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Internal and external drivers for change

Business leaders today know that they have to be prepared to take their organizations through change so as to make them leaner and more competitive. Change management is about modifying or transforming organizations in order to maintain or improve their effectiveness (Hayes 2007). Change can be brought about by two factors; forces for change forces (enablers) for status quo (constraints). To be successful a company needs to have a blueprint for change adapted to its specific needs (Carr et al 2003) Therefore, Organisational change means moving from the old way of doing things to a new one that will bring positive outcomes.

Over the past years, the importance of change in organization and change management principles have be recognised, in fact change management has been recognised as far back as the 1940’s. In 1958 a social psychologist, Kurt Lewin divided the process of change into three stages, ‘the known present, the transition, and the desired future’ (Hayes 2007). The transition process can be described as painful if not planned out properly. The factors contributing to change management practices today are quiet complex as the present change differs in three ways, technological innovation, availability of information and a globally competitive environment (Hayes 2002)

This report is going to analyze the success and failures of the transformation process undertaken by Harley-Davidson and Ducati and critically compare and contrast the strategic response taken by the two companies. Furthermore, the report will evaluate the circumstances of the company and recommendations will be made with justifications on what would have been done differently if one was the senior manager in the organisation.

Harley Davidson Company and Ducati Motor Holding Company Overview

Harley-Davidson

is one of the leading American heavy weight manufactures where it celebrated its 106th birthday in 2009. Since 1986 it has been enjoying the market share of the US heavy weight (651 +cc), Harley-Davidsons leading market share and strong brand appeal in the US, gives it important competitive advantage over its peers. Harley derives strength from its strong market position, the company controlled 48.9% of the US and Canada market in 2004 and it has managed to produce an average annual gain of 37% since its 1989 IPO. Based on retail registrations of new Harley-Davidson motorcycles, the company’s market share in the US were 49.3% and 48.7% respectively in 2006 and 2007. ‘In the US the company sells its motorcycles and related products to a network of approximately 684 independently-owned full-service Harley-Davidson dealerships’ (Data monitor 2009). Harley-Davidsons and Buell’s 57 dealerships allows the company to meet demands for its products in various regions in a cost-efficient way. The company’s distribution network extends to Australia and New Zealand. Harley-Davidson’s asset turnover ratio at the end of fiscal year 2007 was 1.1, which was relatively higher than its competitors Honda Motor Company Limited (0.9), Ducati and BMW (0.7) hence, signifying the management’s ability to deploy success (Harley-Davidson 10-k form 2007).

Harley expresses a consistent image both internally and externally, their guiding concept is that their brand is more than a brand; emphasizing on brand loyalty with an accompanying lifestyle and culture. For example, the Harley-Davidson Owners Group (HOG) offers support to various enthusiast and social groups, and encourages Harley owners to become more active in the sport (Hook & Stuart 2003).

Ducati

On the other hand, Ducati was founded in 1926 by the Ducati family and other investors in Bologna who initially produced industrial components for radio transmissions, the company was called Societa Scientifica Radio Brevetti Ducati. The company only started producing motorbikes after the Second World War, which took place in 1947 and has had the advantage of winning Superbike Championship repeatedly for decades. In 1985, Ducati Company and brand name was acquired by the Cagiva Group, a private motor-industry group which was controlled by the Castiglione family (Cathcart 1987). Cagivas strategy to strengthen the Ducati brand was by ‘refocusing the company’s activities on its traditional competitive advantage in high performance competition motorcycles and, as an outcome, it was able to consistently increase the annual sales volumes of the firm’ (Thompson & Bonnello 1998) The Cagiva Group, helped Ducati motorcycles increase their reputation in the commercial and competitive fields.

Besides its motorcycles Ducati sells accessories and apparel in 40 countries worldwide, with a focus on Western Europe and North America. Ducati enhanced its control over its main markets by increasing the amount of subsidiaries, replacing underperforming distributors and selecting new distributors to enter new markets including Chile, Malta and Thailand (Bronson 2005). Ducati mainly competes with two European manufactures (BMW and Triumph) four Japanese manufacturers (Suzuki, Yamaha and Kawasaki) and to some degree with the US based Harley-Davidson’s Buell Division. The key starting point of Ducati ecommerce activities took place on January 1st, 2000 when the limited edition of its MH900e motorcycle was exclusively sold through the Internet. It was the first motorcycle ever sold this way and the first year production of the MH900e was sold out after just 31 minutes, making Ducati one of Italy’s largest e-tailors.

