Download - Harley Davidson
Manita Punda
Kittipatr
Agenda
Company Background
Situation Analysis
Issues
Recommendation
Financial Justification
Key Success Factors
Conclusion
Company Background
• Began business as independent Harley-Davidson MotorCompany 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 Analysis
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
After facing with almost bankruptcy in 1980’sAs of 1995, financially sound with gross sales exceeding$ 1.5 billion
However,• Stock price has slumped 7 percent• Inability to meet demand may be jeopardizing relationship with customers
Situation Analysis
Issue Identification
Issue I
Declining Market Share
Strategies:
I. Capacity Expansion
II. Price Increase
DecliningMarket Share
Issue IStrategy:
Managing ResourcesAllocation To Maximize
Overall Performance
Issue II
Strategy:
Portfolio Management
I. Capacity ExpansionII. Price Increase
Issue Identification
I. Harley-Davidson
I. Capacity Expansion
Key Consideration: Quantity WITH Quality
Current Plan
Proposed Plan
Production Capacity
Growth plan = 7% annuallyMarket Growth = 15% annually Decrease in Market Share
Year 1999
• Reduce lead time by 4 months• Reduction in excess demand
Increase Capacity1995-1997 = 20%1998-1999 = 17%
I. Harley-Davidson
II. Price Increase
Justification for Price Increase•Still excess demand after expansion•Demand Inelastic “Capture Opportunity”
Proposed Plan:Price10% IncreasePredicted Demand5% Decrease
Result
• Reduce Lead Time by 1 month• Net Income Increases by 9%
I. Harley-Davidson
Price Increase + Capacity ExpansionGoal: Reduce Lead Time and Increase Market Share
Without Recommendations 45.19%47.30%49.51%51.83%55.70%
Market Share
With Recommendations 65.65%63.94%62.27%58.12%55.70%
1995 1996 1997 1998 1999
Excess Demand
Without Recommendations 190,487163,789140,362119,83096,200
With Recommendations 105,16198,99592,82492,73685,640
1995 1996 1997 1998 1999
Lead Time
Without Recommendations 15.1613.9512.7911.6910.04
With Recommendations 5.766.246.738.0610.04
1995 1996 1997 1998 1999
High Medium Low
Hig
hM
ed
ium
Lo
w
Harley-Davidson
Holiday Rambler
Buell
Market Attractiveness
Com
peti
tive S
tren
gth
II. Portfolio ManagementAnalyzing SBUs
Grow
Hold
Divest
II. Portfolio Management
Divesting Holiday Rambler
1. Not core business2. Large capital Investment3. Low Market Share4. At a disadvantage relative to competitors
• Economies of Scale• Lack of management expertise in market
5. Limited Human Resource Must allocateto best maximize the company’s profitability
Rationale:
Strategy:Divest to use capital and focus management’s attention on more promising projects
Harley Davidson
II. Portfolio Management
Harley-Davidson
“Investment Priority”•Main issue: unmet demand
Trademark Licensing•High Margin•Stimulate Demand For Motorcycles•Lay Ground For International Growth
“Continuous Expansion”
1995 1996 1997 1998 1999 2000Activities
Harley Davidson
Portfolio
Operate At Full Capacity
New Capacity Expansion Plan
Selling Process
Increase Price by 10%
Trademark Licensing
Existing expansion plan
New expansion plan
New Pricing Policy
Holiday Rambler
Trademark Licensing
Capacity @ 115,000
Capacity @ 220,000
NPM increase ~ 9%
Grow @ 20%
Existing Capacity Expansion Plan Complete
$70,000,000
Time Line
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
1996F
30.60%
1997F
-5.98%
Financial Justification
Growth Rate
