PROFESSOR EDWARD DESMARAIS
BUS470 BUSINESS POLICY AND STRATEGY
FALL 2001
CANNONDALE CORORATION
CASE ANALYSIS
December 17, 2001
International Strategic Annalists
TABLE OF CONTENTS
A. Executive Summary
…………………………………………………………….
1
B. Current Situation
…………………………………………………………….
2

Current Performance
……………………………………...…………….
2

Strategic Posture
…………………………………………..……….
4

Corporate Governance
………………………………………………..….
18
…………………………………………………………….
19
C. External Factors

Industry and Competitive Analysis
……………………………………..….
21

Summary of External Factors
…………………………………………
73
…………………………………………………………….
77
……………………………………………………
105
D. Internal Factors

Financial Analysis

Management’s Personal Ambitions, Philosophies, and Ethics
………...
117

Company Culture ……………………………………………………………..
118

Summary of Internal Factors
…………………………………………..
120
………………………………………………………………………
125

Generic Strategy ……………………………………………………………..
125

Strategy to Gain Maintain Competitive Advantage …………………………..
126

Matching Strategy ……………………………………………………………..
127

Summary of the Strategies …………………………………………….……..
130
F. Recommendation and Implementation / Evaluation and Control …...……………..
134
…………………………………..
143
Appendix B (SWOT Matrix) …………………………………………………………….
152
……………………………………………………
155
E. Strategies
Appendix A (Consolidated Financial Statement)
Appendix C (Responses to Panel)
i
A. Executive Summary
Corporate, Business, Functional, Departmental
Mission
and Vision
Cannondale
Corporation
mission
statement is:
“To be the
best cycling
company in
the world” .
Their
mission
inspired ten
principles
and on of
them is
“Stay lean,
remain
competitive
and
entrepreneur
ial” 1 To
fulfill their
missions
they enter
the
motorcycle
industry
recently.
Cannondale
Vision is
“making the
best cycling
and off-road
motorsports
company in
the world” 2.
Objectives
Internal
Strengths and Weaknesses
Opportunities
- Faster then US growth of
international markets.
- Expend domestic market
share.
- Locate manufacturing
plant in other countries
with lower labor cost than
in US.
- Societal values and
lifestyles in which
customers turning toward
outdoor activities in their
leisure time and have
disposable income to
spend.
- Market size
- E-commerce
- High demand for juvenile
bicycles.
- Low rivalry in the
motorcycle industry.
Threats
- Maturity of the US market.
- Low industry profitability.
- Exit barriers which
required large capital to
leaving the market in terms
of stakeholders’ equity.
- Economic slowdown.
- Pace of technological
innovation in product
introduction.
- High Rivalry
- Fast changing trends and
lifestyle.
- Fast diffusion of knowhow.
Strengths
- A powerful narrow
differentiation strategy
supported by skills and
expertise in key functional
area.
- Flexible manufacturing
capabilities suited for
production of high-end,
high-quality bikes.
- Higher that rivals degree of
differentiation supported by
greater degree of vertical
integration.
- Brand name recognition.
- Cannonade’s proven skill in
continuous products
innovation.
- CAD and CAM technology
(short and long term; financial and strategic)
External
Opportunities and Threats
Strategic objectives
Short term:
- Achieve 15% share of the off-road motorcycle US market
by year 2002.
- Lower the operation cost in manufacturing by 2% by 2001.
- Quicker product design-to-market times by 15% in 2002.
- Decrease the number of new product defect by 20% by
2002.
- Deliver their products to the retail stores in 5 to 12 days
from the order receive.
Long term:
- Become number one manufacturer and marketer of highperformance bicycle in the world by 2010.
- Reduce the number of defects to 1 on 10,000,000 bicycle
by 2004 to 2009.
- Enter motorcycle European markets by 2005 and capture
additional 10% of market share.
- Spend $1 million on marketing each year to get the
strongest and most recognized brand name by 2005.
- Establish 50% more specialty retailers store in Australia
and Europe by 2005.
Financial objectives
Short term:
- Achieve 20% annual revenue growth in the 2000.
- Return to its profit margins of 6.2% from 1995 by the end
of next year.
- Improve its MVA by 10% by the end of the next year.
- Increase revenues from Europeans market by 34% by 2001.
- Improve Assets turnover by 12% by 2001 to improve assets
efficiency.
Long term:
- Achieve annual sales growth of 30% through 2001 to 2005.
- Reduce Debt/Equity by 23% by 2003 to maintain financial
stability.
- Become one of the two best performing stocks in the bike
industry by 2005.
- Reduce costs to achieve higher profit margins and increase
ROE to 1991 levels of 17% by the end of 2004.
- Achieve profit margin of 12% by 2003
Cannondale Corporation Case Study, p.127, 2 Cannondale.com
1
Weaknesses
- Production processes not
suited for production of
low-end bicycles.
- Low Profit margins of 3.3%
(1999).
- One plant in light of global
competitors.
- High debt leverage.
Recommendations
(include the pros and
cons of each
recommendation)
- Outsource
production of lowend bicycles.
- Develop linkages
with foreign
distributors of lowend bicycles to
increase scale.
- Open
manufacturing plant
in Eastern Europe
and capture more
market share.
- Aggressively enter
off-road motorbike
industry to
rejuvenate growth.
- Increase
customization in the
high end to
command higher
premium prices and
increases Profit
margins.
- Build strong line of
inexpensive
bicycles with
different brand
name and to use the
capabilities in
design and increase
profits.
B. Current Situation
I. Current Performance
Cannondale Corporation manufacture high-performance aluminum bicycles and bicycles
accessories. In early 2000 Cannondale was world’s leading bicycle industry manufacturers and marketer
with an estimated 20% share of U.S. high-performance bicycle market. The company sells their product
in more then 60 other countries.
Cannondale’s revenue growth had slowed to an annual rate of 9.7 % between 1995 and 1999 after
growing at a compounded annual rate of 22.3% between 1991 and 1995. In January 1999 Cannondale
posted revenue of $176,819,000, and net income of $5,923,000. Their stock price steadily declines since
its peak of $27 in 1997.
In 2000 the company sold its bicycle through 1,150 specialty retailers in Canada and US, who
could provide knowledgeable sales assistance regarding to the technical and performance characteristics
of products and offer ongoing a commitment to service. Cannondale products were not available through
mass merchandisers. Cannondale provides their dealers with a full line of bicycle components,
accessories, and men and women’s cycling apparel. Cannondale offer 71 total bicycles models of which
70 are aluminum based.
2
In early 2000 the company prospects for a growth by introduce MX400 off-road motorcycle.
Cannondale management planned to capitalize on the initial success of the MX400 with the unveiling of
several additional motorcycles at the motorcycle industry.
Cannondale corporate headquarter is located in Georgetown, Connecticut and its manufacturing
facilities in Bedford, Pennsylvania. End of July 1999 Cannondale employed a total of 779 full-time
workers in US, 115 in Europe, 16 in Japan and 6 Australia subsidiary.
3
II. Strategic Posture
Mission: “To be the best cycling company in the world” .
Their mission inspired ten principles and on of them is “Stay lean, remain competitive and
entrepreneurial” 1 To fulfill their missions they recently enter the m motorcycle industry.
Criteria
What is our business?
Facts
Cannondale business is to manufacture
and market high-performance aluminum
bicycle and high-performance bicycle
components. They also provide its
dealers with a full line of bicycle
components, accessories, and men’s and
women’s cycling apparel. Cannonade is
pioneer leadership in developing and
producing the first lightweight aluminum
frame for road and mountain bicycles.
The company’s bicycles are carrying
“Handmade in US” logo.
The company distributes their product to
the best specialty retailers in the world
that provide knowledgeable technical
and characteristic of the product sales
assistance and ongoing commitment to
service.
In 2000 the company launch MX400 offroad motorcycle.
4
What does this mean?
Cannondale satisfies and delights their
customers with the high-performance,
high quality bicycles and is the trends
maker in the bike industry.
Their business operates in the mature
stage of the industry, which produces
fundamental changes in the industry
competitive environment. Cutting-edge
know-how and first-to-the market
capabilities are very important in this
market. Cannondale differentiate their
products through technological
innovations that make their bicycle
lighter, stronger, faster and more
comfortable then rivals.
They concentrate on the specific market
niche for high-performance, high-quality
bicycles for mostly adults’ customers
who are turning toward outdoor activities
in their leisure time. They also
concentrate on very narrow market niche
for racing team member and they try to
be the best market provider for these
customers.
The industry business environment is
changing by attitudes and lifestyle, and
the shifting needs of the customers must
be taking into consideration. Cannondale
developed alternative business segments
by enter into new motorcycle industry
and introduced their first motorcycle to
the new customers they try to capture.
Cannondale operates in the international
market mostly in countries (Europe) with
high economic growth and high numbers
of individuals that have the disposable
income to purchase bicycle for
recreations reasons.
Cannondale’s sale model provides their
customers with excellent after purchase
customer care and assistance.
Who are our customers
(stakeholders) (p. 34)?
-Customers
-Competitors
-Employees
-Shareholders
-Suppliers
-Community
-Financial Institutions
-Government
What do we do for each
of them (p. 34)?
-Customers: Supply durable
construction, innovative design, high
quality and exceptional performance
products to the market quickly. Provide
excellent customer service.
Cannondale is a niche market provider
for five different bicycle category market
segments: mountain bike, road racing,
multisport, recreational, and specialty.
Their customers in all market segments
have different needs and expectations,
and for each of the customer segment
Cannondale provide different product.
-Competitor: Cannondale provides
alternatives for the consumers and
creates a competitive force in the cycling
market. Competition is based on
perceived value, brand image,
performance features, product
innovations and prices. They stay lean,
remain comparative and entrepreneurial.
5
Cannondale has an obligation and
responsibilities toward each of them and
fulfills it to the best of their knowledge
and ability. They care about each other,
the shareholders, customers, and
vendors.
Cannondale fulfills customer’s needs
though their business models. They
successfully respond to changing
customers demands and trends in timely
manner, including the introduction of
new or updated product at prices
acceptable to their customers.
Cannondale attempt to serve different
customers with the different types of
products. They add value to each
segment by innovate and improve their
bicycles and make them more
comfortable and easier to use for the
customer. For example for mountain bike
customers they combine elements form
other bicycles categories that allow more
upright cycling positions then read
racing bike.
Cannondale tries to be the industry
leader and the best cycling company in
the world. The worldwide market for
bicycles and accessories is extremely
competitive and Cannonade has to face
strong competition from a number of
manufacture in each of the product line.
Cannondale’s competitors are mostly
companies from Asia and US. To be able
to compete with them Cannondale tries
to establish high brand name recognition
among their customers. They produce
their products in US as a guaranty of
better quality over the rivals. Their US
manufacturing base is key competitive
advantages. Cannondale produce faster
by using domestic components than
rivals who import from Far East and
quicker design-to-market times are a key
competency in the industry. It also
prevents other component suppliers in
Asia from copying their products and
selling at lower price.
As the entrepreneurial Cannondale
entered the motorcycle industry and they
designed and introduced their first new
product.
-Employees: Provide growth
opportunities for talented/motivated
individual, benefits, economic and
educational development, contribute to
improve life standard of employees.
90% of profits is going back into the
company for growth and the balance is
share with the employees.
In 1999 they employed a total of 779
full-time workers in US and 115 in
European subsidiary, 16 in Japan and 6
in Australia.
Cannondale creates friendly and safe
working environment for their
employees and gives them the
opportunity for individual growth.
The company encourages employee to be
innovative and entrepreneur.
Continuously improvement respects and
cares one another is the most important
issue in Cannondale. The management
encourages employee to be innovative
and entrepreneur. The company shares
profits with all employees.
The employee relations are good.
-Shareholders: Cannondale provides
yield earnings.
Cannondale increases owner’s wealth by
providing earnings.
-Supplier: Alliance partnership with
various aluminum suppliers to achieve
favorable pricing and delivery terms and
technical assistance. But the company
believes that termination of its contracts
would not have the significant impact on
the cost, because of aluminum’s wide
availability.
Cannondale contributes to their
suppliers’ financial growth and creates a
good relationship with them. They need
to develop the ability to maintain flexible
relationship with their current suppliers
and the ability to substitute new
suppliers without interruption of
component supply. The alliances with
suppliers lead Cannondale to receive
services and quality products. Their
buying power allows them to secure
higher-volume purchasing discount.
-Community: Cannondale provides jobs
in the community.
Cannondale cares for the environment by
taking proactive position in regard to
safe and responsible cycling.
Cannondale creates a good image for
their company in the society.
-Government: Cannondale pays taxes
and follows rules and regulations.
Cannondale fulfills their financial duties
towards government in order to operate
business legally.
6
-Financial institution: Cannondale
borrows money to operate their business
and pays interest.
How (technology used or
functions performed) do
we meet their needs and
expectations (p. 34)?
Cannondale meets expectation through
the use of high technological innovations
in frames, components and suspension
systems. In 1999 they use carbon
composites and titanium to produce
frames in high technologically advanced
mountain bikes and K2 computer-chipactivated Smart Shock.
In 2000 the company launch MX400 offroad motorcycle.
How do we
communicate the
mission to our
organization and our
customers (stakeholders)
(p. 40)?
-
The company Web page
Post in a building
Annual report
Advertisement
News letters/Memos
Press release
Cannondale is able to pay the interest to
their creditors and uses financial
leverage to increase their competitive
advantages.
Cannondale creates opportunities for the
consumers, stakeholder and suppliers
and creates a challenge to their
competitors. Cannondale continues to
focus on customer needs by using newest
technological innovation and advantages
in the operation processes and services,
that makes Cannondale leader of the
high-end bicycles sector. Cannondale has
competitive advantages in manufacturing
processes and R&D they shares
experience, new designs, and new
product ideas with racing engineering
staff which significant improve the
efficiency of the R&D activities. Though
the flexible manufacturing process,
know-how to Cannondale is able to have
a quicker design to market in comparison
to their competitors. Industry
manufacturers kept adding features to
their products in attempts to maintain
their market share and Cannondale is a
pioneer in production and product
innovation process. The technology that
Cannondale implant in their business
model gives them the competitive
capability over their rivals and address
customer’s needs. To remain competitive
and entrepreneurial. Cannondale entered
new motorcycle industry.
Cannondale shows their stakeholders
whether or not they are achieving their
objectives by keeping them informed of
their presence situation. Informed
employees are motivated and fulfil
Cannondale’s missions more
successfully. Cannondale tries to stay
close to their customers to better fill their
needs and expectations.
Vision (Refer to the same pages for the mission concepts.)
Criteria
What will our business
be in 5, 10 years?
Facts
Cannondale will be the best cycling and
off-road motorsports company in the
7
What does this mean?
By achieving this vision, Cannondale
will care of their stakeholders,
world”
Who are our future
customers?
Cannondale’s future customer will be:
- Existing adult and juvenile mountain
bikers in the world
- Potential mountain bikers in the
world.
- Team racers
- Distributors (independent specialty
dealers)
- Motocross riders
- Contractors (i.e. L.L. Bean, Tommy
Hilfinger)
What will we do for each Current customers:
of them?
- Cannondale will retain and keep
attracting their existing customers by
improving their products and brand
image to prevent them from
switching to the other rivals
products.
- Cannondale will provide competitive
products and price.
New customers:
- Cannondale will provide highperformance products and
competitive price that potential
customers want.
- Cannondale will keep maintaining
their brand image by using sales &
marketing and promotion programs.
8
customers, and venders.
Produce high-performance, innovative,
and quality aluminum bicycle as well as
high-performance bicycle components.
Device flexible manufacturing processes
that enable them to deliver their products
to the market quickly.
Limit the distribution to the best
specialty retailers in the world with
excellent customer services.
Remain competitive and entrepreneurial.
Cannondale promote from within
whenever possible.
Improve everything continuously.
Cannondale has potential and existing
customers in their business. They will be
able to survive in the US and the other
international markets by retaining their
customers and gaining more market
share.
Each customer has different preferences.
Cannondale will offer many kinds of
product line-ups, wide range of pricing,
and custom-fitting bicycles to fit the
customer needs and wants. Cannondale
will attempt to serve different customers
with the different types of products.
They will add value to each segment by
innovate and improve their bicycles and
make them more comfortable and easier
to use for the customer
Cannondale need to improve their brand
image and competitive capabilities to
produce valued products at the best price
not only to gain new customers but also
maintain existing customers. To
implement those objectives, Cannondale
will improve and develop marketing
program and promotion, R&D and
efficient manufacturing processes. They
will need a large amount of capital to
invest.
When Cannondale enter international
markets, they will have to deal with
foreign government’s restrictions and
foreign exchanges. They need to have
competitive features to offset the
disadvantages of these restrictions.
-
Cannondale will sell its products
only to specialty retailers that have
knowledge of the products so that
customer can find exactly what they
want.
- Cannondale will deal with the
foreign restrictions to enter
international markets.
How (technology used or Though technological innovations
functions performed)
Cannondale makes their products lighter,
will we meet their needs stronger, faster, and more than rivals.
and expectations?
Cannondale uses components and parts
supplied from best known suppliers,
such as Shimano, SunTour, and
Campionolo in order to gain additional
value on its products.
Cannondale uses CAD/CAM technology
to improve manufacturing processes and
reduces the time required to design and
produce new bike models. The system
also allows Cannondale to offer customfitted bicycles.
How will we
Cannondale will communicate their
communicate the vision
vision through:
to the organization and
- Cannondale’s annual report
our customers?
- Advertising
- Logo “Handmade in the USA”
- Volvo/Cannondale racing team
- Media campaign (print media and
television)
- Web site
- Print media, point-of-sale literature,
banners, product packaging, and
product catalog.
Cannondale will focus on the innovation
and development in frames, components
and suspension systems as well as
manufacturing systems. They will invest
on R&D and add more attractive features
and values on their products in more
efficient manufacturing processes than
the rivals.
In the high-performance bicycle
industry, customer recognition is one of
key contributors to compete against the
rivals. Cannondale strengthens
communication to their customers by
using many kinds of means.
ESTABLISHING OBJECTIVES (p. 41)
Criteria
Market share
Facts
Cannondale is the world’s leading
manufacturer and marketer of highperformance aluminum bicycles with an
estimated 20 percent share of the U.S.
high-performance bicycle market.
What does it mean?
Long term objective:
- Become number one manufacturer
and marketer of high-performance
bicycle in the world by 2010 (Not
only the world’s leader in aluminum
bikes but also all other lightweight
materials as well.).
Short term objective:
- Gain 20% of US market share in off-
9
Quicker design-tomarket times
Higher product quality
Lower costs relative to
rivals
Broader or more
attractive product line
than rivals
Better e-commerce and
internet capabilities than
rivals
Cannondale is able to have a quicker
design to market in comparison to their
competitors.
Cannondale is able to assure higher
product quality to their buyers.
road motorcycle industry by 2002.
Long term objective:
- Cannondale will create teams of
engineers working with all its
strategic suppliers and R&D
personnel to shorten the design time
of their new products by 30% by the
year 2006.
Short term objective:
- Quicker product design-to-market
times by 15% in 2002.
Long term objective:
- Reduce the number of defects to 1 on
10,000,000 bicycle by 2004 to 2009.
Short term objective:
- Decrease the number of new product
defect by 20% by 2002.
Cannondale costs are relatively similar to Long term objective:
their immediate rivals.
- Cannondale will lower the cost of
production down to 15% by 2005.
Cannondale offered 71 models of
bicycles, all of which except its carbonfiber Raven model featured aluminum
frames.
Their product line in similar to other
rivals.
Cannondale maintains an innovative web
site that averaged more than 25 million
hits each month. Their e-commerce
capabilities are similar to rivals.
10
Short term objective:
- They should continue manufacturing
the frames in the U.S. But they
should outsourcing 25% more of
their components by 2002.
Long term objective:
- Developing and introduce to the
market one new product per year.
They should put more emphasizes in
the Carbon-fiber models since they
already have 70 aluminum models.
- Enter motorcycle European market
by 2005 and capture 10% of market
share.
Short term objective:
- Cannondale will achieve 15% share
of the off-road motorcycle market by
year 2002.
Shot term objective:
- They should expand their use of ecommerce technology by increase
their web site features and services.
Gain an additional 5% of the market
share by 2002 through the use of the
internet.
Superior on-time
delivery
They are able to have superior on-time
delivery in comparison to rivals.
Stronger brand name
than rivals
Cannondale is on or the worlds best
known manufacturer and marketer of
high-performance aluminum bicycles.
Superior customer
service
Cannondale’s specialty retailers provides
their customers with excellent after
purchase customer care and assistance.
Stronger global
distribution than rivals
The company does not have stronger
distribution capability than rivals.
Industry leader in
technology
Since this market is maturing the need to
keep with advance technological
innovations is essential. Cannondale is
able to stay as an industry leader
technological advancement.
Industry leader in
product or service
innovation
The company has an ongoing
commitment to R&D and had continued
to expand and develop its aluminum
bicycle line with a series of innovations.
Cannondale’s know-how and
11
Long term objective:
- They should capitalized on superior
on-time delivery by outsourcing 50%
of their total demanded production
by 2006.
Short term objective:
- By 2003 Cannondale will deliver
their products to the retail stores
from 5 to 12 days from the order
receive.
Long term objective:
- Cannondale will spend $1 million on
marketing each year to get the
strongest and most recognized brand
name by 2005.
Long term objective:
- Cannondale will increase by 10%
customer satisfaction by 2005.
Short-term objective:
- Cannondale will improve by 15%
their dealers’ performance by 2002.
Long term objective:
- They should work in programs that
would allow them to have the
strongest distribution capabilities by
20% in the industry by 2007.
Short term objective:
- Become one of the leading
distributors in high-performance
bicycle in Europe by 2002.
Long term objective:
- Cannondale should strive to
minimize their rivals’ sales. They
should truncate their lesser
competitive rivals by introducing
new technologically advance
products and features in a way that
will eliminate some of their rivals.
Cannondale will be the industry
leader in technology by the end of
2005.
Long term objective:
- Cannondale should use their knowhow in developing new product
lines. They should develop a least
one new product per year and
Wider geographic
coverage than rivals
manufacturing skills enables the
increase the number of technological
company to be a first-mover and trend
innovations in their bicycle products
seller.
by 20% by the end of 2005.
The company sells its bicycles through
Long term objective:
1150 specialty retailer locations in the
- Establish 50% more specialty
United States and Canada. They also sell
retailers store in Australia and
in other countries as well.
Europe by 2005.
Short term objective:
- Enter East Europe in 2002 and
achieve market share 2 % by 2003.
Long term objective:
- The company to have had introduced
to the market one of the industry’s
best customer satisfaction assurance
program by 2004.
Higher levels of
customer satisfaction
than rivals
Short term objective:
- The company to develop a new and
improved quality insurance plan by
May of 2002.
Financial Objectives
Criteria
Revenue growth
Earnings growth
Facts
Between 1983 and ‘85- 30%
Between 1991 and ‘95- 22.3%
Between 1995 and ‘99- 9.7%
Sales 1991=54,544,000
Sales 1993=80,835,000
Sales 1995=122,081,100
Sales 1999=176,819,000
Net income:
1991=1,162,000
1995=7,548,000
1999=5,923,000
Growth rate between
1991 and ‘95=59.65%
1995 and ‘99=-5.88%
Higher dividends
N/A
Wider profit margin
Year
1991
1995
Profit margins
3.5%
6.2%
12
What does it mean?
Long-term objective:
- Cannondale will achieve annual sales
growth of 30% through 2001 to
2005.
Short-term objective:
- Cannondale will achieve 20% annual
revenue growth in the 2000.
Long-term objective:
- Cannondale will return to its earning
growth of 60% by 2003.
Short-term objective:
- Cannondale will generate 220%
earning growth from off-road
motorcycles line of business by the
end of the next year.
Cannondale will reinvest all earnings
into new lines of its business.
Long term objective:
- Cannondale will achieve profit
margin of 12% by 2003
1999
EVA performance
MVA performance
Strong bond and credit
ratings
Recognition as a blue-chip
company
1999
=11,371,000-2,051,000785{income
tax}-( (cost of equity)*75,010,000)
1999
=$10.00(stock price average of
1999)*(7,518,000)75,010,000(shareholders equity
investment)=$170,000
BBB+/Stable/
Our senior debt rating is ‘BBB+’,
reflecting the company’s good
market position, expanded product
line, and strong financial profile.
Our outlook is stable.
(www.standardandpoors.com)
-
More diversified revenue
base
3.3%
Cannondale is not blue chip.
Cannondale it traded on the
NASDAQ.
Cannondale stock price was
rising between 1995 and 1998.
After 1998 stock price declined
from level above $20 per share
annually to $5 in 2000.
Cannondale entered the international
market in 1989 when it established a
European subsidiary, Cannondale
Europe, in the Netherlands. The
company sold its bicycles through
retailers in Austria, Belgium,
Denmark, Finland, Sweden and UK.
Sales growth in Europe had an
average compound growth rate of
12.4% between 1993-99.
In February 1998 Cannondale
13
Short-term objective:
- Cannondale will return to its profit
margins of 6.2% from 1995 by the
end of next year.
Long-term objective:
- Cannondale will improve EVA ratio
by 35% by the end of 2004.
Short-term objective:
- Boost profit margins from 3.3%(’99)
to 6.2% by the end of 2001.
Long-term objective:
- Consistently beat EPS estimates for
the next 5 years to improve our
MVA.
Short-term objective:
- Cannondale will improve its MVA
by 10% by the end of the next year.
Long-term objective:
- Cannondale will be among 2 best
rated companies in the industry by
the 2004.
Short-term objective:
- Cannondale will achieve ‘BBA’
rating by 2002.
Long-term objective:
- Cannondale will be one of the two
best performing stocks in the bike
industry by 2005.
Short-term objective:
- Cannondale will beat current EPS
estimates to improve its stock price
in the next year.
Long-term objective:
- Cannondale will increase market
share in off-road motorbikes and
clothing to 18% by the end of 2004.
Short-term objective:
- Cannondale will increase revenues
from Europeans markets by 34% by
2001.
Stable earnings during
recessions
Higher ROI,
Higher ROE
Higher cash flow
Financial ratios superior to
rivals
entered the off-road motorcycle
industry. In January 2000
Cannondale’s orders for its new
MX400 had exceeded its projected
sales forecasts by more than 80%.
Financial data do not cover
sufficient period of time to reflect
Cannondale’s vulnerability to
economic slowdowns. Data for 1990
not provided.
No data available
Based on 1999 financial
performance summary =
5923/75010= 7.9%
Based on 1991 financial
performance summary =
(1162/ 6893)= 16.9%
ROE is declining.
Years Free cash flows
’97
($5,189)
’98
($9,588)
’99
($578)
’00
($11,911)
Cannondale’s cash flows are rapidly
declining.
Year
1999
1998
1997
1996
P/E
8.47
8.36
14.36
18.84
Price
3.69
6.53
9.00
21.75
P/E and Price significantly falling.
Also Profit margins falling after
1995
Year
Profit margins
14
Short-term objective:
- Cannondale will reduce wage by
20% in case of recession to maintain
projected earnings in 2001
Short-term objective:
- Decrease cost of debt by 5% by year
2002.
Long-term objective:
- Cannondale will increase ROI by
15% by 2004.
Long-term objective:
- Cannondale will reduce costs to
achieve higher profit margins and
increase ROE to 1991 levels of 17%
by the end of 2004.
Short-term objective:
- Increase sales by 25% to affect
Assets turnover and increase ROE by
the end of next year.
Long-term objective:
- Cannondale’s new business of offroad motorbikes will generate
$100,000 in 2003 to offset negative
cash flows.
Short-term objective:
- Cannondale will increase sale of low
efficient assets (Some building and
old machines) to improve cash
position by the end of next year.
Long-term objective:
- Cannondale will reduce Debt/Equity
by 23% by 2003 to maintain
financial stability.
Short-term objectives:
- Cannondale will improve ROA by
15% by the end of next year.
- Cannondale will improve Assets
turnover by 12% by 2001 to improve
assets efficiency.
1991
1995
1999
Year
1991
1995
1999
3.5%
6.2%
3.3%
ROA(Net income/TA)
3.3%
9.0%
3.6%=($5923/$162379)
ROA between 1991 rises by 5.7%.
However, after 1995 efficiency of
assets is declining.
Strategic objectives
Short Time Objectives

Achieve 20% share of the off-road motorcycle US market by year 2002.

Lower the operation cost in manufacturing by 2% by 2001.

Quicker product design-to-market times by 15% in 2002.

Decrease the number of new product defect by 20% by 2002.

Cannondale will improve by 15% their dealers’ performance by 2002.

Become one of the leading distributors in high-performance bicycle in Europe by 2002.

The company will develop a new and improved quality insurance plan by May of 2002.
Long Time Objectives

Become number one manufacturer and marketer of high-performance bicycle in the world by 2010.

