Ducati Solution Essay
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 explosive double-digit profit growth in the next decade and eventually reach Harley Davison’s profit level.
Ducati is considering attacking Harley Davidson by entering the cruiser market, which is Harley Davidson’s niche product and also a very profitable market segment in the industry. To do this, Ducati must invest 17 million Euro and cost of 26 million Euro. Based on this huge capital requirement, should Ducati enter the new market segment or should Ducati just concentrate on its current segment? If Ducati chooses to enter the cruiser market, what are other requirements 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 executives 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 4 segments. Ducati’s dominating segment is the sport sector. Ducati managed to utilize 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.
Unfortunately, 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. Also, entering the cruiser market is not really necessary for Ducati based on its current performance level. Industry analysis Although the number of motorcycle manufacturers has declined by a large number over the last century, competition exists among companies from different continents. Currently, all major manufacturers are from Japan, The U. S. , and Europe.
The motorcycle industry is segmented into four categories: off-road, cruisers, touring and sport bikes, each of them with different qualities and target customers. Industry forces Economic condition is one of the major factors that drive the industry. This is an important factor because depending on the condition of the economy buyers’ demand will change. For example, 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.
In other words, they are luxury 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. Motorcycles, like any type of automobiles, are a source of transportation, except they are luxury products. Companies in this industry compete with differentiation strategy rather than low cost strategy, meaning that companies focus on the quality of the product rather than low price.
As long as the economy stays healthy, high income consumers will always buy the product no matter how much it costs. Another key factor is to understand the target market. As mentioned earlier, the motorcycle industry can be segmented into 4 categories. “A wide variety of individuals, with equally different tastes, bought and rode motorcycles” (Gavetti, pg 2). Each segment has certain qualities that attract different customers with different preferences. The riders can also be categorized into different types just as the motorcycles and they are “knee down”, “easy-riders”, “weekend riders”, and “highway riders.
Different qualities include performance, functionality, lifestyle, and comfort. Riders choose their motorcycle based on which qualities they are attracted to. Motorcycles are not standardized products. They are highly differentiated products and they are not items that can be bought in large volume. For this reason, the power of buyers is relative low. Also, since the majority of buyers are not price sensitive, switching to different vendors is fairly easy. Prices do not affect the buyers in this industry because the buyer heavily demands quality over price.
For example, if a new company comes up with a model with the best quality, the buyers will still switch to the new company no matter how expensive the new product is. This is the point where strong rivalry comes into play. All competitors have the same objective, which is to attract as many customers as they can by providing quality products. Although their objective is the same, each competitor follows their objective with their own unique strategies. Since customers can easily be attracted with innovative products, the rivalry in this industry is very high.
One of the most important drivers of the industry is strong innovation. Technology advancement is very critical in this industry. Companies 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. Major companies used their early technology inventions as their foundation, and built up to an even higher level. Due to strong innovative thoughts, “motorcycles’ performance, comfort, reliability, and ease of maintenance had improved vastly” (Gavetti, pg 3).
Due to very high capital requirement, strong innovative thoughts, and numerous large size competitors, the entry barrier is very high. Also, to be able to compete with these companies, new entrants must design a complex but efficient supply chain system for the manufacturing process. Motorcycle manufacturers rely heavily on the suppliers for quality input and satisfying delivery. “Outsourcing minimized fixed asset investment, but the quest for quality, reduced costs, and responsiveness to market fluctuations forced final assemblers to create strong commitment at the level of suppliers” (Gavetti, pg 3).
To create high quality output at a lower fixed investment, it is very important for the manufacturers to maintain a good relationship with the suppliers. Also, as mentioned earlier, motorcycles are not standardized products, but differentiated products. This means that the components of the motorcycles are also quality 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 quality motorcycle. Ducati’s unique business model and core activities helped to produce Ducati’s way of quality motorcycles mainly focusing sport sector. Ducati’s strength comes from four core activities, which are production process, distribution system, development of product and R&D, and “The world of Ducati. ” One of Ducati’s core strategies is that Ducati heavily outsources its production compared to its competitors. As of 2001, outsourcing had grown to approximately 87%, and the company planned to bring it to 90%, probably the highest in the industry (industry experts estimated that the average outsourcing level for the industry was lower than Ducati’s)” (Gavetti, pg 10). By doing this, Ducati is able to reduce fixed asset investment, and mainly focus on product design, development and quality control. To ensure its product quality, Ducati collaborated with a number of the well-known firms such as Ferrari, Lombardini, Motori, etc, and formed the “Engine Technology District” (Gavetti, pg 11).
