Summary for 2 articles and answer question for 2 cases

1. The length of the summary for each article should be between 15-30 lines (single-spaced, Times New Roman, 12-point font, 1-inch margins). Please use a space between the paragraphs.

2. Please make sure to separate each article and case by the title of the article or case in bold format.

3.The length of the case answer for each question should be between 10-30 lines (single-spaced, Times New Roman, 12-point font, 1-inch margins). Please note that for some questions you need to draw a table and use bullet points. You need to submit the case questions along with the article summary in one document. You can use outside sources to answer case questions, but make sure to paraphrase and have references in the text and at the end of the document. Please write the original question and use a space between the paragraphs.

Article(1): orter, M. E. (2001). The value chain and competitive advantage. Understanding business processes, Chapter 5, pp. 50-59. 

Article(2): MacMillan, I. C., & McGrath, R. G. 1997. Discovering new points of differentiation. Harvard Business Review, 75, 133-145.

Case(1): Ducati

Case questions:

1. In the last ten years, how has Ducati created and captured value? Conduct an internal analysis of the turnaround period (1996-2001) using the value chain model
2. Analyze the capabilities of Ducati.

Case(2): A Maestro without borders 

Case questions:

1. Is the classical music industry attractive? If you were head of an orchestra set on beating the competition, what strategic options could you have? What would be the likely results? 
2. What is the key logic underlying Rieu’s business success? 
3. Despite his impressive achievements over the years, André Rieu suffered a financial downfall at one point in his career, as described in the case. Seen from a blue ocean strategy perspective, what did he do wrong there? 

IN1380

A Maestro without Borders:

How André Rieu Created the Classical
Music Market for the Masses

08/2017-6304

This case was written by Mi Ji, Institute Senior Executive Fellow of the INSEAD Blue Ocean Strategy Institute, under
the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is intended to be used as
a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.

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“Classical music today is in deep trouble. It is not clear whether we can do more
than bear witness…”

Samuel Lipman, pianist and music critic1

“…[Audiences] are aging, and the collapse of arts education in the public schools
makes it difficult to find new listeners among a younger, more ethnically diverse
urban population. The repertory has grown stuffy and predictable, and daring
ventures tend to alienate old, reliable subscribers. Finances are shaky in all the
arts, but orchestras . . . are particularly vulnerable.”

Schwarz, K. Robert, New York Times2

In the past few decades, pessimism about the viability of classical music as reflected in the
above quotes has been growing. “Classical music is dying.” “There is no money, no interest,
no relevance.” “It’s about dead composers and a dying audience…there is no coming back
from it.” These are the observations and comments we often see in newspapers about classical
music.3 Average music listeners are not enthusiastic about their classical music experience
either, as they often feel bored, intimidated and frustrated by the stuffy atmosphere, the
pompous etiquette, the elitist repertoire and the impersonal rendition of music at classical
orchestral concerts.4 All this seems to suggest a bleak future for the classical music industry.

Classical Music: A Dying Industry with No Future?

As a form of art, classical music has been accorded a high place. But it is a known fact that its
market is shrinking and its influence waning among the mass population. It is now viewed as
an endangered species that relies increasingly on external support for its financial viability.

1 Samuel Lipman, Music and More: Essays 1975-1991. Evanston: Northwestern University Press, 1992, p25.
2 Robert K. Schwarz, “The Crisis of Tomorrow are Here Today,” New York Times, October 31, “Arts and

Leisure”: 31-32.
3 See, for example, Mark Vanhoenacker, “Classical Music Sales Decline: Is Classical on Death’s Door,”

Slate Magazine, January 21, 2014
(http://www.slate.com/articles/arts/culturebox/2014/01/classical_music_sales_decline_is_classical_on_deat

h_s_door.html, accessed May 23, 2017), “Sunday Dialogue: Is Classical Music Dying,” The New York
Times, November 24, 2012 (http://www.nytimes.com/2012/11/25/opinion/sunday/sunday-dialogue-is-
classical-music-dying.html, accessed May 23, 2017), Anna Goldworthy, “The Lost Art of Listening: Has
Classical Music Become Irrelevant,” The Monthly, October, 2015,

(https://www.themonthly.com.au/issue/2015/october/1443621600/anna-goldsworthy/lost-art-listening,
accessed May 23, 2017), “As Interest Wanes, Classical Music Hits Sour Route,” USA Today, April 14,
2015 (https://www.usatoday.com/story/news/nation/2015/04/14/music-industry-jobs/25787067, accessed
May 23, 2017), and Simon Behrman, “From Revolution to Irrelevance: How Classical Music Lost Its
Audience,” International Socialism, Issue 121, January 2009.

4 See, for example, Richard Dare, “The Awfulness of Classical Music Explained,” blog article, Huffington
Post, May 29, 2012

(http://www.huffingtonpost.com/richard-dare/classical-music-concerts_b_1525896.html, accessed May 23,
2017), Samuel Cottell, “Is Classical Music Boring,” CutCommon Magazine, January 19, 2016
(http://www.cutcommonmag.com/is-classical-music-boring/, accessed

May 23, 2017).

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That was not the case 150 years ago, when classical music was the mainstay of popular
culture. Emerging from the performances commissioned by the royal courts of Europe,
classical music became an independent industry in the 19th century. It was so much a part of
daily life in Vienna, for example, that one could often hear Johann Strauss playing his waltzes
while strolling through the public gardens. Talented musicians were no longer treated as
subordinates of nobles and were worshipped by middle-class fans in vast numbers. As
audiences grew bigger, concerts increasingly moved from salons and courts to larger halls
destined solely for performance. Professional orchestras were established to deliver the works
composers created for their new audience. Many of the top orchestras today such as the Berlin
Philharmonic, Vienna Philharmonic, London Symphony Orchestra and the ‘Big Five’
Orchestras in the US, namely the New York Philharmonic, Boston Symphony Orchestra,
Chicago Symphony Orchestra, Philadelphia Orchestra and Cleveland Orchestra, were all
founded in the late 19th century or early 20th century to meet the rising demand for classical
concerts.

In the meantime, new rules and etiquette were created for the full-fledged industry. In an 18th
century court, where musicians performed in intimate settings, appreciative clapping, cheering
and even conversation were acceptable during a performance. Now, as concert halls became
much bigger, the distance between the ensembles performing on stage and their audiences
widened and the larger audiences made more noise. As orchestras played unamplified, new
requirements for audience demeanour were called for. Composers like Richard Wagner
formally demanded the audience to be quiet during the presentation of their works. Respectful
fans followed the advice and made it a general rule for concerts. This tradition evolved to
become the industry standard: people listened solemnly and reverently, reserving their
coughing and clearing of throats for a pause in the music. To ensure the integrity of the
musical presentation, they were in general not supposed to clap between movements of the
same piece. Attending a live concert became a largely inward and constrained emotional
experience. On the other hand, the conductor and his orchestra, dressed sombrely, focused
their attention on the music itself rather than interacting with the audience.

While the classical music industry continued to uphold its proud heritage, cultural shifts were
taking place in the post-war world as artists like Elvis Presley and the Beatles ushered in the
rock ‘n’ roll era and paved the way for the gigantic pop music industry. Easy-listening pop
music with its anti-elitist undertones appealed to the younger generation and beyond, bringing
them from lofty concert halls to vast stadiums.

Since then, the audience for classical music has been aging. According to various reports, the
age of the average American audience for a symphony concert in 1937 was 30.5 By 1982 the
average went up to 40. In 1992 it was 45, and in 2002 it reached 49.6 In Australia, the largest
proportion of attendees at classical music concerts in 2009-2010 were aged 65-74.7 In France,

5 Margaret Grant, Herman S Hettinger, National Orchestra Survey, American Symphony Orchestras, W.W.

Norton & Company, Inc., 1940.
6 Greg Sandow, “Important Data,” in Greg Sandow on the Future of Classical Music: An Artsjournal Blog,

November 24, 2006, http://www.artsjournal.com/sandow/2006/11/important_data.html, accessed May 23,
2017.

7 Anna Goldsworthy, op. cit.

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a 2008 study by the Ministry of Culture found that 50% of classical concertgoers were aged
55 and over.8

That is not yet the whole story. With the popularization of television media, the advent and
development of hi-fi stereo technology, and the availability of multiple formats of live
entertainment, the audience size for live classical concerts was shrinking in absolute terms.
On the one hand, classical music lovers found ways to enjoy high-quality classical music
outside concert halls. In America, an investigation into the potential audience for classical
music suggests that most of those who expressed some interest in classical music did not
regard the concert hall as the preferred place to listen, with the car being the most frequently
used “venue” for classical music, followed by the home.9 Here they could appreciate the
magnificence of classical music by selecting the pieces or just the sections they loved the
most, at the most convenient time, without having to worry about the attire they should wear
or the etiquette they should abide by. On the other hand, for those who loved to attend live
entertainment events, there were myriad offerings in the marketplace such as pop concerts,
theatre, opera, ballet and Broadway shows.

All this has led to a contracting market for classical music concerts. In 1982, merely 13% of
American adults reportedly attended at least one classical concert event. Twenty years later, in
2012, this figure was further reduced to 8.8%.10 And a study by the League of American
Orchestras shows that classical concert audiences declined by 10.5% between 2010 and
2014.11 Depending on the general economic conditions, ticket pricing strategies and many
other factors, concert attendance fluctuates. Generally speaking, the industry sells 70% of
seating capacity at best.12

A full-size orchestra typically employs 90-110 full-time musicians. On top of this, top-tier
orchestras often have several hundred managerial staff members, artistic support people and
part-time musicians on the payroll. A 2012 study shows that the median number of employees
in 13 top orchestras in the US was 617.13 On average, each orchestra gives more than 170
concerts per year.14 Big concert halls normally have a maximum seating capacity for about
2,000 people. To maximize revenue, orchestras normally employ a price discrimination
strategy for different seating positions in a concert hall. Overall price levels also vary
depending on the standing of the orchestra in the industry. For first-class orchestras, the
average price typically ranges between $130 and $300.

8 Limelight Magazine, “Music Briefing: Ageing Audiences,” October 19, 2012,
http://www.limelightmagazine.com.au/Article/319863%2Cmusical-briefing-ageing-audiences.aspx,

accessed May 23, 2017.
9 John S. and James L. Knight Foundation, “Classical Music Consumer Segmentation Study: How

Americans Relate to Classical Music and Their Local Orchestras,” October 2002.
10 “Share of adults attending a classical music event at least once in the past 12 months in the United States

from 1982 to 2012,” Statistica, Inc. (NY)
11 Zannie Giraud Voss, Glenn B. Boss and Karen Yair with Kristen Lega,“Orchestra Facts: 2006-2014: A

Study of Orchestra Finances and Operations,” League of American Orchestras, November 2016.
12 Robert J. Flanagan, The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic

Challenges, New Haven: Yale University Press, 2012.
13 “Report of Executive Compensation in Orchestras and Performing Arts Centers,” Wilson Group, June

2012.
14 Robert J. Flanagan, op.cit. , pp42-43.

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As musicologists and critics have been lamenting the situation and talking about the death of
classical music, orchestras have reacted by giving more concerts and hiring more superstar
conductors and guest soloists with the hope of drawing in more customers and, with them,
more revenue. For example, the Boston Symphony Orchestra nowadays gives more than 250
concerts annually. But artistic pay and benefits of the orchestra industry have been higher than
any other arts and cultural sector. In 2014 they accounted for nearly half (46%) of the average
budget of American orchestras.15 Top orchestras often pay over $1 million per year to their
leading conductor/music director, and top guest soloists are said to earn $30,000 to 70,000 per
appearance.

Some orchestras have also made efforts to attract new audiences to their concerts. Programs
like “Student Advantage” or “Under 18s Free”, for example, offer price discounts to young
people as well as free tickets for minors. Many orchestras have also held free educational
concerts, aiming to nurture interest among young people. These efforts to boost demand,
however, have failed to increase revenue significantly, while incurring further marketing and
production costs, putting even more pressure on orchestras’ rapidly disappearing profit
margins.

Traditional orchestras have had to rely heavily on financial support from philanthropic
organizations and public institutions to survive. During the first decade of the 21st century, the
‘big five’ orchestras in the US ran deficits in the millions of dollars. The Philadelphia
Orchestra filed for bankruptcy in 2011 and some others imposed pay-cuts on their
musicians.16 From 2012 to 2014, as the US economy emerged from the financial crisis of
2008, the general outlook appeared to have marginally improved. However, a recent study
shows that when investment income (e.g., earnings from endowment funds) was excluded,
revenues from performance activities on top of the current charitable income orchestras
received, simply could not support orchestras to break even. For 2014, the average orchestra
would have ended up with a deficit of $1.4 million, and shortfalls would have been the norm
for all orchestras with annual expenses greater than $300,000.17 This calls into question the
sustainability of the industry’s common business model during possible economic downturns,
when revenues from investment would shrink drastically. In fact, if orchestras were to rely
solely on their performance earned revenues, as pop artists do, almost none could survive.

In Europe, where orchestras are heavily supported by government subsidies, cuts in public
financing in the cultural sector have threatened the existence of some orchestras and resulted
in the downscaling of others. According to the German Orchestra Association, between 1992
and 2012, the number of German cultural orchestras fell from 168 to 132, representing a
decrease of over 20%. In the same period, budget shortfalls led orchestras to cut positions or
leave some musician seats empty, as the orchestras could not afford to fill them.18

15 Zannie Giraud Voss et al., op.cit.
16 See Robert J. Flanagan, op.cit., Chapters 1 & 6.
17 Zannie Giraud Voss et al., op.cit.
18 “Schleichender Abbau von Musikerstellen – Zahl der deutschen Kulturorchester sinkt weiter,” NMZ,

January 24, 2012. https://www.nmz.de/kiz/nachrichten/schleichender-abbau-von-musikerstellen-zahl-der-
deutschen-kulturorchester-sinkt-weit, accessed May 24, 2017.

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Enter André Rieu

Yet these difficulties were never relevant to André Rieu and his Johann Strauss Orchestra,
which he started in 1987. Since then, Rieu has been one of the biggest male touring artists in
the world in all music genres – from pop to hip hop to classical – for over a decade. In the
first half of 2009, for example, he sold out more stadiums than Bruce Springsteen, with $57.4
million in gross revenue, according to Billboard Magazine. Only Madonna, Tina Turner and
Britney Spears earned more revenue during the same period. Rieu plays for over 700,000 fans
every year and has sold more than 40 million CDs worldwide.

As a child, Rieu received an orthodox training in classical music. His father was a conductor
of the Maastricht Symphony Orchestra in the Netherlands. He and his five siblings grew up in
a house where the classical canon was revered. Rieu started the violin when he was five and
later on attended conservatories in Belgium, finally receiving his degree, the “Premier Prix”
from the Royal Conservatory of Brussels. He also spent 10 years playing in the Limburg
Symphony Orchestra in Maastricht, his hometown.

While fascinated by the world of music, even as a child he found himself frustrated with the
sombre atmosphere of concerts. No one smiled – players, conductor and audience alike.
Everyone appeared so serious and stiff, even though the music to him radiated so much joy,
love and life. As he later commented, “The classical music world is so snobbish. I think there
are people who use classical music to say, ‘I am better than you, because I know all the rules
and you don’t’. You’re not allowed to have fun or entertain.” To Rieu, music should above all
bring joy and freedom rather than being a constraint and a burden. “Why don’t you put some
flowers on stage? Why do you have the girls always in black dresses? Why do the people
always look so serious? Why does the conductor turn his back to the audience? No wonder
classical music was dying.” He questioned those “pompous orchestras”.19

It was in this spirit that he started his own Johann Strauss Orchestra. Since the orchestra gave
its first performance in 1988, Rieu has been taking classical music to people and places that
rarely show an interest in it. Today he is known as “the maestro for the masses”.20

André Rieu: Making People Waltz – and Happy

An André Rieu concert is an entirely different experience. While traditional classical concerts
are normally hosted in noble, solemn concert halls, André Rieu’s concerts take place in
stadiums or arenas, on city squares or in courtyards of castles. There are generally three venue
sizes for Rieu’s concerts: world-stadium-tour venues of between 25,000-35,000 capacity,
regular outdoor shows that play to around 10,000, and indoor concerts that draw crowds of
between 4,000 and 10,000. Even the smallest of his concerts accommodates twice the

19 Julia Llewellyn Smith, “King of Schmaltz André Rieu Waltzs towards a No. 1 Clash with Pop Prince

Robbie Williams,” Telegraph, November 11, 2012. http://www.telegraph.co.uk/culture/music/music-
news/9669220/King-of-schmaltz-André-Rieu-waltzes-towards-a-No-1-clash-with-pop-prince-Robbie-
Williams.html, accessed May 24, 2017.