Reduce the number of defects to 1 on 10,000,000 bicycle by 2004 to 2009.

Enter motorcycle European markets by 2005 and capture 10% of market share.

Spend $1 million on marketing each year to get the strongest and most recognized brand name by
2005.
15

Establish 50% more specialty retailers.

Cannondale will create teams of engineers working with all its strategic suppliers and R&D
personnel to shorten the design time of their new products by 30% by the year 2006.

Developing and introduce to the market one new product per year. They should put more
emphasizes in the Carbon-fiber models since they already have 70 aluminum models.

They should capitalized on superior on-time delivery by outsourcing 50% of their total demanded
production by 2006.

They should work in programs that would allow them to have the strongest distribution capabilities
by 20% in the industry by 2007.

Cannondale should strive to minimize their rivals’ sales. They should truncate their lesser
competitive rivals by introducing new technologically advance products and features in a way that
will eliminate some of their rivals.

Cannondale will be the industry leader in technology by the end of 2005.
Financial objectives
Short term:

Achieve 20% annual revenue growth in the 2000.

Return to its profit margins of 6.2% from 1995 by the end of next year.

Improve its MVA by 10% by the end of the next year.

Increase revenues from Europeans market by 34% by 2001.

Improve Assets turnover by 12% by 2001 to improve assets efficiency.

Cannondale will generate 220% earning growth from off-road motorcycles line of business by the
end of the next year.
16

Cannondale will return to its profit margins of 6.2% from 1995 by the end of next year.

Boost profit margins from 3.3%(’99) to 6.2% by the end of 2001.

Cannondale will achieve ‘BBA’ rating by 2002.

Cannondale will beat current EPS estimates to improve its stock price in the next year.

Cannondale will reduce wage by 20% in case of recession to maintain projected earnings in 2001

Decrease cost of debt by 5% by year 2002.

Cannondale will increase sale of low efficient assets (Some building and old machines) to improve
cash position by the end of next year.
Long term:

Achieve annual sales growth of 30% through 2001 to 2005.

Reduce Debt/Equity by 23% by 2003 to maintain financial stability.

Become one of the two best performing stocks in the bike industry by 2005.

Reduce costs to achieve higher profit margins and increase ROE to 1991 levels of 17% by the end of
2004.

Achieve profit margin of 12% by 2003.

Consistently beat EPS estimates for the next 5 years to improve our MVA.

Be among 2 best rated companies in the industry by the 2004.

Cannondale’s new business of off-road motorbikes will generate $100,000 in 2003 to offset negative
cash flows.

Cannondale will return to its earning growth of 60% by 2003.
17
III. Corporate Government of Cannondale Corporation
1. Executive officers of the registrant.
 Joseph S. Montgomery
Chairman of the board, president and chief executive officer, director.
 William A. Luca
Vice president of finance, treasurer, chief financial officer, chief operating officer, and director.
 Daniel C. Alloway
Vice president of sales, director.
 Leonard J. Konecny
Vice president of purchasing.
 John P. Moriarty
Assistant treasurer and assistant secretary, chief accounting officer.
 Michael T. Dower
Vice president of information technology.
 Mark A. Charpentier
Vice president.
18
C. External Factors
Macro-environment forces
Criteria
The economy at large
-
-
Legislation and regulation
-
-
-
-
-
Facts
Late 1980s and early 1990
the world economy began to
recover from a mild
recession. GNP is growing
in the US and most WesternEuropeans countries.
Bicycle industry reached
maturity during mid-1990s
and grew at an approximately
annual rate of 2% during the
late 1990s.
1990 US government enacted
legislation that required
communities to include
cycling in local transit
infrastructure planning.
Clean air act for air quality,
to make bicycle a more
viable transportation.
1991 ISTEA recognized
transportation value of
bicycling and waking.
Cycling facilities in Western
Europe such as bike lanes,
parking sites, traffic calming
and intermodal transit links
encouraged people to use
bicycles as means of
transportation.
TEA-21 transportation equity
act of the 21 century.
19
What does this mean?
Great opportunities for the bicycle
industry in late 1980s and early 1990s.
The Federal Reserve Board’s monetary
policies enable industries to make large
capital expenditures on technology.
Early 1990s Federal funding was
available for states and metropolitan
organizations to increase the use of
bicycles as a mean of transportation. In
turn, these expenditures led to
significant improvements in
productivity. These improvements
allowed companies to grow while
keeping their costs and prices down.
This in turn kept inflation low and
allowed the Federal Reserve Board to
keep interest rates low. These
conditions reinforced additional capital
spending on technology. The
combination of low interest rates and
productivity gains through technology
created significant opportunities for the
industry. Consequently revenues in the
bicycle industry grew at a compounded
annual rate of 22.3%.
This is an opportunity for the industry
because US population will feel safer to
use bicycles as transportation and
leisure. ISTEA offered mechanisms to
increase consideration of bicyclists and
pedestrians enhanced by federal funding
which was available for states and
metropolitan organizations.
In Western Europe, cycling facilities
such as bike lanes Parking sites, traffic
calming and intermodal transit links,
were great opportunities to the industry
because they encouraged people to use
bicycles for as much as 20 to 50 percent
of all urban trips.
Industry participants believe that TEA21 would provide $500 million in
revenues between 1999 and 2003; which
would be a great opportunity for the US
industry to increase their market size.
Population demographics
-
-
Societal values and lifestyles
-
-
-
-
Technology
-
Over one billion bicycles
exist in the world.
Western Europeans are the
biggest users of bicycles with
an estimated of 115 millions
bicycles.
70% usage as a means of
transportation, 29% used for
recreational purposes and 1%
in racing event.
This is an opportunity for the industry.
Chinese are the largest users of bicycles
in the world. In China and so many
developing countries bicycling is the
primary means of land transportation.
Six hundred millions users in China
alone. Chinese are able to absorb the
local production of bicycles because of
daily usage as means of transportation.
This is a key driven factor for the
industry growth. In industrialized
nations, high demographic populations
of “Baby Boomers” children got to their
maturity level with growing disposable
income to purchase bicycles to balance
transport, recreation and sport.
For the high-end segment of industry
this is a great opportunity because savvy
“ Baby Boomers” with their growing
disposal income will not hesitate to buy
every time high quality bicycles with
new features come out in the market.
Cycling the fifth most
popular recreational activity
in US. Early 1990.
More adults were turning
toward out door activities in
their leisure.
Introduction of the mountain
bike as an Olympic sport in
1996.
Growing interest in a total
fitness lifestyle.
Americans demand fast pace,
cheaper priced, innovative
products and services.
This is an opportunity for the industry
because generations of “Baby Boomers”
are more aware of their health and
physical conditions than the old
generations. This increased the number
of people being active in some type of
physical activity. Americans wants fast
pace, cheap, innovative products and
services. This in turn combined with a
growing interest in a total fitness
lifestyle had caught the attention of
manufactures to introduce in 1984 the
aluminum frame mountain bikes in the
market.
It was a great opportunity for both low
and high-end segments of the industry
to benefit from the popularity of the
mountain bike. Between 1983 and
1985, sixty three percent of all bicycles
sold in the industry were mountain
bikes. Revenues grow at an annual rate
of 30 percent.
This is a threat for the industry because
innovations diffused quickly throughout
the industry as manufacturers kept
adding features in attempts to maintain
Technology Innovation
became increasingly
important in the industry as
rival mountain manufacturer
20
-
-
-
-
-
attempted to outpace the
modest industry growth rate
by adding technology
innovation frames,
components, and suspension
systems.
Introduction in 1983 of the
first-ever large diameter,
aluminum-tube bicycles.
1989 First mountain bike
with a carbon-fiber frame.
1993 introduction of the
frames M4 metal matrix
composite material of
aluminum, silicon, copper,
and magnesium with
advanced full-suspension
bikes.
In 2000 introduction of
MX400, highly innovative
aluminum-frame motorcycle.
(CAD/CAM) Computeraided design and
manufacturing technology,
technological advanced that
automatically calculated
specific tube length, and its
computer-guided laser tube
cutters allowed the
manufacturer to offer
custom-fitted bicycles.
K2’s computer-chipactivated Smart shock was an
example of a technological
innovation that could provide
a bicycle manufacturer with
the level of differentiation
necessary to support
premium pricing.
their historical growth rates. In order to
be competitive in this industry
companies are required to retain
earnings and invest large amounts of
capital expenditures in R&D. In turn
advanced technological manufacturing
systems such as K2’and (CAD/CAM)
allow companies to reduced the time to
complete bike from 17 days to only 3
days and allow manufacturers to offer
custom-fitted bicycles.
. Manufacturers were able to have costeffective production of wide product
line and a broad range of models in
single day in order to respond to
customer demands.
This gave companies economy of scales
in manufacturing. Further advanced
technological tools enabled companies
to maintaining their competitive
position by supporting research into
further improvements in its
manufacturing process. This has
allowed companies to further divest into
new product line such MX400, which
suppose to give its manufacturer future
substantive revenues and competitive
advantage over competitors. Companies
that can not keep up with innovation
could be absorbed by the ones that have
the know-how technology; or are simply
obligated to file chapter 11 bankruptcy
protection; or have to merge with other
companies in order to be competitive in
the industry. In this industry innovative
features on a regular basis help to
maintain a comfortable level of
differentiation over not only high-end
brands but also lower-priced bicycles. In
the bicycle industry either you “innovate
or you die”.
1. The Industry's dominant economic features
Criteria
Market size
Facts
The US bicycle industry was
approximately a $5 billion per year
industry counting the retail value of
bicycles, related parts, and accessories
through all channels of distributions.
21
What does this mean?
Low-segment:
Increasing threats for US companies
because high annual sales for the US
industry will attract foreign companies
therefore increase rivalry in an industry
already in maturity.
More over 40% of bicycles sale in the
discount retailers were produced outside
the United states, in countries such as
China where manufacturing cost
structure have advantages over US or
West- European made bicycles; due to
China’s low labor cost. This will
increase price competition at the
discount retailers and therefore compel
US bicycles manufacturers to abandon
bicycle production in the United States.
Scope of the competitive
rivalry
-
High-end segment:
Opportunities for companies to increase
market shares because companies in this
segment of the industry are custom-made
and competition is based primarily on
perceived value, brand image,
performance features, product
innovation, and cost. More over in the
high-end segment of the industry
companies that are able to introduce new
features and new competitive bicycles
are still being able to maintain an annual
growth rate despite industry being in
maturity.
Low-end segment:
Companies that are able to locate their
plants in China have competitive
advantage over their rivals. They are able
to provide bicycles and related products
at low price due to low labor cost in
China. It is an opportunity for those
companies to be able to provide low
price bicycles at the discount retailer
stores where low price is a key success
factor to generate sales.
Multi-countries
National
Regional
Local
High-end segment:
Globalization is an opportunity for
companies at the low end as well at the
high-end segments of the industry.
Globalization is imminent for companies
to gain market shares in this mature
industry. Less threat and better chances
to survive for big companies who are
capable to expand their businesses
globally in order to increase their market
shares. Europe market is growing. There
22
Market growth rate and
position in the business
cycle
-
Number of rivals and
their relative size
-
-
Number of buyers and
their relative size.
-
is an opportunity for cycling companies
to expand their business and gain market
share in Europe.
Annual Domestic market growth rate Domestic market:
of 9.7%.
The slowing of the annual market growth
Kid’s mountain bikes are the fast
rate indicates that this is a mature market
growing segment of the industry.
and companies should be concentrating
Mid 1990s industry grew approached in capturing the new market segments
maturity.
through product innovation. Indeed the
The compound growth rate is 12.4% highly innovative aluminum-frame
in Europe between 1993 and 1999.
motorcycle MX400 is described to a
future strategic spark that will help the
industry to grow. Domestic market is a
threat for the industry because
companies that are competing to gain
market shares in a limited pie.
Over 2000 companies involved in
either manufacturing or distributing
cycling products.
About Six major players: Schwinn,
Intrepid, Specialized, Giant, Derby
and Cannondale
There were estimated 54.5 million
active adult cyclists in the US in
1999 who used their bicycles at least
once weekly.
23
International Market:
The international growth is an
opportunity for the bicycles industry.
The western European market is an
opportunity for companies competing at
the high-end segment of the industry.
Demand for the high performing bicycles
in this region of the world keeps
increasing. Europe market is growing.
There is an opportunity for cycling
companies to expand their business and
gain market share in Europe.
These major companies in the industry
have success in short period established
markets, brand name recognition, capital
to operate and alliances with major
suppliers. In this situation there is a lot of
threat for small companies or new
entries, because it is hard to enter the
industry and operate well in such a
competitive environment.
Although small companies may have
fewer advantages than the major
companies, there is still possibility for
them to become one of the largest
companies in the industry if their
strategies fit the market needs. There is
an opportunity for small companies to
become leaders in this industry.
Low-End:
The number of potential buyers around
the world is large, which creates
opportunity for the whole industry for
-
Extent of rivals vertical
integration
Adult bicycles fell into 5 broad
categories: mountain, road racing,
multi-sport, recreational and
specialty.
- Cycling enthusiasts do not shop in
discount stores. Most of the bikes
sold by mass merchandise retailers
are offered at prices below $200 and
tended to be heavy, without the
precision matching or reliable
components demanded by cycling
enthusiasts.
- Mountains bikes, the largest segment
of the adult market, accounted for
53% of all bicycles sold in the USA
in 1997.
- Clients of discount retailers were
looking mainly for low-end, lowperformance models.
- Discount store customers were not
particularly brand-loyal and usually
made their purchasing decisions
based on price.
- Cycling enthusiasts bought 30% of
industry total bikes in the USA. This
accounted for about 50% of total
dollar sale of the industry.
- Customers that purchased their bikes
in specialty dealer shops do not
perceive bikes as high quality if they
were distributed by discount store.
All companies in this industry have some
type of limited vertical integration.
24
future sales and profit. Buyers have the
power over which product to buy, this
can be a threat for small companies at the
low-end segment of the industry; which
the products in general may not be as
attractive in price and innovated as those
in the high-end segment.
Asia has the largest population in the
world and has large number of buyers in
the future.
Rivalry increases. Opportunity for Asian
producers to capture the US and
European market of low-end market.
High-end:
Western European with 115 millions
owners has a large number of savvy
bikers. The potential future customers of
the high-end bicycles will come from the
western part of Europe
There are potential buyers around the
world but companies have the
technology know-how to add features in
new bicycles and the strategic means to
conquer those buyers have better
opportunities to increase their share of
the pie. The rivalry is fierce in this
segment of the industry as many
companies try to capture the opportunity
and become leader of this segment of the
industry.
Low –end:
Vertical integration is not a threat to the
discount retailers. Companies have gone
from vertical integration in this segment
of the industry. Most of the companies
imported their frames and components
from Asia; which has low labor cost than
western Europe and the United States. .
Outsourcing bicycle frame and
components is often cheaper and less
complicated than making them in-house.
This gives companies low cost
production advantage over rivals. In
return help them to sell for a competitive
price at the discount retailers.
High end:
Vertical integration in this industry
would be advisable if companies cannot
rely on suppliers to offer high quality
Extent of rivals
horizontal integration
Types of distribution
channels rivals use
products at low cost. Limited value is
not a cost advantage in this segment of
the industry. If a company can produce
bicycle components in house with better
quality at lower cost. More over
suppliers from China are not reliable.
Vertical integration would be an
opportunity in this segment of the
industry.
Signed purchase agreement with
Horizontal integration is an opportunity
suppliers has allowed companies to
for the industry; because of sizable scale
secure higher volume purchase discounts of economies in purchasing bicycles
and therefore achieved economy of scale. components in large volumes and in the
assembly processes itself. Partnership
with suppliers of bicycle components
such as Shimano, Sun tour and
Campionolo have allowed major
companies to operate with manufacturing
cost saving. Reduce the risk expose to
changing technology. Improve the
company’s ability to innovate by
interacting and allying with “best inworld” suppliers who have considerable
intellectual depth and innovative
capabilities of their own. Allows
companies to concentrate its resources
on performing in house activities that it
can perform better then rivals.
Two primary distribution systems
Low-end:
existed in the U.S bicycle industry, large This is an opportunity for the industry;
discount retailers and independent
customers at the discount retailers are not
special bicycle shops.
knowledgeable about bicycle
components. Low price is a key factor to
attract. Also discount retailers are not
required to have a high knowledge about
the bicycle components.
High-end:
However at special bicycle shops
companies are require to keep up speed
distributors about new technology in
order to provide technical support to
customers as an ongoing commitment to
service. Those distributors who are not
able to provide good customer service
for bicycles savvy customers have
competitive disadvantage over
distributors who are able to keep up with
fast technology in this segment of the
industry. Because savvy bikers will not
shop in a place where they cannot find
25
Pace of technological
innovation in production
process innovation
-
-
Technology Innovation is fast and
increasingly important in high-end
segment of the industry.
Speed of technological change is
slower at the discount retailers.
Extent to which the
rivals products and/or
services are
differentiated
-
Low
Midrange
And high-end bicycles.
Extent to which rivals
use economies of scale
in:
 Purchasing
 Manufacturing
 Services
 Transportation
The industry has the benefit of economy
of scale and rivals take full advantage of
it.
26
highly knowledgeable distributors.
This is a treat for this high-end segment.
Low end:
This is an opportunity. The slow speed
of change allows companies competing
in this segment of the industry to take the
resources (capital and means of
manufacturing) that would have been
allocated to keeping up with changing
technology and apply them to some other
area of their industry that needs more
attention. This is an opportunity.
High-end:
This is a threat for the industry because
innovations diffused quickly throughout
the industry as manufacturers kept
adding features in attempts to maintain
their historical growth rates. In order to
be competitive in this industry
companies are required to retain earnings
and invest large amounts of capital
expenditures in R&D and manufacturing
tools such as (CAD/CAM). This in turn
will increase their cost structures. In this
industry, especially at the special shops
innovative features on a regular basis
help to maintain a comfortable level of
differentiation. In the bicycle industry
either you “innovate or you die”.
At the low-end:
Segment of the industry there is no
differentiation among rival’s products.
Price is the key factor of high sales.
At the high-end
Segment of the industry, competition is
based primarily on perceived value,
brand image, performance features,
product innovation, and price market.
Product differentiation increases threat
for smaller companies that are not able to
introduce new features and innovated
products in the market.
Economy of scale is very important in
this industry. Contracts with suppliers
on discount price based on large quantity
order in a specific period of time are
needed to obtain cost advantage. This
also applies for manufacturing.
Producing large orders for particular
customer and making profit on high sales
(logistics)
Marketing
Advertising
General and
Administration
 Other steps in the
value chain (Refer to
chapter 4 for the
description of the
value chain.)
Extent to which the key
industry participants are
clustered in one
geographic location
value, rather then high profit margin for
small orders.
Relocate manufacturing facilities in other
countries with low labor cost (China).
Using professional racing events for
marketing can help the industry to better
focus on technology and the need of
bicycles savvy users. This also can help
companies gain more market shares.
This is an opportunity for the industry.



The key industry participants are
clustering around the global market.
Most of the manufacturing plants are in
the USA, Western Europe and China.
Extent to which certain
industry activities result
from learning and
experience curve effects
-
Capacity surplus or
shortage in the industry
-
Capital requirements and
the ease of entry or exit
Racing events
R&D
Over 2000 companies involves in
either manufacturing or distributing
cycling products.
- Capacity surplus will decrease the
prices of the products.
Entry
- Long term debt at the year-end for
Cannondale average $ 55, 997,000.
Exit
- Large capital required forced many
small US firms get out from the
market.
- Large capital required leaving the
market in terms of stakeholders’
27
The major industry players are located in
countries with the highest cycling
technology, like USA, Western Europe
and China. With 70% of all bicycles in
the industry manufactured and used in
China, the participants seem to be
clustered in the Asian region of the
hemisphere.
This is a threat to the industry because it
increases rivalries in this region.
Great opportunity for the industry
because most companies in the industry
view racing events as marketing tool but
most of all companies such as
Cannondale use racing events to send a
team of engineers to promote and
analyze the performance of their high
end bicycles. As result companies were
able to have direct feedback from
athletes to bring fresh innovations to
their products. Cannondale is a first
mover and trendsetter in the industry so
that the company can establish brand
recognition faster than rivals in the
market.
Capacity surplus occurs when production
capacity exceed market demand. This
would be a great threat for companies to
increase production in a maturing
industry.
Entry:
Large capital requirement is a threat for
new entrants in the industry. Companies
are obligated to have the technology and
the infrastructure to operate with high
technological manufacturing tools such
(CAD/CAM), K2 in order to provide
high quality bicycles according to
customer’ specifications. New entrants
equity.
Industry profitability
Profit margins for Cannondale is
constantly growing even though the
industry has a moderate annual growth
rate.
Degree of alliances
High degree of alliances
- Speed the availability of nextgeneration components.
- Reduce the supplier’s costs, which
lower the buying price.
- Enhance the quality of the bicycle
parts.
28
have to go through long-term debt in
order to acquire technology. In turn
increase their fixe cost and therefore give
cost disadvantage over competitors.
Exit:
This is a big threat for existing
companies to exist the industry because
Companies are required to retain
earnings and invest large amounts of
capital expenditures in R&D in order to
bring up in the market new innovated
bicycles. Companies that are not capable
of adding new features and high quality
components to their high-end bicycles
may loose market shares or may file
bankruptcy. Existing companies have a
lot to loose to exit the industry.
Companies performing in the high-end
segment of the industry are still
profitable. This is an opportunity for
companies to continue investing in R&D
in order to be competitive in this
industry.
Degree of alliances allowed the
companies to secure high volume
purchase discounts. Therefore help
companies to achieve economy of scale;
which is very important in this industry.
Contracts with suppliers on discount
price based on large quantity order have
help companies to have competitive
advantages over competitors.
2. What is competition like and how strong are each of the competitive forces?
Criteria
RIVALRY
How many competitors
are there in this
industry?
What is the relative size
of each competitor?
Facts
What does this mean?
In the US market, there are 100 brands of
bicycles and 2,000 companies are
involved in either manufacturing or
distributing cycling products.
The cycling industry is segmented into
two categories, low-performance and
high-performance bikes. There are 6
major competitors in high-performance
segment that sold products to
independent specialty dealers, Schwinn
Cycling & Fitness, Intrepid, Inc.,
Specialized Bicycles, Giant Global
Group, Derby Cycle Corporation, and
Cannondale.
3 leading producers of low-end, lowperformance bikes that sell bicycles to
discount retailers are Brunswick
Corporation, Huffy Corporation, and
Murray Ohio.
The competitors are major 6 companies
that produce high-performance bicycles
and 3 companies that produce lowperformance bicycles in the US cycling
industry which has reached to maturity.
The number of competitors creates a
strong force for the industry. It makes
hard for new comers to enter. The
companies are competing to gain
additional market share from
competitors’ with maintaining their
market share in the limited pie. This
market condition is a threat for the
companies.
These two segments of companies are
dependent on the different distributors,
and target on different customers. Thus,
there is less competition between lowand high-performance bike manufactures
than between the companies in the same
segments.
Because of a number of the competitors,
competition becomes tense in basis of
perceived value, brand image,
performance features, product
innovation, and price. This is a threat for
a company that does not meet these
factors to survive in the cycling industry.
The size of major competitors is nearly
equal size in terms of sales revenue. The
major companies are competing on fairly
even footing, which makes it harder for
one or two firms to win the competition
and dominate the market. This is a threat
for the major companies.
The US bike industry has $5 billion in
sales (1999). 7.7 million units of lowend, low-performance models are sold
(1997) and earned 3.3 million units of
high-performance models are sold
(1997). The total sales of bikes
Schwinn had 18.8% of market share in
specialty retail channel (1999).
Intrepid had top market share in the
specialty retailer channel and $400
million of revenue in 1997 (65% in the
US and 35% in international markets),
and distributes 5 bicycle lines (mountain
bike, road-racing, touring, tandem,
BMX, and children models)
29
It is hard for smaller companies that have
less capability to gain or maintain market
share in the mature stage of the industry.
Smaller companies are competing
against other small companies and major
companies. This is a threat.
Specialized Bicycles: N/A
55 models of bicycle
Giant: Sales revenue was $400 million
and 2.5 million bicycles were produced
(1999). 43 models of bicycle.
Derby was 5th top producer in the US,
$500 million in sales and 2.1 million
units sold in 1997. 49 models in
mountain bike.
What is the industry
concentration ratio (C4)?
What is the product or
service demand growth
rate?
Cannondale had 20% of the US highperformance bicycle market in 2000. 71
models of bicycle in 4 categories.
Sum of TOP 4 competitor’s sales divides
by total industry sales.
(Not enough data)
The US industry reached to maturity in
the late 1990s and annual growth rate
became 2.1% between 1997 and 1998.
The compound growth rate is 12.4% in
Europe between 1993 and 1999. Western
Europeans are the biggest users of
bicycles, with and estimated 115 million
bicycle owners. Especially in the
Netherlands, Denmark, and Germany,
bicycles are used for transportation as
well as recreation and sport.
In Eastern Europe, bicycles are used
widely and accounted for roughly half of
all trips to work.
Are rivals using price
cuts or other competitive
weapons to boost unit
volume?
The high-performance bike manufactures
are using differentiation strategy, such as
offering custom-fitting bike and high
technology and innovation products to
compete against the rivals.
The low-performance bike manufactures
are using price cuts strategy to meet
customers’ demand.
30
Annual growth rate of the industry is
very low and will slow down
unexpectedly. There is not enough
business for every company to grow. The
mature and unpredictable condition is a
threat for the competitors in the US
market. Companies that over exceed in
production harm by holding excess
inventories including law material and
finished goods or responding slowly in
operation toward the market.
Europe market is growing. There is an
opportunity for cycling companies to
expand their business and gain market
share in Europe. Especially in Western
Europe, people enjoy bicycles as
recreation and sport; the market segment
is very similar to the US one. Potential
customers in Western Europe have
similar preferences and needs. This is an
opportunity for US companies to sell
their products and gain customers in the
Europe.
Price cuts and requirement of high
technological innovation create a stiff
competition among rivals.
In the high-performance segment, this is
an opportunity for both major and
smaller companies to survive or win the
competition because of the basis of
creativeness and innovation in order to
Are the customer's
switching costs low?
Are rivals launching
moves to change their
market share or industry
position at the expense
of other industry
participants?
What are the payoffs for
strategic moves?
The customer’s switching cost is high
among high-performance bikes produced
by different makers. The switching cost
is very high especially for bike racers or
enthusiastic cyclists. Once a customer
gets used to the model, they enjoy
satisfaction, comfort, and brand loyalty.
They need time of getting use to the new
model, additional equipment and parts,
or knowledge of maintenance and repair
when they change the products. But
some customers who enjoy any mountain
bikes; the switching cost is lower. The
more a customer like a product, the
higher the switching cost.
add values on its products.
In the low-performance segments, this is
a threat for smaller companies because
usually smaller companies have fewer
capabilities or capacity to realize lower
price than major companies.
The switching cost of high-performance
bike is higher. Customers have to pay
some costs when they switch to the other
products. In such a situation, this is an
opportunity for companies that already
acquired customers because customers
are not likely to switch to the other
products.
The customer’s switching cost is low
among low-end bikes sold in discount
retailers because customer-purchasing
decisions are based on price, type, color,
and size. They would easily switch the
products with few costs.
Rivals are launching moves to change to
be more competitive and gain more
market share. Acquiring rival companies
and locating facilities in lower wage
countries are the examples.
The customer’s switching costs are low
for the low-end products. This is a threat
for the low-end manufacturers because
customers are likely to switch the
products.
To retain acquired market share and gain
additional share in worldwide, and
become a leader in the industry.
The payoffs for strategic moves generate
a new opportunity to win in the industry.
The companies have an opportunity to
gain more due to their efficiency.
The high exit cost creates a threat for
companies because it cost a lot when the
companies go out of business.
Does it cost more to exit
the industry than to
continue participation?
Exiting the industry cost is higher than
continuing to participate because of high
capital invested and loss of opportunity
cost.
How consistent are rivals High-end bike makers are basically very
strategic visions,
consistent their strategic visions, intents,
strategic intents,
and objectives, but also they flexibly
objectives, strategies,
apply to new strategies to be more
resources and origins?
competitive. For example, Intrepid
created new vision when they needed to
improve loses.
31
This is a threat for rivals because a rival
would become stronger and take more
advantages by their new movements.
Rivals in the high-performance segment
are very consistent to their strategic
vision, intents, and objectives. It makes
the competition stiffer. This is a threat
for rivals in the industry.
Are strong new entrants
acquiring weaker rivals
and launching wellfunded, aggressive
moves?
Low-performance bike makers produce
bikes cheaper by imitating the highperformance bikes and using lower
quality of materials, and sell large
volume at lower prices.
Strong new entrants are acquiring
weaker rivals to gain additional market
share, technological know-how, and
manufacturing capabilities. In fact, as
growth in the mountain bike segment
had slowed during the 1990s, a number
of mergers and acquisitions involving
key brands occurred. Owning more than
one brand allowed manufacturers to gain
greater coverage in specific geographic
locations and exclusive territory. For
example, Intrepid acquired the Gray
Fisher and Klein, which allowed the
company to increase its dealer networks.
By acquiring weak rivals, this is an
opportunity for the companies to achieve
economies of scale at lower price than
they would establishes by itself because
they would gain advantages from the
acquired company simultaneously, such
as experiences and technological knowhow, or another intangible assets as well
as tangible assets.
This is a threat for the weak companies
that will be acquired. This is an
opportunity for stronger companies that
acquire weak companies because of
gaining more competitive capabilities
and becoming stronger.
THREAT OF ENTRY
What economies of scale
exist in each of the
following areas:

Production
High-performance bike:
- Flexible product line to reduce
production time, and individual setup
or high tooling changeover costs as
producing various models and small
batch size simultaneously.
- Employing a patented process and
joint designs, which cut the uniquely
configured joints of models to reduce
manual setup or changeover.
Low-performance bike:
- Produce volume of bike in longer
production run, and sell the same
bikes under different brand names.