1994 1995F 1996F 1997F 1998F 1999F
26.64% 17.07% 30.60% -5.98% 17.53% 17.69%
1,541,7961,805,023
2,357,3262,216,418
2,605,025
3,065,905
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
1994 1995F 1996F 1997F 1998F 1999F
Net Sales
Financial Justification
Growth Rate
1994 1995F 1996F 1997F 1998F 1999F
26.64% 17.07% 30.60% -5.98% 17.53% 17.69%
Net Income
104,272 119,463
378,637 373,131
457,498
546,800
0
100,000
200,000
300,000
400,000
500,000
600,000
1994 1995F 1996F 1997F 1998F 1999F
Financial Justification
Cost Estimation
1995F 1996F 1997F 1998F 1999F
Capacity Expansion
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
(20,000,000.00)
(20,000,000.00)
(20,000,000.00)
(20,000,000.00)
Transport Vehicle Division 70,000,000.00
Total Cost
(50,000,000.00)
(120,000,000.00)
(120,000,000.00)
(120,000,000.00)
Fund needed in total $ 410,000,000
Sources of fundSales of TVD
Internal generated fund
Financial Justification
Cost Estimation
1995F 1996F 1997F 1998F 1999F
Capacity Expansion
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
(20,000,000.00)
(20,000,000.00)
(20,000,000.00)
(20,000,000.00)
Transport Vehicle Division 70,000,000.00
Total Cost
(50,000,000.00)
(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
Financial Justification
Key Success Factors
Quality
Efficient Distribution Of Resources
Operational Efficiency
SupplierRelationship
Issues Are Solved
DecliningMarket Share
Managing Resource Allocation To Maximize
Overall Performance
Issue I
Issue II
Current Issues
Strategy I:
I. Increase PriceII. Capacity Expansion• Reduce lead time by 50% by 1999• Market Share Increase by 10% by 1999
Strategy II
Portfolio Management• Divest Holiday Rambler•Heavyweight motorcycle
-Investment Priority- Licensing expansion
THANK YOU
1992 1993 1994Liquidity ratio current ratio (times) 1.57 1.75 1.88 Quick ratio (times) 0.81 0.86 0.94
Leverage ratio Debt ratio (%) 44.30% 68.93% 41.39% Interest coverage (times) -19.79 -84.00 3643.34
Profitability ratio Net Profit Margin (%) 4.87% -0.98% 6.76% Return on asset (%) 10.30% -2.04% 14.11% Return on equity (%) 16.04% -3.66% 24.07%
Activity ratio Account receivable (times) 11.86 14.15 10.75 Average collection period (days) 30.77 25.79 33.95 Inventory turnover (times) 8.57 6.28 6.46 Average sale period (days) 42.61 58.11 56.50 Fixed asset turnover (times) 4.31 4.88 4.62 Total asset turnover (times) 2.12 2.09 2.09
Ratios Analysis
Historical Ratio Analysis
Sales by Division
1994 g 1995F g 1996FMotorcycle unit shipments 95,811 95,811 95,811 Net Sales - - Motorcycles 902.60 15.00% 1,037.99 20% 1,245.59 Motorcycle parts and accessories 256.30 25.00% 320.38 25% 400.47 Recreational vehicles 274.50 17.00% 321.17 15% 369.34 Commercial vehicles 95.10 17.00% 111.27 111.27 Others 13.30 7.00% 14.23 15% 16.37 Total 1,541.80 17.07% 1,805.03 18.73% 2,143.03
g 1997F g 1998F g 1999F95,811 95,811 95,811
- - - 20% 1,494.71 15% 1,718.91 15% 1,976.75 25% 500.59 25% 625.73 25% 782.17
- - - - - -- - - - - -
20% 19.64 20% 23.57 20% 28.28 -5.98% 2,014.93 17.53% 2,368.21 17.69% 2,787.19
1994 Avg.%of sales Avg.%changed 1995 1996 1997 1998 1999COGS 1,120,332.00 72.72% 18.05% 72.50% 72.00% 71.50% 71.00% 71.00%Selling, admin, & enginner exp. 261,157.00 17.41% 14.87% 16.90% 16.35% 16.00% 15.70% 15.40%Income from operations 160,307.00 8.31% 50.73% - - - - -Interest expense (net) 44.00 -0.17% -94.19% -0.17% -0.17% -0.17% -0.17% -0.17%Other income (exp.) net 1,718.00 -0.20% -113.25% -0.20% -0.20% -0.20% -0.20% -0.20%Provisions for income tax 57,797.00 3.61% 29.51% 3.61% 3.61% 3.61% 3.61% 3.61%
