View with images and charts Case Analysis on Cannondale Corporation I. History, Development and Growth of the Company Cannondale Corporation is a world-class leader in the design and manufacture of high-end, highperformance aluminum bicycles. The company also makes and sells bicycle parts and accessories, including clothing, packs, bags, and bike trailers which pioneered an entire industry product category. Preceding most of its competitors, Cannondale introduced its first mountain bike in 1984, and continues to lead the pack in bicycle-related design and technological innovation--reflected in rapid sales growth, averaging 20 percent per year (from $54.5 million in fiscal 1991 to $146 million in fiscal 1996). Cannondale has two wholly owned subsidiaries, Cannondale Europe B.V. and Cannondale Japan KK. In July 1996, Cannondale formed Cannondale Australia Pty Limited, which imports fully assembled bicycles and accessories from the company and components manufactured by other parties. Cannondale products are sold in over 60 countries.
History The company was founded in 1971 by Joe Montgomery to manufacture backpacks and bags for camping and later bicycle trailers for bicycle touring. Today, Cannondale produces many different types of high-end bicycles, which used to be hand made in USA, specializing in aluminum (rather than steel, titanium or carbon fiber) frames, a technology in which they were pioneers. The name of the company was taken from the Cannondale Metro North train station in Wilton, Connecticut. In the late 1990s Cannondale attempted to move into the motor-sports business, producing a line of off-road motorcycles and all-terrain vehicles. According to an interview with Cannondale Communications Director, Tom Armstrong, the company was unable to drive down the cost of their motor vehicles fast enough. Sales took off when the company was still losing money on each motorbike they shipped. This gap drove the company to seek bankruptcy protection in 2003, and to sell off the motor-sport division. Cannondale's bicycle division was purchased in 2003 by Pegasus
Capital Advisors, which supported the company's renewed focus on bicycle production. In February 2008, Cannondale was purchased from Pegasus Capital Advisors by Dorel Industries. In April 2009 it was announced that all production would be transferred to Taiwan. Cannondale Corporation engages in the manufacture and distribution of bicycles and bicyclerelated products worldwide. It manufactures aluminum bicycles, offering approximately 80 models. The company manufactures and sells bicycle models for the adult market in seven major categories: mountain, road racing, sport road, multi-sport, road warrior, recreational, and specialty. Cannondale also offers a line of men's and women's cycling apparel that ranges from traditional cycling shorts and jerseys to water and windproof shells designed specifically for cold weather cycling. This line includes two main collections, Chrono, a line of apparel for riders of all abilities, and garments for off-road riding. In addition, the company provides bicycle accessories, such as bags, shoes, and other items.
Growth Gross profit margin 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999
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The gross profit margins of the company have shown consistent performance over the years. This is due to increased sales revenue accompanied by increased profit over the years. Gross profit and operating profit have increased over the years with an increased sales revenue is an indication of operational efficiency of the hospital.
Net profit margin 10% 8% 6% 4% 2% 0% -2%
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-4% -6% -8%
But the net profit margin is decreased because net profits have decreased over the years with an increased cost in research and development. Return on total assets 15% 10% 5% 0% 1999
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-5% -10%
ROA figures also show that the company has performed well historically because it has shown consistency over the years and it has increased on FY 1995-1997. This is due to increased profit generation over the years. This increased profitability is also reflected by increasing ROE which indicates that the equity holders are getting increasing return over the years. High ROA shows that the company is capable of generating cash internally. Thus it can be said the company has been successful in maintaining the profitability.
Return on share holders equity 40% 20% 0% -20%
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-40% -60% -80% -100% -120%
Debt to Equity ratio 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 1999
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The debt-equity ratio is reflecting similar performance over the years. This is due to increased current liabilities and long term liabilities over the years. Increased current liabilities resulted mainly from bank loan taken by the company for the execution of the expansion plan. Because of the expansion, the performance of the company has got a pace which is reflected by increased profitability and efficiency. This improvement has resulted is reduced financial ratios on FY 19951997. Because of increased sales revenue and profit generation the hospital has been able to cover the financial requirement satisfactorily.
Debt to Assets ratio 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999
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The Cannondale Cooperation was the world’s leading manufacturer and marketer of highperformance aluminum bicycles. •
The Cannondale Cooperation was the world’s leading manufacturer and marketer of highperformance aluminum bicycles.