The internal and external drivers for change

Harley-Davidson

During the late 1950’s, the U.S market attracted Japanese motorcycle manufactures where they focused on capturing the customer segments of older males and younger women. They marketed smaller, quieter and more fuel-efficient motorcycles that needed little or no maintenance and were easier to maintain and handle in comparison to Harley Bikes (Harley Motorcycles weighed between 450 to 800 pounds). By 1975, Harley-Davidsons share of the market segment began to decline due to the competition and challenges brought about by the Japanese companies. This was also because they was an economic downturn at the time and motorcycle demand dropped, forcing all manufactures to compete for a bigger share of the dormant market. Between 1970 – 1980 Harley-Davidsons share declined by over 80% (Nolan and Kotha, 2007). Due to tough competition in the market especially from the Japanese manufactures, Harley had to find new strategies to keep its US market share from significantly dropping.

Ducati Motor Holding; In the mid 1990’s Harleys Italian competitor Ducati focused on restructuring the production system in order to maintain the product margin and boost the level of sales and turnover, their transformation process however, started much later than Harley’s. Ducati shared divisions like product development, financial management, marketing and the sales network with other sister companies within the Cagiva Group; this lead Ducati to enter into a deep financial crisis in spite of their racing success and product innovation. When parent company, Cagiva group incurred cash flow problems the company did not have any essential liquidity to pay suppliers. And as a result of the liquidity problems, many of their suppliers reduced their component flows leading to serious production delays. This affected its production and therefore, negatively affecting its market (Thompson & Bonnello 1998). Consequently, Ducati was acquired by Texas Pacific Group as a strategic plan to increase the company’s value through a growth in turnover volume and the guardianship of product margins. In 1996 Ducati had a ROIC of 5% with a WACC of 8% (Ducati Annual Report 1997)

Competitor; Ducati is representative of Harley-Davidson’s European competition - Unlike Harley-Davidson Ducati does not build bikes on the basis on longing and comfort, rather Ducati sells style and performance based on technologically advanced designs. Ducati’s are race proven bikes, sold for use on the street - the ultimate café racer (Thompson & Bonnello 1998). Like Harley-Davidson, Ducati employs a premium pricing strategy; however, Ducati’s customers tend to be younger and to some extent less wealthy; consequently sales differ more with the economic cycle. Harley-Davidson’s new V-Rod appears to be designed directly at the high-end of Ducati’s customer base (Bronson 2005). Europeans differ in their tastes on a regional and national basis for example, 79% of the European market is comprised of average and performance bikes, market segments in which the traditional H-D offerings are barely competitive. Europeans would normally opt for the Ducati or for the highly refined BMW. Harleys has had to compete with the V-Rod against its European competitors such as Ducati and BMW. All of Harley-Davidson’s major competitors have their headquarters outside the U.S and are mostly larger diversified companies, e.g. Yamaha, Kawasaki, Suzuki and BMW. Ducati, an Italian company that is a leader in the European market

189kg sets a new benchmark: Constantly reducing weight is part of the design brief for all Ducati models. Less weight enables maximum performances both in terms of dynamic behavior and safety. A lighter motorcycle will break in a shorter distance, accelerate faster and be easier to steer. Every single component of the( Multistrada 1200) therefore, Ducati designs to achieve weight reduction without compromising load-bearing capacity. With a dry weight of just 189kg (417lb) the Multistrada 1200 is lighter than any other road endure, touring or sport touring bike currently available. The light weights combined with an excellent chassis set-up ensure exceptional handling, a key factor for sports, touring, urban or enduro riding.

This weight saving is the result of applying new technologies to Ducati's design and engineering of all major components. Crankcases are now cast using Vacural® technology and frame components use welded Trellis tubes, cast alloy elements and hi-tech polymers. Further savings have also been made with the single-sided swing arm in aluminum and the fuel tank has been developed using blow molding technology in pursuit of the best compromise between capacity and weight.

