Dr.

Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

Case one:
KTM

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

1Summary
KTM, primarily a producer of off-road sports motorcycles, has been the fastest growing major motorcycle manufacturer for the past three years with a cumulative average growth rate from 1998-2001 of 31% in revenues and 50% in profits. Its improved financial performance enabled the company to pay down long-term debt and fund the capital expenditures associated with the companys aggressive expansion goals. However, the prospect of slowing growth, coupled with the desire of the venture fund BC European Capital, which is holding 49% of KTM, to exit soon means that KTM will have to consider how to manage its resources to be able to facilitate this exit.

2Problem
KTMs top management has to decide on the most profitable direction for the companys future growth.

3CastofCharacters
Dr. Rudolf Knnz o Chief Financial Officer(CFO) of KTM Stefan Pierer o Knnzs partner o These two purchased KTM from original founders in 1991 to prevent bankruptcy o Because the Management Structure is lean and the company is privately financed, these two partners have a high level of influence over the operations of the company BC European Capital o Venture capitalist firm o Holds a 49% stake in KTM ownership after buying in went the company went private in 1999 o Because of KTMs success, BC European Capital would be looking for an exit strategy to maximize their gain on investment By: Mark Engelking David Augustsson Karin Hkansson Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

o Constricts KTMs strategic direction, as it forces KTM to consider opportunities that would foster enough growth to allow BC European Capital to exit

3Chronology
Today(2003) o Fastest growing motorcycle company over the past three years o Main focus still Off-road bikes, as it represented 70% percent of revenues o Technological and Performance leaders: Built bikes that were ready to race o Committed to performance, sponsored over 50 world championships in many different racing categories o Was also known for success in these competitions, especially the prestigious and difficult Paris-Dakar Race o KTM riders have won 23 world championships over the past 3 years o Partnered with widely recognized companies like Red Bull, raising brand awareness History 1999 o KTM went private again to ensure its stability and leadership o Received equity financing from BC European Capital, who purchased a 49% stake in company ownership. Late 1990s o KTM received a bid from Harley Davidson o Despite the fact that stock analysts were advocating Mergers and Acquisitions instead of internal growth, the bid was rejected o Largely due to the fact that there was not one synergy between KTM and Harley (Knnz) 1996 o KTM went public in order to generate capital to grow and pay out the venture fund o Created unstable ownership By: Mark Engelking David Augustsson Karin Hkansson Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy 1991 o KTM declared bankruptcy

Wirtschaftsuniversitt Wien 31 oktober 2008

o Purchased by Knnz and his partner, Stefan Pierer, along with some European importers and a venture fund o Due to the conflict emerging as time passed, Knnz and Pierer bought out the importers and increased their stake in the company 1934 o Hans Trunkenpolz opened a motorcycle repair shop in Mattighofen, Austria o Trunkenpol teamed with up Ernst Kronreif to start Kronreif, Trunkenpolz, Mattighofen (KTM) o The company became popular with many off-road motorcycle enthusiasts due to its sponsorship of racing events and gained a reputation for reliable high-quality motorcycles

4Issues
In order to evaluate KTMs strategic position and suggest a direction for the company to pursue, we have used two theoretical frameworks in order to analyze KTMs current strategical position and the prospect of expanding through either product development or new market entries. A SWOT analysis coupled with a TOWS and the Ansoffs Matrix. The first framework, SWOT and TOWS, will allow us to dissect the internal and external factors influencing KTM. The second framework, the Ansoffs Matrix, allows us to assess the general opportunities for expansion in both new products and markets. This will allow us to introduce a range of strategic directions to KTM.

4.1CompanySituation
As a result of assessing the internal and external factors influencing the company, the following grid has been constructed. Strengths: Technology Flexibility in the product mix A strong dealer network Brand strength By: Mark Engelking Weaknesses: Low market share in a growing US market Dependency on automotive suppliers High dependence on general importers David Augustsson Karin Hkansson Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy Organizational culture facilitating innovation Long-term relationships with suppliers Opportunities: Steady market growth High potential of on-road segment Growing segment of extreme sports fans Expansion of EU Emerging markets around the globe

Wirtschaftsuniversitt Wien 31 oktober 2008 National manufacturing Specialized suppliers located in Europe Targeting towards the experienced riders only Threats: Decline in the European market Expansion of EU Competition + substitution Possible switch in dominant engine technology Occurring challenges in developing markets

