Polaris Industries, Inc., 2013

Headquartered in Medina, Minnesota, Polaris (named after the North Star) designs, engineers, manufactures, and markets off-road vehicles (ORVs), snowmobiles, motorcycles, and electric on-road vehicles

primarily in the USA, Canada, and Europe, with 70 percent of revenue coming from the USA. Polaris also produces On-Road Vehicles (ORV), which are predominantly Victory motorcycles. Their ORV sales grew 64 percent in 2012 to $240 million.

Polaris does business in more than 130 different nations and outside; U.S. sales were up 21 percent in 2012 and net income was up 37 percent. Completion of a 425,000-square foot manufacturing facility in Monterrey, Mexico, in 2011 serves as a platform for better Polaris penetration in Latin and South America. Polaris also produces replacement parts and other accessories such as oils, chrome accessories, electric starters, covers, cargo box accessories, and much more.

Polaris has a defense (military) segment that recently reported excellent sales of the electric Ranger and the unmanned mine roller. Sixty-nine percent of Polaris’s sales came from ORVs, a 22-percent increase from the prior year. Nine percent of sales comes from snowmobiles, and 8 percent comes from on-road vehicles. Polaris is the North American leader in total power sports sales with around 20-percent market share, above rivals Harley Davidson, Honda, and Yamaha. In December 2012, Polaris acquired Teton Outfitters, LLC, a privately owned, Rigby, Idaho-based company that designs, develops and distributes KLIM Technical Riding Gear. This acquisition adds KLIM to Polaris’ growing parts, garments, and accessories (PG&A) business.

For the six months that ended 6-30-13, Polaris’ sales were up 12 percent overall, including Off-Road Vehicles (+7%), Snowmobiles (71%), Motorcycles (−6%), Small Vehicles (+109%), and Parts, Garments & Accessories (+30%). The company’s Small Vechicles division includes its GEM and Goupil electric vehicles as well as Aixam. For Q2 of 2013, Polaris reported record second quarter net income of $80.0 million, up 15 percent from the prior year’s second quarter net income of $69.8 million. Sales for the second quarter 2013 totaled a record $844.8 million, up for last year’s second quarter sales of $755.4 million.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

The father of the snowmobile is considered to be Edgar Hetteen, who in 1955, with employees David Johnson, Paul Knochenmus, and Orlen Johnson, created a vehicle to ride through the snow. The primary use of the craft was to access better hunting areas that traditionally had required wearing snowshoes. An early Polaris snowmobile was called the Polaris Sno Traveler that rolled off the assembly line in Minnesota in 1956. Edgar displayed his snowmobile on a 1,200-mile trek across Alaska in 1960. However, unhappy with the performance of his Polaris vehicle, Edgar soon left the company, and started Polar Manufacturing, that later changed its name to Artic Enterprises, which ultimately went bankrupt in the 1980s. Artic emerged from bankruptcy and continues today under the Arctic Cat Brand, one of Polaris’s major competitors in the snowmobile market. For the next 50 years, without Edgar, Polaris developed snowmobiles, all-terrain vehicles (ATVs), side-by-side vehicles (ORVs), and motorcycles.

Polaris began developing a smaller consumer-sized, front-engine snowmobile to compete with the SkiDoo in the early 1960s. In 1964, Polaris released the Comet, and then in 1965 the Mustang, which became a hit as a family snowmobile. In the early 1980s, Polaris created an Indy style snowmobile with a wider stance. In 1985, Polaris introduced the Trailboss, considered to be the first U.S.-made ATV. ATVs are a one-seat variation of ORVs. Today, Polaris is one of the top-selling ATV brands. In the 1990s, Polaris entered the motorcycle market and the water-craft market, producing jet skis, but exited the jet-ski market in 2004. In 2010, Polaris moved its parts plant from Wisconsin to Monterrey, Mexico, saving the company about $30 million annually in lower labor costs.

