Back on the Road Again

Harley-Davidson’s remarkable turnaround – from a firm teetering on the brink of bankruptcy to one of America’s major automotive success stories – is the stuff of business legend. How did they do it? President and COO Jim McCaslin explains.

On the verge of bankruptcy in 1981, Harley-Davidson found itself facing severe market conditions and heavy foreign competition. Quality problems were rife. Customers were leaving in droves. Cash-flow was negative. And worker morale was at rock bottom. Probably not the easiest of starting points, then, for the group of 13 enthusiastic employees who’d bought the company for $81 million earlier that year with the dream of re-instilling traditional Harley-Davidson values and turning the firm’s fortunes around. What happened next rewrote the rulebook on how to kickstart a business revolution and transformed America’s last remaining motorcycle manufacturer from the rust bowl of the Midwest into a Fortune 500 company success story.

“It was a bad time to start anew,” agrees Jim McCaslin, President and COO of the Milwaukee-headquartered automotive icon. “ In 1981 the economy was pretty bad; there was a lot of layoffs, especially of the blue-collar type, and given that Harley-Davidson’s core customers at the time were blue-collar employees, our sales volumes pretty much dropped in half fast. We went from 4000 employees down to 2200 very quickly. So we started off basically fighting for survival.”

The new management team’s response was to formulate a recovery plan based around something they called “the engine of success”, including a renewed focus on quality products and services, aggressive marketing, an emphasis on the customer’s price-to-value perception, sales excellence, and highly motivated employees. “Most of all, what we needed to do was focus in on the customer again,” says McCaslin. “We talk about experiential quality, not just motorcycle quality. It’s the quality of everything we do with that customer, every point we touch that customer. Our continuous improvement journey is based around this idea of experiential quality.”

McCaslin sees this as the dynamic integration of thought, action and emotion. “It’s anything that appeals to our customers’ senses,” he explains. “It’s the ‘wow’ factor of our bikes, and it’s anything that creates an emotional commitment. Every moment we create has to be a quality experience, whether it’s with our products, our services, the events – anything to do with our brand. That’s our goal – after all, when someone puts your brand on their arm, that’s a heck of a commitment. Those people probably aren’t gonna be riding a Honda if they can help it.”

A focus on quality

As a result of this rediscovered commitment to its customer base, one of the first items on the agenda was to check out the competition. When the new owners took over, a couple of them took a trip to Marysville, Ohio to take a tour through the Honda motorcycle assembly plant. What they saw there shocked them. “It wasn’t the fact that the plant was clean; it wasn’t the fact that the pace of work was very good; and it wasn’t the fact that there was hardly any inventory sitting around. It was the fact that they were doing things exactly the same as they were in Japan,” says McCaslin. “Back then we had numerous excuses about why we couldn’t compete with Japan. It was the culture, it was the government, it was this, it was that – we came up with a million reasons. But when you actually walked through the plants and saw that they were doing the same thing with American workers as they were doing with Japanese workers, a lot of these arguments just fell away.”

This was the ‘eureka’ moment for the Harley-Davidson leadership – or as McCaslin puts it: “The realization that it wasn’t them, it was us; that the problem was management.” Armed with this newfound knowledge, the team started attacking some of the problems that had previously been deemed culturally impossible to address for an American manufacturer: first, they developed a materials-as-needed demand system to cut back on inventory; second, they implemented statistical operator control to drive up quality; and finally, they encouraged greater employee involvement in order to better engage the workforce in improving both quality and productivity.

“The bottom line is that this allowed the quality to improve rapidly and significantly,” McCaslin says. “During those first couple of years, there was literally nothing in the bank. So when we executed these initiatives, we were able to take so much inventory out of the system that it covered the loss of flow of cash in the rest of the business and kept Harley afloat at a very critical time.” At the same time, the company developed a new, much-improved engine – the Evolution – and also started a new product family called the Softail. With the product improving considerably from a design standpoint, the next step was to re-engage with the company’s most important asset: its passionate fan-base.

