Business Policy and Strategy Essay

Mission and Vision
Objectives
(short and long term; financial and strategic)
External
Opportunities and Threats
Internal
Strengths and Weaknesses
Recommendations (include the pros and cons of each recommendation) Corporate, Business, Functional, Departmental
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 entrepreneurial” 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. 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 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 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

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.
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

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.

Outsource production of low-end bicycles.
Develop linkages with foreign distributors of low-end 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. Cannondale Corporation Case Study, p.127, 2 Cannondale.com

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. 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. 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
Facts
What does this mean?
What is our business?
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 off-road motorcycle.

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 -Community
-Competitors -Financial Institutions
-Employees -Government
-Shareholders
-Suppliers

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. 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.

-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.

-Shareholders: Cannondale provides yield 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.

-Community: Cannondale provides jobs in the community.
Cannondale cares for the environment by taking proactive position in regard to safe and responsible cycling.

-Government: Cannondale pays taxes and follows rules and regulations.

-Financial institution: Cannondale borrows money to operate their business and pays interest. 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.

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.

Cannondale increases owner’s wealth by providing earnings.

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.

Cannondale creates a good image for their company in the society.

Cannondale fulfills their financial duties towards government in order to operate business legally.

Cannondale is able to pay the interest to their creditors and uses financial leverage to increase their competitive advantages. 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-chip-activated Smart Shock. In 2000 the company launch MX400 off-road motorcycle.

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. 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 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
Facts
What does this mean?
What will our business be in 5, 10 years?
Cannondale will be the best cycling and off-road motorsports company in the world” By achieving this vision, Cannondale will care of their stakeholders, 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.

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)
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 What will we do for each of them?

Current customers:
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 high-performance products and competitive price that potential customers want. Cannondale will keep maintaining their brand image by using sales & marketing and promotion programs. 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. 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. How (technology used or functions performed) will we meet their needs and expectations? Though technological innovations Cannondale makes their products lighter, stronger, faster, and more than rivals. 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 custom-fitted bicycles. 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. How will we communicate the vision to the organization and our customers? Cannondale will communicate their vision through:

Cannondale’s annual report
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. 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
Facts
What does it mean?

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. 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-road motorcycle industry by 2002. Quicker design-to-market times
Cannondale is able to have a quicker design to market in comparison to their competitors. 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.
Higher product quality
Cannondale is able to assure higher product quality to their buyers. 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.
Lower costs relative to rivals
Cannondale costs are relatively similar to their immediate rivals. Long term objective:
Cannondale will lower the cost of production down to 15% by 2005.

Short term objective:
They should continue manufacturing the frames in the U.S. But they should outsourcing 25% more of their components by 2002. Broader or more
attractive product line than rivals
Cannondale offered 71 models of bicycles, all of which except its carbon-fiber Raven model featured aluminum frames. Their product line in similar to other rivals.
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. Better e-commerce and internet capabilities than rivals
Cannondale maintains an innovative web site that averaged more than 25 million hits each month. Their e-commerce capabilities are similar to rivals. Shot term objective:
They should expand their use of e-commerce 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. 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. Stronger brand name than rivals
Cannondale is on or the worlds best known manufacturer and marketer of high-performance aluminum bicycles. Long term objective:
Cannondale will spend $1 million on marketing each year to get the strongest and most recognized brand name by 2005. Superior customer service
Cannondale’s specialty retailers provides their customers with excellent after purchase customer care and assistance. 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. Stronger global distribution than rivals
The company does not have stronger distribution capability than rivals. 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. 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. 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. 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 manufacturing skills enables the company to be a first-mover and trend seller. Long term objective:

Cannondale should use their know-how in developing new product lines. They should develop a least one new product per year and increase the number of technological innovations in their bicycle products by 20% by the end of 2005. Wider geographic coverage than rivals

The company sells its bicycles through 1150 specialty retailer locations in the United States and Canada. They also sell in other countries as well. Long term objective:

Establish 50% more specialty retailers store in Australia and Europe by 2005.

Short term objective:
Enter East Europe in 2002 and achieve market share 2 % by 2003. Higher levels of customer satisfaction than rivals

Long term objective:
The company to have had introduced to the market one of the industry’s best customer satisfaction assurance program by 2004.

Short term objective:
The company to develop a new and improved quality insurance plan by May of 2002.

Financial Objectives
Criteria
Facts
What does it mean?
Revenue growth
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
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. Earnings growth
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%
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.

Higher dividends
N/A
Cannondale will reinvest all earnings into new lines of its business. Wider profit margin
Year Profit margins
1991 3.5%
1995 6.2%
1999 3.3%
Long term objective:
Cannondale will achieve profit margin of 12% by 2003

Short-term objective:
Cannondale will return to its profit margins of 6.2% from 1995 by the end of next year. EVA performance
1999
=11,371,000-2,051,000785{income tax}-( (cost of equity)*75,010,000) 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. MVA performance
1999
=$10.00(stock price average of 1999)*(7,518,000)- 75,010,000(shareholders equity investment)=$170,000 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. Strong bond and credit ratings
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) 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.
Recognition as a blue-chip company
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. 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. More diversified revenue base
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 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%. 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
Financial data do not cover sufficient period of time to reflect Cannondale’s vulnerability to economic slowdowns. Data for 1990 not provided. Short-term objective:
Cannondale will reduce wage by 20% in case of recession to maintain projected earnings in 2001 Higher ROI,
No data available
Short-term objective:
Decrease cost of debt by 5% by year 2002.

Long-term objective:
Cannondale will increase ROI by 15% by 2004.
Higher ROE
Based on 1999 financial performance summary = 5923/75010= 7.9% Based on 1991 financial performance summary =
(1162/ 6893)= 16.9%
ROE is declining.
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. Higher cash flow
Years Free cash flows
’97 ($5,189)
’98 ($9,588)
’99 ($578)
’00 ($11,911)
Cannondale’s cash flows are rapidly declining.

Long-term objective:
Cannondale’s new business of off-road 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. Financial ratios superior to rivals
Year P/E Price
1999 8.47 3.69
1998 8.36 6.53
1997 14.36 9.00
1996 18.84 21.75

P/E and Price significantly falling.
Also Profit margins falling after 1995

Year Profit margins
1991 3.5%
1995 6.2%
1999 3.3%

Year ROA(Net income/TA)
1991 3.3%
1995 9.0%
1999 3.6%=($5923/$162379)

ROA between 1991 rises by 5.7%. However, after 1995 efficiency of assets is declining. 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.

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. 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. 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. 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.
C. External Factors

Macro-environment forces
Criteria
Facts
What does this mean?
The economy at large
Late 1980s and early 1990 the world economy began to recover from a mild recession. GNP is growing in the US and most Western-Europeans countries. Bicycle industry reached maturity during mid-1990s and grew at an approximately annual rate of 2% during the late 1990s. 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%. Legislation and regulation

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.

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 TEA-21 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
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.

