Table of Contents
| Chronology of Events | |
| Acknowledgments | |
| Authors' Note | |
| Introduction | 1 |
| 1 | The Prelude | 5 |
| 2 | Getting Under Way | 19 |
| 3 | Agreeing on a Road Map for Change | 43 |
| 4 | Awareness Expansion: Testing the Commitment | 69 |
| 5 | The Business Process | 83 |
| 6 | Evaluation and Development | 107 |
| 7 | Upending the Pyramid | 121 |
| 8 | The Whole Package | 145 |
| 9 | Lifelong Learning | 167 |
| 10 | Determined to Communicate | 191 |
| 11 | Partnering: A Case in Point | 209 |
| 12 | Signposts of the Journey | 233 |
| 13 | Reflections on a Journey | 255 |
| Index | 271 |
| About the Authors | 277 |
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Chapter One
The Prelude
In 1965, sixty-two years after its founding in Milwaukee by William Harley and the three Davidson brothers—Walter, William, and Arthur—the last surviving solely domestic motorcycle manufacturer in the United States found itself in deep trouble. Under increasing pressure from foreign competitors, including several recent Japanese entries into the industry, the company needed cash for modernization and diversification. As a result, the company went public, and over the next three years, more than 1.3 million Harley shares were sold.
But public ownership had its perils. By late 1968, it was becoming clear that at least one company—Bangor Punta, a well-known "bottom feeder" with roots in the railroad industry—had hostile designs on Harley. Bangor Punta had a history of wringing cash out of its acquisitions and then scrapping the remains. This possible fate had little appeal to the founding families, who were still closely involved in the affairs of the company.
Acquired!
* * *
A possible solution to Harley's woes would be acquisition by a larger company, preferably one with deep pockets, manufacturing skills, and a compatible corporate philosophy. One potential white knight was American Machine and Foundry (AMF), headquartered in White Plains, New York. Until recently, AMF had been a fairly staid conglomerate, with most of its assets engaged in the manufacture of industrial products, such as tobacco processing and baking equipment. But, in an effort todiversify its portfolio, AMF in the 1960s had begun venturing into the "leisure products" industry. Its first move in this direction—an investment in automatic pin-setting equipment—had quickly become its primary generator of cash. AMF then went on to buy other leisure products producers, including companies that made golf clubs, tennis rackets, skis, and yachts.
In 1969 AMF acquired Harley. AMF got its desired toehold in a new sector of the leisure industry, and Harley began receiving a massive, multiyear infusion of capital that was desperately needed for improvements in its manufacturing processes. Even if this wasn't a match made in heaven, it was at least a successful marriage of convenience, and all parties declared themselves satisfied with the outcome.
At the time of the acquisition, all of Harley's operations were in Milwaukee, Wisconsin. Harley's plants were woefully outdated, and its quality standards suspect. The company's three most valuable assets—aside from the new AMF relationship—were a skilled dealer network, a powerful brand (which, fortunately, inspired astounding consumer loyalty), and a dedicated employee base. The company's hourly employees were all represented by local chapters of international unions: the Allied Industrial Workers (which later merged with the United Paperworkers International and will be referred to as PACE throughout this book) represented operating and maintenance employees, and the International Association of Machinists (IAM) represented the smaller skilled trades workforce.
When AMF bought Harley, it named a group executive located in White Plains, New York—site of AMF's headquarters—to oversee the motorcycle division. This change was a rude awakening for many longtime residents of Milwaukee. After sixty-five years in the heart of one of Wisconsin's oldest and proudest manufacturing centers, Harley-Davidson's headquarters were unceremoniously relocated to a white-collar suburb of New York.
More changes came quickly. Harley requested the necessary capital to expand production in Milwaukee; AMF responded by pointing out that the parent company had a huge, well-equipped plant sitting mostly idle in York, Pennsylvania. As a result, final assembly of the large bikes moved to York. True, AMF was sinking large amounts of capital spending into Harley, in both York and Milwaukee, and the motorcycle company's volume began to rise. But it would have been hard to claim that Milwaukee still "made motorcycles." In reality, Harley's Milwaukee-based operations had been reduced to the role of a major components supplier to the York factory.