Purchasing
High- and low-performance bikes:
- Making agreements with suppliers
on discount price based on large
quantity order in a specific period of
time.

Inbound and
High-performance bike:
- Selling more products reduces
32
Economies of scale are very important in
this industry. Competitors already in the
industry benefit from economies of scale,
making it harder for new entrants to
benefit. Production, purchasing,
advertising, financing, logistics, and
R&D economies of scale exist. These
economies of scale in the industry can
prevent potential competitors entering
into the market because they may take
either diseconomies of scale in each
areas of operation or disadvantages of
cost performance. When new comers
enter the market, they may lower
profitability because of lack of
economies of scale. This is an
opportunity for existing companies to
gain competitive advantages.
outbound logistics
shipping costs of inbound and
outbound logistics and the idle time
of sales people at retailers.
- Locating manufacturing facilities in
the US where are close to their
suppliers or distributors in order to
lower shipping and freights costs.
Low-performance bike:
- Selling large volume of products at
lower prices at discount stores which
reduces costs per sales person.

Advertising
-

Customer service
High-performance bike:
- Selling products to specialty retailers
where the knowledgeable assistant
help find a marching bike in order to
offer better customer services rather
than sell to discount stores that do
not offer sales assistance.

R&D
High-performance bike:
- Acquiring a company in order to
gain technology and technological
experts.
- Acquiring more resources for R&D
by sharing experience and
technologies between racing team
and engineers.
Existing companies have cost and
resource advantages as mentioned above.
The companies that already establish
partnership with their suppliers get
materials and components at the best or
cheaper price. The existing companies
also establish distribution network in
broader areas than new entrants. The
companies may possess patents and
proprietary technology of highperformance bikes.
New entrants face a significant cost
disadvantage competing against existing
companies because they lack of learning
and experience curve effects to lower
unit costs by improving layouts, gaining
in labor efficiency, redesigning
machinery to increase operating speed.
Cost and resource
disadvantages
independent of size
What are the learning
curve and experience
effects to enter?
Boosting local or regional market
share can lower sales and marketing
costs per unit.
33
New entrants have cost and resource
disadvantages. The existing companies
have shorter value chains, cheaper and
faster shipping components, and efficient
manufacturing layouts. This is an
opportunity for existing companies
because they have more competitive
advantages than potential entrants.
The lack of learning curve effects is an
entry barrier for new entrants. This is an
opportunity for existing companies to
produce better products at more
profitable price than new entrants.
Inability to match the
technology and
specialized know-how of
firms already in the
industry. How
accessible is the
industry's technology?
Brand preferences and
customer loyalty
What are the capital
requirements to enter?
What other resource
requirements are
necessary to enter?
What is the access to
distribution channels?
The industry’s technology is very
accessible. Most of major companies
supply components and parts from Asia.
They provide technologies and new
innovations to these countries. The
companies in Asia can easily imitate
these techniques with less R&D costs.
Although it is easier to follow the
technology and innovation, it is hard to
be on the edge of highly innovative
technology, especially for new entrants
that are lack of technological capability,
experience, and skilled people.
The technology is constantly improving,
and firms are trying to stay ahead and
developing even more and better ways of
manufacturing products. Companies
need large capital to invest on R&D and
innovative techniques in order to survive
in the industry. This is a threat for the
new entrants that have less competitive
capabilities.
This is an opportunity for new comers
because the technology is widely
available and it can be used to help the
company compete with other firms. The
technology is available, but to implement
it efficiently is the key. This makes threat
of entry a strong force.
The high-end mountain bike industry is
It is costly and slow processes to
highly attached to brand names and
establish brand name recognition. The
images. The rivals put their effort to
first major brand is able to establish and
establish the brand loyalty through
maintain its brand name at a lower cost
advertising, S&P programs, and racing
than being a late mover. New comers
teams.
need a large capital to invest on
advertising and promotions. This is an
opportunity for existing companies to
win against new comers on brand
loyalty.
Large capital is required to enter this
New entrants require large capital to
industry. Capital requirements are
invest in resources, capabilities, and
associated with manufacturing facilities
customer recognition. This is an
and equipment, inventories of parts and
opportunity for existing companies to
components, labors, advertising and sales compete against new entrants.
promotion, and cash reserve to cover
start-up losses.
New entrants need know-how in
This is not a threat to existing firms
technology and manufacturing process,
because these resources need large
high skilled personnel, a corporate
amounts of capital, which is hard to raise
culture and skilled people who are
for a start-up company.
willing to tale risks in new conditions,
This is an opportunity for existing firms
clever advertising, large capital
that already acquired tangible and
investment in manufacturing plants and
intangible resources in the industry.
R&D, and knowledge/skill/experience to
enter the industry.
The high-performance bike
This is an opportunity for existing
manufacturers sell the product to
companies in the high-performance bike
specialty bike retailers that provide
industry. They already have the inbound
knowledgeable sales assistance regarding and outbound logistics necessary to
the technical and performance
distribute their product. It is very hard
characteristics of products and offer an
for new entrants to access distribution
ongoing commitment to service.
channels unless they are able to provide
34
What regulatory policies
apply?
International Mountain Bike Association
regulated that industry sales were
directly tied to open biking trails in order
to reduce damages on lands and improve
safe cycling.
Competition in foreign markets is
affected by duties, tariffs, foreign
exchange fluctuations, taxes, and the
effect of various trade agreements and
import restrictions.
What tariffs and trade
restrictions apply?
-
Foreign government trade
restrictions
Tariffs
Is the substitute of better, There are many good substitutes for
worse or equal
bikes as a means of transportation,
performance?
recreation, multi sports, and out doors
activities. When it comes to juveniles,
they can use a moped or electronic
scooters for both transportation and
recreation. And for a more specific type
of outside activity such as mountain
biking, there are dirt riders and climbing
equipment.
SUBSTITUTES
What is the availability
Substitutes are readily available and
of attractively priced
most are attractively priced.
substitutes?
Many substitutes have better features.
In the most part, switching cost is low.
Is the substitute of better, In the most part, substitutes are either of
worse, or equal quality?
equal or better quality, performance, and
Is the substitute of better, attributes-but also pricier.
worse or equal
35
with high quality of products that can
make customer switch from existing
products in the market.
This is an opportunity for competitors in
the US market to help maintain its
market share.
Governments commonly limit foreign
entry and must approve foreign
investment applications. This is an
opportunity for US companies because
companies from foreign countries are
affected by the regulatory pollicies and
weakened competitive advantages.
There are many ways by which national
governments regulate international trade.
Some of these are tariffs, quotas,
voluntary export restrains, antidumping
duties, awe well as technical
administrative and the other regulations.
For example, a tariff increases prices to
domestic consumers, reduces the
quantity demanded at home and imports
from abroad, and encourages the
domestic production of import
substitutes. This is an opportunity for US
companies.
Substitutes represent a major threat to
this industry. Companies competing in
this industry are not only faced with the
fierce competition created by the market
maturity but they are also faced with a
relative large number of good substitutes
that consumers can chose from. This
creates a strong competitive pressure for
the industry.
Firms in this industry are in close
competition with firms in other
industries especially in recreation and
transportation segments. This represents
a tremendous threat for this industry.
Especially since it is not difficult to
switch to substitutes, the attributes
offered by substitutes are a threat to the
bike industry. This represents a strong
performance?
competitive force for the industry. This
is a real threat for this industry.
Is the substitute of better, N/A
worse, or equal quality?
Can buyers easily switch Buyers can easily switch to substitutes.
to the substitutes?
When it comes to mountain biking it
might be harder to find alternatives but
there are some, such as dirt riders,
horses, and climbing.
SUPPLIERS
Is the item or service a
The items are available from many
commodity available on suppliers.
the open market from
many suppliers who are
capable of filling the
order?
This represents a tremendous threat for
the biking industry and a strong
competitive force.
Because of the many suppliers of
aluminum and other raw materials used
for the making of bikes, bicycles makers
really exercise bargaining power and
control in purchasing.
Some bike makers contract with specific
suppliers to gain volume discounts.
Suppliers cannot exercise sufficient
bargaining power to really influence the
terms and conditions of supply in their
favor. This represents an opportunity for
the bicycles makers in this industry.
Are there good
substitutes for the
product or service to
which the buyers can
easily switch?
There are many good substitutes for
bikes as a means of transportation,
recreation, multi sports, and out doors
activities. When it comes to juveniles,
they can use a moped or electronic
scooters for both transportation and
recreation. And for a more specific type
of outside activity such as mountain
biking, there are dirt riders and climbing
equipment.
Substitutes represent a major threat to
this industry. Companies competing in
this industry are not only faced with the
fierce competition created by the market
maturity but they are also faced with a
relative large number of good substitutes
that consumers can chose from. This
creates a strong competitive pressure for
the industry.
Is the company a major
buyer?
Cannondale is a major buyer of parts and
raw materials. Cannondale has a large
market share in the USA for specialty
bikes and the world’s leading
manufacturer and marketer of highperformance aluminum bicycles.
Does the supplier
dominate the industry?
(The supplier provides
the industry with an item
that accounts for a
sizable fraction of the
Though there might be major suppliers
in the industry, none exercise sufficient
power to dominate the industry.
Cannondale contracts with specific
suppliers in the industry to purchase
large quantities of parts and raw
materials from them and thereafter gain
volume discounts. Cannondale has
negotiation power with their suppliers
and can get effective relationships with
their suppliers because of their huge
market demand for specialty bikes.
Cost of switching to other suppliers
could be an opportunity for rivals
because they have control power in
purchasing (switching cost is very low).
No supplier dominates the market. This
creates opportunities for the bike
36
costs of an industry's
product (or service), is
crucial to the industry, or
significantly affects
product quality.)
Does an outside supplier
provide a cost advantage
over vertical integration?
Does an outside supplier
provide other advantages
over vertical integration?
What types of working
relationships exist? Start
by listing the types of
working relationships
that exist. Then, focus
on the strategic
importance of
relationships with
suppliers in this industry.
Are these relationships
of strategic value for the
competitors in the
industry? If so, why and
how do the relationships
impact the competitive
structure and
environment of the
industry?
What is the relative
quality of the supplier
and his services or
products?
industry because rivals have the power to
choose among many suppliers.
Outside suppliers provide a cost
advantage to high-end bike makers. A
company can achieve economies of scale
to reduce costs by making agreements
with suppliers to ensure pricing and
delivery terms which improves the
company’s inventory turnover, or by
purchasing high volume from fewer
suppliers to secure discounts.
Companies can get additional brand
loyalty and reliability on its products by
using suppliers that have customer
recognition, such as Shimano, SunTour,
and Canmpionolo.
- Making contracts on delivering term
and price.
This is an opportunity for competitors to
strengthen their competitive position.
-
Bargaining power
Companies that purchase large quantity
of components have bargaining power
among fewer suppliers. This allows the
company to secure higher-volume
purchase discount. This is an opportunity
for the company to get cost advantages.
-
Relied on the well-known suppliers’
components.
Companies can add values by using
reliable components, such as handlebars,
brakes, cranks, and derailleurs
comprising from best-known suppliers.
This is an opportunity for the company
to get competitive advantages on their
products.
Suppliers are different on their quality
and services so that the bike
manufacturers can get competitive
advantage or capability by choosing the
best suppliers. This is an opportunity to
gain competitive advantage to win the
industry.
There is less difference among aluminum
suppliers because aluminum is widely
available. If the suppliers locate close to
bike produce facilities, however, they
can offer faster shipping at lower price to
US bike manufacturers than ones that
locate in Asia or the other countries.
Since the other components, such as
handlebars, brakes, cranks, and
derailleurs comprising are significant
portion of bike’s portion, the suppliers
37
This is an opportunity for competitors to
add values to its products.
By making contracts, companies can
ensure favorable pricing and delivery
terms and certain technical assistance.
This is an opportunity for the company
to gain cost advantages.
can differentiate its product by quality,
reliability, and brand image.
BUYERS
What is the cost of
switching?
How many buyers are
there in this industry?
Because it is easy for buyers to use
competitor’s products, buyers are not
lock-in one competitor’s products.
Buyers in this industry have the
flexibility to fill their needs by switching
brands.
With over 1 billion bicycles existing in
the world, millions of people are
potential customers.
What is the relative size
of each buyer?
The relative size of each buyer is pretty
much small: One-to-two bikes per sale
(in the specialty bikes segment).
Infrequently, their large buyers such as
Tommy Hill who have asked
Cannondale to design a bike for them.
What is the buyer's
knowledge level?
Buyers’ knowledge level is high for
specialty bike.
The knowledge level of the other market
segments for this industry tends to be
low to average.
Can the buyers threaten
the industry with
backward integration?
Are the industry's
products discretionary
purchases?
The buyers cannot threaten the industry
with backward integration.
Buyers have the discretion in whether
and when they purchase the products and
services offered in the specialty bike
industry.
38
The cost of switching creates
competitive pressure for sellers.
These represent a threat for the industry
and also represent a strong competitive
force because buyers are raising the bar
for quality, value and performance.
The bike industry is a very large market.
When it comes to specialty it would be a
moderate size market segment. This is a
strong competitive force for the industry.
But the opportunities for this market are
a moderate as the size of the market.
This represents an opportunity for the
industry but not a major one.
This represents somewhat of an
opportunity for each rival on the
industry. This is not a strong
competitive force. (The bargaining
power of these buyers could be
weakened by the fact that they are small
and infrequent).
Buyers’ knowledge represents a threat
especially because the more information
the buyers’ have, the better bargaining
position they are in and by exercising
such power, they raise the bar for overall
value.
Buyers’ knowledge represents a very
strong competitive force in this industry.
The bargaining power of backward
integration does not really affect this
industry.
This is neither a strong nor a weak
competitive force for the industry
because sellers are competing for buyer’s
preference and not for buyers’ will to
buy. Although they are competing for
existing buyers, they are just aiming at
gaining preference when buyers are able
and willing to buy. The buyers dictate
the market. Their decisions could
represent a threat if they decide to wait to
buy or not to buy at all.
3. What is (and how are they) causing the industry's competitive structure and business environment to change?
Factors
(pages 94-100)
Internet and new ecommerce opportunities
Increasing globalization of
the industry
Industry competitive structure
This factor is supposed to capture how
the drivers of change are altering the
industry's competitive structure.
Industry business environment
This factor is supposed to capture how
the drivers of change are altering the
industry's business environment.
The competitive structure of an industry entails the number of competitors and
their competitive relationships. For example, an industry entering maturity
causes fewer, larger competitors. This affects the industry's structural
arrangement between rivals, buyers and suppliers. When approaching maturity
or when in decline, the industry's business environment will create intense rivalry
for a diminishing market.
No data
No data
 With over 1 billion bicycles existing
in the world, usage varied
considerably, with about 70% of all
Rivalry between companies
significantly increases. Companies
want to expand operations to foreign
39
Strategic implications
E-commerce and Internet in an
Opportunity for this industry.
Companies can apply B2B solutions
between business units and suppliers to
lower cost.
Companies in the bike industry should
consider Internet and new e-commerce
as a great opportunity for the industry.
The industry should try to incorporate
new internet tools in their business
model to reduce operational costs,
introduce their product to the
customers and eventual direct sales.
Internet tools will provide customers
with products they want at lower prices
and create sustained competitive
advantage for the part of the industry
that will implement them successfully.
Strategic implications:
 Abandon low end segment of the
market or develop capabilities to
bicycled used as a means of
transportation, 29% used for
recreational purposes, and about 1%
used solely in racing events.
 Most of the bicycles were made and
used in Asia. 75% of the world’s
bicycles were produced in China,
India, Taiwan, Japan and Thailand.
 Globalization in a Threat for US
bike industry.
countries in order to grow faster. The
competition becomes global. U.S based
companies compete not only with U.S
based companies but also with foreign
ones.
compete on cost with Asian
companies
 Become industry leader in product
innovation.
There are pressures for companies to
expand globally. Global companies
compete eye-ball to eye-ball with small
local competitors. There are more
threats for small competitors as large
giants can obtain bigger discount and
can apply to a larger extent economies
of scale. The structure is changing as
Asian competitors use US based
resellers and US based companies
outsource production to Asia. More
international links appear in the
structure and those linkages become
critical in the light of global
competition.
Long term industry growth
rate



Cannondale growth rate during
1990 had been severely restricted
as the bicycle industry reached
maturity during the mid-1990s and
grew at an approximate rate of 2%
during the late 1990s.
Domestic market in 1999 - 24.7%
For the whole industry, market
growth rate is slowing down.
Rivalry intensifies as market enters
maturity stage. Long term growth rate
forces companies to become either cost
leader or pioneers in the product
innovation. Nothing in between in not
acceptable by the market. A successful
company has to position itself
decisively. Either as a low-cost leader
of Pioneer in product innovation.
40
Threats for US based companies that
had a reputation as a low-cost leader
(Schwinn).
Opportunities for Asian producers to
gain market share in low- end of the
market
Opportunities for pioneers in the

Indicators: computers sale and
prices are falling.
International markets in 1999 17.6%
Companies try to shelter their
Long-term industry growth rate causes
more alliances. More mergers take
place. There is a fewer number of
larger competitors as industry in
maturing. Also, more bankruptcies take
place. Industry competitive structure in
the US in the low-end consists of more
and more competitors from Asia. Asian
companies has advantages in cost and
in the light of maturity they take over
customers of US companies with US
based production in the low end.
Industry competitive structure consists
more linkages with Asian based
manufacturers as US based companies
try to narrow down existing cost
disadvantages. Companies decide to
take different business posture to out
compete others. Schwinn becomes
obsessed with the cutting cost and
move production overseas. Also signs
up alliance with Giant Global Group
Taiwanese and import bikes from
Thailand. In the low-end segment of
the market, there is much more
international partnerships
In the high-end segment, US leading
companies as growth declines there are
more acquisitions. Companies buy
their competitors to increase network
41
production innovations process in the
high-end segment of the market.
 Diversify your revenue
 Use your existing capabilities to
migrate to related industries
 Buyout smaller competitors if
they posses capabilities that can
complement your capabilities
Who buys the product and
how do they use it
of dealers to increase revenue. The
number of the companies is decreased.
Also, companies from high-end
segment try to diversify their revenue
and enter into new more
technologically advanced market
where foreign competition will not be
capable to quickly copy their product.
 There were estimated 54.5 million
active adult cyclists in the US in
1999 who used their bicycles at
least once weekly. Adult bicycles
fell into 5 broad categories:
mountain, road racing, multi-sport,
recreational and specialty.
 Cycling enthusiasts do not shop in
discount stores. Most of the bikes
sold by mass merchandise retailers
are offered at prices below $200 and
tended to be heavy, without the
precision matching or reliable
components demanded by cycling
enthusiasts.
 Mountains bikes, the largest
segment of the adult market,
accounted for 53% of all bicycles
sold in the USA in 1997
 Clients of discount retailers were
looking mainly for low-end, lowperformance models.
 Discount store customers were not
particularly brand-loyal and usually
made their purchasing decisions
based on price.
 Cycling enthusiasts bought 30% of
Rivalry increases. In the low-end
segment stress on cost. There are many
manufacturers from Asia that try to
copy innovation in quickly incorporate
them into their bicycles. High-end of
the market the rivalry is fierce. Many
companies try to capture the
opportunity and become leader of the
high-end sector
Opportunity for Asian producers to
capture the US and European market of
low-end market.
42
Strategic implication:
 Analyze your customers needs and
deliver what they expect.
 Watch new arising trends and
closely analyze the use of the
products.
 Use market segmentation based on
the distribution channel.
 Expand to Europe
industry total bikes in the USA.
This accounted for about 50% of
total dollar sale of the industry.
 Customers that purchased their
bikes in specialty dealer shops do
not perceive bikes as high quality if
they were distributed by discount
store. For example, Brunswick
developed lower-priced models for
discount retailers as well as
maintaining high-priced models for
its independent dealers. Once
Mongoose model become available
at discount stores, many dealers
chose to drop the Mongoose brand
because of the difficulty in
convincing consumers that the
dealers’ higher priced models were
of better quality than models found
in discount stores.
Changes in customer demographics:
more customers are expected to be
located outside the U.S.A. can alter the
industry competitive structure. In the
USA and other industrialized
countries, high demographic
populations of “Baby Boomers”
children got to their maturity level with
growing disposable income to purchase
bicycles to balance transport,
recreation and sport. This causes shift
in demographics and new opportunities
for mountain bikes appear. As a result
industry competitive structure in
altered. The industry competitive
43
structure consist now of high-end
mountain bicycles producers that
capture the opportunity of growing
demand of mountain bikes and low end
segment that produces bikes used in
completely different way. Producers in
the high end develop new and different
linkages with distributors. Also they
use different suppliers for their
components. As a result a
demographic shift creates two different
markets high and low end that have
different customers, use different
suppliers and distributors.
Product innovation and
Technological change
 Cannondale products have been
recognized for their innovation by
such publications as USA Today,
Sport Illustrated Popular Science.
 Technological innovations became
increasingly important in the
industry as rival mountain bike
manufacturers attempted to outpace
the modest industry growth rate by
introducing technological
innovations in frames, components
and suspension systems.
 Cannondale’s patented
manufacturing process which
employed lasers and other devices
to cut the uniquely configured joints
of various bicycles models.
 Cannondale was using computeraided design and manufacturing
(CAD/CAM) technology.
Cannondale’s CAD/ CAM systems
Rivalry increases as product innovation
increases. In the high-end segment
customers constantly expect
innovations. Companies incorporate
more and more upscale features. Even
in the high-end market where
companies try to deliver more value by
incorporating upscale feature
competitors have to compete on cost.
As a result margin are low and some
competitors are trying to diversify their
revenues by entering into the industries
that require more technological knowhow.
44
Implication:
 Become product innovation leader
 Enter new industries (motorcycle
industry) where the competition is
lighter
Threats for companies that do not
develop capabilities in product
innovation processes and can not
match costs of foreign competitors.
Threat for High-end bike industry as
change in product innovation is very
rapid and company can not capitalize
on their innovations.
automatically calculated specific
tube length, and its computedguided laser tube cutters allowed the
company to offer custom-fitted
bicycles
 Cannondale had developed several
proprietary suspension systems and
enhancements. Its HeadShok
incorporated the suspension and
steering mechanisms into one unit
build into head tube of the bicycle.
This design provided more accurate
steering control than other frontsuspension models and also allowed
easily adjusting while riding.
Rate of product innovation is very fast
in the bike industry and causes shakeups in the structure of competition.
Companies that do not keep pace with
technological innovation and are not
positioned well loose their leadership
and go bankrupt. Fast rate of product
innovation in this industry basically
does not affect low end where the
competition is based on price. High
end competes on perceive value.
Companies that invest large outlays of
moneys in R&D want to differentiate
from competing on cost competitors.
Industry competitive structure is
altered as high-end competitors
establish connections with dealers to
offer better service to customers than
low-end competitors. The make-up of
competitive structure in high-end
45
Marketing innovation
consists of mainly US-based and
European competitors as they are
pioneers in production innovation. The
make-up in the low-end consists of
Asian based competitors as they
emphasize cost.
 Trek cosponsored racing reams with
Volkswagen and the U.S Postal
Service and independently
sponsored a triathlete team to racetest the company’s upcoming
generations of products. All three
cycling teams won a number of
prestigious events during 1999.
 Specialized Bicycle company
created and sponsored the Cactus
Cup race series that allowed
amateurs to race in events similar to
professional race but at a level no
threatening enough for first-time
racers to have plenty fun.
 Cannondale was maintaining
innovative Web site than averaged
more than 25 million hits each
month.
 Cannondale formed the Volvo/
Cannondale racing team.
Cannondale leveraged the success
of its racing team by using photo
images of the athletes in print
media, point-of-sale literature,
banners, product packaging, and
product catalogs.
Marketing Innovations are very
important in the high-end bike
industry. Companies try to build their
High rivalry.
46
Strategic implication:
 Build stronger image
 Develop creation with leading car
manufacturers to be perceived as a
leading brand in the bike industry
Entry of major firms
Exit of major firms
image to be perceived by customers as
better of more reliable. They create
teams with Volvo, Volkswagen car
industry leader indicate the good value
of their product. They open web site so
their customers can see and compare
their products. This shakes up the
competitive environment. Companies
(even foreign) that successfully
communicate leadership in production
innovation and reliability of their bikes
gain more market share.
Giant, which began as a small exporter
of bicycles in 1972, was the worlds
largest bicycle exporter in 1999 with
93% of its bicycle sold outside Taiwan.
The company growth was made
possible in large part by an early
alliance with Schwinn, which gave the
market savvy and production knowhow it needed to be a major
competitive force in the industry.
Asian competitions with savvy
manufacturing know-how and market
knowledge enter the US and European
market. They create new alliances with
distributors. They establish new
linkages with suppliers.
 Watching the trends in the industry
is becoming very important.
 Schwinn filed for Chapter 11
bankruptcy protection in 1992.
Exit of US based competitors in the
High rivalry increases as foreign
competitors enter the market.
This is a threat for US industry.
Strategic implications:
 Add more value to your customers
by increasing differentiation
 Use strong comparative adds to
strengthen your image
 (US business: Simultaneously
strengthen efficiencies (learning
curve effects) and incorporate the
features that raise the performance
of products so the price premium
paid by customers on bikes does not
seem t0o high relative to less
expensive Asian alternatives.
Business environment is highly
competitive. US based companies that
can not match the cost must exit the
market. In the high-end segment fierce
competition between companies from
Europe or US.
Low end of the market
Opportunities for companies that will
employ intensive economies of scale
located in low labor intensive
countries.
Size of low-end of the market is an
47
Diffusion of technical
know-how
low end creates opportunities to
capture their customers. Industry
competitive structure in the low-end
consists of more Asian based
competitors that capture the
opportunity. Globalization changes the
competitive environment. US based
industry is more vulnerable to attract
from non-US based companies. USbased companies that are not leaders in
product innovation go out of business.
Foreign competitors capture their
market share. New leaders arrive. Big
companies that pioneer in product
innovation try to enter different
segment to capture new opportunities,
as they can not compete with new
leaders.
 Technological innovations diffused
quickly through the industry as
manufacturers kept adding features
in attempts to maintain their
historical growth rates. Cannondale
was the first to offer affordable,
large diameter aluminum tube
bicycles in the early 1980s, but by
1999 aluminum-frame bikes were
produced by almost all bike
manufacturers, including companies
that manufactured inexpensive
bicycles sold in discount stores. In
1999, aluminum frames were still
found on high-end bikes, but other
materials (such as carbon
composites and titanium) were also
used on more technologically
Opportunity
Strategic implications:
 Develop competitive advantages in
cost of production.
 Continue to search for cost reduction
without sacrificing acceptable
quality
 Apply to a great degree economies
of scale
 Expand globally
Rivalry intensifies as companies get
access to technical know-how. Most of
the competitors after some time
discover activities in the value chain.
Rivals try to copy activities and match
prices.
An opportunity for Asian competitors
to be capable to quickly incorporate
technological advances and to come up
with competitive models.
Threat for US and European based
companies that can not fully capitalize
on their expenses for R&D.
Threat for companies that do not try to
revamp the value chains.
Strategic implication:
 Monitor competitors to get ideas
how to improve activities
performed.
 Shelter your know-how. Do not
outsource production to Asia.
48
 Increase degree of differentiation to
narrow down the price disadvantage:
provide better service and custom
assembled bikes
advanced mountain bikes. Other
innovations that had become
popular with cycling enthusiast
during the late 1990s included
clipless pedals, disc brakes,
automatic shifting, and suspension
systems.
Cost and efficiency
Asian competitors as they entered
lower segment have bigger ambitions
as they see big profits in the high-end
of the industry. Competitive structure
is changing as companies such as Giant
enter the high end of the industry. Now
make-up of the high-end consist also
Asian based competitors. Asian-based
competitors develop new distribution
channels in USA and Europe where
they sell their high end products.
Fast diffusion and technical knowhow. Rivals try to copy business
processes that prove high production
efficiency. Quick rotation in the market
share.
 Efficiency is important but not a
decisive factor in the segment of
market that Cannondale is in.
 Schwinn became obsessed with
cutting costs by moving production
overseas. Initially, the company
outsourced its bicycles from Japan.
Schwinn made the strategic mistake
of ignoring the mountain bike craze
for the most of the 1980s. Schwinn
retailers failed to notice key market
trends or keep up with the
Rivalry increases. Giant Taiwanese
competitor that had competitive
advantages in manufacturing
emphasized a “total best value” design
and production approach that
attempted to match rivals in terms of
frame design, component quality and
finish wile beating competitors on
price. Even in higher end of the market
producers that are capable of
delivering more value are gaining more
market share
49
Strategic implications high-end
segment:
 Monitor activities in the value
chain of your competitors.
 Stress product innovation (high
end) but also improve efficiencies
by increasing learning curve effects
to deliver the best value.
 Keep developing features and
attributes that appeal to the tastes
and special needs of the high end
of the bike industry.
 Diversify into off-road motorcycle
industry were competition is less
intense
 Outsource production to less
capital intense countries if you
want to compete on cost
technological changes sweeping the
industry. Schwinn filed for Chapter
11 bankruptcy protection in 1992.
 Cannondale’s manufacturing
strategy was its flexible
manufacturing system. The strength
of the system included reduced
production time, simultaneous
production of various models and
small batch sizes without high
tooling changeover costs.
Growing buyer
preferences for
differentiated products
instead of a commodity
product
Changes in cost in this case result from
cost differences between Asia and US.
These cost differences put significant
pressures on US based competitors.
There are more bankruptcies of low
end US based companies. Asian posses
cost advantages that can not be
matched in the low end. As US based
distributors are looking for the lowest
prices they are caring Asian based
manufacturers’ products.
 There is growing demand in the
USA for differentiated products.
 Trek was Intrepid’s best-selling
brand and was a pioneer in carbon
finer frames. The Waterloo,
Wisconsin, firm recorded revenues
of about $400 million in 1997
 Cannondale sough to differentiate
its accessories through innovation.
 Cannondale offered packs and bags,
apparel and footwear, components,
and other accessories
High rivalry. More vertical integration
to provide components and attributes
demanded by customers.
Opportunities for US based business to
provide features that US based
customer wants.
Strategic implication:
 Develop business model that
facilitates customers’
differentiation of products.
 Develop new features, offer
option and accessories and
create image differences to
capture high-end loyal
customers.
50
Regulatory and
government policy
changes
Societal concerns,
attitudes and lifestyle
changes
Two types of competitors appear. New
segment of high-end bikes is created.
This creates Opportunities for US
based companies. The Asian can not
deliver as high value as US-based
competitors therefore their number is
limited in the high end.
 1990 Clean Air Act set standards for
air quality and required some
metropolitan areas to develop
methods to reach compliance.
 The Intermodal Surface
Transportation Efficiency Act
(ISTEA) of 1991 recognized the
transportation value of bicycling.
 1998 Transportation Equity Act for
the 21st Century (TEA-21) would
better integrate cycling into
mainstream transportation in the
USA.
 TEA provided as much as $500
million between 1999 and 2003 to
create walkable and bicycle-friendly
communities that would make
cycling and walking alternatives to
traveling by automobile.
 Beginning in the 1970s, consumer
tastes were changing.
 There was a mountain bike craze for
the most 1980s.

