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Proposed Strategic Plan for Ducati

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Summary:

Ducati has garnered great success over the previous years and many may argue that the turnaround has reached its peak. Their challenge is how to rekindle this momentum in order for it to last. The purpose of this paper is to analyze Ducati’s internal and external environments in order to identify its strategic position, and uncover its best strategic option in moving forward.

We will analyze their value configuration and identify their key strengths and weaknesses. When analyzing their resources, whether they have the potential for sustained competitive advantage, it must manifest four attributes: valuable, rare, inimitable, and non-substitutable (the VRIN framework). The company’s threats and opportunities will be identified in the external analysis, we apply Porter’s five forces model to gauge industry rivalry and PESTEL to uncover important trends that will impact Ducati. The key factors derived from these two analyses will be presented in a SWOT model, and use these to identify strategic options Ducati could follow.

We conclude that the company should maintain their strong focus in their niche market, but exploit the opportunities they can harvest from expanding their customer base and efforts in e-business; an untapped source of increasing revenues.

Ducati’s Strategic Challenge

Ducati is an Italian motorcycle designer and manufacturer that specialize in the sport bike market segment in which speed is most important; other segments being off-road/dual purposes, cruisers and touring. Its customers are increasingly younger males between the age of 25 and 35, including a portion of women who also like Ducati due to certain design attributes. Ducati’s strategy has been to develop a global brand that appeals to a broad range of customers, not only the extreme riders, while keeping true to its core values and traditions. Ducati is well positioned in a high-end Italian motor vehicle cluster, and take great pride in an identity connoting state-of-the-art engineering and design. Its corporate strategy has changed after Fredrico Minoli became CEO, as he wanted to leverage Ducati’s well-engineered product and brand to achieve double digit growth and equal Harley Davidsons profit level; increase market share from 4 to 10% (Thompson et al., 2012).

Since transforming into one of the most profitable motorcycle manufacturers in the world, because of a high price premium, Ducati has enjoyed growth and profitability (Gavetti, 2002). Their on-going strategic challenge will be to create and execute a successful strategy to maintain their growing success. Some of the challenges the company will have to confront is whether to expand into new market segments, how to reach new customers, or driving innovation in an industry where everyone perceives innovation as a key strategic advantage.

One alternative, already considered by Ducati’s top management, is to attack Harley Davidson’s traditional niche with a Ducati interpretation of the classic cruiser (Gavetti, 2002). The Ducati motorcycle is already a cultural icon so it becomes essential to remain true to the company’s vision and core values – the true purpose of their existence, when deciding on the right strategic move.

Ducati’s Strategic Position

Internal Analysis
By understanding how Ducati creates value, we can identify the company’s strategic resources that become their source for competitive, even sustainable, advantage (Barney, 1991). We identify their strengths and weaknesses. Ducati’s primary activities include transforming input into final products – motorcycles. Their value creation logic is based on a chain of sequential activities and coordination among them, i.e. a value chain (Stabell & Fjeldstad, 1998). The main value drivers for Ducati, which affects how the customers value the outcome, is their product and segment choices.

Brand Name. Ducati has built itself a strong brand name and image within their niche segment; sport bikes. Their motorcycles are a symbol of Italian design and tradition that makes them unique in the market; an asset that is inimitable. Another characteristic about Ducati is the true passion for the brand shared by all its employees. According to Minoli, it is ultimately the people who run the company, representing the “real soul” of Ducati (Gavetti, 2002). Strengthening its brand and image, Ducati.com became a powerful interface to connect with its customers, and to understand their needs and psychology. However, the company has never utilized its full potential. The internet is a great tool with global reach.

