Founded in Bologna, Italy in 1926, Ducati Case Study

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Founded in Bologna, Italy in 1926, Ducati is a leading manufacturer of high performance motorcycles. Since the 1950s, its motorcycles have dominated international motor racing competitions and have competed in road racing competitions with engine capacities of over 500cc (a measurement for the motor cylinder capacity). The motorcycle market is primarily spread across North America, Europe and Japan with new markets emerging in South America, India and China. Product diversification can be divided into four segments: the motor scooter market, the off-road market, the road market with engine capacities of less than 500cc, and the road market with engine capacities of over 500cc. The road market segment with engine capacities of over 500cc includes four sub-segments: sport, touring, dual and cruiser. The following analysis will investigate possible strategies for the company over the next 5 years.

Analyzing the Internal Environment

General Environment

Demographic -- Ducati has a diverse customer base with a median age between 25 and 35 years. 8% of its sales are female riders. The consumer spectrum can be seen as divided between those whose value performance and functionality and those who value lifestyle and comfort.

Economic -- Approximately 1.6 million motorcycles were sold around the world in 2001. The market can be divided into 4 sections: the motor scooter market, the off-road market, the road market with engine capacities of less than 500cc, and the road market with engine capacities of over 500cc. There are major differences in consumer preferences and section predominance in each of the world's major markets: with North America preferring cruisers, Japan preferring the motor scooter market and Europe possessing an even split between the two.

Technology - Post turnaround Ducati has invested heavily in R&D and is manned by a team of top and passionate engineers. The company's products are differentiated from those of their competitors by the Desmodronic distribution system, L-twin engine, tubular trestle frame, Italian style and unique sound. Ducati has developed a potent brand image as well as gained a reputation for technological superiority and performance. While the company's engineers have a reputation for excellent performance motorcycles, they have also demonstrated an ability to develop successful motorcycles in other sub-segments of the market, such as road racing.

General Conclusions -- The overall motorcycle industry can be understood as a highly competitive global market with extremely different customer demands based on national market, customer profile and lifestyle. Ducati stands at a crossroads as an organization. Incredible opportunities exist via capitalizing on its global branding and technical experience, Ducati can expand into developing markets, grow its female customer base and interest existing motorcycle owners, such as those interested in cruisers, through effective advertising and image control.

Industry Analysis

Profit Pool - The profit pool for Ducati is 60 million Euros in 2000 and is 7% of the entire motorcycle market. It is concentrated in technological innovation and marketing.

Barriers to entry - Ducati's buyers fall in the 25- to 35-year-old age group. The company hopes to address older audiences with news model but limited sales of this model suggest that consumer's needs are not being met. In addition, sparse dealer networks limit Ducati's exposure to potential customers and the company has no presence in big emerging markets, such as China and South America. On the other hand, a reduction in trade barriers in emerging economies Ducati may reduce costs and reach new customers by producing and/or selling in these new markets.

Substitutes - The cruiser market is typically characterized by older, wealthier consumers. Some of these consumers may choose to substitute motorcycles for cars to meet the needs of their growing families. However, given the high average income of a cruiser owner it is quite likely that he/she already owns a car in addition to a motorcycle, and thus the threat of substitution by products from different industries is quite low. There is also the small possibility of substitution by other segments of the motorcycle industry.

Buyers - The strength of the market leader's (Harley Davidson) brand globally, as displayed by very high brand loyalty, implies that cruiser buyers possess significant bargaining power. This is reinforced by the fact that a number of Japanese motorcycle manufacturers have (at great R&D expense) introduced cruisers that are technologically superior to Harley Davidson but have not been able to sway Harley's customers as the perceived switching costs are too high. Thus cruiser buyers appear to be influenced more by brand strength than the attributes of the product.

In addition, new entrants would be restricted in their choice of intermediate buyers (dealers) since many of them are locked into exclusive contracts with the companies they represent (eg. Harley Davidson).

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Another issue is that Ducati's buyers fall in a younger age group. The company hopes to address older audiences with its Sport Touring model but limited sales of this model suggest that consumer's needs are not being met.

Suppliers - The Company has strict selection procedures for suppliers of component, reducing their numbers by almost 20%. Ducati has two potential suppliers for every component and maintains short-term contracts with all except a few key suppliers, thus giving the company more flexibility, bargaining power and increasing competition among suppliers to improve quality. The platform approach to production results in increased accountability of the main component supplier who is responsible for sub-component suppliers.

As of 2001, 87% of production has been outsourced; standardized production of cylinder heads and crank shafts increases efficiency. The platform production approach reduces transaction costs and in-house quality control ensures consistent high quality products. Within Europe and North America, high concentration of suppliers and related industries results in increased competition, lower costs and innovations on the parts of suppliers and gives Ducati access to a larger pool of knowledge. On the other hand, Ducati's competitors enjoy high economies of scale. Companies such as Honda, Yamaha, BMW, Kawasaki and Suzuki spread their costs across a number of industries including automobiles, snow and water vehicles and heavy machinery. This also gives the competitors more bargaining power with suppliers.

Rivalry -- Ducati faces competition in two distinct directions. Ducati's main Asian competitors, such as Honda and Yamaha, supply the market at lower prices. Combined with Ducati's low quality/price perception, this is a big threat to the company. Ducati's main American competition is Harley Davidson. Harley commands a 48.1% share of the U.S. market, 25.8% of the Japan/Australia market and 8.1% of the European market for heavyweight motorcycle (>650cc). Since the cruiser market forms only a part of the heavyweight motorcycle segment, this implies that Harley possesses a higher market share of the cruiser market than the above figures suggest. Thus we can see that Harley Davidson enjoys a monopoly-like status in the U.S. And Japan/Australia while competition is much more evenly matched in Europe.

With the exception of BMW, most cruiser manufacturers have imitated Harley's styling while ignoring the brand building exercises that have led to Harley Davidson's success. What other cruiser manufacturers have done is made technological advances that meet the needs of European consumers for performance which could possibly explain Harley's relatively poor performance in the continent. In addition, Harley Davidson and BMW's products are priced higher than the prices of Japanese manufacturers.

Industry Conclusions -- The industrial profile of Ducati is challenging but has great opportunity. The company has the potential to expand its consumer base through product diversification, market development and reducing costs. It is critical that these changes are matched with strong advertising and marketing efforts to build brand loyalty which will diminished both substitution and attract new entrants. One area of concern is the economy of scale of Ducati vs. its competitors. While in North America and Europe, the company has a high concentration of suppliers resulting in increased competition and lower costs, companies such as Honda, Yamaha, BMW, Kawasaki and Suzuki spread their costs across a number of industries including automobiles, snow and water vehicles and heavy machinery. In conclusion, Ducati has the opportunity to maximize its profits and market access through strengthening its brand and ensuring that it plays to its strengths vs. its competitors.

Capabilities

Ducati's main capabilities are an innovative product development line and an established management ability to adapt to the economic environment. With a variety of cruiser and racing bikes being developed this potential for produce line diversification separates Ducati from its competitors. In addition, Ducati's management over the last few years have demonstrated their talents to help sustain the company and bring it back from the edge of bankruptcy in the early 1990's. Looking forward these capabilities can play towards expanding market share, developing new markets and attracting new customers in existing markets.

2. External Analysis

Analyzing the External Environment for Cruisers using Porter's 5-forces analysis:

Despite the fact that the heavyweight motorcycle market is the fastest growing segment in the industry, Ducati has not been able to increase its market share between 2000 and 2003. They attempted to expand into new markets by appealing to an older consumer with their Sport touring model,….....

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