Indian Motorcycle Company: strategy for market reentry.(Instructor's Note)

Droege, Scott

CASE DESCRIPTION

The primary subject matter of this case concerns strategic management. Secondary issues examined include entrepreneurship. The case has a difficulty level of four, appropriate for senior level courses. The case is designed to be taught in two class hours and is expected to require two hours of outside preparation by students.

CASE SYNOPSIS

This case presents a an iconic U.S. firm, Indian Motorcycle Company, with a rich history that has ceased production three times in the past century and compromised the authenticity upon which the brand is based through a variety of ownership changes and market challenges. Indian Motorcycle Company most recently disillusioned consumers and distributors in 2004 by suddenly ceasing production, leaving distributors without products to sell, and leaving customers with unenforceable warranties. But currently, the British private equity firm, Stellican Limited, is attempting to restore the brand. Two of Stellican's partners, Steve Heese and Stephen Julius, have taken active management roles in the new Indian Motorcycle Company. Both have experience in reviving struggling brands. Indian will soon begin production of a motorcycle model, the Indian Chief, which hearkens back to the 1930s. Yet with three failures in its past, it is uncertain whether Stellican can bring the Indian brand back to life. Students must decide whether the reentry of this nostalgic brand will be successful in the highly competitive heavyweight cruiser segment of the U.S. motorcycle industry.

INSTRUCTORS' NOTES

Recommendation for Teaching Approaches

The following five questions with potential answers are specifically mentioned in the case. These questions would be appropriate for student case prep prior to case discussion. Following this are theoretical perspectives professors may want to use for case discussion allowing the discussion to move from specific case issues to more generalized theoretical implications.

1. No doubt there is a consumer base that desires premium motorcycles, but will Indian be able to take market share from established incumbents such as Harley-Davidson?

The three previous failures in Indian's history argue against the ability of the Indian brand to be successful. In addition, Stellican Limited is a British private equity firm and even though they have established manufacturing in North Carolina, biker purists will certainly recall Indian's checkered history when the British private equity firm, Brockhouse Limited, purchased rights to the Indian name and simply rebranded its Royal Enfield bikes as Indian Motorcycles during the 1955-1985 era.

However, Stellican Limited is the venture capital firm that now owns Indian Motorcyele. Stellican is experienced in reviving failing brands and has carefully studied Indian's past. In addition, Stellican has a vested interest in Indian's success and is willing to back up this interest with capital injections. In addition, Indian's top-management team views this as a long-term commitment rather than an overnight story. Combined with Stellican's capital backing, this argues in favor of success.

2. Will another newcomer such as Indian be able to achieve quality levels at the outset necessary to win over consumers and distributors who were burned by Indian's sudden closure in 2004?

Indian has put together a world-class engineering team. Also, top management is well aware of negative consumer sentiment from the most recent 1999-2004 failure. Together with Stellican's long-term commitment, Indian should be able to manufacture a quality motorcycle. On the downside, however, Indian's mall size will not allow scale advantages that can quickly translate into cost savings. Thus, although Indian may be able to build a quality motorcycle, this will likely come at a cost higher than those for incumbents. It is therefore likely that pricing for introductory models will be above competitors' prices for similarly featured motorcycles.

3. Will a single model line in the near term, the Indian Chief, be enough to convince potential customers and distributors that Indian is here to stay?

Students may have a hard time with this question. The argument against Indian's ability to convince customers and distributors that Indian has staying power is its three past failures. Students who look deeper, however, will realize that the Indian Chief, as the most recognized model among Indian motorcycle aficionados, is the most logical choice for initial reintroduction. Thus, bringing back the Indian Chief is a smart way for the new Indian Motorcycle to begin restoring the authenticity of the brand among biker purists who have a substantial influence over product perceptions.

4. Will the financial backing of Stellican Limited provide Indian Motorcycle Company with enough time and resources to pierce the American cruiser market?

This question is a bit tricky but astute students will reframe the question. The answer to this question revolves around Stellican's expected return on equity. Stellican has a long time horizon, but as a private equity firm it will certainly be accustomed to cutting its losses if the reintroduction of Indian does not have at least marginal success. Thus, students should recognize that the market, not Stellican per se, will determine whether Stellican will be willing to provide the time and resources needed to make the brand a success.

5. Why has Stellican Limited chosen Indian when there are numerous other investment alternatives?

Stellican has a strategy of reviving failing brands by unlocking brand equity. The unique focus of this strategy is dependent on the path Stellican has taken in previous private equity decisions. Stellican's managers have climbed the experience curve and now have the expertise to unlock the potential in the Indian brand. (See below for an explanation of how to expand this topic to the path-dependant nature of strategic choice).

Theoretical Perspectives

1. Resource-Based View

Indian's unique place in the history of the American motorcycle market is imperfectly imitable. The social complexity of developing a brand with such recognition among Indian's target market has potential value if the new Indian Motorcycle Company can leverage it in a way to capture the nostalgia of the brand.

