Harley-Davidson, an iconic US brand that for decades has built a reputation for heavy touring and cruising motorcycles with large, powerful engines, took a chance and introduced in 2014 a line of smaller, lighter-weight motorcycles.
The Harley-Davidson Street 750 and Street 500 are meant to appeal to beginning riders and younger, urban riders with a smaller budget in the US, southern Europe, and emerging southern Asian markets such as India. Street motorcycles that are sold overseas are assembled at Harley-Davidson’s India plant, which started operations in 2011 in Bawal, about 100 kilometres southwest of New Delhi.
The Street motorcycles “are all about bringing our brand promise to a new, global generation of young adults,” John Olin, Harley-Davidson’s CFO, said in a video announcing the new product lines. Offering an entry-level product to young men and women of all ethnic backgrounds is part of the company’s “Fatten the Tails” strategy to access new and emerging markets over the next ten to 20 years.
It’s a strategy projected to boost sales and more than make up for demographic shifts away from white, male US Baby Boomers, the core of Harley-Davidson’s fiercely loyal fan base. But Harley-Davidson also faces other strategic risks, said Robert Gould, CPA, the company’s director of internal audit. Emissions and safety regulations are getting stricter worldwide, and environmentally conscious customers are less accepting of rides they perceive as expensive gas guzzlers.
“We need to be innovative,” Gould said. “We need to compete with other companies doing different things. How do you do that when you’re the iconic US heavyweight motorcycle brand?”
Specifically, how do you do that without jeopardising the Harley-Davidson look, feel, and sound — the attributes that define the brand, which is one of the company’s biggest assets?
HOW TO ASSESS THE RISK
Multinational food and beverage companies are particularly likely to encounter this challenge because tastes and preferences are often tied to culture, religious beliefs, or regional traditions. Cheese-topped pizzas don’t go over well in China because about 90% of Chinese are lactose-intolerant. Alcohol cannot be legally sold in Saudi Arabia. And anything to do with meat can be off-putting to the about 30% to 40% of Indians who in polls identify themselves as vegetarian.
Enterprise risk management (ERM) offers tools to companies facing this challenge, said Jim Traut, CPA, CGMA, an ERM expert and president of Traut Consulting. He was previously vice president for reputation, risk management, and ethics and compliance at food-processing company H.J. Heinz.
An enterprise-wide risk assessment that involves all functions of the business (strategy, finance, quality, supply chain, R&D, etc.) and all business units worldwide lets people share their ideas and collect information that can then be synthesised, Traut said.
“This is the strength and the value and the benefit to [ERM],” he added. “You have an iconic brand, something extremely valuable, and you have an organisation that understands the concept of risk management, of capturing reward, and that then can readily deploy whatever the change process is.”
Traut suggested companies considering introducing a brand into a new market answer the following five questions during their risk assessments:
- Do we want to be in the new market long-term?
- Do we understand how to serve customers in the new market, including, for example, maintaining a supply chain in the face of possible corruption pressures?
- Do we have the capacity to supply the product?
- Do we make the product locally — build or acquire a local plant or enter a joint venture with a local partner — or are we shipping it in?
- What does all this mean financially over a five- to ten-year period?
BUSINESSES INCREASINGLY WORRY ABOUT THEIR REPUTATION
An enterprise-wide risk assessment is important because strategic missteps can be costly. Strategic risks are on top of executives’ and directors’ minds worldwide, ahead of operational, financial, and compliance risks, according to research by accounting and consulting firms. Reputational risk, which is driven by consumers’ brand experience, product or service quality, and public perception about a company’s ethics, is a leading strategic risk concern.
Seventy-six per cent of CGMA designation holders said in a global survey in 2013 that businesses in their industry focused more on reputational risk than before, and 65% reported their companies always or often consider the financial implications of reputational risk.
Of about 300 senior executives and board members Deloitte polled worldwide last year, 87% considered reputational risk to be more important than any other strategic risk their companies face, and 81% identified customers as the top stakeholder for reputational risk. Revenue and brand value are most likely at risk in case of reputational damage, respondents said.
TAKING ONE STEP AT A TIME
Risk to the brand has been well-considered amidst Nestlé’s Nespresso strategic change in Japan. Nespresso started adapting its brand to the Japanese market about three years ago, 25 years after the Swiss multinational introduced coffee machines that use pressurised steam and capsules containing a single serving of coffee in a country known for its tea-drinking culture.
