Motorcycle Industry Essay

Ducati, an Italian company, has designed and manufactured motorcycles since 1926. As time passed by, the owner has changed and new strategies have been adopted. Starting from a small company opened by three Ducati brothers, Ducati now has become an obbligato in the motorcycle industry. Their sports segment is especially well-known by motor-racers. So what are their essential strategies and what are they facing? Overview of global motorcycle industry The global motorcycle industry includes four critical categories, motorcycles, scooters, mopeds and three wheelers. The total motorcycle market was worth about 48. 3 billions in 2004.

According to the report, the trend of worldwide revenues of motorcycle in past five years is optimistic and upward. There was about 2. 5% compound annual sales growth and 3. 3% units growth. The Asia-Pacific region, accounting for 56. 1% of the global market’s value, is in the leading position of the global market. The U. S, holding 17. 3% of the market, surpassed the European consumption which was approximately 16. 4% in 2004. The motorcycles are playing two disparate roles in different regions. Industry observers pointed out the role of motorcycle in Asia-Pacific region was an affordable source of transportation that runs as good as cars.

In contrast, North America and Western European treat motorcycle as a secondary recreational vehicle. As a result, it distinguishes global motorcycle market into high and low markets. An emerging segment in “BRIC” countries (Brazil, Russia, India and China) provides opportunities and a big stage for motorcycle industry, especially those higher-priced and higher-powered motorcycle producers, such as Harley-Davidson and Ducati. According to Exhibit 2, “BRIC” countries’ great amount of population and high growth rate of GDP provide a stable market to motorcycle industry.

The reasonable age structure of BRIC countries and their relatively lower median ages were other positive factors that might contribute to motorcycle market. The Exhibit 2’s 2001-2005 sales summary of BRIC countries strongly supported our statement that the strong economic performance of BRIC countries improved their motorcycle industry. From that report, the sales revenue and units from 2001 to 2005 stayed in a good shape, especially sales in India and China approximately 400 million per year. The highly increasing female customer is another contributor to the ncreasing motorcycle industry. Although motorcycle industry is growing and expanding, they are facing various threats when we apply Porter’s Five Forces analysis. Threat of entry On a mature stage of life cycle, motorcycle industry is not so attractive for new competitors to come in. The threat of entry for motorcycle industry is low when incumbency advantage, capital requirements, customers’ switching cost and economies of scale are considered. Firstly, in current motorcycle industry, there are several well-recognized brands, such as Honda, Yamaha, Harley-Davison and Ducati.

Some of them are building loyalty of customers by organizing owners’ clubs and sponsoring frequent rallies. Costumers are more likely to stick with those recognized brands or at least the brands they had experience with. The so many established brands and cumulative experience make it difficult for new entrants to survive in this industry. Secondly, the capital requirement of entering motorcycle is high. Most of the current motorcycle companies were founded by big automobile companies or private equity firms, such as BMW, Honda, and Suzuki.

The expenses on product lines, marketing, research and development are too high that not everyone can bear. Thirdly, the switching cost is relatively high for customers, as the cost of a motorcycle ranges from $4000 to $21000. People who are collectors or enthusiastic motorcycle fans treat their motorcycles as a long-term investment or a hobby. Finally, all current motorcycle producers enjoy the benefit of economies of scale. They benefit from large amount producing and sales with lower cost per unit. The Power of buyers The power of buyers in motorcycle industry is low.

Customers do not have strong bargaining power. The prices of motorcycles are not influenced by buyers’ pricing sensitivity but by motorcycles’ true value which are design, engine power and performance. The power of suppliers Motorcycles are composed by thousands of small pieces. Outsourcing is a popular way utilized by many companies. For example, Ducati was outsourcing near 90 percent of its production to third parties based on cost effectiveness. The switching cost is relative low for motorcycle producers to change from one to another. Substitute

There are so many substitutes of motorcycles, such as scooters, mopeds, three-wheelers, bicycles, automobiles and so on. As a choice of transportation, motorcycles are facing great challenge from all other transportation sources. Although People choose motorcycles for several reasons, such as fuel efficiency, comfort and ease-of-use, its substitutes also have one or two similar reasons. But motorcycles customers do have their own unique reasons, such as an engineered method of transit and represented concepts of coolness, freedom, rebellion and desire, which lower threats of substitute to some extent.

Rivalry among existing competitors The competition among motorcycle industry is highly intense. Many producers even have overlaps on similar target markets. The high rivalry limits the profitability of the whole industry. The competitions among Suzuki, Yamaha, BMW, Harley-Davison and Ducati are very intensive. All these producers try hard to differentiate their products to satisfy different customers’ expectations. Their prices similarly range from $4000 to $20000. More and more producers differentiate themselves by providing high quality services and features. And also they come up with various strategies to maintain their strengths.