Throughout this succession of wrenching changes—many of which stuck in the craw of Harley loyalists but were more or less critical to the company's survival—AMF officials assured their Wisconsin employees that the relocation of final assembly and other operations to the York plant would not lead to layoffs in Milwaukee. This soon proved untrue. And beyond the specifics of these kinds of broken promises, the people of Harley felt fundamentally betrayed. Harleys (Harleys!) were now being assembled by people from Pennsylvania who knew more about pin-setting equipment and bomb casings—two of York's leading products—than they knew about motorcycles. If there were such things as "Harley people," as the Milwaukee-based Harley employees saw it, they surely didn't live in York, Pennsylvania.
Partly as a result of these changes, relationships between PACE and Harley's management deteriorated steadily. The number of grievances escalated. Even though Harley badly needed to make productivity improvements, all management-initiated efforts to get the company's work done more efficiently were met with hostility and resistance. In particular, efforts to get Milwaukee-based employees—including managers—to interact and coordinate with their counterparts in York generated little more than stony silence. (This was ironic, in light of the fact that the IAM also represented York's employees.) A low point came in June 1974, when the Wisconsin-based PACE called a strike over the company's refusal to agree to coordinated bargaining across all unions within the larger AMF empire. (Absent that arrangement, to which AMF was loath to agree, it was impossible to control the movement of work from one AMF plant to another.) The work stoppage lasted more than one hundred days—an unprecedented rift in a company that for decades had prided itself on conducting itself like a "family."
Meanwhile, AMF was losing faith. Not only was Harley proving difficult to manage—divided as it now was between two states—but the motorcycle subsidiary was failing to respond to massive infusions of AMF cash. The Japanese conquest of the high-end motorcycle market continued unabated. And, although Harley's sales amounted to 17 percent of AMF's total revenues, very little of that dropped to AMF's bottom line. A study by the Boston Consulting Group suggested that an additional $60 million to $80 million would be needed to make Harley's proposed new engine line a reality.
Back in White Plains, enough was enough. By 1980, AMF let it be known that it was open to offers for its troubled motorcycle division.
From Honeymoon to Hard Times
* * *
On June 16, 1981, Vaughn Beals—formerly AMF's group executive for the Harley division, and now chairman and CEO of a newly independent Harley-Davidson, Inc.—rode his "hog" up Capitol Drive and into the parking lot of the Milwaukee plant. The ride was a highly symbolic one. Through his act, Beals made the point that Harley was returning to its birthplace and that Harleys once again would be made by "Harley people."
Three days earlier, Beals and twelve associates had purchased Harley from AMF in a daring and unlikely management buyout. How had this come to pass? To AMF's dismay, an aggressive effort to market the Harley division had elicited no interested buyers. When an internal management group led by Beals stepped forward with a proposal for a leveraged buyout, AMF had little choice but to negotiate. Several months and some $80 million later, Harley regained its former status as a private and independent company. The AMF logo was removed from Harley's trademark teardrop gas tank. Life, it seemed, could go back to normal.
Or could it? Beals and his adventurous associates faced some grim realities. The heavyweight-motorcycle market was contracting steadily. Even worse, Harley's share of that declining market was still plummeting—from nearly 80 percent of the 850cc+ category in 1973 to 30.8 percent in 1980. For the first time in fifty years, Harley lost money. As a result of the leveraged buyout, the company now carried a staggering debt load. Citicorp, the lender that had made the buyout possible, was already indicating that it might force Harley's liquidation in order to recover at least some of its investment in the motorcycle maker.
Meanwhile, of course, the company's internal problems had not gone away. Foreign competitors introduced new designs, but because Harley's product design and development processes were slow and unpredictable, the company had to stick with its traditional products. ("Traditional" was good in terms of visual appeal, but less good in terms of outmoded technologies.) Break-even points were high, making the company extremely vulnerable to even modest market swings. In terms of quality, the standard that the company embraced was not an improved product, but one that was "just good enough." Excessive in-process inventories and associated carrying costs sucked up the company's precious cash.
Beals and his colleagues knew that they had to turn things around. To their credit, they looked inside the company first. Yes, they were convinced that the external threats to the company were real enough—efficient Japanese competitors, a declining market, and so on. But even more responsible for the company's woes were its employees: management and labor alike. This, Beals and his colleagues decided, was where change had to occur.