1,994 Avg.%of sales Avg.%changed 1995 1996 1997 1998 1999A/R 143,396.00 8.27% 29.50% 9.50% 9.50% 10.00% 10.00% 10.00%Inv. 173,420.00 10.43% 36.08% 11.25% 11.25% 11.25% 11.25% 11.25%Prepaid expense 9,424.00 0.76% -1.01% 0.76% 0.76% 0.76% 0.76% 0.76%Other current asset 20,111.00 1.72% -8.38% 1.72% 1.72% 1.72% 1.72% 1.72%Liabilities & Equity 0.00%A/P 63,988.00 4.68% 5.35% 4.10% 4.00% 4.00% 3.90% 3.90%Salaries Payable 62,882.00 3.26% 56.75% 3.00% 3.00% 3.00% 3.00% 3.00%ST debt/current LTD 18,303.00 1.49% 5.81% 1.00% 1.00% 1.00% 1.00% 1.00%Other CL 71,105.00 5.57% 1.81% 4.00% 4.00% 4.00% 4.00% 4.00%
Assumptions (with recommendations)Statement of Operations
Balance Sheet
Assumptions
1994 1995F 1996F 1997F 1998F 1999FNet sales 1,541,796 1,805,023 2,357,326 2,216,418 2,605,025 3,065,905 COGS 1,120,332 1,308,642 1,542,977 1,440,671 1,681,425 1,978,902 Selling, admin, & enginner exp. 261,157 305,049 350,384 322,388 371,808 429,227 Income from operations 160,307 191,332 463,965 453,358 551,792 657,776Interest expense (net) 44 (3,067) (3,642) (3,424) (4,024) (4,737) Other income (exp.) net 1,718 (3,635) (4,316) (4,058) (4,769) (5,613)
1,762 -6,703 -7,958 -7,482 -8,794 -10,350Income from op. bf ext. item and acct. change 162,069 184,630 456,007 445,876 542,998 647,426Provisions for income tax 57,797 65,167 77,370 72,746 85,500 100,627 Net income (loss) 104,272 119,463 378,637 373,131 457,498 546,800
Statement of operations (with pricing effect)
Pro Forma Financial Statement
1994 1995F 1996F 1997F 1998F 1999FAssetsCash 59,285 127,315.17 429,866.24 669,344.73 1,054,845.86 1,474,874.80 A/R 143,396 146,470.62 171,477.22 214,302.36 201,492.51 236,820.43 Inv. 173,420 173,452.05 203,065.12 241,090.15 226,679.07 266,422.98 Prepaid expense 9,424 11,653.38 13,642.93 16,197.64 15,229.43 17,899.63 Other current asset 20,111 26,486.79 31,008.82 36,815.39 34,614.76 40,683.80
Total CA 405,636 485,378 849,060 1,177,750 1,532,862 2,036,702PPE 262,787 262,787.00 297,787.00 377,787.00 457,787.00 537,787.00 Other Asset 70,792 80,792.00 90,792.00 95,792.00 100,792.00 105,792.00
Total Asset 739,215 828,957 1,237,639 1,651,329 2,091,441 2,680,281Liabilities & Equity - - - - - A/P 63,988 63,213.64 72,200.93 85,720.94 78,582.08 92,359.97 Salaries Payable 62,882 46,253.88 54,150.70 64,290.71 60,447.75 71,046.13 ST debt/current LTD 18,303 15,417.96 18,050.23 21,430.24 20,149.25 23,682.04 Other CL 71,105 61,671.84 72,200.93 85,720.94 80,597.00 94,728.17
Total CL 216,278 186,557 216,603 257,163 239,776 281,816L-T debt 29,422 29,422.00 29,422.00 29,422.00 29,422.00 29,422.00 Deffered tax 0 - - - - - Postretirement health care benefit 60,283 60,283.00 60,283.00 60,283.00 60,283.00 60,283.00
Total Liabilities 305,983 276,262 306,308 346,868 329,481 371,521Common stock, net 772 772.00 772.00 772.00 772.00 772.00 Additional paid in capital 150,728 150,728.00 150,728.00 150,728.00 150,728.00 150,728.00 Rettained earnings 283,010 402,472.51 781,109.11 1,154,239.71 1,611,737.36 2,158,536.93 Unrealized foreign exchange GN/LOS 303 303.00 303.00 303.00 303.00 303.00
434,813 554,276 932,912 1,306,043 1,763,540 2,310,340Less: treasury stock 1,581 1,581.00 1,581.00 1,581.00 1,581.00 1,581.00