Process of Change

They are many processes that can be used to undertake change some of the models include Kurt Lewin’s Force Field Analysis where he divides the change process into three categories where by an organisations unfreezes itself from the former state, goes through the change transition then refreezes into the new state. However, it is important to carefully consider the enablers and constraints of the organisation. (McCalman & Paton 2008)

Harley-Davidson; In 1965, Harley-Davidson went public after 60 years of private ownership so as to raise capital for new products and expand production. In spite of increasing sales, the company’s market share declined and was unable to attract enough capital, causing it to face severe pressures; this lead to the company being acquired by a friendly takeover by AMF shortly after going public (Nolan and Kotha, 2007). However, in AMF’s eagerness to increase production, many quality issues were ignored. This caused Harley’s reputation for quality and reliability to fall steeply. According to Richard, Teerlink, the firms CEO at the time mentioned that the domestic market share had dropped from 100% to a low of 23%. ‘Brand new Harleys sitting on the dealership floor had to have cardboard put down beneath them to sop up the leaking (Hayes 2007).According to Hayes, successful firms can become contended, internally focused and caught in what Nadler & Shaw (1995) refer to as the ‘trap of successes’. They take their eyes off the competition and fail to pay enough attention to what is going on in the external environment (Hayes 2007) this was exactly what happened in Harley’s case.

By February 26th 1981, thirteen Harley-Davidson senior executives signed a letter of intent to buy Harley-Davidson motor company from former parent company AMF and by Mid-June the buyback was official. At the time, the company had been suffering from a bad reputation for poor quality and low reliability, and it lacked innovative product design and development (Nolan and Kotha, 2007).

Using the Japanese production methods as a blueprint, Harleys management teams instituted what they termed as the productivity triad to reduce costly inventory and increase consistency and quality. The new approach had three components (i) Employee involvement, (ii) use of just-in-time (JIT) inventory practices and (iii) statistical operator control (SOC) techniques (Nolan and Kotha, 2007) These changes in the company encouraged workers to contribute in the decision-making process where it was essential participate in quality formed circles and were made directly accountable for improving motorcycle quality. In order to free up much needed cash Harley introduced a Material-as-needed (MAN) program a version of the Japanese (Honda) JIT inventory control practices, the aim was to lower inventory levels in order to make problems more evident and encourage employees to take action. Lastly, the SOC program helped employees identify quality problems, trace and correct them during the production process (Nolan and Kotha, 2007).

Beer (2001) has identified two well tried strategies which are economic and organizational development; however, he suggests that the most effective strategy is the best of both. Economic strategies are strategies that normally involve the imposition of technical solutions for example, restructuring, drives for efficiencies and layoffs which are seen as problems that may undermine organizational effectiveness. Economic strategies may deliver short term results but they may not guarantee long success (Hayes 2007).

Organisational development strategies focus on creating the capabilities required to sustain competitive advantage and high performance (Hayes 2007 p 245) for example, coordination and teamwork; commitment & trust; competence (technical & leadership); open communications, creativity, the capacity for constructive conflict and learning. ‘Organisational development strategies emphasis on the importance of shared purpose, strong culture ‘bottom up’ change and involvement rather than financial incentives as a motivator for change. This approach can improve shareholder value but it has been criticised on the grounds that is too direct and takes too long especially when the need for change is urgent’ (Hayes 2007p 244)

Using the organisational development strategies Harley-Davidson has had to change as the organization evolved, in 1987 after the company’s IPO was released, the company started to transform itself from an informal organization to a formal one. They emphasized individual and organisational learning at all levels through its leadership Institute Program, it also worked on simplifying its structure through the creation of teams and well defined roles. For example, Harley depends on teams to produce and support the product. The company also made changes to worker job descriptions, responsibilities and production process and eliminated jobs that did not add value to their products. They focused on increasing job enrichment and worker empowerment (Nolan and Kotha, 2007). Harleys decentralized structure enabled the company to act flexibly, shift resources and manage strategically in the global market place. To complement the organizational changes, new rewards and incentives systems were introduced. According to Teerlink the firms CEO at the time, suggested that there was a need for his employees to understand empowerment (Nolan and Kotha, 2007).

The extensive change process led to a joint vision process where the organization changed from a hierarchical structure to what they called a circle organization which comprised of three elements which were concern with providing support, creating demand and producing products (Nolan and Kotha, 2007) In order to compete with its Japanese competitors and in the European market and increase its existence H-D acquired the exceptional shares of the Buell Motorcycle Company; where it shared workings and technology with H-D. The lower priced Buell is proposed to attract younger and non-traditional riders to the H-D logo.