20 Nina Siegal, “A Maestro for the Masses, if Not the Critics,” New York Times, December 21, 2016.
https://www.nytimes.com/2016/12/21/arts/André-rieu-dutch-violinist-dazzles.html?_r=0, accessed May 24,
2017.

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maximum capacity of a regular classical concert. But Rieu has never had to worry about how
to fill them – his concerts have always been packed with fans. At the Telstra Dome in
Melbourne, Australia, for example, Rieu drew 76,000 fans in a three-night engagement on his
2008 world stadium tour. In Romania, 12,500 tickets for Rieu’s 2015 concert in Bucharest
were sold out half a year in advance and in just three hours.

In a world where top orchestras struggle to fill a concert hall, the popularity of André Rieu as
a classical artist appears to be inexplicable. Yet a closer look suggests that his concerts are
almost everything a traditional classical concert is not.

There is no requirement or peer pressure for dress code. People come to Rieu’s concerts
dressed in the way they feel comfortable, without having to worry about being “out of place”.
On a stage complete with flowers, performers are not dressed in the subdued black and white
attire characteristic of a classical orchestra; while the men are in relatively classic
eveningwear, female performers wear dazzling taffeta ballgowns. Instead of performing
unamplified like traditional orchestras, André Rieu uses amplification and sound
reinforcement equipment for his concerts so that high-quality sound reaches every corner of
the vast venues. Moreover, a huge panoramic backdrop and side screens provide cinematic
quality throughout, making it a feast not only for the ears but also for the eyes. Not only do
audiences hear the music, they are dazzled by colourful lighting, fireworks that erupt in
synchronization with the climax of the music, and aesthetic performances ranging from
waltzing in graceful costumes to ice-skating against a dreamland stage background.

The traditional separation between the orchestra and concertgoers is gone. Rieu’s musicians
are relaxed and seem to have as much fun as the audience. Not only do they enjoy playing the
music, they often dance, clap, sway and even whistle to the music. As the conductor and
violinist himself, André Rieu does not turn his back to the audience. Instead he faces them,
talks to them and interacts with them throughout the entire performance. Sometimes he will
lead his orchestra to enter the venue from the rear and walk through the audience towards the
stage, smiling, waving and winking at cheerful fans giving him a standing ovation, drawing
closer to see him better, then parting with respect to let him through as he approaches. On the
stage, not only does Rieu lead his orchestra with “[his] bow, [his] head, and [his] whole
body”, he also stirs up the audience with jokes and gestures, and leads them to make waves,
sway and jump in sync with the music. His fans are fascinated by his “rock-star demeanour”,
his “piercing eyes that can look at you from the stage, find you in an audience…and make you
waltz.” André Rieu introduces each song to the audience. He also gives a lot of room to his
orchestra and singers. Together, he and his orchestra take the stage with humour and a
genuine affection for the audience.

Rieu and his orchestra seldom play the heavy and solemn genre of classical music typically
played by traditional orchestras. When Rieu set up his orchestra, he named it the Johann
Strauss Orchestra with the intention of keeping the music of the waltz king alive. As a child,
Rieu attended his father’s concerts and noticed that “when he played waltzes as encores, the
audience seemed different. They smiled; they started to move in their seats. This music still
had a magic power to move people.” This was exactly what Rieu wanted to do: to play music
that everyone – not only the educated few – could enjoy and love. The waltz has therefore
become the dominant rhythm of his concerts and Rieu is hailed as the new waltz king by the
media and his fans. When he does play music beyond the waltz repertoire, he often changes
the time signature slightly to “make everything waltzable”.

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Rieu only plays music that “speaks to the heart.” He picks tunes that are most familiar to
average listeners and performs the “best bits”. This means forgoing the complex and
challenging pieces of classical music that tend to be more intellectual than emotional in
favour of popular ones and including only the highlights for easier listening. For example, he
reduced Ravel’s Bolero from 22 minutes to 4 minutes.

Yet waltzes and other familiar and short classical melodies are not the only music Rieu plays.
He will also intersperse “The Blue Danube” with “Feed The Birds” from Mary Poppins, Elvis
Presley’s “Are You Lonesome Tonight?” or Celine Dion’s “My Heart Will Go On”. His
concerts create a joyful and epic experience for the audiences by mixing well-known classical
pieces, pop songs and movie themes – anything that touches the heart.

At Rieu’s concerts, audiences do more than listen; they participate in the performance. On one
occasion, tens of thousands of viewers, on cue from Rieu, took out a plastic cup from their
concert party bags, removed the cover and gargled the water to create sounds to accompany
the orchestra in its performance of Verdi’s opera Aida, their laughter filling the air of the
venue. In Maastricht, the audience across the entire city square hailed in unison the opening
rendition of the famous song “Granada” by Mexican composer Agustin Lara, to the
satisfaction of André Rieu who had jokingly demanded “Spanish Spanish, not Maastricht
Spanish” from them. At almost every concert, Rieu and his orchestra stir the audience to
dance in the aisles as enthusiastically as at any pop concert. As one media report commented,
“André Rieu took the seriousness away from classical music.”21 Rieu has confirmed this,
saying he wants to bring back humour into classical concerts. More importantly, he brings
genuine joy to people. Often, as the “Blue Danube” is being played and the audience sway,
sing and dance in total self-indulgence, they appear to be the happiest people in the world.

On top of the fun family atmosphere, Rieu’s concerts also offer a feast for the senses, with
special effects such as smoke, explosions, balloon or dove launches that are alien to any
traditional classical concert. At a Maastricht concert, the soprano, dressed as Mary Poppins,
singing live, flew into the stadium suspended on an invisible wire and descended to the stage
to join Rieu and the other performers, to the awe and amazement of the audience. During his
world stadium tour “A Romantic Night in Vienna”, Rieu combined artistic expressions from
ballet, opera and figure skating to create a dream-like experience for his fans.

The average price of an André Rieu concert ticket is comparable to that of a top orchestra
performance with guest soloist appearance. But the sheer size of the audience means that an
André Rieu concert earns multiple times the revenue of a traditional concert. Depending on
the seating position, Rieu’s ticket prices range from around $60 to over $1,000, allowing fans
with different needs and means to either simply attend the event, have VIP seats, or even meet
André Rieu backstage.

The ages of André Rieu concertgoers are said to “range from 6 to 100”. Indeed, the family-
friendly and festive atmosphere draws people of different ages to Rieu’s concerts, some even
with babies in their arms. Most importantly, André Rieu appeals to a vast demographic that is
overlooked by both the pop and classical music industries. Pop music acts have always
focused on teenagers and adults below the age of 30, whereas orchestras, in view of their
aging and shrinking customer base, have tried desperately to arouse interest among the

21 “Getting the World to Waltz,” Billboard, May 15, 2010, p46.

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younger generation by giving discounted or free educational concerts at the expense of their
current profitability. Yet the great majority of the relatively mature demographic do not feel
they fit into the pop culture of younger people. On the other hand, they are either intimidated
or frustrated by the stuffiness of classical concerts so that they have seldom or never been to
such a concert. As music lovers they sometimes watch old concert recordings on TV but have
never considered the possibility of enjoying the music with a crowd in a public place, as their
children or grandchildren do at pop concerts. These people now come to André Rieu’s
concerts, some even flying from other countries or continents, dancing, swaying and
celebrating together with tens of thousands of André Rieu fans. There were also people who
first came to an André Rieu concert to accompany parents or friends, and were anticipating a
“schmaltz musical show”, only to find that they fell in love with the ambiance and
“abandoned themselves to the joy of listening to the best bits.”

As executives working for Rieu acknowledge, people who like André Rieu are more affluent
than the average teenage kid… they want to pay money to get something they like. They don’t
expect music to come to them for free.22 These people form the solid fan base of André Rieu
and his orchestra. Over the years, Rieu has played for more than 15 million people worldwide,
giving from 70 to 112 concerts per year. Since 2008, he has stayed consistently on Billboard’s
top 25 touring concerts list, grossing from $40 million to $96 million annually.

The Waltz King’s Expanding Business Empire

The huge success of André Rieu goes beyond live concerts. Rieu’s fans love his musical
programs so much that he is able to leverage his brand across multiple streams of revenues
from the merchandising of posters and calendars to perfumes and recordings. In addition to
albums, his performances, which have a strong visual appeal, have also been made into DVDs
and distributed around the world. So far he has sold over 40 million albums and DVDs and
notched up 30 No.1 chart positions worldwide. Again, Rieu’s fans who were very much
ignored or forgotten by the music industry form a strong customer base for these products.
According to Pierre Rieu, André Rieu’s son and manager of his production company, unlike
teenage music lovers, these customers “want to have the real thing: the disc in their hand, to
see the booklet, put the DVD in the player and watch the show.”23 All this allows André Rieu
to be less impacted by problems such as illegal downloading in the digital age.

André Rieu’s performances have also been broadcast on TV and screened in cinemas in many
parts of the world. TV broadcasts of live concerts and event appearances have boosted album
sales and concert ticket sales as their emotional and visual impacts are so strong that people
are enticed to go and experience such an event themselves.

André Rieu’s concerts have come to the cinema and set box-office records. During the
Christmas week of 2016, André Rieu: Christmas with André 2016 took around £1.2 million in
UK cinemas despite only being released for a single day – overtaking the Marvel box-office
hit “Doctor Strange” which took £941,628 in that week. Rieu was the first artist to take over
£1 million at the box office in one night in the UK, surpassing similar successes by One
Direction and Take That. His Maastricht concerts have been screened in cinemas around the

22 Ibid., p 46.
23 Ibid., p.46.

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world since 2011. Of all releases of live performances and other special live events at cinemas
worldwide, the screening of Rieu’s hometown concert was the highest grossing cinema event
in 2015 and 2016. The 2016 Maastricht concert took more than £1.5 million at the UK box
office – the highest grossing music concert of all time in the territory. In Denmark, the concert
became the highest grossing cinema release of a live event of all time, and it also topped the
event cinema box office in Australia and the Netherlands. The concert was screened in over
30 countries worldwide including the US, Brazil, Canada and South Africa to an estimated
cinema audience of 200,000.24 For one live concert, therefore, André Rieu’s company earns
both the revenue from ticket sales and a share of the box-office income from cinema
screening of the same event.

The Johann Strauss Orchestra turns a substantial profit every year without receiving a penny
in subsidy. The orchestra, which had only 12 members at its inception in 1987, has since
hovered around 50 to 60 members, whereas a full-scale symphony orchestra normally has
from 90 to over 110 musicians. While a big orchestra typically has 200-300 part-time
musicians and other artistic support people, Rieu is able to keep the size of his orchestra lean
thanks, in part, to the reduced music complexity of the repertoire, which requires fewer
instruments to perform. Moreover, the use of amplification allows his orchestra to achieve
great sound from a smaller group of musicians.

While a regular orchestra often has several conductors on the payroll, André Rieu is the sole
conductor of his orchestra. With the immense popularity of his performance based on the
intrinsic appeal of the music and dramatic visual and sound effects, he has never had to use
ultra-famous and expensive external soloists to boost ticket sales. Instead his guest performers
include child prodigies like the 3-year-old violinist Akim Camara and the 10-year-old soprano
Amira Willighagen. Their incredible talent and authentic style appeal strongly to audiences,
often moving them to tears. These young people are given a boost to their reputations by
performing with André Rieu, while he benefits from their outstanding performances without
bearing the regular high costs of star performers. Rieu also spots talented, well-trained
professional musicians and brings them on board under long-term engagements. Since 2005,
for example, he has brought three accomplished soloists who formed “the Platin Tenors” in
2000 – into his world stadium tours and made them a permanent part of his concerts. For
these musicians, working with André Rieu guarantees their exposure to big audiences and
makes them famous worldwide. On the other hand, by offering them a unique platform for
professional growth, André Rieu has been able to secure their high-standard performances at a
reasonable rate for the long term, avoiding the often prohibitive and escalating costs of ultra-
famous soloists that traditional orchestras bear.

Despite relative low staffing costs, Rieu and his orchestra deliver high-quality and much-
appreciated performances. While critics may be unkind to André Rieu and talk down his
choice of repertoire and the sentimental, dramatic way of presentation, few deny that he is a
gifted and brilliant violinist and his musicians are craftsmen and craftswomen par excellence.

By performing in public stadiums and vast city squares, Rieu not only provides more seating
and wider aisles for his fans to waltz to the music, but also dramatically lowers the venue cost
per attendee. In fact, his concerts boost the local economy of his hometown Maastricht so

24 “André in Cinema,” André Rieu official website (https://press.andrerieu.com/andre-in-cinemas/, accessed

May 23, 2017).

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much that each time he plays a concert there he receives tons of flowers from restaurants
around the city square, which benefit from the huge flow of customers coming to town and
dining before the event.

The “Fairytale Castle Crisis” of 2008: A Hard Lesson Learned

André Rieu’s business success in the past two decades has been premised upon two equally
important factors – the extreme popularity of his performances and a lean cost structure. Rieu
has always attached importance to details such as the lighting, the set, staging and costumes,
and considered them an integral part of his music offering. He is known to have always
personally designed and guided these details to ensure they are exquisite and magical. But one
time he went too far.

In 2008, after playing in front of the Schönbrunn Palace in Vienna with ballet, horses and
debutants on the scene, Rieu was so much satisfied and excited that he decided to replicate
this visual experience in other parts of the world. He pursued this grandeur by having the
palace recreated room-by-room and sending it to Australia on a world stadium tour. In so
doing, he lost sight of his long-standing focus on delivering a spectacular performance while
keeping costs down, and instead dramatically raised production costs. The entire project was
so expensive that by the time he had paid for the set and hotel rooms, he was €34m in debt
and on the verge of bankruptcy. With the grace and support of his bank manager, who trusted
that he would get the money back with continued performances, and a reinstated focus on
keeping a lean cost structure, Rieu was able to turn around his business within a couple of
years.

Eventually, the extravagant show with the castle replica gained him the needed publicity that
boosted sales of his next tour, for which he eventually reaped €22m. However, this one-off
expensive approach was out of step with Rieu’s overall smart business model. And he realized
that. “It was stupid,” Rieu told reporters, “I promised Marjorie (Rieu’s wife) I will never do it
again. We were in Australia to build this castle with 500 people, including the artists. Now
when we come, we travel with 110.”25 Rieu never repeated this mistake in the years that
followed. And as of today his business is healthy and continues to prosper.

A Maestro without Borders

For nearly two decades, Rieu has stayed on the Billboard Top 25 Tours list, with the size and
revenue of his tours rivalled only by the biggest pop and rock acts. He has been one of the
biggest touring artists and the only classical artist to enter Pollstar’s TOP 10. His concerts are
placed on the same level as those from pop icons like Elton John, Barbara Streisand and Justin
Bieber.

Between 2008 and 2015, Rieu performed an average of 85 shows per year, with average
revenue of $58.8 million per annum, which was more than the combined revenues of New

25 Lynda Dugdale, “How Did André Rieu Make Classical Music a Multimillion Dollar Business,” Intheblack,

October, 2016. https://www.intheblack.com/articles/2016/10/10/how-André-rieu-made-classical-music-
multimillion-dollar-business, accessed May 23, 2017.

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York Philharmonic and London Symphony Orchestra in 2014. While major labels such as
Sony, BMG and Warner Music were forced to close down their unprofitable classical music
branches in Europe, Rieu’s albums have gone platinum 485 times, and gold 270 times around
the world. While selling 10,000 copies of an album would be considered remarkable for a
classical musician, Rieu’s CDs and DVDs have sold more than 40 million. Instead of relying
on public grants and charitable contributions to stay afloat like traditional orchestras, Rieu’s
company has generated a tidy and steady profit over the years solely based on orchestra
activities.