A point to make with students is that competitive advantage arises from a combination of all factors of the resource-based view--value, rarity, inimitability, and nonsubstitutability. One classroom approach would be to outline each factor and have students derive a table from this. For example, a table might look similar to the following:

The point of this exercise is to help students see that the RBV requires a combination of factors to garner competitive advantage. It does not appear from this standpoint that Indian is likely to generate a competitive advantage at least in the near term.

However, competitive advantage--performance above industry averages--is not necessary for success (a point students sometimes overlook). Instructors may want to point out that Stellican Limited will be looking for a return on investment similar to other investments with similar risk. Whether or not Indian becomes an industry leader with a competitive advantage relative to the industry average is in some ways irrelevant as long as Stellican's ROI hurdle rate is achieved. In other words, whether other firms outperform Indian is not the most relevant question, but rather the question is whether Stellican can obtain its desired risk-adjusted ROI.

2. Alliances

A way to bring alliances into the discussion is to compare Indian to Victory Motorcycles. Victory was a new market entrant in 1998 as a division of Polaris, an established manufacturer of snowmobiles and all-terrain vehicles (ATVs). Victory competes directly with Harley-Davidson and had a difficult time gaining acceptance in the market. After sluggish initial sales, Victory aligned with Arlen Ness, a firm with a long history of designing custom motorcycles and custom motorcycle parts. Victory developed an alliance with Arlen Ness in which Arlen Ness handles the design work on a select group of Victory's models known as the Arlen Ness Signature Series. In addition to Victory's other product lines, this has created additional sales to those who prefer a "factory custom" motorcycle--a mass produced motorcycle with a custom look with the Arlen Ness special edition name attached.

It would be interesting to ask students if a similar alliance would benefit Indian Motorcycle Company. Indian Larry Legacy is a well-known boutique firm among custom motorcyclists that designs one-of-a-kind motorcycles. The namesake of the firm known as Indian Larry passed away in 2004, but this only increases the distinction. The name "Indian Larry" is especially appropriate to the Indian Motorcycle Company brand. Questions to interject to spur class discussion for comparison might be: Would Indian benefit from an alliance with the Indian Larry Legacy at the outset in the same way that Victory has benefited from its alliance with Arlen Ness, or would it be better for Indian to establish itself on its own merits before considering such alliances?

3. The Threat of New Entrants

The threat of new entrants can be examined from the perspective of incumbent firms. Does Indian represent a viable challenge? Instructors teaching this case can divide the U.S. cruiser market into four groups (as discussed in industry segment of the case): (1) Harley-Davidson as the incumbent with historical similarities to Indian but with a huge market lead and an established distribution network, (2) Victory Motorcycles, the division of Polaris started in 1998 that can, along with Indian and Harley-Davidson, claim that it is an American motorcycle company with headquarters in Minnesota (an American country of origin tends to have consumer appeal in the U.S. cruiser market segment), (3) non-U.S. firms that target the motorcycle cruiser market such as Honda, Yamaha, Kawasaki, and Suzuki and (4) boutique firms that make custom motorcycles such as Orange County Choppers and Mad Dog.

Students' analysis should reveal that boutique firms will be the least concerned about Indian's market reentry. In fact, sales of Indians will likely spur new demand for the boutiques as Indian owners customize their bikes; i.e., chopper forks and other fairly expensive customizations. Non-U.S. firms face the largest threat; even though they have operations in the U.S., foreign countries of origin tend to matter to at least a segment of cruiser buyers. Victory and Harley-Davidson are in the middle of this risk continuum; both can claim to be American bikes although Harley-Davidson has the edge over Victory given Harley's establishment as a brand dating back to 1903 (versus Victory's beginning in 1998).

Instructors may wish to use the above information in class to draw a risk continuum based on the threat of Indian's market reentry. The continuum would look similar to the following: Potential Threat of New Entry by Indian Strong Threat Weak Treat Non-U.S. firms Victory Harley-Davidson Custom boutiques (Yamaha, etc.) (This segment may actually benefit from Indian's reentry).

4. Private Equity Acquisition

Stellican Limited is a private equity firm specializing in three areas: distressed situations, value situations, and special situations. Part of Stellican's philosophy is that "superior management is the largest and most controllable source of value creation." Stellican typically gains a controlling interest in a firm then works closely with the firm's management to unlock potential value. But with Indian Motorcycle Company, two of the four Stellican partners (Steve Heese and Stephen Julius) have taken on management roles with Heese as president and Julius as chairman. Clearly, this was necessary given that Stellican simply bought the trademark of a defunct company that had no management team.