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Cannondale’s products had been recognized for their innovations.
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Cannondale’s aluminum road bikes and its aluminum-frame bike introduced in 1984were instant hits and allow company revenues to grow at annual rate of 30 percent.
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Cannondale was first to offer affordable large-diameter aluminum-rube bicycles in the early 1980.
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In early 2000 the company is going to introduce MX400 off-road motor bike.
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The discounters’ advantages were price and convenience to those clientele consisted mainly of buyers looking for low-end, low performance models. So by this strategy they are target price sensitive customer.
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The company manufacture its own frames in United States were most of the competitor are importing it from Asia.
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They differentiated their bicycles through technology innovations that made their bicycles lighter, stronger, faster and more comfortable than those of rivals.
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Cannondale’s know how and manufacturing skills enabled the company to be first mover and trendsetter in the industry.
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Flexible Manufacturing system help them to reduced production cost and time, simultaneous production of various models and small batch sizes without high tooling changeover cost.
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Further efficiency in the development process for other parts was realized through a new prototyping and tooling center with computer-aided design and manufacturing technology.
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Cannondale’s strategy is to sale their products from specialty bicycle store to provide better knowledge and services to their customers.
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In 1999 Cannondale was selected as one of the top 12 Road Bikers of All Time by Cycle Sports a magazine devoted to European racing.
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The accessory line helped the company to capitalize more fully on its distribution channels’ capability and at the same time built the brand name and recognition.
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Their proprietary components like its CODA competition suspension seat-port not only help them in differentiation but also a n additional source of revenue.
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The MX 400 contains enough innovation to make everything else with knobbies appear quality antique.
One of the most frightening weaknesses glaring Cannondale in the face is the fact that the growth of core business is declining. By 1999 the mountain bike industry was mature. Though bicycle related activities account for approximately 32% of fitness participation sales within the U.S. have been stagnant. 1. The company’s decelerated growth rate was reflected in its stock prices, which is steadily declined since its peak if $27 in 1997. 2. Net income is declining since last three years. 3. They have keen acquiring a lot of debt and had to pay more interest which is affecting the bottom line of their balance sheet. Cannondale could no longer expect to see the exponential growth in its mountain bike sales as it had during the previous decade. Also the company’s Revenue has been growing; its Net Income is having problems. The company’s struggling position can also be seen by the decline in Net Profit Margin
II. The nature of external environment surrounding the company Cannondale is a part of the motorcycle, bicycle and parts industry. A few top companies in this industry are Harley Davison, Huffy, Murray, Trek, Kawasaki, Brunswick Corporation and Cannondale. This industry is highly influenced by the public’s desire for recreational activities, their concern with general fitness and transportation needs. Throughout the world 1 billion bicycles are in use. The majority of the world’s bikes are made and used in Asia. In the United States, bicycle sales total approximately $5 billion annually. Throughout the 1980’s and early 1990’s, the industry saw a steady line of growth. During the mid 1990’s, this growth moved to the maturity stage. The industry is now growing at a rate of 2% annually. A learning curve and economies of scale exists for the bicycle industry. The industry has a high fixed cost associated with the equipment used to manufacture bicycles. As a company produces more bicycles, the unit cost of the bicycle drops. Therefore, bicycle manufacturers who produce bikes in high volume are able to charge lower prices for their product. A learning curve exists when a company becomes more proficient at producing a product as the number they produce increases. Bicycle companies become more skilled at crafting bicycles as the number produced increases. In follows that companies within the bicycle industry can charge a low price if they produce in high volume and the number of bicycles produced goes up.
