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PROFESSOR EDWARD DESMARAIS

BUS470 BUSINESS POLICY AND STRATEGY

FALL 2001

CANNONDALE CORORATIONCASE ANALYSIS

December 17, 2001

International Strategic Annalists

TABLE OF CONTENTS

A. Executive Summary ……………………………………………………………. 1

B. Current Situation ……………………………………………………………. 2 Current Performance ……………………………………...……………. 2

Strategic Posture …………………………………………..………. 4

Corporate Governance ………………………………………………..…. 18

C. External Factors ……………………………………………………………. 19 Industry and Competitive Analysis ……………………………………..…. 21

Summary of External Factors ………………………………………… 73

D. Internal Factors ……………………………………………………………. 77 Financial Analysis …………………………………………………… 105

Management’s Personal Ambitions, Philosophies, and Ethics ………... 117

Company Culture …………………………………………………………….. 118

Summary of Internal Factors ………………………………………….. 120

E. Strategies ……………………………………………………………………… 125 Generic Strategy …………………………………………………………….. 125

Strategy to Gain Maintain Competitive Advantage ………………………….. 126

Matching Strategy …………………………………………………………….. 127

Summary of the Strategies …………………………………………….…….. 130

F. Recommendation and Implementation / Evaluation and Control …...…………….. 134

Appendix A (Consolidated Financial Statement) ………………………………….. 143

Appendix B (SWOT Matrix) ……………………………………………………………. 152

Appendix C (Responses to Panel) …………………………………………………… 155

i

A. Executive Summ a ry

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)

1

Cor

pora

te, B

usin

ess,

Func

tiona

l, D

epar

tmen

tal

Cannondale

Corporation

mission

statement is:

“To be the

best cycling

company in

the world” .

Their

mission

inspired ten

principles

and on of

them is

“Stay lean,

remain

competitive

and

entrepreneur

ial” 1 To

fulfill their

missions

they enter

the

motorcycle

industry

recently.

Cannondale

Vision is

“making the

best cycling

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.

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.

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 2

Cannondale Corporation Case Study, p.127, 2 Cannondale.com

3

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.

4

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.

5

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

6

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.

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

7

-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

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.

8

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.

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.

9

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 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

10

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.)


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.

11

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 &

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.

12

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.

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.

13

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.


- 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.


- Quicker product design-to-market

times by 15% in 2002.

Higher product quality Cannondale is able to assure higher

product quality to their buyers.


- Reduce the number of defects to 1 on

10,000,000 bicycle by 2004 to 2009.


- 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.


- Cannondale will lower the cost of

14

production down to 15% by 2005.


- 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.


- 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.


- 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.


- They should capitalized on superior

on-time delivery by outsourcing 50%

of their total demanded production

by 2006.


15

- 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.


- 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.


- 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.


- They should work in programs that

would allow them to have the

strongest distribution capabilities by

20% in the industry by 2007.


- 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.


- 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

16

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.


- 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.


- Establish 50% more specialty

retailers store in Australia and

Europe by 2005.


- Enter East Europe in 2002 and

achieve market share 2 % by 2003.

Higher levels of

customer satisfaction

than rivals


- The company to have had introduced

to the market one of the industry’s

best customer satisfaction assurance

program by 2004.


- 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%

Long-term objective:

- Cannondale will achieve annual sales

growth of 30% through 2001 to

17

Sales 1991=54,544,000

Sales 1993=80,835,000

Sales 1995=122,081,100

Sales 1999=176,819,000

2005.


- 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%


- Cannondale will return to its earning

growth of 60% by 2003.


- 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%


- Cannondale will achieve profit

margin of 12% by 2003


- 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)


- Cannondale will improve EVA ratio

by 35% by the end of 2004.


- Boost profit margins from 3.3%(’99)

to 6.2% by the end of 2001.

MVA performance 1999 Long-term objective:

18

=$10.00(stock price average of

1999)*(7,518,000)-

75,010,000(shareholders equity

investment)=$170,000

- Consistently beat EPS estimates for

the next 5 years to improve our

MVA.


- 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)


- Cannondale will be among 2 best

rated companies in the industry by

the 2004.


- 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.


