a) What do you understand by the term ‘value chain’? Suggest how patterns and trends in the international business activity might influence the company’s value chain over the next five years or so. Carefully explain the reasoning behind any changes you might predict.
b) How might the future logistical operations of the company be influenced by the changes you have identified to the value chain in part a) above? Explain your reasoning.
Introduction This essay aims to initially introduce the reader to Michael Porter’s value chain, as well as appraise its significance in the modern business environment. This will be achieved by critically evaluating relevant literature, and implementing it to a renowned multinational company: Harley-Davidson Motorcycles. After the initial findings, an evaluation of the international corporation’s future potential will be undertaken, concluded by recommendations and forecasts that could have potential benefits for the Company.
A value chain could be considered as a picture of all the activities that a company goes through in order to provide a product or service of superior value in the eyes of a consumer and achieve competitive advantage over other companies within the same market. Michael Porter (1985) identifies this value as the amount of money that a customer is willing to pay for the product that the company is offering. Marketing, the quality of the product and any kind of information about its production process that reaches the consumer, will all be important in determining this price.
Allan Griffiths (2005) defines the value chain as the key tool that companies use in order to identify geographical locations that are strategically advantageous for outsourcing in house processes.
According to Porter (1985) a value chain of a company can not be understood by looking at a firm as a whole. He argues that the value chain is the margin of two activities; Primary Activities and Secondary or Support Activities. Each activity is separated into departments managed and evaluated separately in order to understand and improve any kind of disadvantages they have against other competing companies.
Each activity of the value chain of the value chain can be improved through the flow of information. This information can be customer feedback, performance testing, performance statistics of the product or other competing products, Balance Sheets and Income Statements (Porter 1985). An illustration of Porters value chain is listed below (Figure 1) in order to understand the order of these activities.
There are five Primary Activities: 1. Inbound logistics are all the activities associated with raw materials, activities such as receiving, storing, warehousing, vehicle scheduling and returns to suppliers.
2. Operations are all the activities that take place in order to transform raw materials into the final product such as machining, assembly, testing, equipment maintenance and packaging.
3. Outbound Logistics are the activities that involve collecting, storing, and distributing the completed product to buyers as well as finished goods warehousing, material handling, delivery operations, order processing and scheduling.
4. Marketing and Sales: The use of the 4Ps of Marketing (Product, Place, Promotion, Price) and advertising in order to provide knowledge of the product to buyers as well as encouraging them to buy it. By sales we actually mean after sales services such as updates, installations, repairs, training and product adjustments in order to increase the life and value of the product. (Wall S. 2004, Griffiths A. 2005, Porter M. 1985)
There are four Secondary Activities:
1. Firm Infrastructure is the general management, strategic management, accounting, legislations, government affairs and quality management departments.
2. HRM: All the activities involved in recruiting, hiring, staff training and wages decision making of all types of personnel.
3. Technology Development is all of the technological know how, the procedures as well as the technological processes of production, including technological equipment, metallurgy, electronics and mechanics.
4. Procurement is purchasing besides raw materials and the assets of the company.
In order to fully understand the usage of the value chain to companies it would be helpful to analyze the value chain of a large multinational company, Harley – Davidson (H-D) for example, and the effects of the global economy within its value chain and its future value chain’s performance. The reason that I have chosen H-D as an example for this assessment is because it is a very famous international company, a niche business well known for its high quality products, self financed by Harley Davidson Financial Services (HDFS) and self marketed. HDFS also provides financing for motorcycle buyers and the company’s independent distributors and dealers.
1. The raw materials that are used through the production process of a H-D motorcycle are aluminum castings, leather, steel, forgings, steel sheets and bars, electric fuel injection systems, batteries, tyres, harnesses and electrical components and instruments. The company uses just in time inventory and manufacturing principles in order to minimize its inventories of raw materials, work in process, scrap metal and network costs.
All of the raw materials are purchased by the company which stores them in each major manufacturing location depending on the motorcycle construction process.Since H-D is an international company it has five distribution channels located in the USA, Europe, Asia, Latin America and Canada. In the USA the company distributes its finished goods at wholesale to a network of 697 independently owned H-D dealerships where they are all stored.
In Europe the company distributes its products to the European Management Team which is located in Oxford and from there to all the independent European H-D dealerships. The same policy is followed in the Asian market where all the products are sent to Tokyo and then on to the independent dealers. In Latin America, with the exception of Brazil, products are sent to the independent dealer directly from the USA. In Canada the products are distributed to a single dealer, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd.