R&D: Technology. We may argue that Ducati’s R&D division creates value by identifying certain development opportunities, encourage innovation, and implement the best solutions. They “solve problems” which can be identified as a value shop; intensive technology (Stabell & Fjeldstad, 1998). The value creation logic differs somewhat from the logic of chain. The R&D department is characterized by non-standardized cases and where applying competences and expertise becomes essential for value creation. We may look at it as a process where all the main activities contribute to generating value. The main drivers in a shop are reputation and learning. Ducati houses a group of top-notch engineers both in the R&D and in the racing division, and their engineering team was reputed to be one of the most expert and skilled in the industry. With their technical superiority Ducati achieved success in the international racing circuit that also fueled a strong performance reputation. Over the years, the core attributes underlying Ducati’s identity and the uniqueness of their motorcycles, emerged as, the Desmodromic valve distribution system, L-twin engine, tubular trestle frame, Italian style, and Ducati’s unique sound (which the company attempted to patent) (Gavetti, 2002). The Desmo system became Ducati’s technical signature, unique to the brand. The past few years Ducati has invested heavily in new design technologies, product development and human capital. These strategic resources are what create customer value, differentiated from what their competitors can offer. Ducati’s competitive advantages enable them to offer their products at a higher price because customers are willing to pay more for the motorcycles.

Reliance on suppliers. Ducati implemented an aggressive outsourcing policy planning to bring it up to 90%, which is much higher than the average outsourcing rate in the industry (Gavetti, 2002). With their increasing reliance on suppliers, Ducati lacks direct control and are forced to create strong commitments with their dealers. The company also radically rationalized its network of suppliers through the adoption of more strict selection and quality control procedures. They reduced their suppliers from 200-130, mostly keeping the on short-term contracts (Gavetti, 2002). There is a risk that the suppliers may take advantage of the company’s dependence to behave opportunistically. If Ducati no longer possesses the resources and capabilities that provide them with competitive advantage, they may become “hollow” corporations (Thompson et al., 2012).

However, keeping in mind outsourcing has proven to be more flexible than vertical integration because suppliers make the investments. The value chain has a cost saving focus, and the cost drivers affecting value creation is scale and capacity utilization. Ducati’s value chain is linked to the value chain of their upstream suppliers and understanding the linkages between activities can lead to more optimal make-or-buy decisions, that again can result in either a cost advantage or a differentiation advantage.

Narrow product line. Ducati’s presence in the market is concentrated on a very narrow product line relative to its rivals. Their strong competitor, Harley Davidson dominated its niche and still entered the sport bikes segment by acquiring Buell motorcycles, posing a threat to Ducati. The company’s customer base keeps growing, and women have become an attractive new target. Certain features, like the low seat height and weight of Ducati’s most popular bike, the Monster, have already attracted women to some of its products.

External Analysis
There is a constellation of opportunities and threats encircling Ducati´s business venture, and we will henceforth clarify how these can affect its strategy. Porter´s five forces model will be applied to gauge intensity of industry rivalry and PESTEL analysis will be used to identify relevant macro-environmental factors. The motorcycle industry structure can be characterized as an oligopoly in which Harley Davidson constitutes the biggest threat with Honda, BMW, Triumph and Yamaha also competing.

Porter´s five factor model. There is an ongoing debate around the number of factors in this model, some saying that the state and complementarities should be added factors, while other praise it for its parsimony: PESTEL compensates this.

Threats from new entrants? Ducati´s sport bike segment is characterized by high investment costs in R&D, and this high barrier of entry plays to its advantage, especially considering its prowess in engineering. Efficient Japanese production techniques have also been implemented to optimize quality and production level. They have reinforced the entry barrier by collaborating with similar firms in its cluster (Porter, 1998), like Ferrari and Maserati, to form an “Engine Technology District” in which fruits from R&D, supplier quality control etc. is shared (Gavetti, 2002). There is however no single actor dominating the European market.

Threats from Substitutes? Motorcycles are not a very functional vehicle, so most people who buy a Ducati is seeking a thrilling experience and is likely to buy it as their second motor vehicle. Sports cars, boats and other kinds of motorcycles could however be a substitute for people seeking such thrills. Motorcycles do not depreciate as much in value as, say cars, so the switching costs are relatively low (Thompson et al., 2012).

What about buyers bargaining power? Buyers do have some bargaining power here since Harley Davidson entered the sport bike market in 1998 when they acquired Buell Motorcycles, and Minoli reacted by considering going into Harley´s niche cruiser market (Gavetti, 2002). The majority of Ducati´s customers are relatively young and hence not as economically secure as older customers.