- Cannondale will be one of the two

best performing stocks in the bike

industry by 2005.


- 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


- Cannondale will increase market

share in off-road motorbikes and

clothing to 18% by the end of 2004.


- Cannondale will increase revenues

from Europeans markets by 34% by

2001.

19

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%.

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.


- 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.


- 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.


- Cannondale will reduce costs to

achieve higher profit margins and

increase ROE to 1991 levels of 17%

by the end of 2004.


- 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.


- Cannondale’s new business of off-

road motorbikes will generate

$100,000 in 2003 to offset negative

cash flows.


- Cannondale will increase sale of low

20

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.


- 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.

21

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.

22

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.

23

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.

24

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. AllowayVice president of sales, director.

Leonard J. Konecny

Vice president of purchasing.

John P. MoriartyAssistant treasurer and assistant secretary, chief accounting officer.

Michael T. DowerVice president of information technology.

Mark A. CharpentierVice president.

25

C. External Factors

Macro-environment forces


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,

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

26

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.

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

27

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.

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

28

- 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.

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”.

29

1. The Industry's dominant economic features


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.

30

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

31

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 - There were estimated 54.5 million Low-End:

32

their relative size. 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.

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 All companies in this industry have some Low –end:

33

integration type of limited vertical integration. 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

34

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.

35

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,

36

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

- Racing events

- R & D

Great opportunity for the industry

because most companies in the industry

37

from learning and

experience curve effects

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

38

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.

39

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

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.

40

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.

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

41

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

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.

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volume at lower prices. 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 ENTRYWhat economies of scale exist in each of the following areas:

Production

Purchasing

Inbound and outbound logistics

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

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.

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Advertising

Customer service

R&D

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.

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

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

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

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industry's technology? 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.

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.

This is an opportunity for competitors in the US market to help maintain its market share.

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Competition in foreign markets is affected by duties, tariffs, foreign exchange fluctuations, taxes, and the effect of various trade agreements and import restrictions.

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.

SUBSTITUTESWhat 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.

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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

This is an opportunity for competitors to strengthen their competitive position.

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company’s inventory turnover, or by purchasing high volume from fewer suppliers to secure discounts.

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.

BUYERSWhat 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

48

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.

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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.

51

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

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.

52

can apply to a larger extent economies

of scale. The structure is changing as

Asian competitors use US based

resellers and US based companies

outsource production to Asia. More

international links appear in the

structure and those linkages become

critical in the light of global

competition.

Long term industry growth

rate

Cannondale growth rate during

1990 had been severely restricted

as the bicycle industry reached

maturity during the mid-1990s and

grew at an approximate rate of 2%

during the late 1990s.

Domestic market in 1999 - 24.7%

For the whole industry, market

growth rate is slowing down.

Indicators: computers sale and

prices are falling.

International markets in 1999 -

17.6%

Long-term industry growth rate causes

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

53

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

they posses capabilities that can

complement your capabilities

54

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.

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,

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

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

55

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

low-end market.

56

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

57

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.

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

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.

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

58

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

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.

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.

59

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

60

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.

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/

High rivalry. Strategic implication:

Build stronger image

Develop creation with leading car

manufacturers to be perceived as a

leading brand in the bike industry

61

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.

Entry of major firms Giant, which began as a small exporter

of bicycles in 1972, was the worlds

largest bicycle exporter in 1999 with

High rivalry increases as foreign

competitors enter the market.

This is a threat for US industry.


Add more value to your

62

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.

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

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


Develop competitive

63

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.

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

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.

64

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.


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

65

Fast diffusion and technical know-

how. Rivals try to copy business

processes that prove high production

efficiency. Quick rotation in the market

share.

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

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

66

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.

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,

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.


Develop business model that

facilitates customers’

differentiation of products.

Develop new features, offer

option and accessories and

67

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.

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

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.

68

create walkable and bicycle-friendly

communities that would make

cycling and walking alternatives to

traveling by automobile.

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

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.

69

companies are created, new suppliers

are created.

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.


Gain more loyal customers.

Stay on the top of customer service

and technical support.

