The Harley Davidson Case

By Team # 5
Angela Whylie
Eva Collins
Andy Stolz
Jake Tracey
Jeremy Bakke
Henrik Roe

Pacific Lutheran University School of Business

Busa 305 Spring Semester 2007
Dr. Linda K. Gibson

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 Table of Contents
Executive Abstract 3
Competitors 4
AMF 5
The Buy Back 6
Productivity Triad 7
The Leadership Institute 8
Chapter Drafts 10

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ABSTRACT

Harley Davidson Motorcycles was founded in 1903 by William Harley and

Arthur and Walter Davidson. The company grew quickly in size and the company
incorporated in September of 1907. Harley Davidson’s growth was not hindered until the
great depression when production suffered an 80 percent decline. In the early years of
operation Harley Davidson had a firm grasp on the market share and the only competition
the company had was the Indian Motorcycle company until they went out of business in
1953. The competition was nearly insignificant until the Japanese Motor Company
Honda entered the market in 1960 as the first of many Japanese competitors to enter the
U.S market in the following decade.
During the 1960’ the Japanese products gain more and more popularity and all of
a sudden the “the all American” Harley is in trouble. During the 1960’ and the 1970’
Harley Davidson had a production model, which caused many quality issues to arise, the
company had a production model, which stressed quantity over quality, which in turn
caused low customer satisfaction and also instability in the Harley workforce. In 1965
Harley goes public, and in 1969 the company was acquired by AMF Inc. AMF wanted to
capitalize on what they believed to be a motorcycle craze in the domestic market. AMF
hired lower skilled workers and increased production from 15,475 units in 1969 to 70,000
units in 1973.
The turnaround for Harley begins when Vaughn Beals is hired as CEO for Harley
Davidson in 1975. Beals quickly acknowledged the need for change and developed a 10-
year product strategy along with his managers. In the early 1980’ the company was not
profitable in any aspect and conflict erupted between AMF and Harley management. In
1980 AMF started to look for a buyer for the Harley Davidson Company. Beals and a
selected few of the managers of Harley arranged a highly leveraged buy-out from AMF
and the beginning of the turnaround was a fact.
Beals and his group of managers realized the need for further change and after a
visit to the Honda plant they realized that a change in quality was critical for the company
to able to compete. Beals and his team used the Japanese production model as a blueprint
for their new program namely the productivity triad. The triad focused on employee
involvement, “Just-in-time” inventories and the statistical operator control. Now for the
first time Harley involved employees from all levels in the production of their
motorcycles. Harley developed the MAN program for their inventory practices; the MAN
program was their own version of the “JIT” model used by the Japanese.
By 1990 the new production model implemented by Beals and his group of
managers had proved to be successful. In 1989 Richard Teerlink was promoted CEO of
Harley Davidson. Teerlink emphasized organizational and individual learning throughout
the organization. In 1993 the leadership institute was established in an effort to build a
learning organization. The institute clearly identified three job areas for learning and also
stimulated thinking before acting.

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INTRODUCTION

The Harley Davidson Company was founded by three men who were
entrepreneurs. Arthur and Walter Davidson along with William Harley created the first
Harley Davidson motorcycle out of a garage as a part time project. After 4 years the three
men had successfully built and sold 50 motorcycles.
The history of the company for the first two decades of its existence is truly a
success story about three men with a passion for engineering who built a company from
the bottom up and created a product and a brand name which later has become an icon.
Unfortunately it has not been all glory for Harley Davidson in the years between 1929
and 1982 there has been many up and many downs as well with many changes in
ownership and organizational structure.
There are many reasons to Harley being one of the most sought after motorcycle
today. One reason the company landed on both feet has to do with the leadership of
Vaughn Beals and his group of managers which turned the company around after many
years of struggle for further existence. They brought the company back from the
ownership and made several changes in structure, a leaner management style was also
adopted later by Beals’ successor Richard Teerlink. But what really made the company
prevail?