Spreading the word

Because of its perceived quality problems, Harley had been hemorrhaging regular customers for years, tempted away by the greater reliability and power of the Japanese products. So as it improved the quality of its products, the company had to figure out ways to get these customers back. Part of that was achieved through the launch of an aggressive advertising campaign, but, as McCaslin explains, the other element was finding out what it was that these customers wanted. “Basically, management started going to events to reconnect with the customers,” he says. “They were riding with our customers, hanging with our customers, talking with our customers, learning, listening and then coming back and making changes based upon what they had heard. That’s probably one of the key things that we did as a company early on: management went out with the customers. And we still do that today.”

In 1983, the company also formed the Harley Owners Group (or HOG), which today has over one million members. “The mission of that group is to ride and have fun and we have a lot of interaction between our employees and our customers in these HOG chapters. Back in the early 1980s, if you were in a group that rode together you were probably what we call a one-percenter – a Hell’s Angels kind of person – and that wasn’t what we wanted. We needed to figure out a way to get people riding together that was fun and safe, and that’s what HOG has done for us. It’s changed our whole customer base.”

Part of the company’s success in reconnecting with its customers has also been down to its belief in communicating what McCaslin calls the customer price-to-value relationship. “We will never be the lowest-cost supplier,” he says. “That’s not what we do. But what we can be is the highest-value supplier, and that’s what we strive for every day. Value comes in partly with the hardware, but it goes way beyond that. It’s about the feelings that a person has around the product – the look, the sound and the feel of the bike – and around the brand. You either love it or you don’t. So we worked very hard on coming up with that price-value relationship so that people are willing to put out their hard-earned money for a Harley Davidson.”

In addition, a major overhaul of the company’s dealerships – making them more welcoming to new customers – has opened additional opportunities for new business.

“Back then, people didn’t necessarily feel comfortable going through the door of a Harley Davidson dealership for the first time,” admits McCaslin with a wry smile. “Even today, if you see a couple guys who’ve been out riding and are in their full leather gear, and if they haven’t shaved for a few days, they can be pretty scary-looking.” To overcome this perception-problem, the company has worked closely with its dealers to upgrade its stores, and has placed a big focus on training. “We train our dealers relentlessly – training our technicians, our salespeople, the parts people, the management. And we continue to do that, over and over again.”

Motivating the workforce

It’s a focus that puts a lot of trust in the value of people, and one that explains how the company overcame one of the biggest issues it faced in the early days of its turnaround – that of low worker morale. Throughout the 1970s, Harley-Davidson was run by a company called AMF, who McCaslin describes as “not the most motivating group”. There were several strikes during that period, and the employee attitude was one of general disharmony. When the new ownership group came in and immediately had to halve the organization, the situation got even worse: staff morale was now at its lowest ebb. “Essentially we had to start over again from scratch,” he explains. “How? Through a passion for motorcycling and a passion for quality.”

From the off, the new owners decided to tie quality to survival – empowering workers with the sense that everything they did made a real difference to the success or failure of the company. Through initiatives such as the co-management of various facilities, working together in teams – even encouraging teams to put out whole projects by themselves – the company inspired its employees to take ownership of its shared problems and take credit for its successes. It’s a philosophy that lives on in the culture of the firm today. “Even though there are very few employees left who were around in the early 1980s, that passion and that equation of quality equals survival lives throughout this organization. It’s in the bricks, and it’s a very key thing for us,” says McCaslin.

It has certainly proved a successful strategy so far. By 1986, five years after the turnaround began, the company was retailing 37,000 units each year. By 1997, this figure had risen to 132,000 units and last year the company was up to more than 338,000 units. “Our goal was to grow but also to improve quality as we did so,” explains McCaslin. “During the 1990s we grew at a minimum of 10% a year, but we also grew at sometimes 15-20% a year based upon our ability to retain and improve quality as we grew.” He recalls incidents where dealers would announce that they were going to take orders for the next quarter, and people would start lining up outside the dealership three days before so that they would be first in line to get their order in. “During the 1990s, we ended up with a pretty big backlog of customers that we didn’t have bikes for,” he admits. “We’ve pretty much caught up now, but back then we made a decision that we wouldn’t go so fast that we couldn’t maintain quality.”

