In Pursuit of Magic Case Analysis free essay sample

Ducati is a specialized manufacturer of racing and sport motorcycles based in Italy. In this case report, we will analyze Ducati’s competitive position through an opportunities and threats analysis, Porter’s Five Forces, a value and cost drivers analysis, as well as the VRIO framework. Opportunities/Threats One of the biggest opportunities in the motorcycle industry is the growth trend of 3. 3% in unit sales over the past five years, mostly in the United States and Asia/Pacific markets. Also, the rapid growth of women ridership offers the potential of an even larger customer base in the future. In the sport segment in particular, growth in the next few years is expected between 2% and 3%. The history and brand recognition of Ducati will help them to attract some of these new customers related to industry growth. The industry continues to face the threat of adverse regulation relating to the safety of motorcycles. Also, the lack of growth in Europe may be signaling a change of preferences away from motorcycles to other forms transportation and recreation. This is particularly troubling for Ducati because most of their sales are to riders in European markets. Also, the industry faces the constant threat of negative exchange rate movements, especially related to the dollar, which devastated Ducati and other European manufacturers in recent years. Porter’s Five Forces 1) Barriers to Entry Overall, the industry has relatively low barriers to entry. 1) One barrier that exists relates to mechanical engineering expertise, which in the sport bike category may be even greater. However, automobile manufacturers may have some of required expertise already or they could hire the needed expertise relatively easily. Therefore, all existing car manufacturers are potential competitors. 2) A second barrier relates to fairly high capital requirements. Investments include the cost to purchase equipment and machines, raw materials, warehouses to store inventory, and to specialists for production and design. On the other hand, existing car manufacturers, again, may face negligible barriers due to the production similarities between the two industries. At the least they could convert an existing car production facility into a motorcycle production facility. 3) The third barrier relates to the established brands of the incumbents. After so many years of motorcycle production, Ducati is a strong brand in the industry. Any new entrants including existing car manufacturers would have to compete with these very successful brands. 2) The Power of Suppliers The power of suppliers is low. Inputs for motorcycles are fairly standard and cheap suppliers exist in the Far East and India. Suppliers depend heavily on the main motorcycle manufacturers, thus their bargaining power is relatively low. In particular, by 2001, Ducati has outsourced the majority of its production to third parties. If suppliers were charging high prices for their service, then Ducati would simply manufacture these parts themselves. 3) The Power of Buyers The power of buyers is relatively low due to the lack of high-volume buyers and product differentiation. Ducati’s global sales network is a combination of 800 multi-franchise distribution points and 151 independent retail stores. In the U. S. market, Ducati predicted that in order to make a distribution point profitable, each place had to sell 200 motorcycles per year which comprised small portion of Ducati’s sales (especially under the circumstance that all of the European brands had low volume in the U. S. and none could stand for a single-line dealer). Moreover, unique design and the use of Desmo system differentiated Ducati models from other products. When buyers purchase product in low volume and the product is highly differentiated, the buyer power is low. 4) The Threat of Substitutes The threat of substitutes is relatively low. The Asia/Pacific market buys motorcycles because they are cheaper to buy and operate than cars, which is unlikely to change in the near future. The U. S. and European markets buy motorcycles for the purpose of recreation and no readily-available product is threatening that purpose. 