Despite his indisputable success, André Rieu is loathed as much as he is adored. Critics from
hard-core classical music circles call him “the Schmaltz King” and “the Liberace of the
violin.” They shudder at his repertoire and the way he intersperses classical pieces with
popular themes.

But André Rieu is not bothered by this. He has deliberately stepped outside the box, breaking
down the boundaries other people put up, and is proud of entertaining people with his music.
As one Rieu supporter observes: “He makes people happy… When you watch an André Rieu
performance you get wonderful music but you also see people being genuinely happy. People
who go to his shows are not classical music fans. Indeed, the classical music fraternity doesn’t
like him. But he has added colour and vitality to classical music.”

Whether the industry, the elites or the critics like him or not is not important to Rieu, as the
mass of people do. They embrace his music with great enthusiasm. That’s exactly what Rieu
intends to achieve – to give back classical music to the people, where it belongs.

Questions to Consider

• Is the classical music industry attractive? If you were head of an orchestra set on beating
the competition, what strategic options could you have? What would be the likely results?

• How do you feel about attending a classical music concert based on what you have seen in
the first video and/or your personal experiences versus how do you think the average
person feels? What are the pain points of such concert-going experiences? Who are the
noncustomers of traditional classical concerts?

• Some critics and hard-core classical music lovers don’t see André Rieu’s music as
authentic classical music. In your opinion, what genre of music does his fit into? In what
way did he change and reconstruct the classical music industry?

• What is the key logic underlying Rieu’s business success?

• Despite his impressive achievements over the years, André Rieu suffered a financial
downfall at one point in his career, as described in the case. Seen from a blue ocean
strategy perspective, what did he do wrong there?

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This case was prepared by Jordan Mitchell, Research Assistant, under the supervision of Professor
Bruno Cassiman as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. November 2006.

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1

DG-1507-E
0-306-074

Ducati: In Pursuit of Magic (A)

On the first business day of January 2006, Federico Minoli pulled up and
parked his Ducati Multistrada motorcycle in front of the Ducati
headquarters in Bologna, Italy. As he looked up at the complex, which
housed offices, the assembly factory and the Ducati museum, he reflected
back on the company’s history. 2006 would mark several anniversaries: 80
years since Ducati was established to produce electronic radio equipment;
60 years since Ducati had been producing motorcycles; and ten years since
Minoli had become the company’s CEO. Minoli joined the then near
bankrupt Ducati in 1996, and led its turnaround by creating the “World of
Ducati,” a world that involved superior engineering, Italian heritage, slick
design and an undeniable attraction for racing enthusiasts to “join the tribe”
and become “Ducatisti.” Revenues moved from €95 million to €380 million
from 1996 to 2000. EBITDA improved from a loss to €60 million in the
same period. However, in the five subsequent years, business results stalled:
revenues fell 2.3 percent on a compound annual growth rate from 2000 to
2005, and EBITDA fell to -€273,000 at the close of 2005.

IES168

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DG-1507-E Ducati: In Pursuit of Magic (A)

In late 2005, an agreement was signed by shareholder Texas Pacific Group to sell its 30
percent stake in Ducati to InvestIndustrial Holdings SA and a syndicate of other
investors, with the understanding that Ducati would pursue a capital increase of €80
million. Minoli was certain that the new shareholders would demand certain changes
to cut costs and get the company’s growth back on track. In selling the concept of the
capital increase to the shareholder base, he would need to articulate a plan that would
address the immediate financial concerns as well as longer-term strategic
considerations. Minoli stated:

“We had a very successful turnaround from 1996 to 2001. The issue with the
turnaround was the question ‘what’s next?’ Unfortunately for us, the ‘next’ already
happened and it wasn’t very pretty. There’s a big chunk of time, which goes from
2002 to 2005 when some bad things happened at Ducati. What happened in
between? I’m oversimplifying the issue but we faltered on the product side.
Internally, we had some issues with the product, and the product is at the core of
any company like ours. There were also some external factors – the primary one
being the decline of the U.S. dollar, which hit us very hard. We have to take that
into account when planning for the future. Our strategy is very much affected by
what we can actually do as opposed to what we’d like to do.”

The Global Motorcycle Industry

The global motorcycle market included motorcycles, scooters, mopeds and three-
wheelers, and was worth $48.3 billion as of 2004.1 Over the past five years, worldwide
revenues of motorcycles had grown at a compound annual growth rate of 2.5 percent,
while units had grown at 3.3 percent in the same period. In 2004, 28.2 million two
wheel motorized vehicles were sold. High displacement motorcycles (over 400cc) made
up only a fraction of the overall worldwide market with annual sales of 1.2 million
units. The Ducati relevant market was estimated at 642,000 units and was defined as
motorcycles in the sports, sport touring and related categories.2 One industry source
predicted that the total number of two wheel motorized vehicles would grow by 4.7
percent year on year, reaching 35.5 million units by 2009; 3 meanwhile the high
displacement market and the Ducati relevant market would both grow between two
and three percent over the next few years. However, there was no universally accepted
method of tracking motorcycle sales, and industry players often disagreed as to the
correct statistics. Exhibit 1 shows more information on the global market for
motorcycles.

Geographic Consumption Asia-Pacific was the leading region, accounting for 56.1
percent of the global market’s value. The U.S. overtook Europe as second-place region
in 2004, holding 17.3 percent of the market – Europe had 16.4 percent and the rest of
the world made up the remaining 10.1 percent. Industry observers believed that the

1 “Global Motorcycle Manufacturers,” Datamonitor, 2005, p. 9.

2 See the section “Motorcycle Categories” for a breakdown and description of the types of motorcycles in the Ducati Relevant Market.

3 “Global Motorcycle Manufacturers,” Datamonitor, 2005, p. 18.

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DG-1507-E Ducati: In Pursuit of Magic (A)

rationale for Asia-Pacific’s high consumption of motorcycles relative to other markets
was because motorcycles were often the primary source of transportation since they
were cheaper to purchase and run than automobiles.4 In contrast, consumers in North
America and Western Europe often opted for motorcycles as a secondary recreational
vehicle. As a result, it was also more common that North Americans and Western
Europeans purchased higher priced and higher powered motorcycles.

In recent years, an emerging segment in “BRIC” countries (Brazil, Russia, India and
China) referred to as the “new rich” were looking to consume North American and
European luxury goods. For example, in China, Harley-Davidson was about to open its
first retail outlet, having been absent from the country since World War II. While the
company was actively promoting its motorcycles to the Chinese new rich, it was
expected that it would face challenges with government restrictions. For example, over
170 cities had limits or bans on motorcycle use for reasons of safety, congestion and
pollution. BMW had entered China in April 2003. In 2005, it sold only 70 motorcycles
due to motorcycle restrictions and the gap between legally and illegally imported
motorcycles. 5 An official from the China Motorcycle Industry Association stated:
“Motorcycle riding fans are still eager to get top machines like Harley-Davidsons, but the
government policy seems not motorcycle-friendly at all.”6 See Exhibit 2 for country
specific information.

Motorcycle Categories Excluding scooters, mopeds and three-wheelers, motorcycles
were often broken down into four main categories based on use: touring, cruisers,
sport bikes, and off-road. Touring bikes generally had a comfortable upright seating
arrangement and were designed for long distance travel. While the seating of cruisers
was similar to touring bikes, cruisers often had larger engine sizes (above 750cc) and
emphasized styling and chrome fittings. Sport bikes – also called performance
motorcycles – were characterized by forward seating and a lighter frame for higher
speeds. Off-road bikes had different tires to facilitate driving through mud and dirt and
usually had an upright seating position, thick pads and heavy-duty exposed shocks.
While engine configurations and regulations changed by country, engine sizes ranged
in four categories from 50cc to over 1,800cc. Ducati considered its relevant market to
be the Sport segment over 400cc, which was estimated to have annual volumes of
642,000 units in 2005. This was further divided into: Superbike (256,000 units); Naked
(239,000 units), Dual (116,000 units) and Sport Touring (31,000 units).

Riders People rode motorcycles for several reasons. A major group of riders chose a
motorcycle as an affordable means of transportation and sought fuel efficiency,
comfort, ease-of-use and safety. However, motorcycles often transcended their form
simply as an engineered method of transit and represented concepts of coolness,
freedom, rebellion and desire. Hollywood movies added glamour and pizzazz to
motorcycling, ranging from Marlon Brando’s use of a Triumph in the Wild Ones in the

4 Ibid., p. 8.

5 Ryan Nakashima, “Harley-Davidson Plans China Dealership,” http://www.cbsnews.com/stories/2006/01/19/world/main1223010.shtml
Jan. 19, 2006

6 Ibid.

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DG-1507-E Ducati: In Pursuit of Magic (A)

1950s through to Carrie-Anne Moss’s high-speed chase on a Ducati 998 Superbike in
Matrix Reloaded. Motorcyclists were characterized from gruff leather-clad groups to
athletic high-speed brightly colored sports aficionados. Somewhere in between fell the
“weekend riders.” All groups had their corresponding networks of clubs, ranging from
the 600,000-member strong H.O.G. (Harley Owners Group) to the D.O.C. (Desmo
Owners Club). Many riders belonged to two or more different riding clubs with
different bikes for a particular occasion or use. Rider clubs arranged frequent rallies or
competitions – notably, the annual pilgrimage to Sturgis, South Dakota attracted over
525,000 motorcycle owners (many of whom were Harley Davidson riders). 7 At the
other extreme was the Dakar Rally off-road event, where over 1,400 competitors drove
through dramatic desert conditions, commencing in a European city, to Dakar,
Senegal. 8 In addition to frequent events and competitions, hundreds of ancillary
products such as clothing, magazines and music were available to support each branch
of motorcycling. In the 1980s and 1990s, the predominant group of motorcyclists were
men; however, women were increasingly purchasing motorcycles. In 1990, women
accounted for 2 percent of annual motorcycle registrations. By 2005, it was estimated
that 10 percent of riders were women.

Ducati’s History: The First 70 Years in Brief: 1926-1995

“People ask what’s the difference between a Ducati and another racing bike. It’s the
same difference as eating homemade pasta in a small Italian village versus eating
processed pasta in an Italian chain restaurant somewhere in New York. There’s no
comparison.” – Livio Lodi, Ducati Museum Curator

In 1926 in Bologna, Italy, Antonio Cavalieri Ducati and his three sons set up Società
Radio Brevetti Ducati as a manufacturer of electrical components for radios. In the
following 15 years, the company established offices in London, Paris, New York,
Sydney and Caracas. During the war, Ducati’s factories were occupied by German
forces and then bombed by American forces. At the end of the war, amidst the ashes,
the family focused its attention on engineering new products. Immediately following
the end of the Second World War, in 1946, the company launched “il Cucciolo.” The
original “il Cucciolo” was a small auxiliary motor that could be attached to a bicycle to
provide enhanced speed. Eventually, Ducati began producing “il Cucciolo” along with
its own frame. The small-sized motorcycle became an instant hit and spawned the
development of the Cruiser 175cc and the 98cc. In 1954, an engineer named Fabio
Taglioni (known lovingly as “Dr. T”) joined Ducati and cut through conformity by
introducing new models and then participating in the races to show the performance of
his designs. Some of his designs broke previous records by surpassing speeds of 162
kilometres per hour. He also implemented the Desmodromic valve distribution system,
which he had seen work in a race-winning Mercedes automobile in the mid-1950s. The
Desmodromic or “Desmo” system allowed for more revolutions per minute and greater

7 Sturgis Motorcycle Rally, http://www.sturgismotorcyclerally.com/newsletter.html, Accessed March 13, 2006.

8 Dakar Rally Website, http://www.dakar.com/2006/presentation/us/r2_chiffres_clefs_01.html, Accessed March 13, 2006.

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DG-1507-E Ducati: In Pursuit of Magic (A)

power. The Desmo innovation was used in subsequent models (it was still used as of
2006), winning hearts with the 450cc Mark 3D, which hit speeds over 170 kilometers
per hour, and the twin cylinder 750 Supersport, which signaled Ducati’s dominance in
motorcycle racing in the early 1970s marked by Mike Hailwood’s win in the Isle of
Man and Paul Smart’s victory in the 1972 Imola race. The racing success attracted
attention from all over and was the subject of a David Cronenberg short movie entitled
The Italian Machine. Besides racing, the company had experimented in other sectors,
such as submitting a bid to supply police forces in the U.S. with the Ducati Apollo in
the 1960s and a luxury scooter called the “Cruiser” from 1964 to 1967. See Exhibit 3
for photos of Ducati’s historical motorcycles.

In the early 1980s, the company was losing money. Its majority shareholder (a state-
run enterprise) diverted Ducati’s focus from motorcycles to other mechanical products
such as small diesel engines.9 However, the strategy was not successful. In 1983, Ducati
was purchased by the Castiglioni brothers under the umbrella of their company, the
Cagiva Group. The brothers steered Ducati back to motorcycle racing. A slew of new
motorcycle models emerged. In 1993, a Ducati designer Miguel Galluzzi developed the
Monster, with the aim of cutting out all non-essential components and creating a fun-
to-ride street bike with the sensation of being on the race track. The result was a sports
racing bike without any of the front or side fairings. A year later, the company
released the 916, a high-performance sports bike emphasizing the latest technology,
style and performance. The 916 was awarded the “Motorcycle of the Century” title in
2000 by the leading British magazine MCN. However, despite the success of the
Monster and the 916, the Cagiva Group did not have sufficient working capital funding
to purchase raw materials – this resulted in late deliveries and production delays.10 By
1996, Ducati was on the brink of bankruptcy. A U.S.-based private equity firm, Texas
Pacific Group, bought a controlling interest in Ducati with the belief that the company
had a strong niche position in the global motorcycle industry.

The Turnaround Strategy: 1996-2001

“Any decision to change, even if well planned and analyzed, always leads to a new
territory that needs to be discovered and charted.”11 – Federico Minoli, Ducati CEO and
Chairman

Federico Minoli was hired by Texas Pacific Group as Ducati’s new CEO in 1996. Minoli
had a long list of accomplishments, starting in the Italian division of Procter & Gamble
in 1974 and later moving between consulting firms (McKinsey and Bain & Co.) and
industry (as the CEO of the U.S. division of Italian garment brand Benetton). Upon
taking the reins of Ducati, Minoli installed a new top-tier management team. However,
instead of trying to put a new strict organizational structure in place, Minoli left the
largely unstructured company alone to encourage creativity and teamwork. He believed

9 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 16.

10 Gavetti, Giovanni, “Ducati,” Harvard Business School, March 8, 2002, p. 7.

11 Ibid.

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DG-1507-E Ducati: In Pursuit of Magic (A)

that Ducati had three top-notch attributes: a unique and differentiated product, a group
of highly skilled engineers, and a brand with high loyalty. The company had been
historically oriented towards speed, performance and innovation and some even
described the engineers as fanatic “knee down” purists.12 It was a common sight at
lunch hour to see engineers in the factory parking lot debating technical specifications
and the customization of their own motorcycles.

Minoli had set two goals: double-digit revenue growth and an EBITDA ratio
comparable to Harley-Davidson’s of 20 percent. 13 In the first year, Minoli and his
management team faced a major decision of where to focus the company’s efforts.
Minoli invested in the Ducati brand. The first major investment was commissioning the
building of a Ducati museum. Minoli reflected:

“Our workers were operating in an essentially obsolete plant. Conventional wisdom
suggested investing in the floor and upgrading the manufacturing capability of
Ducati. Much to the contrary, we decided to build the museum.”

Minoli wanted to send a substantially different signal to the company that an
ideological change had taken place. He wanted to communicate that Ducati was more
than just a motorcycle – it represented a dream. To reflect this change, Minoli and his
management team created the “World of Ducati,” which was a strategy aimed at all
aspects of the Ducati experience and reinforcing loyalty with the loyal “Ducatisti.” (See
Exhibit 4 for a chart of the “World of Ducati”). As Minoli stated: “we were moving
from the mechanical to entertainment.” 14 To take advantage of the strong Ducati
brand, Minoli purchased a controlling interest in Gio.Ca.Moto, an apparel and
accessories company that had been producing products for Ducati. It also formed a
joint venture with Dainese to develop and manufacture special riding equipment.