Strengths KTMs main strength is its technology that allows the companys racers to win championship titles and therefore to gain significant reputation among consumers for reliable, performance oriented, high-quality motorcycles with unique design elements. This represents a continuous positive contribution to the brand awareness and image of KTM. Furthermore, one of the underlying factors of KTMs success is its competence in flexible product development and manufacturing, which means reducing time-to-market and adapting swiftly to emerging consumer trends. This has been achieved partly through an innovation-oriented and highly democratic organizational culture, and partly through building a strong dealer network concentrating on intimate contact with dealers, who in turn provide the company with high-touch access to its customers. Another important success factor is KTMs competence in building long-term relationships with its specialized suppliers thus tailoring them to KTMs needs. Weaknesses One of the major KTMs weaknesses is its relatively low market share in the rapidly growing US market in comparison to its competitors. Moreover, the company is highly dependent not only on its general importers in smaller markets (the problem of control), but also on its automotive suppliers, who are frequently too busy to fulfill KTMs low volume orders. What is more important, the company lacks global sourcing, which will make it harder to go really international, because it is tied to its European-base suppliers. Another important problem that the company has recently faced is connected with its

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

manufacturing location, which makes its exports to the US highly dependent on exchange rates and exports regulations. Opportunities In terms of opportunities offered by the external environment, the paramount factor is steady and continuing growth of global motorcycle sales over the last several years, especially in North America and developing countries. The expansion of the EU may also offer new potential markets. Another significant opportunity is the rapidly growing on-road segment, accounting for 80% of motorcycle sales, which offers lots of possibility for revenue growth. Another major point is the growing popularity of extreme sports, adventure-oriented leisure activities and racing, which all may provide KTM with new potential customers. Threats On the other hand there are some significant threats. First of all, the European market for motorcycles is continuously declining. This really impacts the off-road niche, as Europe is densely populated, with little room for off-roading in comparison to North American and other world markets. That may also cause a new wave of fierce competition during the EU expansion, as many of the new countries have lower population densities. The second point to consider is the high level of competition on the North American and Asian markets with all major competitors present. Furthermore, although the dominating trend among motorcycle manufacturers is to internationalize, this process is connected with emerging challenges in developing markets such as cost-based competition, problems with defending brand names, difficulty in managing geopolitical risks and adapting to local preferences. A lot of people in emerging markets also have lower disposable incomes. Additionally, the possible switch in dominant engine technology may hurt KTM hardy as it will take a lot of time and resources to catch up with completely new technology. Moreover, there may be a prospect of competition from substitutes companies selling an extreme lifestyle different from motorcycle racing.

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

SO Expand geographically (emerging markets and North America) relying on innovation, flexibility and relationships with dealers Expand product line to the on-road segment (performance bikes) using racing technological experience, flexibility and existing dealer network ST Increase the market share in North America using technological, design and racing experience, dealer network and brand image Invest further in racing technology and racing events in order to outbid competitors Introduce a new line for European leisure riders

WO Move manufacturing to another European country (to reduce costs) or build a new facility in the North America Expand dealer network reducing the number of general importers Introduce a line of products for less experienced riders WT Withdraw from North American market in order to avoid competition and problems with local sourcing concentrate on home market or go to countries where competitors have weak positions

4.2PossibleWaysofExpansion
In order to generalize the strategic choices applicable to KTM we have used the Ansoffs matrix framework. It gives the opportunity to assess general directions of potential growth. Product Current Current Market New Market penetration (for existing models) Market development: New geographical areas (geographical expansion of off-road bikes) Entering new market segments (move to on-road bikes) New Product development (for off-road bikes) Diversification (move to ATVs)

5Options
We propose two major options for KTMs further growth:
1. Product line expansion: either entering a new market segment (on-road

motorcycles) or diversification (move to ATVs);

2. Geographic expansion: Europe, North America, and developing countries.

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

Although both options can be combined in the very long-term perspective, at present the company has to concentrate on one of them due to the resource restrictions involved in the exit of a large source of capital. Lets now look more closely at each option.

