How Harley Fell Into The Commoditization Trap

As Published in Forbes

by Richard D'Aveni

In January Harley-Davidson announced higher-than-expected losses of $218.7 million for the final quarter of 2009. The motorcycle legend also announced that it anticipated sales of between 201,000 and 212,000 in 2010. Compare that with sales of 349,000 in 2006, and you get an idea of the ills that have beset the company.

Now, you might presume that Harley, with its premium-priced, iconic product, could not, definitely not, be affected by the phenomenon called commoditization, where a product becomes indistinguishable from its competitors. You would be wrong. The long straight highway has had a few hidden potholes, and in those potholes commoditization has lurked in the guise of both cheaper Japanese competitors like Honda and sexy upstarts at the top end like Big Dog.

Based on an in-depth study of more than 30 industries, I have identified the three most common patterns that create commodity traps: deterioration, when low-end firms move in with low-cost, low-benefit offerings that draw away the mass market; proliferation, when companies develop new combinations of price and unique benefits to attack part of an existing market; and escalation, when competitors offer more benefits at the same or a lower price, squeezing everyone's profit margins. Sound familiar? It certainly would if you were a Harley executive.

The company has faced two out of those three woes: deterioration and proliferation.
Harley first fell prey to commoditization in the 1970s, when it was undermined by a reputation for poor quality, lack of innovation and inadequate customer service. Japanese rivals such as Honda, Suzuki and Yamaha took advantage of its weakness and offered motorcycles at lower prices with better reliability. It was a textbook example of deterioration.

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. The company could either slash prices to hold onto its market share or hold prices but concede share. Neither move would lead to financial health, given the firm's fixed costs.

The company's future looked grim at that point. But after a leveraged management buyout in 1981, Harley's leadership turned the company around. They kept its classical advantage in engine power but also emphasized a valuable secondary benefit: branding based on its rebel image and iconic status. This made the Japanese rivals' advantage in reliability less important as an inducement to purchase and value motorcycles. Rebels care more for role models than reliability.

Key to this was the launch in 1983 of the Harley Owners Group. HOG became the largest factory-sponsored motorcycle club anywhere and now has over a million members. HOG helped Harley develop a brand that could be extended to apparel and collectibles and reinforced the brand's adventurous, bad-boy image. The company roared back. During the 1990s buyers had to wait in line for months to get their bikes. In 2003, its centennial year, the company announced record revenues of $4.6 billion, up 13% from the year before.

My research found that in 2002 Harley customers were willing to pay on average 38% more for a Harley-Davidson motorcycle than for a similarly equipped bike from one of the big four Japanese companies, Honda, Yamaha, Kawasaki and Suzuki. Harley commanded this premium even though a Japanese bike at the same price offered 8% to 12% more power, measured by engine displacement. Harley customers were willing to pay more for less than purchasers of the most popular Japanese models.

A feeling of victory was understandable. Harley's turnaround showed how a company could--initially, at least--fight back successfully against commoditization by differentiating its products.

Read the rest of this article about Harley at Forbes

Drive The Surprising Truth About What Motivates Us

by Daniel H. Pink
book review by Ian Cook

In his new book Dan Pink accomplishes two outcomes really well:
He consolidates some major social science research around human motivation into clear, straightforward discoveries

He challenges the current thinking and practice in the vast majority of our organizations.The Great DebateAm I motivated in my work primarily through what I receive from the organization and the key players around me or through the fulfillment of needs and desires that reside within me?

These are the dueling positions of extrinsic vs. intrinsic motivators that have fueled a debate in psychology over the last eighty-plus years.

On the one hand you had B.F. Skinner who saw all behavior as a pure stimulus-response mechanism and F.W. Taylor who studied the physical micro movements of a laborer to determine the optimum way to work with minimal variation or “interference” from the worker’s mind. According to their school of thought, rewards and punishment, or what Pink calls “Motivation 2.0,” are the only way to get people to maximize their productivity. (“Motivation 1.0,” by the way, is triggered by our very basic need for food and other necessities for our survival.)

On the other side of the debate are professors Edward Deci and Richard Ryan and others, like Pink, who claim Motivation 2.0 strategies don’t work for most new jobs that are emerging today and into the future. Rewards and punishment cause our minds to focus very narrowly on accomplishing the immediate task. But narrow focus doesn’t serve us well in the new jobs being created that require us to see patterns, work with concepts, address meaning, and come up with alternative strategies in a world of constant churn.

Furthermore, Deci and Ryan’s research confirms that, except for routine, mindless jobs, additional money will spur, at best, a brief uptick in performance. Then motivation actually starts to fall (“What have you done for me lately?”).

Clearing the Decks for Intrinsic MotivationMoney both is and isn’t a motivator! As Frederick Herzberg showed us decades ago, if you don’t provide (perceived) “fair” salaries and benefits your people will be demotivated. But pay them enough, plus a bit more, and they still won’t be motivated. They just will be no longer demotivated. Dan Pink calls this “taking money off the table.”

