“Everything becomes a commodity eventually,” writes Richard A D’Aveni in his new book Beating the Commodity Trap - How to Maximize Your Competitive Position and Increase Your Pricing Power. “If you are not…convinced, consider Harley Davidson. The ultimate premium-priced iconic product surely defies commoditisation.
In a world where products routinely turn to glass, Harley has been a perpetual commercial diamond. At least, that’s what you might think,” he adds. D’Aveni is a Professor of Strategic Management at the Tuck School of Business at Dartmouth in the United States.
Harley Davidson faced a tough time in the late seventies and the early eighties. As D’Aveni writes, “Founded in 1903, Harley Davidson came to define the motorcycle industry in the United States. But in the 1970s,
it encountered its first major commoditisation trap. The company was undermined by a reputation of poor quality, lack of innovation, and poor customer service. Japanese rivals such as Honda, Suzuki, and Yamaha took advantage of this weakness to offer motorcycles at lower prices with better reliability.”
This, of course, hit Harley’s business. “As these rivals offered greater benefits at lower prices, the outcome was predictable, if not inevitable. In spite of its legendary status, Harley’s market share shrank from 39 to 23% between 1979 and 1983. Harley was truly caught in a commodity trap.”
In order to get out of this trap the company could either cut prices or keep the prices constant and at the same time lose the market share it commanded. “But neither move would lead to financial health, given the firm’s fixed-cost structure,” writes the author.
In 1981, Harley’s management bought out the company and eventually turned it around by emphasising on “branding based on its “rebel” image and iconic status.”
As D’Aveni writes “Key to this turnaround was the launch in 1983 of the Harley Owners Group (HOG). HOG became the world’s largest factory sponsored motorcycle club and now has over one million members worldwide. HOG helped Harley sell an array of branded apparel and collectibles, further encouraging its adventurous Harley lifestyle and bad-boy image. If you couldn’t afford a Harley, you could always buy a Harley jacket or Harley emblem. The company roared back in the 1980s.
In 2003, its centennial year, the company announced record revenues of $4.6 billion, up 13% from previous year.” This rescued Harley from the highway to commoditisation and put it back on track. “My analysis found that, in 2002, “hog-wild” customers were willing to pay an average of 38% premium for a Harley-Davidson motorcycle, over a similarly equipped motorcycle from one of the big four Japanese companies (Honda, Yamaha, Kawasaki, and Suzuki)-despite the fact that Japanese models offered 8 to 12% more power for the same price…Harley customers were willing to pay a third more for tenth less power.
In fact, Harley’s image was so powerful that it even became the dominant brand in large-displacement motorcycles in Japan,” writes the author.
And that’s how Harley scored over the Japanese motorbikes. But in the recent past, it’s had problems again. The current generation sees “Harley as their father’s motorcycle… The average Harley rider is a married man in his forties with an income of $84,300.” This of course does not help Harley. Over and above this, Harley’s bad boy image does not appeal to the women’s segment, the fastest growing segment of the market.
As D’Aveni writes “While women accounted for 12% of Harley’s sales, spending about $300billion, not counting clothing and other accessories, the company lagged behind rivals such as Kawasaki and Suzuki in reaching this growing segment, in part because these Japanese competitors offer smaller, less intimidating bikes.”
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