Executive Summary:
Route to Building Competitive Advantage: Harley Davidson
Severe over-capacity in manufacturing is driving down prices and enhancing customer bargaining power in many industries. Sustaining competitive advantage over the long-term is difficult for firms, and even entire industries. Companies that develop successful products not only listen to their customers, but also develop an organizational architecture to quickly assimilate new concepts and ideas into tangible, quality products. The competitive strategy used by Harley Davidson—a highly differentiated range of products combined with a build-to-order manufacturing capability—enabled them to survive intense Japanese competition and define a new product concept in a highly mature market. The lessons from Harley Davidson embody a corporate turnaround and success story useful on many levels for manufacturing firms, but also illustrate elements of success for other organizations.
A Differentiation Strategy
Firms practicing differentiation seek to design highly distinctive products or services that create high value for their customers, thus justifying a premium price. According to author John Slocum, “In order to have a differentiated strategy, the firm must have a niche and a focus which separates them from the competition. In the case of Harley, they separate themselves in the buying experience and on after-sales service.” The attention to physical uniqueness as well as intangible sources of value enables firms to build this strong competitive advantage. Five attributes that can lead to competitive advantage are: price, service, product, access, and experience. Typically firms dominate in one attribute, differentiate in a second, and are competitive in the remaining three.
A differentiated strategy also relies on relationship management and image. Developing corporate mystique or image requires great attention to product features, pre-and post-purchase service, and relationship management. A strong organizational capability that promotes interdepartmental coordination and knowledge sharing is equally important. For example, a tight supply chain, high quality vertical information system, and branded packaging and design are additional aspects integral to successfully executing this strategy; each step of the value-creation process should reflect the skills and insights needed to support the strategy. A net result of this information management is enhanced product development and relationship management providing accurate, timely information about consumer needs and purchase patterns.
Pull vs. Push, Build-to-Order
One vehicle for implementing a differentiated strategy is to create a build-to-order manufacturing strategy, a radical departure from traditional supply chain management strategy. Companies are pulling inventory through the supply chain based on customer demand who in turn are dictating supply. With build-to-order, the sales process is turned upside down. Traditionally, sales staff are taught and rewarded to push product, especially if the product’s sales are slow. A benefit of build-to-order is that rapid response to sudden changes in demand is possible with reduced inventory needs. Dell Computer is a good example of using build-to-order, yet companies across a variety of industries are implementing this manufacturing strategy.
Firms using this approach must redefine their marketing activities. Sales representatives must respond directly to a customer’s needs rather than an organization’s capabilities. The organization must realign its compensation and reward policies to reflect this change in focus. In build-to-order, consumers get exactly what they want. One disadvantage is that production time is longer than off-the-shelf buying, but that is part of the cost of having desires perfectly met. This type of system also requires a high level of speed and flexibility in every part of the design, engineering, fabrication, and distribution to be successful. Suppliers must be agile and nimble. Benefits of the accurate customer data from build-to-order include improved levels of research and development and opportunities to uncover unforeseen market niches. Warehousing costs decrease and discounting becomes obsolete.
An organization needs to have crafted a differentiated competitive strategy to execute build-to-order. So, brand image, i.e., corporate mystique, must be increased or enhanced to command premium pricing and encourage consumers to wait longer for their product. Part of mystique is knowledge that the individual customer is important to the company’s success and that they identify with being part of something having a unique reputation. Many of the practices of Harley Davidson embody a successful build-to-order organization.
Harley Davidson
Founded in 1903, this leading US motorcycle manufacturer has survived the Great Depression, two World Wars, the rise of the Japanese motorcycle, and near bankruptcy in 1985. With net profit margins increasing throughout the 90’s, Harley Davidson’s strategy has been its key to success—a full commitment to build-to-order and focused-differentiation strategies.
Customer satisfaction and commitment is high. The firm focuses on the customer’s (buying) experience first and service second. Whether through its online venue or one of the more than 1,300 dealerships, one can expect to purchase a quality-built custom motorcycle. Customers are made well aware that they are central to the company. Their 800-page catalog reflects any conceivable choice by the customer; the sales force responds to its customers’ needs and desires in an educated and professional manner. Researcher Heidi Kuglin attests to the experience of the Harley Davidson mystique and the buying experience in the paper. Every consumer must purchase his or her motorcycle at a dealership where a certified sales representative guides the buyer through the entire process. Customer’s then understand their HOG (Harley vernacular for their bike) inside and out.
Dedicated assembly line teams assemble the motorcycles from start to finish, raising team knowledge with all contributing to the custom feel of the motorcycle. Additionally, Harley Davidson concentrated on assembly setup and computer systems for information and inventory management to shift production from a push to pull format. Employees are also equipped with the necessary tools to fix problems before they happen which has improved the firm’s production speed, quality, and inventory turnover.
To implement build-to-order and just-in-time manufacturing, in 1987 Harley conducted extensive supplier communications. Supplier connectivity is a vital element in Harley’s supply chain program that is based on long-term contracts, focus on quality, and stabilized production schedules. Suppliers working with Harley express that ‘clear expectations exist between both parties and that the relationship is a two-way street.’
Harley Davidson Mystique
The unquantifiable is considered one of the most important aspects about Harley, beyond the motorcycle. According to William Davidson, one of the original founders:
‘In fact, I truly believe that our brand belongs to everyone involved with our company—the riders, dealers, employees, and enthusiasts throughout the world. And it is our job to carefully manage and protect our great trademark and everything that it implies. We do this with respect.’
The story begins with Walter Davidson’s first race, at a time when most riders carried spare parts on their races for when their motorcycles inevitably broke down. Davidson brought no spare parts, trusting completely in his Harley’s quality; this became a de facto testament of high quality. Harley Davidson customers do not just buy a motorcycle, but a community and an image.
During the restructuring in 1983, the firm realized the need to capitalize on this phenomenon. Richard Teerlink, CEO, helped develop the brand image of Harley and its HOG, which was critical to executing a differentiation strategy. The build-to-order strategy has required the concomitant need to manage customer expectations—namely that purchasing a Harley requires a wait. Harley’s mystique helps buffer the inconvenience of waiting, while enhancing the desire to own one.
Conclusion
With the Internet offering unparalleled information and access to products, the buyer is in the driving seat. In an effort to meet consumer expectations, companies will continue to seek ways to sustain competitive advantage—through unbundling the vertically integrated organization to build-to-order manufacturing. However, over the long-term, a capability to innovate new products which meet shifting customer demands is necessary. A build-to-order organization will be successful if senior management understands the firm’s core competencies, their customer relevancy attributes, and can integrate their functional departments and extended enterprise partners.
Differentiation strategies enable firms to erect strong barriers to imitation from competitors and help create products and services that satisfy customer’s needs on a variety of levels. “A firm needs mystique to fulfill a differentiation strategy,” explained Dr. Slocum. “A firm must, however, be able to deliver on the mystique; this uniqueness is hard to copy.” In today’s world of over-capacity the story of the Harley Davidson achievement is nothing short of outstanding.
“A Route to Building Competitive Advantage: Harley Davidson” by Heidi Kuglin of McKinsey & Company, Fred Kuglin of Kuglin & Associates, and Dr. John Slocum, Chair of Management and Organizations of SMU Cox, is forthcoming in the Singapore Nanyang Business Review in the latter part of 2004. |