Societal values and lifestyles
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. Technology

Technology Innovation became increasingly important in the industry as rival mountain manufacturer 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) Computer-aided 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-chip-activated 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. 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. 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 cost-effective 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
Facts
What does this mean?
Market size

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. 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.

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. Scope of the competitive rivalry

Multi-countries
National
Regional
Local
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.

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 is an opportunity for cycling companies to expand their business and gain market share in Europe. Market growth rate and position in the business cycle

Annual Domestic market growth rate of 9.7%.
Kid’s mountain bikes are the fast growing segment of the industry. Mid 1990s industry grew approached maturity.
The compound growth rate is 12.4% in Europe between 1993 and 1999. Domestic market:
The slowing of the annual market growth rate indicates that this is a mature market and companies should be concentrating in capturing the new market segments through product innovation. Indeed the highly innovative aluminum-frame 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.

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. Number of rivals and their relative size

Over 2000 companies involved in either manufacturing or distributing cycling products. About Six major players: Schwinn, Intrepid, Specialized, Giant, Derby and Cannondale 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. Number of buyers and their relative size.

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, low- performance 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. Low-End:

The number of potential buyers around the world is large, which creates opportunity for the whole industry for 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. Extent of rivals vertical integration

All companies in this industry have some type of limited vertical integration.

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 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. Extent of rivals horizontal integration

Signed purchase agreement with suppliers has allowed companies to secure higher volume purchase discounts and therefore achieved economy of scale. Horizontal integration is an opportunity for the industry; because of sizable scale of economies in purchasing bicycles 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 in-world” 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. Types of distribution channels rivals use

Two primary distribution systems existed in the U.S bicycle industry, large discount retailers and independent special bicycle shops. Low-end:
This is an opportunity for the industry; customers at the discount retailers are not 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 highly knowledgeable distributors. This is a treat for this high-end segment.

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. 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”. Extent to which the rivals products and/or services are differentiated Low

Midrange
And high-end bicycles.
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. Extent to which rivals use economies of scale in:

Purchasing
Manufacturing
Services
Transportation (logistics)
Marketing
Advertising
General and Administration
Other steps in the value chain (Refer to chapter 4 for the description of the value chain.) The industry has the benefit of economy of scale and rivals take full advantage of it. 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 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. Extent to which the key industry participants are clustered in one geographic location The key industry participants are clustering around the global market. Most of the manufacturing plants are in the USA, Western Europe and China. 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. Extent to which certain industry activities result from learning and experience curve effects Racing events

R ; D
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 or shortage in the industry

Over 2000 companies involves in either manufacturing or distributing cycling products. Capacity surplus will decrease the prices of the products.
Capacity surplus occurs when production capacity exceed market demand. This would be a great threat for companies to increase production in a maturing industry. Capital requirements and the ease of entry or exit

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’ equity. 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 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. Industry profitability

Profit margins for Cannondale is constantly growing even though the industry has a moderate annual growth rate.

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

High degree of alliances
Speed the availability of next-generation components.
Reduce the supplier’s costs, which lower the buying price. Enhance the quality of the bicycle parts.

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

Facts
What does this mean?
RIVALRY
How many competitors are there in this industry?
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, low- performance 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 low-performance 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 low- and 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. What is the relative size of each competitor?

The US bike industry has $5 billion in sales (1999). 7.7 million units of low-end, 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)

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.

Cannondale had 20% of the US high-performance bicycle market in 2000. 71 models of bicycle in 4 categories. 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.

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. What is the industry concentration ratio (C4)?

Sum of TOP 4 competitor’s sales divides by total industry sales. (Not enough data)

What is the product or service demand growth rate?
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. 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. 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. 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 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. Are the customer’s switching costs low?

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.

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. 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 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. Are rivals launching moves to change their market share or industry position at the expense of other industry participants? 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. This is a threat for rivals because a rival would become stronger and take more advantages by their new movements. What are the payoffs for strategic moves?

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. 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. The high exit cost creates a threat for companies because it cost a lot when the companies go out of business. How consistent are rivals strategic visions, strategic intents, objectives, strategies, resources and origins? High-end bike makers are basically very consistent their strategic visions, intents, and objectives, but also they flexibly apply to new strategies to be more competitive. For example, Intrepid created new vision when they needed to improve loses. Low-performance bike makers produce bikes cheaper by imitating the high-performance bikes and
using lower quality of materials, and sell large volume at lower prices. 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 well-funded, aggressive moves? 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 know-how, 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

Purchasing

Inbound and outbound logistics

Advertising

Customer service

R&D

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.

High- and low-performance bikes:
Making agreements with suppliers on discount price based on large quantity order in a specific period of time.

High-performance bike:
Selling more products reduces 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.

Boosting local or regional market share can lower sales and marketing costs per unit.

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.

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.

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.

Cost and resource disadvantages independent of size
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 high-performance bikes. 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. What are the learning curve and experience effects to enter? 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. 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? 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. Brand preferences and customer loyalty

The high-end mountain bike industry is highly attached to brand names and images. The rivals put their effort to establish the brand loyalty through advertising, S;P programs, and racing teams. It is costly and slow processes to establish brand name recognition. The first major brand is able to establish and maintain its brand name at a lower cost than being a late mover. New comers 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. What are the capital requirements to enter?

Large capital is required to enter this industry. Capital requirements are associated with manufacturing facilities and equipment, inventories of parts and components, labors, advertising and sales promotion, and cash reserve to cover start-up losses. New entrants require large capital to invest in resources, capabilities, and customer recognition. This is an opportunity for existing companies to compete against new entrants. What other resource requirements are necessary to enter?

New entrants need know-how in technology and manufacturing process, high skilled personnel, a corporate culture and skilled people who are willing to
tale risks in new conditions, clever advertising, large capital investment in manufacturing plants and R;D, and knowledge/skill/experience to enter the industry. This is not a threat to existing firms because these resources need large amounts of capital, which is hard to raise for a start-up company. This is an opportunity for existing firms that already acquired tangible and intangible resources in the industry. What is the access to distribution channels?

The high-performance bike manufacturers sell the product to specialty bike retailers that provide knowledgeable sales assistance regarding the technical and performance characteristics of products and offer an ongoing commitment to service. This is an opportunity for existing companies in the high-performance bike industry. They already have the inbound and outbound logistics necessary to distribute their product. It is very hard for new entrants to access distribution channels unless they are able to provide with high quality of products that can make customer switch from existing products in the market. 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. 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. What tariffs and trade restrictions apply?

Foreign government trade restrictions
Tariffs
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. Is the substitute of better, worse or equal performance?

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. SUBSTITUTES

What is the availability of attractively priced substitutes? Substitutes are readily available and most are attractively priced. Many substitutes have better features.
In the most part, switching cost is low.

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. Is the substitute of better, worse, or equal quality?

Is the substitute of better, worse or equal performance?
In the most part, substitutes are either of equal or better quality, performance, and attributes-but also pricier. 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 competitive force for the industry. This is a real threat for this industry. Is the
substitute of better, worse, or equal quality?

