HARLEY-DAVIDSON STRATEGIC PLAN

Submitted by Stacey Wagner Prepared for Professor Don Looney Business Policies and Strategies Spring 2007
2 TABLE OF CONTENTS VISION STATEMENT .................................................................................................... 3 MISSION STATEMENT ................................................................................................. 3 EXTERNAL ASSESSMENT ........................................................................................... 3 External Audit ................................................................................................................. 3 Porters Five Forces Analysis ......................................................................................... 7 External Factor Matrix .................................................................................................... 8 Table 1 ................................................................................................................ 8 Competitive Profile Matrix ............................................................................................. 9 Table 2 ................................................................................................................ 9 INTERNAL ASSESSMENT .......................................................................................... 10 Key Internal Forces ....................................................................................................... 10 Financial Ratio Analysis ............................................................................................... 12 Table 3 .............................................................................................................. 12 Internal Factor Evaluation Matrix ................................................................................. 16 Table 4 .............................................................................................................. 16 SWOT MATRIX ............................................................................................................. 17 Table 5 .............................................................................................................. 17 SPACE MATRIX ............................................................................................................ 18 Table 6 .............................................................................................................. 18 GRAND STRATEGY MATRIX ................................................................................... 20 Table 7 .............................................................................................................. 20 LONG-TERM OBJECTIVES AND STRATEGIES ................................................... 21 ANNUAL OBJECTIVES ............................................................................................... 21 PRO-FORMA FINANCIAL STATEMENTS .............................................................. 22 Table 8 .............................................................................................................. 23 Table 9 .............................................................................................................. 25 Table 10 ............................................................................................................ 26 BIBLIOGRAPHY ........................................................................................................... 28 3 VISION STATEMENT We at Harley-Davidson are a worldwide manufacturer of motorcycles and related products and focus on providing a unique lifestyle for our customers. MISSION STATEMENT At Harley-Davidson, we provide our customers around the world with an aggressive outdoor lifestyle through superior products and service. Through modern technology, we provide the latest in safety and environmentally friendly engineering in

our products. We focus on safety and harmony within the workplace. At HarleyDavidson, we do not simply sell motorcycles; we improve our customers lives through recreational opportunities. EXTERNAL ASSESSMENT External Audit An external audit assesses the industry that Harley-Davidson operates in. The U.S. motorcycle market value grew 7.7% from 2001-2005. Market volume grew 6.4% in the same time. The U.S. market accounts for 25% of the global motorcycle market. Honda and Yamaha are the other leading competitors, next to Harley-Davidson, in the U.S. market. Market value is expected to grow 7.1% from 2005-2010. Market volume is expected to grow 7.5% in the same time period.1 The motorcycle market value in Europe declined .8% from 2001-2005. Market volume also decreased 1.6% in the same time period. More moped products are sold in Europe than motorcycles. Honda and Yamaha have the largest market share in Europe.
1 Motorcycles

in the United States, DataMonitor, November 2006.