5.1Option1:ProductLineExpansion(Recommended)
Considering product line expansion there are two possible choices available:
To enter a new market segment: on-road motorcycles, performance motorcycles in

particular (they best fit with KTMs identity, technology and image) recommended;
To diversify into all-terrain vehicles (ATVs).

To choose the best alternative we have to consider pros and cons of such a choice. Choice1:OnroadMotorcycles(SportsMotorcycles)DevelopedInhouse Pros
Rapid growth of the on-road segment Key success factors (technical performance, style, time-to-market, brand image)

apply to KTMs key strengths

KTMs focus on racing technology is mostly similar to performance bikes.

Moreover, KTMs (ready to race can be stretched to performance bikes with no damage for the brand image)
KTMs target group (young and edgy; into racing and adventure) is similar to

performance bike riders

Access to distribution channels: KTMs existing dealer network could be receptive

to adding an on-road line

Huge prospects of sales increase for winning a race (4000-5000 units), which

should only take only 2-4 years, and winning a championship title (20000 units)
Low financial costs and risks in comparison to joining with another firm

Cons:
Additional costs:

o Investment in R&D (R&D and tooling $10mln each) o Continuous investment into developing cutting edge racing technologies o Racing training and racing events ($5mln each year) o Training KTMs sales force in regards to a new product line o Developing a dealer network for on-road bikes By: Mark Engelking David Augustsson Karin Hkansson Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

Highly competitive racing competitions mean it would be tough to gain a

significant edge: o Moto Gran Prix: KTM can compete in 125cc or 250 cc, but to compete in 1000cc it needs to develop a new engine (technology is not available on the street) o Superbike circuit (America): less prestigious, dominated by Ducati, likely to become more competitive Choice2:DiversifyingIntoATVs Pros:
Similar markets and technologies (as for off-road motorcycles) Growing sport/adventure/racing ATV niche Access to distribution channels (in North America many dealers carried ATVs)

Cons:
KTM had the necessary technological know-how to produce high-end, sport ATVs

but not utility ATVs

Higher safety risk High competition from established companies like Polaris and Bombardier Limited market for ATVs in Europe

5.2Option2:GeographicExpansion
Considering geographical expansion there are three possible choices available:
Invest in North America Invest in developing countries (e.g. Latin America) Continue investment in Europe (especially considering EU expansion)

To choose the best alternative we have to consider pros and cons of such a choice Choice1:NorthAmerica Pros:
Growth of KTMs US market share from 1% to 5.4% in the last decade Tremendous growth prospects in both off-road and on-road segments (10-years

growth; 10% sales increase in 2003; recreational off-road segment well established and growing amongst younger riders; expected sales increase 17-18% over the next 3 years)
US dealers appreciated KTM, easy to expand dealer network

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy Cons:

Wirtschaftsuniversitt Wien 31 oktober 2008

Strengthening Euro causes problems with exporting (growing costs and prices) US trade protectionism (duties)

These disadvantages can be overcome by locating a new production facility in North America (in the USA). This alternative also has to be evaluated Manufacturing in North America Pros:
Solves the duty problem Ability to charge lower prices to the dealers and end customers Higher responsiveness to market Easier to expand geographically to Latin or South America

Cons:
Time and financial resources to build a new plant are enormous Supply problems

o Lack of local suppliers for motorcycle parts o Importing parts from Europe creates delivery costs and currency risks o Need to convince a local supplier to move to North America as well, which represents an additional cost
May lead to reduced economies of scale

Choice2:DevelopingCountries Pros:
Potentially growing markets Advantage of first-entry Everyone is internationalizing Possibility to cut costs through cheap labor and production

Cons:
Demand is higher for transportation than recreational motorcycles Low disposable income Very price competitive markets Problems with defending brand names Geopolitical risks Need to adapt to local preferences

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy Choice3:Europe Pros:
EU expansion streamlines potential markets

Wirtschaftsuniversitt Wien 31 oktober 2008

o Common set of regulatory standards o Reduces manufacturer and dealer complexity o A common currency will eliminate currency fluctuations in these countries o Possible new markets with less population density, allows greater use of offroad bikes
KTMs Home market, lots of pre-existing market knowledge

Cons:
Decline in European sales Europe is a densely populated area (a major concern for off-road segment) Uncertainty about how changes in EU would affect KTMs position