70

4. Competitors position in the cycling industry

High

Price Medium

Low

Narrow Broad Market Scope

High

Performance Medium

Low

Narrow Broad Market scope

High

quality Medium

Low

Narrow broad Market scope

High

TechInnovation Medium

Low


Mountain Bike Segment

71

Many others such: Huffy, murray and bruswick

Trek, Raleigh, Cannondale, specialized, and Diamondback

Trek, Schwinn, Giant, Raleigh, Cannondale, specialized, and Diamondback


Schwinn, Giant, Derby



Quality/Performance/Price





High

Medium

Low


Recreational Bike Segment

High

Medium

Low


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.

72



Quality/Performance/Price



5. Strategic moves are rivals likely to make nextL

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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-fiberFrames 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

Aggressive expansion via

Well entrenched in the industry

Both Differentiation in

Specialized’s dealers should be knowledgeable about the latest technology

55

leader? technology. innovatingFrames for competition bicycles.

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.

56

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

Wha

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Technology related KSFsScientific 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

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

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 independe

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

57

bicycles. with the quality, performance and the low price.

nt bike maker. They had to allocate their resources for R&D if they want to compete in the U.S. and international markets.

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

Good The company emphasized quality and efficiency in plant operations.Klein bicycle use only certified

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

Excellent Cannondale implemented flexible manufacturing system. The strength of the system includes reduced

58

their contract-manufacturing partner becomes their competitor.

aerospace grand aluminum and custom-made, property production equipment to assembly frames at alignment tolerances as exacting +-.0002 inches.

the technological know-how from Schwinn.

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

59

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.

Very good Intrepid Inc. company tries to use product innovation to fulfill market expectatio

Very good Specialize had been recognized for developing a number of technologically advanced

Very good As an independent company in 1900s Giant wan numerous awards for the design innovation

Very good Cannondale differentiated their bicycles through technological innovations that

60

This strategic mistake brings them low sales, not profits and removes them from the market as a key competitor.

nsThe 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.

bicycle materials and components use in the production of mountain bicycle.The company has the capabilityand the resources to create new technological innovations in their products. They achieve a great success in designing and innovative new mountain bike.

s thanks to large investing in R&D department. The new designs give the opportunity to capture the U.S. market.

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-

Very good They first made frames from metal matrix

N/A N/A Very Good

1983 they produce first-ever large-diameter,

61

fiber frames. Because of that sales and revenue increase.

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.

aluminum-tube bicycle.

Manufacturing related factorsLow-cost production efficiency

Average The try to achieve low cost production efficiency outsourcing the components overseas,

N/A N/A N/A N/A Good The company main location was in Taiwan, which give them the advantage

Average Due to producing their main component in U.S. their production efficiency is not

62

instate then improve and make more efficient their own production process. In consequent they only accomplish company view as a low-cost bike producer.

in low cost production process because of outsourcing the components.

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

63

tooling changing costs.

Marketing related KSFsAdvertising 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

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

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.

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

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

64

the purchase of less-avid cyclists.

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.

By advertising they introduce their products to international and domestic customers, and they increase their market share in the industry.

customers internationally.

interested in outdoor activities and current customers in market.

Distribution related KSFsSpeed 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

65

have specialty bicycle retailers who could provide knowledgeable sales assistant and ongoing commitment to service.

Organizational capability KSFsAbility 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

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

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

66

trends, which put rivals in the comparative advantage over the Schwinn.

changing market conditions quickly.

Other KSFsImage 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

67

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

68

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,

69

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

Cannondale’s business model enables company to grasp growing demand for differentiated products.

70

assembled bikes at extra cost Growing demand for mountain

bikes with carbon fiber frames Growing demand for best-value

bikes with aluminum frames

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 productsMaturity of the marketGrowing 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

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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.

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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

- Take proactive position in regard to safe and responsible cycling through company’s activities.

- Use lobby to influence policy

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

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and improve safe cycling.

- US Government limitations of entrance for foreign companies weaken their competitive advantages to compete in the US.

makers to allocate more funds for supporting bike transportation.

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

- Continue to develop and improve products and technology.

- Make attractive and innovative products.

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transportation, recreation, and outdoor activities.

- Switching cost among substitutes is low.

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,

- 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.

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such as motorcycle segment and European market.

- Outsource products in Asia to realize low costs.

