Issues/Challenges

Today, Ducati is one of the most successful motorcycle companies in the world with a
dramatic profit growth since 1996. Before its huge success, Ducati was one step away from
facing bankruptcy. Ducati managed to overcome such an obstacle through strong innovation and
culture. Today, Ducati is faced with another challenge that may bring fortune to the company if
successfully managed. Ducati set a new goal, which is to sustain the eplosive double!digit profit
growth in the net decade and eventually reach "arley Davison#s profit level. Ducati is
considering attacking "arley Davidson by entering the cruiser market, which is "arley
Davidson#s niche product and also a very profitable market segment in the industry. To do this,
Ducati must invest 1$ million %uro and cost of &6 million %uro. Based on this huge capital
re'uirement, should Ducati enter the new market segment or should Ducati (ust concentrate on
its current segment) *f Ducati chooses to enter the cruiser market, what are other re'uirements
besides the capital) Does Ducati have what it takes to succeed in the new market segment)
The purpose of this memo is to help the eecutives of Ducati to make the optimum
decision for Ducati#s future success. This memo contains the industry analysis, as well as an
internal strategic analysis, company performance, and solutions and recommendations. This
industry is divided into + segments. Ducati#s dominating segment is the sport sector. Ducati
managed to utili,e its differentiation strategy by taking into account of the industry#s driving
forces. The cruiser segment is one sector that Ducati is very interested in entering. -nfortunately,
Bert#s consulting concluded that this is not the best option through the feasibility analysis. The
analysis contains the advantages and disadvantages of both options and the result was that the
disadvantages outweighed the advantages. .lso, entering the cruiser market is not really
necessary for Ducati based on its current performance level.
Industry analysis
.lthough the number of motorcycle manufacturers has declined by a large number over
the last century, competition eists among companies from different continents. /urrently, all
ma(or manufacturers are from 0apan, The -.1., and %urope. The motorcycle industry is
segmented into four categories2 off!road, cruisers, touring and sport bikes, each of them with
different 'ualities and target customers.
Industry forces
%conomic condition is one of the ma(or factors that drive the industry. This is an
important factor because depending on the condition of the economy buyers# demand will
change. 3or eample, when the economy stays strong, more people will buy the product while
less people will buy when there is an economic downturn. The reason for this is because
motorcycles are products that are not really necessary to possess in life. *n other words, they are
luury goods. During the economic downturns, people become price sensitive and they could
simply choose not to buy the product or find a substitute such as public transportation or vehicles
that can hold more passengers. Therefore, the threat of substitute is very high. 4otorcycles, like
any type of automobiles, are a source of transportation, ecept they are luury products.
/ompanies in this industry compete with differentiation strategy rather than low cost strategy,
meaning that companies focus on the 'uality of the product rather than low price. .s long as the
economy stays healthy, high income consumers will always buy the product no matter how much
it costs.
.nother key factor is to understand the target market. .s mentioned earlier, the
motorcycle industry can be segmented into + categories. 5. wide variety of individuals, with
e'ually different tastes, bought and rode motorcycles6 78avetti, pg &9. %ach segment has certain
'ualities that attract different customers with different preferences. The riders can also be
categori,ed into different types (ust as the motorcycles and they are 5knee down6, 5easy!riders6,
5weekend riders6, and 5highway riders.6 Different 'ualities include performance, functionality,
lifestyle, and comfort. :iders choose their motorcycle based on which 'ualities they are attracted
to. 4otorcycles are not standardi,ed products. They are highly differentiated products and they
are not items that can be bought in large volume. 3or this reason, the power of buyers is relative
low. .lso, since the ma(ority of buyers are not price sensitive, switching to different vendors is
fairly easy. ;rices do not affect the buyers in this industry because the buyer heavily demands
'uality over price. 3or eample, if a new company comes up with a model with the best 'uality,
the buyers will still switch to the new company no matter how epensive the new product is.