The company boosted research and development from €3.2 million in 1997 to €12.9
million in 2000 to build up new products and the racing division. From 1997 to 2000,
the company introduced a number of new models under each family. The time to
market for new models was reduced from an average of 36 months to 15 months. In
1997, Ducati introduced a new Sport Touring line targeted at an older crowd (over 70
percent were over 30 years old). The entry into Sport Touring was considered a
departure from the purist leanings of the past since Ducati’s typical sport customer was
18 to 30 years old. Additionally, the company sought to expand its offerings within
each family of products. For example, it targeted the release of entry-level and high-
end models simultaneously. One example was the release of the Monster Dark, targeted
at new riders, timed with the launch of the high-end Monster Chromo, positioned
towards current Monster owners who wanted to upgrade. Exhibit 5 shows Ducati’s
price premiums over time in each of its product families.

12 Ibid., p. 8.

13 Ibid., p. 8.

14 Gavetti, Giovanni, “Ducati,” Harvard Business School, March 8, 2002, p. 8.

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DG-1507-E Ducati: In Pursuit of Magic (A)

The company continued to follow a policy of outsourcing the majority of its
production to third parties, the majority of which were located in the Emilia region.
The Emilia region was known for its automotive racing tradition, as it was home to
Ferrari, Maserati and Lamborghini. In 1996, the company was outsourcing 80 percent
of its production. By 2001, this had grown to nearly 90 percent. The company
maintained the machining of two key components – crank cases and cylinder heads –
and assembled all bikes in its production facility in Bologna.

The company’s turnaround strategy produced positive business results. Revenues
climbed from €195.6 million in 1997 to €379.5 million in 2000. EBITDA moved from
€33.4 million in 1997 to €60.0 million in 2000. Near the end of the turnaround, Texas
Pacific Group reduced its holdings from 72 percent of Ducati to 34.8 percent in an
initial public offering on the Milan and New York Stock exchanges.15

The “Next” Era: 2002-2005

After five years of growth, Ducati’s financial performance stagnated. Revenues
were €362.4 million in 2001, €366.7 million in 2002, €344.0 million in 2003,
€363.4 million in 2004 and €320.8 million in 2005. EBITDA decreased from €78.5
million in 2001 to -€273,000 in 2005. In 2005, the company posted an after-tax
loss of €41.5 million in comparison with a loss of €3.5 million in 2004. Exhibit 6
shows the company’s financial statements and Exhibit 7 shows the stock
performance of Ducati Motor Holding. The worsening of results in 2005 was due to
a drop in motorcycle volumes combined with an unfavorable mix. Revenues from
motorcycles decreased 13.1 percent. In addition, spare parts, accessories and
apparel sales dropped by 3.8 percent. Compounding the issue was the drop in the
U.S. dollar against the euro, which cost Ducati an estimated €19.3 million in
EBITDA in 2004.

In assessing the period from 2002 to 2005, Minoli stated: “We achieved this great
growth in the turnaround period, but we also made many mistakes, which were
embedded in that growth.” Minoli believed that three major internal issues had
contributed to Ducati’s lackluster results from 2002 to 2005: product discontinuity,
trouble with the customer acquisition model and a halving of U.S. volumes due to local
mismanagement and disruption. At the same time, Ducati released the Multistrada to
strong sales response and experienced increased accessory sales and improvements in
production efficiencies (see Exhibit 8).

At the heart of product discontinuity was Ducati’s top premium Superbike category. In
2004, the company had replaced the popular 998 with the 999, which received tepid
reactions from the Ducatisti. Minoli commented:

15 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 16.

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“I may be over-dramatizing, but the 999 was too radical. The bike itself is more
comfortable, more technologically advanced and has better performance than the
998. We think, and all the data points to the fact that is it is largely a style or look
issue. There was continuity in the performance, but there was a clear discontinuity
in the look. And, in hindsight, you may say why would you change the look of
something that was so successful? If you go back and look at the 998, people would
say that was like a Michelangelo. So, why try and recreate a Michelangelo? Instead,
we created a Picasso, which is also beautiful, but in a different way. It came across
as too angular, too strange and people did not like it. This is a mistake that we will
not repeat.”

Claudio Domencali, head of Ducati’s product development and Ducati Corse racing
division, commented:

“A sportsbike is for customers who are more traditional and conservative. For a
Ferrari, you would never expect a space-moon futuristic car. These designs are an
evolution of an evolution. This is our conclusion and maybe we are wrong. Race
bikes evolve themselves without making strange steps. The race bike is about being
aerodynamic, functional and having certain flowing lines. The 999 was breaking
these rules and was trying to create its own way without looking at the racing
track.”

While the superbike category did not produce the intended results, the company
experienced sales increases with the 2003 release of the Multistrada. In the first full
year of production in 2004, Ducati sold 3,898 units. Originally, Minoli was hesitant
about the production of the Multistrada as some believed it was a move away from
Ducati’s brand soul since it had an upright seating position and larger windshield than
Ducati’s other bikes. Some observers wondered if the Multistrada signaled a future
move into building a cruiser. Minoli commented: “the Multistrada is nothing like
making a cruiser. A parallel would be Porsche’s Cayenne.16 Mind you, if we were to
build a cruiser, that would be like Ferrari building a truck!”

Instead of building a cruiser with the Ducati name, Minoli had made several attempts
to purchase Italy’s oldest motorcycle, the heritage cruiser MotoGuzzi. As Minoli said, “I
see Guzzi as a lighter European version of Harley.”17 Ducati’s interest in MotoGuzzi
stretched back to 1998 when MotoGuzzi was purchased by New York equity group
Trident Rowan Group for US$8.2 million.18 For the year ending 1999, MotoGuzzi had
sales of US$44.8 million per year and a net loss of US$11.9 million. MotoGuzzi had
experienced losses for 12 consecutive years.19 Italian manufacturer Aprilia purchased
the brand for $66 million (including accumulated debt) in 2000 to complement its

16 The Porsche Cayenne was a sport utility vehicle (SUV) released by Porsche in 2003. The Cayenne caused some turmoil among
Porsche 911 and Carrera enthusiasts, as it was seen to move away from Porsche’s key customers. Some accused Porsche of trying to sell
to “soccer moms.” However, as of 2005, half of Porsche’s sales were Cayennes.

17 Tom Roderick, “The Italian job: Ducati’s Minoli remains patriotic on the Aprilia buyout,” Dealernews, February 1, 2005, p. 64.

18 MotoGuzzi Annual Report, 10-K, www.sec.gov, December 31, 1999, p. 7.

19 Ibid., p. 8.

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portfolio of racing and off-road bikes and scooters.20 When Aprilia went up for sale in
2004, Ducati and Piaggio engaged in a year long public bid for the company. Ducati
had initially offered €40 million for the MotoGuzzi brand and Aprilia off-road
motorcycle assets.21 In February 2005, Piaggio emerged as the successful acquirer of
Aprilia’s entire business. At the time, Minoli commented to the press: “Guzzi is a great
brand but it needs a lot of attention and a lot of investment. Colaninno [the leader of
Piaggio] has the intention and the money to do it and if he does it will be good for all
the sector. If he decides not to, we’re always ready to take it on.”22

Another challenge was the change in the customer acquisition model. The strategy that
Ducati had implemented during the turnaround period called for the Monster Dark,
priced at €6,000, to “open a door” to new Ducatistis, with the intention of capturing
the customer and encouraging an up grade in three to five years to a more expensive
bike. As Minoli stated, “we liked the strategy so much, we opened up two new doors in
the superbike with the SS651 and the dual with the 620.” See Exhibit 9 for a diagram
of the entry strategy by segment. However, the two new entry bikes were met with new
threats from the four Japanese competitors. Minoli explained what happened:

“The Japanese unpredictably upped the technological content of the entry bike
dramatically in the superbike segment and at the same time they lowered the price.
We could not increase our price and we cannot compete on costs with the Japanese.
Hence, the cost of the maneuver became unbearable. We just scrapped the SS651
project. In the dual segment, we will also have to reconsider the 620 since it’s
dragging the profitability down.”

The third challenge was a major decline in the U.S. business. The company’s sales
decreased by 39 percent from an all-time high of 7,619 units in 2000 to 4,618 in 2003.
In 2001, Ducati North America’s head office moved from the east coast to the west
coast. Minoli commented:

“The move caused major disruption. We lost 100 percent of our employees when we
moved the U.S. head office. In the meantime, we changed the IT system and basically
we did not invoice for four months. It was a major screwup. However, in 2001 we
recruited a new CEO, Michael Lock, from Triumph and after two years of suffering, we
have been able to recover the lost volume and in 2006 we’ll get back to previous levels.
I predict that in two years, the U.S. will become the biggest market.”

Ducati as of 2006

“In five words: Ducati is a sports bike.” – Claudio Domencali, Head of Product
Development and Ducati Corse Racing Team.

20 “Italy Aprilia Moto Guzzi,” Associated Press Newswires April 14, 2000.

21 “Ducati Motor Holding confirms its interest in Aprilia Group,” Press Release, www.ducati.com, September 9, 2004.

22 Andrea Mandala and Jane Barrett, “Ducati goes it alone but CEO keeps eyes open,” Reuters News, January 13, 2005.

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Products As of early 2006, Ducati produced motorcycles in the Sport segment across
six families: Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and
Sportclassic. (See Exhibit 10 for more details.) Within each family, Ducati offered
several variations on engine capacity, design and color schemes. All families shared
five common characteristics, which gave all Ducati bikes a consistent look and feel. As
Lodi stated: “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.”

First, all bikes used the Desmodromic valve control system, which allowed the engine
to “breathe” at high speeds, thereby increasing engine performance. 23 The system
allowed Ducati’s two-cylinder bikes to perform as consistently as competitors’ four-
cylinder engines (see Exhibit 11 for more information on competitors). Ducati was the
only bike on the market that used the Desmo system, even though there was no legal
restriction preventing competitors from using it. Some individuals felt that the Desmo
engine was a “self-imposed dogma” that should be reassessed for other alternatives
such as pneumatic and spring engines. Domencali commented:

“There’s a good debate inside the company whether the Desmo is necessary on all
bikes. For a high performance engine, the Desmo is quite good. Now, we may argue
if it is compulsory on some bikes. However, if we took it off the entry-level bike,
people may feel that the bike is on the cheap side from a quality perspective.”

Second, all Ducati engines were built in an L-twin design, which involved the two
cylinders of the engine mounted at a 90-degree angle. 24 The L-twin design provided
improved aerodynamics and lighter weight.25 Third, Ducati motorcycles had a signature
low-hum engine sound.26 Fourth, the Ducati frames were built around the Formula One-
inspired tubular trestle. Ducati engineers maintained that the tubular trestle frames gave
greater rigidity, handling power, enhanced speed and offered a more compact design
architecture.27 Fifth, all Ducati bikes were imbued with Italian styling. Industry observers
frequently noted that Ducati was in the very heartland of iconic automotive designers since
it was in the Emilia region of Italy. Others noted that the bikes generally had lower seating
and a lighter weight making them attractive for female riders.

New Product Development Each new motorcycle, including the development of a
corresponding engine, took three years on average and cost €20 million. Ducati
invested approximately €26.5 million in research and development in 2005,
representing 8.3 percent of revenues. This contrasted with €19.3 million (5.3 percent) in
2004 and €12.9 million (3.7 percent) in 2000. In 2005, the company appointed
Domenicali, who had been the managing director of Ducati Corse Racing, to take over
the development of all products.

23 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 23.

24 Ibid.

25 Ibid.

26 Ibid.

27 Ibid.

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Several individuals inside and outside of the company had wondered whether or not
Ducati would expand outside of its sports focus by entering the 500cc plus Cruiser
segment, which was enjoying growth in the U.S. Minoli commented:

“What makes Ferrari not build a truck? We’ve made a choice to be a racing bike
and a cruiser is the antithesis of that. It’s a bathtub on wheels. The cruiser market is
dominated by Harley Davidson. You cannot stretch the brand into a cruiser
segment. However, we would like to acquire a brand such as MotoGuzzi, which is a
great cruiser. But, MotoGuzzi is not for sale.”

Domenicali balanced the view:

“My personal opinion is that if we were to make a cruiser it would need to be on
the sports side of the niche. We can do it with the brand. But, it also depends on
how you do it. If you’re thinking of a big, comfortable, luxury cruiser then forget it.
It would need to be essential Ducati, which means that it would be fast with good
braking ability. That’s what would position the bike. At the same time, I think there
is a lot of opportunity for us to continue growing in our conventional market – the
sports segment.”

Ducati’s in-house design team was responsible for the design and engineering of all
new models and series, and all racing bikes for the Grand Prix and World Superbike
Championship. Traditionally, the internal design team had taken care of all aspects of
designing completely new models, which were not based on previous bikes. In 2004,
Ducati had employed an external designer to start from scratch and generate a rough
design on paper for a radically new type of bike. The rough design was then handed to
the internal design team who engineered the bike through the prototype stage to
preparation for the production line. The first model designed under the new method
was the Hypermotard, within the Dual segment, planned for release in 2007. Minoli
talked about the role of the external designer:

“The question is: how do you predict what someone is going to want in three
years? We restructured the very initial part of design and put it outside the
company with an independent designer – his job is to come up with the magic!”

In explaining the notion of “magic,” Minoli paralleled the design of motorcycles to the
fashion industry:

“There are two approaches in fashion right now. One is what Zara and H&M are
doing, which is to reduce the time to market. This is pure process and they have
been very successful. The other way is what I call the Italian way, which is a
company like Dolce & Gabbana. I don’t know why but for some reason, they are
able to know what people want in the future. How do they do it? It’s a mystery.
They have something inside and it’s what I call ‘the magic.’ We need that magic at
Ducati.”

The Hypermotard was also an example of Ducati using online surveys and a personal
blog that Minoli himself had set up to gain feedback. In the online survey, Ducati
received 28,000 responses, many from owners of KTM off-road bikes. On the blog,

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Minoli asked directly for feedback on the initial design and style. Minoli stated: “many
people blasted me for setting up a blog and asking for direct feedback like that, but my
point is that it’s a community and we have to build it together.” Exhibit 12 shows a
picture of the Hypermotard bike.

Ducati Corse Racing The company saw its participation in professional motorcycle
racing as one of its most important initiatives. The company talked about the
importance of racing in its annual report:

“The performance of Ducati motorcycles on international professional racing
circuits helps to sustain and increase demand for Ducati’s products. Racing
increases the visibility of Ducati motorcycles through media coverage of the races
and serves as a practical demonstration of the high-performance characteristics of
Ducati motorcycles. Our racing program also supports our research and
development function, as many features designed specifically for improving
performance on the racetrack are later introduced into production Ducati
motorcycles.”28

The company managed its racing teams and the manufacturing of specific motorcycles
in competitions under the separate company Ducati Corse SRL (spun off in 2005).
Ducati competed actively in the World Superbike Championship, clinching 13
manufacturers’ titles since 1990 and winning more single race victories than all other
manufacturers combined. 29 In 2003, the company re-entered the Moto Grand Prix
Championship for the first time since the 1970s and finished second-place amongst
manufacturers.30

Accessories and Spare Parts Ducati sold approximately €29 million of accessories and
spare parts in 2005 to support the existing fleet of 350,000 Ducati motorcycles. In
2004, the company outsourced the logistics and storage of the spare parts business in
Europe and the U.S. to reduce costs.

On average, owners that purchased a new Ducati motorcycle spent €1,600 within the
first six months and up to €3,000 for the top of the range bikes. The most common
accessories that were purchased within the first six months were carbon components,
special mudguards, aluminum chain guards and exhaust systems by Termignoni. Lucio
Attinà, director of Ducati Community, stated:

“Accessories are twice as profitable as motorcycles on the basis of margin. We are
equal to Harley Davidson in terms of the amount of accessories that we sell to
Ducatistis. We would like to offer accessories so that Ducatistis increase the
customization of their bike to between €1,000 and €3,000 at the time of purchase.
Then, we hope that the customization will continue within the first six months with
expenditures of another €2,000.”