Some of them invested more money in developing better performance engines and increasing customer’s experience. Others invested in additional products such as clothing, magazines and music. When we move on to the specific sports segment, the five forces analysis will not change dramatically. The sports bike, also called performance motorcycle, is characterized by forward seating and a lighter frame for higher speed. Threat of entrant The threat of entrant for sports segment is lower than the whole motorcycle industry as the high performance motorcycles have higher standards in the producing processes.

They require better engine, design, and technology support. In this segment, customers focus more on the brands rather than prices. The power of suppliers The power of suppliers is similar to the whole motorcycle industry. Ducati, who concentrates on sports segment, outsources most of its bike components but still keeps two main components, crank cases and cylinder heads. Many components can be sourced from multiple suppliers. The power of buyers The buyers have low bargaining power in sports segment also. The buyers of sports motorcycles spend more than the average cost of other kinds of motorcycles.

This customer group tends to be wealthier than the general motorcycle buyers, so they are less conscious of the price and care more about the design, performance and brands. Substitute There are fewer substitutes in sports segment than the whole motorcycles industry. Because of its higher performance and luxury characteristic, it looks like only luxury brand automobile with outstanding performance could be considered as a real substitute for sports bike. Rivalry among sports industry Although there are fewer companies focusing only on this segment, the demand of sport motorcycles is small.

According to the report, the sport segment over 400cc was estimated to have annual volumes of 642000 units in 2005. This was further divided into: superbike (256000 units), Naked (239000 units), Dual (116000 units) and sport touring (31000 units). In contrast to small demand of sport bikes, there were a relatively large number of manufactures in this segment competing each other, such as Ducati, Harley-Davison, Yamaha, BMW and so on. Because of the low price sensitive of customers, the profit margin of this segment is very good. The EBITDA ratio of Harley-Davison is approximately 20%, as an example.

Rather than compete on price, the majorities in this industry concentrate more on features and services. As a result, the performance, design, brands are factors that help distinguish from others. According to the above analysis, sports segment has lower threat of entrants, power of buyers and suppliers, fewer substitutes, but higher rivalry competition. The profitability level will decrease in the future due to more intensive competitions in sports segment, more investments required in research, development and advertising. And at the same time, the growth rate of demand is not high enough to generate profits.

Value Drivers and Cost Drivers in the Industry The motorcycle industry is often broken into four main categories based on use: touring, cruisers, sport bikes and off-road. The producers in different categories have unique strategies to survive. The value drivers that always exist in sports segment include unique motorcycle’s design, high engine performance, aesthetics, customer service, complements and many support activities. The common cost drivers include lowering cost material, money and labor. Due to intense competition among the motorcycle industry, Ducati’s market strategy focuses on value driver and narrowed scope.

Ducati primarily concentrates on sports segment (only 642000 units in 2005). The sports segment is further divide into: superbike, naked, dual, and sport touring. Ducati fully covers all those four categories. Ducati complies differentiation strategy with high degree of value driver. Ducati host various events, including speed week, riding experience, every year. it also sponsor or creates 130 clubs worldwide. Ducati fully opens manufacture to customer. The Ducati museum is one of the most important investments. The museum fully presents spirit and world of Ducati. It enforces loyalty of Ducatisti.

And also high achievement in racing strongly maintains statue of Ducati in sports world. In conclusion, the Ducati pursues a focused differentiation strategy. Competitive Advantages and Disadvantages of Ducati According to the data of year 2005, Ducati has several competitors in both the industry of global motorcycle and its relevant market, such as Kawasaki from Japan, Yamaha from Japan, BMW (Bayerische Motoren Werke) from German, and Harley-Davidson from the United States. The global motorcycle market share of Ducati is a tiny small pie, which is apparently also a competitive disadvantage of Ducati. Exhibit1 in the case) In 2004, Yamaha owns a significant portion of motorcycle market share of 10. 0%, right next to Honda which has 17. 8% market share. Harley-Davidson and Kawasaki come after Yamaha both with 9. 6% market share. BMW shares 2. 6%, and Ducati only carries 0. 7% globally. Ducati is obviously not a utility player who is good at most of the sub-industry in motorcycle market. In order to survive as a company, Ducati has to focus on one or a few segments in the whole motorcycle industry and do an outstanding job.

The second competitive disadvantage of Ducati is its narrow market area. As said above, Ducati has been focusing on Sports segment only, which brings a less wide market of motorcycle industry. If there is anything big happened making an earthquake effect on sports bike in general, then that would strike total sales of Ducati right on heart since its sales mainly depends on that one segment. Another thing is the price. Ducati sports bikes are not low-priced because of the technologies they offer and the Italian elements they carry. However, every coin has its two sides.