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.

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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.

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

1 Thompson and Strickland, Crafting and Executing Strategy, 12th edition, 2001, p.266

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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.

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).

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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

“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

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.

2 Thompson A.A., Strickland A.J. Crafting and Executing Strategy. McGraw-Hill, Irwin 2001,p.68-69

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- Performance

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

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.

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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.

What is the competitive scope stages of the industry's

production-distribution chain it operates,

geographic market coverage, and

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.

USAWest EuropeJapanAustralia 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.

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

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Size and composition of the customer base?

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.

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, - 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’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.

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Purchasing

Marketing and Promotion

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

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.

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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.

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.

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

3 Thompson and Strickland, Crafting and Executing Strategy, 12th edition, 2001, p.266

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

Earnings:Net income:1991=1,162,0001995=7,548,0001999=5,923,000Growth rate between 1991 and ‘95=59.65%1995 and ‘99=-5.88%

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

4 Porter, Competitive Strategy, p.232-233.

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Profit margins:Year Profit margins1991 3.5%1995 6.2%1999 3.3%

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.

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

Cannondale is a leading company in the high-performance bicycle market, which brings the company competitive advantages, such as gaining

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Profit margin

Net profits

ROI

EVA (page 9)

MVA (page 10)

Financial strength

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 Price1999 8.47 3.691998 8.36 6.531997 14.36 9.001996 18.84 21.75

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

Year Profit margins1991 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

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 tha n 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

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Sales growth

Image

Reputation

Industry position

declining.

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

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.

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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

The resource is hard to copy. It should last for as long as the company continues to provide best value in this

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marketing of high-performance bikes. This is due mainly to their position in the learning curve of the production of aluminum bikes.

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

Cannondale marketing position in high-performance aluminum bikes is hard to copy, significantly superior,

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aluminum bikes.- Cannondale has the

highest market share in aluminum bikes in the USA

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.

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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.TechnologyPatent 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 Linkage: Technology N/A Learning Linkage: N/A Interrelation N/A Institutional

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cost drivers Commit

ment to continuous improvement

Product quality

Process quality

Capacity utilization

Internal business processes

Working with buyers and suppliers on costs

Etc.

Cannondale makes agreements with aluminum suppliers to ensure certain technical assistance to maintain quality.

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.

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.

Cannondale sells products at specialty retailers who have technical knowledge to match the items to customer needs.

ship:Cannondale collaborate with their racing team to improve and develop products by sharing know-how, experiences, and ideas.

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.

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CriteriaInbound Logistics Operations

Outbound Logistics

Sales and Marketing Service

Profit Margin R&D HRM A & G

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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

N/A Cannondale use own brand of

Cannondale offers a full line of

Cannondale shows its quality by

Technical sales assistance

N/A Cannondale is a leader who

N/A N/A

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buyer satisfaction in non-economic or intangible ways

component on some models.Cannondale improve manufacturing process and drastically reduce the time required to design and produce new bike models.

bicycle components, accessories, and men’s and women’s apparel to meet customer’s demand.

attending bike races, which also are used to maintain brand recognition.

gives customers reliability and assurance to purchase matching products.

introduces innovative products in the high-end market.

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

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4. How strong is the company's competitive position?

Key success factors

weight Cannondale Specialized Bicycles Intrepid, Inc.Rating Weighte

d scoreRating Weighte

d scoreRating Weighte

d scoreReputation/ 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

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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 bikesCannondale 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.

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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.

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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.

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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 bikeRiding 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

Interepid had low-end mid-range and high-end models Specialized’s basic classes of bicycles included:

Cannondale had advantages in Product Innovation(R&D), manufacturing and customer

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it offset the competition's competitive advantages?

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.

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.

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

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Competitive scope( only high end bicycles in the light of globalization and high rate of diffusion of know-how)

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.

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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

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some potentialsIntrepid 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.

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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)= 3.55Industry 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

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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=2.4216Industry 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

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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.

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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%


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%


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%


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.

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5. Return on Equity (ROE) = Net income/Common Equity = 7.89%


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%


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%


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

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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


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


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

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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


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.

