The diversification strategy represented by Audi-Volkswagen’s acquisition of Ducati is horizontal diversification. The latter occurs when a company or corporate makes a decision to add new services or products that are unrelated to the existing products and services either commercially or technologically. In this strategy, the addition of the new services or products is because they may be appealing to an organization’s current customers. The horizontal diversification strategy has a tendency of increasing the dependence of companies or firms on particular market segments that are already covered by old but high-quality products and services. In this case, VW’s Audi unit aims at venturing into the manufacture and sale of motorcycles as an additional product to the firm’s automobiles (Rauwald, 2012).
Expansion is essential to firms that aim at maximizing profitability and gaining competitive advantage in a particular market. The two most common expansion modes that firms leverage on are the equity and non-equity modes. For the case of Volkswagen, it used an equity expansion mode to diversify into the motorcycle industry. The equity expansion mode entails joint ventures, acquisitions and purchases, as well as wholly owned subsidiaries. However, there is a high risk that can accompany this technique, which is the minimum or no return on investment.
Firms leverage on business level strategies to give value to customers as well as gain a competitive advantage in particular markets. Volkswagen’s business level strategy is to offer a broad range of products to customers including passenger cars, trucks, buses, commercial vehicles, large-bore diesel engines, special gear units, and turbo machinery. The acquisition of Ducati has expanded the range of products offered to customers to include motorcycles.
The acquisition of the Ducati, which has since seen VW venture into the production and distribution of motorcycles other than automobiles highlights its business strategy of offering a wide range of products and services to customers. However, the acquisition of the Ducati does not make sense bearing in mind its benefits versus the costs incurred. VW acquired the Ducati for around $ 1.1 billion in 2012, and this was inclusive of debt (Rauwald, 2012). VW has invested a lot to implement necessary changes to make Ducati more acceptable to customers. Significant changes have been made by VW to the company’s racing program, but the benefits have not been seen. Despite reporting record-breaking sales in 2012, when 44, 102 motorcycles were moved; the profits remain significantly low as compared to the $1.1 billion used in the acquisition of the Ducati (Flannery, 2014). As such, VW’s acquisition of the Ducati does not make sense.
As mentioned above, the benefits of VW’s acquisition of the Ducati do not justify the $1.1 billion purchase price. First, despite the enormous purchase price, the Ducati remains unsuccessful on the track and is far from reaching the success levels enjoyed by rival firms such as Honda. The fact that renowned riders such as Andrea Dovizioso abandoned the Ducati for other brands such as Honda also underscores the extent to which the $1.1 billion purchase price remains unjustified. After the purchase of the Ducati for a purchase price of approximately $1.1 billion, only 44, 102 bikes were moved in 2012 and 44, 287 in 2013 (Flannery, 2014). The profits obtained from the sale of the Ducati bikes were insignificant such that they could not in any way justify the $1.1 billion purchase price.
Rauwald, C. (April 18, 2012). Audi Nears Ducati Purchase. Wall Street Journal.
Flannery, N.P. (September 29, 2014). Can Volkswagen Help Ducati Rebuild Its Reputation? Forbes. Retrieved from http://www.forbes.com/sites/nathanielparishflannery/2014/09/29/can-volkswagen-help-ducati-rebuild-its-reputation/#5aadf017e6d4