Instead, they added more manufacturing capacity, opening a second US assembly plant in Kansas City in addition to its York, Pennsylvania facility, and building a second engine plant to handle increased demand. “ We’ve added some volume, but we are very careful on the volume we add. We focus in on our core competencies so in that we can maintain quality as we grow.”

The road ahead

It all comes back to this key idea of building experiential quality – a concept that is critical to the firm’s future. “ If we’re gonna grow, we need more customers and we need to expand the Harley-Davidson experience to more customers,” says McCaslin. “A lot of what we’re gonna do in the future is kind of what we’ve done in the past, only scaled up and readjusted for the way the world is now.”

Part of this challenge is to continue to develop more exciting products and services. “If you just do the same thing over and over again, it doesn’t stay very exciting, so we need to figure out ways to keep that level of excitement there,” he says. “ We also need to continue our continuous improvement journey in our plants and our operations. We’ve been on this journey for quite a while, and we’ve had what I would consider islands of success. However, we have a long way to go and need to continue to work at it in order to get there – although of course, there is no ‘there’, right? But the bottom line is we’re working towards it.”

The other part of the equation is dealing with a changing demographic. “When we look at the domestic market, our growth occurred in the 1980s by igniting the passions of boomer white males. When you look at the potential customers of the future, however, it’s a much more diverse group. Our market and who we market to has got to change, and that’s part of our task as we look forward.” McCaslin’s solution is to continue to listen and learn from riding with the company’s customers. “My director-levels and above in the company attend over 300 events each year – which is what, five-a-week, six-a-week? – in order to keep current with our customers. We did that 25 years ago and we do it now, and our competition does not, and that is a very big thing for us.”

Indeed, the company’s mission statement – to “inspire and fulfill dreams around the world through Harley Davidson experiences” – embodies this idea of experiential quality. “If every employee just remembers we fulfill dreams, we have been very successful,” concludes McCaslin. “How many of all your employees know what your vision or your mission is? Ours do, and ours understand it. We fulfill dreams through the experience of motorcycling, and it guides us in everything that we do. Everybody loves freedom. Everybody loves a sense of the open road, and we hope to help them with that. ”

International growth

International sales currently represent 30% of Harley-Davidson’s business – a figure that is growing fast. One of the company’s fastest growing markets is Europe, along with Australia (where growth has tripled in the last three years), Canada and Brazil. Most satisfying of all, Harley-Davidson has made major inroads into the home market of the country that had caused it so much heartache throughout the 1970s and 1980s – Japan. “We have been number one in the heavyweight motorcycle market for the last eight years in Japan,” says McCaslin proudly. “Ever since I’ve been in the automotive business it’s felt like they’ve been kicking our butts, so you don’t know how pleasing this is to be number one in the Japanese home market. I love that.”

Fast facts

Founded: 1903
Headquarters: Milwaukee, Wisconsin
2007 revenues: $5.73 billion
Employees: 9000+ worldwide
HOG members : Over one million

A turnaround timeline

1981. Thirteen Harley-Davidson senior executives sign a letter of intent to purchase Harley-Davidson Motor Company from AMF. By mid-June, the buyback is official.
1982. The Materials As Needed (MAN) application is introduced to production, meaning that parts and raw materials are purchased and built only as required.
1983. The Harley Owners Group is founded. Fondly referred to as HOG, the Group immediately becomes the largest factory-sponsored motorcycle club in the world.
1984. The result of seven years of development, the Evolution engine produces more power, runs cooler, cleaner and is oil-tight. The Softail bike design also debuts.
1986. The company is listed on the American Stock Exchange, the first time Harley-Davidson is publicly traded since 1969. The following year it is listed on NYSE.
1990. Upon its introduction, the FLSTF Fat Boy almost instantaneously becomes a modern legend of motorcycle design.
1998. A new assembly facility opens in Manaus, Brazil, the first operations to be located outside of the US.
2003. More than 250,000 people come to Milwaukee for the final stop of the Open Road Tour and the Harley-Davidson 100th Anniversary Celebration and Party.
2008. A celebration of the company’s rich history, the passion of the riders, and the stories of those who have contributed to its legacy, the Harley-Davidson museum opens in July.