In 2011, Polaris announced an investment in Brammo, an electric vehicle company based in Ashland, Oregon. Its first production electric motorcycle, the Brammo Enertia, is assembled in Ashland and sold at dealerships. Polaris participated in the $13 million opening tranche of Brammo’s Series C funding in July 2012. Polaris had been showing interest in electric propulsion, producing an electric version of its Ranger Side-by-Side and more recently buying Global Electric Motorcars (GEM) from Chrysler. As one publication put it, “This latest move likely signals the addition of clean and quiet drivetrains to ATVs and motorcycles under the global giant’s brand umbrella—snowmobiles may have to wait on battery breakthroughs before they become commercially feasible.”

Polaris purchased GEM from Chrysler in 2012 and also purchased France-based Goupil. Polaris recently restarted production on its Indy-named sleds (stopped in 2004 with the Indy 500) with the release of the 2013 Indy 600 and Indy 600 SP.

Internal Issues

Strategy

Polaris is a testament to the benefits of strategic planning. Led by Chief Executive Officer (CEO) Scott Wine, the company is in the mist of a 10-year strategic plan that is broken down into stated objectives, three- to five-year goals for each, annual actions for each, and last three-year results for each objective—all provided on the company website ( http://phx.corporate-ir.net/phoenix.zhtml?c=108235&p=irol-progress ). Polaris’s overall objective is to increase sales to $5 billion and obtain a 10-percent net income margin by completion of its strategic plan in 2018. CEO Scott at the front of the company’s 2011 Annual Report says:

· We again achieved record performance in a down market. Our success is the result of being extremely focused on our strategic plan and executing against it meticulously. Our disciplined approach has made us the best in Powersports and it’s how we’ll continue to deliver shareholder value well into the future.

Polaris has a history of successfully acquiring and divesting businesses to continue on a path of strategic improvement. Yet to its credit, Polaris reports minimal goodwill on its balance sheet. Some recent notable divestures include exiting the jet-ski market in 2004 after a 12-year stint. Polaris ceased production of its Breeze line of on-road vehicles in 2011 and acquired GEM and Goupil to fill this void. Currently, Polaris is producing more side-by-side ORVs because customers are favoring them over the traditional ATV style, single-driver, four-wheeler product.

Vision and Mission

Despite placing great emphasis on strategic planning, Polaris does not have a clearly stated vision or mission statement, but various statements on the company’s elaborate website could be construed to represent those statements.

Organizational Structure

Polaris has a hybrid divisional-by-product-by-region organizational structure as illustrated in Exhibit 1 . Note in the diagram it is somewhat unusual for the Vice-president of Sales and Marketing (a staff officer) to also be a line executive. It is also unclear who in the hierarchy has command and control over the U.S. operations analogously to the two other geographic vice-presidents. For example, who would be responsible for motorcycle sales in Texas, or for that matter, motorcycle sales in Germany? Also, notice that there is only one female in the corporate hierarchy.

Production

Polaris assembles products in Minnesota, Iowa, Wisconsin, and Mexico. To save costs and improve component part quality, many of the firm’s product lines are vertically integrated. Plastic injection molding, welding, clutch assembly, and painting are all produced in house. Items such as fuel tank, tires, seats, and instruments are purchased from third-party vendors.

Polaris has an effective inventory management process called Maximum Velocity program (MVP) in which ORV orders can be placed in two-week intervals for high-volume dealers. Smaller dealers can use a similar process. The new process helps to keep costs down and inventories at manageable levels. Although ORV orders can be placed at any time, snowmobile orders must be placed in the spring and secured by deposit. Victory motorcycle orders are currently under MVP testing.

EXHIBIT 1 The Polaris Organizational Structure

Source: Based on company documents.

Sales and Marketing

Polaris has a network of about 1,650 independent dealers in North America and 15 subsidiaries and 80 distributors in over 100 countries outside of North America. The company’s brands include RZR and Ranger ATVs, Indian and Victory motorcycles, and Polaris Rush snowmobiles. Snowmobiles are sold to dealers in the USA and Canada; many dealers also carry Polaris ORVs. A little more than half of all Polaris dealers in North America sell snowmobiles. ORVs are also sold through lawn and garden dealers in North America, but outside of North America, ORVs are generally handled through independent distributors. Polaris is shifting this strategy to wholly owned subsidiaries, which are now operating in Spain, China, Brazil, and India.