6Recommendation
We recommend that KTM adopt a new product line represented by an on-road performance motorcycle that is developed in-house (Option 1, Choice 1). This of course in conjunction with continued product development for off-road motorcycles. The on-road performance motorcycles segment simply offers significant growth potential and higher revenues. It is going to become even more competitive in a few years time. That is why it is high time for KTM to enter to try and capitalize on its potential market, before it becomes saturated. The company has the relevant technological experience, the right extreme sports appeal and a strong brand image. Combined with its reputation for winning races, reliable high performance, and strong and receptive dealer network in several countries, this becomes quite an attractive option for KTM. This means that KTM can exploit all its key strengths on the growing market, which will offer aggressive and profitable growth perspectives. Onroad racing motorcycles will be a good complement to the companys product portfolio, because KTM will cover the bigger part of the extreme sports lifestyle market. Additionally, it wont take KTM a long time to develop relevant technology and go into racing events and eventually winning a championship title. It already has valuable experience in racing research and preparation through its off-road endeavors. By: Mark Engelking David Augustsson Karin Hkansson Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy

Wirtschaftsuniversitt Wien 31 oktober 2008

This option also doesnt require huge investments in comparison to expanding geographically. This is also important considering the expected exit BC European Capital. Moreover, after the company successfully extends its product line, it will be easier (in the long-run) to transition into geographical expansion, first with further market penetration in North America (through building a new manufacturing facility, moving crucial suppliers from Europe and developing new dealership networks) and then with geographic expansion to developing markets. Latin America is currently the most appealing developing market for expansion, because of the growing strength of its middle class and the immense popularity of motor sports. However, these options for expansion can be re-evaluated at a later time.

7PlanofAction
SteponeImmediately o Begin Market Research into Customer desires in the Sports Bike market o Continue with R&D and product refinement in the off-road market o Continue building brand awareness through successful performances in races and marketing campaigns, as higher brand awareness will only help the onroad line when it is released o Develop more training seminars for riders to allow a larger segment of the population exposure to KTM, bring in experienced well known riders to run the seminars StepTwoInOneMonth o Begin Developing an on-road motorcycle in-house by consulting designers o Develop a working design of the bike through discussion and plans from the designers and engineers o Educate Sales force from design to production; have them present at on-road races to learn what makes the bike successful so they can market these qualities to consumers o The more hands on experience they get with the bike, the better they will be at relaying this knowledge to customers

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy StepThreeFourMonthsfromNow

Wirtschaftsuniversitt Wien 31 oktober 2008

o Invest in relevant technology(R&D and tooling) for an on-road motorcycle, focusing on racing technology initially (best way to market your sports product is to produce a product that succeeds) o Find suppliers for components once design is finalized (Should be able to use many of the same suppliers used for off-road bikes, especially for less significant components) o Market the incoming series of bikes to dealers to build on KTMs excellent dealer relationships, by stressing that the same KTM quality that they desire will just be present in a different series of bike StepFour9MonthsfromNow o Test prototype and produce eventual models once performance tests are deemed adequate o Use existing off-road races to market upcoming entry into the on-road market. Have models at the tracks for customers to view, hire existing racers to show up to vouch for the bikes quality StepFiveOneYearfromNow o Invest in racing events, concentrating on the Superbike circuit to gain exposure in the American market StepSix18MonthsfromNow o Begin Racing in the Superbike circuit by entering bikes into the races StepSevenTwoYearsfromNow o Make the bike available to consumers, establish brand awareness and create publicity events. Hold demonstrations at local tracks, autograph/photo sessions with popular racers, create a community for consumers who purchase the bike StepEightThreeYearsfromNow o Win A Race, due to constant innovation and trendsetting in the on-road racing market

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva

Dr. Christian Kreuzer International Business Policy & Strategy StepNineFiveYearsFromNow

Wirtschaftsuniversitt Wien 31 oktober 2008

o Re-evaluate geographic expansion in contrast to market penetration. Consider how the market has changed, and the current economic situation for both KTM and the rest of the world. o Consider the benefits of expanding into developing markets, or building a manufacturing plant in North America. If still a profitable option, begin construction of a North American plant. StepTenSixYearsFromNow o Win a Championship Title, a culmination of dedication to performance by employees and racers

By: Mark Engelking

David Augustsson Karin Hkansson

Carson Dunlap Polina Kormiltseva