Develop multiple of bike
models.
Strategic implication USA:
 Use lobby to influence policy
makers to allocate more funds for
supporting bike transportation.
 Try to influence policy makers to
establish import quotas on foreign
bikes.
Rapidly changing.
Increase interest in the USA and
Europe in physical fitness creates new
industries. One of the new industries is
mountain biking. This alters
51
Strategic Implication:
 Monitor customers’ lifestyle and
attitudes. Deliver what they
expect.
 Do not diminish the firm’s image
by entering lower segment of the
market. If you enter the low-end
market use different distribution
and change the name of the
Reductions in uncertainty
and risk
competitive structure as new segment
of the industry appears. Interest in
fitness creates new group of customers
that have different needs. As a result
new companies arise. They develop
new resellers and have different
suppliers. The same societal shift takes
place in Europe. US based competitors
and European competitors establish
international linkages to gain more
customers. Societal shift alter the
industry competitive structure as new
companies are created, new suppliers
are created.
Fewer larger companies that have big
financial resources and employ
economies of scale in the low end of
the market.
bicycle.
Rivalry increases in both market
segments.
52
Strategic implication:
 Gain more loyal customers.
 Stay on the top of customer service
and technical support.
4. Competitors position in the cycling industry
Schwinn,
Giant, Derby
High
Price
Many others
such: Huffy,
murray and
bruswick
Medium
Trek, Raleigh,
Cannondale,
specialized, and
Diamondback
Low
Narrow
Broad
Many others
such: Huffy,
murray and
bruswick
Market Scope
High
Performance
Trek, Schwinn, Giant,
Raleigh, Cannondale,
specialized, and
Diamondback
Medium
Low
Narrow
Broad
Market scope
Many others
such: Huffy,
murray and
bruswick
High
quality
Trek, Schwinn, Giant,
Raleigh, Cannondale,
specialized, and
Diamondback
Medium
Low
Narrow
broad
Market scope
Many others
such: Huffy,
murray and
bruswick
High
Tech
Innovation
Trek, Schwinn, Giant,
Raleigh, Cannondale,
specialized, and
Diamondback
Medium
Low
Narrow
Broad
Market scope
53
Quality/Performance/Price
Mountain Bike Segment
High
Schwinn,
Giant, Derby
Medium
Many others
such: Huffy,
murray and
bruswick
Trek, Raleigh,
Cannondale,
specialized, and
Diamondback
Low
Narrow
Broad
Market scope
Quality/Performance/Price
Recreational Bike Segment
Schwinn,
Giant, Derby
High
Medium
Many others
such: Huffy,
murray and
bruswick
Trek, Raleigh,
Cannondale,
specialized, and
Diamondback
Low
Narrow
Broad
Market scope
Rivalry exists in all segments of the industry. Some competitors are taking advantage of both
high-end and low-end market opportunities but at the same time they are presented with more rivalry
offensive moves and threats. Those that cover a narrow-and- high-end market segment are most impacted
by major threats from buyers, rivalry, and raid change in technological advancements. High-end and
narrow market competitors are not favored by the industry driving forces, but this does not represent a
threat or opportunity for this segment. Profit potential for differentiated focused competitors should be
much higher but these are not always so because of the increased expenditure required in R&D to
maintain a competitive position in this segment. Competitive tech- now how and low cost
production/manufacturing capabilities should be a strength that high-end rivals must obtain and retain to
compete in this industry.
54
What is their strategic posture
(offensive, defensive, both)?
local
Trying to
survive
after being
sold twice
in 1993
and 1997
Give up
market share
and file
chapter 11bankruptcy
protection in
1992.
Losing ground
Both
Intrepid
Multicountry
Dominant
leader
Well entrenched
in the industry.
Both
Specialized
Multi-
To be a
Aggressive
expansion via
international
growth. About
35% of its
$400 millions
revenues came
from
international
sales.
Aggressive
Well entrenched
Both
55
What does this mean in terms
of their most likely moves?
What is their competitive
position (getting stronger, well
entrenched, stuck in the middle,
going after different market
position, losing ground,
retrenching)?
Schwinn
What is their competitive
strategy (low cost,
differentiation, broad or
narrow, best value)?
What is the competitive scope
of each (local, regional,
national, multi-country, or
global)?
What is their strategic intent
(dominant leader, overtake the
leader, top 5, move up a
position, maintain position,
survive)?
What is their market share
objective (aggressive expansion,
expansion via internal growth,
expand by acquisition, hold
present share, give up share)?
Strategic moves are rivals likely to make next
List the competitors
5.
Differentiat
ion by
going into
low cost to
be into a
leadership
positioning
in the US in
the retail
channel.
Best value,
Pioneer in
carbonfiber
Frames
give Trek
best-selling
brand in
1997.
Schwinn turnaround and its additional of
GT bikes put it into contention for a
leadership position in the US specially
retail channel.
Differentiat
Specialized’s dealers should be
Technological know-how to add new
features in bicycle components is a key
success in this high-end segment of the
industry
Bicycles
country
dominant
leader?
expansion via
technology.
in the industry
56
ion in
innovating
Frames for
competition
bicycles.
knowledgeable about the latest technology
because they believe innovation is the key
success in this industry. Specialized’s
slogan is “Innovate or die.” This was
driven force to allow them to innovate
features in bicycle frames.
6. The key factors for competitive success in bicycle industry
Technology
related
KSFs
Scientific
research
and
expertise
N/A
N/A
Good
They
Excellent
assigned
resources
for R&D.
They come
up with
new
frames
technology
and new
shapes for
their
bicycles.
In
1974Gary
Klein start
his project
in MIT
and use
$20,000 to
develop on
of the first
57
The
company
created the
special SWork
R&D team
that was
allowed
them to
build
“dream
bikes”
without
regard of
budget.
The want
to create
the best
design for
their bikes,
which will
satisfied
Good
What does
this mean?
Cannondale
Corporation
What is their
capability for
this factor?
What does
this mean?
Giant Global Group
What is their
capability for
this factor?
What does
this mean?
Specialized Bicycle
What is their
capability for
this factor?
What does
this mean?
Intrepid, Inc.
What is their
capability for
this factor?
Schwinn Cycling &
Fitness
What is their
capability for
this factor?
Key
Success
Factors
When the
Excellent
company
moved
away from
contract
manufactu
ring they
decided to
2% of its
annual
revenue
R&D and
higher 65
designers
to develop
futures
models.
This was a
good move
for the
company
that wants
What does
this mean?
Cannondal
e has
ongoing
commitme
nt with
R&D and
has
continued
to expand
and
develop its
aluminum
bicycle
line with
series of
innovation
s, focusing
on
property
frame
design,
suspension
aluminumframe
bicycles.
Technical
capability
to make
innovative
improveme
nts in
production
processes
Poor
The
company
rather then
innovates
to achieve
overall
cost
savings
they move
Good
The
company
emphasize
d quality
and
efficiency
in plant
operations.
Klein
the
customer
with the
quality,
performan
ce and the
low price.
Good
58
The first
star to do
massproduction
of
mountain
bike.
to be an
independe
nt bike
maker.
They had
to allocate
their
resources
for R&D if
they want
to compete
in the U.S.
and
internation
al markets.
Very good
Giant
Global
was
Schwinn
contract
manufactu
ring with
70% of its
production
Excellent
systems,
and
component
s.
Investing
in R & D
area gives
the
strengths
to the
company.
Working
closely on
new
product
developme
nts allows
Cannondal
e to
determine
the best
relevant
technologi
es to be
delivered
to the
market.
Cannondal
e
implement
ed flexible
manufactu
ring
system.
The
strength of
production
overseas.
Eventually
their
contractmanufactu
ring
partner
becomes
their
competitor
.
bicycle use
only
certified
aerospace
grand
aluminum
and
custommade,
property
production
equipment
to
assembly
frames at
alignment
tolerances
as exacting
+-.0002
inches.
for
Schwinn.
They learn
the
technologi
cal knowhow from
Schwinn.
59
the system
includes
reduced
production
time,
simultaneo
usly
production
of various
models
and small
batch sizes
without
high
tooling
changing
costs. Use
laser for
cut joints
of various
bicycle
models.
Reduce
complete
bike for 17
days to 3.
Use
CAD/CA
M in for
developme
nt other
parts in the
process.
Cannondal
e consider
their
Product
innovation
and
Technologi
Poor
Failed to
notice key
market
trends in
Very good
Intrepid
Inc.
company
tries to
Very good
60
Specialize
had been
recognized
for
Very good
As an
independe
nt
company
Very good
manufactu
ring
process as
a key
comparati
ve
advantage
over the
rivals.
Because
the
contract
manufactu
ring in not
able to
copy their
product
and sale
utter its
own name,
the
product is
deliver
quicker to
the
market,
because is
not
waiting
came over
form
overseas.
Cannondal
e
differentiat
ed their
cal change
1980s and
keep up
with the
technologi
cal
changes.
This
strategic
mistake
brings
them low
sales, not
profits and
removes
them from
the market
as a key
competitor
.
use
product
innovation
to fulfill
market
expectatio
ns
The
innovative
products
provide an
opportunit
y for
growth
and
increase
sales in a
mature
market.
Trek’s Yshape
carbon
composed
frame was
one of the
company’s
more
innovative
and
popular
products
during the
late 1990s.
developing
a number
of
technologi
cally
advanced
bicycle
materials
and
component
s use in the
production
of
mountain
bicycle.
The
company
has the
capability
and the
resources
to create
new
technologi
cal
innovation
s in their
products.
They
achieve a
great
success in
designing
and
innovative
new
61
in 1900s
Giant wan
numerous
awards for
the design
innovation
s thanks to
large
investing
in R&D
departmen
t. The new
designs
give the
opportunit
y to
capture the
U.S.
market.
bicycles
through
technologi
cal
innovation
s that
made its
bicycles
lighter,
stronger,
fester and
more
comfortabl
e then
rivals.
They have
several
different
product
innovation
s the give
them
leading
position in
the market
and the
comparati
ve
advantage
over the
rivals.
Expertise
in a
particular
technology
N/A
N/A
Very good
The
company
was a
pioneer in
carbonfiber
frames.
Because of
that sales
and
revenue
increase.
Very good
Manufactur
ing related
factors
62
mountain
bike.
They first
N/A
made
frames
from metal
matrix
composite
material of
aluminum,
silicon,
cooper,
and
magnesiu
m. The
new
technology
provides
the
opportunit
y for
growth,
increase
sales in
mature
market and
opportunit
y for
Specialize
d to reach
internation
al markets.
N/A
Very
Good
1983 they
produce
first-ever
largediameter,
aluminumtube
bicycle.
Low-cost
production
efficiency
Average
Manufactu
ring
flexibility
N/A
The try to
achieve
low cost
production
efficiency
outsourcin
g the
component
s overseas,
instate
then
improve
and make
more
efficient
their own
production
process. In
consequen
t they only
accomplis
h company
view as a
low-cost
bike
producer.
N/A
N/A
N/A
N/A
N/A
Good
The
company
main
location
was in
Taiwan,
which give
them the
advantage
in low cost
production
process
because of
outsourcin
g the
component
s.
Average
Due to
producing
their main
component
in U.S.
their
production
efficiency
is not
lower then
rivals.
N/A
N/A
N/A
N/A
N/A
N/A
Excellent
Cannondal
e
implement
ed flexible
manufactu
ring
system.
The
system
allows
63
them
simultaneo
usly
production
of various
models
and small
batch sizes
without
high
tooling
changing
costs.
Marketing
related
KSFs
Advertising Good
The
Good
company
begins to
advertise
its product
through
racing
circuit and
crosspromotion
with
brands as
Old-Navy,
Toyota,
and MCI.
The
advertising
methods
put the
company
The have
Very good
good
advertising
methods
and
experience
. They
advertise
their
products
through
sponsor
racing
teams for
Volkswag
en, and
U.S.
Postal
Services,
also
64
Specialize Good
d advertise
their
product
through
racing
events,
like Cactus
Cup which
allowed
amateurs
to race
similar to
profession
al one.
Turing
1998 1999
the event
was held
in Canada,
They
begin a
racing
program to
promote
the
company’s
name
among
avid
cyclists
and
mountain
bike racers
to endorse
the
company’s
products.
They
know that
Excellent
The
purpose of
the
advertising
was to
establish
Cannondal
e position
in the
specialty
bicycle
retail
channels.
The
formed the
Volvo/Can
nondale
racing
team. Give
advertising
in leading
position in
U.S.
specially
retail
channel
for
hardcore
cyclists,
who often
influence
the
purchase
of lessavid
cyclists.
Distribution
related
KSFs
N/A
Speed of
getting new
products to
N/A
sponsored
a triathlete
team to
race-test
the
company’s
upcoming
generation
of
products.
Which
gives tem
the
advantage
to
introduce
the future
product to
the current
customer
ahead,
increase
their sales
and make
known
their brand
and
products to
a new
customers.
Good
They
fallow
market
France,
Brazil.
They also
created the
firs
profession
al
mountain
bike racing
team in
1983.
By
advertising
they
introduce
their
products to
internation
al and
domestic
customers,
and they
increase
their
market
share in
the
industry.
N/A
65
N/A
thanks to
the
advertising
and
promotion
they will
be able to
gin U.S.
market
share and
win new
customers
internation
ally.
N/A
N/A
in
magazines
for cycling
and
general
lifestyle
magazines
. They try
to capture
new
customers
interested
in outdoor
activities
and
current
customers
in market.
Very good
They
follow
market
trends and
respond
quickly
with
bringing
new
product
that
satisfied
the
customers.
market
Organizatio
nal
capability
KSFs
Ability to
respond
quickly to
shifting
market
conditions
Poor
They do
not have
the ability
to respond
quickly to
the
Good
The have
the ability
to respond
quickly to
the market
conditions.
trends and
respond
quickly
with
bringing
new
product
that
satisfied
the
customers.
They also
have
specialty
bicycle
retailers
who could
provide
knowledge
able sales
assistant
and
ongoing
commitme
nt to
service.
Very good
66
All the
new
products
and
technologi
cal
Very good
The have
the ability
to respond
quickly to
the market
conditions,
Very good
The have
the ability
to respond
quickly to
the market
conditions,
changing
market
conditions.
In 1980s
they
ignore the
mountain
bike
popularity.
They
failed to
notice key
market
trends,
which put
rivals in
the
comparati
ve
advantage
over the
Schwinn.
Other KSFs
Image and
reputation
Poor
Brand
recognitio
n in lowend price
points
between
$250 and
$500
The
company
introduces
a number
of awardwinning
bicycles,
which let
them to
keep
current
market
position.
Good
Brand
recognitio
n as
quality
Americanmade
high-end
bicycles.
innovation
that they
implement
ed in
production
process of
their
bicycles
testify that
they are
able to
respond to
the
changing
market
conditions
quickly.
Very good
67
Brand
recognitio
n in low
and highend
bicycles.
because of
al the
advertising
they are
doing and
the large
amount of
revenues
they
invested in
R&D
Very good
Global
brand
recognitio
n
because of
al the
advertising
they are
doing and
the large
amount of
revenues
they
invested in
R&D
Excellent
Global
brand
recognitio
n
7. Is this industry attractive and what are its prospects for above-average profitability?
Criteria
Industry growth potential
Does competition permit
adequate profit potential?
Does competition lead to
stronger or weaker forces?
Facts
In 1999 the US bicycle industry
was approximately a $ 5 billion per
year industry. The annual sales of
bicycles peaked in 1973 at 15.2
million units and averaged nearly
11.5 million units during the
1990s.
The growth rate of the industry is
very slow about 2% annually.
Fierce global competition.
Competitors in the mountain bike
segment:
 Schwinn Cycling and Fitness
(USA)
 Intrepid (USA)
 Specialized bicycles (USA)
 Giant Global Group (Taiwan)
 Derby Corporation (UK)
 Cannonade’s revenue growth
had slowed to an annual rate of
9.7% between 1995 and 1999
after growing at a compound
rate of 22.3 between 1991 and
1995
 The high end in the mountain
bike industry was highly
competitive in the USA and in
many other countries.
Competition was based
primarily on perceived value,
brand image, performance
features, product innovation and
price.
 Schwinn become obsessed with
cutting costs by moving
production overseas.
 Companies had big budgets for
R&D
 Cannondale’s sales growth
between 1995-99 slowed to
9.7%
 The Waterloo, Wisconsin firm
recorded revenues of about $400
million in 1997
68
What does it mean?
Industry is becoming unattractive.
It is entering the maturity stage.
Demand is falling sharply and
producers that want to maintain
market positions must position
themselves on the market. This is a
threat for entire industry.
As the growth of sales in mountain
bikes declines profit margins
decline. Some of the companies
are able to maintain high revenue
growth in the high end of the bike
industry. Fierce competition that is
the outcome of maturity and global
competition permits adequate
profit potentials only to the
pioneers in the technological
innovation than are able to build
high image and influence buyers.
This is a threat to the industry.
Global competition will result in
stronger competitive forces.
This is a Threat to the US Industry.
Leaders of early 1990 may not
continue their leadership if not able
to be on the cutting edge of
technology. Competition in the
mountain bike segment leads to
very strong forces. Asian
companies initially establish
partnerships but after they build
higher image in the USA and gain
necessary know how they become
major competitors. US based
companies try to outpace the
modest growth by introducing
more and more innovations. There
are innovations in frames,
components and suspension
systems. Diffusion of know how is
very rapid and to continue faster
than average growth leaders have
Will the prevailing driving
forces positively or negatively
impact profit potential?
 High technological innovation
(frames, components,
suspension systems)
 Quick diffusion of know-how
 Mergers and acquisitions (Some
manufacturers owned more than
one brand)
 Global competition
What is the company's relative
competitive potential in this
industry?
 Cannon dale had a high image
in the industry
 Cannonade had a strong market
position Cannondale had a 20%
of high performance US market.
 Cannondale had good
manufacturing capabilities(
Manufacturing system allowed
Cannondale to reduce time to
assemble bike from 17 to 3
days)
 Cannondale could deliver
custom made bicycles.
Cannondale established its high
market position by producing
affordable aluminum mountain
bikes with high degree of
innovation. In 1980s Cannondale
grew at the rate of 30% capturing
the market craze for mountain
bikes. Between 1995-99 companies
compound growth significantly
slowed down to 9.7%.
Between 1995-99 Intrepid was
growing significantly faster than
the rest of the industry. Intrepid
was a pioneer in carbon fiber
frames.
After Giant gained know how and
image their revenue growth was
much faster as Giant emphasized
its best value to its customers.
What is the company's ability
to capitalize on its competitor's
weaknesses?
69
to continue innovations.
It is a Threat for the industry.
High end of the bike industry
experiences big competitive
pressures. Competitive pressures
stem from high degree of
technological innovation that
occurs through research but also
high degree of diffusion. Limited
number of companies may benefit
only if they are pioneers in product
innovation. Others that do not
maintain technological leadership
may be forced out of the market.
The prevailing forces are likely to
reduce profit potentials of
competitors in these industry
Cannondale is a strong competitor
in the US market. Cannondale’s
created driving force in the US
bike market and achieved high
market position. Cannondale
should use its strong position to
position itself as an industry leader
in the production innovations.
Cannondale competitive position in
the late 1990s eroded. Other
competitors such as Intrepid are
capable to deliver newer and more
advanced models with carbon
frames other competitors because
of advantage in labor cost (Taiwan)
and stronger than before reputation
are capable to underprice
Cannondale.
Cannondale cannot compete on
cost with Asian manufacturers and
have to more decisively to either to
enhance their bike models with
carbon frames and newer designs
or enter new markets where
application of aluminum
technology would produce higher
profits. Company has still strong
Can the company defend
against or is it insulated from
the factors that make this
industry unattractive?
 Industry in maturity. Growth is
2% annually.
 Cannondale enter new market of
off-road motorbikes
 Cannondale growth is slowing
down to 9.7%
70
market position and can defend it,
as has a broad base of loyal
customers. Also accessories and
additional features that support
differentiation plus ability to
custom assemble bikes make
Cannondale a strong competitor.
Strategic move into off-road
motorbike might yield positive
results and might restore high
historical growth for the company.
However Cannondale, except for
entering new markets, has to better
position itself in the mountain bike
segment of the industry.
Cannondale should work towards
increasing sales of custom
assembled bikes. Company has
already capabilities. They should
increase degree of differentiation to
capture more custom assembled
bike sales.
Industry condition is a big threat to
Cannondale. Cannondale is not
insulated from the declining
demand and the maturity of the
market.
Cannondale has to revise its
strategy. The reason company has
achieve success in 1980s and 90s
are being analyzed by its
competitors and now applied by
them. Cannondale can defend
either by entering into new markets
or becoming a leader of
innovations in the bike industry.
New trends in the industry show
that consumers are very sensitive
on technological innovations such
as carbon fiber frames.
The size of the low-end market is
an Opportunity. As Asian
competitors started attacking the
high-end and company should take
decisive steps to defend its
position. Company should consider
in the light of global competition
entering the low end by
outsourcing the production of lowend bikes to less intense countries.
How well do the company's
capabilities match the industry's
KSFs?
What are the future
uncertainties and risks for this
industry?
What is the severity of the
issue(s) or problem(s) facing
this industry?
If a corporation, will continued
participation in this industry
positively or negatively impact
its ability to compete in other
industries?
 Growing demand for
differentiated products:
Cannondale can provide custom
assembled bikes at extra cost
 Growing demand for mountain
bikes with carbon fiber frames
 Growing demand for best-value
bikes with aluminum frames
Diffusion of know-how.
How fast will the diffusion of
know-how will be in the future?
Will technology leader be able to
capitalize on their technological
breakthroughs before Asian
competitors will incorporated their
findings and try to sell it at lower
cost?
Higher outlays on R&D are
reducing profit margins.
Global competition deliver
underprice products
Maturity of the market
Growing selling and advertising
expenses
 In 1972 Giant was a small
company… in 1999 Giants
revenues were estimated at $400
millions
 Intrepid recorded revenues of
$400 millions in 1997
 Cannondale growth slowed
between 1995-99 to 9.7%
annually
71
Cannondale’s business model
enables company to grasp growing
demand for differentiated products.
Company has a high image.
However in late 1990 their product
innovation capability is lower that
their rivals.
This is an Opportunity for Asian
Competitors.
The maturity of the market and
high diffusion of know-how is a
threat to the US industry. The
companies have to expand globally
to look for new customers or enter
into different industries where
growth is faster.
Different companies in this
industry in the face of mounting
competition take different strategic
positions. New leaders arise
quickly.
Cannondale faces strong
competition. From one site it is
attacked by attractive Asian
mountain bikes. Other competitors
are capable to deliver as
technologically advanced models
as Cannondale. Cannondale has to
position itself better on the market.
It’s move into off-road motorbike
industry and toward diversification
of revenues appears to be
successful. As Cannondale uses
existing capabilities this is very
good strategic move. However in
the reality of mounting competition
company may quickly loose
ground and market share if it not
repositions itself on the market.
Consequently, Cannondale has to
maintain its leadership in
innovation of its mountain bikes.
Otherwise continues participation
in this industry may result in
negative impact on the company.
As the rate of production
innovation is very fast and
diffusion is fast Cannondale can
not fully capitalize on its research
and development. Company should
aggressively enter into sleepy offroad industry where rivalry is
lower. Also, in the light of global
competitors, addressing low-end
market (capture Opportunity) and
position itself better as a global
competitors and leader in the
biking and motor industry.
72
II. Summary of External Factors
Opportunities
Societal
Political
Legal
Regulatory
- Increase the
number of adults
toward outdoor
activities in their
leisure time with
growing
disposable income
to purchase
bicycles.
- Growing interest
in a total fitness
lifestyle.
- Popularity of
cycling as a
recreational
activity in the US.
- Increase the
terrain available to
bicycles.
- Certain standards
(i.e. ISO9000
standard) facilitate
international trade
and allow a
company to enter
global market
easily.
- Increase
consideration of
bicycle as
transportation
alternatives.
- Increase cycling
facilities and trails.
- Increase awareness
of bicyclist’s
safety.
- Regulations to
keep open the
lands to cycling
and laws
regarding open
biking trails in
Strategic
Implications for the
company
Threats
Strategic
Implications for the
company
- Monitor
customers’
lifestyle and
attitudes and
deliver what they
expect to meet
social trend.
- Fast changing
popularity of
recreational
activity, trends and
lifestyle.
- Monitor customers’
lifestyle and
attitudes and deliver
what they expect to
meet social trend.
Monitor the political
climate.
Tariffs, taxes, and
other international
trade restrictions.
Follow the foreign
trade restrictions
when a company
deals with the
country.
Respond quickly to
the legal changes.
- The chapter 11
bankruptcy laws.
Operate efficiently to
avoid bankruptcy.
- Take proactive
position in regard
to safe and
responsible cycling
through company’s
activities.
A mantra of IMBA
discourages
manufactures to ads
that depict racing
photos and restricts
trail access.
- Take proactive
position in regard
safe and
responsible
cycling though
company’s
73
Dominant
economic
traits
Five forces
order to reduce
damages on lands
and improve safe
cycling.
- US Government
limitations of
entrance for
foreign companies
weaken their
competitive
advantages to
compete in the
US.
- Competition in the
high-performance
bicycle is based
on perceived
value, brand
image,
performance
features, product
innovation, and
cost.
- Large number of
potential buyers
around the world.
- Growing demand
in Europe.
- Growing demand
of high-end
juvenile bike.
- Growing demand
for differentiated
products.
- Large market size
of low-end bike
segment.
- Exist barriers when
entering the
industry.
- Widely available
items from
suppliers.
- Bargaining power
toward suppliers.
- Enable to gain
cost/value
advantages
provided by outside
suppliers.
- Use lobby to
influence policy
makers to allocate
more funds for
supporting bike
transportation.
activities.
- Use lobby to
influence policy
makers to allocate
more funds for
supporting bike
transportation.
- Be innovative on
product features
and improve
production
processes and
operation in order
to gain customer
recognition.
- Monitor market
trends and growth
rate.
- Respond fast to the
market.
- Fast speed of
technology in the
high-performance
bicycle segment.
- Fast rate of product
innovation.
- Customer’s
bargaining power
in low-end bike
segment.
- Mature industry in
the US.
- Fast diffusion of
technology and
know-how.
- Decline industry
profitability.
- Economic slow
down.
- Be on the edge of
the technical
innovation and
develop capabilities
of production
processes.
- Monitor market
trends and growth
rate.
- Respond fast to the
market.
- Take advantages
of its position
power against
suppliers and new
entrants.
- Collaborate with
suppliers to gain
better items at best
prices.
- Buyers’ high level
of knowledge.
- Many competitors
in the industry
(high rivalry).
- The size of major
competitors is
nearly equal in
terms of sales
revenue.
- Exit barriers
required.
- Readily available
- Continue to develop
and improve
products and
technology.
- Make attractive and
innovative
products.
74
-
Driving
forces of
change for
the industry
and the
industry’s
environmen
t
Companies
in the
strongest
and weakest
position
Rivals most
likely moves
substitutes as a
means of
transportation,
recreation, and
outdoor activities.
Switching cost
among substitutes
is low.
Lower priced
products from
foreign companies.
Increase rivalry.
Fast change in
product innovation
and technology.
High competition
in marketing
innovation.
Increase
competitors
entering from
foreign countries.
Diffusion of
technical knowhow.
- Gain advantages of - Incorporate new
e-commerce and
internet tools in
internet in business
business models.
activities.
- Develop
- Increase
capabilities to
globalization of the
compete on cost
industry.
with Asian
- Outsource to realize
companies.
low-cost products.
- Become industry
leader in product
innovations.
- Enter new
industries
(motorcycle
industry) where
the competition is
lighter.
-
Intrepid, Cannondale
and Specialized
Bicycles are in the
strongest position to
be dominant leader in
the high-performance
segment.
- Mergers and
acquisitions to own
more than one
brands.
- Enter new merging
Competitors must
keep using
differentiation
strategy in
technology and
innovation.
Small companies in
low- and highperformance
segments.
- Monitor rival’s
move and market
condition and
respond quickly.
Lack of information
of rival’s moves.
75
-
-
-
-
- Develop
capabilities to
compete on cost
with Asian
companies.
- Analyze customer
needs and deliver
what they expect.
- Watch new arising
trends.
- Become industry
leader in product
innovations.
- Enter new
industries
(motorcycle
industry) by using
existing
capabilities.
- Build strong image
by using strong
comparative ads.
- Add more value
and differentiate
products.
- Shelter technical
know-how.
- Increase degree of
differentiation,
customer services.
Competitors must
keep pace with
technological
innovation and
position better.
- Monitor rival’s
moves and market
condition and
respond quickly.
-
Key Success
Factors
-
-
-
-
-
-
Industry
Attractivene
ss and
prospects
for
profitability
-
-
-
market, such as
motorcycle
segment and
European market.
Outsource products
in Asia to realize
low costs.
Specific research
and experience.
Technical
capability to make
innovative
improvements in
production process.
Product innovation
and technological
change.
Expertise in a
particular
technology.
Low-cost
production
efficiency.
Manufacturing
flexibility.
Advertising
Speed of getting
new products to
market.
Ability to quickly
respond to shifting
market conditions.
Image and
reputation.
Mergers and
acquisitions to own
more than one
brand.
Growing demand
for differentiated
products.
Diffusion of
technological
know-how
(opportunity for
Asian competitors).
- Continue to invest
in technological
innovation,
manufacturing
process, and brand
loyalty.
The key successfactors are a threat
for companies who
lack of capabilities to
gain.
- Invest in R&D to
be on the cutting
edge of the
technology and
innovation.
- Differentiate
products to meet
customer’s
demand.
- Offer outsourcing
to gain technical
know-how from
contracted
companies.
- Maturity industry.
- Improve operation
- Slow growing rate
to maintain high
in the US market.
revenue growth.
- Decline profit
- Move to other
margin in mountain
industry by
bike segments.
applying existing
- Highly global
capabilities (i.e.
competition.
motorcycle
- Quick diffusion of
industry).
technological
- Protect own
know-how.
technology.
- Highly competition
in technical
innovation.
76
- Continue to invest
in technological
innovation,
manufacturing
process, and brand
loyalty.
D. Internal Factors
1.
How well is the current strategy working?
Criteria
Facts
What are the present
 Cannondale has focused
strategies? (Note: This
differentiation strategy.
question applies to the
corporate, business and
Functional level strategy:
functional levels of the
 Market segmentation
organization.
strategy by bicycle
category and channel of
distribution.
- Market share grows faster
than rivals from 1983 to
1985.
- In 2000 world’s leading in
manufacture of highperformance mountain
bicycle.
- Sales its bicycle only
through independent
specialty shops.
- Move into motorcycle
production in 1998 and
introduce MX400 to the
market in 2000.