All 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 “R&D, purchasing, suppliers’ quality control, employee training etc” (Gavetti, pg 11). Ducati is very strict on selecting suppliers. Since suppliers play key roles in providing quality motorcycle components to the company, Ducati selected different suppliers for each component. Also, Ducati did not make long-term contracts with suppliers except for the major components.
Ducati simply switched to different suppliers when the short-term contracts were over if needed. This ensured the quality and reliability of Ducati. Another 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. First of all, Ducati had full control of the distribution and marketing process.
Instead 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. All the subsidiaries were managed under Ducati, which help to retain traits of Ducati’s brand (Gavetti, pg 12). This also increases the profit because Ducati owns the total sales made by all subsidiaries. Second, Ducati re-organized its network of dealers. Unlike many other companies, Ducati concentrated to improve the dealers’ performance instead of geographic expansion.
There are many aspects that Ducati took into consideration for dealers’ performance such as sales forces, good technical assistance, and an adequate physical space for product display (Gavetti, pg 11). Instead of expanding 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. Lastly, 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.
These stores provided a unique retail environment emphasizing the distinctive traits of Ducati’s Brand: while a ‘History Wall’ displayed images of Ducati’s racing heritage, and ‘Engineering Wall showed a large scale engineering drawing of the 916, Ducati’s symbol” (Gavetti, pg 12). 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 unique production development and R&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 Cagiva Research Center and the Ducati Design center. The Cagiva Research Center focused on external design and Ducati Design Center focused on internal design. “As a consequence of these efforts, the company greatly reduced the ‘time to market’ for new product launches” (Gavetti, pg 12). This means that Ducati is able to develop a new model in shorter time period. Also, Ducati integrated R&D and marketing for technological improvements. Through market research and customer feedback, Ducati managed to improve their technology and design.
The World of Ducati is a strategy that helps the development and improvement of the value of the brand through a set of activities. “In addition to ‘Ducati Stores,’ the ‘World of Ducati’ compromised a series of other activities that had been consistently developing in the past three years” (Gavetti, pg 12). One activity is that unlike its competitors, Ducati implemented an “Open Paddock” 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 ccording to a company’s website survey, the most important purchasing factor is the Superbike competition, followed by magazine tests, sports orientation of the brand, and its link to competition (Gavetti, pg 12). All these factors definitely improved customers’ loyalty to Ducati’s brand which is very important to sustain customers. Racers greatly collaborated with the R&D process of Ducati by constantly testing the machines through competitions. Another activity is that, unlike its competitors, Ducati only used special magazines as the source of advertisement.
One of the most popular campaigns was “Ducati/People,” which “featured Ducati workers and their motorcycles in and around Bologna in black and white retro’ pictures, and emphasized some central values of the brand: the Italian style, the history of the company, the young age of the riders and their sporty attitude” (Gavetti, pg 13). There are many other well-known specialized magazines that are related to motorcycles. Others activities involved Ducati’s museum tour, owners clubs, and social events.
All these activities attracted many customers to learn the history of Ducati, get indepth knowledge of Ducati and ultimately increase the number of fans and customer base. Performance analysis So far, Ducati enjoyed the dramatic profit growth. “Revenues quadrupled since 1996; EBITDA had grown from 33. 4 million Euros in 1997 to around 60 million. In 2000; market share had gone from 5. 1% in the sport bikes segment in 1997 to 6. 7% in 2000” (Gavetti, pg 1). This is clear proof that Ducati is a very competitive opponent to many companies within this industry.