But now these adequately remunerated employees are ready for what the author calls “Motivation 3.0.” Instead of rewards and sanctions applied by bosses and companies, intrinsic (i.e. internal) motivators kick in. Pink’s research reveals three such motivators:
Autonomy – the freedom to have significant control over how you do your work to generate the performance results to which you agreed

Mastery – the opportunity to get continually better at something that matters to you. This is an elemental human desire

Purpose – having your work contribute to the well-being of people or to outcomes beyond your own self-interest

Why I like this book.
I recommend Drive to managers because of its clarity, its easy reading–the author writes with a journalist’s flair–and especially because of its message.

A sizeable majority of our governments, service organizations and private sector enterprises are mediocre and, in some cases, toxic places to work. If we are to turn these into great places to work, leaders have to take a good look at their beliefs about what motivates people. All too often, their assumptions that determine their management style are out-of-date and counter-productive for a 21st century world.

As Dan Pink presents so well, the verdict of science is in. Managers have to let go of their need to control the behavior of their staff. They have to realize that human beings, in all their infuriating and marvelous complexity, cannot be manipulated into performing better. But employees most definitely can be enrolled. You do this by providing a work experience that gives them the latitude to grow and to make a difference.

What’s missing for me.
The author covers a huge topic in his book. That said, there are three areas I would have liked him to address:

How you do motivate people in jobs where any opportunity for variety and creative expression has been designed out of them? Toll booth operators, ditch diggers and, of course, burger flippers come to mind. And then there are those jobs where a strong union will not agree to any deviation from rigid, collectively bargained job duties.

For the manager who sincerely wants to motivate his or her staff, the fixed design of jobs and work processes, as well as externally bargained work rules, represent the “elephant in the room.” So often managers’ hands are tied, yet they are still expected to produce solid results and create a satisfied employee group.

What does the science have to say about sales people? Monetary rewards linked to sales quotas are the fuel these people run on. I know there is the personal satisfaction in closing a deal but the scoreboard of choice remains money.

What role do employees themselves play in the preservation of Motivation 2.0? I teach in my own presentations that deep within almost all of us is the desire to make a difference, to have the work we do each day matter in some way to some people. That said, ask most employees what is missing for them in their work and their gut reply will be “more money.”Not only do the assumptions and beliefs of managers have to change. Employees must get in touch with their own need for autonomy, mastery and purpose, be aware when these elements are missing for them, and take responsibility for the level of work motivation they choose to have.

Dan Pink’s main thesis is that, despite the unassailable truths that have emerged from the field of social science and organizational behavior, when faced with the pressure to increase performance, most managers still fall back on the twin strategies of dangling more money or threatening negative consequences.

In Drive Dan is on a quest to raise our consciousness to this mismatch. He is a very good communicator and I believe he will transform a lot of managerial minds.

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Ian Cook, presenter and consultant, works with managers who want to increase their effectiveness as a leader and build a stronger team.

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Saturn, A Good Idea not allowed by GM to flourish

Innovation is never enough by itself. This article in Forbes - How GM Destroyed Its Saturn Success, by David Hanna - explains what went wrong at Saturn.

"A lesson in how to win at innovation in even the most traditional company--and then how to crush that innovation."
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I remember talking with an official from Saturn in the nineties. I was excited about what they were doing then and quite optimistic about their future. The biggest innovation that I saw was the partnership between labor and management.

From my dealing with GM in the eighties as material manager for a just-in-time supplier, I witnessed first hand how both management and labor at GM were messed up.

There were many bad management decisions from GM. That included poor planning and the resultant knee jerk decisions to put band aids on problems.

GM visited our plant often and I visited their operations several times. During one of my visits to a GM plant a GM engineer was explaining a packaging idea for the parts that we supplied to them.

The engineer wanted to show me what they were using for another product. So we approached a production line that was machining small parts for transmissions. He pointed out the plastic trays that they used to hold the finished parts and prevent them from being damaged. Each plastic tray was similar to an over-sized egg cartoon holding about 20 finished parts.

The trays in front of us were full of parts so the engineer asked the production worker, "Do you have an empty tray that we could have?"

The production worker looked at the engineer, then calmly picked up a tray full of finished parts, dumped the parts in a scrap bin and gave the tray to the engineer.

The engineer and I looked at each other in shock, shook our heads and returned to his office.

My first three cars were GM. I've never even considered buying GM since.


George Torok

Business Speaker

20 Essential Resources for Your Current Career or Your Next

Here is a helpful list of resources for managing and growing your career.

"The work place is ever changing and you don’t want to get passed up for a raise or get laid off for becoming a stale employee. Click on the links below to be part of the cutting edge and show your boss and co-workers you are looking ahead and ready for anything. Or if you are unemployed, these sites will help you get ready for your next job."

20 Essential Resources for Your Current Career or Your Next

CEO Conversation with Ursula Burns, CEO, Xerox

Ursula Burns, CEO of Xerox talks with Spelman college about global leadership.




George Torok