Harley Davidson

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In 1903, William Harley (age 21), a draftsman, and his friend, Arthur R. Davidson, began
Experimenting with ideas to design and build their own motorcycles. They were joined by Arthur's brothers, William, a machinist, and Walter, a skilled mechanic. The Harley-
Davidson Motor Company started in a lOxl5-foot shed in the Davidson family's backyard in Milwaukee, Wisconsin. This case was prepared by Professor Patricia A. Ryan of Colorado State. This case was edited for 5MBP and Cases in 5MBP-9th and 10th Edition. The copyright holders are solely responsible for the case content. Copyright @2002 and 2005 by Patricia A. Ryan and Thomas L. Wheelen. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy-10th Edition (and the International version of this book) and Cases in Strategic Management and Business Policy-10th Edition by the copyright holders, Patricia A. Ryan and Thomas L. Wheel en. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Patricia A. Ryan and Thomas L. Wheelen have granted an additional written reprint permission.

In 1903, three motorcycles were built and sold. The production increased to eight in
1904.ThecompanythenmovedtoJuneauAvenue,whichisthe siteofthecompany's present
offices. In 1907,the company was incorporated.

In 1969, AMF, Inc., a leisure and industrial products conglomerate, acquired Harley-,/
Davidson. The management team expanded production from 15,000in 1969to40,000motorcycles in 1974.AMF favored short-term profits instead of investing in research and development and retooling. During this time, Japanese competitors continued to improve the quality of their motorcycles, while Harley-Davidson began to turn out noisy, oil-leaking, heavily vibrating, poorly finished, and hard-to-handle machines. AMF ignored the Japanese competition.
In 1975, Honda Motor Company introduced its Gold Wing, which became the standard
for large touring motorcycles. Harley-Davidson had controlled that segment of the market for years. There was a $2,000 price difference between Harley's top-of-the-line motorcycles and Honda's comparable Gold Wing. This caused American buyers of motorcycles to start switching to Japanese motorcycles. The Japanese companies (Suzuki and Yamaha) from this time until the mid-1980s continued to enter the heavyweight custom market with Harley lookalikes.
During AMF's ownership of the company, sales of motorcycles were strong, but profits
were weak. The company had serious problems with poor-quality manufacturing and strong Japanese competition. In 1981,VaughnBeals, then head of the Harley Division, and 13 other managers conducted a leveraged buyout of the company for $65 million.

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New management installed a Materials as Needed (MAN) system to reduce inventories
and stabilize the production schedule. Also, this system forced production to work with marketing to create more accurate forecasts. This led to precise production schedules for each month,allowingonlya 10%variance.Thecompanyforceditssupplierstoincreasetheirquality in order to reduce customer complaints.
Citicorp, Harley's main lender, refused to lend the company more money in 1985. On
New Year's Eve, four hours before a midnight that would have meant Harley's demise, the company inked a deal with Heller Financial that kept its doors open. Seven months later, amid

SECTION E Industry Two: Recreation and Leisure

The terms of the Board of Directors were on a three-year stagger system: (a) The term
expiring in 2002 was Sara L. Levinson (51); (b) terms expiring in 2003 were Bleustein (62), Donald James (58), and James A. Norling (60); and (c) terms expiring in 2004 were Barry K. Allen (53), Richard L Beattie (62), and Richard G. LeFauve (67).

Directors who were employees of Harley-Davidson did not receive any special compensation for their services as directors. Directors who are not employees of Harley-Davidson receive an annual fee of $25,000 plus $1,500 for each regular meeting of the board, $750 for each special meeting of the board, $750 for each board committee meeting and a clothing allowance of $1,000 to purchase Harley-Davidson@MotorClothesTMapparel and accessories.

Pursuant to the 1998 Director Stock Plan, an outside director could elect to receive 50% or 100% of the annual fee to be paid in each calendar year in the form of stock based on the fair market value at the time of the annual meeting. In 2001, each outside Director received an option to purchase 600 shares of common stock.6
All directors and executive officers as a group (19 individuals) owned 4,311,178 shares
(1.4%). Jeffrey E. Bleustein owned the largest block with 1,785,993 shares, which was 0.5% ofthe outstandingstock.AXAAssurance LARD. Mutuelleowned22,324,662shares(7.4%) and was the largest shareholder.