COMPETITORS

From 1903 through the 1950’s Harley Davidson did not have the threat of
competition. Throughout that time Harley kept a “tough,” “rugged,” “live your lives on
the edge” image. Sense there was no competition for Harley during that time they were
able to maintain that attitude whether consumers liked it or not.
After the Second World War Japanese Manufacturers entered the U.S. motorcycle
market starting with Honda. Honda found that there was a market completely untapped
by Harley Davidson because of their rugged attitude. Younger women and older men
didn’t want the rugged individualistic attitude, so Honda began capitalizing on that.
Honda unlike Harley Davidson sold a much different attitude about their bikes, and that
attitude was “you meet the nicest people on a Honda.” This motto stuck, and by 1965 one
out of every two motorcycles sold in the U.S. were Honda. Later other Japanese
motorcycle companies entered the market. Companies like Yamaha, Suzuki, and
Kawasaki used the same ideas Honda did to take more and more market share.
Harley Davidson sat back idly with the same attitude they had when there were no
competitors. Their thought was all the Japanese motorcycle companies were going to
bring them business. Their reasoning was that when people were ready to step up past
Honda to the next level of ruggedness and toughness then they would sell even more
bikes. Harley Davidson was proven wrong and by 1969 a company called AMF acquired
them in a friendly takeover.
AMF struggled just like the previous owners of Harley, but instead of trying to fix
the old way Harley created bikes, they decided on trying to steal some of Honda’s market
share by creating small, low quality bikes. Honda on the other hand, in 1975, tried to take
over Harley’s “big” and “strong” market by introducing the Honda “Goldwing.” They
were successful and soon the other Japanese motorcycle companies followed suit. AMF

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had failed, and lost almost the entire market share once controlled by Harley. One of the
reasons why they lost that much market share was because AMF management did not
listen to their employees. AMF had zero cohesiveness with their employees and therefore
continued to fail, because they didn’t know what worked in the manufacturing process.
Do to the failure AMF was bought back by Haley Davidson’s top management.
Harley’s management decided it would be smart to learn from their competitors. After
watching Honda Harley concluded that Honda new how to run a manufacturing plant
much better. Honda kept the work place clean, employees happy, and conducted ways to
get quality over quantity. Harley realized that quality over quantity was the best way to
get results for their type of business, so they invented what they call Productivity Triad.

AMF

As a result of avoiding the Japanese as competition during the 1960’s, Harley-

Davidson did not have the means to expand production and therefore handed the
company over to AMF in a “friendly-takeover”. Rodney Gott (AMF’s new CEO)
overconfidence bias, led him to believe that mass-producing the motorcycle would lead
to an expansion is sales and overlooked the actual quality of production. It was clear that
when “oil-leaked on the showroom floor”; AMF did not look to fix the problem but
increased their escalation to commitment by continuing to expand on poorly developed
main-streamed products and refused to look at the product as a “hand crafted machine”..
The AMF Bureaucratic chain of command attributed to the lack of
communication between upper management and the workers (the experts that come into
contact with the motorcycles). Without direct communication and a lack of participative
management with the workers, AMF strayed away from having a balanced leadership
position with the employees, thus steering toward a production-based leadership. This
contradicted the very nature of the Harley Davidson motorcycles, which relied on the
performance of its’ products and the originality it originally represented, rather than
becoming a filtered product that would also cause a very low degree of leader-member
relations, since the overall sales and the representation of the company rapidly declined.
Since avoidance of the conflict dramatically caused decreased sales, AMF then
collaborated with an Italian company, Ameracchi, in order to produce cheap and smaller
motorcycles, which was unsuccessful and this partnership ended in 1978. After this
failure, AMF decided to re-focus their conflict resolution by compromising Harley
Davidson’s original image by hiring a new marketing team (Benton and Bowles). The
result of changing Harley Davidson into a main-steamed product not only failed to attract
new customers but it also alienated its traditional customers.
As Rodney Gott left the company, he hired Vaughn Beals to be his replacement.
Beals decided to collaborate directly with Harley Davidson managers who had been in
the company for a long time and design a 10-year product strategy. Since AMF was
funding the NOVA product through R&D funding, long-term profitability became an
issue. This caused tension between AMF’s management team and Harley Davidson’s
managers.
By 1980, profit was at it’s lowest and AMF was ready to sell the company. The
competitive politics within the company (between AMF and Harley-Davidson managers)
was in actuality a great catalyst in promoting Beals and a small group of HD managers to

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buy back the company from AMF with their own cash flows instead of income.
Although this was extremely risky to take such a high debt, this created an opportunity
for Harley Davidson to survive despite its rapid decline in quality and profitability.