The trade off of focusing on one single segment indeed makes Ducati go into a deeper level vertically by giving up increasing variation of product types horizontally. Ducati relevant market share (4. 4%) is way higher than its market share in global motorcycle market (0. 7%), though it is still lower than most of its competitors (See Figure1: Comparison among Competitors). Ducati dedicates itself to keep developing its sport bikes with better design and powerful performance. “You strip away the fairing on Japanese bikes and you don’t know what brand it is.

You can strip away almost everything from a Ducati and you still know it’s a Ducati. ” It demonstrates that being different from its competitors, especially those from Japan, Ducati offers special and consistent look and feel including variations on engine capacity, design and color schemes. This is one of the most powerful competitive advantages owned by Ducati. In the whole Sports segment, the name of “Ducati” has become a premium symbol. Though it takes them three years on average and costs 20 million euros to develop a motorcycle engine, the best quality and professional technology have been fully recognized by customers.

High prices with high costs make it nothing special, but the great reputation and high-end brand value help earn a lot of customer loyalty. Also, by building up Ducati’s museums along with its “World of Ducati” plan, Ducati strengthened its brand value, and this is no wonder another important competitive advantage of Ducati. Hence, its high values with relatively high costs bring Ducati a comparatively high wedge in sports segment. VRIO Internal Analysis To determine whether Ducati has a sustainable competitive advantage, we then study the four aspects of Barney’s VRIO framework. Value

Ducati motor is known for its superior engineering, Italian heritage, slick design and an undeniable attraction for racing enthusiasts. Focusing on Sport segment of the motorcycle market, Ducati has over 80 years of experience in the field. The company has a strong niche position in the global motorcycle industry with a group of highly skilled engineers. They have most advanced Desmodromic valve control system used on their motorcycles to increase the engine performance twice as much as competitors’ engines and have special L-twin design on its engines which provides improved aerodynamics and lighter weight.

Ducati motorcycles also have a signature low-hum engine sound and their frames are built around the Formula One-inspired tubular trestle which gives greater rigidity, handling power, enhanced speed and a more compact design architecture. The lower seating and a lighter weight of Ducati motorcycles make them also attractive for female riders. The advanced technology and outstanding performance all root in the big focus and input on the company’s research and development.

The company’s participation in professional motorcycle racing also provides support to the research and development function as many features designed specifically for improving performance on the racetrack are later introduced into production Ducati motorcycles. Ducati definitely has the resources and capabilities that are adding value to exploit more opportunities for the company. Rareness Ducati is believed to have three top-notch attributes: a unique and differentiated product, a group of highly skilled engineers and a brand with high loyalty.

The company tried to create a “World of Ducati” to expand its influences and tell people Ducati represents a dream. One major investment was commissioning the building of a Ducati museum. They also bought apparel and accessories company and formed a joint venture with a special riding equipment manufacturer to take advantage of their strong brand. All families of Ducati’s sport motorcycles shared the common characteristics that gave them a consistent look and feel. “You can strip away almost everything from a Ducati and still know it’s a Ducati, but don’t know what brand it is when it’s Japanese bike. Those are where Ducati tries to do differently. And its unique Desmo system, powerful engines, Italian styling are what really makes it stand out. Imitation Ducati is the only Italian motorcycle company along with its major competitors. And it is specially located in the very heartland of iconic automotive designers region – Emilia so that its Italian heritage and styling are hard for those non-Italian companies to duplicate. Although there is no legal restriction preventing competitors from using their Desmo system, Ducati is still the only bike on the market that uses it. Also, Ducati is a company that keeps innovating.

They are trying hard to become a company like Dolce & Gabbana that knows what people want in the future. To better anticipate the future trend in motorcycle industry, they frequently contact riders through its websites, emails, forums or Minoli’s personal “Desmoblog” to carry out questionnaires or surveys on new product development and user satisfaction. This makes imitation even harder. Organization Since the moment Minoli joined the company in 1996, instead of trying to put a new strict organizational structure in place, he left the largely unstructured company alone to encourage creativity and teamwork.

However, this led to chaos on management and operation later on. A good example is the decline in the U. S. business. A head office move resulted in 100 percent of employees lost. The IT system was also changed so that they could not invoice for four month long. The company’s sales in the U. S. dropped dramatically because of this major disruption. Ducati is obviously not enough organized to fully exploit its competitive potential at this time.

Based on the four points, we conclude that Ducati currently enjoys a temporary competitive advantage with strength and distinct competence on its powerful performance and special design. (See Figure2) Ultimately, Ducati is still facing many of both opportunities and threats in the motorcycle industry. Developing better ways to approach more sustainable competitive advantages is something Ducati can never stop working on. A more organized firm is needed to exploit the full competitive potential of resources and capabilities, for a company like Ducati in a fierce industry of motorcycles.