N/A

Can buyers easily switch to the substitutes?
Buyers can easily switch to 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. This represents a tremendous threat for the biking industry and a strong competitive force. SUPPLIERS

Is the item or service a commodity available on the open market from many suppliers who are capable of filling the order? The items are available from many suppliers.
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 high-performance aluminum bicycles. 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. Does the supplier dominate the industry? (The supplier provides the industry with an item that accounts for a sizable fraction of the costs of an industry’s product (or service), is crucial to the industry, or significantly affects product quality.) Though there might be major suppliers in the industry, none exercise sufficient power to dominate the industry. 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 industry because rivals have the power to choose among many suppliers. Does an outside supplier provide a cost advantage over vertical integration? 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. This is an opportunity for competitors to strengthen their competitive position. Does an outside supplier provide other advantages over vertical integration? Companies can get additional brand loyalty and reliability on its products by using suppliers that have customer recognition, such as Shimano, SunTour, and Canmpionolo. This is an opportunity for competitors to add values to its products. 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? Making contracts on delivering term and price.

Bargaining power

Relied on the well-known suppliers’ components.
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.

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.

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. What is the relative quality of the supplier and his services or products? 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 can differentiate its product by quality, reliability, and brand image. 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. BUYERS

What is the cost of switching?
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. 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. How many buyers are there in this industry?

With over 1 billion bicycles existing in the world, millions of people are potential customers. 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. 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. 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). 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. 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. Can the buyers threaten the industry with backward integration? The buyers cannot threaten the industry with backward integration. The bargaining power of backward integration does not really affect this industry. Are the industry’s products discretionary purchases?

Buyers have the discretion in whether and when they purchase the products and services offered in the specialty bike 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)
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. Strategic implications

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.

Internet and new e-commerce opportunities
No data
No data
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. Increasing globalization of the industry

With over 1 billion bicycles existing in the world, usage varied considerably, with about 70% of all 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.

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.

Rivalry between companies significantly increases. Companies want to expand operations to foreign 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. Strategic implications:

Abandon low end segment of the market or develop capabilities to compete on cost with Asian companies Become industry leader in product innovation.

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. Indicators: computers sale and prices are falling. International markets in 1999 – 17.6%

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 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. 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. Companies try to shelter their

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 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

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, low- performance 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. 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 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.

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. 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

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 computer-aided design and manufacturing (CAD/CAM) technology. Cannondale’s CAD/ CAM systems automatically calculated specific tube length, and its computed-guided 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 front-suspension models and also allowed easily adjusting while riding.

Rate of product innovation is very fast in the bike industry and causes shake-ups 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 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. 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 know-how. 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. Marketing innovation
Trek cosponsored racing reams with Volkswagen and the U.S Postal Service and independently sponsored a triathlete team to race-test 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 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. High rivalry.

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
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 know-how 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. 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. Exit of major firms

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 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. US-based 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. 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 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
Diffusion of technical know-how
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 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.

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 know-how. Rivals try to copy business processes that prove high production efficiency. Quick rotation in the market share. 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.
Increase degree of differentiation to narrow down the price disadvantage: provide better service and custom assembled bikes Cost and efficiency
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 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.

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. 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 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 Growing buyer preferences for differentiated products instead of a commodity product 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

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. 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. Develop multiple of bike models.

Regulatory and government policy changes
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.

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. Societal concerns, attitudes and lifestyle changes

Beginning in the 1970s, consumer tastes were changing.
There was a mountain bike craze for the most 1980s.

Increase interest in the USA and Europe in physical fitness creates new industries. One of the new industries is mountain biking. This alters 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. Rapidly changing.

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 bicycle. Reductions in uncertainty and risk

Fewer larger companies that have big financial resources and employ economies of scale in the low end of the market. Rivalry increases in both market segments.
Strategic implication:
Gain more loyal customers.
Stay on the top of customer service and technical support.
4. Competitors position in the cycling industry

High

PriceMedium

Low

Narrow Broad
Market Scope

High

PerformanceMedium

Low

NarrowBroad
Market scope

High

qualityMedium

Low

Narrowbroad
Market scope

High

Tech
InnovationMedium

Low

NarrowBroad
Market scope

Mountain Bike Segment

High

Medium

Low

NarrowBroad
Market scope

Recreational Bike Segment

High

Medium

Low

NarrowBroad
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. 5. Strategic moves are rivals likely to make next

List the competitors
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)? What is their competitive position (getting stronger, well entrenched, stuck in the middle, going after different market position, losing ground, retrenching)? What is their strategic posture (offensive, defensive, both)? What is their competitive strategy (low cost, differentiation, broad or narrow, best value)? What does this mean in terms of their most likely moves?

Schwinn
local

Trying to survive after being sold twice in 1993 and 1997

Give up market share and file chapter 11-bankruptcy protection in 1992. Losing ground
Both
Differentiation by going into low cost to be into a leadership positioning in the US in the retail channel. Schwinn turnaround and its additional of GT bikes put it into contention for a leadership position in the US specially retail channel. Intrepid

Multi-country
Dominant leader
Aggressive expansion via international growth. About 35% of its $400 millions revenues came from international sales. Well entrenched in the industry.
Both
Best value,
Pioneer in carbon-fiber
Frames give Trek best-selling brand in 1997.
Technological know-how to add new features in bicycle components is a key success in this high-end segment of the industry Specialized Bicycles
Multi-country

To be a dominant leader?
Aggressive expansion via technology.
Well entrenched in the industry
Both
Differentiation in innovating
Frames for competition bicycles.
Specialized’s dealers should be 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

Key Success Factors
Schwinn Cycling ; Fitness

Intrepid, Inc.

Specialized Bicycle

Giant Global Group
Cannondale Corporation

What is their capability for this factor?
What does this mean?
What is their capability for this factor?
What does this mean?
What is their capability for this factor?
What does this mean?
What is their capability for this factor?
What does this mean?
What is their capability for this factor?
What does this mean?
Technology related KSFs

Scientific research and expertise
N/A
N/A
Good
They 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 aluminum-frame bicycles. Excellent

The company created the special S-Work 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 the customer with the quality, performance and the low price. Good

When the company moved away from contract manufacturing 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 to be an independent bike maker. They had to allocate their resources for R;D if they want to compete in the U.S. and international markets. Excellent

Cannondale has ongoing commitment with R;D and has continued to expand and develop its aluminum bicycle line with series of innovations, focusing on property frame design, suspension systems, and components. Investing in R ; D area gives the strengths to the company. Working closely on new product developments allows Cannondale to determine the best relevant technologies to be delivered to the market. Technical capability to make innovative improvements in production processes Poor

The company rather then innovates to achieve overall cost savings they move production overseas. Eventually their contract-manufacturing partner becomes their competitor. Good
The company emphasized quality and efficiency in plant operations. Klein bicycle use only certified aerospace grand aluminum and custom-made, property production equipment to assembly frames at alignment tolerances as exacting +-.0002 inches. Good

The first star to do mass-production of mountain bike.

Very good
Giant Global was Schwinn contract manufacturing with 70% of its production for Schwinn. They learn the technological know-how from Schwinn.

