one page summary about the Ducati case andshort answer for :
1) How did Ducati become the second most profitable motorcycle maker? What is the fundamental economic logic of Minoli’s turnaround? – Cost advantages or differentiation?
2) Can Ducati sustain its competitive advantage?
Ducati 9-701-132 R E V . M A R C H 8 , 2 0 0 2 ________________________________________________________________________________________________________________ Professor Giovanni Gavetti prepared this case solely as the basis for class discussion. Professor Andrea Lipparini of the Cattolica University of Milan contributed to prepare the industry overview. The author wishes to acknowledge Professors Tarun Khanna and Jan Rivkin for comments on an earlier draft. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. G I O V A N N I G A V E T T I Ducati By the end of 2000, Federico Minoli had won his battle. Over the past five years, the “turnaround artist” -- as Forbesi magazine dubbed him –- had transformed a company on the verge of bankruptcy into one of the most profitable motorcycle manufacturers in the world; a mechanical concern into a global brand; a fast motorcycle into a symbol of Italian design and tradition, extreme performance, and technical excellence. Under Minoli, Ducati had enjoyed explosive growth and profitability. Revenues had quadrupled since 1996; EBITDA had grown from 33.4 million Euros in 1997 to around 60.0 million Euros in 2000; the market share had gone from 5.1% in the sport bikes segment in 1997 to 6.7% in 2000 (see Exhibit 1). Despite this success, Minoli was concerned with the future of the company. He knew that Ducati could not grow indefinitely, and was struggling with what strategy might overtake these bounds. Minoli and the rest of Ducati’s top management team were considering different alternatives. One alternative was to attack Harley Davidson’s niche with a Ducati interpretation of a cruiser. Was this broadening of Ducati’s traditional niche the right move to sustain the profitable growth of the company? The Market for Motorcycles in 2001 The roots of the motorcycle industry date back to 1868, when Louis Perraux installed a steam engine on a rudimentary bicycle. In 1894, the Hildebrand brothers and Alois Wolfmüller produced the first motorcycle with an internal-combustion, two-cylinder gasoline engine. The motorcycle quickly became a cultural icon. As T. Krens, the curator of “The Art of the Motorcycle” exhibition at the Guggenheim Museum in New York, observed: The motorcycle is a perfect metaphor for the twentieth century. Invented at the beginning of the industrial age, its evolution tracks the main currents of modernity. The object and its history represent the themes of technology, engineering, innovation, design, mobility, speed, rebellion, desire, freedom, love, sex, and death. Park the latest Ducati, Harley, Honda, or BMW on a street corner in any city or town in the world, and a crowd will gatherii. For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. 701-132 Ducati 2 Products Approximately 1.6 million motorcycles were sold around the world in 2001 (see Exhibit 2). Industry experts divided the market for lage-displacement motorcycles into four segments: off-road, cruisers, touring and sport bikes. The off-road segment typically included both motorcycles for purely off-road use, and motorcycles designed for both on-road and off-road use (dual purpose bikes). These motorcycles were characterized by an upright ergonomics, thickly padded seats, soft shocks, and superior sturdiness. The largest players within this segment were all of the Japanese manufacturers, KTM, BMW, and Huskvarna. Cruisers were big motorcycles with an upright riding position. Their design emphasized styling over comfort and speed, and was preferred by many American riders. Harley-Davidson dominated this segment, while Japanese companies such as Honda, Yamaha, Suzuki, and Kawasaki imitated the traditional Harley style. In 1997, BMW introduced its own interpretation of a cruiser, which enjoyed a stunning commercial success. Touring bikes were larger motorcycles equipped for longer rides and greater comfort. Within this segment, the three largest players were BMW, Harley-Davidson, and Honda. Sport bikes had lighter frames, a more forward seated position, and emphasized speed, acceleration, and minimal comfort. This niche, which Ducati identified as its relevant market (see Exhibit 3), could be further disaggregated into four sub-segments: hyper-sport (extreme performance, closely derived from the racing world), super-sport (high performance, good handling and low weight), naked (good performance and urban riding) and sport touring (speed and handling, married with comfort for longer rides). Japanese companies dominated this niche, while European firms such as Ducati, BMW, and Triumph also vied for market share. Harley-Davidson entered the sport bike market by acquiring Buell Motorcycles in 1998. This segment was Ducati’s reference market. Customers A wide variety of individuals, with equally different tastes, bought and rode motorcycles (Exhibit 4). “Knee down,” or racing aficionados, sought extreme performance and functionality (e.g., reliability and technical excellence). ”Easy-riders” lay at the other extreme, and associated the motorcycle with a particular lifestyle. “Weekend riders” and “highway lovers” were more interested