1
In-house production,
flexible-manufacturing
system strategy, and stayon-the-offensive strategy1.
Produce their products in
Pennsylvania facilities
while most of competitors
import frames from Asia.
Reduce the production
time, simultaneous
production of various
modes and small batch
size without changing
high tooling changeover
costs.
Reduce the time to
complete the bike from 17
to 3 days only.
Provides high production
efficiency.
What does this mean?
The focused differentiation strategy is
difficult strategy to implement and
maintain. It depends on buyer segment
that is looking for special product
attributes or seller capabilities.
Cannondale’s ability to successfully
implement this strategy gives them
strong competitive capabilities over
their rivals and the ability to compete
with them. The strategy gives
Cannondale the strength to exploit
opportunities in the industry. Only few
other rivals are attempting to
specialize in the same target segment.
Also the strategy gives them the
strength to defend against threats in
the market, because is costly or
difficult for multisegment competitors
to put capabilities in place to meet the
specialized needs of the market niche
and at the same time service their
mainstream customers.
The focused differentiation strategy
allowed them to make broad array of
products in a bicycle industry and take
further step to move to the motorcycle
industry. The strategy is Cannondale’s
strength.
As the industry mature Cannondale
need to seek out new strategies moves
to strength their competitive position.
In this stage is good for a company to
have a wide selection of models,
features and product options, improve
the value chain efficiency, trimming
costs, expending internationally and
acquiring weaker rivals.
The functional level strategies are very
well design and implemented.
Cannondale is able to enhance
manufacturing process, have quick
bicycle assembly turnover, and rapid
Thompson and Strickland, Crafting and Executing Strategy, 12th edition, 2001, p.266
77

Trend and market leader
in high-performance in the
bicycle industry.

Alliance partnership with
various aluminum
suppliers.
Their buying power
allows them to secure
higher-volume purchasing
discount. But the company
believes that termination
of its contracts would not
have the significant
impact on purchasing
costs.


Ongoing commitment to
R&D.
Cannondale’s know-how
and manufacturing skills
enable the company to be
a first-mover and trend
maker in the industry.

Cannondale uses highly
leverage (High
Debt/Equity ration) to
finance their company.
Cannondale is highly
leverage (High
Debt/Equity ratio) and has
lower ROE than the rest of
industry.

incorporate new technologies and
components into their products. This
allows Cannondale to produce high
quality product more efficient.
Cannondale’s domestic manufacturing
base is key competitive advantage.
Alliances with suppliers allow them to
cut cost on high quality components or
ability to change the supplier if they
can buy same components for less.
The functional strategy is a strength.
Their functional strategy in finance is
not very strong. High debt and
maturity of the market may pose
danger of the slow down in the sale.
Then Cannondale may lose liquidity.
Also, its free cash flow is negative and
stock price as a result is going down.
EPS is going down. This is a threat to
Cannondale. Should diversify
(motorbike industry).
Assess the company’s relative
performance using the three
tests for a winning strategy.
(Refer to Chapter 2, pages 68
and 69.)
- Goodness of fit
“Goodness of fit” test analyzes
how well Cannondale’s
strategies fit the industry. “A
good strategy has to be well
matched to industry and
competitive conditions, market
opportunities and threats, and
other aspects of the enterprise
78
Cannondale’s strength is the ability to
develop competitive capabilities that
match the opportunities and threats in
the mature bicycle industry.
Cannondale’s strategy passes the test
of Goodness of fit. The company has
numerous internal strengths tailored to
their strategy. Cannondale’s “Stay-on-
- Competitive advantage
2
environment. 2”
Cannondale meets the
requirements with high quality
bicycles that incorporate the
latest technology and
innovations and meets the
requirements for new trends
and demands in the markets by
introduce first the aluminum
mountain bicycle and now
new product line motorcycle
MX400.
the-offensive” strategy and know-how
makes them the first mover and
trendsetter in the industry. They first
introduced the aluminum frame
mountain bicycle to the market, and
soon captured first place in the highperformance bicycle industry in the
US. However, when the industry
reached the maturity stage, with rivals
cutting into their profit margins, they
diversified their business and began
motorcycle production. Their first
motorcycle model brought them
instant success in the motorcycle
industry as well.
“A good strategy leads to
sustainable competitive
advantage. The bigger the
competitive edge that a
strategy helps build, the more
powerful and effective.”2
This Competitive Advantage
Test analyzes how well
Cannondale’s competitive
capabilities match the business
environments.
The flexible manufacturing
system give Cannondale
comparative advantage over
the rivals. They were able to
reduce the production time,
simultaneous production of
various modes and small batch
size without changing high
tooling changeover costs. This
manufacturing system allows
them to reduce the time to
complete the bike from 17 to 3
days only. Development in
new prototypes through
computer-aided design and
manufacturing (CAD/CAM)
technology. Rivals try to copy
business process that provides
high production efficiency.
Cannondale recently has
Cannondale passes the test for
competitive advantage. They are the
master in production innovation
process. They have strong
relationships with vendors. Rivalry
intensifies in a mature business
environment. By capturing
opportunities of growing customers’
demand for differentiated products and
new trend in the recreation life style,
Cannondale broadened its competitive
advantages over their rivals.
Cannondale focused differentiation
strategy enabled them even customize
their products (this adds value) and
deliver to the customer within few
weeks. This strategy led them to
establish good image and brand name.
Thompson A.A., Strickland A.J. Crafting and Executing Strategy. McGraw-Hill, Irwin 2001,p.68-69
79
expanded its product line to
include motorcycles.
- Performance
“The Performance Test. A
good strategy boosts company
performance. Two kinds of
performance are the most
telling of a strategy’ caliber:
gains in profitability and gains
in the company’s competitive
strength and long-term market
position.”1
In 2000 Cannondale has
estimate 20% of share in U.S.
high performance bicycle
market. Their revenue growth
at an annual rate of 30%
between 1983 and 1985.Their
stock price had appreciated at
an annual rate of 32% since its
initial public offers in 1994.
Bicycle industry reached the
maturity during the mid-1990s
and grew an approximate
annual rate of 2% during the
late 1995 and 1999,
Cannondale revenue growth
had slowed to annual rate of
9.7% between 1995 and 1999
after growing at compound
annual rate of 23.3% between
1991 and 1995.
Sales growth in Europe had an
average compound growth rate
of 12.4% between 1993-99.
Cannondale’s past five years
were significantly higher than
the industry average.
Cannondale’s strategies lead
the industry.
- Cannondale has large
market share in the US
(20% share) and sale its
product in other countries.
- 1999=$176,819,000 in
revenue
- 1999=$5,923,000 net
income.
80
Cannondale passes the performance
test. Capability of performance is
Cannondale’s strength. This indicated
well-crafted and/or well-executed
strategy.
The company is a leader in the bike
market and manufacturing highquality bikes to satisfy niche
customers. Cannondale competitive
position was strong in the last 5 years.
Cannondale has competitive
advantages in manufacturing
processes and R&D and is able to
have a quicker design to market in
comparison to their competitors.
Selling products at specialty retailer
enables Cannondale to provide their
products to customers with sales
assistance and maintain their product’s
image as highly innovative
performance bikes.
In the motorcycle market, Cannondale
establish good position in the industry.
This is an indicator that Cannondale
strategy is working.
Cannondale should keep the currant
strategy and innovate or improve their
product quickly than the rivals do in.
To gain more market share they need
to expend to new internationals
markets especially Europe.
What is the competitive scope
 stages of the industry's
production-distribution
chain it operates,
Cannondale has alliance
partnership with various
aluminum suppliers and
operated with few days
inventory.
They produce their products in
Pennsylvania facilities while
most of competitors import
frames from Asia. The flexible
manufacturing system reduce
the production time from 17 to
3 days to complete the bike,
allows simultaneous
production of various modes
and small batch size without
changing high tooling
changeover costs. Cannondale
sell bicycles through specialty
bicycle retailers’ stores who
could provide knowledgeable
sales assistance. In 2000 the
company sold its bicycle
through 1,150 specialty
retailers in Canada and US.
Cannondale products were not
available through mass
merchandisers.
Cannondale’s focused differentiation
strategy is supported by well-crafted
and implemented functional strategies.
Functional strategies in production and
outbound logistics are Cannondale
strength. Company has different than
rivals’ production-distribution chains.
Cannondale’s domestic manufacturing
base is a competitive advantage.
Cannondale produce faster by using
domestic components than rivals who
import from Far East. Quicker designto-market times are a key competency
in the industry, also this prevents other
component suppliers from Asia copy
their new product designs and deliver
to the market at cheaper price. The
flexible manufacturing system
provides high production efficiency
that gives them the position of trend
and market leader in high-performance
bicycle industry. This strategy is
Cannondale’s strength.

USA
West Europe
Japan
Australia and New Zealand
Cannondale geographic scope strategy
addresses the needs of the customers.
Cannondale competes in this
markets and uses global
strategy for their products. In
US Cannondale sell bicycles
through specialty retailers’
stores, but before establish
new dealer they consider such
factors like competitors,
population and demographics.
In Europe they use imported
parts and frames from US
facility and only assembly
there. In the other regions they
imported their bicycles and
accessories from US and sell
them.
Cannondale focuses on a narrow
segment of customers and they try to
provide them with the best product
and the best service. They produce
high-performance bicycle for
recreation or racing purpose and sell
their products at premium prices. This
is why they only coverage the markets
with high economy and GDP. They
can not compete with the low-end
bicycle producer who sell the product
in countries where the bicycle is use
for commuting purpose only. Selling
products through specialty retailer
enables Cannondale maintain their
product’s image as highly innovative
geographic market
coverage, and
81
performance bikes.

Size and composition of
the customer base?
70% of bicycle in the world is
use in as means of
transportation, 29% use for
recreation purposes and, and
about 1% use in racing events.
In U.S. during the late 1980s
and early 1990s the mountain
biking as a form of recreation
grew exponentially with 54%
of U.S bicycle sales.
Cannondale’s customers are
mostly adults who are turning
toward outdoor activities in
their leisure time.
Racing team members.
Tommy Hilfinger company Cannondale produce sport
mountain bike for them.
Cannondale’s products are
design for cyclists who want
high-performance, highquality bicycles.
What are the functional
strategies
 Production,
- Cannondale’s products made
in the US are one of
differentiated features.
Especially hand-welded
aluminum frames indicate
the premier position in the
category. Their frames also
initiate the brand image as
high-performance bike
producer. In-house
production: Cannondale
produces bicycles,
motorcycles, components,
and accessories in their
facilities in Pennsylvania
while most of competitors
import frames from Asia.
Cannondale hopes to gain a
competitive advantage over
manufacturers who rely on
outside component suppliers.
82
Cannondale does not have a very
diversified customer base. Using
market research they need to identify
who will be able to buy their products,
in what areas.
They need to address the needs and
wants of the younger generation
customers and research the trends and
popularity in recreation forms. If they
fail to address the changes in the
domestic market, they will lose market
share to their competitors.
The international market is an
opportunity for Cannondale.
Promising markets are in West Europe
with high numbers of individuals that
have the disposable income to
purchase bicycle for recreations
reasons.
Cannondale’s domestic manufacturing
base is key competitive advantages.
Cannondale produce faster by using
domestic components than rivals who
import from Far East. Because the
customers respond to the new design
or models instantaneously, quicker
design-to-market times are a key
competency in the industry. It also
prevents other component suppliers in
Asia from copying their products and
selling at lower price. This strategy is
Cannondale’s strength.


Purchasing
Marketing and Promotion
- Employ flexible
manufacturing system: The
strengths of the system are
reduced production time (the
time to completed bike from
17 days to 3 days),
simultaneous production of
various models and small
batch sizes without high tool
changeover costs.
The system gives Cannondale
competitive capability to reduce
manufacturing costs. Though the
system Cannondale achieve to gain
cost drivers, such as shortening
assembling time and sharing product
process with the other products. The
manufacturing system enables the
cost-effective production of a wide
product line and a broad range of
models in a single day in order to
respond to customer demand.
Cannondale can control finish-goods
inventory with the system and gain
ability to introduce new products
quickly into the market. This is a
strength.
- Employ CAD/CAM system.
The system allows offering
custom-fitted bicycles at low
price and within short period
(6 weeks).
The technology enables Cannondale to
manufacture more efficiently and offer
new service (custom-fitted bikes) to
the customers. This is a strength.
Make agreement with various
aluminum suppliers to ensure
favorite pricing and delivery
terms and certain technical
assistance.
Concentrated buying power
among fewer suppliers.
Because aluminum is widely
available, Cannondale cannot have a
significant discount price. This is a
weakness.
Cannondale’s marketing
program is to establish the
company as the leading highperformance bicycle brand in
the specialty bicycle retail
channel. The marketing
focuses on promotion of the
firm’s product innovation,
performance, and quality
leadership though
Volvo/Cannondale mountain
bike racing teams, media
campaigns, and print
advertising.
Cannondale’s print advertising
focus on magazines for
Cannondale’s marketing and
promotion programs target on those
who are bicycle enthusiasts and
interested in outdoor and leisure
activities. Cannondale’s marketing and
promotion programs are strengths.
83
The company can reduce costs of
products by buying power. Sustaining
buying power is Cannondale’s
strength.
cycling enthusiasts and
general lifestyle magazines to
reach upscale adults with an
interest in outdoor and leisure
activities.

Sales and Distribution
Sell bicycles through 1,150
specialty bicycle retailers in
the US and Canada who could
provide knowledgeable sales
assistance regarding to the
technical and performance
characteristics of products and
offer ongoing a commitment
to service.
Because in the high-performance
cycling industry rivals are competing
on fast introducing innovation and
improvement, and customers sensitive
to the new features, it is necessary to
explain the newest technical and
performance characteristics when
purchasing. Selling products at
specialty retailer enables Cannondale
to provide their products to customers
with sales assistance and maintain
their product’s image as highly
innovative performance bikes. This is
a strength.

R&D
- Continually Cannondale
invests $20 million for 3
years on R&D to make
bicycles lighter, stronger,
faster, and more comfortable
by collaborating and sharing
technical know-how with the
racing team.
- Maintain their competitive
position by supporting
research into further
improvements in
manufacturing processes
with CAD/CAM technology.
Cannondale realize high-end, highperformance bicycles by using
athletes’ feedback to bring fresh
innovations to their bikes. By the form
of interrelationship, Cannondale’s
R&D shares experience, new designs,
and new product ideas with racing
engineering staff which lowers cost
because know-how is significant to
improve the efficiency of the R&D
activities. This is a strength.
- Stay-on-the-offensive
strategy3: Be a trend and
market leader in highperformance in the bicycle
industry.
Cannondale’s know-how and
manufacturing skills enable to be firstmover trendsetter so that the company
can gain first-mover advantages. The
advantages include that (1) helping
build a firm’s image and reputation
with buyers; (2) early commitments to
new technologies, new style of
components can produce an absolute
cost advantages over rivals; (3) firsttime buyers remain strongly loyal to
the pioneering firm in making repeat
Start by listing the functional
areas; then provide the facts
associated with each of the
areas. Finally, conduct your
analysis and determine how
well the functional areas are
working and the associated
strengths and weaknesses.
3
Thompson and Strickland, Crafting and Executing Strategy, 12th edition, 2001, p.266
84
purchases; and (4) moving first
constitutes a preemptive strike,
making imitation extra hard or
unlikely.4
Has the company achieved its
financial objectives? Go back
to your chapter 2 worksheets
for the financial objectives.
Determine if they achieved
their short and long-term
objectives and provide the
supporting analysis why they
did or did not achieve the
objective.
4
Revenues:
Between 1983-1985: 30%
Between 1991-1995: 22.3%
Between 1995-1999: 9.7%
Sales (1991): 54,544,000
Sales (1993): 80,835,000
Sales (1995): 122,081,100
Sales (1999): 176,819,000
Earnings:
Net income:
1991=1,162,000
1995=7,548,000
1999=5,923,000
Growth rate between
1991 and ‘95=59.65%
1995 and ‘99=-5.88%
Porter, Competitive Strategy, p.232-233.
85
Cannondale competitors have higher
revenues than Cannondale. This is
Cannondale’s weakness
(Comparisons to Rivals are not
possible-no data available).
1991-97. Cannondale achieves its
financial objectives. Earning growth
exceeds industry average. Cannondale
strategy is working. After 1997
Cannondale earning decline.
Cannondale under perform and do not
meet its earning objectives (See
Financial Section for details). This is
Cannondale weakness. Earnings are
declining as result of slowdown in
sales and rapid growth of expenses on
R&D. While sales slow down R&D
accelerate at about 25% annual rate
between 1997-99. Earnings results are
crucial for the company as they are
closely correlated with price share of
the Cannondale. Closer earning
comparisons with Intrepid and
Specialized would be highly
recommended at this point but
unfortunately data is not available.
Facts only available (1999
www.specialized.com and page 122
textbook) Intrepid suggests that they
achieve record sales in this years
(1997-99). It appears as Cannondale
after 1997 should start reconsidering
its strategic posture. Both Intrepid and
Specialized have strategies that
emphasize broader competitive scope.
Specialized has two lines of low-end
bicycles and Intrepid has more lowerend models in high-end than
Cannondale. Earnings results appear
to suggest that strategy after 1997
should be revised to capture new
existing opportunities and restore
historical high growth rates.
Cannondale on the level of crafting
strategy should put more emphasis on
synergies between its R&D that could
be transferred to other business lines
or related industries to broaden its
scope of customer base at low
marginal cost. This will yield
additional revenues, strengthen
earnings and finally position
Cannondale well for the future.
Profit margins:
Year
Profit margins
1991
3.5%
1995
6.2%
1999
3.3%
Has the company achieved its
strategic objectives? Go back
to your chapter 2 worksheets
for the strategic objectives.
Determine if they achieved
their short and long-term
objectives and provide the
supporting analysis why they
did or did not achieve the
objective. Then you are in a
position to determine the
associated strengths or
weaknesses.
Market share:
Cannondale is the world’s
leading manufacturer and
marketer of high-performance
aluminum bicycles with an
estimated 20 percent share of
the U.S. high-performance
bicycle market.
Cannondale has lower profit margins
than the rest of the industry. This is
Cannondale weakness. Relative
assessment to each of the rival is not
possible, as sufficient data is not
available.
Cannondale is a leading company in
the high-performance bicycle market,
which brings the company competitive
advantages, such as gaining
economies of scale, buying power, and
customer recognition. This is a
strength.
Design-to-market times:
Cannondale is able to have a
quicker design to market in
comparison to their
competitors.
This is a strength. Cannondale
maintain its brand recognition and
reputation.
Higher product quality:
Cannondale is able to assure
higher product quality to their
buyers.
This is a strength.
Lower costs relative to rivals:
Cannondale costs are
relatively similar to their
immediate rivals.
This is a weakness.
What is the company's
position relative to EACH of
its competitors?
86

Market share
20% share of the US highperformance bicycle market.

Profit margin
3.3% (1999)

Net profits
Profit in 1999 is $176.82
million from $122.08 million
in 1995.

ROI
N/A

EVA (page 9)
=11,371,0002,051,000785{income tax}-(
(cost of equity)*75,010,000)
Cannondale’s EVA is declining as
Profits are declining. (EVA on
industry are unavailable)

MVA (page 10)
=$10.00(stock price average
of 1999)*(7,518,000)75,010,000(shareholders
equity investment)=$170,000
Cannondale MVA is declining as
stock is underperforming as company
faces high rivalry and it’s profit
margins decline.

Financial strength
Year
1999
1998
1997
1996
Cannondale is highly leverage and
delivers lower that average Profit
margin. High business risk is
Cannondale’s weakness. Weak
financial position relative to rivals is
Cannondale’s weakness
P/E
8.47
8.36
14.36
18.84
Cannondale has lower profit margins
than the rest of the industry. This is
Cannondale weakness. Relative
assessment to each of the rival is not
possible, as sufficient data is not
available.
Price
3.69
6.53
9.00
21.75
P/E and Price significantly
falling.
Also Profit margins falling
after 1995
Year
1991
1995
2000
Cannondale is a leading company in
the high-performance bicycle market,
which brings the company competitive
advantages, such as gaining
economies of scale, buying power, and
customer recognition. This is a
strength.
Profit margins
3.5%
6.2%
3.3%
Year
ROA(Net
income/TA)
1991
3.3%
1995
9.0%
87
Cannondale competitors have higher
profits than Cannondale. This is
Cannondale’s weakness
1999
3.6%=($5923/$162379)
ROA between 1991 rises by
5.7%. However, after 1995
efficiency of assets is
declining.

Sales growth
Sales (1991): 54,544,000
Sales (1993): 80,835,000
Sales (1995): 122,081,100
Sales (1999): 176,819,000
Better that industry average sales
growth is Cannondale strength. While
industry growth only 2% a year
Cannondale growth at 9% annual rate.

Image
Cannondale was a first to offer
affordable large-diameter
aluminum-tube bicycles and
established the first major
brand. Cannondale has a good
image as a leader of a highend, high-performance bike
market. Selling products to
specialty retailers with
technical sales assistance
avoids selling at discount
stores at lower price and
decline image.
Brand image is one of key success
factors in the industry. Cannondale
maintains good image with buyers,
which gives buyers brand loyalty and
prevents from customer’s switching to
the rivals’ products. This is a strength.

Reputation
Cannondale manufactures
highly innovative, light,
durable, and high-performance
products in the US, which give
buyers reliability on the
products.
Cannondale established and retains a
good reputation on their highperformance products. This is a
strength.