4. Since 2002 H-D has focused most of its marketing campaign on the V-ROD(r) motorcycle series. The introduction of this new motorcycle model was the attempt of the company to attract a younger demographic. Harleys pricing strategy on this new line of products has been based on the used motorcycle market and the lower priced competitors. Since 1983 the company’s main promoting technique has been the Harley Davidson Owners Group (HOG). The HOG’s main advertising element is the female presence since more than 80% of H-D’s customers are males.
5. All H-D dealers have a small service and repair department next to the main store. This highly effective strategy is very helpful to customers and enables them to customize their own motorcycles with new parts and paintworks, as well as installations, annual motorcycle checkups and repairs and riders training programs.The Motor Company Leadership Group is responsible for government affairs, quality management and quality control. This group is made up of five members; Joan M. Bischmann, Vice President Licensing and Events, David P. Bozeman, General Manager Powertrain operations, Steven S. Philips, Vice President quality, reliability and technical services, Timothy K. Hoelter, General Manager of Government Affairs and Treasurer, and Leroy Coleman, Vice President of quality operations. Read also basic tenets listed for the strength management program of the national guard recruiting
2. The Vice President of Human Resources of the company is Harold A Scott. Scott uses both the geocentric and polycentric approaches of HRM. More specifically, in key positions of management his policy is to hire military veterans because in his opinion they bring more work ethic due to their training. On the other hand, when hiring staff for other company activities the company chooses to hire nationals from the hosting country because most employees that want to be involved with H-D are usually long time customers.
3. H-D emphasizes most of its technological development on its motorcycle’s revving noise, vibration, harness (NVH) and design. The NVH facility is run by Alex Bozmoski. He states that most of the technological process is engine testing in order to manage to keep the sound in balance with the strict domestic and international noise regulations. He also states that vibration and the harness play a very crucial part in the riding experience.
Much attention is paid during the design and manufacturing process on the distance between the harness, the foot pegs and the handlebars in order to maximize the vibration on all the operating points in order to make each ride an experience. In order to keep the engine’s sound and vibrations to a certain level the company uses CADA-X acoustic and vibration testing from LMS Engendering Innovation. LMS is a company which provides many industries such as the motorcycle and airline industries with testing facilities and machines.
4. In 2006 the company held an amount of $2,280,217 on Finance Receivables for investments and has $5,532,150 worth of assets. (Harley Davidson Annual Report 2006) The main economic trends that have always affected and influenced H-D’s value chain are the lowering of tariffs and interest rates worldwide, the growing world economy, which has resulted in the low cost of manufacturing in Asian countries, the increasing strength of the heavyweight motorcycle industry and the decreasing loyalty of customers due to the increasing variety of brands in the industry.
Since the company is its own distributor tariffs do not affect its value chain significantly. Loyalty is also not a problem since it is a niche business and very famous for its influence and trust upon its customers. In an H-D survey on its 100th anniversary in 2004 there was not one fan that would not argue that since their first purchase from this company no other company could substitute or even reach H-D’s motorcycles high performance and top quality accessories (Harley Davidson one hundredth Anniversary, Discovery Channel August 29, 2003).
On the other hand low interest rates and competitors with low cost manufacturers in Asia play a major threat to the company’s competitive advantage. Most of these strong competitors of the company have independent financial and marketing resources that are much greater than the company’s. The company is vulnerable to interest rate fluctuations in the global marketplace. Since it is an international company it sells its products to foreign countries where they are exchanged for the those countries’ currencies. As a result the company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency.
HDFS’s earnings are strongly affected by changes in domestic and foreign interest rates (Harley Davidson Annual Report 2006). Another reason for its vulnerability is that the HDFS has an Intercompany Borrowing agreement. This means that HDFS has a revolving credit line with the company whereby HDFS may borrow up to $210 million from the company at whatever the interest rate is at the time. Luckily although US domestic interest rates were extremely low in 2003 (1%) due to a sub prime crisis, thanks to the highly successful marketing and sales of the new V-ROD(r) motorcycles series, the company was not affected at all.In addition between 2003 and 2006 Harley Davidson’s net revenue increased by 20.23% from $4,624 million to $5,801 (Harley Davidson Annual Report 2006).
Successful marketing and sales also helped the company gain 49% of the domestic heavyweight motorcycle market, 6.1% of the European market, 16.5% of the Asian market and 38% of the Canadian market in 2006. Due to this success since December 31, 2006 HDFS has had no outstanding debts owed to Harley Davidson under this agreement (Harley Davidson Annual Report 2006). On the other hand if a similar crisis concerning domestic interest rates were to occur again in a low sales season there would be no certainty about the company’s future.
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