28 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 33.

29 Ibid., p. 34.

30 Ibid.

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Apparel As of 2006 the company collaborated with other well-known apparel brands
like Oakley, Dainese and Suomy to produce Ducati-branded suits, jackets, gloves,
boots, helmets and other gear.31 Ducati also licensed its logo and name for a wide-
range of products including other apparel, umbrellas, video games, toys, model replicas
and publishing.32 During the business decline from 2002-2005, Ducati had experienced
growth in apparel sales. Attinà pointed to Ducati’s participation in the Moto Grand
Prix for widening the appeal:

“For the Superbike championship, a lot of the people that attended were Ducati
riders. The difference is that with the Moto Grand Prix, there are a lot of people that
are big Ducati fans even though they ride scooters. But, they buy Ducati keychains,
T-shirts and leather jackets because they aspire to ride a Ducati.”

Marketing The company had a number of marketing initiatives, all of which were
aimed at broadening the appeal of the “World of Ducati.” Ducati did not invest in paid
advertising to the general public and only placed ads in select motorcycle publications.
Minoli explained the rationale:

“The idea with tribal advertising is that you don’t do major advertising. It comes
with the dream and it comes through with the racing. Traditional advertising under
this approach is blatantly wrong. We are in 60 countries and we will never have
critical mass. A lot of people here will disagree with me, but they also don’t
understand the concepts of reach and frequency. If you have an ad with no
frequency, it’s wasted money.”

Ducati supported enthusiasts’ clubs and relied upon media coverage, events and racing
to support the brand name. There were 27 local Ducati clubs around the world in 1998,
while in 2005 they had risen to almost 200, totaling an approximate figure of 50,000
members. Ducati established the D.O.C. (Desmo Owners Club) as an umbrella
organization to contact the individual clubs and encourage participation in company-
related events. One such event was World Ducati Weekend, first hosted at the company
museum in 1998 attracting 10,000 Ducati fans. In 2005, the event attendance had risen
to over 50,000.

Ducati’s museum and factory tour was another hallmark of the Ducati experience,
where visitors could see Ducati’s complete history. The museum had attracted over
500,000 people since its opening in 1998. Lodi stated: “Some visitors have told me it’s
like visiting Willy Wonka and the chocolate factory! You can create Ducati fans by
showing them the museum and factory.”

The company also offered formal motorcycle training sessions under the name of
Ducati Riding Experience. In 2005, the company trained 1,300 individuals in the
formal course. Other events included: the Motogiro d’Italia, a tour of Italy on vintage
Ducati bikes; the Centopassi, a race through the Alpine mountains; and the Desmo
Challenge, a competition for male and female riders.

31 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 27.

32 Ibid.

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Other associations with the Ducati brand included art, design, luxury shows and
fashion through participation in museum exhibitions, select brand placement (a Ducati
was used in coordination with the launch of Zegna’s new cologne) and feature films
(the Ducati Monster Dark was used in the film Catwoman). Famous celebrities including
Tom Cruise, Brad Pitt and Lyle Lovett had made their affection for Ducatis publicly
known. As Patrizia Cianetti, the head of Marketing and Ducati.com stated: “We don’t
actually give the bikes away to celebrities. They choose Ducatis because they like
them.”

Ducati.com In addition to Ducati.com, the company had eight country-specific
websites (Ducati.fr, Ducati.de, Ducati.es, etc.). All Ducati websites strove to provide
complete information on model specifications while also allowing visitors an
impression of a virtual tour of Ducati’s world headquarters in Bologna. Since the web’s
inception in 2000, the company had sold 3,000 custom bikes that were only available
online. The company had 10 million unique visitors in 2005 and a database of 200,000
Ducati riders. Ducati frequently used its database to contact riders through email,
forums or Minoli’s personal “Desmoblog” to carry out questionnaires on new product
developments and user satisfaction. Each year, the company conducted between three
and five surveys, with the last questionnaire about the Hypermotard bike generating a
record 28,000 responses. Cianetti talked about the value of Ducati.com:

“The website gives us a great communication and relationship opportunity with the
Ducati community. In the future, I’d like to do more with the concept of connecting
different networks of people and having microhubs within those. Perhaps something
like meetup.com. From an aesthetic point of view, we often look to Italian fashion
websites.”

Minoli talked about the opportunities with the Internet:

“We’ve actually been able to measure the influence of the Moto Grand Prix on the
Internet. It has increased the dream. We have 10 million unique visitors on our
website – that’s a huge dream! We have 350,000 bikes, so we must be able to do
something with those people who have the dream.”

Sales and Distribution Ducati’s sales network was divided between 800 multi-franchise
distribution points in 61 countries and 151 independent mono-franchise Ducati retail
stores in select markets such as London, Vienna, Cape Town, Sydney, Hong Kong,
Seattle, Paris, Tokyo and Frankfurt.

On the wholesale distribution side, the company sold its motorcycles through wholly
owned subsidiaries in North America, Germany, France, Benelux/Scandinavia, the
United Kingdom and Japan. Ducati’s management believed that wholly owned
subsidiaries that managed wholesale sales in foreign markets offered several benefits:
direct contact with the end consumers; more control over marketing initiatives; and,
more flexibility to redirect products throughout various distribution points.

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In Italy and other countries, the company sold through a network of independent
dealers. Ducati had reduced the number of Ducati dealers from 165 in 1996 to 59 in
2005 in Italy, with the intent of focusing on the strong performers and offering
enhanced marketing and merchandising support. Most of the Italian dealers sold only
Ducati in a Ducati-store format. Ducati encouraged dealers to invest in and upgrade
the look and feel of the dealerships to support the brand experience. The company was
in the midst of restructuring the dealer network in France, Germany and the UK by
using a similar approach to that taken in Italy.

In the U.S., the company was working to improve the quality of distribution points
through a combination of Ducati-dedicated shops in select markets and multi-franchise
dealerships offering high-end European brands. The major challenge in the U.S. market
was seen to been the minimum required number of motorcycles necessary to make a
single-brand outlet profitable. Ducati management predicted that 200 bikes per year
would need to be sold per distribution point to make it profitable. The infrastructure
costs of setting up the back office of the distribution points in the U.S. was estimated
to be $7 million. To share the costs of setting up distribution points, Minoli had
proposed that European brands band together to have both a joint back office, which
he estimated to cost $10 million if shared by three to five brands, and a multi-
franchise distribution point. He stated to the press:

“The reality is that none of the European brands have enough volume in the U.S. to
be represented by a network of single-line dealers. My idea is that Europeans should
do something together in the U.S. The U.S. is such a fragmented and big market and
because the Europeans each have a very small share of that market they should
team up and offer The House of European Motorcycles and split the overheads and
give to whoever does not want to buy Japanese the choice of all the European
brands… Of course, if Ducati had the volume that Harley or Honda has in the U.S., I
would not even dream of proposing what I’m proposing.”33

Production Located outside of Bologna, Italy, Ducati’s manufacturing facility consisted
of 360,000 square meters and had 1,000 employees. The factory was responsible
primarily for engine and motorcycle assembly and the machining of crank cases and
cylinder heads. In 2005, the facility produced a total of 35,000 finished bikes. Daily
output ranged from 120 to 160 bikes with one shift and approximately 250 working
days per year. The production facility followed the Toyota Production System, which
had been implemented by Porsche Consulting in 1997. The Toyota production
principles called for “lean” manufacturing, including concepts such as kaizen (a
method for just-in-time raw materials to eliminate inventories) and statistical quality
control.

On average, a motorcycle had 1,400 parts. The majority of parts and components were
outsourced to third parties. Eighty percent of the value of outsourced parts 34 was

33 Tom Roderick, “Moderating the negative: Ducati says Italy’s not all doom and gloom,” Dealernews, July 1, 2005, Volume 41; Issue 8,
p. 42.

34 80 percent refers to the monetary value of COGS. Later the case states that 75 percent of components came from Italy. 75 percent
refers to the number of actual components (1,400 X 75% = 1,050 components).

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supplied by Italian manufacturers and the top ten suppliers accounted for 45 percent of
the value of all outsourced materials. 35 The company implemented a “platform”
approach to 83 assembly groups whereby key suppliers were responsible for a specific
section of the motorcycle.36 The “platform” approach had contributed to a reduction in
the number of suppliers. Many components could be sourced from multiple suppliers.
Ducati aimed to have two suppliers for each component and only relied on one
supplier for hi-tech parts.37 Approximately 93 percent of the company’s cost of goods
sold were from parts and components and 7 percent was attributed to labor and
research and development. Ducati was in the midst of trying to build up suppliers in
low cost areas such as the Far East and India. Minoli commented:

“A bike has 1,400 components and there may be 20 parts that you don’t want to
change. Right now, 25 percent of the components come from this region, 50 percent
come from other parts of Italy and 25 percent from Japan for quality reasons – like
electronics for example. However, there is an opportunity for more global sourcing.
An extreme example would be comparing a fairing made in Florence, Italy for 82
euros and the same one made in Thailand for 8 euros. However, other parts, may
give you a reduction in costs of 20 percent maximum.”

Chasing the Magic into the Future

In preparing for the new investors, several options for a future growth plan had
circulated through Ducati’s management. Some had even predicted that the company
in its current form would be an attractive takeover target for companies in sectors
outside of the motorcycle industry, such as Bombardier or Red Bull (see Exhibit 13).
However, the immediate concern was inoculating the company to get back on a path
of sustainable and profitable growth. Minoli summarized his intentions:

“Ducati grew very fast from when we took over in 1996 to about 2001. On a
worldwide basis we went from 11,000 motorcycles per year to 40,000 motorcycles.
Whenever you grow this aggressively you definitely stretch the organization, and
we have been retuning the company in the past two or three years under difficult
conditions. We have one more year of stability; then we are planning to start
growing again in an aggressive way… We will remain a niche producer, loyal to the
sports enthusiast. We do not want to grow to 100,000 units, that is not our
strategy.”38

35 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 37.

36 Ibid., p. 36.

37 Ibid.

38 Tom Roderick, “Moderating the negative: Ducati says Italy’s not all doom and gloom,” Dealernews, July 1, 2005, Volume 41; Issue 8,
p. 42.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 1
Global Motorcycle Industry Information

Global Motorcycle Market Share: % Share, by Value in US$, 2004

Honda 17.8%
Yamaha 10.0%
Harley-Davidson 9.6%
Kawasaki 9.6%
Suzuki 7.4%
BMW 2.6%
Ducati 0.7%
Other 42.2%
Total 100.0%

Ducati Relevant Market: Market Share % by units

Suzuki 25.0%
Honda 19.9%
Yamaha 18.6%
Kawasaki 14.0%
BMW 9.1%
Ducati 4.4%
Triumph 3.2%
Buell 1.5%
Aprilia 1.2%
KTM 1.3%
MV Agusta 0.5%

Source: Ducati Company documents.

2001 2002 2003 2004 2005E
United States Motorcycle Market
Units (milions) 0.850 0.936 0.996 1.026 1.073
Value (US$ billions) 6.800 7.600 8.200 8.600 9.100

Europe Motorcycle Market
Units (millions) 2.067 1.942 1.900 1.866 1.871
Value (US$ billions) 8.659 8.265 8.199 8.157 8.158

Asia-Pacific Motorcycle Market
Units (millions) 15.700 17.400 18.600 20.300 21.600
Value (US$ billions) 9.600 10.300 11.000 12.100 12.900

Source: “Motorcycles in the United States”, Datamonitor, December 2005, p. 9 & 10.
“Motorcycles in Europe”, Datamonitor, 2005, pp. 9 & 10.
“Motorcycles in Asia-Pacific”, Datamonitor, 2005, pp. 9 & 10.

Source: “Global Motorcycle Manufacturers”, Datamonitor, 2005, p. 13.

Note: The above market share refers to the total market value in US$ of motorcycles over 100cc. This
does not refer to units. Ducati’s share is the case writers’ estimate.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 2
Information on ‘BRIC’ Countries

Motorcycle Sales
Value in US$ (millions)
2001 204.4 189.5 1,700.0 5,500.0 2,250.7 6,800.0
2002 195.0 209.0 2,100.0 5,900.0 2,097.3 7,600.0
2003 192 231.9 2,500.0 6,100.0 2,090.5 8,200.0
2004 199.5 263.6 2,900.0 6,800.0 1,986.9 8,600.0
2005 (e) 207.9 304.8 3,200.0 7,300.0 1,894.5 9,100.0

Units (thousands)
2001 107.9 95.3 4.300,0 10.300,0 594,0 850,0
2002 98.5 98.1 5.100,0 11.200,0 558,4 936,0
2003 99.9 106.4 5.600,0 11.800,0 525,6 996,0
2004 105.4 117.4 6.500,0 12.600,0 482,6 1.025,9
2005 (e) 109.0 128.8 7.200,0 13.300,0 467,0 1.073,0

Source: CIA World Fact Book, www.cia.gov , Accessed May 12, 2006, by country.
Global income per capita Growth taken from: http://www.finfacts,com/biz10/globalworldincomepercapita,htm , Accessed July 15, 2006.
HNWI information from “World Wealth Report”, Capgemini and Merrill Lynch, 2004, p. 31.
Motorcycle information from Datamonitor Reports, by country, Motorcycles, pp, 9 & 10 of each report, December 2005.

in US $ Brazil Russia India China Italy U,S,
People
Population 188,078,227 142,893,540 109,535,1995 1,313,973,713 58,133,509 298,444,215
Age structure
0-14 years old 25.8% 14.2% 30.8% 20.8% 13.8% 20.4%
15-64 years old 68.1% 71.3% 64.3% 71.4% 66.5% 67.2%
+65 years old 6.1% 14.4% 4.9% 7.7% 19.7% 12.5%
Median age 28.2 years 38.4 years 24.9 years 32.7 years 42.2 years 36.5 years
Population growth % 1.04% -0.37% 1.38% 0.59% 0.4% 0.91%

Economic
GDP Growth rate 2.4% 5.9% 7.6% 9.3% 0.1% 3.5%
GDP/capita 8,400 10,700 3,400 6,300 29,200 41,800
Global income per capita growth rate (03-04) 12.0% 30.7% 14.8% 17.3% 21.1% 9.3%
GDP by sector
Agriculture 10.0% 5.0% 20.6% 14.4% 2.1% 1.0%
Industry 39.4% 35,0% 28.1% 53.1% 28.8% 20.7%
Services 50.6% 60,0% 51.4% 32.5% 69.1% 78.3%
Distribution of family income: Gini Index* 59.7 40,00 32.5 44,00 36,00 45,00
Number of high net worth individuals (HNWI)** 80,000 84,000 61,000 236,000 not avail. 2,272,000
HNWI growth rate – 1 year 6.0% 5.0% 22.0% 12.0% not avail. 14.0%
HNWI as % of total population 0.04% 0.06% 0.01% 0.02% not avail. 0.76%

* The Gini Index measures the inequality of a distribution – 0 is perfect equality (everyone has the same income)
and 100 is perfect inequality (one person has all the income).
** High net worth individuals (HNWI) are defined by those who hold over US$1 million in financial asset wealth.

Comparisons

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 3
Pictures of Ducatis Through the Years

Il Cuccioli Bicycle with Motor First Racing Bike – 1940s

1950s Racing Bike – Marianna Cruiser Scooter – 1964-1967

The Apollo – 1960s Paul Smart – Imola Race – 1974

Source: Ducati Website, Heritage, www.ducati.com, Accessed March 13, 2006 and photos by case writers.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 4
World of Ducati

Source: Company documents.

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Exhibit 5
Ducati’s Price Premiums vs. Competitors’ Comparable Products

Year Hyper-Sport Super-Sport Sport-Touring Naked Dual
1997 31.0% 8.0% 30.0% 13.3%
2001 31.4% 7.2% 20.4% 13.0%
2006 E 33.9% 8.0% 20.0% 28.4% -11.6%

Exhibit 6
Ducati Motor Holding S.p.A. Financials (€ millions)

Source: Company documents.

