Case KTM PDF

Dr.
Christian Kreuzer Wirtschaftsuniversität Wien

International Business Policy & Strategy 31 oktober 2008
Case one:
KTM
By: David Augustsson Carson Dunlap

Mark Engelking Karin Håkansson Polina Kormiltseva
Dr. Christian Kreuzer Wirtschaftsuniversität Wien
1  Summary 
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 company’s 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.
2  Problem 
KTM’s top management has to decide on the most profitable direction for the
company’s future growth.
3  Cast of Characters 
• Dr. Rudolf Knünz
o Chief Financial Officer(CFO) of KTM
• Stefan Pierer
o Knünz’s 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 KTM’s success, BC European Capital would be looking for an
exit strategy to maximize their gain on investment

o Constricts KTM’s strategic direction, as it forces KTM to consider
opportunities that would foster enough growth to allow BC European
Capital to exit
3  Chronology 
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” (Knünz)
1996
o KTM went public in order to generate capital to grow and pay out the
venture fund
o Created unstable ownership

1991
o KTM declared bankruptcy
o Purchased by Knünz and his partner, Stefan Pierer, along with some
European importers and a venture fund
o Due to the conflict emerging as time passed, Knünz 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
4  Issues 
In order to evaluate KTM’s strategic position and suggest a direction for the company
to pursue, we have used two theoretical frameworks in order to analyze KTM’s
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 Ansoff’s Matrix. The first
framework, SWOT and TOWS, will allow us to dissect the internal and external
factors influencing KTM.
The second framework, the Ansoff’s 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.
4.1  Company Situation 
As a result of assessing the internal and external factors influencing the company, the
following grid has been constructed.
Strengths: Weaknesses:
Technology Low market share in a growing US
Flexibility in the product mix market
A strong dealer network Dependency on automotive suppliers
Brand strength High dependence on general importers

Organizational culture facilitating National manufacturing
innovation Specialized suppliers located in Europe
Long-term relationships with suppliers Targeting towards the experienced riders
only
Opportunities: Threats:
Steady market growth Decline in the European market
High potential of on-road segment Expansion of EU
Growing segment of extreme sports fans Competition + substitution
Expansion of EU Possible switch in dominant engine
Emerging markets around the globe technology
Occurring challenges in developing
markets
Strengths 
KTM’s main strength is its technology that allows the company’s 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 KTM’s 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 KTM’s
competence in building long-term relationships with its specialized suppliers thus
tailoring them to KTM’s needs.
Weaknesses 
One of the major KTM’s 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
KTM’s 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

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.

SO WO
• Expand geographically (emerging • Move manufacturing to another
markets and North America) relying European country (to reduce costs) or
on innovation, flexibility and build a new facility in the North
relationships with dealers America
• Expand product line to the on-road • Expand dealer network reducing the
segment (performance bikes) using number of general importers
racing technological experience, • Introduce a line of products for less
flexibility and existing dealer network experienced riders
ST WT
• Increase the market share in North • Withdraw from North American
America using technological, design market in order to avoid competition
and racing experience, dealer network and problems with local sourcing –
and brand image concentrate on home market or go to
• Invest further in racing technology and countries where competitors have
racing events in order to outbid weak positions
competitors
• Introduce a new line for European
“leisure” riders
4.2  Possible Ways of Expansion 
In order to generalize the strategic choices applicable to KTM we have used the
Ansoff’s matrix framework. It gives the opportunity to assess general directions of
potential growth.
Product
Current New
Product development (for
Current Market penetration (for existing models)
off-road bikes)
Market development:
Market • New geographical areas (geographical
Diversification (move to
New expansion of off-road bikes)
ATVs)
• Entering new market segments (move to
on-road bikes)
5  Options 
We propose two major options for KTM’s 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.

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. Let’s now look more closely at each
option.
5.1  Option 1: Product Line Expansion (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 KTM’s 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.
Choice 1:  On‐road Motorcycles (Sports Motorcycles) – Developed In‐house 
Pro’s
• Rapid growth of the on-road segment
• Key success factors (technical performance, style, time-to-market, brand image)
apply to KTM’s key strengths
• KTM’s focus on racing technology is mostly similar to performance bikes.
Moreover, KTM’s (“ready to race” can be stretched to performance bikes with no
damage for the brand image)
• KTM’s target group (“young and edgy; into racing and adventure”) is similar to
performance bike riders
• Access to distribution channels: KTM’s 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 KTM’s sales force in regards to a new product line
o Developing a dealer network for on-road bikes
• 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
Choice 2: Diversifying Into ATVs 
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
5.2  Option 2: Geographic Expansion  
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
Choice 1: North America 
Pros:
• Growth of KTM’s 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

Cons:
• 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
Choice 2: Developing Countries 
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

Choice 3: Europe 
Pros:
• EU expansion streamlines potential markets
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 off-
road bikes
• KTM’s “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 KTM’s position
6  Recommendation 
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. On-
road racing motorcycles will be a good complement to the company’s product
portfolio, because KTM will cover the bigger part of the “extreme sports lifestyle”
market.
Additionally, it won’t 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.

This option also doesn’t 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.
7  Plan of Action 
Step one ‐ Immediately 
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 on-
road 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
Step Two ‐ In One Month 
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

Step Three ‐ Four Months from Now 
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 KTM’s excellent
dealer relationships, by stressing that the same KTM quality that they desire
will just be present in a different series of bike
Step Four ‐ 9 Months from Now 
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
Step Five ‐ One Year from Now 
o Invest in racing events, concentrating on the Superbike circuit to gain
exposure in the American market
Step Six ‐ 18 Months from Now 
o Begin Racing in the Superbike circuit by entering bikes into the races
Step Seven ‐ Two Years from Now 
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
Step Eight ‐ Three Years from Now 
o Win A Race, due to constant innovation and trendsetting in the on-road racing
market

Step Nine ‐ Five Years From Now 
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.
Step Ten ‐ Six Years From Now 
o Win a Championship Title, a culmination of dedication to performance by
employees and racers


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Dr.

Christian Kreuzer Wirtschaftsuniversität Wien

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

By: David Augustsson Carson Dunlap

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