This brings up two questions typically asked about corporate acquisitions but also apply here: (1) Is the acquired company better off and (2) is this the best alternative? Students will easily see that question 1 doesn't apply given that there was nothing more than a trademark at stake before Stellican intervened. However, question 2 may provide some debate. The instructor could frame the debate around the issue of whether Heese and Julius are the appropriate persons to head Indian. Both are full-time partners in Stellican and both are on the top management team of Chris Craft, the boating firm Stellican previously revived. Thus, given that both of these executives cannot give their full attention to Indian, is Stellican's ownership of Indian the best alternative? Would Indian be better off with a management team devoted solely to this single firm and its outcomes rather than splitting its partners time between Indian and these partners (Heese and Julius) other responsibilities?

At this point, professors may wish to bring up the path-dependent nature of strategy. That is, future strategic options are to some extent limited by past strategic choices. As a private equity firm, Stellican could conceivably invest in any number of struggling businesses but Heese and Julius' experience has been reviving iconic, although struggling, brands. Their cumulative experience thus steers them toward strategic situations in which they have some prior, applicable knowledge. The goal of this is to show students that sometimes it is helpful to break the frames--the assumed logic--of a strategic path. Once professors make the point that Stellican may have difficulty recognizing opportunity outside their relatively narrow frame of reference, professors could then encourage students to think of other situations in which a firm may have been better off to pursue "frame-breaking" rather than obvious strategic alternatives. (A classic example is Kodak's hesitancy to move into digital cameras early in the digital camera product life cycle, preferring instead to incrementally improve its film technology--a strategic mistake that nearly cost Kodak its viability).

Their active involvement with Stellican and Chris Craft ensure that Heese and Julius have less at stake than a typical management team; their employment is diversified. If Indian turns out to be another failure once again, Heese and Julius can walk away with Indian (as it has done before) leaving customers and distributors hanging. On the other hand, both Heese and Julius have a vested interest in Indian's success through Stellican's large investment in restoring Indian. In addition, both executives have experience in turnaround situations. Thus, the debate comes down to how much confidence customers and potential distributors can place in a top management team that has a stake in the outcome but who can also walk away. In other words, is the stake large enough to inspire confidence? There are no clear answers at the present time; the fact there are no clear answers should help stimulate class debate.

Ethics

For those wishing to bring up ethical issues, a recent interview by MotorcycleUSA would be a good starting point. MotorcycleUSA asked Indian Motorcycle Chairman Stephen Julius:

"There have been stories in the media where Native Americans have protested using their likeness in a manner they perceive as offensive. They even tried to have the professional baseball team, the Atlanta Braves, change their name. Have you had any negative feedback from Native American groups over the use of the word 'Indian' and 'Chief' and 'Scout'?"

Julius responded:

"Well, let me make two comments. First, anything we will do will certainly not be in any way disparaging to the Native American population here. We are proud to be associated with them. Secondly, these issues were raised in the past and they were dealt with, actually, after quite long and expensive legal cases in the courts and they've all been resolved, so that's not something that is of concern to us."

Instructors might begin by asking students if they agree that using the Indian brand name might be offensive. For instance, is it ethical to use a group that has historically suffered discrimination and prejudice to advance a commercial brand? As students discuss this point, additional debate can be injected by asking whether students would support brand called "African American" if that brand name would increase sales. The larger point to discuss is at what point do commercial interests cross the line when using historical situations involving minority groups?

As students debate this issue, it is worth considering whether endorsements might help overcome any negative reaction to the Indian brand. For example, Indian Motorcycle could perhaps ask Native American tribes to endorse the Indian brand name as emblematic of the historical struggle of Native Americans. This would turn the tables and allow potentially damaging brand name from the perspective of insulting a minority group to become an asset rather than a liability

Scott Droege, Western Kentucky University RBV Factor Indian Motorcycle Company Value The value of Indian's resources is derived from the nostalgia of the brand although the market leader, Harley-Davidson, also has the same sense of nostalgia having begun in 1903 (only two years after Indian began). Rarity Indian's resources include the Indian brand, the top management team with experience in reviving failed brands, and a world-class R&D/engineering team. Inimitability The unique historical path makes imitability unlikely. Victory, as a fairly recent new entrant, is a long way from approaching Indian's history. Still, other brands such as BMW and Triumph have historical uniqueness of their own. And of course the main competitor--Harley-Davidson--will be a constant threat to inimitability based on historical authenticity and nostalgia. Nonsubstitutability Indian plans on mass production. Substitutes include custom builders such as Orange County Cycles and Mad Dog. Clearly, custom builders will be considerably higher priced. Substitutes also include smaller, more fuel-efficient, motorcycles. The most obvious substitute, of course, is other modes of transportation (autos, buses, cabs, etc.). Substitutability could also be premised on the fact that because the U.S. cruiser market is primarily discretionary, purchase of a motorcycle is simply a substitute for other ways to spend leisure time. Thus, a raft of potential substitutes (movies, fishing, football, etc.) could potentially dampen demand.