1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenues 195,6 240,1 294,5 379,5 362,4 366,7 344,0 363,4 320,8
EBITDA 33,4 46,5 50,8 60,0 78,5 59,2 45,2 36,4 (0,3)
EBIT 16,4 27,3 26,4 30,4 25,6 14,7 4,3 (4,5) (33,6)
Net income 2,7 (1,2) 8,9 10,5 2,0 (3,0) (5,4) (3,5) (41,5)

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 6 (continued)
Ducati Motor Holding, S.p.A. – Performance Details

Source: “Ducati Motor Holding Announces 2005 Full Year Results,” PR Newswire, February 15, 2006.

2004 2005 Ch %
Net Revenues (in euros)
Motorcycles 284,566 247,236 -13.1%
Spare parts, accessories, apparel 73,191 70,397 -3.8%
Other 5,602 3,215 -42.6%
Total 363,359 320,848 -11.7%

Motorcycle Shipments (in Units)
North America 5,298 7,070 33.4%
Main European Market 21,862 18,158 -16.9%
Japan 2,351 2,575 9.5%
Rest of World 7,049 6,733 -4.5%

36,560 34,536 -5.5%

Motorcycle Product Mix (in Units)
Superbike 10,213 6,094 -40.3%
Supersport 1,426 1,030 -27.8%
Sport Naked 18,026 16,585 -8.0%
Sport Touring 2,997 1,397 -53.4%
Multistrada 3,898 6,156 57.9%
Sport Classic – 3,274

36,560 34,536 -5.5%

Unofficial Motorcycle Registrations (in Units)
North America 5,600 7,040 25.7%
Main European Market 21,752 18,961 -12.8%
Japan 2,914 2,754 -5.5%
Rest of World 5,621 5,876 4.5%

35,887 34,631 -3.5%

Source: “Ducati Motor Holding Announces 2005 Full Year Results,” PR Newswire, February 15, 2006.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 7
Ducati Motor Holding S.p.A. Stock Performance – Milan Stock Exchange

Source: BigCharts.com, Accessed May 26, 2006.

Exhibit 8
Production Statistics

2000 2001 2002 2003 2004

Volume produced units 39,549 40,665 41,392 36,661 35,538
Plant efficiency1 n/a 0.935% 0.942% 0.956% 0.957%
# of bikes produced/# of employees units 80.4 87.1 89 89.5 98.2
# of bikes produced/# direct employees units 84.5 91.8 105.6 107.2 112.8
Throughput time hours 14.5 10.5 10.3 10.2 10
WIP stock days 4.7 4.1 4 3 2.9
Material stock days 31.2 27.9 23.1 27.4 20.3

1 Plant Efficiency equals the ratio between the total human hours spent at producing versus the total amount of hours of
presence in the company.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 9
Entry Bike Strategy

Source: Company documents.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 10
Product Lines

Superbike The Superbike was Ducati’s flagship
motorcycle and was used in high profile races such as
the World Superbike Championship. The first Superbike
was introduced in 1987 and the company had gone on
to release subsequent models such as the award-
winning 916 and the 748. From 2001 to 2005, the
company had replaced the 916 with the 996 and had
introduced a total of five new superbikes. Each
subsequent model typically had greater aerodynamics
and a more powerful engine than its predecessors.39 All
motorcycles within the Superbike category could reach

speeds over 250 kilometers per hour and were recognizable for their compact and slim design.40 In 2005,
Ducati released a new Superbike design, which had a new front fairing, front shield and new mudguard,
substantially changing the look of the bike from prior models.41 Top Superbike models sold for between
€17,000 and €32,000. The category sold a collective 6,094 units in 2005, representing 17.9 percent of the
company’s unit sales, down from 27.9 percent in 2004. Due to the high value of the bikes, the category
made up 30 percent of the company’s revenues in 2005.

Super Sport The first Ducati Super Sport offering
emerged in 1973. Super Sport bikes were lightweight,
allowed for delicate handling and were equipped with a
two-valve twin engine lovingly called the “Pompone”
(“strong pump” in Italian) by Ducatistis.42 The company
expanded the category to range from 750cc to 1000cc
engines with its most popular color being the matte black
750cc and 900cc versions. In 2004, the company
eliminated all models in Super Sport except the 1000cc
due to soft demand and sales declines.43 As of 2006, Super
Sport bikes sold for between €9,000 and €10,800). The
company sold 1,030 units in 2005, making up 3.0 percent of total sales.

Sport Naked/Monster The Monster hit the roads
commercially in 1993. The aim was to offer a
stripped-down bike for the urban rider with the
performance of a sports bike.44 The Monster did not
have any fairing, leaving its engine exposed for a
“bare” aesthetic. Ducati had brought out over 15
variations of the Monster since 1993 including the
Monster City for commuters, the Monster Dark for
younger consumers and the premium priced Monster
Chromo. 45 Monsters sold for between €7,500 and
€14,500. The category accounted for 48 percent of

total motorcycle unit sales in 2005.

39 Ducati Annual Report, www.sec.gov, 20-F, December 31, 2004, p. 24.
40 Ibid.
41 Ibid.
42 Ibid.
43 Ibid., p. 25.
44 Ibid.
45 Ibid.

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Exhibit 10 (continued)

Sport Touring Ducati launched the Sport Touring
line in 1997. The category was targeted towards
customers who wanted the performance of a Ducati
combined with a more upright seating arrangement
for longer rides.46 The Sport Touring also included a
passenger seat and two side bags. The products were
priced between €11,200 and €12,700. As of 2005,
the Sport Touring category accounted for 4.0
percent of unit sales (1,397 units), down from 8.2
percent (2,997 units) in 2004.

Multistrada Ducati introduced a prototype of the Multistrada
in 2001 and the first bike rolled off the production line in
2003. The Multistrada category was a multipurpose
sportsbike with an upright seating position and a powerful
1000cc engine.47 It was priced at approximately €12,000.
The company increased its unit sales from 3,898 units in
2004 to 6,156 units in 2005. The category accounted for
17.8 percent of total unit sales.

Sportclassic Announced in late 2003, the
Sportclassic line became available in 2005. The
intention of the line was to recreate the splendor of
past “retro” bikes with modern technology. Ducati
released the line after multiple requests and online
research conducted with Ducati enthusiasts. The
first bike in the category was the Paul Smart 1000
Limited Edition, a bike inspired by the 750 Super
Sport that rider Paul Smart rode to victory in the
Imola 200 race in 1974. 48 The bikes sold for
between €10,000 and €14,500. In its first year,
Ducati sold 3,274 units in the Sportclassic category,

making up 9.5 percent of the company’s unit sales.

Source: Company documents

46 Ibid.

47 Ibid.

48 Ibid., p. 26.

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Exhibit 11
Competition

Suzuki – Japan (Date Founded: 1909). Sales in 2005: US$21,995.1 million. 1-year sales
increase: 5.7 percent. Employees: 13,760. Suzuki Motor Corporation manufactured small cars,
outboard motors, scooters and motorcycles. The company competed in all categories with
engine sizes ranging from 400cc to 1400cc. Prices ranged from €6,000 to €14,000 for sportbikes
in Europe. Suzuki was heavily involved in racing, participating in all of the major motorcycle
events. It had won seven World Championship manufacturer titles and five individual titles
since it began entering motorcycles in the World Grand Prix in 1960.49

Kawasaki – Japan (Date Founded: 1896). Sales in 2005: US$11,544.3 million. 1-year sales
increase: 5.1 percent. Employees: 28,682. Kawasaki Heavy Industries was involved in the
manufacturing of ships, submarines, industrial plants, tractors, trains, industrial robots, military
aircraft, jet engines, satellites and aerospace components. With its cut-line, “Let the good times
roll,” the company’s consumer products included ATVs (all-terrain vehicles), water craft, utility
vehicles and motorcycles. Prices ranged from €4,500 to €13,500 for sportbikes. Adorned in
bright green, the Kawasaki team had won nine superbike championships and seven supersport
contests within the road racing team.50

Yamaha – Japan (Date Founded: 1887). Sales in 2004: US$9,657.8 million. 1-year sales
increase: 14.2 percent. Yamaha Motor Co. was partially owned (23 percent) by Yamaha
Corporation – the musical equipment manufacturer. Yamaha Motor Co. made motorcycles,
ATVs, recreational boats, snowmobiles, golf carts, helicopters, electro-hybrid bicycles,
generators, motors and motorcycles. The company held the number two position for its
motorcycles and scooters in its native Japan, behind Honda. Retail prices for sportbikes ranged
from €7,500 to €15,500. Yamaha’s racing team had been led by racer Valentino Rossi to capture
the Moto GP championships in 2004 and 2005.

Honda – Japan (Date Founded: 1948) Sales in 2005: US$80,705 million. 1-year sales increase:
3.2 percent. Employees: 137,827. Honda was the world’s largest manufacturer of motorcycles.
The company also made a full line of automobiles, ATVs, watercraft, electrical generators,
marine engines, and lawn and garden equipment. The company had models in every category
of the motorcycle and scooter market. The price ranged between €5,500 and €16,000 in Europe
for the majority of sport bikes. The company’s racing team, known as “Honda Red Riders,”
competed in all segments of off-road, motocross and road racing. Honda’s road racing team had
clinched 14 titles in the Grand Prix 500cc segment and five number one finishes in the World
Superbike championship.51

BMW – Germany (Date Founded: 1913). Sales in 2005: US$55,254.7 million. 1-year sales decrease:
(8.6) percent. Employees: 105,798. BMW (Bayerische Motoren Werke) was one of Europe’s most
prominent automobile and motorcycle manufacturers. Sixty percent of its sales were derived from
car sales. The company sold approximately 95,000 motorcycles around the world as of 2005. BMW
competed in the touring, cruiser, performance and off-road segments. BMW had a reputation for
innovative designs and components and was often touted as being reliable, comfortable and safe.
Prices were between €8,000 and €21,000 depending on the model.

49 Suzuki Website, http://www.suzuki-motogp.com/pages/common/crescent.aspx?art=20, Accessed May 26, 2006.

50 Kawasaki Website, http://www.kawasaki.com/motorsports/road_racing.asp, Accessed May 26, 2006.

51 Honda Red Riders Website, http://www.hondaredriders.com/roadracing/racinghistory.asp?bhcp=1#Series5, Accessed May 26, 2006.

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Exhibit 11 (continued)

Triumph – United Kingdom (Date Founded: 1936) Known as “British Steel,” Triumph
Motorcycles had been revived in 1991 after going bankrupt ten years earlier. The company
focused solely on motorcycles, which were equipped with liquid-cooled, three- or four-cylinder
engines ranging from 650cc to 2,294cc. The company emphasized its nostalgic engine
technologies and frame design. Prices ranged from €8,000 to €18,000.

Piaggio (Aprilia & MotoGuzzi) – Italy (Founded: 1884) Piaggio Sales in 2005: €1,451.8 million.
Sales increase: 25.3 percent mostly due to Aprilia acquisition. Aprilia’s sales in 2005: €351
million.52 Piaggio manufactured scooters under the Piaggio, Vespa, Gilera, and Aprilia brands
and motorcycles under Aprilia, MotoGuzzi, Laverda and Derbi brands. The Piaggio Group was
controlled by an industrial and property holding company called Immsi S.p.A., which was listed
as a public company. Aprilia’s bikes ranged from 125cc to its 1000cc flagship RSV Mille.
Aprilia actively competed in both the off-road and sports segments. The company had been
victorious in several of the smaller engine category motorcycle racing championships since it
began participating in 1985.53 Prices for Aprilia sportbikes ranged from €7,000 to over €17,500.
MotoGuzzi competed largely in the Touring and Cruiser segment with average prices between
€7,500 of €14,000 (with one product at €24,000).

MV Agusta (MV Agusta, Cagiva & Husqvarna) – Italy (Founded: 1907) Originally established
as an airplane manufacturer in 1907, the company released its first motorcycle in 1945 and
became known for its high quality racing bikes during the 1950s. The company stopped
producing motorcycles during the 1980s, and in the 1990s the MV Agusta brand was
resurrected by the Castiglioni family’s Cagiva Group (former owners of Ducati). Husqvarna, an
off-road motorcycle brand was included under the umbrella from its native home of Sweden. In
2004, the company was loss-making and was sold to Malaysian industrial and car
manufacturing group Proton for €70 million, only to be sold a year later to an Italian
investment group for a token euro. The company’s flagship bike was the Brutale and was priced
similarly to Ducati’s range between €8,000 and €15,000. In 2005, MV Agusta released the
Tamburini after designer Massimo Tamburini, who had worked at both Moto Guzzi and Ducati
to great acclaim in the motorcycle community. Cagiva produced bikes between 125cc and
1000cc that aimed to balance style, technique and price. Husqvarna made off-road bikes only in
the 250cc, 450cc and 510cc range and sold between €3,000 and €10,000+. The Husqvarna
name boasted 42 world titles.54

52 Piaggio Group Website, http://www.piaggiogroup.com/_vti_g2_nwArt.asp?rfrsh=8548657&idnews=99, Accessed May 26, 2006.

53 Aprilia Website, http://www.racingaprilia.com//campioni.asp, Accessed May 26, 2006.

54 MV Agusta Website, www.mvagusta.it, Accessed July 15, 2006.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 11 (continued)

KTM – Austria (Date Founded: 1934) Kronreif, Trunkenpolz, Mattighofen (KTM) manufactured
on and off-road motorcycles and was best known for its dominance in supplying motorcross
bikes for the off-road Dakar Rally. The company sold approximately 80,000 motorcycles per
year and its engine designs were based on either the LC4 (a single-cylinder, four-valve, liquid-
cooled engine) or the LC8 (eight-valve, two-cylinder, 75 degree V-twin, liquid-cooled engine).
Engine size ranged from 400cc to 999cc. Prices of KTM off-road motorcycles ranged from
€3,000 to +€10,000. In 2004, the company forged an agreement with Polaris Industries, a U.S.-
based company that manufactured Victory motorcycles, ATVs, watercraft, snowmobiles and
ranger Jeeps. The partnership was aimed at expanding the reach of both businesses – Polaris
products in Europe and KTM in North America. In 2005, Polaris purchased 24 percent of KTM for
€66.6 million.55

Harley-Davidson – United States (Date Founded: 1903) Harley-Davidson was generally
considered to be one of the most profitable motorcycle manufacturers in the world. It was the
largest U.S. motorcycle manufacturer and held 48.9 percent of the U.S. heavyweight motorcycle
segment (defined by bikes over 650cc).56 In 2005, the company’s revenues increased by 6.5
percent to US$5.34 billion from the prior year. The increase was due to an increase in unit sales
(329,017 shipments of motorcycles) and a favorable mix. The company was targeting a volume
between 348,000 and 352,000 units in 2006. The company had 33 models across five product
groups: Sportster, Dyna, Softail, Touring and VRSC. Each design was primarily in the touring
and cruiser segment. Engine sizes ranged between 883cc and 1690cc. Retail prices in the U.S.
ranged from $6,595 to $20,685 and in Europe from €8,000 to over €31,000. The average
Harley-Davidson consumer was in his mid-forties, had a household income of $83,000 and used
the motorcycle for recreation.57 In 1998, Harley-Davidson entered the sports segment with its
acquisition of Buell Motorcycle Company. As of 2006, Buell manufactured and sold seven
heavyweight models and one lightweight called the Blast. Buell motorcycles were equipped with
engines ranging from 984cc to 1203cc and were air-cooled, twin-cylinder engines in a 45-
degree “V” formation. Prices ranged from $8,695 to $11,495, with the exception of the Blast,
which was 492cc and sold for $4,965.58 Like its parent, Buell also had a full line of accessories
and related products.

55 “Polaris, KTM in $80 million deal,” Powersports Business, July 25, 2005 issue, http://www.allbusiness.com/periodicals/article/494610-
1.html, accessed May 26, 2006.

56 Harley-Davidson Annual Report, www.sec.gov, 10-K, December 31, 2005, p. 3.

57 Ibid., p. 4.

58 Ibid.

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 12
Picture of the Hypermotard

Source: Company documents.