4 Future market value is expected to increase 4.4% from 2005-2010. Market volume is expected to increase 4.5%.2 From 2001-2005, market value for motorcycles in the Asia/Pacific region grew 9.2%. Market volume grew 8.3%. Two-thirds of products sold there are motorcycles; one-third are mopeds. Honda has the largest market share. It is expected that market value will increase 13.2% from 2005-2010, while market volume increases 9%.3 Other external factors that may affect Harley-Davidson include the economy. Economic factors include the stock market, interest rates, inflation, and unemployment levels. In the past year, the Dow Jones Industrial Average has risen 16%.4 Interest rates increased only marginally in the same amount of time.5 Unemployment remained unchanged at 4.4% in the last year. Inflation was up 2%.6 Overall, these factors indicate a fairly strong U.S. economy and based on recent trends, this expected to continue. Other external factors affecting Harley-Davidson include social, cultural, and demographic changes. The average Harley owner is 47 years old and makes over $80,000 per year.7 The U.S. population increased 1% from 2004 to 2005, while the population over age 62 increased more than 2.5%. The median age of the U.S. population increased from 36.2 to 36.4 in the same time period. The number of married couples without children under the age of 18 stayed constant. The mean household income increased over 4% to $62,556.8 As aging couples with excess income are Harleyin Europe, DataMonitor, November 2006. in Asia-Pacific, DataMonitor, November 2006. 4 CNN Money, <http://money.cnn.com>, accessed on April 17, 2007. 5 Federal Reserve, <http://federalreserve.gov>, accessed on April 17, 2007. 6 Bureau of Labor Statistics, <http://www.bls.gov>, accessed on April 17, 2007. 7 Harley-Davidson Investor Relations, <http://investor.harley-davidson.com>, accessed on March 13, 2007. 8 U.S. Census Bureau, <http://factfinder.census.gov>, accessed on April 17, 2007.
3 Motorcycles 2 Motorcycles

5 Davidsons target market, the aging population growth and income growth are good signs for the company. The U.S. veteran population has increased by 1.1%.9 Veterans tend to be motorcycle owners, and an increasing veteran population may be sign of market segment growth for Harley.10 Another area of untapped segment of growth for Harley is women.

Over four million women have owned a motorcycle in the past, but only 635,000 currently do.11 Only 11% of Harleys current buyers are female, but they are increasing by .5% per year.12 Political, governmental and legal changes are important as well. The Environmental Protection Agency (EPA) regulates automobile and motorcycle emissions. These regulations were most recently revised in 2004. 13 Future revisions could negatively impact the motorcycle industry. Another concern is the price of raw materials for motorcycles. Steel prices increased 57% from 2003 to 2004, and aluminum increased by 24% in the same time period.14 Further increases could force motorcycle companies to pass the cost increases on to consumers, thus raising the price of the product. Technology is constantly evolving. The widespread use of the Internet has changed the way business is done. Communication across continents is easier and cheaper than ever before. Computer-based inventory control systems could play a role in managing motorcycle inventories. Currently Harley does not allow for transfer of product between dealers, but a centralized computer system could make for an easy
9 U.S. 10 Jim

Census Bureau, <http://factfinder.census.gov>, accessed on April 17, 2007. Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27,

2007. 11 Sheila Seger (Lehman Trikes), personal interview, April 20, 2007. 12 Harley-Davidson Investor Relations, <http://investor.harley-davidson.com>, accessed on March 13, 2007. 13 Environmental Protection Agency, <http://www.epa.gov>, accessed on April 17, 2007. 14 Company Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006.

6 transition.15 Technology also impacts design. Todays motorcycles are more reliable because of technological change. Modern motorcycles also are relatively free of oil leaks, vibration, and are more comfortable than those of the past.16 Although Harley-Davidson has many competitors, its main competitors are Honda and Yamaha based on their world-wide market share. Because Harleys competitors are more diversified, they are less vulnerable to industry changes. Honda and Yamaha also offer products that sell well in the international markets compared to Harley. 17 Harley products are more expensive than its competitors, but are known for service and salability.18 Models of motorcycles available include custom, touring, performance, and standard models. Custom is the largest market segment in the U.S., with 53.9% of all motorcycles on the road. However, touring bikes have increased in popularity with each year, now comprising 27.2% of registered bikes. From 2004 to 2005, this increase was over 30%.19 Touring motorcycles are the most luxurious and easiest to ride of all models. These models often include radios and cruise control. Victory, Honda, Suzuki, and Harley have expanded their touring line of motorcycles to cater to the aging market. Harley offers eight variations of the touring motorcycle.20 Victory entered into an agreement with Lehman Trikes to produce three-wheeled motorcycles under the Victory brand. These products will be fully supported by Victory warranty, and will be marketed to aging adults as a safer way to ride. The Pit Boss was
15 Jim

Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27, 2007. 16 Sheila Seger (Lehman Trikes), personal interview, April 20, 2007. 17 Company Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006. 18 Sheila Seger (Lehman Trikes), personal interview, April 20, 2007.