5) Rivalry The rivalry in the motorcycle industry is very high. There are many brands such as Suzuki, Kawasaki, Yamaha, Honda, BMW, Harley Davidson, and others which all competing for market share across different categories. In the entry bike category, the Japanese firms have priced some of their European rivals out of the market. In the racing category, the firms literally compete on the track in races that managers believe greatly influence unit sales between them. Value Drivers/Cost Drivers/Strategy The key value driver in the industry appears to be customer acquisition. Once a consumer is acquired (buys a motorcycle) they continue to buy accessories for their bike and merchandise of the same brand for years to come. This nature makes the acquisition of a first-time motorcycle buyer extremely important as they are likely to become a lifetime customer. Another value driver is success on the international racing circuits which increases brand image and visibility, and thus sales. The key cost drivers are parts and components which account for 93% of Ducati’s cost of goods sold. Other cost drivers include research and development, advertising, and assembly costs. Ducati pursues a focused-differentiator strategy with a niche around sport bikes. They charge significant premiums than their competitors overall. Ducati mainly increases their brand’s visibility by their bikes’ performance on the international racing circuits. They also operate a museum/factory tour and support Ducati riding clubs to boost their brand and the Ducati lifestyle. Competitive Advantages/Disadvantages Ducati’s main competitive advantages are its brand as well as its history. They offer a unique and differentiated product and have a brand with high customer loyalty. The brand benefits from its association with the Emilia region, home to Ferrari, Maserati, and Lamborghini, where the majority of Ducati’s components are built. The brand is also boosted by its strong performance in professional racing and the establishment of the Ducati museum. Ducati also has several technological advantages such as the Desmo control system which allows Ducati’s 2-cylinder bikes to perform as well as competitors’ 4-cylinder engines. Also, Ducati’s L-twin design provides lighter weight and improved aerodynamics. Finally, the low-hum engine sound, enhanced speed and greater rigidity brought by the Formula One-inspired tubular trestle, and Italian design were all elements that made Ducati be more attractive to the customers, especially female riders. The firm is disadvantaged in the entry bike category. The Japanese manufacturers are successfully selling their entry bikes with more technology at lower prices. Furthermore, the effect may be even worse if the Japanese brands are retaining these customers on their future motorcycle purchases. Also, Ducati recognizes a certain discontinuity in their product mix. Ducati replaced its famous and classic 998 model with the newer 999, which was unsuccessful. People tended to like classic design and not the more advanced, but un-familiar design of the 999. Also, 90% of Ducati’s inputs are being outsourced to third parties which means they may have too strong of a reliance on their suppliers. Finally, Ducati is also struggling to regain market share in the U. S. after relocating their regional office. During the relocation, the company lost 100% of its employees and needs to make up for lost time. Some of these disadvantages may be reflective of poor management. Driving the â€Å"Wedge† Ducati has a wider wedge than its competitors due to the large premiums that it charges. For example, in the Hyper-Sport, Sport-Touring, and Naked categories, Ducati estimates premiums ranging from 20% to 34% in 2006. However, their wedge could be driven wider if standard component parts were sourced from cheaper areas such as the Far East and India. Also, by applying the â€Å"Platform† approach, Ducati may be able to consolidate their demand among a select few suppliers and recognize volume discounts as well as reduced transportation costs. VRIO Analysis Ducati’s resources include high-quality engineering, a unique history, and high customer loyalty. The high-quality engineering allows for better performance than other manufacturers and thus price premiums. Their history and customer loyalty help to neutralize the threat of their rivals manufacturers. Also, the advantages of the Ducati racing include: media attention, increased brand visibility, as well as demonstrating Ducati’s performance to potential customers. The rareness of Ducati bikes relates to their production in the Emilia region of Italy. Additionally, Ducati’s use of the â€Å"Desmo† system and the L-Twin design are exclusive. However, some of these rarities may be exploited by Ducati’s competition in the future. The ability of competition to imitate Ducati products is very low. The Ducati brand, technology such as the Desmo system and L-Twin engine, and design would all be difficult to imitate. To imitate, a firm would require significant capital investment, engineering expertise, and the reputation for high-quality sport bike manufacturing. On the aspect of organization, it seems that many of Ducati’s rivals face similar challenges. Many of the European manufacturers lack the volume to setup selling and distribution channels in the U. S. Honda, however, has captured much of the U. S. market and can more effectively distributed its motorcycles in the U. S. market. Conclusion In conclusion, the motorcycle industry have a favorable outlook due to growth in the United States and Asia markets, and â€Å"BRIC† countries also provide a beneficial environment to motorcycle sales.