Excellent
Cannondale implemented flexible manufacturing system. The strength of the system includes reduced production time, simultaneously 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/CAM in for development other parts in the process. Cannondale consider their manufacturing process as a key comparative advantage over the rivals. Because the contract manufacturing 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. Product innovation and Technological change

Poor
Failed to notice key market trends in 1980s and keep up with the technological changes. This strategic mistake brings them low sales, not profits and removes them from the market as a key competitor. Very good

Intrepid Inc. company tries to use product innovation to fulfill market expectations The innovative products provide an opportunity for growth and increase sales in a mature market. Trek’s Y-shape carbon composed frame was one of the company’s more innovative and popular products during the late 1990s. Very good

Specialize had been recognized for developing a number of technologically advanced bicycle materials and components use in the production of mountain bicycle. The company has the capability
and the resources to create new technological innovations in their products. They achieve a great success in designing and innovative new mountain bike. Very good
As an independent company in 1900s Giant wan numerous awards for the design innovations thanks to large investing in R;D department. The new designs give the opportunity to capture the U.S. market.

Very good
Cannondale differentiated their bicycles through technological innovations that made its bicycles lighter, stronger, fester and more comfortable then rivals. They have several different product innovations the give them leading position in the market and the comparative advantage over the rivals. Expertise in a particular technology

N/A
N/A
Very good

The company was a pioneer in carbon-fiber frames. Because of that sales and revenue increase. Very good
They first made frames from metal matrix composite material of aluminum, silicon, cooper, and magnesium. The new technology provides the opportunity for growth, increase sales in mature market and opportunity for Specialized to reach international markets. N/A

N/A
Very Good
1983 they produce first-ever large-diameter, aluminum-tube bicycle. Manufacturing related factors

Low-cost production efficiency
Average
The try to achieve low cost production efficiency outsourcing the components overseas, instate then improve and make more efficient their own production process. In consequent they only accomplish company view as a low-cost bike producer. 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 outsourcing the components.

Average
Due to producing their main component in U.S. their production efficiency is not lower then rivals. Manufacturing flexibility
N/A
N/A
N/A
N/A
N/A
N/A

N/A
N/A
Excellent
Cannondale implemented flexible manufacturing system. The system allows them simultaneously production of various models and small batch sizes without high tooling changing costs. Marketing related KSFs

Advertising
Good
The company begins to advertise its product through racing circuit and cross-promotion with brands as Old-Navy, Toyota, and MCI. The advertising methods put the company in leading position in U.S. specially retail channel for hardcore cyclists, who often influence the purchase of less-avid cyclists. Good

The have good advertising methods and experience. They advertise their products through sponsor racing teams for Volkswagen, and U.S. Postal Services, also 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. Very good

Specialized advertise their product through racing events, like Cactus Cup which allowed amateurs to race similar to professional one. Turing 1998 1999 the event was held in Canada, France, Brazil. They also created the firs professional mountain bike racing team in 1983. By advertising they introduce their products to international and domestic customers, and they increase their market share in the industry. Good

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 thanks to the advertising and promotion they will be able to gin U.S. market share and win new customers internationally. Excellent

The purpose of the advertising was to establish Cannondale position in the
specialty bicycle retail channels. The formed the Volvo/Cannondale racing team. Give advertising in magazines for cycling and general lifestyle magazines. They try to capture new customers interested in outdoor activities and current customers in market.

Distribution related KSFs

Speed of getting new products to market
N/A
N/A
Good
They fallow market trends and respond quickly with bringing new product that satisfied the customers. N/A
N/A
N/A
N/A
Very good
They follow market trends and respond quickly with bringing new product that satisfied the customers. They also have specialty bicycle retailers who could provide knowledgeable sales assistant and ongoing commitment to service. Organizational capability KSFs

Ability to respond quickly to shifting market conditions
Poor
They do not have the ability to respond quickly to the changing market conditions. In 1980s they ignore the mountain bike popularity. They failed to notice key market trends, which put rivals in the comparative advantage over the Schwinn. Good

The have the ability to respond quickly to the market conditions. The company introduces a number of award-winning bicycles, which let them to keep current market position.

Very good
All the new products and technological innovation that they implemented in
production process of their bicycles testify that they are able to respond to the changing market conditions quickly. Very good

The have the ability to respond quickly to the market conditions, because of al the advertising they are doing and the large amount of revenues they invested in R;D Very good
The have the ability to respond quickly to the market conditions, because of al the advertising they are doing and the large amount of revenues they invested in R;D Other KSFs

Image and reputation
Poor
Brand recognition in low-end price points between $250 and $500 Good
Brand recognition as quality American-made high-end bicycles. Very good
Brand recognition in low and high-end bicycles.
Very good
Global brand recognition

Excellent
Global brand recognition
7. Is this industry attractive and what are its prospects for above-average profitability?

Criteria
Facts
What does it mean?
Industry growth potential
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. 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. Does competition permit adequate profit potential?

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 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.

Does competition lead to stronger or weaker forces?
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 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 to continue innovations. 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
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 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 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. What is the company’s ability to capitalize on its competitor’s weaknesses? 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. 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 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. 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%
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 low-end bikes to less intense countries. How well do the company’s capabilities match the industry’s KSFs? 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
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. What are the future uncertainties and risks for this industry? 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? This is an Opportunity for Asian Competitors.

What is the severity of the issue(s) or problem(s) facing this industry? Higher outlays on R&D are reducing profit margins.
Global competition deliver underprice products
Maturity of the market
Growing selling and advertising expenses
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. If a corporation, will continued participation in this industry positively or negatively impact its ability to compete in other industries? 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
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 off-road 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.

II. Summary of External Factors

Opportunities
Strategic Implications for the company
Threats
Strategic Implications for the company
Societal
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.
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. Political

Certain standards (i.e. ISO9000 standard) facilitate international trade and allow a company to enter global market easily. Monitor the political climate.
Tariffs, taxes, and other international trade restrictions.
Follow the foreign trade restrictions when a company deals with the country. Legal
Increase consideration of bicycle as transportation alternatives. Increase
cycling facilities and trails.
Increase awareness of bicyclist’s safety.
Respond quickly to the legal changes.
The chapter 11 bankruptcy laws.
Operate efficiently to avoid bankruptcy.

Regulatory
Regulations to keep open the lands to cycling and laws regarding open biking trails in 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. Take proactive position in regard to safe and responsible cycling through company’s activities. Use lobby to influence policy makers to allocate more funds for supporting bike transportation. 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 activities. Use lobby to influence policy makers to allocate more funds for supporting bike transportation. Dominant economic traits

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.
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.
Five forces
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. 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 substitutes as a means of transportation, recreation, and outdoor activities. Switching cost among substitutes is low.
Continue to develop and improve products and technology.
Make attractive and innovative products.