in attributes like functionality and comfort, while a large portion of “undecided bikers” preferred a more balanced and versatile bike. Each customer type differed by age, income, education and gender. For instance, the median age for a Harley-Davidson customer in 2000 was 46 (up from 35 in 1987), while most of Ducati’s buyers, whose median age had consistently decreased in the last few years, ranged between 25 and 35 years old. Women had become an attractive new customer base for motorcycle manufacturers, and were particularly important to some manufacturers like Harley and Ducati. Harley’s proportion of female purchasers had increased from 2% in 1987 to 9% in 2000. Ducati claimed that women were attracted by the low seat height and weight of its motorcycles and accounted for 8% of sales of some models of its most popular bike, the Monster. Specialized magazines, such as Motorcycle Consumer News, Rider, and Cycle World, catered to cycle buyers and educated them about the technical and stylistic characteristics of new products. They tested and ranked new motorcycles on several criteria, such as style, engine performance, handling, and overall comfort. Although the majority of the motorcycle companies advertised through specialized magazines, only some of them—typically the largest manufacturers—also advertised through the non-specialized press. Motorcycle firms also gained media coverage by participating in racing events. In addition, movies brought cachet to motorcycles. Motorcycles had been featured prominently in Hollywood movies, most notably the Triumph ridden by Marlon Brando in “The Wild One” and the Harleys ridden by Peter Fonda, Dennis Hopper, and Jack Nicholson in “Easy For the exclusive use of T. Phan, 2020. This document is authorized for use only by Trang Phan in MGMT 449_THUR_Spring 2020 taught by JUNG YEON LEE, Kennesaw State University from Jan 2020 to Jul 2020. Ducati 701-132 3 Rider.” Department stores like Bloomingdale’s and Harrods sometimes used motorcycles in their window displays. Technology and R&D From the first 7 mph wooden Daimler Einspur of 1885 to the 171 mph MV Augusta F4 of 1998, motorcycles’ performance, comfort, reliability, and ease of maintenance had improved vastly. These advances ranged from significant innovations, which offered superior performance and distinguished companies’ brands, to stylistic features introduced for little cost by combining modified components from old models. Kawasaki’s 1984 world’s first, 16-valve, liquid-cooled 4-cylinder engine, Ducati’s Desmodromic valve management system and L-Twin engine, or BMW’s anti-lock braking system were examples of the former type of innovation. Nevertheless, improvements like paint, trim, chrome, and exhaust pipe shaping were also necessary to appeal to modern bikers, especially when deference to the company’s styling tradition caused innovation to occur incrementally. Starting in the mid-‘70s, the most important trend had been the progressive introduction of electronic components. More recently, advances in materials science led companies to introduce composites, carbonium, titanium and magnesium to make their bikes lighter and more reliable. Industry experts estimated that in 2001 in-house R&D expenditures ranged between 2% and 5% of total revenues. Motorcycles’ technological improvements stemmed from different sources. Manufacturers concentrated on optimizing engine performance while decreasing motorcycles’ weight, as well as improving their aerodynamics to lower fuel consumption and toxic emissions. They also pushed suppliers to improve quality and technology, thus enhancing components like sophisticated “air- assisted” forks, mono-shock rear suspensions, and front and rear disc brakes. Especially since the early ‘80s, some major companies like Honda, Kawasaki, Yamaha, and Ducati had also used racing competitions to develop technical solutions and test materials, and eventually transferred effective solutions to their production series. The racing circuit encompassed a number of different competitions, the most important of which were the Grand Prix (with the 125 cc, 250 cc, and 500 cc categories) and the Superbike Championship (with bikes ranging from 750 cc to 1,000 cc). Industry analysts agreed that a recent trend that can be generalized to the entire industry had been a stronger integration between R&D and marketing, which caused a larger number of technical improvements or innovations to derive from market surveys or customer feedback. The pace of technological innovation was aided by the advent of CAD and CNC technologies, which greatly helped manufacturers’ efforts in styling, prototyping and assessing product feasibility. Manufacturing Most motorcycle companies invested heavily to automate production lines and worked with parts suppliers to improve quality and delivery. Only a few firms, such as Triumph, increased their level of vertical integration. Triumph in 2000 outsourced around 58% of its production. Many outsourced a considerable portion of their inputs. As a consequence, most of them had a highly flexible, streamlined production structure. 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. For instance, Harley established a supplier advisory council (SAC), made up of 16 suppliers, to expose supplier executives to the best practices of other suppliers in the Harley-Davidson network. For the