Exhibit 13
Information on Additional Companies

Bombardier – Montreal, Canada

Bombardier was the largest manufacturer of railway equipment and systems in the
world. It was also involved in the production of aircraft, being the third largest
producer of civil airplanes behind Airbus and Boeing and the second largest business
jet manufacturer. In addition to trains and airplanes, the company had a vibrant
recreational vehicle business including Ski-Doo and Lynx snowmobiles, ATVs (all-
terrain vehicles), and Sea-Doo jet ski watercraft.

Bombardier
in millions of euros (ending Jan 31st) 2005 2004 2003

Sales 12,151.7 12,906.4 14,314.3
Operating income 39.9 148.9 368.4
Net income after taxes (65.2) (118.0) (370.3)
Cash 1,806.8 980.0 630.9
Total assets 15,405.4 15,477.9 17,547.0
Long-term debt 5,296.7 4,887.5 5,332.0
Total liabilities 13,642.4 13,510.6 15,889.1
Employees 59,550

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DG-1507-E Ducati: In Pursuit of Magic (A)

Exhibit 13 (continued)

Red Bull – Fuschl am See, Austria

Founded in 1987 by Dietrich Mateschitz, Red Bull was the worldwide leader in the
energy drinks category, dominating approximately 80 percent of the global market.
Red Bull was available in 120 countries and focused on five user categories that
spanned all age groups: students, drivers, clubbers, business people and sports people.59
While the Red Bull mark was well known in clubs and stores, the company had closely
associated itself with alternative and extreme sporting events such as downhill skiing,
snowboarding, cliff diving, street luge, paragliding, and hang gliding. In 2004, the
company purchased all of the assets of Jaguar’s Formula One motorsport racing team
and aimed to inject a youthful, fun spirit into the competition.

Red Bull
PRIVATELY HELD COMPANY
in millions of euros (ending Dec 31st) 2004
Sales 2,000.0
1- Year Sales growth 22.0%
Employees 1,850

Source: Compiled by case writers from Hoovers.com

59 Claire Phoenix, “Red Bull – Fact and Function,” Softdrinksworld, Feb. 2001, p. 26-35.

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Discovering New Points
of Differentiation

by Ian C. MacMillan and Rita Gunther McGrath

Reprint 97408

Harvard Business Review

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

JULY-AUGUST 1997

Reprint Number

HarvardBusinessReview
W. CHAN KIM AND RENEE MAUBORGNE FAIR PROCESS: MANAGING IN THE KNOWLEDGE ECONOMY 97405

KATHLEEN M. EISENHARDT, JEAN L. HOW MANAGEMENT TEAMS CAN HAVE A GOOD FIGHT 97402
KAHWAJY, AND L.J. BOURGEOIS III

MICHAEL VAN BIEMA AND MANAGING OUR WAY TO HIGHER
BRUCE GREENWALD SERVICE-SECTOR PRODUCTIVITY 97410

WILLIAM A. SAHLMAN HOW TO WRITE A GREAT BUSINESS PLAN 97409

DOROTHY LEONARD AND PUTTING YOUR COMPANY’S WHOLE BRAIN TO WORK 97407
SUSAAN STRAUS

PAUL KRUGMAN HOW FAST CAN THE U.S. ECONOMY GROW? 97406

GORDON ADLER HBR CASE STUDY
WHEN YOUR STAR PERFORMER CAN’T MANAGE 97401

TARUN KHANNA AND WORLD VIEW
KRISHNA PALEPU WHY FOCUSED STRATEGIES MAY BE WRONG FOR

EMERGING MARKETS 97404

RYUZABURO KAKU THINKING ABOUT…
THE PATH OF KYOSEI 97403

IAN C. MACMILLAN AND MANAGER’S TOOL KIT
RITA GUNTHER MCGRATH DISCOVERING NEW POINTS OF DIFFERENTIATION 97408

ALEXANDRA WYKE BOOKS IN REVIEW
CAN PATIENTS DRIVE THE FUTURE OF HEALTH CARE? 97411

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

Most profitable strategies are built
on differentiation: offering cus-
tomers something they value that
competitors don’t have. But most
companies, in seeking to differenti-
ate themselves, focus their energy
only on their products or services. In
fact, a company has the opportunity
to differentiate itself at every point
where it comes in contact with its
customers – from the moment cus-
tomers realize that they need a prod-
uct or service to the time when they
no longer want it and decide to dis-
pose of it. We believe that if compa-
nies open up their creative thinking
to their customers’ entire experience
with a product or service – what we
call the consumption chain – they
can uncover opportunities to posi-
tion their offerings in ways that
they, and their competitors, would
never have thought possible.

Take the case of Blyth Industries,
a candle manufacturer. By differenti-

ating and redifferentiating its prod-
ucts, Blyth has been able to grow
from a $2 million U.S. producer of
candles used for religious purposes
to a global candle and accessory
business with nearly $500 million in
sales and a market value of $1.2 bil-
lion. Not bad for a company in an in-
dustry that, as CEO Robert B. Goer-
gen says, “has been in decline for
300 years.” Blyth’s story is, quite
simply, a manifestation of the power
of strategic differentiation.

Business history is full of stories
of entrepreneurs who stumbled
upon a great idea that then became
the cornerstone of a successful com-
pany. But finding ways to differenti-
ate one’s company doesn’t have to
be an act of genius or intuition. It is
a skill that can be developed and
nurtured. We have designed a two-
part approach that can help compa-
nies continually identify new points
of differentiation and develop the

ability to generate successful differ-
entiation strategies. The first part,
“Mapping the Consumption Chain,”
captures the customer’s total experi-
ence with a product or service. The
second, “Analyzing Your Custom-
er’s Experience,” shows managers
how directed brainstorming about
each step in the consumption chain

M A N A G E R ’ S T O O L K I T

DRAWINGS BY PAUL MEISEL Copyright © 1997 by the President and Fellows of Harvard College. All rights reserved.

Open up your thinking to your customer’s entire experience with your product or service.

Discovering New Points of Differentiation

by Ian C. MacMillan and Rita Gunther McGrath

Ian C. MacMillan is the George W.
Taylor Professor of Entrepreneurial
Studies and a professor of manage-
ment at the University of Pennsyl-
vania’s Wharton School in Philadel-
phia. Rita Gunther McGrath is an
assistant professor in the Manage-
ment of Organizations Division of
Columbia University’s Graduate
School of Business in New York City.
MacMillan and McGrath are coau-
thors of “Discovery-Driven Plan-
ning” (HBR July-August 1995) and
“Discover Your Products’ Hidden
Potential” (HBR May-June 1996).

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

can elicit numerous ways to differ-
entiate even the most mundane
product or service.

Mapping the
Consumption Chain

As we’ve said, the first step toward
strategic differentiation is to map
your customer’s entire experience
with your product or service. We rec-
ommend that companies perform
this exercise for each important cus-
tomer segment.

To begin, assemble groups from
all areas of your company – in par-
ticular, those employees who use
marketing data and those who have

face-to-face or phone contact with
customers. Charge the groups with
identifying, for each major mar-
ket segment, all the steps through
which customers pass from the time

they first become aware of your
product to the time when they final-
ly have to dispose of it or discon-
tinue using it.

Naturally, every product or ser-
vice will have a somewhat differ-
ent consumption chain. However, a
few activities are common to most
chains. Consider the following ques-
tions, each of which illustrates one
of those activities. Then, as the
group begins to get a feel for the spe-
cial relationship between your cus-
tomers and your products, ask ques-
tions about more complex activities
that pertain to your business.

How do people become aware of
their need for your prod-
uct or service? Are con-
sumers aware that you
can satisfy their need?
Are they aware that they
even have a need that can
be satisfied? Your com-
pany can create a power-

ful source of differentiation if it can
make consumers aware of a need in
a way that is unique and subtle.

Consider the problem of differen-
tiating an everyday consumer prod-

uct, such as a toothbrush. For many
people, brushing is a ritual to which
they pay relatively little attention.
As a consequence, many brushes are
used well past the point when their
bristles are worn and are no longer
effective. Toothbrush maker Oral-B
discovered a way to capitalize on
this widespread habit. The company,
by introducing a patented blue dye
in the center bristles of its tooth-
brushes, found a way to have the
brush itself communicate to the cus-
tomer. As the brush is used, the dye
gradually fades. When the dye is
gone, the brush is no longer effective
and should be replaced. Customers
are thus made aware of a need that
previously had gone unrecognized.
So far, the idea sounds like some-
thing out of Marketing 101. What
gives it particular value is that the
need can be filled only by Oral-B’s
patented process. The company
turned differentiation into a com-
petitive advantage.

How do consumers find your of-
fering? Opportunities for differenti-
ating on the basis of the search
process include making your prod-

M A N A G E R ’ S T O O L K I T

4 HARVARD BUSINESS REVIEW July-August 1997

Oral-B created a powerful source of differentiation with a toothbrush that tells customers when they need a new one.

The first step is to map
your customer’s entire

experience with a product.

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

uct available when others are not
(24-hour telephone-order lines), of-
fering your product in places where
competitors do not offer theirs (the
mini McDonald’s outlets in Wal-
Mart stores), and making your prod-
uct ubiquitous (Coca-Cola). Making
the search process less complicated,
more convenient, less expensive,
and more habitual are all ways in
which companies can differentiate
themselves. And when competitors
can’t or won’t do the same – at least,
not right away – you have the poten-
tial for a strategic advantage.

One example is the rapid growth
of catalog sales in channels formerly
dominated by retail chains. Con-
sumers now can obtain detailed, up-
to-the-minute information about a
breathtaking range of products over
the telephone or through the Inter-
net, without enduring the inconve-
nience of visiting a showroom and
the often inadequate knowledge of
the floor sales staff. The PC Connec-
tion & Mac Connection, a company
that sells computers through its
catalog, operates a 24-hour-a-day,
seven-day-a-week toll-free phone
number for people wanting informa-
tion about computers, software, and
related products. When a caller ex-
presses an interest in buying a com-
puter system, a company representa-
tive asks a set of questions to narrow

down the possibilities to a few good
candidates. The rep and the con-
sumer then can discuss each option
in detail. What is remarkable about
this approach is that, in effect, it
allows consumers to tailor the search
experience to their own needs.

How do consumers make their fi-
nal selections? After a consumer has
narrowed down the possibilities, he
or she must make a choice. Can you
make the selection process more
comfortable, less irritating, or more
convenient? Look for the ideal situa-
tion, in which competitors’ proce-
dures actually discourage people

from selecting their products, while
your procedures encourage people to
come to you. Citibank for years cap-
tured a significant share of the col-
lege student market for credit cards
simply by making it easy for stu-
dents to obtain a card while com-
petitors made it difficult.

Another example of this dynamic
is playing out right now in the used-
car business. For many potential
customers, the experience of choos-
ing a used car is an
ordeal – to the point
where one CEO of a
major automaker ob-
served that some peo-
ple would rather have
a root canal. But a new
method of selecting
cars is transforming
the industry. Compa-
nies such as CarMax Auto Super-
store and AutoNation USA have tar-
geted the selection experience as
their competitive focus. At a Car-
Max showroom, customers sit in
front of a computer and specify what
features they are looking for in an
automobile. They can then, in pri-
vate, scroll through detailed descrip-
tions of cars that might meet their
needs. The final (and only) price for
each vehicle is listed. A sales assis-
tant then lets the customers inspect
the autos that interest them and

handles all the paper-
work if they decide to
buy one. The “selling” is
done not by the salespeo-
ple but by the selection
process the customers
create for themselves.

How do customers or-
der and purchase your product or
service? This question is particular-
ly important for relatively low-cost,
high-volume items. Can a company
differentiate itself by making the
process of ordering and purchasing
more convenient?

American Hospital Supply revolu-
tionized its industry by radically
simplifying the ordering and re-
stocking process for such products
as bandages, tongue depressors, sy-
ringes, and disinfectants. The com-
pany installed computer terminals
at each hospital and medical supply
store with which it did business.

The terminals connected those cus-
tomers directly to the company’s
system, allowing direct drop ship-
ment and automatic restocking
whenever supplies fell below a cer-
tain level. Hallmark uses a similar
approach for its greeting cards.

Many companies, including ice-
cream makers and pet-food manu-
facturers, are also using this method
to stock supermarket shelves, reap-
ing the benefits of preferred access

to these crucial outlets as well as
of superior displays. Another, more
subtle benefit of this form of dif-
ferentiation is that it imposes a
switching cost on customers that
might be tempted to try another
supplier. Once customers have
signed on, it is expensive for them
to switch; this deterrent creates a
barrier to competition and, once
again, a potential strategic advan-
tage for the supplier.

How is your product or service de-
livered? Delivery affords many op-
portunities for differentiation, espe-
cially if the product is an impulse
purchase or if the customer needs
it immediately. Let’s return to our
catalog computer dealer, the PC
Connection. Customers can call its
toll-free number as late as 3 A.M. to
receive “next-day” shipments of
items in stock. How does the com-
pany do it? The amazing turnaround
times are possible because the ware-
housing and distribution facilities
are conveniently located near an
Airborne Express hub. Packages can
be picked up at the warehouse,
transferred to Airborne, and shipped
to the customer in a matter of hours.
Not only does this delivery strategy
constitute a real benefit for cus-
tomers, but, because there are a lim-
ited number of opportunities for
such a warehouse-hub connection,
competitors will find it hard to adopt
the same strategy.

M A N A G E R ’ S T O O L K I T

HARVARD BUSINESS REVIEW July-August 1997 5

CarMax and AutoNation
“sell” cars by letting
customers create their
own selection process.

Can you make the buying
process more convenient

and less irritating?

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

What happens when your product
or service is delivered? An often
overlooked opportunity for differen-
tiation lies in considering what has
to happen from the time a company
delivers a product to the time the
customer actually uses it. Opening,
inspecting, transporting, and assem-
bling products are frequently major
issues for customers.

That applies even to the delivery
of services. Consider how difficult it
can be to get an auto accident claim
processed and paid by an insurance
company. Now consider how Pro-
gressive Insurance of Cleveland,
Ohio, tackled the problem. The
company has a fleet of claims ad-
justers on the road every day, ready
to rush to the scene of any auto acci-
dent in their territory. There they
can record all the information they
need and often settle claims on the
spot for policyholders. The process
has greatly increased customer satis-
faction by eliminating the hassle
and delay that so often accompany
conventional reporting, inspection,

and assessment methods. A side
benefit for the company is that its
approach also has decreased the inci-
dence of fraud by reducing the op-
portunity to file false claims and in-
flate repair bills.

How is your product installed?
This step in the consumption chain
is particularly relevant for compa-
nies with complex products. For ex-
ample, installation has presented an
enormous barrier for computer man-
ufacturers trying to break into the
novice-PC-user market. Computer
beginners are notoriously intolerant
of such on-screen messages as “Disk
Error 23.”

Compaq Computer, with its Pre-
sario line, was among the first to tar-
get installation as a source of differ-
entiation. Instead of providing an
instruction book filled with techni-
cal terminology, Compaq offers its
customers a poster that clearly illus-
trates the ten installation steps. The
company uses color-coded cords, ca-
bles, and outlets to simplify installa-
tion further and also has rigged its

computers so that a cheerful video
and audio presentation leads new
users through the setup and registra-
tion process when they first turn on
the machine.

How is your product or service
paid for? Many companies unwit-
tingly cause their customers major
difficulties with their payment poli-
cies. Here’s a test to see whether
payment might be such an issue for
your customers: Take a walk over to
your accounts-receivable depart-
ment and ask to see a copy of a re-
cent invoice. If your company is
anything like about 80% of those
we have worked with, the invoice
will be virtually incomprehensible.
Why? Because invoices are generally
designed by systems people for sys-
tems, not customers. Given the
prevalence of this situation, your
company may find opportunities to
set itself apart by making the whole
payment process easier for cus-
tomers to understand.

