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

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