19 Harley-Davidson

Investor Relations, <http://investor.harley-davidson.com>, accessed on March 13, 2007. 20 Sheila Seger (Lehman Trikes), personal interview, April 20, 2007.

7 released for sale on July 31, 2006. Harley entered a similar agreement with Lehman Trikes on September 1, 2006.21 Porters Five Forces Analysis The overall attractiveness of the motorcycle industry is average. The threat of new competitors or supplier power is low, but consumers have the power to switch brands and substitute products easily. There is also competition for market share among rivals in the motorcycle industry.22 Rivalry among competing firms is fairly high in the motorcycle industry. Brand image is very important in the industry and products frequently compete directly with a product of another manufacturer. Potential entry of new competitors is somewhat low in motorcycle manufacturing because of start-up costs and loyalty already established by existing firms. It would be a difficult task to gain market share from the existing giants in the motorcycle business. The bargaining power of suppliers is a relatively small threat as there are more suppliers than manufacturers. Potential development of substitute products is a threat to the motorcycle industry. Replacement products for motorcycles include boats, snowmobiles, and RVs because these are all luxury recreational items. Motorcycle consumers are likely to weigh a purchase decision against a substitute product. Motorcycle consumers tend to fit a specific demographic profile and have discretionary income; therefore, the entire population is not a potential buyer. Thus, the bargaining power of consumers is also a threat to motorcycle companies. 23
21 Sheila 23 Ibid. 22 Company

Seger (Lehman Trikes), personal interview, April 20, 2007. Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006.

8 External Factor Matrix Table 1 EFE Matrix Key External Factors Weight Rating Weighted Score Opportunities 1. Aging U.S. Population .20 4 .80 2. Strong U.S./Canadian market growth .20 4 .80 3. Increasing number of women riders .10 2 .20 4. Very strong growth in Asia .03 1 .03 5. Very strong growth in Mexico .03 1 .03 Threats 6. Aging U.S. Population .04 2 .08 7. Competitors are more diversified .10 1 .10 8. Union relations .05 2 .10 9. Declining European growth .05 2 .10 10. Availability of substitute products .20 1 .20 Total 1.0 2.44 Harley-Davidson excels at focusing on the baby-boomer motorcycle market

segment in the U.S.; however there are several opportunities that Harley is not using to its full advantage. Very strong growth in the motorcycle industry is occurring in Asia and Mexico, yet Harley-Davidson has not fully taken advantage of this market.24 Increasing numbers of women ride motorcycles and yet only ten percent of Harley riders are women. 25 These could be areas of potential growth for Harley. Threats to Harley-Davidson include an aging U.S. population. While this factor is considered an opportunity as well, it is a threat as the population ages and is eventually unable to operate a motorcycle, thus extinguishing Harleys largest market segment. The contract with Lehman Trikes could counteract some of this effect. Though not a significant threat because of Harleys limited market share, the European motorcycle
24 Motorcycles 25 Company

in Asia-Pacific, DataMonitor, November 2006. Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006.

9 industry is suffering from declining growth. Harley-Davidson competitors are more diversified into markets other than motorcycles, which makes them less vulnerable to fluctuations in the motorcycle industry.26 Also, relations with union workers are a threat to the industry.27 The readily available substitute products to motorcycles are the biggest threat to the industry and to Harley-Davidson. Competitive Profile Matrix Table 2 Competitive Profile Matrix Harley-Davidson Honda Yamaha
Critical Success Factors Weight Rating Weighted Score Rating Weighted Score Rating Weighted Score