What about suppliers bargaining power? They have pursued an aggressive outsourcing policy under the reign of Minoli, but they have been careful not to outsource their competitive advantage; namely design, R&D and quality control. Their most important suppliers are within their Italian cluster, like Brembo and Magneti Marelli, but they do rely on the Japanese Showa for suspension components. When it comes to riding gear, they are in a joint venture with Dainese.

PESTEL on industry drivers and changers. As Porter (1998) details, its important to have politics on your side when you are planning and executing your strategy, and tariff protection, trade, import, tax and other local policies affecting Bologna cultivates this cluster. One threat to Ducati would be a change in laws regulating public land vehicles, like e.g. EU directives proposing lower speed limits on motorcycles; Ducati is all about speed! Ducati puts much of its pride in the sound of their motor and wanted to patent it (Gavetti, 2002), but there is a risk of laws regulating sound pollution. World markets are much more open, but Ducati has been careful when it comes to outsourcing to e.g. Asian markets. The Asian Financial Crisis in 1998 does not seem to have had a significant effect on Ducatis financial performance, and the Asian economy had made a comeback by 2000 anyway.

There are social and demographic changes that Ducati have considered, like the increased interest in motorcycles among females. Ducati´s bikes weigh less and are lower in height than their competitors, making it easier for females to use them. Ducati has created Museums, special stores and a website to cultivate the social image of its brand, but it is facing R&D competition from Japanese manufacturers like Honda, Suzuki and Yamaha who are in all motorcycle market segments.

Evaluating Ducati’s Strategic Alternatives

It is key for Ducati to think strategically about how they can leverage strengths, and downplay weaknesses to seize opportunities and neutralize threats (Barney, 1991).

(1) Utilize Ducati’s strong brand and R&D to expand
Ducati has very specialized resources and capabilities that Minoli wants to leverage by getting into the cruiser segment, and it has a very strong brand that it can leverage across new products. Their brand is currently directed towards a fairly limited segment of the overall market, and studies on its brand attributes mirror this sport bike focus (Gavetti, 2002). Minoli has been very clear on his ambition to turn Ducati into a global brand capable of taking on the likes of Harley in brand awareness and profitability; like Harley´s healthy revenues from customization and apparels.

A related question is whether their innovations within mechanical engineering can be applied to other kinds of motor engines, e.g. for boats, snowmobiles etc.. Ducati´s R&D department has become more open after Minoli became CEO, and their HPE joint venture with Piero Ferrari and Ferrari car company could open up many fruitful opportunities for getting into related adjacencies.

There is a decent amount of growth in the market for small motorcycles, cruiser, touring, and off road/dual. All of Ducati´s competitors are in multiple segments, with only Harley Davidson also following a niche strategy to a high degree. Honda is an example of a company that has leveraged their very broad portfolio to great effect, and their R&D department benefits from the inputs from e.g. the automobile engine engineers (Gavetti, 2002); Honda has been a lurking competition in the World Superbike Championship as well.

Implementation. Executing this strategy depends on their ability to maintain their specialized R&D competencies even though they are pursuing a more general development strategy. This, in turn, pertains to the extent of strategic fit between these R&D programs and whether they also match with their manufacturing, distribution, sales and supply chain activities. Expansion will require a hefty capital investment, be time consuming and the outcomes are unpredictable. Its essential for Ducati to calculate the industry attractiveness of these opportunities, as pertains their profitability, intensity of competition and what the projected growth rate is; the BCG matrix is also a neat, though quite simplistic, tool to gauge how Ducati would be positioned dependent on market share and growth (Thompson et al., 2012).

(2) Maintain focus on current market and customers
One of the least exciting options would be to essentially stick with what they got. They have a strong brand and there is a high barrier of entry for its competitors, and gains from numerous inimitable complementarities within its cluster (Porter, 1998). Diversifying into other segments could be costly (43 million Euro) and risky since it could potentially water-down its brand as a state-of-the-art motorcycle company. Ducati customers have a high degree of brand loyalty, and european data on repeat purchase intentions shows that broadly diversified companies like Honda and BMW have less loyal customers from 1995-2000; data from Kawasaki is an exception (Gavetti, 2002).