Driving forces of change for the industry and the industry’s environment Gain advantages of e-commerce and internet in business activities. Increase globalization of the industry.
Outsource to realize low-cost products.
Incorporate new internet tools in business models.
Develop capabilities to compete on cost with Asian companies. Become industry leader in product innovations.
Enter new industries (motorcycle industry) where the competition is lighter. 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 know-how.
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.
Companies in the strongest and weakest position
Intrepid, Cannondale and Specialized Bicycles are in the strongest position to be dominant leader in the high-performance segment. Competitors must keep using differentiation strategy in technology and innovation. Small companies in low- and high-performance segments.

Competitors must keep pace with technological innovation and position better. Rivals most likely moves
Mergers and acquisitions to own more than one brands.
Enter new merging market, such as motorcycle segment and European market. Outsource products in Asia to realize low costs.
Monitor rival’s move and market condition and respond quickly. Lack of information of rival’s moves.
Monitor rival’s moves and market condition and respond quickly. Key Success Factors
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.

Continue to invest in technological innovation, manufacturing process, and brand loyalty. The key success-factors are a threat for companies who lack of capabilities to gain. Continue to invest in technological innovation, manufacturing process, and brand loyalty. Industry Attractiveness and prospects for profitability

Mergers and acquisitions to own more than one brand.
Growing demand for differentiated products.
Diffusion of technological know-how (opportunity for Asian competitors). 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.
Slow growing rate in the US market.
Decline profit margin in mountain bike segments.
Highly global competition.
Quick diffusion of technological know-how.
Highly competition in technical innovation.
Improve operation to maintain high revenue growth.
Move to other industry by applying existing capabilities (i.e. motorcycle industry). Protect own technology.

D. Internal Factors

1. How well is the current strategy working?
Criteria
Facts
What does this mean?
What are the present strategies? (Note: This question applies to the corporate, business and functional levels of the organization.

Cannondale has focused differentiation strategy.

Functional level strategy:

Market segmentation 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 high-performance mountain bicycle. Sales its bicycle only through independent specialty shops.
Move into motorcycle production in 1998 and introduce MX400 to the market in 2000.

In-house production, flexible-manufacturing system strategy, and stay-on-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.

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. 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 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

– Competitive advantage

– Performance

“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 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.

“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 expanded its product line to include motorcycles.

“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.

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-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 high-performance 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.

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.

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 high-quality 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,

geographic market coverage, and

Size and composition of the customer base?
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.

USA
West Europe
Japan
Australia and New Zealand

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.

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, high-quality bicycles. 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 design-to-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.

Cannondale geographic scope strategy addresses the needs of the customers.

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 performance bikes.

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. What are the functional strategies

Production,

Purchasing

Marketing and Promotion

Sales and Distribution

R;D

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.

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.

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.

Employ CAD/CAM system. The system allows offering custom-fitted bicycles at low price and within short period (6 weeks).

Make agreement with various aluminum suppliers to ensure favorite pricing and delivery terms and certain technical assistance. Concentrated buying power among fewer suppliers.

Cannondale’s marketing program is to establish the company as the leading high-performance 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 cycling enthusiasts and general lifestyle magazines to reach upscale adults with an interest in outdoor and leisure activities.

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.

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.

Stay-on-the-offensive strategy3: Be a trend and market leader in
high-performance in the bicycle industry.

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.

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.

The technology enables Cannondale to manufacture more efficiently and offer new service (custom-fitted bikes) to the customers. This is a strength.

Because aluminum is widely available, Cannondale cannot have a significant discount price. This is a weakness.

The company can reduce costs of products by buying power. Sustaining buying power is Cannondale’s strength.

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.

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.

Cannondale realize high-end, high-performance 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.

Cannondale’s know-how and manufacturing skills enable to be first-mover 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) first-time buyers remain strongly loyal to the pioneering firm in making repeat 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. 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%

Profit margins:
Year Profit margins
1991 3.5%
1995 6.2%
1999 3.3%

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 lower-end 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.

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. 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.

Design-to-market times:
Cannondale is able to have a quicker design to market in comparison to their competitors.

Higher product quality:
Cannondale is able to assure higher product quality to their buyers.

Lower costs relative to rivals:
Cannondale costs are relatively similar to their immediate rivals. 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.

This is a strength. Cannondale maintain its brand recognition and reputation.

This is a strength.

This is a weakness.

What is the company’s position relative to EACH of its competitors? Market share

Profit margin

Net profits

ROI

EVA (page 9)

MVA (page 10)

Financial strength

Sales growth

Image

Reputation

Industry position

20% share of the US high-performance bicycle market.

3.3% (1999)

Profit in 1999 is $176.82 million from $122.08 million in 1995.

N/A

=11,371,000-2,051,000785{income tax}-( (cost of equity)*75,010,000)

=$10.00(stock price average of 1999)*(7,518,000)- 75,010,000(shareholders equity investment)=$170,000

Year P/E Price
1999 8.47 3.69
1998 8.36 6.53
1997 14.36 9.00
1996 18.84 21.75

P/E and Price significantly falling.
Also Profit margins falling after 1995

Year Profit margins
1991 3.5%
1995 6.2%
2000 3.3%

Year ROA(Net income/TA)
1991 3.3%
1995 9.0%
1999 3.6%=($5923/$162379)

ROA between 1991 rises by 5.7%. However, after 1995 efficiency of assets is declining.

Sales (1991): 54,544,000
Sales (1993): 80,835,000
Sales (1995): 122,081,100
Sales (1999): 176,819,000

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 high-end, high-performance bike market. Selling products to specialty retailers with technical sales assistance avoids selling at discount stores at lower price and decline image.

Cannondale manufactures highly innovative, light, durable, and high-performance products in the US, which give buyers reliability on the products.

Cannondale is a leading company with high technology and innovation in the high-end, high-performance in the bike market and motorcycle market. Cannondale’s market position is very narrow and differentiation (focused differentiated strategy).

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.

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 competitors have higher profits than Cannondale. This is Cannondale’s weakness

Cannondale’s EVA is declining as Profits are declining. (EVA on industry are unavailable)

Cannondale MVA is declining as stock is underperforming as company faces high rivalry and it’s profit margins decline.

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

Better that industry average sales growth is Cannondale strength. While industry growth only 2% a year Cannondale growth at 9% annual rate.

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.

Cannondale established and retains a good reputation on their high-performance products. This is a strength.

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 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
Proprietary technology
advertising and promotion
product innovation
ability to improve production processes
technological know-how
Cannondale possesses a superior technology in the making of aluminum bikes. Cannondale marketing goals are through promote their product innovation, performance, and quality leadership through the use of strategic promotional partnerships, media and their innovative web site. Cannondale has an ongoing commitment to R;D and differentiates its bicycles through technological innovations. 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). Their Skills and expertise are not very hard to copy.