The Polaris Victory and Indian motorcycles are distributed through independently owned dealers outside the USA, with Melbourne and Sydney, Australia, being exceptions, in which Polaris has company owned dealers. As of 2012, Polaris had 400 dealers of Victory brand motorcycles in North America and 20 dealers of Indian motorcycles. The Polaris GEM business has around 130 dealers, and Groupil sells direct to customers in France and to dealers outside of France. The firm’s military products are sold directly to the military and other government agencies.

Polaris uses group publications, billboards, and traditional television and radio for advertising. Product brochures, leaflets, posters, dealer signs, and other items are also used to help dealers market the products. Polaris spent $210 million in marketing in 2012, up from $179 million the prior year.

Research and Development (R&D)

Polaris has about 550 employees in R&D that concentrate on improving production techniques and developing new and improved products. R&D has a long tradition at Polaris because the company claims to have produced the first snowmobile with liquid cooled brakes, hydraulic breaks, three cylinder engines, and recently the MacPherson strut front suspension and Concentric Drive System in ORVs. Many of the R&D employees work in the 127,000-square foot R&D facility in Minnesota. Polaris spent about $127 million on R&D in 2012, up from $106 million the prior year.

Segments

Polaris competes in four distinct product segments: (1) ORVs, (2) snowmobiles, (3) on-road, and (4) PG&A. ORVs include side-by-side and ATV vehicles. Total revenues, as well as percent share each segment, are provided in Exhibit 2 . Note that ORVs overwhelmingly are Polaris’s best selling segment.

ORVs

As illustrated on the corporate website, Polaris produces 7 ORV models designed for the military, ranging in price from $7,000 to $35,000. The full line of ORVs, excluding military, consist of 35 vehicles in two-, four-, and six-wheel designs ranging in price from $7,000 to $35,000. A nice feature of most Polaris ORVs is that they offer a variable transmission, resulting in no manual shifting, and several models come with the MacPherson strut front suspension, enabling better control and stability. ORV sales increased 22 percent in 2012.

Snowmobiles

Although snowmobiles are where Polaris got its start, snowmobiles today account for about 9 percent of all sales, but the company’s snowmobile sales increased 1.0 percent in 2012. Polaris today produces 28 different models of snowmobiles, including youth models, utility models to performance, and competition models used in racing. In 2012, U.S. retail prices for snowmobiles averaged $2,700 to $12,300 and are sold in Canada, Europe, and Russia. The company has a history of snowmobile innovation.

On-Road Vehicles

Polaris offers many options of its Victory brand motorcycles and many designed for cross- country trips. Acquired by Polaris in 2011, the Indian Motorcycle Company was the first motorcycle company in the USA, even predating Harley Davidson. Founded in 1901, Indian Motorcycle has earned distinction as one of the most legendary and iconic brands in the USA through unrivaled racing dominance, engineering prowess, and countless innovations and industry firsts (see www.indianmotorcycle.com ). In total, Polaris makes 20 different motorcycle options available ranging in price from $12,500 to $36,000. Prices on the Polaris GEM range from $7,600 to $13,500, and the higher-end Goupil has 2012 prices ranging from $25,000 to $35,000.

PG&A

Polaris’s PG&A segment is used to supply replacement parts and provide accessories for Polaris product lines. Items included in this category for ORVs include winches, bumper guards, plows, racks, mowers, tires, cargo box accessories, and many more. Snowmobile accessories include covers, traction products, electric starters, bags, and windshields. Motorcycle accessories include saddle bags, backrests, windshields, seats, and various chrome accessories. In addition to parts designed for use with specific products, the Polaris also produces apparel, including helmets, jackets, bibs, and pants.