You may discover even greater op-
portunities by rethinking why your
company uses its current payment
policy in the first place. We once
worked with a company in the ener-
gy control business that was having
a hard time selling its services to res-
idential co-op owners. At every co-
op, the company ran into opposition
from a hard core of owners who re-
sisted the capital outlay involved in
installing an energy management
system. The company eventually
won a huge share of the co-op mar-
ket by altering its policy. Customers
no longer pay an up-front installa-
tion fee; instead, they pay over time,
out of the energy savings.

How is your product stored? When
it is expensive, inconvenient, or
downright dangerous for customers
to have a product simply sitting
around, the opportunities for differ-
entiation abound. Air Products and
Chemicals, a producer of industrial
gases, grew to dominate its market
segments by addressing the prob-
lem of storage. Realizing that most
of its customers – chemical compa-
nies – would rather avoid the burden
of having to store vast quantities of
dangerous high-pressure gases, Air
Products built small industrial-gas
plants next to customers’ sites. The

M A N A G E R ’ S T O O L K I T

6 HARVARD BUSINESS REVIEW July-August 1997

Compaq discovered a valuable way to differentiate itself:
it provides customers with a user-friendly installation video.

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move pleased customers; it also gen-
erated switching costs. Best of all,
once an Air Products plant was in
place, competitors had little oppor-
tunity to move in.

How is your product moved
around? What difficulties do cus-
tomers encounter when they must
transport a product from one loca-
tion to another? Whether the jour-
ney is across a room or across a state,
this step in the consumption chain
is another often-overlooked oppor-
tunity for differentiation. Ask your-
self the following questions: Does
the customer find the product frag-
ile? Difficult to package? Awkward
to move?

Consider how John Sculley’s mar-
keting team at Pepsi-Cola used
packaging as a way to differentiate
Pepsi from Coke. Sculley’s team cre-
ated a distinct–if temporary–advan-
tage for Pepsi in the early 1970s by
designing plastic bottles that were
lighter, and thus easier for cus-
tomers to carry, than the heavy glass
bottles of the time. The beauty of
the move was that it not only made
carrying soda easier, but it also re-
duced the advantage of Coke’s well-
known contoured glass bottle. At
the time, it was difficult to produce
plastic bottles in that shape.

What is the customer really using
your product for? Finding better
ways for customers to use a product
or service is a powerful differentia-
tor. And such opportunities abound,
especially for companies whose
products are expensive and used
relatively infrequently. General Elec-
tric’s Transportation Systems divi-
sion, which manufactures diesel-
electric locomotives, used this step
in the consumption chain as the ba-
sis for rethinking its business.

With few exceptions, the railroads
that are the customers for GE’s loco-
motives are not all that attached to
a particular unit. What they really
want to know is, if they have freight
to ship, will a locomotive be there to
haul it? GE is working on an arrange-
ment through which the company
will guarantee that a locomotive
will be available on demand. Under
that arrangement, GE will take over
the management of all the engines in
the customer’s system. It will re-

lieve the customer of repair and
maintenance concerns, and also will
gain economies of scale by managing
an entire network. What’s more, the
entry barrier created by such a sys-
tem can be formidable.

What do customers need help
with when they use your product?
The company with the most helpful
response has a significant advantage
here. GE, for instance, has an enor-
mously popular 800 number that is
available 24 hours a day to help peo-
ple who have difficulty using any of
the company’s consumer products.
Similarly, Butterball Turkey’s 24-
hour hot line fields cooking ques-
tions from hundreds of customers
every Thanksgiving. Butterball has
recently supplemented its hot line
with an Internet home page and a
turkey-cooking guide that its cus-
tomers can download.

What about returns or exchanges?
Too many companies put all their
efforts into the selling side of the
product life cycle, forgetting that
long-term loyalty requires attention

to customers’ needs throughout
their experience with a product.
Handling things well when the prod-
uct doesn’t work out can be as pow-
erful as meeting the need that moti-
vated the initial purchase.

Nordstrom is an excellent exam-
ple of a company that has taken this
issue to heart. The clothing retailer
captured national publicity in the
1970s when one of its store man-
agers “took back” a set of tires from
a customer despite the fact that
Nordstrom did not sell tires. By fo-
cusing on and aggressively promot-
ing its no-questions-asked return
policy, Nordstrom has enhanced its
position as a company that provides
unique customer service. Customers
may be unhappy with the brands
they return, but they are not un-
happy with the store.

How is your product repaired or
serviced? As many users of high-
tech products will attest, repair ex-
periences – both good and bad – can
influence a lifetime of subsequent
purchases.

M A N A G E R ’ S T O O L K I T

HARVARD BUSINESS REVIEW July-August 1997 7

Nordstrom takes its no-questions-asked return policy seriously,
and the result is strong customer satisfaction.

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An ideal solution, used by Tan-
dem Computers – a company that
makes computers with parallel cen-
tral-processing units for applications
in which downtime is a major prob-
lem – is to try to repair a product
even before the customer is aware
that such service is needed. Tandem
staff members can spot a malfunc-
tioning component through remote
diagnostics, send the appropriate
part and instructions to the cus-
tomer by express mail, and walk the
customer through the repair process
on the phone. This approach has al-
most completely eliminated expen-
sive and inconvenient downtime for
the company’s customers; it also has
eliminated their need for a costly on-
site service force.

Otis Elevator uses remote diagnos-
tics in a different way. In high-traffic
office buildings, where servicing ele-
vators is a major inconvenience to
occupants and visitors alike, Otis us-
es its remote-diagnostics capabili-
ties to predict possible service inter-
ruptions. It sends employees to carry
out preventive maintenance in the
evening, when traffic is light.

What happens when your product
is disposed of or no longer used? In
a world in which it is becoming
increasingly economical simply to
replace many products as they age
rather than spend the money to fix
them, what do customers do with
the obsolete goods?

Canon offers an interesting exam-
ple of how a company can differenti-
ate itself at this step in the chain. It
has developed a system that allows
customers to return spent printer
cartridges at Canon’s expense. The
cartridges are then rehabilitated and
resold as such. The process makes it
easy for customers to return used
cartridges: all they need to do is drop
the prepaid package off at a United
Parcel Service collection station. At
the same time, it enhances the im-
age of Canon as an environmentally
friendly organization.

Analyzing Your
Customer’s Experience

Although mapping the consump-
tion chain is a useful tool in itself,
the strategic value of our approach

8 HARVARD BUSINESS REVIEW July-August 1997

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lies in the next step: analyzing your
customer’s experience. The objec-
tive is to gain insight into the cus-
tomer by appreciating the context
within which each step of the con-
sumption chain unfolds. It is crucial
to remember that the customer is al-

ways interacting with people,
places, occasions, or activities.
Those interactions determine the
customer’s feelings toward your
product or service at each link in the
chain. When they are viewed strate-
gically, they can shape the dynamics
of competition for that custom-
er’s business.

Essentially, this step involves con-
sidering how a series of simple ques-
tions–what, where, who, when, and
how – apply at each link in the con-
sumption chain. We have found that
the most rewarding way to approach
this exercise is to have a group of
people from a company start down a
path with any of their questions and
brainstorm until their ideas dry up.
Sometimes a given question will not
lead to any particular insight. That’s
not a problem; the goal is to assem-
ble an inventory of possible points
of differentiation. Once the ideas
are on the table, you can assess each
one and select those that are most
promising for your situation.

Blyth Industries, the candle manu-
facturer we mentioned earlier, pro-
vides a good example of how analyz-
ing your customer’s experience
works in practice. By exploring the
options raised by their analysis,
Blyth employees were able to take a
prosaic product that is easy to imi-
tate and create a profitable competi-
tive advantage. What is important to
understand here is that Blyth makes
no pretense of being able to create
the fabled “sustained competitive
advantage” – so beloved of strat-
egy texts – in any single segment of
the candle market. Rather, what the

company seeks to do is be the first to
create and then dominate many
small niches in rapid succession
over time, gaining economies of dis-
tribution and scale by the sheer
number of products it has in the
marketplace.

Consider some of the
possibilities that Blyth em-
ployees uncovered when
they applied the questions
to their business:

What? What are cus-
tomers doing at each
point in the consumption
chain? What else would
they like to be doing?

What problems could they be experi-
encing? (These problems may not be
directly related to your product or
service.) Is there anything you can
do to enhance their experience while
they are at this stage of the chain?

Candles, when you think about it,
can play a role in everyday life in a
host of different ways. Among other
things, they are used to celebrate
birthdays, create a festive atmo-
sphere for dinner parties, warm buf-
fet dishes, cope with power outages,
and set the mood for
romantic evenings.
Candles can be pur-
chased in specialty
shops, at crafts fairs, in
supermarkets, and at
card stores. Further,
their use can be ac-
companied by a huge
variety of containers,
displays, accents, and mood-creating
products. All this suggests that can-
dle makers might do well to explore
the possibility of offering a complete
“candlelight experience” by produc-
ing or marketing complementary
products as well.

Where? Where are your customers
when they are at this point in the
consumption chain? Where else
might they be? Where would they
like to be? Can you arrange for them
to be there? Do they have any con-
cerns about their location?

Because candles can have so many
uses, it isn’t surprising that there are
as many potential places for their
use. Candles can be found at the
beach, on picnics, at proms, at wed-
dings, at home, in restaurants, at

children’s birthday parties, and in
places of worship. What quickly be-
came evident to Blyth was that the
concerns and behavior patterns of its
customers were likely to be different
in each location. That insight sug-
gested the potential for differentia-
tion on the basis of location.

For example, consider how can-
dles are used in the home. Virtually
every room in the house has poten-
tial: the dining room, living room,
kitchen, bedroom, bathroom, and
basement can all conceivably pro-
vide a setting for candle use, each for
a different reason.

Who? Who else is with the cus-
tomer at any given link in the chain?
Do those other people have any in-
fluence over the customer? Are their
thoughts or concerns important? If
you could arrange it, who else might
be with the customer? If you could
arrange it, how might those other
people influence the customer’s de-
cision to buy your product?

Honing in on the line of thinking
Blyth used about domestic candles,
consider the use of candles in the
dining room. Who else is going to be

there? The other people could be
members of the immediate or ex-
tended family, business associates,
close friends, or a suitor. Each type
of person means a possible point of
differentiation; each type means a
different experience, a different
mood, and a different time.

When? When–at what time of day
or night, on what day of the week, at
what time of the year – are your cus-
tomers at any given link in the
chain? Does this timing cause any
problems? If you could arrange it,
when would they be at this link?

Take the scenario of a dining room
with the family. Blyth found that the
question when uncovered a wealth
of opportunities for differentiation.
Candles are used in the dining room

M A N A G E R ’ S T O O L K I T

HARVARD BUSINESS REVIEW July-August 1997 9

Candle makers might
explore the possibility of
offering a complete
“candlelight experience.”

To analyze your customer’s
experience, consider how

five simple questions apply
at each link in the chain.

For the exclusive use of S. Wang, 2023.

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with the family on birthdays, an-
niversaries, holidays, and graduation
days, and at meals marking other
special occasions. Each occasion
provides a distinct experience. Im-
portant for a candle maker, each also
triggers distinct emotions. Blyth em-
ployees were able to identify what
became several successful new areas
of differentiation by exploring how

their candles might be designed in
special shapes, colors, or scents.
They also came up with a variety of
ways to package the candles and
combine them with such accessories
as napkins to suit each situation.

Candles intended for use with fami-
ly members at Thanksgiving, for ex-
ample, might be scented with cinna-
mon, colored in tones associated
with the holiday, and sold with spe-
cial holders.

Because there are many holidays
and other occasions when families
get together in the dining room, you
can begin to get a sense of the oppor-

tunities available for dif-
ferentiation. Moreover, the
process can be repeated for
as many different compan-
ions and settings as the
imagination of your em-
ployees can contemplate.
Blyth, for example, also

has found a tremendous opportunity
to differentiate its products for roman-
tic meals. CEO Goergen has worked
hard to design scented candles in vari-
ous shapes in order to influence the
ambience of such occasions so that, as

he says, “eating becomes dining, and
dining becomes romance.”

How? How are your customers’
needs being addressed? Do they
have any concerns about the way
in which your company is meeting
their needs? How else might you at-
tend to their needs and concerns?

Think about how candles are used
outdoors – say, at a company barbe-
cue. Citronella candles come to
mind. In addition to creating a fes-
tive atmosphere, they are an attrac-
tive way to protect people from in-
sect bites.

As we’ve seen, there is consider-
able potential for differentiation
even in products so simple that at
first blush they seem like commodi-
ties. Candles are but one. Gasoline is
another. (See the exhibit “Is There a
Way to Differentiate Selling Gas?”)
Understanding the customer’s expe-
rience at any link in the chain for

M A N A G E R ’ S T O O L K I T

10 HARVARD BUSINESS REVIEW July-August 1997

Consider the “purchase link” of the consumption chain.

What else are your customers
doing when they buy gasoline?
Among other things, they might be
commuting, on a leisure trip, on a
business trip, on vacation, shopping, or
planning to use equipment (such as a
mower or a tiller).

If you pursue the business-trip option,
the next question is,
Whom are they with when they
buy gasoline on a business trip?
Your customer could be alone or
accompanied by a colleague. He or she
could be with a spouse or significant
other. Your customer also could be
traveling with a group of people.

If you pursue the idea that your customer
is alone, the next question is,
Where does your customer buy
gasoline while he or she is on the
business trip?
Your customer might stop first at a local
gas station, then again between cities
along the way.

Even a simple product
such as gasoline can be

differentiated.

Is There a Way to Differentiate Selling Gas?

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any product offers companies the op-
portunity to identify and explore
many nontraditional ways to create
value. The task then becomes select-
ing from among this wealth of possi-
bilities; considering how each idea

meshes with a company’s particular
skills, assets, and systems; and fo-
cusing only on those that can gener-
ate a competitive advantage. Each
idea also may open up an opportuni-
ty to develop a new competence.

Too many companies pursue what
seem like great new ideas without
carefully assessing whether their
organizations are well suited to do

so and how quickly competitors
can respond. Robert Goergen knows
that Blyth Industries has certain
strengths its competitors do not, in-
cluding several unique production
techniques and, more important, a

deep knowledge of fra-
grances. Those special
strengths, coupled with a
solid understanding of
customers based on mar-
ket research, give Blyth
an edge. Goergen thus
evaluates opportunities

for differentiation based on those
considerations and moves forward
only with the ideas that promise the
strongest returns.

Focused Creativity
Virtually every company we have

ever worked with has within it
scores of people of considerable cre-
ativity and imagination. Unfortu-

nately, all too often, the company
never benefits because that talent
isn’t appropriately focused. It may
even be squelched by the homoge-
nizing pressures that any large orga-
nization tends to impose.

An important benefit of the pro-
cess we’ve outlined above is that it
unlocks the creativity in an organi-
zation so that the insights of particu-
lar individuals can contribute to a
shared understanding of the cus-
tomer – so that the company, in ef-
fect, knows its customers almost
better than they know themselves.
Companies that do this successfully
find themselves deeply attuned to
their markets. And, like entrepre-
neurs, they spend the imagination
they have in lieu of the money they
may lack to outperform competitors
where it counts.
Reprint 97408
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M A N A G E R ’ S T O O L K I T

HARVARD BUSINESS REVIEW July-August 1997 11

If you consider in depth the concern about personal security, one way to differentiate
the process of selling gasoline would be to reconfigure the structure of your gas stations
along those highways that are principal business routes. For example, you could
� ensure that your station is well lit and monitored;
� provide an attendant to pump the gas;
� provide a “travel adviser” at each station who has a detailed knowledge of the
area; such a person might be able to advise your customer about the safest routes,
areas under construction, congested areas, and good restaurants and hotels;
� arrange for customers who buy gas to rent a mobile phone at the gas station,
possibly negotiating with the phone company to share usage revenues.

Which leads to:
Does your customer have any
concerns in any of those
situations, and how is your
company addressing them?
Among other things, your customer
might worry about getting lost or
running out of gas. Or he or she might
be concerned about personal security.
Also, your customer certainly doesn’t
want the car to break down.

Keeping those ideas in mind, consider:
When does your customer buy
gasoline?
Anytime: during the day or night; during
the week or on the weekend.

Consider how each idea
meshes with your
company’s skills,

assets, and systems.

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