Ducati Motor Holding; On the other hand, in 1996, the Caviga sold 51% stake in Ducati Motor Holding SpA (DHM) to the Texas pacific Group, an American investment fund (TPG) and Deutshe Morgan Grenfell Capital (Italy). This brought a new group of international managers who initiated a turnaround programme aimed at increasing production efficiency, net sales and profit. One of the aspects that lead to the process of change at Ducati was the fact that they were too many components being assembled within the factory and there were a large number of suppliers thus leading to a necessary strategy to change. Ducati developed new software which is able to examine input and information flows in order to support the co-ordination and planning of the incoming flow of semi-manufactured goods. This helps to provide a wide-range and continuous overview of the process and detecting the need for intervention when needed (Jelassi & Enders 2005).

The second element of the re-organisation process involved outsourcing elements such as distribution logistics so as to reduce fixed costs which are related to the maintenance and management of such functions and reduce the company’s infrastructure. Since 1996 has Ducati initiated a turnaround program where it has increased its working capital to raise production levels, it also created a new management team and employed 250 professionals worldwide to rebuild its sales, marketing and public relations departments. They introduced new models and streamlined its assembly process and in December 1999 Ducati’s revenues increased by 22.6% over the previous year (Jelassi & Enders 2005) And by 2001, Ducati had restructured its value chain activities and its order to decrease costs, it outsourced 90% of its production, support and logistic. Today, the company is totally controlled by Ducati Motor Holding SpA (DHM). Where it designs, builds and distributes motorcycles and components under the Ducati brand name. Furthermore, DHM restructured its distribution network where it replaced its multi-brand dealers with Ducati-designed stores hence, reducing the number of its dealer outlets. One of Ducati’s key strengths is its historical brand name, product innovation capability, high technical capabilities and high levels of motoring solutions (Thompson & Bonnello 1998 )

Alternative Strategies

From 1969 to 1973, AMF decided to increase Harley-Davidson’s production units by 55,525 units, because it was believed that high production was the way to success. This strategy was used to gain capital quickly and regain its competitive advantage however, a lot of quality production techniques were overlooked as they mainly focused on increasing production units; this resulted to over 50% of Harley’s final quality inspection failing (Nolan & Kotha 2007). AMF should have used Total Quality Management Systems to improve quality and reduce mistakes.

Harley-Davidson should have diversified its brand from the very beginning to meet the interests of different market segments and not have rigid strategies. Assuming that Harley was involved in the light weight motor industry and the female segment it would have been harder for the Japanese to take over the market share of that segment. Brand loyalty is considered important and the Americans would have preferred a brand that they are familiar with, therefore they would have gained the majority of the market share. The acquisition of Buell was a strategy used to gain a market share in a different segment however, Harley was a bit too slow to react to the change

Honda’s assembly line was neat and uncluttered, with minimum paperwork – their inventory was controlled through Just-in-time system that used no computers or automation. Furthermore, they were built to order rather than inventory (Nolan & Kotha 2007) Harley-Davidson should have had a similar operations strategy from the very beginning, this would help increase inventory space and money plus increasing its quality products.

Due to the economic downfall in the late 1970’s the demand for motorcycles had dropped (Nolan & Kotha 2007) For that reason, Harley-Davidson should have applied lower pricing strategies so as to stay in the market and keep hold of its loyal customers and regain new customers

During the 1960’s when the demand for motorcycles has grown significantly Harley should have introduced programs like Rider’s edge and Rental programs then, this would help them increase their customer base and loyalty. For example, According to the survey in 1999 when these programs were introduced Harley’s sales went up by 32%, this suggests that would have been successful even earlier these programs were introduced then.

In the 1980’s CEO Teerlink implemented changes in the organisational structure from an informal organisation to a formal one where he introduced learning through all levels through a program called Leadership Institute. This gave employees more responsibility and enhanced employee empowerment. Former Harley leaders should have introduced similar to empower their employees.

Harley-Davidson should have started internet sales earlier than it did, like Ducati who were very successful in selling their limited edition (MH900cc) over the internet. Harley-Davidson should also implement a tight Supply Chain Management to reduce the cost of production and reduce the middlemen between the company and consumer, which would help them provide better services.