This is the point where strong rivalry comes into play. .ll competitors have the same ob(ective,
which is to attract as many customers as they can by providing 'uality products. .lthough their
ob(ective is the same, each competitor follows their ob(ective with their own uni'ue strategies.
1ince customers can easily be attracted with innovative products, the rivalry in this industry is
very high.
<ne of the most important drivers of the industry is strong innovation. Technology
advancement is very critical in this industry. /ompanies heavily invest a large portion of their
revenues into research and development to create innovative technologies that differentiate
themselves from competitors. This is very important in strengthening their name brands. 4a(or
companies used their early technology inventions as their foundation, and built up to an even
higher level. Due to strong innovative thoughts, 5motorcycles# performance, comfort, reliability,
and ease of maintenance had improved vastly6 78avetti, pg =9. Due to very high capital
re'uirement, strong innovative thoughts, and numerous large si,e competitors, the entry barrier
is very high. .lso, to be able to compete with these companies, new entrants must design a
comple but efficient supply chain system for the manufacturing process.
4otorcycle manufacturers rely heavily on the suppliers for 'uality input and satisfying
delivery. 5<utsourcing minimi,ed fied asset investment, but the 'uest for 'uality, reduced
costs, and responsiveness to market fluctuations forced final assemblers to create strong
commitment at the level of suppliers6 78avetti, pg =9. To create high 'uality output at a lower
fied investment, it is very important for the manufacturers to maintain a good relationship with
the suppliers. .lso, as mentioned earlier, motorcycles are not standardi,ed products, but
differentiated products. This means that the components of the motorcycles are also 'uality
inputs provided by the suppliers. The influence of the supplier on the final output is immense>
therefore, the power of suppliers is high.
Internal strategic analysis
Ducati uses differentiation strategy as many other companies within the motorcycle
industry. Therefore, all companies compete with each other by producing the best 'uality
motorcycle. Ducati#s uni'ue business model and core activities helped to produce Ducati#s way
of 'uality motorcycles mainly focusing sport sector. Ducati#s strength comes from four core
activities, which are production process, distribution system, development of product and :?D,
and 5The world of Ducati.6
<ne of Ducati#s core strategies is that Ducati heavily outsources its production compared
to its competitors. 5.s of &@@1, outsourcing had grown to approimately A$B, and the company
planned to bring it to 9@B, probably the highest in the industry 7industry eperts estimated that
the average outsourcing level for the industry was lower than Ducati#s96 78avetti, pg 1@9. By
doing this, Ducati is able to reduce fied asset investment, and mainly focus on product design,
development and 'uality control. To ensure its product 'uality, Ducati collaborated with a
number of the well!known firms such as 3errari, Combardini, 4otori, etc, and formed the
5%ngine Technology District6 78avetti, pg 119. .ll the firms within this district had one thing in
common. They were all heavily focusing on engine technology. They basically collaborate with
each other on activities such as 5:?D, purchasing, suppliers# 'uality control, employee training
etc6 78avetti, pg 119.
Ducati is very strict on selecting suppliers. 1ince suppliers play key roles in providing
'uality motorcycle components to the company, Ducati selected different suppliers for each
component. .lso, Ducati did not make long!term contracts with suppliers ecept for the ma(or
components. Ducati simply switched to different suppliers when the short!term contracts were
over if needed. This ensured the 'uality and reliability of Ducati.
.nother core strategy that Ducati has is the distribution system. This strategy mainly
helps Ducati to create a standard and unified Ducati designed business model for all dealers and
subsidiaries to keep the scent and the culture of Ducati alive and therefore increase the value of
the brand name. Through this system Ducati found many advantages. 3irst of all, Ducati had full
control of the distribution and marketing process. *nstead of distributing its products to
franchising dealers, and independent distributors, and letting them independently manage their
own network of dealers, Ducati established company owned subsidiaries throughout the world.
