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Value Above Cost: Driving Superior Financial Performance

Mar 26, 2009

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Value Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never Used

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Design and Communication

To succeed, an organization needs to provide customer value at acceptable costs and communicate that value to target customers. Design and communications must both be focused on the customer. As Tony Davidson, president of the D&AD Global Awards, pointed out, “In the end, it’s not just about whether something [an advertisement] is a good idea. It’s about whether it’s a good idea and relevant.”³²

Customer value comes from innovations in design—the new products and services or improvements in products, services, and processes that a company generates over time. At the heart of communications is branding—the reputation of the company in the minds of its target customers. Without innovation, branding withers. But without branding, the company is not rewarded for its innovations.

For example, many years ago Xerox developed many innovations in computing—but never truly received credit for their achievements in terms of their brand. On the other hand, Levi’s has been a very powerful brand, but failures to keep pace with innovations in styling eroded the brand’s value.³³

In the long run, both innovation and branding are required for success, as shown in the sidebar, a 30-year tale of two companies: Harley-Davidson and Norton Villiers Triumph.³⁴

Winners and Losers: The US Motorcycle Industry

The 1970s

In the 1970s, the motorcycle market in the United States was under fierce attack from the Japanese motorcycle manufacturers. At one time, Harley-Davidson held nearly 100 percent of the US motorcycle market, but by 1981, the Japanese companies had secured 94 percent of that market (Table 1.1).

Table 1.1. United States Motorcycle Shares

Year		Honda	Yamaha	Kawasaki	Suzuki	Harley Davidson	BMW	NVT
1974	TOTAL	43.0%	20.0%	13.0%	11.0%	6.0%	.9%	1.4%
1981	TOTAL	38.0	25.0	17.0	14.0	5.0	.4	.2
	<750 CC	41.0	27.0	18.0	14.0	0	.2	N/A
	>750 CC	31.0	21.0	16.0	14.0	17.0	.8	N/A
1991	TOTAL	26.0	9.5	14.5	17.0	31.0	2.0	0
2001	TOTAL	26.6	20.0	11.2	11.1	24.0	1.8	0
2005	TOTAL	28.6	17.4	9.6	12.5	25.6	1.3	.8
Source: “Top Motorcycle Makers.” Dealer News, Market Share Reporter, Thomson Gale, various years.

The Japanese motorcycle manufacturers used a classic international strategy to defeat Harley: They obtained a beachhead in the market with innovative products—small motorcycles—then built their brand and introduced larger and larger bikes.

Compared to Harley, the Japanese manufacturers Honda, Kawasaki, Yamaha, and Suzuki were more efficient producers, built more reliable motorcycles, and spent more on customer advertising. When AMF merged with Harley, they increased output three-fold. The speed of the expansion had its consequences. More than half the Harley’s produced were missing parts, and the others leaked oil. Bikers said you needed to buy two Harley’s, one to provided spare parts to keep the other on the road.

The 1980s

Harley-Davidson and Norton Villiers Triumph (NVT) both lost share to the Japanese companies during the 1970s. In the 1980s, NVT eventually went out of business, but Harley-Davidson used innovation and branding to not only survive, but also regain its position as a force in the motorcycle industry.

At the beginning of the 1980s, both Harley-Davidson and NVT, arguably, were stuck in the middle in the Strategic Themes Matrix. In the middle of the top row was BMW, which was widely regarded as a high-performance, reliable motorcycle and, seemingly, content to stay in that position. In the right-most column were the four Japanese producers, led by Honda, all driving toward the upper-right hand high value/low cost position.

Meanwhile, the situation was getting worse for both Harley and NVT. Their bikes had poor reputations for reliability, and they were behind in product design. Both Harley-Davidson and NVT had to take action if they were to survive. In 1981, 13 Harley managers purchased the company from AMF and proceeded to decrease their costs by cutting their workforce by 40 percent, decreasing salaries by 9 percent, and then freezing hiring and salaries. They adopted cost-lowering methods such as just-in-time inventory, which they learned from visits to the production lines of their Japanese competitors. They also improved their quality control.

These changes in operations required time. Their chief designer, William “Willie G.” Davidson, provided that time. He designed new Harley bikes such as the Super Glide that did not require substantial time for retooling. Davidson’s designs permitted Harley to increase their perceived value per unit in the short-run, while they waited for their longer-term efforts to pay off. In 1984, for example, they introduced a new engine, the Evolution, which was very well-received.

The Harley brand was in danger of being hollowed out by the prior actions of AMF. While Harley had improved their product, their brand had to be revived by communicating the product improvements to their customers.

Once they had restored the performance of their product, Harley used print ads to communicate with their target customers, including a memorable print ad showing a group of tough-looking bikers with the headline, “Would you sell an unreliable motorcycle to these guys?”

Another key part of the revival of their brand was the Harley Owners Group (HOG). Started by Harley in 1983, today it is the largest motorcycle club in the world—and an excellent example of how to build relationships with your customers.

Increasing CVA^® by simultaneously increasing perceived customer value per unit and decreasing cost per unit worked for Harley. In 1991, they had more than a 30 percent share of the total US market for motorcycles and nearly 50 percent of the cruiser (large) motorcycle market.

Meanwhile, during the 1980s, NVT was struggling and continuing their retreat strategy of the 1970s, dropping models from their line. They had labor problems. Their motorcycles continued to have product defects. Their policy with regard to warranty claims could be described as grudging. Spare parts were difficult to find. They lost orders destined for police departments in the UK.

Their brand was spiraling down the failure route, and their cash flow problems made it difficult for them to innovate. In efforts to lower costs, they cut models from their line until, finally, they could no longer cover their overhead. In 1983, NVT closed their Meriden factory and the company was liquidated.

The 1990s and Beyond

Honda eventually reached the upper right-hand corner—the high value/low cost position on the Strategic Themes Matrix—and remains a formidable competitor to Harley-Davidson. Harley occupies a position on the high perceived value top row. They continuously reinvigorate their brand with a stream of new engines, new transmissions, and new bikes (10 new models launched in 2005-6). They have also focused their efforts on lucrative new segments among older bikers. In 1987, the median age of a Harley buyer was 35; in 2006, it was 47. More than 20 percent of their sales are outside the US, in markets such as China and Japan, where Harley has the leading share in heavyweight motorcycles.

Going forward, Harley still faces challenging decisions concerned with younger riders. The competitive environment does not get quieter.

Lessons

In the 1970s, both Harley-Davidson and Norton Villiers Triumph were multi-domestic companies, succeeding in their home markets and selected export markets. They did not seek competitors, but the competitors—the Japanese motorcycle companies—came to them. Both Harley and NVT were slow to react, and both lost share in the US market in the 1970s. However Harley-Davidson was able to use innovation and branding to recover. NVT was unable to innovate and reverse their brand failure route.

Harley-Davidson’s recovery is even more dramatic if one recalls the backdrop. In the 1970s and 1980s, many managers of US companies were complaining about the “unfair” practices of Japanese companies. One Harley executive commented, “First, we thought it was the Japanese pricing, then we thought it was the Japanese culture.... Finally, we realized the problem was us, not them.”

Although NVT disappeared, Triumph motorcycles live on. A new, privately-owned company—Triumph Motorcycles Limited—was started in the mid-1980s. Six brand new Triumph motorcycles were launched in 1990, followed by more innovations and more models. One might say that innovation and branding Triumph once again.³⁵

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