THE BUY BACK

After AMF acquired Harley-Davidson, many problems began to show up. With
the new emphasis on quantity rather than quality, the bikes began going downhill, along
with their market share. Bikes would be on the showroom floor with cardboard under
them because they were leaking oil. Also, the long-term profitability of the company
came into question causing Harley-Davidson’s managers to be in tension with AMF’s
managers. AMF started looking for a buyer.
These events caused Beals and a small group of Harley-Davidson managers to
buy back the company from AMF. They weren’t able to raise the entire asking price and
so they took the majority of it on as debt…
This is a perfect example of the rational decision-making process that we learned
about in chapter 5. There were six steps to this model. The first was to define the
problem. Beals did this by saying that the quality of their bikes was not good enough and
needed to be improved. The second step was to identify decision criteria, which was
done naturally by Beals. He decided that quality was a major criterion, along with
profitability and efficiency. None of these were being attained before this buy back. The
third step is to allocate weights to the criteria. Beals seemed to think that quality was the
most important thing. However, AMF only focused on quantity. The fifth step is to
identify alternatives. In this case, since AMF was trying to find a buyer, he could either
buy it himself or let them sell it to somebody else. Apparently, he thought that he was the
best man for the job. This led him to the sixth step. Selecting the best alternative in this
case meant to buy the company back from AMF. This is the process that occurred here.
Beals thought the situation through rationally, and ended up taking a huge risk to make
his company better off.
Another issue that can be applied to this part of the case is the issue of change.
This was brought up in chapter 19. This particular chapter is very applicable to this area
of the Harley-Davidson case. The main driving force for change in this case was that of
competition. With the Japanese entering the market, there were more bikes for people to
purchase. The Japanese had a better manufacturing process and were able to put out
more bikes at lower prices. This made Harley lose a lot of their market share. The future
of the company started to look dark, forcing a change. Without a change, they would go
out of business shortly.
This particular change was an example of planned change. The managers knew
that something needed to be done. That is why they bought the company back. When
they bought it back, there were many new processes that were introduced into they
company. Some of these are the productivity triad and the leadership institute. These
will be brought up in depth later. This is why the buy back was considered a planned
change.
Lewin’s three-step model is a good way of showing what the new management at
Harley was trying to achieve through this buy back. This model involves three steps:
unfreezing, movement, and refreezing. Unfreezing is what happened right when they

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bought the company back. They introduced many new processes into the company in an
extreme attempt to change the way they ran their business. The company was stuck in its
old processes that were taking it nowhere. In fact, they were leading them to bankruptcy.
That is why this unfreezing process was necessary. In a sense, this entire case involves
this model. This is just the first step of the change process. The movement and
refreezing will happen later on in our case.

THE PRODUCTIVITY TRIAD

The productivity Triad was the vehicle that changed Harley Davidson’s strategic
ways of production. After the buy back, Beal and a group of senior managers visited their
competitors at the Honda’s Marysville plant in Ohio. While visiting they studied the
organizational development of Honda, and noticed that there JIT (Just-In-Time) system
was a team-building atmosphere rather than departmentalized by individual efforts. The
Honda Corporation was goal oriented in quality as their main objective. Beal realized that
through the AMF years to current, the goal has always been quantity instead of quality.
While Beal was learning from the Japanese he realized that only 5% of Honda’s
motorcycles failed to pass quality inspection whereas Harley Davidson was soaring over
50% using the same test.
Beal used several segments out of the Job characteristics model to implement his
new system known as the productivity triad. He changed the departmentalized
atmosphere into a team-based society. He allowed autonomy to take place within the
teams by applying the JIT system from Honda which Harley Davidson named the MAN
(Materials-As-Needed) program. It was designed to free up much needed cash by
reducing work-in-process inventory. Harley Davidson employees had the freedom to
order parts and materials as needed instead of working through a hierarchical submission.
These Teams in the Triad are characterized in the JCM model as Task Identity.
The teams finished the product from start to finish and then ran it through inspection
themselves for completion. Harley Davidson was able eliminate the inspection process
which was being performed by the “checkers” who checked each bike as it came off the
assembly line. By instituting these teams, Harley’s employees were able to trace the
problems and correct them in the production process.
The unfreezing part of Lewin’s three step Change Model occurred when Beal and
his senior managers completely restructured the assembly line to imitate that of Honda.
The movement consisted of teaming up engineers and assembly-line workers to work
together from start to finish on a single product. Finally, Beal and the senior managers re-
froze the movement through the implementation of the productivity triad.
The success was rapid after implementing the MAN program with the
Productivity Triad. Productivity went up over 50%, work in progress inventory went
down a mere 75%; scrap and reqrok, a measure of quality improvement was down 68%.
International revenues increased 1.7 times and operating profits increased by $59 million.
The Harley Davidson market share that was plummeting now increased 97%.
During the implementation of the Productivity Triad, Harley Davidson in 1983
sought tariff protection from the U.S. government. They requested and were granted a 5-
year, self-liquidating tariff by President Reagan.