Recommendations

DEMOGRAPHIC PROFILE (2003-2007)

GENDER

2007

2006

2005

2004

2003

Male

88%

88%

88%

89%

89%

Female

12%

12%

12%

11%

11%

Adapted from the 10-k report

According to the above statistics which are adapted from the 10-k report it show that most of Harleys customers are male therefore, they should focus more producing motorcycle for women to diversify their products. They should develop easier to handle bikes and that cost less than $10,000

2007 PURCHASERS

52%

Owned Harley-Davidson® motorcycle previously at any point during lifetime

33%

Owned a competitive motorcycle previously

15%

First motorcycle purchased

Adapted from 10-k report 2007

The above statics suggest that 52% of Harley owners owned a Harley-Davidson before suggesting that they have strong customer loyalty. However, they should more incentive for their return buyers like discounts or free bike maintenance for a year to increase the number of return customers. At present they have a low amount of new customers (15%) therefore they should increase their advertising strategies and build customer trust through their HOG program.

MEDIAN AGE

MEDIAN INCOME

Adapted from 10-k report

The above graphs suggest that Harley’s baby boomers are growing old therefore they need to start focusing on other segments and be more innovative so as to keep their old customers. For example produce motor vehicles that the above 60’s can use.

Market Share of select competitors Worldwide

According to the above graph with has been adapted from Jelassi & Enders 2005 Harley-Davidson should focus on other markets round the world especially the emerging one like Brazil, Russia, China and India has they have a very small market share in comparison to its competitors

Harley should adapt to heavy advertising strategies through specialised sports magazines, use celebrity endorsement to promote their products. They should also enter other growing market segments including Brazil, Russia, China and Eastern Europe so as to expand their product market and increase their market share in the industry,

Conclusion

Harley has established robust survival skills in the company’s 106 year history. Most prominent, in the 1980’s as a result of tough competition from the Japanese manufactures, where it was forced to totally transform its production and management methods and change the way it built its motorcycles. On the other hand, Ducati, an Italian manufacturer of high-performance motorcycles has highly been associated with street bike market segment like Harley-Davidson with cruiser. The company took numerous initiatives aiming at strengthening the Ducati brand, enhancing its portfolio and rising its sales and profitability subsequent to its liquidity crisis in 1996. Both companies have undergone major changes in their management and production process. The report has analysed the transformation process where it attempted on pointing out the mistakes that the two companies would have done differently. Some of the strategies taken where much too late however, it is always better late than never. Harley has now developed a women’s section in order to diversify its market and is continually trying to be innovative and stay on top of its market. The company continues to expand its product offering to compete in the standard and performance segments with motorcycles such as Nightster and Harley-Davidson XR1200, Buell 1125R and MV models. The company’s traditional Harley-Davidson products compete primarily in the custom and touring segments.

References

Cameron, E & Green, M (2004)’Making Sense of Change Management: a complete guide to the models’, Kogan Page Publishers

Carr D et al (2003 )’Managing the change process: A Field Book For Change Agents, Consultants, Team Leaders and Reengineering Managers’

Ducati Motor Holding, S.p.A (2007) “Form 10-K”, United States Securities and Exchange Commission, Washington, D.C.

Giulio, D et al, (2001) ‘Ducati: Design and Emotion’, MotorBooks/MBI publishing Company, US

Hayes J., (2002) The Theory and Practice of Change Management, New York: Palgrave Macmillan.

Harley-Davidson, Inc (2007) “Form 10-K”,United States Securities and Exchange Commission, Washington, D.C.

Hook, P & Stuart, G (2003) ‘Harley-Davidson: The Complete History’, Sterling Ltd

McCalman J., Paton P., (1992) Change Management – A Guide to effective Implementation, Paul Chapman Publishing Ltd., London

McCalman J., Paton P., (2005) Change Management – A Guide to effective Implementation, SAGE Publishing Ltd., London

Nolan R., Kotha S., (2007) Harley-Davidson: Preparing for the next Century, case study given.

Paton, R & Mc Calman (2008) ‘Change Management: A Guide to Effective Implementation, SAGE Publications Ltd

Thompson, J & Bonnello, J (1998) ‘Ducati’, MotorBooks/MBI Publishing Company, US

Teerlin, R. and Ozley, E. (2000) “More Than a Motorcycle: The Leadership Journey at Harley-Davidson” Harvard Business Press, U.S.

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