.ll the subsidiaries were managed under Ducati, which help to retain traits of Ducati#s brand
78avetti, pg 1&9. This also increases the profit because Ducati owns the total sales made by all
subsidiaries. 1econd, Ducati re!organi,ed its network of dealers. -nlike many other companies,
Ducati concentrated to improve the dealers# performance instead of geographic epansion. There
are many aspects that Ducati took into consideration for dealers# performance such as sales
forces, good technical assistance, and an ade'uate physical space for product display 78avetti, pg
119. *nstead of epanding the number of dealers, Ducati reduced by a large number. This made it
easier for Ducati to manage to improve each dealership since the number decreased. Castly,
under this system, Ducati created its own chain stores. These stores owned by mono!franchisers
offered company branded merchandises such as accessories and provided technical support and
customer service. 5These stores provided a uni'ue retail environment emphasi,ing the distinctive
traits of Ducati#s Brand2 while a D"istory Eall# displayed images of Ducati#s racing heritage,
and D%ngineering Eall showed a large scale engineering drawing of the 916, Ducati#s symbol6
78avetti, pg 1&9. This is an important factor because it strengthens the brand name and also
increases customers# loyalty by creating a culture.
The third Ducati#s core strategy is the uni'ue production development and :?D process.
Ducati invested a large portion of their revenue in designing new technologies, development of
products and human resource management. Ducati created two research centers, the /agiva
:esearch /enter and the Ducati Design center. The /agiva :esearch /enter focused on eternal
design and Ducati Design /enter focused on internal design. 5.s a conse'uence of these efforts,
the company greatly reduced the Dtime to market# for new product launches6 78avetti, pg 1&9.
This means that Ducati is able to develop a new model in shorter time period. .lso, Ducati
integrated :?D and marketing for technological improvements. Through market research and
customer feedback, Ducati managed to improve their technology and design.
The Eorld of Ducati is a strategy that helps the development and improvement of the
value of the brand through a set of activities. 5*n addition to DDucati 1tores,# the DEorld of
Ducati# compromised a series of other activities that had been consistently developing in the past
three years6 78avetti, pg 1&9. <ne activity is that unlike its competitors, Ducati implemented an
5<pen ;addock6 policy, which allow members of Ducati club to be in close contact with the
racers by participating in dinners and events. This is very important because according to a
company#s website survey, the most important purchasing factor is the 1uperbike competition,
followed by maga,ine tests, sports orientation of the brand, and its link to competition 78avetti,
pg 1&9. .ll these factors definitely improved customers# loyalty to Ducati#s brand which is very
important to sustain customers. :acers greatly collaborated with the :?D process of Ducati by
constantly testing the machines through competitions. .nother activity is that, unlike its
competitors, Ducati only used special maga,ines as the source of advertisement. <ne of the most
popular campaigns was 5DucatiF;eople,6 which 5featured Ducati workers and their motorcycles
in and around Bologna in black and white retro# pictures, and emphasi,ed some central values of
the brand2 the *talian style, the history of the company, the young age of the riders and their
sporty attitude6 78avetti, pg 1=9. There are many other well!known speciali,ed maga,ines that
are related to motorcycles. <thers activities involved Ducati#s museum tour, owners clubs, and
social events. .ll these activities attracted many customers to learn the history of Ducati, get in!
depth knowledge of Ducati and ultimately increase the number of fans and customer base.
Performance analysis
1o far, Ducati en(oyed the dramatic profit growth. 5:evenues 'uadrupled since 1996>
%B*TD. had grown from ==.+ million %uros in 199$ to around 6@ million. *n &@@@> market
share had gone from G.1B in the sport bikes segment in 199$ to 6.$B in &@@@6 78avetti, pg 19.