Market share .15 3 .45 3 .45 3 .45 Financial position .05 4 .20 3 .15 3 .15 Price competitiveness .10 1 .10 3 .30 3 .30 Customer loyalty .20 4 .80 2 .40 2 .40 Global expansion .20 2 .40 4 .80 4 .80 Product quality .10 3 .30 4 .40 3 .30 Product selection .15 2 .30 4 .60 4 .60 Management .05 4 .20 4 .20 4 .20 Total 1.0 2.75 3.30 3.20 Customer loyalty is Harley-Davidsons strongest competitive advantage. In product quality and financial position, Harley is also strong. However, Harley is not as strong as its competitors in some critical areas. Harley falls far behind Honda and Yamaha in global market share of motorcycle products. In addition, Harley motorcycles are not as competitively priced as other brands. Product selection is another area of
26 Company 27 Jim

Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006. Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27,

2007.

10 weakness at Harley. While offering many products in the 1000cc+ category of motorcycles, Harley lacks an array of smaller bikes. Also, Harley is not diversified into

other recreational lines such as watercraft and ATVs as many of its competitors are and is thus more susceptible to fluctuations in the motorcycle market.28 INTERNAL ASSESSMENT Key Internal Forces To determine Harley-Davidsons strengths and weaknesses, an internal assessment is required. Areas to be evaluated include: management, marketing, finance, production and operations, research and development, and management information systems (MIS). Harley-Davidson offers a broad selection of 32 product models, has 650 dealers in the U.S., and has the largest market share in the U.S. However, Harley only has 7.7% of European market share (the second largest motorcycle market in the world), and 25.3% of the Asia/Pacific region.29 Clearly, Harley-Davidsons strengths are in the U.S. market, as 80% of Harleys net revenue comes from U.S. sales.30 Harley worked to improve its image over the years. In the 1960s, Harley was viewed as sub-par when compared to British motorcycles. In the modern market, Harley has a reputation for style and quality. Credit for this is due to the research and development department, who implemented the trend towards quality for the company.
28 Company 29 Ibid. 30 Harley-Davidson

Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006. Investor Relations, <http://investor.harley-davidson.com>, accessed on March 13,

2007.

11 Harley-Davidson also introduced water-cooled engines, fuel injection, and catalytic converters to improve exhaust emissions.31 Brand image is critical in the motorcycle industry, and Harleys strength in this area is largely due to its marketing abilities in the U.S. market. Harley customers are extremely loyal to their brand and 90% of Harley owners intend to purchase another Harley. The production and operations department at Harley-Davidson has consistently built reliable motorcycles for Harley customers. This consistency has helped sustain brand image.32 Harleys internal management and finance department is strong. Harley is a financially sound company, largely due to effective management.33 Management information systems could be used to more effectively manage inventory at Harley. Instead of allotting a certain number of products to each dealer, Harley could use an enterprise-wide system to match inventory levels to demand. This is currently one of Harley-Davidsons few internal weaknesses. 34
31 Jim

Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27, 2007. 32 Company Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006. 33 Jim Burgess (Black Hills Harley-Davidson), speech given at Black Hills State University, March 27, 2007. 34 Ibid.