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Summary of Financial Ratios

Ratio name Cannondale Industry Average CommentI. Liquidity ratios

Current ratio 3.55 1.90HIGH (inefficient use

of current assets) Quick ratio 2.42 times 0.8 HIGHII. 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 OKIII. 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 LOWV. Growth rates Sales-5 year growth rate 0.10 0.02 EXCELLENT EPS - 5 year growth rate 0.325 0.12 VERY GOODEPS-2 year growth -50.5% NA INCOMPARABLE6

Dividends - 5 year growth rate NM 0.11 GOODVI. 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

5 Appears to be high. However is strengthened by high EPS rate from 1996 and 19976 Net income is declining as sales volume growth slows down.

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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

Profit Margin: Earnings as a Percentage of Sales 3.31%

Multiplied by

Total Asset Turnover1.10 times

Return on Assets3.65%

Assets/Equity = $162,379/$75,010 = 2.164

Return on Equity=7.89%

Multiplied by

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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.

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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.

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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.

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IV. Summary of Internal FactorsStrength Strategic implications Weaknesses Strategic

implicationsCompetitive 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

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

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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

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 industryFunctional Areas Production

Marketing Continue improvements in manufacturing

processes

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R&D HR

Use your vertical integration to increase differentiation

Increase application of e-commerce Hire the best professionals for your R&D

departmentStrategic 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

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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

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

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ability to overcome financial problems

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

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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

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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.

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III. Matching a Strategy to Cannondale’s position

Industry Environ-

ment

Key IssuesPosition

Strategic Alternatives and Moves, Pitfalls and

HurdlesStrategic Recommendations

MA

TU

RIT

Y

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.

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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

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.

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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.

MA

TU

RIT

Y

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.

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IV. Summary of the strategiesExternal Factors

Opportunities/ThreatsInternal Factors

Strength/WeaknessesTesting Cannondale’s

StrategyOpportunities- 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

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

- 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-

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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

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.

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.

ImplementationCannondale 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.

Cannondale should measure the success of their strategic moves: introduction of lower-end bikes, outsourcing low-end

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- 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.

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.

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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.

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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.

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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.

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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.

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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

136

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.

137

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).

138

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.

139

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.

140

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.

141

Appendix A (Consolidated Financial Statement)

ANNUAL INCOME STATEMENT12 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

142

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

143

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.

144

ANNUAL BALANCE SHEETAs of As of As of As of As of

06/28/1997 06/27/1998 07/03/1999 07/01/2000 06/30/2001

ASSETSCash 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

145

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

LIABILITIESAccounts 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

146

Other Liabs. 294 275 400 424 427

Total Liabilities 45,663 74,039 87,369 94,221 78,736

SHAREHOLDERS EQUITYPref. 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


147

ANNUAL CASH FLOWS12 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 FLOWSNet 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 -2,089 -3,319 -2,723 -5,391 -1,301

148

ExpensesInt. 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 FLOWSCapital 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 FLOWSIss./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

149

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


Source: www.ameritrade.com

150

Appendix B (SWOT Matrix)

Cannondale S.W.O.T. Analysis

Opportunities Threats

Mar

ket S

ize

of

low

-end

mar

ket

Dem

and

in

Euro

pean

M

arke

ts

Gro

win

g de

man

d fo

r diff

eren

tiate

d pr

oduc

ts

Gro

win

g D

eman

d fo

r Ju

veni

les B

ikes

Mot

orbi

ke

indu

stry

Fast

Rat

e of

Pr

oduc

ts

Inno

vatio

n

Hig

h R

ival

ry in

th

e H

igh-

End

Mat

urity

of t

he

US

Mar

ket

Econ

omic

Sl

owdo

wn

Fast

diff

usio

n of

kn

ow h

ow

Exit

barr

iers

Dec

linin

g In

dust

ry

Prof

itabi

lity

Narrow differentiation strategy

X X X X X X X X

Skill in continuous product improvements

X X X X X

Flexible manufacturing X Xquick design-to-market times X X X X X X X XProven product quality X X X X X X XAn attractive base of loyal customers

X X X X

CAD/CAM systems X X X X X X X X

151

Stre

ngth

sHigher 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 XR&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

Low Profitability X X X X X X X X X

152

Wea

knes

sHigh 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

153

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.