This is clear proof that Ducati is a very competitive opponent to many companies within this
industry. Ducati had indefinite growth in profit margin and gross margin 7see ehibit9 over the
past G years. Ducati had a net loss in 199A, which affected the profit margin of that year. This is
because Ducati needed to invest more on a new sub!segment of sport bikes. . larger portion of
its revenue was utili,ed on increasing number for employees on the new sub!segments. This
investment was necessary because the following year, Ducati had dramatic increase in net
income leading to higher profit margin compared to 199$. Ducati did well in all G years based on
gross margin. The growth was indefinite but, it was satisfying. .lso, based on ehibit &, Ducati
did well in terms of sales. .s shown below, the highest sale growth was in year &@@@.
Solutions and recommendations
Ducati must either choose to penetrate the cruiser market or (ust focus on current
segment. There are advantages and disadvantages to both options.
The disadvantages for Ducati to enter the cruiser segments are the following2
Ducati must make heavy capital investment for a new product design and :?D
"arley!Davison already dominates the segment
"arley!Davison#s customers are considerably loyal
4ay affect company#s brand loyalty
4ay be time consuming
-npredictable economic condition
The advantages of entering the new segment are the following2
%pansion of segment
*ncrease in market share
The disadvantages of focusing on eisting segment are the following2
Cosing the chance of possible epansion
The advantages of focusing on eisting segment are the following2
:isk reduction
Better customer service and support to eisting loyal customers
1ustain current brand name and strategic strength
/ontinue increasing brand#s loyalty
Based on the above analysis, in order to compete in cruiser market, Ducati must meet the
following re'uirements. 3irst, Ducati must have a product that is differentiated from its
competitors, (ust the way it Ducati has in the sport bike segment. The cruiser must have a
heritage of Ducati#s brand. *n other word, Ducati must have its own way of a cruiser like B4E
and "arley!Davidson. To do this, Ducati needs to make heavy capital investment for design
process and :?D. By concentrating on the new market segment, Ducati may lose focus on the
eisting segment and therefore lose the value of its brand. 1econd, Ducati needs a strategy to
attract customers on the new segment. *t will be very hard for Ducati to penetrate the cruiser
market because "arley!Davison is already dominating this segment with its own style of strategy
that made it the most profitable in the industry. .lso, the ma(ority of "arley!Davidson customers
are highly loyal to the brand, which makes it harder for Ducati to gather a new customer base for
the cruiser segment. /oming up with a new strategy, may take an unreasonable amount of time
through research. .lthough, Ducati is able to make such capital investment that is re'uire to
enter the cruiser market at the moment, unepected economic downturn may affect Ducati#s
profitability in the middle of the process of entering the cruiser market.
*n conclusion, Ducati should not enter the cruiser market. .lthough, entering the cruiser
market is a possible option, there is no need for Ducati to enter the market based on current
performance level. 3or the past five years, Ducati eperienced growth without a doubt. This was
possible because of its strong brand name and culture that increased the number of Ducati#s fan
loyal customers. Ducati should (ust focus and invest more on the eisting segment. Ducati also
has its own style of strategy that makes it dominate in sport bike segment (ust like "arley!
Davidson has in the cruiser segment. Ducati should sustain its strategy and strengthen even more
so no one can ever penetrate into the sport segment. This is the optimum option because it
reduces the risk and helps Ducati to support the eisting customers and therefore increase their
loyalty even more.
Appendix 1
%hibit 1
Appendix 2
%hibit &
Bibliography
%. ;orter, 4ichael. 5-nderstanding *ndustry 1tructure.6 Harvard Business School. .ugust &@@$. Boston,
4.2 ;resident and 3ellows of "arvard /ollege.
8avetti, 8iovanni. 5Ducati.6 Harvard Business School. 4arch &@@&. Boston, 4.2 ;resident and 3ellows
of "arvard /ollage.
1ection =
Memorandum
To: ederico Minoli! Chief "xecuti#e $fficer! %ucati
From: Albert Bon &oung 'oo! Section (! Senior Consultant! Bert Consulting
Date: May )! 2**+
Re: ocusing on "xisting Sport Mar,et Segment