Industry position
Cannondale is a leading
company with high technology
and innovation in the highend, high-performance in the
bike market and motorcycle
market. Cannondale’s market
position is very narrow and
differentiation (focused
differentiated strategy).
The company is a leader in the
mountain bike segment and
manufacturing high-quality bikes to
satisfy niche customers. This is a
strength. Cannondale concentrates on
being the clear leader in the segment;
their competitive advantage is superior
technological depth, technical
expertise that is highly valued by
customers, and capability to
consistently beat out rivals in
pioneering technological advances.
However, it can also be weakness.
Because Cannondale focuses on such
a narrow segment, the company could
88
overlook those who will be future
customers or stakeholders and earn
less profit.
In the motorcycle market, Cannondale
is trying to establish good position in
the industry.
2. What are the company's resource strengths and weaknesses?
Criteria
Facts
What does this mean?
Skills and expertise
- Cannondale possesses a
- Their Skills and expertise are not
superior technology in the
very hard to copy.
 Proprietary technology
making of aluminum
- They can develop economy of
 advertising and promotion
bikes.
scale in their skills and expertise
 product innovation
Cannondale
marketing
and thereafter keep a head of
 ability to improve
goals
are
through
promote
competitors and make they
production processes
their product innovation,
resources last.
 technological know-how
performance, and quality
- Cannondale technology is
leadership through the use
somewhat superior to may of their
of strategic promotional
rivals, but their advertising and
partnerships, media and
promotion, ability to improve
their innovative web site.
production processes and tech- Cannondale has an
know how could by trumped by a
ongoing commitment to
rival’s resources/capabilities if
R&D and differentiates its
they don’t further work in creating
bicycles through
substantial competitive advantages
technological innovations.
in their skills and expertise.
- Cannondale partial
vertical integration and
CAD/CAM gives them the
ability to improve their
production processes.
- Cannondale’s know-how
and manufacturing skills
enabled the company to be
a first-mover and trend
seller (P. 130).
Physical assets
- Cannondale is able to have Cannondale physical assets are a
a wide geographic
resource that is hard to copy in the
 plant capacity
coverage and has a global high-performance aluminum bike
 plant and equipment age
distribution capability for
segment. The physical assets superior
and technological
their
products.
(This
is
competitive resource time span
capabilities
not
really
competitively
depends on their offensive/defensive
 plant and retail location
superior to their rivals)
moves, on rivals offensive moves, and
 access to distribution
Cannondale
plant
capacity
the industry conditions. The resource
channels
allows
the
company
to
is somewhat competitively superior.
 wide geographic coverage
have
a
quicker
-designed
The resource can be trumped by rival's
 global distribution
to
market
than
rivals.
resources/capabilities.
capability
- Cannondale retail
89
Human assets
 Superior intellectual
capital
Organizational asset
 financial position
 patents
 better product quality
 culture
 product line breadth and
depth
 product quality
Intangible asset
 image
 brand name
 reputation for customer
service
Competitive capabilities
 cost advantages
 sophisticated use of ecommerce
locations represent a
strong competitive
capability for the company
because their retail
locations' sales agents are
profoundly educated in
Cannondale products.
Cannondale has superior
intellectual capital in the
production, manufacturing and
marketing of highperformance bikes. This is
due mainly to their position in
the learning curve of the
production of aluminum bikes.
- Cannondale financial
position could represent a
weakness for the company
because as the industry
matures cost battle might
arise and Cannondale’s
weak debt position might
not be able to handle it.
- Cannondale Emphasis
product quality in their
manufacturing of bikes.
- Cannondale culture fits
the company's strategy
and the company's
external factors.
- Cannondale offer 71 total
products of which 70 are
aluminum based.
Cannondale Image, Brand
Name, and reputation for
customer service are
comparable to their major
rivals’ intangible asset.
-
-
Cannondale has an
innovative Web site to
provide value and
convenience for their
customer.
Cannondale does not have
a cost advantage over
90
The resource is hard to copy. It should
last for as long as the company
continues to provide best value in this
segment. The resource has
demonstrated to be really
competitively superior. They resource
would be hard to be trumped by rivals
offensive moves.
Cannondale Financial position is not a
superior capability they have.
Cannondale emphasis in product
quality is a competitive capability they
have, it is not really hard to be copied
but it should last for as long as they
aim to be the leader in Aluminum
bike's product quality. Rivals will
have a hard time trying to trump
Cannondale’s Aluminum bike
marketing and manufacturing
leadership.
Cannondale product depth enables the
company to cover a larger geographic
area (in Aluminum bikes segment)
than rivals and enable them to capture
a significantly part of this market
segment. The resource should last for
at least another 3-to-5 years, is hard to
coy, is clearly superior but could be
trumped by rivals’ offensive strategic
moves.
Though Cannondale intangible asset is
not superior to their rivals, this does
not represents a competitive
disadvantage for the company nor it
represents a weakness.
Cannondale web site does not yet
represent a competitive advantage for
the company.
Cannondale cost structure (especially
affected by their current debt) could
represent a weakness for the company.
-
Market position
 recognized industry leader
 attractive customer base
-
-
Alliances or cooperative
ventures
rivals
The company does have
superior competitive
capability in skills and
expertise, physical assets
and market position in the
high-performance
aluminum bike market
segment.
Cannondale is recognized
as the industry leader in
high-performance
aluminum bikes.
Cannondale has the
highest market share in
aluminum bikes in the
USA
Cannonade's strategy is not
based on alliances or
cooperative ventures.
- Cannondale does have
contracted with suppliers to
get volume discount and have
use Volvo/Cannondale
mountain bike racing team for
marketing and promotion.
91
Cannondale marketing position in
high-performance aluminum bikes is
hard to copy, significantly superior,
and should last as long as they
continue their marketing effort
focused on the promotion of the firm's
product innovation, performance, and
quality leadership.
Cannondale marketing position could
be trumped by a rival, if any happens
to introduce some significantly better
Aluminum bikes to the industry.
Alliances or cooperative ventures are
not a competitive advantage that
Cannondale has.
Any one in the industry can contract
with their suppliers and joint
promotional campaigns with strong
companies in other industry.
Rivals might be able to use their
alliances or cooperative ventures with
other companies to create additional
competitive pressure in the industry.
3A. Are the company's prices and costs competitive?
Inbound
Operations Outbound
Logistics
Logistics
Sales and
Marketing
Service
Profit
Margin
R&D
HRM
A&G
Scale
economies:
Cannondale
’s US based
manufacturi
ng lowers
shipping
costs and
time by
locating
close to
retailers in
the US.
Vertical
linkage:
The linkage
with
specialty
retailers
reduces
sales costs
by
eliminating
handling
sales
people.
Interrelatio
nship:
The linkage
with sales
and service
activities
with
specialty
retailers
that provide
knowledge
able sales
assistance
reduces
service
costs by
eliminating
handling
service
people.
Scale
economies:
Cannondale
reduces
total
product’s
costs by
achieving
economies
of scale in
overall
operation.
Interrelation
ship:
Collaborate
and share
technical
experience,
know-how,
and ideas
with racing
team
achieve
scale and
get learning
curve
faster.
N/A
Interrelation
ship:
Structural cost
drivers
 Scale
economies
 Learning
curve
 Technology
requirements
 Capital
intensity
 Product line
complexity
 Etc.
Linkage:
Cannondale
makes
agreements
with
aluminum
suppliers to
ensure
favorite
pricing and
delivering
terms (cost
impact is
low).
Cannondale
concentrate
s on buying
power
among
fewer
suppliers,
which
allows
securing
higher
volume
purchase
discounts.
Linkage:
Cannondale
’s flexible
manufactur
ing system
enables to
produce
various
models.
Scale
economies:
Simplify
manufactur
ing line
allows
producing
wide
product
line and a
broad range
of models
in at small
size in a
single day.
Technology
Patent selffixturing
joint design
enables to
reduce
tooling
changeover
costs.
92
Integrating
A&G
between
bike and
motorcycle
products
can avoid
the cost of
procuremen
t and
transportati
on costs of
supplies.
Executional
cost drivers
 Commitment
to continuous
improvement
 Product
quality
 Process
quality
 Capacity
utilization
 Internal
business
processes
 Working with
buyers and
suppliers on
costs
 Etc.
Linkage:
Cannondale
makes
agreements
with
aluminum
suppliers to
ensure
certain
technical
assistance
to maintain
quality.
Technology
Cannondale
’s
CAD/CAM
system
allows the
company to
product
accurately
and
precisely.
Cannondale
uses CODA
component
s on certain
models.
N/A
Learning
curve:
Cannondale
is a first
mover and
trendsetter
in the
industry so
that the
company
can
establish
brand
recognition
faster than
rivals in the
market.
Capacity
Utilization:
The
flexible
manufactur
ing system
allows the
company to
increase
capacity
utilization
by sharing
capacity
with sister
units
having a
different
pattern of
needs.
93
Linkage:
Cannondale
sells
products at
specialty
retailers
who have
technical
knowledge
to match
the items to
customer
needs.
N/A
Interrelation
ship:
Cannondale
collaborate
with their
racing team
to improve
and
develop
products by
sharing
know-how,
experiences
, and ideas.
N/A
Institutional
factors:
Cannondale
can avoid
influences
of foreign
exchange
rate more
than the
rivals who
highly rely
on parts
and
finished
products
imported
from Far
East.
Strategic
choice:
Cannondale
can lower
the demand
fluctuation
and
maintain
fixed cost
by
increasing
the number
of models
and
products
offered.
3B. Each step in the value chain creates or adds value and the integration of each successive step in the value chain increases value.
Criteria
 Incorporate
product
attributes
and user
features that
lower the
buyer's
overall costs
of using the
company's
product
Inbound
Logistics
Operations
The
inbound
logistics
function
enables
Cannondale
to create
custom
bikes in
less than 6
weeks.
This lowers
the buyers
lost
opportunity
costs.
Cannondale
’s
CAD/CAM
technology
allows the
company to
offer
custommade bikes.
This lowers
customer’s
remodeling
costs after
purchasing
ready-made
bikes.
Outbound
Logistics
Sales and
Marketing
Cannondale
’s
manufactur
ing
facilities
locate in
the US,
which
reduces
time to ship
a new
model into
the US
market.
This lowers
the buyers
lost
opportunity
costs.
Cannondale
’s specialty
retailers
provide
knowledge
able sales
assistance,
which
lowers
customer’s
time and
costs to
research
which
models are
best fitted.
94
Service
Cannondale
allows
cyclists to
order
customfitted bikes
with more
than 8
million
possible
combinatio
ns. This
lowers
customer’s
costs to
find
matching
component
s to their
bike.
Profit
Margin
R&D
HRM
A&G
N/A
N/A
N/A
N/A
 Incorporate
features that
raise the
performance
a buyer gets
out of the
product
N/A
 Increase
features that
enhance
buyer
satisfaction
in noneconomic or
intangible
ways
N/A
Cannondale
makes
handwelded
aluminum
frames in
the US.
Cannondale
uses own
component
brand,
CODA on
their certain
bikes.
Cannondale
use own
brand of
component
on some
models.
Cannondale
improve
manufactur
ing process
and
drastically
reduce the
time
required to
design and
produce
new bike
models.
Cannondale
introduces
new models
and
innovation
into the
market
faster than
rivals by
manufactur
ing
products in
the US.
Technical
sales
assistance
at retailers
enables to
match to
the
individual
customer
needs.
Cannondale
allows
customers
to order
custom
fitted bike
with 8
million
possible
combinatio
ns of parts.
N/A
Cannondale
continues
to expand
and
develop
their bike
line with a
series of
innovation.
N/A
N/A
Cannondale
offers a full
line of
bicycle
component
s,
accessories,
and men’s
and
women’s
apparel to
meet
customer’s
demand.
Cannondale
shows its
quality by
attending
bike races,
which also
are used to
maintain
brand
recognition.
Technical
sales
assistance
gives
customers
reliability
and
assurance
to purchase
matching
products.
N/A
Cannondale
is a leader
who
introduces
innovative
products in
the highend market.
N/A
N/A
95
 Deliver
value to
customers
via
competitive
capabilities
that rivals do
not have or
cannot afford
to match
Working
with
suppliers
on shipping
terms.
Cannondale
’s flexible
manufactur
ing system
allows the
company to
produce
bikes in 3
days.
Cannondale
produces
bikes in the
US so that
they can
provide
faster than
the rivals
who import
finishing
goods from
Far East.
N/A
Specialty
retailers
where
Cannondale
sells
products
have
technical
support
while
discount
stores
where some
other rivals
sell
products do
not have.
96
N/A
Cannondale
researches
into further
improveme
nts in its
manufactur
ing process
and
drastically
reducing
the time
required to
design and
produce
new bike
models.
N/A
N/A
4. How strong is the company's competitive position?
Key success
factors
weight
Reputation/
Image
Manufacturing
capability
Quality
/product
performance
Technological
skills
Distribution
capability
New product
innovation
Financial
resources
Relative cost
position
Customer
service
.10
Cannondale
Rating
Weighte
d score
9
.90
Specialized Bicycles
Rating
Weighte
d score
8
.80
Intrepid, Inc.
Rating
Weighte
d score
9
.9
.10
10
1.0
8
.80
7
.7
.15
9
1.35
8
1.2
8
1.2
.20
10
2.0
8
1.6
10
2.0
.05
10
.5
8
.40
8
.40
.15
8
1.20
7
1.05
8
1.2
.05
10
.5
7
.35
7
.35
.15
9
1.35
8
1.2
7
1.05
.05
10
.50
8
.40
9
.45
Overall
weighted
average
100%
9.35
7.80
97
8.25
5.
What strategic issues does the company face?
Typical issue areas
facts
Is the present strategy adequate  Cannondale remained a leader in high performance
in light of driving forces present
segment of the mountain bike industry with innovative
in the industry?
products but its growth have been severely restricted as
the bicycle industry reached maturity for the late 1990s.
As the company prepared to begin shipping the new
MX 400 this spring, Joseph Montgomery (CEO)
hopped that the new motorcycle would be strategic
spark that the company needed to restart the share price
growth.
 Most of the world’s bicycles were made in Asia.
 Cannondale had 20% of market share of high-end
market.
 The manufacturing system enabled Cannondale the
cost-effective production of a wide product line and a
broad range of models in a single day in order to
respond to customers’ demand.
 Children’s bikes were the fastest growing category in
1997
98
What does this mean?
Narrow differentiation strategy is a strenght but
Cannondale in the light of global competition
and fast diffusion of know-how should
accentuate low-end market and address growing
demand for juvenile bikes
Cannondale established itself on the market as
an innovator and the manufacture of mountain
bikes. Its business strategy from the very
beginning was focused differentiation.
Cannondale’s management accurately assessed
driving forces in the bike industry by capturing
change in growth of demand for high-end bikes.
Growth in demand combined with a shift of
consumers towards fitness and leisure yielded
high demand for mountain bike introduced by
Cannondale. This put Cannondale in a very
good market position. Cannondale developed
competitive capabilities such as creative R&D,
ability to match shifting demand conditions by
introducing flexible manufacturing processes
and efficient production processes. However
now as the landscape is changing Cannondale
tries to reposition itself into new market. As
company faces more global competition that
before and maturity of the US market
Cannondale tries to use the same core
competencies(R&D, manufacturing processes)
to enter new market of off -road bicycles. This
part of strategy is very adequate in light of
driving forces in this industry (slowdown in
long-term growth and globalization of the bike
industry. Can Cannondale pursue and invest
money into R&D into so many directions?
Their profit margins are already under pressure.
Is the present strategy geared to
the industry's future key success
factors?
Key successful factors for this industry in Industry Analysis
are:
 Scientific research and expertise
 Technical capability to make innovative improvements
in production processes
 Product innovation and Technological change
 Expertise in a particular technology
 Low-cost production efficiency
 Manufacturing flexibility
 Advertising
 Speed of getting new products to market
 Ability to respond quickly to shifting market conditions
 Image and reputation
Cannonade has a very good image, very good
product innovation capabilities and ability to
develop a streamline of innovative bike and bike
related products. This is Cannondale’s strength.
Now company is trying to capture new growth
opportunities in off-road bike industry. Their new
motor bike topped sales forecast. It signals that
company has a competitive capabilities geared to
future KSFs. Cannondale’s ability to use developed
competencies is Cannondale’s strength.
It appears, however there are some parts of business
strategy that needs improvement. One of the major
drivers in this industry is globalization.
Globalization opens markets for Asian companies
but also gives opportunities for US based
corporation to use capabilities of Asian based
manufacturers to narrow down cost disadvantages.
Company had an image of the pioneer in innovation
in the bike industry. Facts in the case indicate as
there are some other bikes on the market that have
frames of equal or close to equal quality (carbon
component frames). Company in the early 1990 had
significant competitive advantage in production of
frame. It appears however that company is loosing
its competitive advantage. Company still produces
top-notch frame and it is Cannondale strength but as
rate of imitation increases the question is if
Cannondale still have competitive advantage in
production of frames? The issue that company face
is either to become a leader in frames while
outsourcing other components (response to maturity
of the market) or lose it competitive advantage as
company is financially not capable to pursue
researches in so many directions (low Profit
Margins, High leverage). Also company should
focus on how to deliver more value to its
customer.
99
How good a defense does the
present strategy offer to the 5
forces?
Rivals:
 Cannondale experienced little competition from the
large manufacturers- that sold bicycles to discount
stores.
 The high segment of the business was highly
competitive. The competition was based on perceived
value, brand, image, performance features, product
innovation, price
 Intrepid recorded revenues of about 400 million in 1997
 Giant began in 1972 as a small Taiwanese exporter. The
Giant revenue in 1999 were estimated at 400 million
 Cannondale considered its domestic manufacturing base
a key competitive advantage
Cannondale still defends against rivalry.
Cannondale developed excellent manufacturing
designing processes. For example CAD models
to offer custom made bicycles. Cannondale also
had a US based production frames that
decelerated diffusion of know how to Asian
companies. Cannondale image is high. All of
them are Cannondale’s strength and defend it
from rivals. It’s Cannondale’s strength.
However Cannondale should examine more
closely why their competitors, Intrepid, Giant
achieve such a good revenues levels (400
millions)? What customer do they target? Are
they stealing Cannondale’s customers (slower
Cannondale’s growth). How to beat them on
product innovation?
Rivalry in this industry will intensify as
Cannondale’s competitors are increasing in size
and perusing global strategies. What other
defense mechanism should Cannondale institute
to protect itself from fierce competitors this is a
question that company faces.
Entry of new competitors:
 There were several major competitors in the high-end
bike industry. Major competitors are: Schwinn, Intrepid,
SB, Giant, Derby, and Cannondale.
 High-end of the bike industry is highly competitive
High rivalry reduces the risk of entrance of new
competitors to this market. Cannondale defends
its position.
100
Attempts to win customers by substitutive products:
 US rates for participation of selected fitness and sports
activities were also high for in-line roller
skating(581.8%)
Substitutes are threat to Cannondale. However
Cannondale should closely monitor trends that
emerge in fitness and sport to be able to
respond and react in time. Shift in customers’
preferences from mountain bike
Riding to other outdoor activities may
significantly reduce already slow demand
growth.
Competitive pressures stemming from supplier-seller
collaboration:
There is no indication of any pressures
stemming from this force. Cannondale defends
this position. It is a strength. They should
develop better, closer relations with their
supplier to put pressures on the rest of the
industry.

Does the present strategy
protect the company against
external threats and internal
weaknesses?
Cannondale concentrated buying power among few
suppliers, which allowed the company to secure higher
volume purchases discounts.
Major Threats:
 High rivalry
 Maturity of the market
 Globalization of the industry
 Quick diffusion of know-how
Weaknesses:
 Low profit margins
 High Debt/Equity ratio.
Is the company vulnerable to
competitive attack by one or
more rivals?
Cannondale was establishing in 1970s. It is company with a
good reputation. There is no data in case that supports
Cannondale’s susptaibility to attack from other rivals.
101
Despite the fact of low profitability and other
weaknesses the present strategy is geared to
future KSFs and protects Cannondale from
external threats. Those weaknesses are
important issues and Cannondale has to address
them quickly. However, in the face of new
strategic move into off-road bicycles where
company can used its developed capabilities to
capture new arising opportunities, we believe
that Cannondale can capitalize on this new
market increase profit margins and modify their
current strategy in the bike industry to reflect
maturity of the market. Further strategic
moves, in the long will be required to offset
globalization and diffusion issues in this
industry and defend bicycle business of
Cannondale.
This is Cannondale’s strength. As no data is
provided we assume that Cannondale was not
vulnerable to attacks in the past
Does the company have
competitive advantages or must
it offset the competition's
competitive advantages?