12 Financial Ratio Analysis Table 3 Financial Ratio Analysis Ratio HarleyDavidson

2006 HarleyDavidson 2005 HarleyDavidson 2004 Honda 2006 Industry Average Liquidity Ratios Current Ratio 2.23 3.6 2.79 1.07 2.04 Quick Ratio 1.56 2.18 1.37 .81 1.45 Leverage Ratios Debt to Equity Ratio .62 .39 .40 .87 .45 Long Term Debt to Equity Ratio .32 .32 .25 .39 .32 Times Interest Earned Ratio N/A N/A N/A 2.37 7.15 Activity Ratios Inventory Turnover 24.29 25.31 24.42 10.69 8.26 Fixed Assets Turnover 6.08 5.57 5.12 5.83 N/A Total Assets Turnover 1.15 1.06 1.02 1.00 1.25 Accounts Receivable Turnover 3.09 3.67 4.34 4.90 10.56 Profitability Ratios Gross Profit Margin 39.50 N/A N/A 28.60 41.82 Operating Profit Margin 25.91 N/A N/A 8.70 15.60 Net Profit Margin 16.86 N/A N/A 4.89 10.17 Return on Total Assets 19.34 17.87 17.05 4.87 12.28 Return on Stockholders Equity 35.72 30.45 28.73 15.29 23.72 Price Earnings Ratio 15.81 N/A N/A 12.36 20.30 Growth Ratios Sales 9.02 N/A N/A 14.95 5.67 Earnings Per Share 15.25 N/A N/A 36.18 14.30 Dividends Per Share 1.33 N/A N/A .76 1.84 Source: <http://www.reuters.com>, accessed on March 13, 2007. 13 Liquidity Ratios
0 0.5 1 1.5 2 2.5 3 3.5 4 2004 2005 2006 Current Ratio

Quick Ratio

Liquidity ratios measure a firms ability to turn short-term assets into cash.35 Harley-Davidson is doing better than the industry average in this category and significantly better than its main competitor, Honda. Leverage Ratios
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 2004 2005 2006 Debt to Equity Ratio Long Term Debt to Equity Ratio 35 Fred R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007.

14 Leverage ratios measure how much a firm is financed by debt.36 HarleyDavidson is fairly close to the industry average on this measure, and is doing better than Honda. Activity Ratios
0 5 10 15 20 25 30 2004 2005 2006 Inventory Turnover Fixed Assets Turnover Total Assets Turnover Accounts Receivable Turnover

Activity ratios measure how well a firm uses its resources.37 Harley is doing especially well in inventory turnover, but falls below average in accounts receivable.
36 Fred R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007. 37 Ibid.

15 Profitability Ratios
0 5 10 15 20 25 30 35

40 2004 2005 2006 Return on Total Assets Return on Stockholders Equity

Profitability ratios measure the effectiveness of management.38 Again, Harley is doing much better than the industry and Honda in almost all of these measures with the exception of the price earnings ratio and the gross profit margin, which fall a bit below industry standards, although still ahead of Honda. Growth ratios measure growth over a period of time.39 Harley is doing better than the industry average in sales and earnings per share growth, but Honda is doing even better. In dividends per share growth, Harley beats Honda, but both fall below industry average. Clearly Harley-Davidson has financial strengths, but there are some areas to be targeted for improvement.
38 Fred R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007. 39 Ibid.

16 Internal Factor Evaluation Matrix Table 4 IFE Matrix Strengths Weight Rating Weighted Score 1. Customer retention .20 4 .80 2. Number of domestic dealers .15 4 .60 3. Domestic market share .15 4 .60 4. Product selection of +1000 cc motorcycles .10 4 .40 5. Financial position .10 4 .40 Weaknesses 6. International market share .10 1 .10 7. Number of international dealers .03 2 .06 8. Product selection in other segments .10 1 .10 9. Dealer inventory system .05 2 .10 10. Product cost .02 1 .02 Total 1.0 3.18 Harley-Davidson has a large number of repeat buyers. Harley has a large volume of dealers in the U.S. and a large share of the U.S. market of motorcycle sales. The company also offers several different products to suit different needs in the over 1000cc category. However, Harley is much weaker in both Europe and Asia in number of dealers and market share. One of the likely reasons for this is Harleys limited offering of smaller bikes that are more popular in international markets. Also, Harleys brand image in the U.S. is much more powerful to consumers than it is internationally. 17 SWOT MATRIX Table 5 SWOT Matrix Strengths S 1. Customer retention