During the next five years, Harley fought for survival. By most early measures, the company's performance and prospects were poor. Efforts to stabilize and improve the company were hampered by severely limited cash, access to which was now limited by a strictly asset-based lending agreement. Desperate measures were called for and taken. In 1982 Harley chopped its overall workforce by 40 percent (with deeper cuts coming in the salaried than in the hourly ranks). All remaining salaried employees took a 9 percent pay cut and agreed to have their salaries frozen at the reduced levels for at least two years. It was not a close call. When management opened its books to the unions in May, the unions could only agree that drastic measures—measures that would hurt many longtime Harley employees—were needed.
The honeymoon that began when Beals and his colleagues brought Harley back to Milwaukee proved short-lived. Forced by circumstance into survival mode, Beals and his lieutenants adopted a highly traditional command-and-control style of management. The company's managers focused on top-down "fixes" and short-term financial results. All actions of consequence originated at the top of the corporate pyramid.
Of course, not all constituent groups felt compelled to take orders all the time. One example arose in late 1981, when management—having decided that operations in the existing warehouse were excessively costly—outsourced parts management and distribution to an external supplier. Arbitration of the resulting labor dispute returned this work to the unionized employees. A second example came in 1983, when a group of Harley dealers who objected to the way management was running the company formed the Harley-Davidson Dealer Alliance. They took their case to Harley's lead lender in an effort to force the company's management to change its ways. Although the effort ultimately failed, challenges were clearly emerging to management's command-and-control tactics.
Rays of Hope
* * *
But the name of the game was survival, and by the mid-1980s, it appeared that Beals and his colleagues might pull off the miracle that Harley needed. First, after several notable product development failures, Harley introduced the Evolution engine for model year 1984. This engine—combined with the exciting new Softail product line—quickly began making money for the cash-strapped company. The Softail was an elegant variation on the classic Harley look, and it stormed the marketplace.
Good products always make marketing easier. But Harley made extra efforts to make sure its improved products found their markets. The company initiated special programs to help its dealers attract and retain customers. Perhaps the most significant of these was the Harley Owners Group (H.O.G.), created in 1983. Begun as a way of communicating more effectively with the company's end users, H.O.G. quickly grew into the world's largest motorcycle club. In part because of this and similar efforts, dealers regained their confidence that the company could act as a dependable partner.
On the operating side, Harley executives pushed hard for improvements. Longtime manufacturing head Tom Gelb organized a group to study the current practices of the world's most effective manufacturing enterprises. Gelb and his manufacturing colleagues became convinced that, if the company's operations could be improved, both product quality and profits would increase dramatically. The manufacturing team therefore introduced into the Harley workplace three techniques borrowed from the Japanese: employee involvement (EI), just-in-time materials delivery (which at Harley became known as Materials as Needed, or MAN), and statistical process controls (which became known as Statistical Operator Control, or SOC). This "three-legged stool" served as the basis of significant productivity improvements in the mid- to late 1980s and remains a cornerstone of the company's manufacturing strategy today.
Operating costs kept a spotlight focused on the company's financial structure, which was shaky both before and after the management LBO. Harley restructured a major portion of its equity and debt in 1983 in an effort to relieve financial pressure and buy time for rebuilding. At the end of 1985—after the abovementioned brush with extinction—the remaining debt was restructured, with two new financial institutions taking the place of Citibank. These two restructuring events, coupled with marginally profitable operations, allowed Harley to show a small but positive net worth by December 1985.
One big step toward financial stability remained: going public. Beals and his associates had mixed feelings about a public offering. On the one hand, they liked being in control of their fate and running their own private company. On the other hand, they knew that access to the public capital markets would contribute to the long-term health of the company. Gradually, with the encouragement of outside advisers, Harley's managers warmed up to the idea of a public offering.
This meant waiting until Harley had recovered enough to command a good price in the marketplace. By 1986, all the relevant financial measures had turned positive. Manufacturing costs were declining. (Reductions in in-process inventories and associated carrying costs generated savings of more than $40 million a year.) Quality improved dramatically, which meant that riders made fewer warranty claims. The dealer network was revitalized and growing. When Harley-Davidson made a public offering in July of 1986, the gamble proved a resounding success. (In fact, it raised $25 million more than the underwriters had expected!) For the time being at least, the company had saved itself.
