley-Davidson from suffering the ill-effects of the recent financial downturn, as its domestic sales have slipped and its financial segment has been hit by defaults as customers find themselves unable to pay for motorcycles they financed through the company. The company has essentially rested on its laurels since World War II, and the intervening decades have been a gradual process of market loss as the company finds itself constantly unable to effectively deal with either the emergence of new competitors or a decreasing brand relevance. Over the last decade this trend has only increased, because even as the company expands into new international markets, its domestic success has been tempered by ever-lowering sales. To get an idea as to the dramatic speed with which the company has fallen, one need only note that from March 2008 to March 2009, Harley-Davidson's share price fell from 48.05 to 9.78 per share. In view of the catastrophic bloodletting, Harley-Davidson recently replaced its CEO, hiring Keith Wandell as its new president and chief executive. By following the strategic plan outlined below, which focuses on trimming unnecessary expenditures and streamlining the company according to its strengths and emerging opportunities, Wandell has the potential to turn around the flagging companies fortunes before it is too late.

To begin this strategic study, one should perform a ratio analysis in order to provide a clearer picture of Harley-Davidson's current position. In 2008 the company had a profit margin of 11.7%, which might seem high until one realizes that only a year before that number was at 16.3%, meaning within a year the amount of profit the company held after expenses dropped dramatically. Similarly, its return on assets ratio fell precipitously, as the company found itself with more assets on hand even as its profitability declined. These numbers are indicative of Harley-Davidson's past strategic blunders, because the company has, nearly since its inception, succeeded largely on luck and beneficial external circumstances than internal competency.

Before examining the options available to Harley-Davidson, it will be helpful to analyze the external forces and circumstances the company finds itself in. Almost from the get-go Harley-Davidson finds itself in a difficult position, because the strategic group that focuses on the kind of heavy, large motorcycles that represent the companies primary product is small and at this point cannot be viewed as a kind of cash cow. In the post-World War II world, as demand for motorcycles was booming and Harley-Davidson was flush with government cash following its wartime contracts, Harley-Davidson enjoyed a high market share and high growth rate, making a true cash cow in the context of Boston Consulting Group's growth-share matrix. However, as demand for motorcycles has leveled off and foreign competitors gradually took parts of Harley-Davidson's market share, one could charitably call the company a "dog," meaning that it has recently been experiencing low growth accompanied by a low level of cash generation.

Part of this decline in market share has to do with the particular product and industry life cycles of motorcycles. Harley-Davidson is well-known brand, and customers are buying the name as much as the machine. However, this also means that Harley-Davidson relies on a kind of lifetime association and identification with the customer, which in turn encourages customers to hold onto their "Harleys" as long as possible, thus opening up a market for replacement parts and accessories but reducing the likelihood that customers will be buying new motorcycles regularly. This is particularly true if one compares the product life cycle of a Harley-Davidson to a luxury car, because while someone might conceivably trade their can in every year for a new model, the allure of Harley-Davidson's brand rests on the idea of the singular individual riding his or her personal machine, an idea that conflicts with the kind of yearly release schedule favored by car manufacturers. Furthermore, voe the lifecycle of the entire industry Harley-Davidson appears more and more like an ossifying elder, who is increasingly unable to adapt the new technologies and strategies of its competitors due to the rigidity of Harley-Davidson's brand, which remains it key strength.

From the perspective of a Porter five force analysis, Harley-Davidson is in equally difficult straights. Porter's five forces depends on identifying the relationship of the different stakeholders/forces in order to better conceptualize the competitive rivalry within an industry, and in the case of motorcycles like those produced by Harley-Davidson, the industry is both competitive and intense. Harley-Davidson's past success was rooted in the fact that it maintained an essential monopoly of the production of motorcycles in America for decades, the company almost immediately began to struggle once it was confronted by genuine competition from Japan. As time has gone on, this monopoly has only eroded, such that the threat of new entrants and the threat of substitute products are ever-present and increasing. In addition, the economic downturn has meant that its customers simply do not have the kind of discretionary spending power they once did, a situation that encourages them to look to Harley-Davidson's less expensive competitors.

Furthermore, three of the four factors included in a PEST analysis (Political, Economic, Social, and Technological factors) point towards an extremely hostile external environment for the company going forward. Only the political context seems conducive for growth going forward, and this is only because there is no reason to think that the current economic climate will produce any tax or environmental regulations that might negatively effect the company. The economic environment is clearly hostile to growth, as Harley-Davidson's key demographic has been hit extremely hard. In addition, the social and technological factors of the environment are aligned against the company precisely because everything that made Harley-Davidson famous is increasingly seen as outdated and unpopular. For example, while Harley-Davidson's trademark engine sound helps makes it popular with its insular group of preexisting customers, this kind of engine seems old hat to a generation of consumers interested in green motorcycles that can achieve comparable acceleration and top speeds without needing to burn gasoline. As such, most new technological development is happening in these areas, so Harley-Davidson is presented with a situation wherein its key strength is incompatible with one of the most existing external opportunities, namely, the development of new fuel and materials technologies.

The picture internally is almost as bad as the external environment, because Harley-Davidson's major strengths are increasingly irrelevant. One may begin pointing this out by considering the company's core strength, its brand, on the level of a VRIO (Value, Rarity, Imitability, and Organization) analysis. The biggest strength the company has it its brand, which is admittedly inimitable, and thus there is little risk of competitors taking over that particular mental or marketing space. However, just because this resource is hard to imitate and thus rare, it is difficult to say that the Harley-Davidson brand is providing any genuine value to the company at this point, or at least any value beyond what it can do to keep the company afloat. In other words, while the Harley-Davidson brand is crucial to the company's success, it represents a lifeboat rather than a way of growing going forward.

Furthermore, there are key gaps in Harley-Davidson's value chain that represent dangerous internal failures. In particular, the areas of technology and marketing & sales represent dramatic gaps in the value chain, because for the most part Harley-Davidson has not improved or adapted these activities for a new environment, as evidenced by the fact that the company still focuses on its iconic heavy motorcycles and depends on its altogether spent brand power. As a result, its still-considerable financial resources are ill-spent, because the company seems to be in the position where it must choose between maintaining what has made it iconic and adapting for a new world.

However, despite this bleak internal and external picture, there is still hope for Harley-Davidson to turn its flagging fortunes around. To do so, it will have to undertake an aggressive campaign of market development and diversification, because the international market was the only area in which Harley-Davidson saw any genuine growth. However, it will be difficult to sell the distinctly American image of the individual rider cruising down a highway on a massive, loud motorcycle, particularly in places like India, where high populations and extreme poverty mean that only a small segment could likely afford Harley-Davidson's traditional models. Furthermore, attempting the kind of financing that would it possible for large segments of the international population to afford a classic Harley-Davidson model would only serve to increase the credit losses experienced by the company.

Instead, the company should shift its strategic focus by attempting to split off the iconicity of the company's name from the products that have traditionally made it famous in order to begin developing low-cost, high-volume alternatives for foreign markets. Harley-Davidson could keep manufacturing its heavy and super-heavy… READ MORE

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