Porter’s Five Forces Analysis The Five Forces Model developed by Michael Porter is one of the most effective ways of measuring the level of competition for a given industry. The model determines the level of competition between rival sellers, new entrants, buyers, substitute products, and suppliers in a given industry. An overall level of attractiveness is given to an industry from this analysis. •
Rivalry among the existing producers
Rivalry among sellers measures the level of competition between members of the same industry that sell the same product. For most industries, the level of competition between sellers is the most influential characteristic. The bicycle industry is no different in this regard. In the bicycle industry, there is a moderately high level of competition between sellers. One of the reasons for the high degree of rivalry is that the industry is not seeing the same level of growth that it did in the
past. Since growth of the industry has become flat, a bicycle manufacturer can only increase its sales at the expense of one of their competitors. Another factor leading to the degree of competition is the number of sellers in the industry. In the United States, there are over 100 bicycle producers selling bikes to the public. Because of this large number of producers, there is a high degree of competition. Last, consumers switching cost is low for the bicycle industry. Buyers have little or no cost to switch from one brand of bicycle to another when they purchase a new bike. The industry, therefore, has a moderately high level of competition between sellers. •
Threat of new entrants
The threat of new entrants measures the likelihood that new companies will try to enter an industry. The motorcycle, bicycle and parts industry has moderately low likelihood that new companies will try to enter the industry. New entrants to the bicycle industry can be deterred because of the economies of scale and learning. Also, there is a brand preference among many consumers of this industry. Customers are loyal to a particular brand, for instance Harley Davison motorcycles have a strong customer following. Many consumers will only ride a Harley and will not accept a substitute for a Harley motorcycle. Furthermore, new entrants to the bicycle industry will very likely be met with retaliation from existing firms, since the growth rate has slowed for the industry. Another factor discouraging new companies to the industry is moderate capital investment required to enter. A rather large amount of capital is required to manufacture bicycles on a large scale and receive the benefit of economies of scale. All these factors lead to the conclusion that it is not very likely that new firm will attempt to enter this industry. •
Substitute products
Competitive pressure from substitute products is relatively high. Most bicycles are used for exercise and recreational activities. There are many good substitute activities available that can replace bicycling. Users of bicycles could easily find other forms of exercise or recreational activity such as jogging, rollerblading, weight lifting or even golf. New kinds of recreational activities can pose a threat to the bicycle industry. For instance, the growth in the popularity of roller blades comes at the expense of other recreational activities such as bicycling. Subsequently, there is a low switching cost of consumers to substitute products. There are many other recreational activities
that can be enjoyed for the same price or less to the consumer. All of these factors show the high degree of competitive pressure from substitute products. •
Bargaining power of Buyers
Buyers have moderate barraging power. Again, buyers have low switching cost to other brands of bicycles or substitute products, which help to give them some leverage over bicycle manufacturers. If a buyer decides to purchase a new bike, the previous bike owned will have little influence on the cost of a new bicycle. There are a large number of companies who produce bikes so the buyer can be selective when making a purchase. Buyers can decide when they will purchase a bicycle; there is usually no fixed time period in which a consumer must make a purchase. Furthermore, a bicycle is not a necessity. If the current cost of bicycles is too high, the consumer can simply hold off making the purchase or purchase another form of recreational equipment to give them satisfaction. Last, many of today’s buyers of bicycles are well informed of the product through various bicycling magazines and Web sites. This gives the buyer the ability to make informed buying decisions. Buyers of bicycles have a moderate level of buying power because of these reasons. •
Bargaining power of Suppliers
The power of suppliers measures the level of power that suppliers have over sellers in an industry. Suppliers in the bicycle industry have a moderate level power. Most bicycles manufacture purchase supplies for their bikes rather than manufacturing all the parts on their own. A large number of parts are purchased from Asian manufacturers. Firms in the industry could backward integrate to make the supplies for themselves, but it makes economic sense for them to pursue the areas of manufacturing they are best at and let other manufacturers make the other supplies. Suppliers than have some control over price charged for their products, but if prices rise too high firms that manufacture bikes will backward integrate and produce the products themselves. Suppliers to the bicycle industry have a moderate power. According to the Five Forces Model the bicycle industry is a relatively unattractive industry. There are many factors from outside the industry that are working against it. The two strongest factors are the threat of substitute products and the rivalry among competing sellers. Efficient and competent firms in the industry should still be able to achieve sufficient
profits. As a whole, the industry is unattractive. Weak performers in this industry should search for other industries where they possess the necessary competencies and where there are better opportunities for growth. Firms looking to enter the bicycle, motorcycle and parts industry should seriously consider their decision.