Departing from brand promotions Nespresso uses in the rest of the world, Nespresso Japan launched a Japan-specific television advertisement in 2014 that focused on the quality of the coffee and the convenience of the machine, said Takayuki Ichikawa, marketing director at Nespresso Japan.
“We make the product the hero,” Ichikawa said, because the educational message better fits Japanese consumption needs.
But the company is stopping short of redesigning the coffee machine to suit Japanese tastes. “We can accomplish a lot with the existing product offering in Japan,” said Felix Langenbach, head of finance at Nespresso Japan.
“The biggest mistake would be to do everything at the same time and then do nothing right,” he said. “We’ll take one step at a time and make the step perfect, because to do something that’s not perfect would be the biggest risk to the brand.”
The Japanese have developed quite a taste for coffee in the past several decades. Consumption of roasted coffee tripled from 1980 to 2010. In 2014, Japan ranked third, behind the US and Germany, in total coffee consumption. In the summer, about two-thirds of the coffee drinks in Japan are consumed cold with large ice cubes — a preference that presents an opportunity for Nespresso in Japan, Langenbach said.
Japanese customers are demanding, he said. They expect high quality and service — a product with even slightly dented packaging will be returned — and they value convenience. In a country where households are getting smaller, Nespresso would benefit if it introduced a solution that made hot and cold coffee by the cup without loss of quality, Langenbach added. But the financial risks with such a technical redesign would have to be carefully assessed, especially since Japan’s unique power supply requirements would render such a development unsuitable for the rest of the world, Langenbach said.
“Some study would have to be done to understand the additional benefits for the consumer to see if it is a relevant innovation,” Langenbach said.
For now, Nespresso Japan’s priority is to heighten the awareness of the brand amongst Japanese consumers, but if the company were to consider changing the technical design of its coffee machine, he said, “we would pretty much work backwards by first focussing on the additional value from the consumer point of view.”
TURNING AN ENTERPRISE RISK INTO A BUSINESS OPPORTUNITY
Changes in consumer demographics, new regulations, and increased competition from emerging markets continue to pressure businesses to be more innovative.
Diageo, a multinational alcoholic beverages company based in the UK, is in the process of introducing a series of innovative new beers in the very competitive North American market. The first in the series was the Guinness Blonde American Lager, which is brewed in Latrobe, Pennsylvania, with American hops and the yeast Guinness has used in Ireland for 125 years.
“Millennial consumers are looking for brands which are new, interesting, and authentic,” Diageo’s chief executive, Ivan Menezes, told industry analysts in January. “They are a multicultural group, internet-savvy, less category-loyal, and they are one-third of the US population.”
Attracting Millennial consumers was just as important to Harley-Davidson.
The risk implications of the Street line of motorcycles were vetted in an exercise that was part of a road map the company developed in 2010 to improve its strategic risk management, Gould explained during a risk-management conference at North Carolina State University’s Poole College of Management in 2013.
Each step of the exercise consists of a to-do list:
- Step 1: Develop templates to identify, assess, and monitor risks; develop risk-mitigation responses; and agree on risk appetite levels before an issue is brought to the board’s attention.
- Step 2: Close risk-management gaps, communicate risk-mitigation plans throughout the company, track risk-mitigation activities, and train risk owners.
- Step 3: Integrate new risks into strategic planning, and provide assurance that the risk-management processes are adequate and appropriate. This stage includes an internal audit and benchmarking of the risk-management programme.
Harley-Davidson refreshes the road map every year, Gould said. Implementing continuous improvement concepts, developing contingency planning scenarios, and devising approaches to manage emerging risks are among the tasks that were new in the 2014 version of the exercise.
A key goal of the exercise is better management of black swan risks, significant events that could damage the Harley-Davidson brand to the point that the survival of the company would be at stake.
Such risks are tricky to identify. In 2010, Harley-Davidson held a workshop in which vice presidents named business assumptions they believed to be critical to the company’s success, Gould said. The assumptions were based on the company’s business strategy, competitive forces, growth objectives, and resource requirements, among other factors.
The executives also discussed what would threaten their assumptions and how to prepare for or prevent the threats.
The first workshop initially produced 62 black swan risks. The participants then whittled the list to the top five, determined whether they had detected any signals that one of the black swans was approaching, and considered whether any of the black swan risks harboured a possible business opportunity, Gould said.
Harley-Davidson’s No. 1 black swan back in 2010? That regulatory, cultural, and competitive factors would significantly compromise the look, sound, and feel of its motorcycles. The company’s responses included innovative new products such as the Street line of motorcycles.