They can develop economy of scale in their skills and expertise and thereafter keep a head of competitors and make they resources last. Cannondale technology is somewhat superior to may of their rivals, but their advertising and promotion, ability to improve production processes and tech-know how could by trumped by a rival’s resources/capabilities if they don’t further work in creating substantial competitive advantages in their skills and expertise. Physical assets

plant capacity
plant and equipment age and technological capabilities
plant and retail location
access to distribution channels
wide geographic coverage
global distribution capability
Cannondale is able to have a wide geographic coverage and has a global distribution capability for their products. (This is not really competitively superior to their rivals) Cannondale plant capacity allows the company to have a quicker -designed to market than rivals. Cannondale retail locations represent a strong competitive capability for the company because their retail locations’ sales agents are profoundly educated in Cannondale products. Cannondale physical assets are a resource that is hard to copy in the high-performance aluminum bike segment. The physical assets superior competitive resource time span depends on their offensive/defensive moves, on rivals offensive moves, and the industry conditions. The resource is somewhat competitively superior. The resource can be trumped by rival’s resources/capabilities. Human assets

Superior intellectual capital
Cannondale has superior intellectual capital in the production, manufacturing and marketing of high-performance bikes. This is due mainly to their position in the learning curve of the production of aluminum bikes. 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. Organizational asset

financial position
patents
better product quality
culture
product line breadth and depth
product quality
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 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. Intangible asset

image
brand name
reputation for customer service
Cannondale Image, Brand Name, and reputation for customer service are comparable to their major rivals’ intangible asset. 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. Competitive capabilities

cost advantages
sophisticated use of e-commerce
Cannondale has an innovative Web site to provide value and convenience for their customer. Cannondale does not have a cost advantage over 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 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
Cannondale is recognized as the industry leader in high-performance aluminum bikes. Cannondale has the highest market share in aluminum bikes in the USA 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

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. 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 Logistics

Operations
Outbound Logistics
Sales and Marketing
Service
Profit Margin
R;D
HRM
A ; G
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 concentrates on buying power among fewer suppliers, which allows securing higher volume purchase discounts. Linkage:

Cannondale’s flexible manufacturing system enables to produce various models. Scale economies:
Simplify manufacturing line allows producing wide product line and a broad range of models in at small size in a single day. Technology
Patent self-fixturing joint design enables to reduce tooling changeover costs. Scale economies:
Cannondale’s US based manufacturing 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. Interrelationship:
The linkage with sales and service activities with specialty retailers that provide knowledgeable 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. Interrelationship:
Collaborate and share technical experience, know-how, and ideas with racing team achieve scale and get learning curve faster. N/A
Interrelationship:
Integrating A;G between bike and motorcycle products can avoid the cost of procurement and transportation 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 components on certain models.
Capacity Utilization:
The flexible manufacturing system allows the company to increase capacity utilization by sharing capacity with sister units having a different pattern of needs. 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. Linkage:
Cannondale sells products at specialty retailers who have technical knowledge to match the items to customer needs. N/A
Interrelationship:
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
Inbound Logistics

Operations
Outbound Logistics
Sales and Marketing

Service
Profit Margin

R;D

HRM

A ; G
Incorporate product attributes and user features that lower the buyer’s overall costs of using the company’s product 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 custom-made bikes. This lowers customer’s remodeling costs after purchasing ready-made bikes. Cannondale’s manufacturing 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 knowledgeable sales assistance, which lowers customer’s time and costs to research which models are best
fitted. Cannondale allows cyclists to order custom-fitted bikes with more than 8 million possible combinations. This lowers customer’s costs to find matching components to their bike. N/A

N/A
N/A
N/A
Incorporate features that raise the performance a buyer gets out of the product N/A
Cannondale makes hand-welded aluminum frames in the US.
Cannondale uses own component brand, CODA on their certain bikes. Cannondale introduces new models and innovation into the market faster than rivals by manufacturing 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 combinations of parts. N/A

Cannondale continues to expand and develop their bike line with a series of innovation. N/A
N/A
Increase features that enhance buyer satisfaction in non-economic or intangible ways N/A
Cannondale use own brand of component on some models.
Cannondale improve manufacturing process and drastically reduce the time required to design and produce new bike models. Cannondale offers a full line of bicycle components, 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 high-end market. N/A
N/A
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 manufacturing 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. N/A
Cannondale researches into further improvements in its manufacturing 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
Cannondale
Specialized Bicycles
Intrepid, Inc.

Rating
Weighted score
Rating
Weighted score
Rating
Weighted score
Reputation/ Image
.10

9
.90
8
.80
9
.9

Manufacturing capability
.10

10
1.0
8
.80
7
.7
Quality /product performance
.15
9
1.35
8
1.2
8
1.2
Technological skills
.20
10
2.0
8
1.6
10
2.0
Distribution capability
.05
10
.5
8
.40
8
.40
New product innovation
.15

8
1.20
7
1.05
8
1.2
Financial resources
.05
10
.5
7
.35
7
.35
Relative cost position
.15
9
1.35
8
1.2
7
1.05
Customer service
.05
10
.50
8
.40
9
.45

Overall weighted average
100%

9.35

7.80

8.25

5. What strategic issues does the company face?
Typical issue areas
facts
What does this mean?
Is the present strategy adequate in light of driving forces present in the industry? Cannondale remained a leader in high performance segment of the mountain bike industry with innovative 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 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. 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

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

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.

High rivalry reduces the risk of entrance of new competitors to this market. Cannondale defends its position.

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%)

Competitive pressures stemming from supplier-seller collaboration:

Cannondale concentrated buying power among few suppliers, which allowed the company to secure higher volume purchases discounts. 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.

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? 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.
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. 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. 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.

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 know-how. 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 know-how) 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.

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

Manufacturers
Facts about market share
MB
RR
MS
R
S
Emphasis
Strategic importance
Discount resellers (Low end of the total; market competition on price below $200) Huffy

Yes
No
No
Yes
No
Cost
Not a Cannondale’s competitor.

Murray Ohio

Yes
No
No
Yes
No
Cost
Not a Cannondale’s competitor.

Brunswick

Yes
No
No
Yes
No
Cost
Not a Cannondale’s competitor.

Other small Asian companies

Yes
No
No
Yes
No
Cost
Not a Cannondale’s competitor.
Specialty stores
Schwinn
18.8% (in the models $250-$500)
Yes
Yes
No
Yes
No
Cost
Not a most dangerous Cannondale’s competitor as of now. But has some potentials

Intrepid
Sold most between $250-$1200 Treck model quality and efficiency. Also strong on high end-Klein Yes
Yes
Yes
Yes

Yes
Cost and differentiation
Competitor

Specialized
Very strong on high end but also offered 6 low end lines of bikes Yes
Yes
Yes
Yes
Yes
Cost and differentiation
Competitor

Giant
70% of total sale from model between 250-800. Also entering the high end and starts competing with high end;1998 model in carbon frame called by Business Week: “Bike of the Year” Yes
Yes
Yes
Yes
Yes
Basically cost
Not a competitor as of now may be dangerous in the future. Has to be monitored

Derby
$250-$500 Low end competitor
Yes
No
No
Yes
No
Cost
Not a competitor

Cannondale
High end. 20% of High end of the market
Yes
Yes
Yes
Yes
Yes
Very strong on differentiation
Intrepid and Specialized may start stealing some lower end customers of Cannondale. Value conscious customers may start switching from Cannondale to Intrepid and Specialized. 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):