Broader diversification could demotivate Ducati’s top notch engineering team and make them gravitate towards more niche focused companies in the area. Engineers at Ducati have voiced to Minoli that they would like to create a more efficient engine and eventually to participate in the Grand Prix Championship, and Minolis rejection of such proposals could result in turnover. This could end up weakening both of its strengths, and consequently make it very difficult to pursue the market opportunities. Harley Davidson has a firm grip on the cruiser market, and the barrier of entry is hence far too high to warrant the risk.

Implementation. This strategy would require relatively little organizational change for Ducati, since its pretty much about maintaining status quo. However, it is important that they prepare for the threat that Harley and its Japanese competitors pose in the sports bike segment. Way to maintain their position would be to listen to the engineers desire to enter more championships and make Ducati the definitive super bike: Ducati´s accomplishments in racing was a strong purchasing factor in the U.S. market (27%) (Gavetti, 2002).

(3) Achieving leading position in e-business through Ducati.com
ICT has undergone a tremendous evolution (Arthur, 1996), and e-business is increasingly becoming a viable alternative to brick and mortar retail. E-business is not anymore only a space for low-end products, it is also a market for luxury products like Omega watches to be purchased online. The big question is to what extent Ducati should be in e-business; should it primarily sell apparel or should they also sell more bike components for those who want to customize, maybe even sell the bikes themselves over the internet as previously experimented with limited edition models. While an online emphasis could detract from its museums and stores, depersonalizing its brand, it could however offer a level of customization their niche consumer wants. An offensive launch into online retail could give its allot of first mover advantages that competitors would struggle to copy (Lieberman & Montgomery, 1998).

Minoli´s right hand and the mastermind who made Ducati.com, Cristiano Silei, was however very clear that Ducati.com should not be interpreted as Ducati becoming an e-business. 43% of their hits come from current customers, also called Ducatiphiles, who purchase everything from accessories to broken race engines as trophe pieces. It would be possible to offer customers the opportunity to greatly personalize their bikes by ordering online.

Implementation. The first bike, MH900 Evolution, was sold through Ducati.com on January 2000 (Gavetti, 2002). Even though Ducati is invested in stores through their single-franchise agreements, there would be various benefits from relying more on e-commerce. Its however important that they avoid direct competition with dealer outlets, and rather focus on selling different things online. Another option for Ducati would be to funnel second-hand items through their site, but that could end up cannibalizing their sales. Revenues from e-commerce have been climbing steadily and its less costly than brick-and mortar (Thompson, 2012). One major challenge for Ducati is however that buying a vehicle is much more of a hands-on experience than other products purchased online.

 

Recommendation – Ducati’s Best Strategy Option

Our suggested strategy for Ducati is somewhat of a hybrid of maintain focus on the current market and customer combined with an effort towards achieving leading position in e-business through Ducati.com. The arguments for and against these respective positions that we mentioned above still hold, and we will hence try to not repeat them too much in the following recommendation; such re-statements would add little value. Our hybrid does however circumvent limitations in both, and has propose succulent growth and profit within its segment, concomitant with reduced risk.

This suggested strategy differs from Minoli´s plan of getting into the cruiser market, but we think it would behoove Ducati to opt for a less risky option. Even though Ducati has grow significantly after Minoli took the reigns, we do warn that one should not let such things get to ones head and cloud strategic vision. We don’t think Ducati is a typical company that can base its strategy on throwing a wide net into the ocean to maximize the catch, but rather one that should focus on quality over quantity (Porter, 1996). Ducati has a unique brand that is very dependent on what it connotes, i.e. state-of-the-art sport bikes, and anything that could jeopardize that could water down one of its key strengths. This is interconnected with its position in a unique cluster with similar industry leading companies, another point is that there seems to be a dissonance about strategy between the top management and engineers at Ducati; macro- versus micro-strategies (Salvato, 2003; Whittington, 2006).