Other External Factors A few other factors affect the external environment of an industry. These include political and legal factors, general economy, societal factors and technology. The bicycle industry has no strong political or legal factors affecting it. The only factor working against the industry is an environmental regulation that some state parks have put in place limiting the access to bike trails. Next, the general healthiness of the economy influences the industry. The sale of bikes is closely related to the amount of disposable income available to the public. If there is a downturn in the economy, consumers will put off purchasing bicycles. In addition, there are societal factors that are linked to an industry. For the bicycle industry, the public’s concern with fitness is the major societal factor at work. Last, technology plays a large role in the bicycle industry. During the 1980’s and 1990’s much of the growth increase can be attributed to new technologies, such as the use of new light weight materials in the frame of bicycles which greatly increased performance. These are some of the other external factors that have an influence on the bicycle industry.
III. SWOT Analysis Having identified the company’s external opportunities and threats as well as its internal strengths and weaknesses here we need to consider what our findings mean. Further analysis will be developed based on the SWOT analysis to evaluate how the company manages its corporate level, business level and functional level management to address its weaknesses, opportunities, threats and opportunities.
Strength of Cannondale
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Product innovation
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Flexible manufacturing system
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Research and Development
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Well developed procurement, sales and distribution channel
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Brand creating marketing and promotional strategy
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Rich product line along with highly differentiated products
Cannondale Corporation’s bicycle which carries its “Speed is Our Friend” motto is recognized for their innovative design; light weight, exceptional performance and durable construction are sold in United Sates and in more than 60 other countries. Product innovation is the basic strength of Cannondale. Its products were designed for cyclist who wanted high-performance, high-quality bicycles. It differentiated its bicycles through technological innovations that made its bicycles lighter, stronger, faster and more comfortable than those of rivals. Cannondale’s flexible manufacturing system is yet another strength that helped it to respond the market quickly. The strength of the system included reduced production time, simultaneous production of various models and small sizes without high tooling changeover costs. Cannondale uses CAD/CAM system, which automatically calculated specific tube lengths, and its computer-guided laser tube cutter allowed the company to offer custom-fitted bicycles. Research and Development became the core product development strategy of Cannondale. Its Volvo/Cannondale mountain bike racing team was closely tied to its R&D process, thus allowing regular testing of both prototypes and finished product models. To ensure structural integrity of its design, an experimental stress and analysis laboratory was used to collect data on stresses placed on product during actual riding condition. In addition stress analysis testing was conducted during production to verify conformance to design specification.Cannondale has a well developed procurement, sales and distribution channel. Most of its bicycle components are purchased from Japanese, Taiwanese and U.S. original equipment manufacturer. Cannondale concentrated buying power among fewer suppliers, which allowed the company to secure higher-volume purchase discount. Its distribution strategy was to sell its bicycles through specialty bicycle retailer who it believed could provide knowledgeable sales assistance regarding the technical and performance characteristics of its products and offer an ongoing commitment to service. Before establishing a new dealer, the company considered such
factors as market density in terms of competition, population, and demographics; ability of the retailer to optimize market penetration; commitment to service and the high-performance segment of the market; and dealer creditworthiness. Cannondale establishes a brand creating marketing and promotional strategy to attract the retail bicycle channel. It established an innovative web site (www.cannondale.com) that averaged more than 25 million hits each month. Its print advertising focused on magazines for cycling enthusiasts and general lifestyle magazines to reach upscale adults with an interest in outdoor and leisure activities. I 1994, the company formed the Volvo/Cannondale racing team. The team generated considerable publicity in both the cycling press and the general press and through television coverage. Cannondale provides rich product line along with highly differentiated products. It offered 71 models of bicycles, all of which except its carbon-fiber Raven model featured aluminum frames. The accessory line helped the company to capitalize more fully on its distribution channels’ capability and, at the same time, build brandname recognition. The company diversified its operation from its bicycle frame design and production skill to the off-road motorcycle industry.
Weaknesses of Cannondale •
Failed to forecast Asian market
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Consistently ignored booming market segments
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Management failed to focus the industry life cycle stage
Cannondale failed to forecast Asian market. It has limited its international operation in Canada, Australia and Europe. Now the biggest market for bicycle is Asia. China and Taiwan is now controlling the Asian market. Cannondale has consistently ignored booming market segments like fitness lifestyle bikes and children’s bike sectors. The growing interest in total lifestyle had caught the attention of specialty dealers. Roughly 25 percent of the bicycle stores in the U.S. sold some kind of indoor exercise bikes. Children bikes are the fastest growing bicycle category sold by specialty dealers, accounted for 33 percent of sales in 1997 versus 20 percent of specialty dealer unit sales in 1994. Cannondale management failed to focus the industry life cycle stage. The bicycle industry has come to its maturity stage. Growth opportunity is shrinking day by day. Cannondale is still relying
its innovative activities rather establishing cash generating activities through market expansion. As a result it had to file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in January 2003.