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-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 short-term 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 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 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. 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 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
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. Summary of Financial Ratios

Ratio name

Cannondale
Industry Average
Comment
I. Liquidity ratios
Current ratio
3.55
1.90
HIGH (inefficient use of current assets)
Quick ratio
2.42 times
0.8
HIGH
II. Asset management ratios
Inventory turnover ratio
5.36 times
7.18
LOW
Days sales outstanding
120 days
52.14
POOR
Assets turnover
1.101 times
1.2
OK
III. Debt management ratios
Long Term Debt ratio
.7465
.3900
HIGH (risky)
Total Debt ratio
1.13
0.60
HIGH (risky)
IV. Profitability ratios

Gross margin ratio
.36
0.3700
OK
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
V. Growth rates
Sales-5 year growth rate
0.10
0.02
EXCELLENT
EPS – 5 year growth rate
0.325
0.12
VERY GOOD
EPS-2 year growth
-50.5%
NA
INCOMPARABLE6
Dividends – 5 year growth rate
NM

0.11
GOOD
VI. Valuation ratios
Price to Earnings ratio
8.28
28.59
LOW
Price to Sales
0.27 times
2.75
LOW
Price to Book ratio
.65 times
5.82
LOW
Price to Free Cash Flow
NA
28.39
POOR

The Du Pont Chart for Cannondale

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.

C) Trend Analysis

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.

As Net Profit Margin is sliding down return on equity and assets are declining and leverage is rising.

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 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.

8. Organization’s culture

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 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. IV. Summary of Internal Factors

Strength
Strategic implications
Weaknesses
Strategic implications
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-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
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.

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
Learning curve effects
Vertical integration
Timing considerations associated with a first mover advantages.

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 market-times Trim marginal products if they start bringing losses

Expand into off-road motor bike industry

Functional Areas
Production
Marketing
R;D
HR
Continue improvements in manufacturing processes
Use your vertical integration to increase differentiation
Increase application of e-commerce
Hire the best professionals for your R;D department

Strategic Position
Narrow differentiation strategy
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.

Develop cross functional team that monitors value chain and concentrate only on cost drivers to minimize your inefficiencies Aggressively enter sleepy market for off-road motorbike industry. Quickly gain leadership position.

Financial Position
High market share of high end market of 20% in the USA
Faster than average growing sales in Europe

Continue to broaden distance between rivals in the market position. Increase sale by addressing simultaneously two markets: high-end and low-end

Low Profit margins of 3.3% (1999)
Low MVA 75,010,000(shareholders equity investment)=$170,000
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 Management Personal Ambitions

Imagination and aggressiveness in perusing opportunities
Stressing Joseph Montgomery’s attention to detail
Proven management ability to overcome financial problems
Leader in high-end of the bike industry
Recognition of prestigious newspaper as the pioneer in product innovation High innovation and creativity among workers
New revolutionary designs and ideas
Higher than expected sales of MX400

Cannondale’s culture
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”
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

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.

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. III. Matching a Strategy to Cannondale’s position

Industry Environ-ment
Key Issues
Position
Strategic Alternatives and Moves, Pitfalls and Hurdles
Strategic Recommendations

MATURITY
Decreased Overall Industry Profitability
Cannondale currently 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. 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. 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. 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 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. 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 E-commerce
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 E-commerce 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 E-commerce.

IV. Summary of the strategies
External Factors
Opportunities/Threats
Internal Factors
Strength/Weaknesses
Testing Cannondale’s Strategy
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.
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.
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. Competitive Advantages

Strategic Alternatives
Recommendations

(Include the pros and cons of each recommendation)
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-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
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 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. Outsource production of low-end bicycles.

Develop linkages with foreign distributors of low-end 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.

Implementation
Cannondale implementation process should be as follows:
Evaluation and Control
For expanding dirt bike segment:
Cannondale top management should develop a separate business strategy and a separate top business management team to run this 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 aggressively expand into Custom-made bikes:
Top management should put together a team of marketers and an operations manager to run this project. Reassess the Value chain to increase total value delivered to consumers and reduce cost of production of various small batch sizes or customized products. 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. Built to custom-fitted bikes to introduce to all their 60-plus international markets its bicycles are sold.

For Introduction Low-end bikes:
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. 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. 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

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 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. 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 interviews) Cannondale top management should monitor economic conditions and should anticipate economic slowdowns especially before implementing any strategic moves. Cannondale should set specific goals and objective for the top management of the other business segments. Develop training programs for employees in Poland and related business segments. Cannondale you have
in place programs for awarding salary increases, bonuses and non-monetary recognition to motivate great strategy implementation and execution.

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. 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.

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.

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.

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. 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). 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:
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. 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. Appendix A (Consolidated Financial Statement)

ANNUAL INCOME STATEMENT

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

Net Sales
162,496
171,496
178,765
162,450
146,791
Total Revenue
162,496
171,496
178,765
162,450
146,791

Cost Of Sales
101,334
110,113
114,627
112,100
110,823
Sell./Gen./Admin.

35,707
39,361
42,545
41,649
36,273
Research & Develop.
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

Interest Expense
-1,574
-1,995
-4,557
-6,308

-6,738
Foreign Cur./Other
843
653
1,160
1,883
346
Income Before Taxes
21,148
13,930
7,974
-4,194
-13,336

Income Taxes
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
Common Dividends/Shr
0
0
0
0

0
Dilution Adjustment
0
0
0
0
0
Diluted Average Shs.
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
Note: Units in Thousands of U.S. Dollars.

ANNUAL BALANCE SHEET

As of
As of
As of
As of
As of

06/28/1997
06/27/1998
07/03/1999
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
Prepaid Expenses
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

Land
1,324
1,270
1,841
1,796
1,725
Build. & Equip.

8,700
18,328
22,868
23,148
23,491
Factory & Equip.
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
Notes Receivable
0
2,688
12,954
13,197
1,441
Other Assets
2,272
3,002
3,801
5,706
4,273

Cessna Jet
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
Cur.Port.LT Debt
562
461
456
4,577
5,004
Acrd. Warranty
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
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
Total Liabilities
45,663
74,039
87,369
94,221
78,736

SHAREHOLDERS EQUITY
Pref. Stock
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
Treasury Stock
0
-12,417
-20,162
-20,162
-20,162
Trans. Adjust.
-1,379
-2,140
-4,059
-5,977
-7,777
Total Equity
81,621
78,238
75,010
70,686
49,055

Shares Outstanding

8,687.62
8,080.69
7,491.41
7,515.23
7,543.36

Note: Units in Thousands of U.S. Dollars.

