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.

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 according 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 in-

depth 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. Ducati had indefinite growth in profit margin and gross margin (see exhibit) over the
past 5 years. Ducati had a net loss in 1998, which affected the profit margin of that year. This is

because Ducati needed to invest more on a new sub-segment of sport bikes. A larger portion of

its revenue was utilized 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 1997. Ducati did well in all 5 years based on

gross margin. The growth was indefinite but, it was satisfying. Also, based on exhibit 2, Ducati

did well in terms of sales. As shown below, the highest sale growth was in year 2000.

Solutions and recommendations

Ducati must either choose to penetrate the cruiser market or just focus on current

segment. There are advantages and disadvantages to both options.

The disadvantages for Ducati to enter the cruiser segments are the following:

• Ducati must make heavy capital investment for a new product design and R&D

• Harley-Davison already dominates the segment

• Harley-Davison’s customers are considerably loyal

• May affect company’s brand loyalty

• May be time consuming

• Unpredictable economic condition

The advantages of entering the new segment are the following:

• Expansion of segment
 • Increase in market share

The disadvantages of focusing on existing segment are the following:

• Losing the chance of possible expansion

The advantages of focusing on existing segment are the following:

• Risk reduction

• Better customer service and support to existing loyal customers

• Sustain current brand name and strategic strength

• Continue increasing brand’s loyalty

Based on the above analysis, in order to compete in cruiser market, Ducati must meet the

following requirements. First, Ducati must have a product that is differentiated from its

competitors, just the way it Ducati has in the sport bike segment. The cruiser must have a

heritage of Ducati’s brand. In other word, Ducati must have its own way of a cruiser like BMW

and Harley-Davidson. To do this, Ducati needs to make heavy capital investment for design

process and R&D. By concentrating on the new market segment, Ducati may lose focus on the

existing segment and therefore lose the value of its brand. Second, Ducati needs a strategy to

attract customers on the new segment. It will be very hard for Ducati to penetrate the cruiser

market because Harley-Davison is already dominating this segment with its own style of strategy

that made it the most profitable in the industry. Also, the majority of Harley-Davidson customers

are highly loyal to the brand, which makes it harder for Ducati to gather a new customer base for

the cruiser segment. Coming up with a new strategy, may take an unreasonable amount of time
through research. Although, Ducati is able to make such capital investment that is require to

enter the cruiser market at the moment, unexpected economic downturn may affect Ducati’s

profitability in the middle of the process of entering the cruiser market.

In conclusion, Ducati should not enter the cruiser market. Although, entering the cruiser

market is a possible option, there is no need for Ducati to enter the market based on current

performance level. For the past five years, Ducati experienced 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 just focus and invest more on the existing segment. Ducati also

has its own style of strategy that makes it dominate in sport bike segment just like Harley-

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 existing customers and therefore increase their

loyalty even more.

Exhibit 1
Appendix 2

Exhibit 2
 Bibliography

E. Porter, Michael. “Understanding Industry Structure.” Harvard Business School. August 2007. Boston,

MA: President and Fellows of Harvard College.

Gavetti, Giovanni. “Ducati.” Harvard Business School. March 2002. Boston, MA: President and Fellows

of Harvard Collage.
 Section3

Memorandum
To: Federico Minoli, Chief Executive Officer, Ducati
From: Albert Bon Young Koo, Section 3, Senior Consultant, Bert Consulting
Date: May 4, 2009
Re: Focusing on Existing Sport Market Segment