Ducati In Pursuit Of Magic

Memorandum Subject: Ducati: In Pursuit of Magic (A) Date: Feb. 19th 2013 Ducati is one of the premium motorcycle producers specializing in sport segment superbike from Italy. The company experienced booming in sales and reputation in 1996-2001. This boost had attracted Texas Pacific Group to pursue controlling interest in the company for higher expected future return. The economic boom somehow masked the mistakes made by Ducati during the period. When sales started to decline during 2002-2005, three major problems started to become more obvious among the management team: * Product discontinuity. Cost disadvantage compared to Japanese producer. * Decline in sales in U. S. market. Ducati needed to addresses these problems to put the company back on track. Before offering solutions to any of the problems mentioned above, we would like to dig into details about the industrial background, company strategic positions, and competitive advantages and disadvantages about the company. These analyses are especially beneficial to help identify potential opportunities and threats of the motorcycle industry and its sport segment. Five forces analysis are supplemented to our analysis. Threats: * Rivalry: rivalry among industry and the sports segment came from United States and Japanese motorcycle makers. There are intense competitions among brands for entire industry as well the sport segment. A major competitor for cruiser is Harley-Davidson, and Honda and other Japanese motorcycle producers constitute major competitors for the sport segment. * Currency fluctuation: exchange rate posted issues for international operations. Ducati and fellow motorcycle companies engaged in operations all over the world, exchange rate fluctuation generated uncertainty for the company.

This is for both the industry and for the sport segment. * Substitutes: there is a high incentive for alternative transportations for the US market. This hurt the industry as well as sport segment. * Government regulation: Chinese government posted regulations that prohibited motorcycle usage domestically for various reasons. This makes it hard the entire industry as well as the sport segment. * Entrant barriers for industry: low entry barrier due to three reasons. First, people with knowledge can build motorcycle easily. Second, low capital requirement for entrants. Last, there are low switching costs for customers. Opportunities: * Entrant barriers: high for the sport segment due to technology advancement, better design and engineer work, high capital requirement for entrants and distinctive incumbency advantages for established brand. * Buyer’s power: low. This is caused by the brand power and the brand loyalty. People want to pay premium for the bike to feel cool and different. There is a huge demand for motorcycle. * Higher buying power in BRIC. Consumers in those countries are more likely to spend on motorcycle. This is beneficial to the industry, especially the sport segment. More diversified riders lead to market growth. There are more women riders than ever before. This is beneficial to the industry and to the sport segment. The following part included company analysis and analysis of company’s strategic position. * Value drivers and competitive advantages: * Use a unique Desmodrimic valve control system to increase the engine performance * Use a engine that were built in a L-twin design to improve aerodynamics and weighted lighter * Special motorcycles had a low-hum sound. * Frame gave greater rigidity, handling power, and enhanced speed.

It offered more compact design architecture. * Superb in-house design and external design team teams. * Related field that increase value: Ducati Corse racing, apparel, local Ducati clubs, Ducati museum, Ducati riding experience training course, Ducati. com and Ducati’s multi-franchise distribution points and mono-franchise Ducati retail stores. * Cost drivers: * The large research and development for consecutive years. * Marketing cost associated with selected motorcycle publications. * The production line used the lean manufacturing, which decreases the production costs. Competitive disadvantages: * Cost disadvantage. Japanese motorcycle makers can produce cheaper bike with advanced technology. * Product discontinuity. Evolution of products that consumers do not recognize. * Do not intend to stretch and extend business to cruiser motorcycles, i. e. limited customers. * Relatively low market share than major Japanese companies, which occupied about 78% of total market share. This lead to low brand recognition. Even though Ducati has its competitive advantages, it does not mean that these advantages are sustainable.

In order to determine whether Ducati will remain competitive, Barney’s VRIO framework is going to be applied. Hence, four questions are going to be addressed in this part of the case study, which are the Question of Value, the Question of Rareness, the Question of Imitability, and the Question of Organization. * The Question of Value: * Ducati has a group of highly skilled engineers and an in-house design team which allow the firm’s products to have the attribute of speed, performance, and innovation. Such capability helps fulfill customers’ needs and perceptions. Ducati is positioned to be fast with good braking ability. The ability of producing sport bike with speed and safety makes its customers feel safe and reliable while using the product, which helps the firm to build up good company’s reputation. * The Question of Rareness * All the Ducati’s bikes use the Desmodromic valve control system which enhances the engine performance and only Ducati uses this system in the market. * All Ducati’s engines were built in the unique L-twin design which gives the benefit of improved aerodynamics and lighter weight.