Total shareholder's equity 433,232 552,695 931,331 1,304,462 1,761,959 2,308,759Total liabilities and shareholder's equity 739,215 828,957 1,237,639 1,651,330 2,091,440 2,680,280
Balance sheet (with pricing effect)
Pro Forma Financial Statement
1994 1995F 1996F 1997F 1998F 1999FLiquidity ratio current ratio (times) 1.88 2.60 3.92 4.58 6.39 7.23 Quick ratio (times) 0.94 1.47 2.78 3.44 5.24 6.07
Leverage ratio D/E ratio (%) 70.63% 33.33% 24.75% 21.01% 15.75% 13.86% Interest coverage (times) 3643.34
Profitability ratio Net Profit Margin (%) 6.76% 6.62% 16.06% 16.83% 17.56% 17.83% Return on asset (%) 14.11% 14.41% 30.59% 22.60% 21.87% 20.40% Return on equity (%) 24.07% 21.61% 40.66% 28.60% 25.97% 23.68%
Activity ratio Account receivable (times) 10.75 12.32 13.75 10.34 12.93 12.95 Average collection period (days) 33.95 29.62 26.55 35.29 28.23 28.19 Inventory turnover (times) 6.46 7.54 7.60 5.98 7.42 7.43 Average sale period (days) 56.50 48.38 48.04 61.08 49.21 49.14 Fixed asset turnover (times) 4.62 5.25 6.07 4.68 4.66 4.76 Total asset turnover (times) 2.09 2.18 1.90 1.34 1.25 1.14
Ratios Analysis (with pricing effect)
Ratio Analysis
1994 1995F 1996F 1997F 1998F 1999FInvestment Outlay -100000 -100000 -100000 -100000OCF with recom. 119,462.51 378,636.61 373,130.60 457,497.65 546,799.57 OCF w/o recom. 119,462.51 119,462.51 143,009.03 161,094.25 178,835.47 OFC - - 259,174.10 230,121.56 296,403.40 367,964.10 Terminal Value 75,000.00 4,313,986.91 CF - - 234,174.10 130,121.56 196,403.40 4,581,951.00
NPV Analysis (with pricing effect)
wD 41.39%kD 7.00%Tax 40.00%wE 58.61%kE 15.00%WACC 10.53%
NPV ฿3,597,519.00
WACC (at present)
NPV Analysis
1994 1995F 1996F 1997F 1998F 1999FNet sales (w/o recommendation) 1,541,796 1,805,023 2,160,800 2,434,060 2,702,121 3,004,958 Net sales (with recommendation) 1,541,796 1,805,023 2,143,024 2,014,925 2,368,204 2,787,186 Net sales (with pricing effect) 1,541,796 1,805,023 2,357,326 2,216,418 2,605,025 3,065,905 Net income (loss) (w/o recommendation) 104,272 119,463 143,009 161,094 178,835 198,878Net income (loss) (with recommendation) 104,272 119,463 164,334 171,638 220,677 268,081Net income (loss) (with pricing effect) 104,272 119,463 378,637 373,131 457,498 546,800
Net Sales and Net Income
Rationales
1994 1995F 1996F 1997F 1998F 1999FMarket growth rate 15% 15% 12% 12% 12%Production growth rate (existing plan) 7% 7% 7% 7% 7%Production growth rate (recommendation) 20% 20% 20% 15% 15%Demand (without pricing effect) 211,200 242,880 272,026 304,669 341,229 Demand (with pricing effect) (5% drop) 211,200 230,736 258,424 289,435 324,167 Domestic demand (without pricing effect) 152,064 174,874 195,858 219,361 245,685 Domestic demand (with pricing effect) (5% drop) 152,064 166,130 186,066 208,393 233,401 Supply (existing plan) 115,000 123,050 131,664 140,880 150,742 Supply (recommendation) 115,000 138,000 165,600 190,440 219,006 Domestic supply (existing plan) 82,800 88,596 94,798 101,434 108,534 Domestic supply (recommedation) 82,800 99,360 119,232 137,117 157,684 Excess Demand (without recommendation) - 96,200 119,830 140,362 163,789 190,487 Excess Demand (with recommendation) - 96,200 92,736 92,824 98,995 105,161 Lead time (without recommendation) 10.04 11.69 12.79 13.95 15.16 Lead time (with recommendation) 10.04 8.06 6.73 6.24 5.76Total market demand 148,653.50 170,951.53 191,465.71 214,441.59 240,174.59 Market share (without recommendation) 55.70% 51.83% 49.51% 47.30% 45.19%Market share (with recommendation) 55.70% 58.12% 62.27% 63.94% 65.65%