The company's mission statementwas asfollows: "Wefulfilldreamsthroughthe experience
of motorcycling by providing to motorcyclists and to the general public an expanding
line of motorcycles, branded products and services in selected market segments."7

Top Management

Jeffrey E. Bleustein had been a director of the company since 1986. He was appointed
Executive Vice President in 1991 and President and Chief Operating Officer of the Motor
Company in 1993. In 1997, Bleustein succeeded Richard E. Teerlink as Chairman and CEO.

Bleustein, a former Yale engineering professor, joined AMF in the early 1970s. In 1981, he joined Harley-Davidson. Thirteen Harley executives, including Bleustein, bought the company in a highly leveraged buyout-$80 of debt for every $1 of equity-in February 1981.
"Before the ink had dried on our paper we were in violation of most of our loan covenants," he said. His current stake, at less than 1%, was worth $40 million.'
Exhibit 3 shows the corporate officers for Harley-Davidson and its business segments-
Motor Company, Buell, and Financial Services.

The lOOthAnniversary Celebration

Forbes named Harley-Davidson its "Company of the Year" for 2001, and it was selected by BusinessWeek as one of the nation's "Most Admired Companies." Additionally, in 2001, it was named to Fortune's list of the "Top 100 Companies to Work For" for the fourth time in five years. The company unveiled its newest bike, the V-Rod, aimed at younger, affluent riders with a list price of $16,995. The V-Rod was named Motorcycle News "Bike of the Year" the same year. Retail sales of Harley-Davison bikes were up 14.4% in 2001 in the United States. In Japan, Harley-Davidson celebrated its 17th consecutive year of growth with retail sales up 10.7% in 2001. In 2000 and 2001, Harley-Davidson was the best-selling heavyweight motorcycle in Japan.9 With all this going for the company, they were moving to their year-long 1O0th Anniversary Celebration with excitement, hope for the future, and satisfaction for past accomplishments. The party was planned to be a year-long celebration, from summer 2002, culminating in a three-day party in Milwaukee in late August 2003.

All was not rosy for the century-old company. Harley-Davidson, which had fought back
from near demise in the 1980s, was to face new rivals in the competitive market, the aging customer base, and the lasting recession.;The projected sales figures looked strong through 2003,

CASE TWELVE Harley-Davidson,
3 Corporate Officers, Harley-Davidson, Inc.

Jeffrey L Blcustein
Chairman and CEO
James M. Brostowitz
VicePresident, Controller;and
Treasurer
and Secretary
James L. Ziemer
Counsel,
Vice President
Officer
and Chief Financial
Motor Company Leadership
Jeffrey L. Bleustein
CEO
Garry S. Berryman
Vice President, Materials
Management/Product Cost
Joanne M. Bischmann
Vice President, Marketing
James M. Brostowitz
Vice President and Controller
Roy Coleman
General Manager, Tomahawk
Operations
Ruth M. Crowley
Vice President, General Merchandise
William B. Dannehl
Vice President and General Manager,
York Operations

William G. Davidson

Vice President, Styling

Karl M. Eberle

Vice President and General Manager,
Kansas City Operations

Jon R. Flickinger

Vice President, North American Sales
and Dealer Services

John A. Hevey

Vice President

JorgeF;..FJidalgo

GeneralJ.1anager, Pilgrim Road

Operations

Timothy K Hoelter

Vice President, Government Affairs

Ronald M. Hutchinson

Vice President, Parts and Accessories

Michael D. Keefe

Vice President and Director, Harley
Owners Group@

Donald C. Kieffer

General Manager, Capitol Drive

Operations

Kathleen A. Lawler

Vice President, Communications

Gail A. Liane

Vice President and General Counsel

James A. McCaslin

President and Chief Operating Officer

Inc., 2002: The lOOthAnniversary

Steven R. Phillips

Vice President, Quality, Reliability,
and Technical Services

John Russell

Vice President and Managing
Director, Europe

Harold A. Scott

Vice President, Human Resources

W. Kenneth Sutton, Jr.
Vice President, Continuous
Improvement

Earl K. Werner

Vice President, Engineering

Jerry G. Wilke

VicePresidentand GeneralManager,
Asia/Pacific and Latin America Regions

Harley-Davidson Fina:ncial ServiCes
Leadership
Lawrence G, Hund

VicePresidentand ChiefFinancial

Officer

Donna E Zarcone

presidf;nt and Chief Operating Officer

Ellen Motorcycle Company
Leadership
Erik EBuell

Chairman and Chief TechnicalOfficer

Johu,


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