154

3. Capital BudgetingA. 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: MotorbikesYears 2000(Investment) 2001 2002 2003 2004 2005Operating Cash Flow 4600 3,500 4,810 5,173 9,305 20,016Sales(g=.30) 30,000 39000 50700 65910 85683 111387.9Cost of good sold*(estimated=.5*Sales) 15,000 19500 25350 32955 42841.5 55693.95R&D 7,000 6,000 10000 15000 20000 5000Administrative expenses 6,000 10,000 10,000 12,000 10,000 20,000-Depreciation 1,000 4,000 4,000 4,000 4,000 4,000EBT 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 4,000Operating Cash Flow 4600 3,500 4,810 5,173 9,305 20,016NPV(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

Parametersg 0.3 6,738

d 0.03 48,434

t 0.4Km 12%Krf 5% 1.13Beta 0.28Cost of capital 8%Cost of equity 0.07Cost of debt 0.084Wdebt 0.614173228Wequity 0.385826772

155

Project 1: Increase sales of custom-made bicycles (estimation only consider custom-made bikes segment)Years 2001 2002 2003 2004 2005 2006Operating Cash Flow -1,000 -2,550 941 1,285 1,635 2,016Sales(g=.09) 10,000 10900 11881 12950.29 14115.82 15386.24Cost of good sold*(estimated=.5*Sales) 5,000 5450 5940.5 6475.145 7057.908 7693.12R&D(after 2002 plan to research only on frames) 3,000 5,000 2000 2000 2000 2000Administrative expenses 3,000 3,000 3,000 3,000 3,000 3,000-Depreciation 1,000 1,000 1,000 1,000 1,000 1,000EBT -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 1,000Operating Cash Flow -1,000 -2,550 941 1,285 1,635 2,016IRR 18%NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))= $2,326.20 Parametersg 0.09d 0.03Km 0.12Krf 0.045Beta 0.28Cost of capital 8%Cost of equity 0.07Cost of debt 0.084Wdebt 0.614173228Wequity 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 analyzedYears 2001 2002 2003 2004 2005 2005Operating Cash Flow -5,000 2,050 1,765 2,112 2,493 2,972Sales(g=.10) 17500 19250 21175 23292.5 25621.75Cost of good sold*(estimated=.7*Sales) 12,250 13,475 14,823 16,305 17,935R&D(limited as competition is based on price) 500 500 500 500 400Administrative expenses 2,000 3,000 3,000 3,000 3,000-Depreciation 1,000 1,000 1,000 1,000 1,000EBT 1,750 1,275 1,853 2,488 3,287

156

-Taxes(40%) 700 510 741 995.1 1314.61+Depreciation 1,000 1,000 1,000 1,000 1,000Operating Cash Flow -5,000 2,050 1,765 2,112 2,493 2,972Initial Outlay -5000IRR 32%NPV(Cost of Capital=Ks=(Km-krf)*Beta+Krf))= $6,391.07 Parametersg 10%Km 0.12Krf 0.045Beta 0.28Cost of capital 0.078598425Cost of equity 0.07Cost of debt 0.084Wdebt 0.614173228Cost of good sold*(estimated=.8*Sales) 0.7Wequity 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 2007Operating Cash Flow -10,000 2,800 3,340 3,961 4,675 5,496Increase 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 15,741R&D(No R&D in Europe) 0 0 0 0 0 0Administrative expenses 0 2,000 2,000 2,000 2,000 2,000-Depreciation 0 1,000 1,000 1,000 1,000 1,000EBT 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 1,000Operating Cash Flow -10,000 2,800 3,340 3,961 4,675 5,496Initial year 2002(Building +equipment) -10,000IRR 26%

157

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

Parametersg 0.15d 0.6Cost of capital 0.078598425Cost of equity 0.08Cost of debt 0.084Wdebt 0.614173228Wequity 0.385826772

B. Time line (Consolidated Cashflows for Cannondale)

PROJECT 3 PROJECT(1,2,5) PROJECT 42000 2001 2002 2003 2004 2005 2006 2007

4,600 -2,500 -5,690 10,679 16,041 28,105 9,663 5,496

158

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.

159

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