Introducing One of the Authors
* * *
One of the architects of Harley's financial recovery was the company's CFO, Richard F. Teerlink, who is also one of the authors of this book. Because Rich played a central role both in Harley's "survival" phase and in the subsequent developments described later in this book, we'll pause now to describe Rich's background and perspectives.
RICH: I'm from the first generation of my family that was born in this country. My dad was a tool-and-die maker from Holland, who came to this country because he knew that he could never have his own tool-and-die shop back home.
Dad believed in people and that everybody should have an opportunity. He implemented a profit-sharing plan at his small agricultural chain company back in the forties, for example. So I grew up steeped in the philosophy that everybody is important. But Dad also intimately understood the business of manufacturing. No matter that he had only a sixth-grade education. He could walk through the plant, look around, and say, "We've got too much inventory. Too many racks are full. Something is wrong."
I was trained as an accountant, but I always had my eye on the bigger picture, perhaps because my dad had run his own shop and had trained me in that perspective. Some of my best preparation for leadership came when I was working for a gentleman named Earl Fester, at a small subsidiary of Miehle-Goss-Dexter in Racine, Wisconsin. The subsidiary had made the decision to grow. I signed on as plant manager and got into a whole realm of activities that I had never done before—negotiating contracts with our union, dealing with grievances, and so on. I then went down to Springfield, Missouri, where we built our new plant.
That experience, and others that came later, focused me on the importance of education and communication. Leaders have to be educated if they're going to be asked to educate, communicate with, and lead others. This doesn't happen by accident. It happens because an organization makes it happen.
But I also learned that there are limits on what you can do, even with educated and articulate leaders. At the end of the day, everybody isn't going to see things your way. They won't always want to do what you perceive to be the right thing.
So, although I was relatively successful as a traditional command-and-control leader, I learned to give the people around me a lot of latitude. I learned to let things evolve. Even when I want things to get done quickly, I still believe they've got to evolve. Some things just take six months to get done, no matter how much you want to get them done in three months. In particular, you've got to take the time to develop management. And that gets back to learning. When I look back on the various experiences that I've had, they always seem to add up to "Learn how people understand. Don't force them to understand. Help them understand."
Looking Forward
* * *
In the dark days of the early and mid-1980s, Harley's employees, salaried and hourly alike, found themselves on a scary ride. Many lost their jobs or lost opportunities for career advancement. Many very good people left voluntarily, deciding that they had brighter prospects elsewhere. Departments were hollowed out, in some cases eliminating bureaucracies, but in other cases crippling vital organizational functions.
As Harley's fortunes improved in the second half of the 1980s, the company's leaders began to wonder if these improvements might be a mixed blessing. What if the survivors, who had a lot to be proud of, concluded that Harley was now "good enough"? After all, the company had beaten back its Japanese competitors and had asked the federal government to rescind its five-year tariff a year ahead of schedule. President Ronald Reagan publicly praised the company (on a May 6, 1987, visit to the York plant) for its return to world-class competitiveness. "You've shown us how to be the best," Reagan said (as quoted in Harley's 1987 annual report). "You've been leaders in new technology. You've stuck by the basic American values of hard work and fair play.... As you've shown again, America is someplace special. We're on the road to unprecedented prosperity ... and we'll get there on a Harley."
By some measures, Harley was back in business. But was Reagan right? Was Harley the best? And was that good enough?
Among themselves, Rich and his senior colleagues at Harley worried that the answer to these questions might be no. Harley surely had a great brand. If not a "leader in new technology," as Reagan had asserted, Harley was now at least on the map technologically. Insiders knew, though, that the company was not particularly skilled at innovation. Most of Harley's profits came from parts sales and other ancillary revenue streams—in other words, not from the sale of new motorcycles. And those on the inside also knew that the company still had serious problems, including a high cost structure—the highest in its industry—inadequate quality standards, and an uncertain level of employee commitment to the continuing success of the company.