2. Financial position 3. Product selection 4. U.S. market share 5. U.S. dealer network Weaknesses W 1. Dealer inventory system 2. International market share 3. Expensive product 4. Product selection 5. International dealers Opportunities O 1. Increasing # of women riders 2. U.S. industry growth 3. Aging population 4. Mexico industry growth 5. Asian industry growth SO Strategies 1. Continue to expand U.S. market share (S4, O2) 2. Expand marketing to female riders (S1, O1) 3. Expand marketing to baby boomers (S1, O3) WO Strategies 1. Balance inventory levels to meet demand (W1, O2) 2. Pursue foreign markets more aggressively (W2, O4, O5) 3. Expand product line to cater to female and aging riders (W4, O1, O3) Threats T 1. Union relations 2. Aging U.S. population 3. Competitor diversification 4. Declining European growth 5. Availability of substitutes ST Strategies 1. Focus on securing new markets as baby boomers age (S4, T2) 2. Focus market growth in the U.S. rather than

European markets (S4, T4) WT Strategies 1. Expand product line to compete directly with competitors (W4, T3) 2. Open foreign factory to gain international market share and lessen reliance on unions (W2, T1) 18 SPACE MATRIX Table 6 SPACE Matrix Ratings Financial Strength (FS) Leverage +6 Liquidity +4 Return on investment +3 Working capital +4 Industry Strength (IS) Growth potential +5 Profit potential +4 Capacity utilization +4 Ease of entry +5 Environmental Stability (ES) Competitive pressures -4 Risk -2 Price range of competing products -5 Demand fluctuations -2 Competitive Advantage (CA) Market share -2 Loyalty -1 Product life cycle -1 Product quality -1 Conclusion ES Average (-13/4) -3.25 CA Average (-5/4) -1.25 IS Average (18/4) +4.50 FS Average (17/4) +4.25 x-axis (CA + IS) +3.25 y-axis (ES + FS) +1.00 19 Conservative FS Aggressive +6 +5

+4 +3 +2 +1 X CA -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 IS -1 -2 -3 -4 -5 -6 Defensive ES Competitive Harley-Davidson falls into the aggressive quadrant of the SPACE Matrix. Aggressive strategies include market penetration and development, product development, backward, forward, and horizontal integration, related and unrelated diversification, and combination strategies.40
40 Fred R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007.

20 GRAND STRATEGY MATRIX Table 7 Grand Strategy Matrix Rapid Market Growth Quadrant II Quadrant I X Weak Strong Competitive Competitive Position Position Quadrant III Quadrant IV Slow Market Growth Harley-Davidson is in Quadrant I of the Grand Strategy Matrix because of its strong competitive position in the motorcycle market as well as the markets strong growth. The motorcycle industry is growing world-wide, and in some markets, growth is quite strong. Harley has a very strong competitive position in North American markets, and has a presence in international markets. According to this matrix, Harley would be 21 wise to pursue market development strategies, market penetration, product development, forward, backward, and horizontal integration, as well as related diversification.41 LONG-TERM OBJECTIVES AND STRATEGIES Long-term objectives will attempt to sustain Harley-Davidsons competitive advantage and keep it a viable competitor in the motorcycle industry.42 For the next three years, Harley should use its current strengths to expand its U.S. market share through market penetration, expand sales to female riders through market development, revise the U.S. dealer network to allow for transfer of units between dealers to improve market penetration and expand its product line to cater to aging riders through product development. Market penetration seeks to increase market share for present products in present

markets through greater marketing efforts. Market development introduces present products into new markets. Product development increases sales by developing or improving products.43 ANNUAL OBJECTIVES To ensure Harley-Davidsons long-term objectives are achieved, annual objectives are matched to long-term objectives.44 To expand U.S. market share through market penetration, Harley will set an annual objective to grow U.S. sales by 15% by May 31, 2008. Also, $5,000,000 will be allocated to marketing efforts to ensure attainment of this goal. Although this is an annual objective, it is anticipated this
41 Fred R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007. 42 Ibid. 43 Ibid. 44 Ibid.