Interepid had low-end mid-range and high-end models
Specialized’s basic classes of bicycles included:
juvenile bikes, two road bike models, six low end
models and high end mountain bikes
Cannondale had excellent efficient flexible
manufacturing processes.
Cannondale concentrated buying power among few
suppliers.
102
Cannondale had advantages in Product
Innovation(R&D), manufacturing and customer
services. This is Cannondale’s strength.
Company has to address the issue how is it
going to compete with other Asian competitors
that have already entered high-end of US
market. As diffusion of know how is rapid it
appears as perusing multiple researches is many
areas will not work as company can not fully
capitalize on them. Cheaper bikes with the
same features appear very quickly. What
strategic posture should Cannondale take to
reduce the number of switching customers from
Cannondale to lower priced bike?
Can they increase the switching costs?
Can they add more value by increasing
customization? Cannondale should develop
capabilities that would enable company to
incorporate features of old high-end bike into
low-end bike category. This would enable
company to further capitalize on money and
development invested into R&D of high-end
bikes. It appears from data that almost all of the
leading competitors have broader line offerings.
If Cannondale developed lower end bicycles
this would broaden their custom base and
enable to defend against fast diffusion of knowhow.
What are the strong and weak
parts of the current strategy?
Strong points:
 Pioneer in innovation of high end bicycles
 Superior customer service
 Ability to deliver custom made bikes
 Already diversified toward motorbike industry
 Quick design to market times
 Base of loyal customers
Weak points:
 High leverage of debt in light of slowdown in the sales
 Low profit margins with high variance.
 Competitive scope( only high end bicycles in the light
of globalization and high rate of diffusion of knowhow)
103
Cannondale has multiple strong part of their
strategy. As management monitors the market
and captures the threat of slow down in sales
and maturity of the market Cannondale is
repositioning itself toward related industry. It
appears as a big success. Competitive
advantage in R&D gives the basis for
successful repositioning on the market.
Management has to tackle now problem of the
bike industry. Has to strengthen capabilities in
marketing, and manufacturing. It appears as
company concentrate more on research in
frames rather than pursuing researches in
multiple directions. Positioning itself as leader
in frames and enabling more customization
combined with outsourcing other part should
decrease costs, deliver better product enable
Cannondale to come back to its fast growth rate
from early 1990s.
What additional moves are
necessary to:
 Improve costs
 Capitalize on emerging
opportunities
 Boost the company's
competitive position
Strategic moves Cannondale management
should take:
 Address low end of the market to boost
company competitive position.
 Further improve efficiencies in value chain
of high-end bicycles to narrow down the
cost differences between Cannondale
bicycles and less expensive Asian based
alternatives.
 Aggressively enter off-road motor bike
industry to use its existing capabilities and
boost its competitive position.
 Capture emerging opportunities of growing
juvenile demand for bicycles.
 Increase sales of custom bikes by
intensifying the degree of customization,
offering better warranty and better service.
 Capture large market of High-end bicycles
in Europe.
104
6. Financial Analysis of Cannondale
A)
Comparative Analysis
USA total bike industry (estimation):
Total bike industry
5,000,000,000,000
Percentage of the total market
Intrepid (400000000*0.65)
260000000
0.0052%
Derby (500000000*0.65)
325000000
0.0065%
Giant (400000000*0.7*0.65)
182000000
0.0036%
Cannondale
72,413,000
0.0014%
Cannondale’s the most dangerous competitors:
Segments of the Market
Discount
resellers
(Low end
of the total;
market
competition
on price
below
$200)
Manufactur Facts about
ers
market share
Huffy
MB
RR
MS
R
Yes
No
No
Yes
No Cost
Murray
Ohio
Yes
No
No
Yes
No Cost
Brunswick
Yes
No
No
Yes
No Cost
Other small
Asian
companies
Yes
No
No
Yes
No Cost
105
S
Emphasis
Strategic
importance
Not a
Cannondale’s
competitor.
Not a
Cannondale’s
competitor.
Not a
Cannondale’s
competitor.
Not a
Cannondale’s
competitor.
Specialty
stores
Schwinn
18.8% (in the
models $250$500)
Yes
Yes
No
Yes
No Cost
Sold most
Yes
between $250$1200 Treck
model quality
and efficiency.
Also strong on
high end-Klein
Specialized Very strong on
Yes
high end but also
offered 6 low
end lines of
bikes
Yes
Yes
Yes
Yes Cost and
differentiation
Yes
Yes
Yes
Yes Cost and
Competitor
differentiation
Giant
Yes
Yes
Yes
Yes Basically cost Not a
competitor as of
now may be
dangerous in
the future. Has
to be monitored
No
No
Yes
No Cost
Yes
Yes
Yes
Yes Very strong Intrepid and
on
Specialized
differentiation may start
stealing some
lower end
customers of
Cannondale.
Value
conscious
customers may
start switching
from
Cannondale to
Intrepid and
Specialized.
Intrepid
Derby
70% of total sale Yes
from model
between 250800. Also
entering the high
end and starts
competing with
high end;1998
model in carbon
frame called by
Business Week:
"Bike of the
Year"
$250-$500 Low Yes
end competitor
Cannondal High end. 20%
e
of High end of
the market
Yes
106
Not a most
dangerous
Cannondale’s
competitor as of
now. But has
some potentials
Competitor
Not a
competitor
Bicycles. It’s an
internal
weakness in the
Cannondale ’s
strategy. Two
choices for
faster growth.
Develop more
efficient
production
processes for
lower end or
abandon the
lower end and
diversify.
Sale by market segment in the bike industry (Specialty Stores):
Sales by segment
Mountain bikes
25%
Recreational
2%
10%
Road Races
63%
Other models and
accessories
B) Cannondale Financial Ratios(1999)
I. Liquidity ratios
1.Current ratio (CR) = (Current assets/Current liabilities) = ($104,247/$29353)= 3.55
Industry average=1.9
Cannondale’s assets that can be converted to cash fairly quickly cover the claims of short-term
creditor 3.55 times. Far lower CR than the average might mean that a company cannot pay off their short-
107
term liabilities and this would be a red flag to their creditors. Cannondale has a significantly higher
Current ratio that the industry. This sends two signals. First, for creditors this is a good sign. Their shortterm liabilities are more that 3 times covered by current assets. Shareholders however might consider it as
not efficient use of assets. A high current ratio might communicate to them that Cannondale has a lot of
money tied up into unproductive assists. Cannondale has huge accounts receivable of almost $60 million.
2.Quick ratio (QR) = (Current assets-Inventories/Current liabilities) =(104,247-33165)/29353=2.4216
Industry average =0.8
Inventories are typically the least liquid of company ‘s current assets. Cannondale has higher
than the average of the industry QR. Again the reason of notably higher QR ratio is high accounts
receivable that are almost double size of inventories. This may indicate that Cannondale should work
towards reduction of its accounts receivable if accounts payable do not contribute to other strategic
objectives that company is achieving. For example by offering better financing conditions to its customers
Cannondale will be achieving higher sales growth than the rest of the industry.
II. Asset management ratios
1.Inventory turnover ratio (ITR) = (Sales/Inventories) = 5.36 times
Industry average = 7.18
Cannondale sells out and re-stocks their inventory 5.36 times a year. Cannondale has lower
inventory turnover that the rest of the industry. Lower inventory turnover signals lower management
efficiency of their assets. Too much cash is tied in unproductive assets. This is an area that Cannondale
should improve.
2. Receivables Turnover = (Sales/Receivables) =3.0106 times a year
Industry average = 7.0
Or
Days sales outstanding (DSO)= (Receivables Turnover)-1*365days=120 days
108
Industry average=52.14 days
DSO represents the number of days’ sales that are tied up in the receivables. Cannondale’s DSO
is more that double than the industry average. Consequently Cannondale wait about 70 days longer to
receive its money. 120 days of financing appears to be unjustifiable. High DSO also raises the operating
capital and increases the amount of cash that is tied up in unproductive assets.
3.Assets turnover (AT) = (Sales/Total assets) = 1.101 times
Industry average=1.2 times
Cannondale has slightly lower asset turnover than the rest of the industry. The bike industry is
getting close to maturity and efficient use of assets will be crucial. This ratio is just OK.
III. Debt management ratios
1.Long Term Debt ratio (LTD) = (Total debt/Equity) =74.65 %
Industry average=39.0%
Cannondale’s debt ratio is noticeably higher that the rest of the industry. High debt leverage may
increase company’s ROE as percentage of equity in total liabilities increases. High leverage is significant
to aggressive companies that want to increase its profitability on $1 of sales. However demand starts
fluctuating highly leveraged companies are much more susceptible to bankruptcy. Cannondale uses very
high leverage of debt to finance its operations that appears to be risky.
2.Total Debt ratio (TDR) = (Total debt/Equity) = 113.8%
Industry average=60%
Much higher usages of total debt than the rest of the industry. Slowdown in sales and demand
combined with high debt leverage signals red flags to creditors. Generally the TDR ratio should be 30%
or lower, but as with most ratios, this one varies by industry. In the less competitive or not cyclical
industries the debt ratio is higher as demand for company’s products is relatively stable. In the bike
109
industry that is entering the maturity stage and faces multiple threats from Asian companies such a high
leverage appears to be very risky.
IV. Profitability ratios
1.Gross margin ratio (GMR) = (Gross Margin/Sales) = 35.88%
Industry average=37.0
Cannondale has slightly lower gross margins to the rest of the industry. This indicates slightly
higher cost of goods sold than the industry.
2. Operating margin (OM) = (EBIT (1-T))/Sales = 5.21%
Industry average=11.70%
This ratio measures how profitable are Cannondale’s actions. Cannondale do not improve its
position. The administrative, selling, general costs and costs associate with research are higher for
Cannondale than for the rest of industry.
3.Net Profit Margin (NPM) = Net income/Sales = 3.31%
Industry average=7.29%
Finally, Cannondale is less profitable than the rest of the industry. Its lower overall profitability is
a result of two factors. First Cannondale has higher operating cost than the industry. Second Cannondale’s
low profit margin results from high use of debt. Its interest expense for 1999 is 4,557,000 that are 2.5% of
total Sales.
4. Return on Assets (RA) = Net income/Total assets = 3.65%
Industry average=9.40%
Cannondale has a return on assets well below the 9.40% average for the industry. This low
return results from their high interest costs and high Total assets and particularly high accounts receivable
and inventories that account for more than 50% of their total assets ((59.3millions+33.1 millions)/162.3.
110
Cannondale competes in the industry that is entering maturity and low assets turnover ratio signals red
flag. Their plants, equipment, intangible assets, and etc. are much less efficient than their rivals. It will be
more and more difficult task to come up with new innovation in the bike industry and efficient use of
assets will be becoming increasingly important.
5. Return on Equity (ROE) = Net income/Common Equity = 7.89%
Industry average=17.51%
This ratio measures the rate of return on stockholders’ investment. Cannondale achieve much
lower rates of returns for their stockholders than the rest of the industry. Theoretically higher usage of
leverage that increases company’s risk should in higher than average ROE. Cannondale should work
toward improving ROE
1. Sales growth rates-5 years average=9.7%
Industry average=2.0%
Cannondale growth rate is mush higher than the rest of the industry. This is positive sign.
Company expands market share faster than the rest of the competitors. However high growth is achieve
mainly due to growth between year 1995 and 1997 (Company’s stock price increases rapidly). After that
rapid growth deceleration of the growth as market reaches maturity (price of stock declines). Company
achieves only 3% growth rate between 1998 and 1999. Compared to 1991-95 of 22.3% company growth
is significantly limited in the last 2 years.
2. EPS - 5 year growth rate = 32%
Industry average=12.10%
EPS-2 year growth rate=-40.5%
Industry average=NA
This ratio represents the compound annual growth rate of earnings for the past five years. This
ratio does not show the entire picture. Cannondale logged negative earnings of (.37) a share in1994. Then
111
grew earnings in the next year to $1.18 and 1.23 in 1996. From 1997 however their earnings are quickly
declining at the rate of 40.5% annually to finally reach .79 a share in 1999. Such a situation is generally
due to significantly higher outlay for research and development and selling and administrative expenses.
3. Dividends - 5 year growth rate = NM
Industry average=8.3%
Cannondale do not pay out dividends. Cannondale reinvests all of the retained earnings.
Cannondale reinvests dividends in research and development
VI. Valuation Ratios
1. Price to Earnings ratio (P/E) = 8.28 times
Industry average=28.59
This ratio is the price of the one share divided by the latest 12 months' earnings per share.
Cannondale has lower ratio than the rest of the industry. Their declining earning in the last two year are
pushing Cannondale’s stock down as investors becoming uncertain about their future. Consequently they
are selling Cannondale’s share as growth perspectives are uncertain and this pushes the EPS down.
Investors expect industry to do better in the future, at least from current position, as the industry has much
higher P/E ratio of 28.59.
2.
Price to Sales (P/S) = 0.27 times
Industry average=2.75 times
This ratio shows how much investors are willing to pay for sales per share. This may indicate that
either Cannondale stock is undervalued (P/S below 1.5 are considered by some analyst a signal to buy) or
that investors have some other reason to sell the stock and reduce P/S ratio
3. Price to Book ratio (P/B) = .65 times
112
Industry average=5.82
This ratio gives us an indication how much investors are willing to pay for a dollar of
Cannondale’s book value. Book value is simply assets minus liabilities. Low P/B ratio may indicate that
investors pay lower market price for ownership in the company than they own on the books. This may be
a result of low ROE and/or ROA and is closely tied with assets efficiency. Low ROE signals that their
returns on equity may be lower that industry average. What is the reason of owning the assets if they are
not productive?
4. Price to Cash Flow (P/CF) = 181.85 times
Industry average=21.67
The price of Cannondale's share divided by cash flow per share from the last 12 months. This is
similar to P/E ratio, but depreciation and other non-cash expenses are added back to Net income.
Cannondale’s total cash flow may be under pressure. In 1999 Cannondale produced only $269,000 of
Total Cash flow. This pushes CF per share to almost 0. The biggest pressure on Cannondale Total Cash
flow is caused by high and negative cash flow for investment activities. Cannondale logged more that
21,000,000 of cash outflow into Capital Expenditures, Buildings and Related Parties. This combined with
slowing demand in the overall bike industry, lower ROA and ROE results in multiple pressures on
Cannondale price.
5. Price to Free Cash Flow (P/FCF)=Price/(Cash flow from operating activities – (Capital
expenditure +Dividend Paid)) = NA
Industry average = 28.39 times
As Cannondale generates cash from operating activities its capital expenditure are higher that
cash from operations that pushes the numerator slightly below 0. Cannondale invests more that generates
from operating activities.
113
Summary of Financial Ratios
Ratio name
Industry
Average
Cannondale
Comment
I. Liquidity ratios
Current ratio
Quick ratio
3.55
HIGH (inefficient
1.90 use of current assets)
2.42 times
0.8
HIGH
Inventory turnover ratio
5.36 times
7.18
LOW
Days sales outstanding
120 days
52.14
POOR
1.101 times
1.2
.7465
.3900
HIGH (risky)
1.13
0.60
HIGH (risky)
Gross margin ratio
.36
0.3700
Operating margin
0.05
0.12
LOW
Net Profit Margin
0.03
0.07
LOW
Return on Assets
0.03
0.09
LOW
Return on Equity
0.08
0.17
LOW
Sales-5 year growth rate
0.10
0.02
EXCELLENT
EPS - 5 year growth rate
0.325
0.12
VERY GOOD
-50.5%
NA
NM
0.11
8.28
28.59
LOW
0.27 times
2.75
LOW
.65 times
5.82
LOW
NA
28.39
POOR
II. Asset management ratios
Assets turnover
OK
III. Debt management ratios
Long Term Debt ratio
Total Debt ratio
IV. Profitability ratios
OK
V. Growth rates
EPS-2 year growth
Dividends - 5 year growth rate
INCOMPARABLE6
GOOD
VI. Valuation ratios
Price to Earnings ratio
Price to Sales
Price to Book ratio
Price to Free Cash Flow
5
6
Appears to be high. However is strengthened by high EPS rate from 1996 and 1997
Net income is declining as sales volume growth slows down.
114
The Du Pont Chart for Cannondale
Return on Equity=7.89%
Return on Assets
3.65%
Profit Margin:
Earnings as a
Percentage of Sales
3.31%
Multiplied by
Multiplied by
Assets/Equity =
$162,379/$75,010 = 2.164
Total Asset Turnover
1.10 times
Cannondale’s Du Pont chart shows us how the profit margin, the total assets turnover and use of debt
interact to finally determine return on equity. Cannondale achieves lower ROE than the rest of the
industry. Cannondale should work toward improving its profit margins to improve ROE. Despite the fact
that Cannondale has a big debt leverage (greater risk) and therefore high equity multiplier its ROE is low.
Low profit margin combined with slowing demand (maturity of the industry) and high selling
administrative expenses and interest expenses may turn profits into losses. Cannondale has big cash
outflows for research and development and capital expenditure and also high debt. If competitors will be
able to develop mountain bicycle (a large segment of the market) of similar feature (quick diffusion of
know-how) at lower prices Cannondale’s sales growth can further decline. At this point of analysis we
can say that Cannondale should move either toward improving assets turnover and overall efficiencies in
their value chain to lower the cost or make strategic move that would allow them to rise the price of their
bikes by introducing focused differentiation strategy based on market niche.
115
C) Trend Analysis
Cannondale(Net Profit Margin)
10
8
6
%
4
Net Profit
Margin (%)
2
0
-2
1991 1992 1993 1994 1995 1996 1997 1998 1999
-4
-6
Net profit
10years
average
-8
Cannondale achieves good profit margin between 1995-97. Combined with rapid
revenue growth years this is good years for Cannondale. Overall however Cannondale has low
2.44(10 years average) profit margins.
Profitability ratios
25
20
Debt/ Equity
15
Return on Equity (%)
10
Return on Assets (%)
5
0
1995
1996
1997
1998
1999
years
116
As Net Profit Margin is sliding down return on equity and assets are declining and leverage is
rising.
Ratios values
Valuation ratios(1995-99)
18
16
14
12
10
8
6
4
2
0
16.9
16.4
14
13.5
Avg P/E
11.1
Price/ Sales
Price/ Book
2.76
0.82
1995
2.55
1.19
1996
1.89
0.95
1997
1.49
0.68
1998
1.14
0.48
1999
Years
Valuation ratios decline as a result of market uncertainty.
7.
Top Management’s values and perspectives
Joseph Montgomery has been Cannondale’s only CEO since established. His ambitions,
business philosophies, and ethical beliefs reflect to Cannondale and generate the company’s
competitive abilities. He believes that the difference between success and failure is the last 5%. He
concentrates on the detail. In fact, when he entered the cycling business, he had a significant financial
problem. But his belief worked out and brought a success to his business. In other word, it can be said
that he is a risk taker. He is willing to be on the edge between success and failure and make a decision
based on “just and right.”
He also believes that the innovation is a key success factor in the high-end bike market and
continuously improves everything, such as technology, products, manufacturing processes, and
overall operation. He encourages employee to be innovative and entrepreneur. For example, he
focuses on devising flexible manufacturing processes. The manufacturing system is a competitive
117
capability to deliver innovative, quality products to the market quickly. Cannondale’s improvement
enables the company to gain competitive capabilities that is able to be a leader in the industry.
Organization’s culture
8.
An organization’s policies, practices, philosophical beliefs, and ways of doing things combine to
create distinctive culture. Strong culture is most likely to shape the company action or chose of
strategic moves. Since the company’s founding, in 1972 Joseph Montgomery shaped his leadership
and culture style in the company. He had a vision to build a company that cares about each other, he
shareholders, customers and vendors. The company put 90% of the profit back for future growth and
the balance they share with all their employees. Cannondale creates opportunities for the consumers,
stakeholder, and suppliers, and creates a challenge to their competitors. Cannondale is continue focus
on customer needs by using newest technological innovation and advantages in the operation
processes and services.
Cannondale philosophy is:
-
Competitive and entrepreneurial
-
share profits with all employees
-
concentrate on detail
-
continuously improve
-
govern by what is just and right
"We approach everything we do - and I mean everything - with an eye toward innovation. And do
a large extent, it's the innovations we've developed on the design and manufacturing side that allow us
to continually bring these exciting new products to market." (p130). The company was committed to
maintaining its competitive position by supporting research into further improvements in its
manufacturing process and drastically reducing the time required to design and produce new bike
model.
Volvo/Cannondale mountain bike racing team was closely tight to their R&D process, for
testing prototypes and finish products. The R&D vice president explain the company’s view of the
118
R&D function. "Most bike companies view racing as a marketing tool, and while we enjoy the
exposure the ream provides, for us it's primary a research and development tool." (P134).
Continuously improvement, respects and care one another is the most important issue that is
in the company culture.
119
IV. Summary of Internal Factors
Strength
Competitive
capabilities
 A powerful narrow
differentiation strategy
supported by skills and
expertise in key
functional area
 Cannonade’s proven skill
in continuous products
innovation
 Flexible manufacturing
capabilities suited for
production of high-end,
high-quality bikes
 Superior capability to
deliver new products fast
to the market supported
by quick design-tomarket times
 US based manufacturing
capabilities of frames
 Existing top–notch
competencies in design
and manufacturing that
can be utilized in bike
related industries(offroad motorcycles)
 A widely recognized
market leader in high-end
bikes with an attractive
base of loyal customers
 CAD/CAM systems
 Capability to concentrate
purchasing power on its
suppliers
Strategic implications
Weaknesses
 Sales growth faster that the industry average
 Better than average design-market times
 Popular Science, Sport Illustrated
recognition for innovations
 Loyal and stable customer base
 Fast growing international sales
 Entering off-road motorbike industry
 Production
processes not
suited for
production of
low-end bicycles
 Lack of global
distribution
capabilities in
the low-end
segment of the
market
 Lack of
production
capabilities in
Europe in the
light of fast
growing demand
and existing cost
advantages.
120
Strategic
implications
 Outsource
production of
low-end
bicycles
 Develop
linkages with
foreign
distributors of
low-end
bicycles to
increase your
scale
 Build
production
facilities in
Europe in the
low capital
intense country
Value chain
Functional Areas
 Genuine, innovating
marketing capabilities
 Existing ability to deliver
custom-made bicycles
 Higher that rivals degree
of differentiation
supported by greater
degree of Vertical
Integration
 R&D with the pipeline
full of innovative frames,
components, suspension
systems and accessories
 Strong global distribution
capabilities
 Customer service equal
or better of leading
companies in the highend segment
 Ability to charge
premium prices for
custom made bicycles
 Market share of 20% in
the high-end of the
industry
 Learning curve effects
 Vertical integration
 Timing considerations
associated with a first
mover advantages.
 Production
 Declining assembly time of bikes(17 to 3
days)
 Continuous production process improvement
to achieve higher efficiencies
 Further strengthen buyer-supplier relation to
create alliances to increase design to markettimes
 Trim marginal products if they start bringing
losses
 Expand into off-road motor bike industry
 Continue improvements in manufacturing
121
 Marketing
 R&D
 HR
Strategic Position
 Narrow differentiation
strategy
processes
 Use your vertical integration to increase
differentiation
 Increase application of e-commerce
 Hire the best professionals for your R&D
department
 Increase sales of custom assembled by
significant increase of customization of
your bike combined with reduction in prices
 Communicate how the products attributes
aim at catering to niche member tastes.
 Remain totally dedicated to serving niche
better that your competitors
 Increase customization and allow your
customers to assemble bikes from
components they choose.
 Develop superior MIS systems to keep a
close track of your value added in your
business model with Vertical Integration
component.
 Increase marketing research to assess
features and attributes that appeals to your
customers
 Remain totally dedicated to narrow niche
while using your existing capabilities in
design to enter the low-end of the market
 Do not blunt the image of Cannondale. Use
different distribution channels and different
name for low-end bikes
 Work with all your stakeholders to develop
unique bled of skills and expertise. Be able
to simultaneously deliver better products
(more features) at competitive prices as
competition stiffens at the high end.
 Launch new projects and reward successful
pioneers.
122
Financial Position
 High market share of
high end market of 20%
in the USA
 Faster than average
growing sales in Europe
Management
Personal
Ambitions
 Imagination and
aggressiveness in
perusing opportunities
 Stressing Joseph
 Develop cross functional team that monitors
value chain and concentrate only on cost
drivers to minimize your inefficiencies
 Aggressively enter sleepy market for offroad motorbike industry. Quickly gain
leadership position.
 Continue to broaden distance between rivals
in the market position.
 Increase sale by addressing simultaneously
two markets: high-end and low-end
 Leader in high-end of the bike industry
 Recognition of prestigious newspaper as the
pioneer in product innovation
 High innovation and creativity among
123
 Low Profit
margins of 3.3%
(1999)
 Low MVA
75,010,000(shar
eholders equity
investment)=$17
0,000
 High Debt to
Equity
 Total Debt
/Equity=
113.8%
 Aggressively
enter off-road
motorbike
industry to
rejuvenate
growth
 Increase
customization
in the high end
combined with
higher
efficiencies in
your value
chain to
command
higher margins
and increase
overall Profits
 Build strong
line of
inexpensive
bicycles to use
your
capabilities in
design and
increase profits