This last point proved difficult for Rich and his colleagues to gauge. Certainly Harley's employees had made heroic efforts to save the company. Every time they had been asked to make sacrifices for the company, they had done so—quickly, willingly, and effectively. And, despite an understandable antipathy for all things Japanese, they had embraced the manufacturing innovations that Tom Gelb and his manufacturing colleagues had imported from Japan. These changes had accounted for the substantial turnaround in the company's fortunes in recent years, a turnaround that was now being celebrated by the business press, as well as by the nation's president.
The company's managers, too, had made a vital contribution. During those troubled years when Vaughn Beals and his colleagues pulled Harley-Davidson back from the brink of extinction, a particular definition of "leadership" came to dominate the company. According to that definition, the role of leadership was to anticipate impending challenges, decide how to solve them, and then impose the prescribed solution on the organization. "Leadership" (according to this theory) resided in a few individuals around whom others within the organization would rally. In this view of the world, leaders had distinctive characteristics that uniquely qualified them to lead: charisma, technical and managerial knowledge, and the ability to focus on the big picture. Leadership was a personal trait, to be exercised in a top-down, hierarchical way.
Harley didn't invent this definition, of course. At virtually all of the more than eighty organizations with which Lee had worked, as well those with which Rich had worked and of which he was aware, the "command-and-control" model was (and still is) the dominant model for organizing industrial organizations. It was dominant in large part because it had proven itself, very recently at Harley, but also in countless other settings. When an organization is under extreme pressure—so much so that one wrong move can mean the death of that organization—then an authoritarian system of controls may be absolutely necessary.
We can make an analogy with a country surrounded on all sides by invading forces. The defending army looks to its generals for decisive leadership, and the nation prays that those generals are skilled and lucky. But what happens when the invading armies are turned back and that immediate pressure is relieved?
And what if the external threat isn't dramatic enough to serve as a compelling rallying cry? Invasion is one thing; a slow erosion of a competitive position is another. When faced by the latter kind of challenge, should the organization persist in its command-and-control ways? Or should it look for new ways of organizing and managing itself?
Rich learned that he would soon be asked to take more responsibility for the company's future. Accordingly, he began talking with his senior management colleagues, including Beals, about alternatives to the command-and-control style of management. Those colleagues were fundamentally in agreement with Rich's concerns, but no one had a clear sense of how those concerns might be acted upon. Had other companies faced similar decision points? What had they done? Who had helped them?
"Traditionally," recalls former Harley executive Jim Paterson,
the company culture keyed around a very, very powerful president or CEO—from the Davidson generations right down through Vaughn Beals. You'd wait to be told what to do, and you'd go do it. If you did it right, you'd get promoted. The problem with that, of course, was that you wound up with a lot of Indians who don't know what to do without the chief. This was true not only in strategy and operations, but also in the way that people were treated. Rich identified these areas as the ones in which the changes were needed.
He wanted to take out layers of management, for example. Of course, this would take out money, and make the company more profitable. But more important, it would make people feel like they belonged, and could make a contribution, and wouldn't have to go through ten levels of management to reach the leaders of the company.
During the lean years, from '81-'86, a lot of this stuff was done by necessity. We took out layers because we had to. And folks down in the lower levels of the organization stood up—they did their jobs, and more. They contributed ideas. They started to feel part of the organization, and part of its success. And we wanted to capitalize on that—not just protect it, but increase it.
In the old organization, you'd concentrate on building your fiefdom—reports, perks, secretaries, and so on. In the new organization that Rich was starting to visualize, you would succeed in very different ways. You were going to have to participate, be intellectually curious, go out and get your education, learn new management skills, be a team member and team leader.
"Easy enough to say," Paterson concludes. "But when you try to institutionalize this kind of thing, it's very difficult."
Inventing and institutionalizing a new approach to running Harley: that was the journey on which Rich set out as he prepared to assume the newly created position of president and chief operating officer of Harley's Motorcycle Division. By any measure, this was the flagship of the larger organization, which now included an Indiana-based manufacturer of recreational vehicles, Holiday-Rambler, acquired in 1987 as part of a planned diversification effort. Whatever Rich and his colleagues came up with in the Motorcycle Division (alternately called the "Motor Company") would be scrutinized for its company-wide implications.
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