22 objective could be modified slightly for each of the next three years as needed to achieve U.S. market penetration. To expand sales to female riders through market and product development, Harley will set an annual objective to double the number of female Harley buyers in the U.S. to 20% of total buyers by May 31, 2008. Also, Harleys marketing budget for targeting female riders will be increased by $5,000,000. Again, this is an annual objective, but it is anticipated this objective could be modified slightly for each of the next three years as needed to strengthen Harleys number of female buyers. Harley will aim to improve its U.S. dealer network to allow for transfer of units between dealers to improve market penetration. The date for this objective to be complete is by December 31, 2007. Enhancements will be made to the current inventory management system as needed until this goal is reached. Input will be largely based on dealer and management input. To expand its product line to cater to aging riders through product development, Harley will set an annual objective of introducing one new product for aging riders by May 31, 2008. This product may be built through the contract with Lehman Trikes. PRO-FORMA FINANCIAL STATEMENTS In order to implement objectives, Harley-Davidson will need to determine the cost of implementation for each objective. Expanding its U.S. market share will increase gross profit by approximately $400,000 annually. Repairing the U.S. dealer network will result in $50,000 less inventory on hand each year. Expanding the product line to cater to aging riders will contribute to increased operating expenses of about $90,000 but will also contribute to the increase in gross profit. 23 Table 8 Pro Forma Balance Sheet (Values in Thousands) 12/31/2006 12/31/2007 12/31/2008 12/31/2009 Assets Current Assets Cash and Equivalents 238,397 250,000 250,000 250,000 Short Term Investments 658,133 660,000 660,000 660,000 Net Receivables 143,049 145,000 145,000 145,000

Finance Receivables held for sale 547,106 550,000 550,000 550,000 Finance Receivables held for investment 1,554,260 1,500,000 1,500,000 1,500,000 Inventory 287,798 250,000 200,000 150,000 Other Current Assets 121,890 120,000 120,000 120,000 Total Current Assets 3,550,633 3,475,000 3,425,000 3,375,000 Long Term Investments Finance Receivables held for investment 725,957 750,000 750,000 750,000 Other Long-Term Assets 1,255,560 1,250,000 1,250,000 1,250,000 Total Non-Current Assets 1,981,517 2,000,000 2,000,000 2,000,000 Total Assets 5,532,150 5,475,000 5,425,000 5,375,000 Liabilities and Shareholders Equity Current Liabilities Accounts Payable 763,186 760,000 760,000 760,000 Current Portion of Finance Debt 832,491 1,000,000 1,100,000 1,200,000 Total Current Liabilities 1,595,677 1,760,000 1,860,000 1,960,000 Non-Current Liabilities 24 Finance Debt 870,000 870,000 870,000 870,000 Postretirement Health Care Benefits 201,126 200,000 200,000 200,000 Other Long-Term Liabilities 108,610 100,000 100,000 100,000 Total Non-Current Liabilities 1,179,736 1,170,000 1,170,000 1,170,000 Total Liabilities 2,775,413 2,930,000 3,030,000 3,130,000 Total Shareholders Equity 2,756,737 2,545,000 2,395,000 2,245,000 Total Liabilities & Shareholders Equity 5,532,150 5,475,000 5,425,000 5,375,000
Notes: Inventory on hand will decrease by $50,000 per year when the new inventory adjustment system is implemented. Liabilities will increase by borrowing short-term funds to increase sales and marketing efforts in the U.S. at $100,000 per year.