Opportunities for Cannondale •
Bicycle industry is highly competitive
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Active lobbying effort
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Technological innovation
As the industry is in maturity stage the high-performance segment of the bicycle industry is highly competitive in the United Sates and in many other countries. Competition is based on perceived value, brand image, performance feature, product innovation and price. Cannondale having all the abilities can be the market leader through proper application of strategies. Cannondale is a large capital company. The bicycle industry in U.S. is huge. The company should maintain an active lobbying effort along with its association to ensure that land regulated by the Bureau of Land Management and the U.S. Forest Service remains open to cycling.Technological innovation can be the biggest opportunity for Cannondale. Technological innovation became increasingly important in the industry as rival mountain bike manufacturer attempted to outpace the modest industry growth rate by introducing technological innovation in frames.
Threats for Cannondale •
Low cost bicycle made by China and Taiwan
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Demand for U.S. bicycles is shrinking
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Mountain bike manufacturer advertisements had created backlash
Aggressive marketing and low cost bicycle made by China and Taiwan became the biggest threat for U.S. cycle manufacturing firms. China produced more bicycle then any other nations in the world. During the mid 90s as little as 40 percent of the bicycles sold by discount retailers were produced outside the United States.
The demand for U.S. bicycles is shrinking day by day. Taiwan was the second largest producer and world’s largest exporter of bicycles. Over 10 percent of the bikes sold in the United States were made in Taiwan.The coverage of racing events in mountain bike magazines and the use of racing photos in mountain bike manufacturer advertisements had created backlash against the industry bikers and others wishing to preserve the environment.
IV. CORPORATE LEVEL STRATEGIES PURSUED BY THE COMPANY PHILOSOPHY They fight to be different... not for the sake of being different but for the sake of being the best. For them, it's the secure click of a cleat meeting its pedal. •
It's the first pedal stroke with anticipation of a long ride churning within.
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Its the first breath inhaled.
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It's the precise moment just before reaching the apex of a long climb, and the exhilaration of conquering it.
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It's the thrill of going down...fast.
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It's finally getting through that technical section and then nailing it every time thereafter.
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It's the "endo", the road rash, the challenge, the thrill.
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It's staring at convention and then disrupting it all to create that unique, spectacular moment in time called your ride.
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It's when you realize that between you and your bike, there is nothing you can not accomplish.
For them at Cannondale, it's building, testing and rebuilding; making it better in the process, never settling for "good enough". It knows it, verses guessing it and using the world's greatest athletes to
prove it. It's having such high standards and expectations in how they want product to perform that they are relentless in our pursuit. It's not about superfluous welds or fancy etchings; it's about performance, innovation, superior product. Does it contribute to the ride? Does it do what they want it to do? When they step back and look at their work, the answer is easy... it does, and they feel it everyday, knowing the customer will feel it too.
Mission "Their mission is to create innovative, quality products that inspire cyclists around the world." To succeed in their mission: •
They strive to exceed the expectations of our consumers, retailers and business partners.
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They believe our people drive our success and act accordingly.
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They work together as one global team.
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They act with respect, responsibility and integrity.
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They produce a stream of innovative, quality products.
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They devise flexible manufacturing processes that enable us to deliver those innovative, quality products to the market quickly and then back them with excellent customer service.
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They limit our distribution to the best specialty retailers in the world.
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They stay lean, remain competitive and entrepreneurial.
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They promote from within whenever possible.
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They concentrate on detail, because the last 5% is often the difference between success and failure. They continuously improve everything.