Demand and Supply
• Prepare to invest in international market
• Invest in motorcycle industry– Buy more Bruell shares– Vertical intregration esp. suppliers
Cash Cow
SWOT AnalysisStrengths
- Product Quality- Brand Recognition- Cultural Philosophy- Trademark Licensing- Supplier relationship- Designer Store Service- Distribution Channel- Financial Position
Opportunities
Threats
Weaknesses- Length Lead Time- Reliant on few suppliers- Transportation Vehicle Division
- Expansion into Europe and Asia-Pacific-Licensing of Trademarks- Growth in RV market
- Competitors- Ending Contracts With The Labor Union
Marketing AnalysisProduct
Promotion
Place
Price
• Harley-Davidson• Holiday Rambler• Buell Motorcycle
• Presences in U.S., Europe, Australia,and Asia• 1033 Worldwide Dealerships• 600 independently owned
• Harley-Davidson: premium• Holiday Rambler: midrange-
premium• Buell Motorcycle: premium
• Dealer promotions• Customer events• Magazine ad• Public Relations
Long Term Issue IInternational Expansion
Where?
?Focus on EuropeAnd Australia
Asian Market Not Promising
Management’s Misunderstanding
Asian Marketi.e. Thailand Taiwan
#’s of motorcyclist
= Potential CustomersPurchasers = Recreational oriented
Key Considerations•Culture•Income•Vision
International Expansion 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
Criteria
Long Term Issue IIAttracting 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 Divesting
Core Business = Harley DavidsonProfitable NicheStrong Brand PresenceRoom for expansion both domestically and internationallyPremium High-Quality Heavyweight Motorcycle• Management’s focus• Unmet Demand• International Expansion
Should Not Diversify to Other Product Line Yet!Harley-Davidson Still Has A Lot of Room for Growth and isA Profitable Niche
Pros Cons
Status Quo -have presence in RV + commercial vehicle market
-high operating costs- scarce human resource is allocated away from core business (more
potential)
Keep Brand(continue
expansion)
-attempt in capturing a portion of several vehicle
markets
-high 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
Divest from Portfolio
-funding for more brand with
higher potential-more focused portfolio
-let go opportunities to capture several markets
BUT, with INTENSE
competition, SMALL market share, and LACK of expertise, chance of Success is very LOW
Holiday Rambler Alternatives
Summary of Management PlanHarley-DavidsonI. Price Increase- Justification to Consumers - However, not as prevalent because nature of product (recreational oriented + premium)– price relatively inelastic
II. Capacity 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
Portfolio ManagementI. Divesting Holiday Rambler- Allocation of fund to other brand (especially Harley-Davidson)- Finding prospective buyers: Existing Play vs. New Entrants
II. Trademark 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 selling point of H-D = “American Culture”
Effects of Price Increase and Capacity Expansion
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
Capacity Expansion• Increase Supply to Match Demand
• Increase Market Share
• Reduces Lead Time
• Increase NPM (in value)
Why Not Increase Capacity to Fully Match Demand?
Quality Issue
If increase too fast, can jeopardize
quality of product.
20% represents highest practical rate