Source: <http://investor.harley-davidson.com>, accessed on March 13, 2007. Table 9 Pro Forma Income Statement (Values in Thousands) 12/31/2006 12/31/2007 12/31/2008 12/31/2009 Total Revenue 5,800,686 6,670,000 7,670,000 8,821,000 Cost of Revenue, Total 3,567,839 4,102,000 4,717,000 5,424,000 Gross Profit 2,232,847 2,568,000 2,953,000 3,397,000 HDMC Operating Expenses 818,490 900,000 990,000 1,090,000 Corporate Operating Expenses 22,561 23,000 24,000 25,000 Total Operating Expenses 841,051 923,000 1,014,000 1,115,000 HDMC Operating Income 1,414,357 1,668,000 1,963,000 2,307,000 HDFS Operating Income 210,724 217,000 223,000 230,000 Operating Income 1,602,520 1,885,000 2,186,000 2,537,000 Total Other Income/Expenses Net 21,720 22,000 22,000 22,000 Earnings Before Interest and Taxes 1,624,240 1,907,000 2,208,000 2,559,000 Income Tax Expense 581,087 680,000 788,000 913,000 Net Income from Continuing Operations 1,043,153 1,227,000 1,420,000 1,646,000 Net Income 1,043,153 1,227,000 1,420,000 1,646,000
Notes: Anticipated total revenue will increase by 15% because of sales volume increase of 15%. COGS will stay fixed at 61.5% of revenue. Operating expenses will increase 10% to cover new R&D expenses. Corporate expenses will increase 3% to cover inflation. HDFS will increase 3% per year to cover inflation. Income tax rate will stay fixed at 35.7%.

Source: <http://investor.harley-davidson.com>, accessed on March 13, 2007. Table 10 Balanced Scorecard Objectives Measure or Target Time Expectation Primary Responsibility Customers Increase number of female buyers 20% of total Harley sales May 2008 Sales/Marketing Increase U.S. market share 15% sales increase May 2008 Sales/Marketing Pursue foreign markets 10% sales increase July 2009 Sales/Marketing Managers/Employees Improve management/union relations Complete negotiations before contract expiration By end of next contract expiration Management Conduct an employee benefits review and add programs currently not offered but desired by employees Review current benefits offerings with employees May 2008 Human Resources Form a team to evaluate foreign factory locations Formation of team December 2007 Management Operations/Processes Negotiate supplier contracts to gain

favorable terms and exclusivity where possible (if not already in place) Set up contracts with current suppliers and renegotiate existing contracts July 2010 Procurement Conduct an operations process analysis to look for efficiency improvements Document each functional process July 2009 Operations Supervisors Improve U.S. dealer network by implementing a computerized inventory system Allow for transfer of product between dealers December 2007 Management/MIS Community/Social Responsibility Offer volunteering opportunities for employees Implement volunteering program December 2007 Human Resources Donate percentage of profits to community charities Determine charities in cities of operations December 2007 Management Implement corporate recycling of all materials Institute bins for

products not currently being recycled December 2007 Human Resources 27 Business Ethics/Natural Environment Meet or beat all emissions standards Comply with all current and future emissions standards May 2008 Research and Development Comply with noise regulations Comply with all noise ordinances July 2009 Research and Development Conduct annual audits in accordance with the Sarbanes-Oxley Act of 2002 Conduct yearly audit December 2007 Finance Financial Increase U.S. sales 15% sales increase May 2008 Sales/Marketing Increase sales to female riders 20% of total Harley sales May 2008 Sales/Marketing Increase international sales 10% sales increase July 2009 Sales/Marketing The Balanced Scorecard allows for a balance of priorities between short and long term goals, as well as among stakeholders and management.45 A copy of the scorecard is distributed to every department to ensure accountability for each departments goals. Progress meetings will be conducted every quarter with all accountable parties in attendance. Executive management will be responsible for ensuring that all goals are implemented in a timely manner.
45 Fred

R. David, Strategic Management: Concepts and Cases, 11th ed., Pearson Prentice Hall, New Jersey, 2007.

28 BIBLIOGRAPHY Bureau of Labor Statistics, <http://www.bls.gov>, accessed on April 17, 2007. CNN Money, <http://money.cnn.com>, accessed on April 17, 2007. Company Spotlight: Harley-Davidson Motor Company, DataMonitor, October 2006.

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