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They govern our every deed by what is ‘just and right’
Vertical Integration It leads a company to enter industries at adjacent stages of the value chain to strengthen its core business model. Cannondale’s overall business strategy had significant vertical integration components. The company manufactured its own frames in the United States; where as most of its competitors imported their frames from Asia. Cannondale was one of the first companies to concentrate on aluminum frames and enjoyed the premier position in this category, as bicyclist continued to gravitate toward lighter, sturdier higher performance bicycles. In addition, Cannondale developed a proprietary component line under the Cannondale Original design application (CODA) brand that was used in a growing portion of its product mix and was becoming more important in the aftermarket. With component such as handlebars, brakes, cranks, and deraileurs comprising a significant portion of a bike’s value. Cannondale hoped to gain a competitive advantage over manufacturers who relied on outside component suppliers such as Shimano, SunTour, and Compionolo.
Backward Vertical Integration to aluminum frame & components parts industry
Full integration Cannondale achieves full integration as it produces the entire aluminum frame needed for its bikes through its own operation. The company manufactured its own frames in United States. Beside this, Cannondale had also a proprietary component line under the CODA brand comprising handlebars, brakes, cranks, and derailleur. These components are used in the bike produced by Cannondale.
Competitive advantage from Vertical Integration •
Design remains proprietary
Cannondale considered its domestic manufacturing base a key competitive advantage. Whereas the majority of bike companies purchased most, if not all, of their models from huge Far Eastern manufacturers. Cannondale made its bike frames in Pennsylvania. The CEO of Montgomery believed that when they went to Asia to get a new frame design Manufactured, the manufacturers made three bikes for each order, one for them, one to sell to another bike company and one to sell under their own brand name. By this time their new bike finally made it into bike shops, the market was flooded with similar designs. So the advantage of operating their own factories was their factories didn’t have other customers ahead of them in line. When they made an improvement, or add a model, the reaction was instantaneous. Also, their proprietary designs remained proprietary. And of course, their product doesn’t spend an extra six months on the water or stuck in customers, before finally becoming available to customers.’ •
Facilitating Investment In Specialized Asset
Through setting up a manufacturing base, Cannondale invested a lot in aluminum frame manufacturing which was their key competitive advantage. Otherwise, it could not get any other supplier of the frame. Because this would require a large amount of investment in specialized asset for making aluminum frame which would lock the supplier with a special kind of asset? •
Enhancing Product Quality
Use of aluminum frame was one their competitive advantage. It allowed Cannondale to innovate new kinds of bikes. By making a backward linkage the company ensured its required key material for making bicycles.
Problems with Vertical Integration Even though Cannondale’s U.S based manufacturing facilities were a valuable competitive resource, various equipment problems in its Bedford, Pennsylvania, plant had resulted in unfilled dealer orders during the fall of 1999 and had delayed the introduction of some 2000 models.
Strategic Alliance
Cannondale made strategic alliance with Japanese, Taiwanese and U.S original equipment manufacturers. Its largest component supplier was Shimano, which was the source of approximately 19 percent of total inventory purchases in 1999.
Features of Cannondale’s Strategic Alliance
Favorable pricing & delivery terms Cannondale entered into purchase agreement with the aluminum pipe supplier to ensure that it would get favorable pricing. It didn’t need to think about the price surge. It would continue to get at the same price. It also enjoyed favorable delivery terms.
Parallel sourcing policy Cannondale didn’t make purchase agreement with only one supplier. Rather it made agreement with different supplier so that the suppliers didn’t take advantage of the agreement. They might lack the motivation or assumed that there were permanent buyers of their product. They didn’t need to compete with the market and thus they were not encouraged to improve their product. By parallel sourcing policy, the suppliers came to know that if they could not supply the right materials on time and cost effective way, Cannondale would fully switch to other supplier.
Large buying power Cannondale concentrated buying power among fewer suppliers, which allowed the company to secure higher volume purchase discounts. It had large buying power as termination of its contracts would not have a significant impact on its cost because of aluminum’s wide availability.
Expanding Beyond a Single industry Cannondale Corporation was basically a leading manufacturers and marketer of aluminum bicycles. But Cannondale didn’t concentrate in only one industry. It didn’t confine its expertise only in the bike industry. Rather it expanded its product mix to bicycle rider’s apparels to leverage its various
distribution channels capability and at the same time, build brand name recognition. Then it entered in off road motorbike industry to transfer its bicycle frame design and production skills. We can describe the Cannondale expansion through a model which allowed us to explain the expansion of Cannondale. Gary Hamel and C.K. Prahalad have developed this model. They think a company is a portfolio of distinctive competencies and then consider how those competencies might be leveraged to create more value and profit in new industries.