Cannondale’s
culture




Montgomery’s attention
to detail
Proven management
ability to overcome
financial problems
Promotion from within
whenever it is possible
Cultivation of
cooperation
Top managers are
focusing ultimately
focused on achieving
goals for the organization
Govern every deed by
what is “just and right”
workers
 New revolutionary designs and ideas
 Higher than expected sales of MX400
 Cadre of dedicated employees with positive
attitudes
 Faster that average design-to-market times
 Superior ability to achieve objectives
 Cannondale is a pioneer in product
innovation
 Higher degree of collaboration among
employees
124
E. Strategies
I. Generic Strategy
Cannondale Employees a focused differentiation strategy which concentrate attention on a narrow
piece of the total bicycle market. Focused differentiation is presented where buyers' needs and preferences
are distinctively different from the rest of the market. It targets to offer features and attributes that appeal
to the tastes and/or special needs of the targeted segment. Because of the use of this strategy, Cannondale
is able to command a premium price for its products, increase unit sales of high performance aluminum
bikes and gain buyer’s loyalty to its brand. Cannondale makes it hard for others to copy their
differentiation strategy by developing economy of scale in the manufacturing of light weight Aluminum
based frames and by keeping up with consumers increased expectations, demands and needs, and by
keeping up with technological advancements. Manufacturing/assembly is made easier by Cannondale use
of CAD/CAM technology and flexible manufacturing.
Competing with a focused differentiated strategy enables Cannondale to take on most
opportunities in the high end niche of the industry but it forces Cannondale to acquire capabilities that
allows them to reduce assembly cost and increase features and overall product quality. It also forces
Cannondale to maintain their substantial competitive capabilities to maintain their leadership position in
the high-performance bicycle industry. Cannondale's product development strategy is directed at
continually making bicycles lighter, stronger, faster, and more comfortable for the consumers. Their sales
and distribution strategy is based on selling their bicycles through specialty bicycle retailers who can
provide knowledgeable sales assistance regarding the technical and performance characteristics of its
products and offer an ongoing commitment to services. Cannondale's overall business strategy has a
significant vertical integration component. The company manufactures its own frames in the United
States and assembles a finished product at their plant located in Bedford, Pennsylvania. Cannondale also
use their manufacturing facilities in Bedford, Pennsylvanian for motorcycles, bicycle components,
accessories, and clothing.
125
II. Strategy to Gain and Maintain Competitive Advantage
In summary, Cannondale strategic objective focus on the market share, industry ranking, product
quality, and best/differentiated value for customers. Within these boundaries Cannondale employees
creative offensive strategies, mainly based on best customized attributes, and defensive strategies to
protect their competitive advantages which are mainly a result of their offensive strategic moves. The
main purpose for Cannondale defensive strategy is to defend themselves against threats and to weaken the
impact of any attacks that may occur. Threats that apply to Cannondale are the fierce competition among
rivals, bargaining power of buyers, effects of a maturing market and rapid change in technology in
production and manufacturing. One of Cannondale offensive strategy the use of flexible manufacturing
processes that enabled them to deliver those innovative, quality products to the market quicker than rivals
and them back them up with excellent customer service. Cannondale uses innovation both, as a defense
against the rapid change in technology in production/manufacturing and increase consumer demand and
as and as on offside move when launching new innovative product to the market. New products are
introduced to the market as a defense against the treat of staying back in the industry. Their vertical
integration component of their strategy is a defense against the power of the Asian producers and exporter
of bicycles. Adjusting to the market condition and consumer needs and to the market trend is also part of
Cannondale's defensive strategies. Cannondale uses their Technological know how and their
marketing/promotions skills to be a first-mover and trendsetter.
126
III. Matching a Strategy to Cannondale’s position
MATURITY
Industry
Environment
Key Issues
Strategic Alternatives and
Moves, Pitfalls and
Hurdles
Cannondale should put
more emphasis in reducing
they total debt: This will
reduce their fixed cost and
thereafter their total cost of
production. This will also
position them in a better
financial position.
Cannondale should use
their internal and external
resources to develop ways
of decreasing costs even
more and thereafter be able
to realize normal profits in
a market of declining
profitability. Cannondale
should capitalize the low
cost and high profits tool,
such as is the use of the
Internet. Cannondale
should establish specific
objective for their cost
structure. Cannondale
should start either
outsourcing a part of their
production of bike frames
and/or opening a plant were
labor and/or raw material
and equipment are less
costly.
Position
Decreased Overall
Cannondale currently
Industry Profitability competes in a mature market.
This market has many
competitors who must stay on
top of delivery best value to
their customer if they are to be
successful and profitable.
Cannondale specifically
competes in the higher
end/high-performance bike
segment. Cannondale has
acquired a competitive
advantage in their learning
curved. Advantage, which
they use to remain the
competitive and an industry
leader. Because of their
position on the learning curve,
Cannondale is able to launch a
number of offensive strategic
moves. Through Cannondale’
competitive capabilities, the
company is able to keep up
with the increase consumer
demands. Cannondale
strategy and overall strength
have position the company as
the number 1
marketer/manufacturer in high
performance Aluminum bikes
worldwide.
127
Strategic Recommendations
Cannondale should increase their
expending in marketing in
emerging markets, in paying of
their debt and in developing
economy of scale in cost of
production. Also they should
develop a better E-commerce
strategy and provide more
internet services.
Lower Cost of
Manufacturing
Capabilities
Cannondale position in the overall
total cost of manufacturing is very
competitive. The company has
developed process to make the
company production more efficient
and less costly (CAD & CAM). As
the market continues to mature, the
need to develop economy of scale
in cost of manufacturing
capabilities will be essential; only
the best cost, and value providers
are going to be able to survive or to
make a reasonable profit.
Cannondale currently use
differentiation as a defense
mechanism against the market
maturity. Their current level of
debt makes their financial position
weaker and if they are to position
themselves in a better-cost
structure, they must reduce their
debt to equity ratio immediately.
128
Cannondale might want to
try to advertise the use of
their innovative web site for
the purpose of ordering
customized bikes (this will
increase their profit
margin). Cannondale
should create strategic
allegiances with their
supplier from Asia and stop
incurring in any additional
debt. If Cannondale is to
continue the use of
Differentiation to defend
against the impact of
market maturity and
increase consumer demand,
Cannondale should improve
their quality assurance
program their customer
satisfaction program and
additional emphasis in
Cannondale should work on
alliances with some of their
supplier to reduce cost. They
should outsource some of their
frame manufacturing or open a
plant in a lesser costly structured
plant. Possibly in south America
or Asia.
MATURITY
Advanced Use of Ecommerce
We are now on an era of rapid
change and faster communications
and commerce. Consumers have the
power of technology, All the
available through their personal
computing devices. Even though
the use of E-Commerce, when
buying a high-performance bike has
not really yet kick-in with
substantial force, it is expected that
as the market matures, and the
average consumer gain additional
knowledge and prices go down in
this market segment. They ought to
buy their high-performance bike
through their computer much often
to get a more competitive price.
Cannondale should put much more
emphasis in developing an even
better web site and a much better Ecommerce strategy. They should
attempt to be the industry leader in
the use of E-commerce now for the
sales of customized bikes and in the
future when most sales of all types
in the high-performance bikes, will
be mainly done through Ecommerce.
129
R&D. Cannondale should
take advantage of they
opportunities arising from
emerging markets and
eastern Europe. They must
develop additional
capabilities to be the leader
in emerging markets.
IV. Summary of the strategies
External Factors
Opportunities/Threats
Opportunities
- Faster then US growth of
international markets.
- Expend domestic market share.
- Locate manufacturing plant in
other countries with lower
labor cost than in US.
- Societal values and lifestyles in
which customers turning
toward outdoor activities in
their leisure time and have
disposable income to spend.
- Market size
- E-commerce
- High demand for juvenile
bicycles.
- Low rivalry in the motorcycle
industry.
Threats
- Maturity of the US market.
- Low industry profitability.
- Exit barriers, which required
large capital to leaving the
market in terms of
stakeholders’ equity.
- Economic slowdown.
- Pace of technological
innovation in product
introduction.
- High Rivalry
- Fast changing trends and
lifestyle.
- Fast diffusion of know-how.
Competitive Advantages
- A powerful narrow
differentiation strategy
supported by skills and
expertise in key functional
area
- Cannonade’s proven skill in
continuous products
innovation
- Flexible manufacturing
capabilities suited for
Internal Factors
Strength/Weaknesses
Strengths
- A powerful narrow
differentiation strategy supported
by skills and expertise in key
functional area.
- Flexible manufacturing
capabilities suited for production
of high-end, high-quality bikes.
- CAD and CAM technology.
- Higher that rivals degree of
differentiation supported by
greater degree of vertical
integration.
- Brand name recognition.
- Cannonade’s proven skill in
continuous products innovation.
Weaknesses
- Production processes not suited
for production of low-end
bicycles.
- Low profit margins of 3.3%
(1999).
- One plant in light of global
competitors.
- High debt leverage.
Strategic Alternatives
Cannondale should increase their
expending in marketing in
emerging markets, in paying of
their debt and in developing
economy of scale in cost of
production. Also they should
develop a better E-commerce
strategy and provide more internet
services.
Cannondale should work on
130
Testing Cannondale’s
Strategy
Cannondale strategy has
placed their company in a very
strong market position.
Cannondale has sustainable
competitive advantages.
In the high-end aluminum
niche of the bike industry,
Cannondale has market
leadership.
Cannondale strategy matches
the industry and the
competitive conditions, market
opportunities and threats, and
other aspects of the
enterprise’s external
environment (only in high-end
market niche).
The personal ambitions,
business and ethical beliefs of
Cannondale executives are
stamped in the strategy
making, implementation and
execution in Cannondale
corporation.
Recommendations
(Include the pros and cons of
each recommendation)
- Outsource production of
low-end bicycles.
- Develop linkages with
foreign distributors of lowend bicycles to increase
scale.
- Open manufacturing plant
in Eastern Europe and
capture more market share.
- Aggressively enter off-road
-
-
-
-
-
-
-
-
-
production of high-end, highquality bikes
Superior capability to deliver
new products fast to the
market supported by quick
design-to-market times
US based manufacturing
capabilities of frames
Existing top–notch
competencies in design and
manufacturing that can be
utilized in bike related
industries(off-road
motorcycles)
A widely recognized market
leader in high-end bikes with
an attractive base of loyal
customers
CAD/CAM systems
Capability to concentrate
purchasing power on its
suppliers
Genuine, innovating marketing
capabilities
Existing ability to deliver
custom-made bicycles
Higher that rivals degree of
differentiation supported by
greater degree of Vertical
Integration
R&D with the pipeline full of
innovative frames,
components, suspension
systems and accessories
Strong global distribution
capabilities
Customer service equal or
better of leading companies in
the high-end segment
Ability to charge premium
prices for custom made
bicycles
Market share of 20% in the
high-end of the industry
alliances with some of their
supplier to reduce cost. They
should outsource some of their
frame manufacturing or open a
plant in a lesser costly structured
plant. Possibly in south America or
Asia.
Implementation
Cannondale implementation process should be as follows:
For expanding dirt bike segment:
- Cannondale top management should develop a separate business
strategy and a separate top business management team to run this
131
motorbike industry to
rejuvenate growth
- Increase customization in
the high end to command
higher premium prices and
increases Profit margins.
- Build strong line of
inexpensive bicycles with
different brand name and to
use the capabilities in
design and increase profits.
Evaluation and Control
Cannondale should measure
the success of their strategic
moves: introduction of lower-
end bikes, outsourcing low-end
bikes production, aggressively
expanding into dirt bikes and
custom built bikes and
expanding into European
markets, by measuring
improvement in market share,
product awareness, and
customers’ preference. (Brand
awareness and preference
could be done through
customers surveys and
For aggressively expand into Custom-made bikes:
interviews)
- Top management should put together a team of marketers and an
Cannondale top management
operations manager to run this project.
should monitor economic
- Reassess the Value chain to increase total value delivered to
conditions and should
consumers and reduce cost of production of various small batch
anticipate economic
sizes or customized products.
slowdowns especially before
- Work with CAD/CAM technology to further Increase efficiencies in implementing any strategic
the development process for other new parts to make Cannondale
moves. Cannondale should set
customized bikes an attractive choice for consumer in the industry
specific goals and objective for
and to reduce tooling change over costs and reduce the time of
the top management of the
production.
other business segments.
- Built to custom-fitted bikes to introduce to all their 60-plus
Develop training programs for
international markets its bicycles are sold.
employees in Poland and
related business segments.
For Introduction Low-end bikes:
Cannondale you have in place
- Located the best production/manufacturing companies to outsource programs for awarding salary
the production of their low end product line. The companies must
increases, bonuses and nonhave the capabilities to use Cannondale processes.
monetary recognition to
- Create strategic alliances with these manufacturers and contract
motivate great strategy
with them for a least 3-5 so they can’t make replica of Cannondale
implementation and execution.
low end product line.
- Putting together a strong management team who is able to execute
and implement this strategy.
- Provide special training to the companies which are going to be
doing the outsourcing
- The different name should be innovative and attractive: Velox
-
business.
Contracting with suppliers of dirt bike parts to gain significant
discounts in purchasing.
Putting together a strong marketing team to work with dirt bike
dealers and/or sellers in the promotion of Cannondale new dirt
bikes.
Also the marketing team should work with motorcycle magazines
and contract with the best-known and viewed magazines to
extensively promote this new line of dirt bikes.
Cannondale should dedicate a portion of their web site primarily for
dirt bikes sales, marketing, and customer satisfaction programs.
For Lower-priced juvenile bicycles.
- Out source the production and manufacturing of these product to the
same
- Asian company or companies which will be manufacturing Velox.
(Cannondale Low end bikes recommendation)
- Focus on teenage generation when producing this lower end
Cannondale bikes.
- Product features should be better than low-end bikes but not too
similar high-end bikes.
- For R&D: Research Teenager's preferences and market trend.
Create innovative and attractive products. Improve manufacturing
132
-
system of outsource companies to product the bikes more
efficiently.
Price range should be from $250-$400.
For aggressively expanding into European Market:
- Open a plant for high-end bicycles in Poland.
- Use Polish workforces for administration and operation sections and
bring the top management from the US.
- Produce frames in Poland and outsource other component from
other companies in Europe or Asia.
- Establish the dealer network for the European customers.
- Create marketing and sales promotion programs for Eastern Europe
market. Examples: Web site in different languages.
133
F. Recommendation and Implementation/Evaluation and Control
Strength/opportunity
1. Cannondale's Know-how and manufacturing skills/ capture growth of related industry.
Action:
Cannondale should continue to diversify their business into the dirt bikes market. Cannondale should
introduce at least three dirt bikes to their dirt bike product line by April of 2003.
Implementation:
1) Cannondale top management should develop a separate business strategy and a separate top business
management team to run this business.
2) Contracting with suppliers of dirt bike parts to gain significant discounts in purchasing.
3) Putting together a strong marketing team to work with dirt bike dealers and/or sellers in the promotion
of Cannondale new dirt bikes.
Also the marketing team should work with motorcycle magazines and contract with the best-known
and viewed magazines to extensively promote this new line of dirt bikes.
4) Cannondale should dedicate a portion of their web site primarily for dirt bikes sales, marketing, and
customer satisfaction programs.
5) Cannondale should put significant R&D toward the development of these new dirt bikes.
C&E:
Cannondale top management should set specific expectations for the top management team chosen to run
the dirt bike business part of Cannondale.
The top management of the dirt bike business part of Cannondale should set specific expectations for the
marketing team about the way they would like to appear on and to what extend they should appear in the
motorcycles magazines. Cannondale top management and the dirt bike top management should both keep
on top of the overall performance of their web site for dirt bikes.
Cannondale top management should make available to the dirt bike top management sufficient resources
to develop this business part.
134
Cannondale top management should evaluate the performance of the top management of dirt bikes
business by evaluating the acceptance of their products in the market, by the impact such sales for
Cannondale, by the quarterly growth rate in market share in the motorcycles industry, and by the revenue
growth rate.
Strength/Opportunity
2. Manufacturing know-how and technology to produce high-end bikes/Growing demand in Europe.
Action:
Expand to new market in Eastern Europe.
Implementations:
1)
Open a plant for high-end bicycles in Poland.
2)
Use Polish workforces for administration and operation sections and bring the top management from
the US.
3)
Produce frames in Poland and outsource other component from other companies in Europe or Asia.
4)
Establish the dealer network for the European customers.
5)
Create marketing and sales promotion programs for Eastern Europe market. Examples: Web site in
different languages.
Control/Evaluation:
Top management should keep track of market share growth in a monthly basis.
Cannondale should evaluate consumer acceptance of this strategic move through customer surveys and
interviews.
Top management should monitor economic conditions and economic slow downs.
Top management should develop a training program for employees and check their productivity and
performances.
135
Strength/Opportunity
3. CAD/CAM system and flexible manufacturing/ expanding the company’s product line to meet a
broader range of customer needs.
Action:
Aggressively expand into custom bike sales, manufacturing and distribution.
Implementation:
1) Top management should put together a team of marketers and an operations manager to run this
project.
2) Reassess the Value chain to increase total value delivered to consumers and reduce cost of production
of various small batch sizes or customized products.
3) Work with CAD/CAM technology to further Increase efficiencies in the development process for
other new parts to make Cannondale customized bikes an attractive choice for consumer in the
industry and to reduce tooling change over costs and reduce the time of production.
4) Built to custom-fitted bikes to be introduce to all their 60-plus international markets its bicycles are
sold (it is already active in the USA)
5) Lowering their charge for custom fitting from a fee of $400 to a more attractive fee of $250 via phone
or special order and $225 via the Internet.
6) The Operations manager should develop a different sales and distribution strategy for these products.
7) Marketing team should advertise their custom made bikes by contracting with Cannondale specialty
bike dealers, via catalogs and bulletin available in bike racing events, and by promoting the use of
their innovative web site for the purpose of ordering a built to custom-fitted bike. Advertising should
be done extensively through the media, point-of-sale literature, banners, product packaging, and
product catalogs. Catalogs should be available also by calling an 1800 number for Cannondale. The
catalogs should be delivered to consumers within 3 business days. Order for customized products
should be available to be done by phone, using item numbers from the catalog.
8) Reduce time of delivery by 3 weeks within 6 months.
136
C&E:
Cannondale's top management should keep track of revenue growth rate in a monthly basis for the first
twelve months and thereafter review sales performance with the operations manager in a quarterly basis.
Cannondale should evaluate customer acceptance of this strategic move through customer surveys and
interviews; after system have been in place for a least 1-quarter.
Within three quarter, Cannondale should measure if the strategic move is worthwhile by analyzing
whether or not financial objectives are being met and by the rate of growth in revenue and increase
overall profit margin for the company.
Cannondale's top management should evaluate how successfully their marketing and operations
management team are executing/implementing the strategy through out the implementation process by
monitoring:
-
How well they are allocating company resource toward the implementation of the strategy
-
How well staff workers are working to implement the strategy
-
How well they tie the reward structure to the achievement of targeted results
-
How well they institute best practices programs for continuous improvement.
Monitoring revenue growth rates.
Cannondale top management should measure the operations mgmt and marketing team performance by:
-
Evaluating employees satisfaction (through surveys and interviews)
-
Evaluating customer loyalty and market niche leadership (every quarter do a detailed survey of
customer satisfaction to detect if they switch to another brand and to see what they liked and did not
like about their custom-built bikes)
-
Evaluating how operating management exert his/her internal leadership needed to drive
implementation forward and to keep improving on how the strategy is being executed.
137
Strength/Threat
1. High technology: Product innovation capabilities/ mature market effects
Action:
Cannondale should make a lower end line of product under a different name.
Implementation:
1) Located the best production/manufacturing companies to outsource the production of their low end
product line. The companies must have the capabilities to use Cannondale processes.
2) Create strategic alliances with these manufacturers and contract with them for a least 3-5 so they can’t
make replica of Cannondale low end product line.
3) Putting together a strong management team who is able to execute and implement this strategy.
4) Provide special training to the companies which are going to be doing the outsourcing
5) The different name should be innovative and attractive: Velox
C&E:
Cannondale should assess the fit that the joint venture or outsourcing company has with Cannondale.
Cannondale top management should set specific goals for the management team chosen to implement this
strategic move and should evaluate them on how solid their strategic moves are and how stable are the
results.
Cannondale should strictly measure the success of the strategic move through the financial performance
of this business segment.
Cannondale top management should schedule monthly meeting to discuss (set up and achieve) objectives
and goals.
138
Weakness/opportunity
1. E-commerce capabilities/ Pursuing dramatically cut costs and pursuing new sales growth opportunities.
Action:
Cannonade should develop better web site features and a much better E-commerce strategy.
Implementation:
1) Management should get together to develop a better E-commerce strategy
2) Hire 20 more IT engineers to help with enhancing their web site.
3) Select and appoint members of management to run their e-commerce operations
4) Develop a different e-commerce marketing strategies to target different market segments
5) Contract with AOL and Netscape to promote new Web site
Control and evaluation:
-
Measure sale performance generated from e-commerce
-
Do internal audits to evaluate investments
-
Do customers survey to evaluate the work of engineers
-
Test web sites internally to evaluate accessibility and effectiveness
-
Do detailed analysis of the results in sales growth in different segments of the market.
Weakness/opportunity
2. Financial position/ ability to grow rapidly because of sharply rising demand in one or more market
segments
Action:
Cannondale should use more of their profits toward paying some of their debt. They should also work in
increasing their production capabilities and revenues.
Implementation:
1) Specific marketing and sales emphasis for these markets (strategic marketing/sales moves).
139
2) Create a program were funds can be obtained towards the payment of debt and corporate financing.
Analyze all part of the market environment such as conditions and needs.
3) Communicate and set the objective of reducing debt to equity ratio to a more competitive position for
the industry. Everyone within Cannondale should fully understand the importance of this strategic
move. And they should be motivated to pursue this for the company on their own
4) Communication of strategic intend and objective to middle management and plant managers. They
should develop their own strategic plans for maximizing productions.
5) Offer additional stock only if it really necessary.
6) Cannondale top management should sell some of their most insignificant assets and/or less important
assets to pay part of their debt. They should strive to use less debt for financing of project and use
more of their profits towards paying for debt.
C&E:
Measure the impact of their strategic move in the company – whether negative or positive.
Cannondale top management should strive to meet their objective in debt reduction through the use of
best practice. (Whatever has the best positive outcome and the least negative impact)
Measure the success of their strategic moves by measuring the trend of improvement in their financial
position. If they are to issue additional stock, they should have stockholders meeting and explain their
strategic intend.
Weakness/threat
1. Old machinery/ Rapid change in technology in production and manufacturing.
Action:
Cannondale should take immediate action in replacing their older machinery with more flexible and
technologically advance machinery.
Implementation:
140
1) Sell their older machinery or write them off. Also they can attempt to update their machinery before
doing anything else.
2) Forecast all negative aspects of replacing their older machinery with new ones and only do so when
they are able to overcome such aspects.
3) The actions and decisions for replacing older machinery should only come from top management.
4) Plan capital expenditure for purchase or updating old machinery, which are feasible to be updated and
make such funds available.
C&E:
Cannondale's cross-analyze the effects of replacing the old machinery with their financial position.
Monitor negative and positive results during the sale or write off of the older machinery.
Prepare the company to overcome any major threats during the transition from old to new machinery.
After re-analyzing this recommendation and the implementation of this strategy. To better
implement this strategy the new implementation process should be as follows:
Weakness/Threat
2. Limited competitive scope/ weak economy (economic conditions)
Action:
Cannondale should make a lower end line of product to target low-end buyers that might be able to buy
the products even during weak economic conditions and/or to target high-end buyers that want to buy
good quality bikes at a lower price for their children or family.
Implementation:
1) Out source the production and manufacturing of these products to the same Asian company or
company which will be manufacturing Velox. (Cannondale low-end bikes recommendation)
2) Focus on teenage generation when producing this lower end Cannondale bikes in order to gain
additional market share in the industry.
141
3) Price range should be from $250-$400.
4) Product features should be better than low-end bikes but not too similar high-end bikes.
5) For R&D: Research teenager's preferences and market trend.
6) Create innovative and attractive products. Improve manufacturing system of outsource companies to
product the bikes more efficiently.
C&E:
Set specific and realistic objectives and goals: Cannondale top management must set specific objectives
and goals for production and sales. Cannondale top management must schedule monthly meeting to
discuss about how well they achieve those objectives and goals.
Track and analyze sales performance: Cannondale must strictly measure the success of this strategic move
through the monthly sales performance and consumers' acceptance.
Monitor customer surveys: Cannondale must monitor customer satisfaction and brand recognition through
surveys to improve products. For example, by including surveys as part of the mail-in warranty
registration.
142
Appendix A (Consolidated Financial Statement)
ANNUAL INCOME STATEMENT
12 MONTHS
12 MONTHS
12 MONTHS
Net Sales
12 MONTHS
12 MONTHS
ENDING
ENDING
ENDING
ENDING
ENDING
06/28/1997
06/27/1998
07/03/1999
07/01/2000
06/30/2001
162,496
171,496
178,765
162,450
146,791
162,496
171,496
178,765
162,450
146,791
101,334
110,113
114,627
112,100
110,823
35,707
39,361
42,545
41,649
36,273
3,576
6,750
10,222
8,470
6,639
Stock Option
Comp.
0
0
0
0
0
Termination Costs
0
0
0
0
0
Total Expenses
140,617
156,224
167,394
162,219
153,735
Total Revenue
Cost Of Sales
Sell./Gen./Admin.
Research &
Develop.
143
Interest Expense
-1,574
-1,995
-4,557
-6,308
-6,738
843
653
1,160
1,883
346
21,148
13,930
7,974
-4,194
-13,336
7,642
4,578
2,051
-1,902
6,431
Income After
Taxes
13,506
9,352
5,923
-2,292
-19,767
Minority Interest
0
0
0
0
0
Preferred
Dividends
0
0
0
0
0
Pri/Bas EPS Ex.
XOrd
1.564
1.108
0.788
-0.306
-2.628
Extraordinary Item
0
0
0
-234
-552
Pri/Bas EPS In.
XOrd
1.564
1.108
0.788
-0.337
-2.701
Primary/Basic Avg
Sh
8,638.00
8,442.00
7,518.00
7,497.00
7,522.00
Foreign Cur./Other
Income Before
Taxes
Income Taxes
144
Common
Dividends/Shr
0
0
0
0
0
Dilution
Adjustment
0
0
0
0
0
8,916.00
8,682.00
7,686.00
7,497.00
7,522.00
Dilutd EPS Excl
XOrd
1.515
1.077
0.771
-0.306
-2.628
Dilutd EPS Incl
XOrd
1.515
1.077
0.771
-0.337
-2.701
Diluted Average
Shs.
Note: Units in Thousands of U.S.
Dollars.
145
ANNUAL BALANCE SHEET
As of
As of
As of
06/28/1997
06/27/1998
07/03/1999
As of
As of
07/01/2000
06/30/2001
ASSETS
Cash
5,521
3,031
3,300
5,064
2,155
Accounts Rcvbl.
0
0
0
60,300
55,032
Allowance
0
0
0
-10,076
-11,270
Accounts Rcvbl.
61,272
61,746
59,379
0
0
Inventories
30,105
39,420
33,165
40,413
37,759
2,386
4,426
4,827
3,300
2,773
Interest Rcvble.
0
23
827
1,318
0
Deferred Taxes
2,623
2,172
2,749
5,571
0
Total Current
Assets
101,907
110,818
104,247
105,890
86,449
1,324
1,270
1,841
1,796
1,725
Prepaid Expenses
Land
146
Build. & Equip.
8,700
18,328
22,868
23,148
23,491
24,388
33,366
39,633
45,889
48,627
Construction
6,493
1,577
3,369
1,427
790
Depreciation
-17,800
-21,572
-26,334
-32,146
-39,005
0
2,688
12,954
13,197
1,441
2,272
3,002
3,801
5,706
4,273
0
2,800
0
0
0
Total Assets
127,284
152,277
162,379
164,907
127,791
LIABILITIES
Accounts Payable
12,330
16,747
17,329
15,912
15,351
Revolving Credit
1,022
2,141
882
2,235
866
Taxes Payable
2,946
1,732
2,252
307
294
Oth. Curr. Liab.
7,851
8,780
5,626
4,879
5,471
562
461
456
4,577
5,004
0
1,982
2,808
2,524
2,889
Total Current
Liabs
24,711
31,843
29,353
30,434
29,875
Long Term Debt
20,319
40,352
55,997
63,363
46,434
Factory & Equip.
Notes Receivable
Other Assets
Cessna Jet
Cur.Port.LT Debt
Acrd. Warranty
147
Subord. Debt
0
0
0
0
2,000
Total Long
Term Debt
20,319
40,352
55,997
63,363
48,434
Dfrd. Income Tax
339
1,569
1,619
0
0
Other Liabs.
294
275
400
424
427
45,663
74,039
87,369
94,221
78,736
0
0
0
0
0
Common Stock
87
87
88
88
88
Paid-In-Capital
56,860
57,303
57,815
57,935
58,423
Retained Erngs.
26,053
35,405
41,328
38,802
18,483
0
-12,417
-20,162
-20,162
-20,162
-1,379
-2,140
-4,059
-5,977
-7,777
81,621
78,238
75,010
70,686
49,055
8,687.62
8,080.69
7,491.41
7,515.23
7,543.36
Total Liabilities
SHAREHOLDERS EQUITY
Pref. Stock
Treasury Stock
Trans. Adjust.
Total Equity
Shares
Outstanding
Note: Units in Thousands of U.S.
Dollars.
148
ANNUAL CASH FLOWS
12 MONTHS
12 MONTHS
12 MONTHS
12 MONTHS
12 MONTHS
ENDING
ENDING
ENDING
ENDING
ENDING
06/28/1997
06/27/1998
07/03/1999
07/01/2000
06/30/2001
OPERATING CASH FLOWS
Net Income
13,506
9,352
5,923
-2,526
-20,319
Depreciation
3,211
4,054
5,782
6,901
8,635
0
0
0
494
552
Provision
Reserve
Prov. Inventory
5,762
7,141
9,498
11,027
11,360
1,484
1,425
2,309
2,157
4,437
Foreign Cur.
Trans.
Deferred Taxes
107
642
-865
-554
-711
-442
425
-129
-1
6,197
0
0
105
0
0
0
0
0
0
400
-1
16
122
129
-40
-17,399
-8,894
-8,151
-3,064
-7,477
Extra. Item/Other
Stock
Compensation
Beneficial
Conver.
Non-Cash Items
Accounts
Receivable
149
Inventory
-1,975
-11,589
4,040
-9,893
-3,043
Prepaid
Expenses
Int. Receivable
-2,089
-3,319
-2,723
-5,391
-1,301
0
0
0
0
1,318
Accounts Payable
138
4,711
505
-1,026
-246
Accrued
Expenses
Other Liabilities
805
3,174
-2,480
-1,274
1,085
1,470
36
743
-2,908
1,022
4,577
7,174
14,679
-5,929
1,869
-9,766
-16,762
-15,257
-5,982
-4,318
1,676
0
4,264
633
808
-227
-2,461
-10,269
-294
-283
0
0
38
51
12,034
-8,317
-19,223
-21,224
-5,592
8,241
Iss./Subord. Debt
0
0
0
0
0
Dividend
Payment
0
0
0
0
0
Cash From
Operations
INVESTING CASH FLOWS
Capital
Expenditures
Sale of Building
Related Parties
Pay./Related
Loans
Cash From
Investing
FINANCING CASH FLOWS
150
Common Stock
896
443
408
120
88
Purch./Sale of
Stock
Issu. Sub.
Debenture
LT Debt Issued
0
-12,417
-7,745
0
0
0
0
0
0
2,000
21,383
3,203
20,738
43,632
2,000
0
0
0
-64,596
-12,000
-3,555
1,291
-1,383
1,352
-1,148
-15,133
16,833
-5,267
32,673
-5,253
3,591
9,353
6,751
13,181
-14,313
Foreign Exch
Effects
Net Change In
Cash
1,365
206
63
104
1,294
1,216
-2,490
269
1,764
-2,909
Cash Interest
Paid
Cash Taxes Paid
1,781
2,071
3,889
5,496
6,609
6,788
7,341
2,385
2,906
-953
Pymt. Retire.
Debt
Debt, Net
Pay.- LT
Debt/Leases
Cash From
Financing
Note: Units in Thousands of U.S.
Dollars.
Source: www.ameritrade.com
151
Strengths
Cannondale
S.W.O.T. Analysis
CAD/CAM
systems
X
X
X
X
X
X
quick design-tomarket times
X
X
X
Proven product
quality
X
X
X
X
152
X
X
An attractive
base of loyal
customers
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Declining
Industry
Profitability
Opportunities
Exit barriers
Maturity of the
US Market
Fast diffusion of
know how
X
Economic
Slowdown
X
High Rivalry in
the High-End
Fast Rate of
Products
Innovation
Motorbike
industry
Growing
Demand for
Juveniles Bikes
Growing demand
for differentiated
products
Narrow
differentiation
strategy
Skill in
continuous
product
improvements
Flexible
manufacturing
Demand in
European
Markets
Market Size of
low-end market
Appendix B (SWOT Matrix)
Threats
Higher that rivals
degree of
differentiation
supported by
greater degree of
Vertical
Integration and
Horizontal
integration
X
US based
manufacturing
capabilities of
frames vs Asian
based of rivals
MS in USA 20%
high end bicycles
Wea
kness
R&D with the
pipeline full of
innovative
frames
Stronger than
rivals
Competitive
capabilities in
design that are
applicable to
relative
industries
Low Profitability
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
153
X
X
X
X
X
X
X
X
X
X
X
X
X
X
High Debt
leverage
X
Production
processes not
suited for
production of
low-end bicycles
X
Limited
production
capabilities in
Europe in the
light of fast
growing demand
and existing cost
advantages.
X
X
X
X
X
X
X
X
X
X
154
X
X
X
X
Appendix C (Response to Panel)
1. How to implement introducing juvenile products?
After re-analyzing this recommendation and the implementation of this strategy, to better
implement this strategy the new implementation process should be as follows: Please See page 141.
2. How to turn around the stock price in a short turn period?
In order to turn around in a short term their stock price, Cannondale should improve its financial
position capabilities.
First Cannondale should think about changing the practice of financing R&D and new plants
from debt to equity financing to reduce interest expense. The company has long-term debt of $55, 997,
000 at the fiscal year ending July 3rd, 1999 with an annual interest expense of $1,883,000. Using equity
financing would allow the company to increase their cash flow.
Second, the company should finance the purchase of raw materials for all global operations in
local foreign currencies to take advantage of gain or loss on foreign rates.
Approximately $6.5 millions relating to foreign exchange fluctuations affected negatively net sales during
1999 fiscal year.
Finally the company should reduce selling, general, and administrative expenses from 23% to
20% of net sales by the end of year 1999 and further reduces it to a lower percentage of net sales
throughout the next fiscal year. In following our recommendations, Cannondale will increase
considerably cash flow, reduce debt leverage, a better debt ratio, and therefore better financial position.
Moreover most of the current capital expenditures in R&D incurred during fiscal year July 4th,
1998 to July 3rd 1999 were for the development of the upcoming MX400. Consequently, expenses in
R&D should decrease in short term, then the company should have no problem turning around their stock
price with the promising sales forecast of MX400 that will significantly increase revenue growth.
155
3. Capital Budgeting
A. Cashflows estimation and NPV and IRR from presented projects.
Provided are only estimates. Further and more detailed research and analysis is required to provide more precise forecasts.
Project 3: Motorbikes
Years
Operating Cash Flow
Sales(g=.30)
Cost of good sold*(estimated=.5*Sales)
R&D
Administrative expenses
-Depreciation
EBT
-Taxes(40%)
+Depreciation
Operating Cash Flow
NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
2000(Investment)
4600
30,000
15,000
7,000
6,000
1,000
1,000
400
4,600
4600
$34,385.87
Initial Investment Land+Building+ Equipment+
Establishing new relations(Further research is needed to
provide more accurate estimates)-they already have
capabilities
Parameters
g
d
t
Km
Krf
Beta
Cost of capital
Cost of equity
Cost of debt
Wdebt
Wequity
2001
3,500
39000
19500
6,000
10,000
4,000
-500
0
4,000
3,500
2002
4,810
50700
25350
10000
10,000
4,000
1,350
540
4,000
4,810
2003
2004
2005
5,173
9,305
20,016
65910
85683 111387.9
32955 42841.5 55693.95
15000
20000
5000
12,000
10,000
20,000
4,000
4,000
4,000
1,955
8,842
26,694
782
3536.6 10677.58
4,000
4,000
4,000
5,173
9,305
20,016
0
0.3
0.03
0.4
12%
5%
0.28
8%
0.07
0.084
0.614173228
0.385826772
156
6,738
48,434
1.13
Project 1: Increase sales of custom-made bicycles (estimation only consider custom-made bikes segment)
Years
2001
2002
2003
2004
2005
2006
Operating Cash Flow
-1,000
-2,550
941
1,285
1,635
2,016
Sales(g=.09)
10,000
10900
11881 12950.29 14115.82 15386.24
Cost of good sold*(estimated=.5*Sales)
5,000
5450
5940.5 6475.145 7057.908 7693.12
R&D(after 2002 plan to research only on frames)
3,000
5,000
2000
2000
2000
2000
Administrative expenses
3,000
3,000
3,000
3,000
3,000
3,000
-Depreciation
1,000
1,000
1,000
1,000
1,000
1,000
EBT
-2,000
-3,550
-60
475
1,058
1,693
-Taxes(40%)
0
0
0 190.058 423.1632 677.2479
+Depreciation
1,000
1,000
1,000
1,000
1,000
1,000
Operating Cash Flow
-1,000
-2,550
941
1,285
1,635
2,016
IRR
18%
NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
$2,326.20
Parameters
g
0.09
d
0.03
Km
0.12
Krf
0.045
Beta
0.28
Cost of capital
8%
Cost of equity
0.07
Cost of debt
0.084
Wdebt
0.614173228
Wequity
0.385826772
Project 2&5: Enter the low-end market + kid's segment of the market realized simultaneously: Increase sales of custom made
bicycles(estimation only consider custom made bikes segment) Only USA market analyzed
Years
2001
2002
2003
2004
2005
2005
Operating Cash Flow
-5,000
2,050
1,765
2,112
2,493
2,972
Sales(g=.10)
17500
19250
21175 23292.5 25621.75
Cost of good sold*(estimated=.7*Sales)
12,250
13,475
14,823
16,305
17,935
R&D(limited as competition is based on price)
500
500
500
500
400
Administrative expenses
2,000
3,000
3,000
3,000
3,000
157
-Depreciation
EBT
-Taxes(40%)
+Depreciation
Operating Cash Flow
Initial Outlay
IRR
NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
Parameters
g
Km
Krf
Beta
Cost of capital
Cost of equity
Cost of debt
Wdebt
Cost of good sold*(estimated=.8*Sales)
Wequity
-5,000
1,000
1,750
700
1,000
2,050
1,000
1,275
510
1,000
1,765
1,000
1,853
741
1,000
2,112
1,000
2,488
995.1
1,000
2,493
1,000
3,287
1314.61
1,000
2,972
-5000
32%
$6,391.07
10%
0.12
0.045
0.28
0.078598425
0.07
0.084
0.614173228
0.7
0.385826772
Project 4: Build production facilities in Europe in less capital intense country for production of high-end bikes
Years
Operating Cash Flow
Increase of Sales in Europe as a result of price reductions new
project(g=.15)
Cost of good sold*(estimated=.6*Sales)
R&D(No R&D in Europe)
Administrative expenses
-Depreciation
EBT
-Taxes(40%)
+Depreciation
158
2002
-10,000
0
2003
2,800
15000
2004
2005
2006
2007
3,340
3,961
4,675
5,496
17250 19837.5 22813.13 26235.09
0
0
0
0
0
0
0
9,000
0
2,000
1,000
3,000
1200
1,000
10,350
0
2,000
1,000
3,900
1560
1,000
11,903
0
2,000
1,000
4,935
1974
1,000
13,688
15,741
0
0
2,000
2,000
1,000
1,000
6,125
7,494
2450.1 2997.615
1,000
1,000
Operating Cash Flow
Initial year 2002(Building +equipment)
IRR
NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
-10,000
-10,000
26%
$5,349.65
Parameters
g
d
Cost of capital
Cost of equity
Cost of debt
Wdebt
Wequity
0.15
0.6
0.078598425
0.08
0.084
0.614173228
0.385826772
B. Time line (Consolidated Cashflows for Cannondale)
PROJECT 3
PROJECT(1,2,5) PROJECT 4
2000
4,600
2001
-2,500
2002
2003
-5,690 10,679
2004
16,041
2005
28,105
2006
9,663
159
2007
5,496
2,800
3,340
3,961
4,675
5,496
4. What additional resources does Cannondale need to enter the low-end segment of the
market?
Had Cannondale decided to enter low-end of the market Cannondale have to develop
several resources. The company will enter into this market utilizing skill and production
capabilities of Asian partners. Asian assemblers will provide them with know-how and expertise
in manufacturing of low-end bikes. Cannondale has to establish strategic partnerships with WalMart or K-Mart and form new corporation: Velox that will coordinate production and
distribution capabilities. The management of Velox will be responsible for developing
competitive capabilities that enable Velox to have short delivery times, low overall cost and
fruitful partnership with supplier and producer.
In the light of global competition in the bike industry company has to develop human
resources that will enable it to establish links with Asian competitors. Gaining talented people
from Asian countries appears to be one of the resources Cannondale still lacks. Cannondale
should recruit Asian foreign nationals graduating from US business schools. Foreign nationals
are familiar with the local cultures of their countries. They could be trained and could help
Cannondale in pursuing opportunities in Asian countries. Once the foreign national become
familiar with inside operations of Cannondale they could become the part of new corporation
called Velox. Had Cannondale developed this resource this would enable them to have long
lasting relations with Asian assemblers as Asian nationals within Velox understanding the
cultures and differences could respond in a sensitive manner to local customs and behaviors.
160