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
Extra. Item/Other
0
0
0
494
552
Provision Reserve
5,762
7,141
9,498
11,027
11,360
Prov. Inventory
1,484
1,425
2,309
2,157
4,437
Foreign Cur. Trans.
107
642
-865
-554
-711
Deferred Taxes
-442
425
-129
-1

6,197
Stock Compensation
0
0
105
0
0
Beneficial Conver.
0
0
0
0
400
Non-Cash Items
-1
16
122
129
-40
Accounts Receivable
-17,399
-8,894
-8,151
-3,064
-7,477
Inventory
-1,975
-11,589
4,040
-9,893
-3,043
Prepaid Expenses
-2,089
-3,319
-2,723

-5,391
-1,301
Int. Receivable
0
0
0
0
1,318
Accounts Payable
138
4,711
505
-1,026
-246
Accrued Expenses
805
3,174
-2,480
-1,274
1,085
Other Liabilities
1,470
36
743
-2,908
1,022
Cash From Operations
4,577
7,174
14,679
-5,929
1,869

INVESTING CASH FLOWS
Capital Expenditures

-9,766
-16,762
-15,257
-5,982
-4,318
Sale of Building
1,676
0
4,264
633
808
Related Parties
-227
-2,461
-10,269
-294
-283
Pay./Related Loans
0
0
38
51
12,034
Cash From Investing
-8,317
-19,223
-21,224
-5,592
8,241

FINANCING CASH FLOWS
Iss./Subord. Debt
0
0
0

0
0
Dividend Payment
0
0
0
0
0
Common Stock
896
443
408
120
88
Purch./Sale of Stock
0
-12,417
-7,745
0
0
Issu. Sub. Debenture
0
0
0
0
2,000
LT Debt Issued
21,383
3,203
20,738
43,632
2,000
Pymt. Retire. Debt
0
0

0
-64,596
-12,000
Debt, Net
-3,555
1,291
-1,383
1,352
-1,148
Pay.- LT Debt/Leases
-15,133
16,833
-5,267
32,673
-5,253
Cash From Financing
3,591
9,353
6,751
13,181
-14,313

Foreign Exch Effects
1,365
206
63
104
1,294
Net Change In Cash
1,216
-2,490
269
1,764
-2,909

Cash Interest Paid
1,781
2,071
3,889
5,496
6,609
Cash Taxes Paid
6,788
7,341
2,385
2,906
-953

Note: Units in Thousands of U.S. Dollars.

Source: www.ameritrade.com
Appendix B (SWOT Matrix)

Cannondale
S.W.O.T. Analysis
Opportunities
Threats

Market Size of low-end market
Demand in European Markets
Growing demand for differentiated products
Growing Demand for Juveniles Bikes
Motorbike industry
Fast Rate of Products Innovation
High Rivalry in the High-End
Maturity of the US Market
Economic Slowdown
Fast diffusion of know how
Exit barriers
Declining Industry Profitability

Strengths
Narrow differentiation strategy

X

X

X

X

X

X

X

X

Skill in continuous product improvements

X

X

X

X

X

Flexible manufacturing

X

X

quick design-to-market times

X

X

X

X

X

X

X

X

Proven product quality

X

X

X

X

X

X

X

An attractive base of loyal customers

X

X

X

X

CAD/CAM systems

X

X

X

X

X

X

X

X

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

X

X

MS in USA 20% high end bicycles

X

X

X

R&D with the pipeline full of innovative frames

X

X

X

X

X

X

X

X

X

X

Stronger than rivals Competitive capabilities in design that are applicable to relative industries

X

X

X

X

X

X

X
Weakness
Low Profitability
X
X
X
X

X

X
X
X

X

High Debt leverage
X
X
X

X
X

X

X

Production processes not suited for production of low-end bicycles X

X

X
X

X

X

Limited production capabilities in Europe in the light of fast growing demand and existing cost advantages.

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. 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
2000(Investment)
2001
2002
2003

2004
2005

Operating Cash Flow
4600
3,500
4,810
5,173
9,305
20,016

Sales(g=.30)
30,000
39000
50700
65910
85683
111387.9

Cost of good sold*(estimated=.5*Sales)
15,000
19500
25350
32955
42841.5
55693.95

R&D
7,000
6,000
10000
15000
20000
5000

Administrative expenses
6,000
10,000
10,000
12,000
10,000
20,000

-Depreciation
1,000
4,000
4,000
4,000
4,000
4,000

EBT
1,000
-500
1,350
1,955
8,842
26,694

-Taxes(40%)
400
0
540
782
3536.6
10677.58

+Depreciation
4,600
4,000

4,000
4,000
4,000
4,000

Operating Cash Flow
4600
3,500
4,810
5,173
9,305
20,016

NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
$34,385.87

Initial Investment Land+Building+ Equipment+ Establishing new relations(Further research is needed to provide more accurate estimates)-they already have capabilities 0

Parameters

g
0.3

6,738
d
0.03

48,434
t
0.4

Km
12%

Krf
5%

1.13
Beta
0.28

Cost of capital
8%

Cost of equity
0.07

Cost of debt
0.084

Wdebt
0.614173228

Wequity
0.385826772

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
-Depreciation

1,000
1,000
1,000
1,000
1,000
EBT

1,750
1,275
1,853
2,488

3,287
-Taxes(40%)

700
510
741
995.1
1314.61
+Depreciation

1,000
1,000
1,000
1,000
1,000
Operating Cash Flow

-5,000
2,050
1,765
2,112
2,493
2,972
Initial Outlay
-5000

IRR

32%

NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=

$6,391.07

Parameters

g
10%

Km
0.12

Krf
0.045

Beta
0.28

Cost of capital
0.078598425

Cost of equity
0.07

Cost of debt
0.084

Wdebt
0.614173228

Cost of good sold*(estimated=.8*Sales)
0.7

Wequity
0.385826772

Project 4: Build production facilities in Europe in less capital intense country for production of high-end bikes Years

2002

2003
2004
2005
2006
2007
Operating Cash Flow

-10,000
2,800
3,340
3,961
4,675
5,496
Increase of Sales in Europe as a result of price reductions new project(g=.15) 0
15000
17250
19837.5
22813.13
26235.09
Cost of good sold*(estimated=.6*Sales)

0
9,000
10,350
11,903
13,688
15,741
R;D(No R;D in Europe)

0
0
0
0
0

0
Administrative expenses

0
2,000
2,000
2,000
2,000
2,000
-Depreciation

0
1,000
1,000
1,000
1,000
1,000
EBT

0
3,000
3,900
4,935
6,125
7,494
-Taxes(40%)

0
1200
1560
1974
2450.1
2997.615
+Depreciation

0
1,000
1,000
1,000
1,000
1,000
Operating Cash Flow

-10,000
2,800
3,340
3,961
4,675
5,496
Initial year 2002(Building +equipment)

-10,000

IRR

26%

NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))=
$5,349.65

Parameters

g
0.15

d
0.6

Cost of capital
0.078598425

Cost of equity
0.08

Cost of debt
0.084

Wdebt
0.614173228

Wequity
0.385826772

B. Time line (Consolidated Cashflows for Cannondale)

PROJECT 3 PROJECT(1,2,5) PROJECT 4
20002001 2002 2003 2004 2005 2006 2007

4,600
-2,500
-5,690
10,679
16,041
28,105
9,663
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 Wal-Mart 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.

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