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 Because of the success of this new program Harley Davidson asked the
Government to lift the Tariff one earlier than expected.
The core values that AMF portrayed was that success was built around the
quantity of motorcycles or products produced. After the buy back and Beal’s visit to
Honda, he changed the core values to producing a quality product, which was accepted
by the entire organization and is what lead to its success during this time period.

THE LEADERSHIP INSTITUTE

The Leadership Institute is Harley-Davidson’s training program that emphasizes

organizational and individual learning. This program was the much-needed change to
create Harley into a formal organization. The Leadership Institute motivated employees
to do their best and gave them the chance to succeed, while creating employee
empowerment within the organization.
The Leadership Institute created motivation for employees to continue learning
about the organization. In the Hierarchy of needs theory, esteem is one of the five needs.
The Leadership Institute fulfilled this need by creating recognition for a job-well done.
Employees are also rewarded for productivity rates, which gives them the attention and
recognition they deserve. This in turn fulfilled the need for self-actualization when a
worker would recognize one’s capability for growth and achieving one’s potential.
Within the McClelland’s theory of needs, The Leadership Institute fulfilled the
need of achievement and the need for affiliation. The need for achievement is a drive to
succeed in a set of standards. The Leadership Institute produces standards for employees
to achieve in. These standards are for employees to excel in the work they do, the tools
they use, and their behavior. The need for affiliation is a desire for relationships, which
is provided by The Leadership Institute by a friendly environment where employees feel
that management cares about their prosperity.
Within contemporary theories of motivation, the leadership institute falls within
the expectancy theory of rewards-personal goals relationship. Through the Leadership
Institute an incremental yearly wage increase was put in place depending on the
commitment towards the organization. It also applied to performance-reward
relationship by pay being based on an employee’s performance level. These rewards also
increased job satisfaction, which in turn increased positive employee behavior.
Management could expect their employees to be satisfied because of new
structural changes. Within the Leadership Institute, employees were cross trained and
given more responsibilities, which increased employee involvement. Line workers were
trained to follow the production of a single motorcycle to ensure it was at the utmost
quality. They were also empowered to order parts as needed, instead of having to go
from one manager to another. All of this was a practice of representative participation.
The Leadership Institute improved Harley on many levels. It fulfilled the many
different needs of the employees by supporting them with rewards and incentives. It also
increased job satisfaction by the use of employee empowerment. It also broke down the
boundaries between management and employees by creating lateral and upward
communication. This program was the much need change to create a more formal
organization to reach Harley-Davidson’s mission.

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CONCLUSION

As for most companies Harley has had its rough times. Normally it is not just
smooth sailing for any company and there is need for change to survive. In the Harley
Davidson case we can clearly see how much change and change management can change
the outcome of a company’s destiny. This case shows us that change can be initiated by a
single person or a small group of people and turn the direction of the company by
implementing changes and by building a learning organization. By building a learning
organization Harley successfully built an organization that became curious and the
workers were empowered and encouraged to make decisions by thinking and then acting.
The managerial structure of the company was flattened, getting rid of positions that did
not add value to the product. These factors along with focus on cross-functional teams
and Harleys Materials As Needed program have contributed to the fact that Harley
Davidson Motorcycles are still viewed as an American icon and the company produces
products of quality and products that many customers view as part of their lifestyle today.