Harley Davidson Strategic Report

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Strategic Report for

Harley Davidson

Mark Melief

Tycen Bundgaard

Jordan Hathaway

April 4, 2006

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Table of Contents

Executive Summary .................................................................. 3

Company History ...................................................................... 4

Five Forces Analysis

Internal Rivalry ................................................................ 8

Entry ................................................................................ 9

Substitutes and Complements ........................................ 9

Supplier and Buyer Power .............................................. 10

Financial Analysis .................................................................... 11

Strategic Issues and Recommendations ................................ 17

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Executive Summary

Harley Davidson remains a financially strong and stable company. During 2005 the

company reported the 19th consecutive year of record revenues and record earnings.

While Harley Davidson's growth has slowed over the past several years the decline in

growth rates are primarily attributable to a maturing market, which results in lower

growth rates for all member of the motorcycle sub-industry. During 2006 Standard and

Poor's predicts that the motorcycle sub-industry will grow between 1% and 3%, a much

slower rate than the double digit annual gains the sector saw throughout the 90's and

late 80's.

Despite the company's strong financial outlook the stock price has not been performing

well over the past year. The stock price fell dramatically in April 2005 when Harley

Davidson management lowered guidance of new motorcycle shipments to the network

of independent dealers. Wall Street analysts proceeded to predict doom for the

company as it appeared that it would be unable to continue its trend of strong growth.

Although the company actually produced results that were in the upper bound of its

guidance and within the guidance from before April the stock price has yet to recover to

its earlier levels. It seems that Harley Davidson management's strategy of underpromising

and over-delivering has backfired, especially because analysts remain wary

of the company's prospects despite Harley exceeding their expectations.

Another reason for analysts' pessimism about Harley Davidson is that recently the

company seems to be resting on its laurels, content with its current market position and

doing little to attract new, younger customers or to offer new motorcycle designs to

appeal to previous customers. One sign of this is that Harley Davidson's dollar amount

spent on advertising and research and development has actually been decreasing over

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the past couple of years. To some it might seem that management is sacrificing the

future of the company by not attracting new riders in order to boost financial

performance today.

Company History

In 1903 William Harley and Arthur Davidson made the first Harley-Davidson

motorcycle available to the public. It was built in a small wooden shed with the words

"Harley-Davidson Motor Company" scrawled on the door. The next year, in 1904, C.H.

Lang opened the first Harley-Davidson dealership in Chicago, selling one of the first 3

Harley's ever made. In 1906 the company opened a new factory, measuring only 28x80

feet in Milwaukee, Wisconsin. The next year, in 1907 the company doubled its factory

space. Also in 1907 the Harley Davidson Motor Company was incorporated, with the

stock being split between the 4 owners, including William and Walter Davidson

(Arthur's brothers). By 1920 Harley Davidson is recognized as the largest motorcycle

manufacturer in the world, supported by over 2,000 dealers in 67 countries. In 1953,

one of Harley Davidson's competitors, Hendee Manufacturing (makers of the Indian

motorcycle line), goes out of business. For the next 46 years Harley Davidson is the

only American manufacturer of heavyweight motorcycles.

In 1912 Harley Davidson built a six story building on Juneau Avenue in downtown

Milwaukee, Wisconsin. This building would become the main offices and factory for

Harley Davidson. In 1947, to supplement existing manufacturing facilities Harley

Davidson purchased the old A.O. Propeller plant, which the company subsequent

converted from wartime manufacturing into a large machine shop. In 1962, in response

to a growing trend of including fiberglass in motorcycle production Harley Davidson

purchases