This design is rare since the two cylinders of the engine are mounted at a 90-degree angle, which it has to work with the unique Desmodromic valve control system to reach its full ability. Moreover, it gives a unique low-hum engine sound which makes Ducati’s engine even more special. * The Ducati’s tubular trestle frame design was evolved from the Fornula One-inspired tubular trestle with Ducati engineers’ special design to enhance the performance features of the bikes. * The Question of Imitability * With Ducati’s investment in research and development, it would be hard for competitors to just imitate Ducati’s newest technology. Ducati’s in-house design team creates a barrier to imitation since its job is to design completely new model. Moreover, Ducati started to use online resources to gain insight into customers’ needs and perceptions. * Ducati’s Italian styling and origin lower the possibility of its design being imitated, yet it is worth to be noted that MV Agusta is owned by an Italian investment group and its designer Massimo Tamburini had worked in Ducati before, which make it easier for MV Agusta to imitate. * The Question of Organization * Ducati started to invest a lot of money in research and development, which boosted from €3. million in 1997 to approximately €26. 5 million in 2005. Such investment enables the Ducati to fully exploit the potential of its engineers and design team. * The internal culture of Ducati encouraging creativity and teamwork allows the engineers and design team to interact and be innovative. * The building of Ducati museum – the “World of Ducati” – allows Ducati to give museum and factory tour to enhance visitors’ experience, build up brand loyalty, and signify the company’s ability to be innovative or to create a dream. * Ducati’s purchase of Gio.

Ca. Moto and joint venture with Dainese help to build the Ducati brand by selling a wide range of products including Ducati apparel and accessories. * The establishment of Ducati Corse Racing team helps to publicize the Ducati brand by participating in professional motorcycle racing. The team also demonstrates Ducati bikes’ high- performance features. * Ducati’s support in enthusiasts’ clubs and the establishment of the Desmo Owners Club (which promotes Ducati’s event to the clubs) help to build the Ducati brand and brand loyalty. The Ducati’s eight country-specific websites not only have information on bike models, but also provide a virtual tour of Ducati’s world headquarters in Bologna, which enhances the customers’ perception to the Ducati brand. Moreover, the websites allow buyers to customize their bikes and also give feedback, which again help Ducati to gain insight into its customers and fully exploit its ability in producing high quality sport bikes. * Ducati has been attempting to build a strong brand by encouraging its dealers to restructure the stores to be in the Ducati-store format.

We proposed three alternatives to tackle the problems associated with our problems. 1. We propose to sell Ducati to produce synergy to premium car maker such as Lamborghini. This provided cost savings and promoted efficiency. 2. Improve and extend U. S. market to gain market share and profits by invest in human capital and better IT system. This corresponds to positive U. S. outlook after 2006. 3. Invest in Research and Development to carry out revolutionized products. In this way we are trying to replicate the revolutionized products that help the company out of trouble in 2003.

Our recommendation is alternative #1. Before analyzing #1, we would like to point out the drawbacks of the other two options. For alternative #2, it would take two years before the U. S. market become the largest market in the world for the motorcycle business. This postponed schedule is unsatisfied to the investment group who foresee better and immediate solutions for our problems. Another challenge for the U. S. market currently is that in the short run, competition and the low demand makes it hard for individual company to capture large profits.

For alternative #3, large amount of research and development input will somehow reduce return for the investment group in the short run. This might not be the primary interest for the investment group that takes controlling interest of the company. On top of that, there are uncertainties involved in the new product even with shortened new product issuance period. Lastly, new product development does not bring current return to the investment group, which is potentially not preferred. Alternative #1 is the best one of all.

It can potentially offer the best price for the investment group in that it can eliminate the downside risk for the company to go under. On top of that, business combination with powerful company such as Lamborghini would provide synergy. This synergy will provide cost saving for Ducati. First, since a lot of parts are produced in those shops, it is way much easier to produce it for themselves than for outside partners for the company. It can also cut down non-necessary division or labor for the cost saving purposes.

Additionally, acquirer with strong financial background can assist in expanding the U. S. market and engage in research and development process to produce a revolutionized product. I predict when the alternative# 1 get implement, the market share of Ducati will rapid increase. Because company such as Lamborghini has enough capitals to innovate different types of motorcycles. With the good fame of Lamborghini, their product will be wide noted and get into the market earlier than the competitors. Ducati will have a bright future and sustainable growth under that company.