Don’t stir the hornet’s nest. Ducati should not be to worried about Harley getting into the naked sport segment, since the state of Ducati´s R&D on these kinds of engines are in an entirely different league. This is reflected in the World Superbike Championship Hall of Fame, in which Ducati has dominated as manufacturer and in terms of riders. We hence think a proper reaction to Harley´s entrance, and the increasing sophistication of Japanese competitors, is to increase the focus on what Ducati does best, namely sport bikes. Ducati has the home field advantage, which it should defend fiercely by improving its design and engineering to a point where Honda and Kawasaki are firmly stationed as second-rate and, in the case of Harley, third-rate alternatives. Getting into cruisers would be tantamount to stirring the hornet’s nest, and could precipitate a very costly warfare that could seriously wound Ducati.

The female market. We know that females like Ducati because of their lighter weight and lower height. Boundaries between typical male and female hobbies are getting smaller, and this currently small female market could present a neat market opportunity. While other companies emphasize a very masculine brand identity, like Harley, it would behoove Ducati to consider making models specifically for females seeking a thrill; its hence very ironic that the most popular Ducati model among females is called “Monster”. We think this is an unutilized opportunity for customer expansion.

Investing into Ducati.com. We think e-business is an opportunity that Ducati should focus more on, since there seems to be a strong demand for Ducati memorabilia, merchandise and social features among its customers. Its focus should be on using it as a tool for sales and marketing, and also increase the amount of non-Ducati owners visiting it; don’t misstep by basing it on a preachment to the converted. An aggressive launch into e-business would give Ducati a first-mover advantage over its rivals, in which it could benefit from learning curve effects and pioneer a commercial arena that speaks to its increasingly younger riders. This focus on Ducati.com would very likely increase brand awareness, and create a broader recognition of its technical excellence.

One interesting feature that could edify Ducati.com would be to let costumers customize and personalize their bikes online. They could charge a premium for such services and take market share from regular custom shops. Such a service does not necessarily have to be limited to full-scale bikes, but it would also be possible to create small model-bikes for customers; so that they could collect their dream bikes.

Increased focus on micro-strategy. A new strategic emphasis lies on what happens at the micro level of the organization, and it makes perfect sense to base ones strategy on the latest discoveries in strategic management (Salvato, 2003; Whittington, 2006). This practice-turn in strategy evolves out of the dissonance there can be between broad and general long-term goals from management, and the micro-activities that constitute strategy in practice. Strategy should henceforth be a more evolutionary iterative process and not exclusively focused on some intermittent revolutionary turn-around. CEO´s like Minoli who came in and took the reigns of a company in duress are certainly going to play their part, but the goal should be to have a more careful study of those ambiguous micro assets in which key competitive advantages can be found. The people who operate where the spade meets the soil have inputs that are underutilized.

 

References

Arthur, B. W. (1996). Increasing Returns and the New World of Business. Harvard Business Review, 74(4), 100-109.

Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17, 99-120. Gavetti, G. (2002). Ducati. Harvard Business School.

Lieberman, M. B., & Montgomery, D. B. (1998). First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View. Strategic Management Journal, 19(12), 1111-1125. doi: 10.2307/3094199

Porter, M. E. (1996). What Is Strategy? Harvard Business Review, 74(6), 61-78. Porter, M. E. (1998). Clusters and the New Economics of Competition. Harvard Business Review, 76(6), 77-90.

Salvato, C. (2003). The Role of Micro-Strategies in the Engineering of Firm Evolution. Journal of Management Studies, 40(1), 83-108. Stabell, C. B., & Fjeldstad, Ø. D. (1998). Configuring Value for Competitive

Advantage: On Chains, Shops, and Network. Strategic Management Journal, 19, 413-437. Thompson, A. A., Peteraf, M. A., Gamble, J. E., III, A. J. S., Janes, A., & Sutton,

(2012). Crafting and Executing Strategy – The Quest for Competitive Advantage. UK: McGraw-Hill Education.

Whittington, R. (2006). Completing the Practice Turn in Strategy Research. Organization Studies (01708406), 27(5), 613-634. doi: 10.1177/0170840606064101

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