Fill in the blanks The lower left quadrant represents the company’s existing portfolio of competencies and products. It refers to the opportunity to improve a company’s competitive position in its existing industries by sharing its current competencies between divisions. Cannondale offered 71 models of bicycles in 2000. But they didn’t stop there. They recognized the need of the cyclist who not only want recreational style bicycle but also want light and strong quality bikes. So they have innovated Raven mountain bike which is made from a carbon composite skin that was stretched over a magnesium spine. The bare frame weighted only 4.7 pounds. It also introduced Smooth Riding Bicycle line of mountain bike frame which were suitable for on road and off road use. It also offered a number of hybrid and comfort bikes to appeal to the cyclist who wanted to cruise around town, get aerobic exercise, and commute to work or occasionally ride off road trails.
White Spaces
The lower right quadrant is referred to as white space because this is the space manager must address. White spaces are opportunities to creatively redeploy or recombine its current distinctive competencies to products in new industries. Cannondale identified the grey area of unmet needs in motorbike industry. So by summer 1998 Cannondale began testing 11 different prototypes of MX400 new engine and frame and it came to market in November 1999. This motorbike achieved a great success in 5-lap races. It also became the concern of other manufacturers because it forced them to move motocross machine into a new technological era.
Premier plus 10 The upper left quadrant is referred to as premier plus 10. It is used to suggest what new distinctive competencies must be developed now to ensure that a company remains a premier provider of its existing products. We saw that when Cannondale already introduced many innovative bikes to the preference of different kinds of cyclist, it then entered in accessory line of business. It offered a variety of bags and panniers, mountain bike bags, lightweight, moderate capacity road bike bags and large capacity touring bags. It also offered a complete line of men & women’s apparel including shorts, jersey and jackets. It helped the company to capitalize more fully on its distribution channels capability. At the same time, it helped the company to build brand name in the cycle industry and make their position more strong.
Related Diversification Cannondale made related diversification in motorbike industry. Motorcycle industry has some form of commonalities with cycle industry. It used its bicycle frame design and production skills in bicycle production in the motorbike industry. It’s motorcycle ha radical new engine design and Cannondale brought three design innovations to the market. Beside this, Cannondale also entered accessories industry to leverage its distribution channels capabilities. Commonalities between the value chain of bicycle and Motorbike Industry Bicycle
Raw Material Aluminum Frame Raw Material
Motorbike
Aluminum Frame
Production
Distribution
Flexible Manufacturing System Production Flexible Manufacturing System
Distribution
Increasing profitability through related diversification •
leveraging competencies
Cannondale developed its distinctive competencies in bicycle industry by flexible manufacturing system and its aluminum frame. Then they implanted it in motorbike industry. They made it happen because of commonalities in the bicycle and motorbike’s value chain functions. •
Sharing Resources: economies of scope
Cannondale could enjoy the economies of scope because the motorbike and cycle shared the same aluminum frame. They could collectively share the raw materials and thus lower its cost structure. They now invested its manufacturing base proportionately and used them more intensively. •
Using product bundling
Cannondale entered in apparel industry and other accessories industry. Thus it offered its customer a wide range of product line and satisfied the cyclist’s needs for a package of related products.
V. Company’s Business-level strategy We know that there are four generic business-level strategies- cost leadership, focused cost leadership, differentiation and focused differentiation. Cannondale is a product differentiator due to their expertise and innovation in aluminum composite material design and fabrication. The company’s main business was high performance bicycle. Cannondale was a leader in the use of lightweight aluminum as a material for bicycle frames and was the only bicycle manufacturer not to build bicycles from steel. Cannondale’s products were designed for cyclists who wanted highperformance, high-quality bicycles. It differentiated its bicycles through technological innovations that made its bicycles lighter, stronger, faster and more comfortable than those of rivals.Cannondale differentiates their bicycles by adding additional features that aren’t available on
other bikes. One primary means of differentiating its bikes is through its research and development department. The company continually develops and adds new features that the customer values. Cannondale’s rise in popularity came as a result of offering the first aluminum frame mountain bike to the market. Over the years, Cannondale has won awards by magazines such as Popular Science, and Popular Mechanic for its design innovations. Joe Montgomery states, “We approach everything we do and I mean everything – with an eye toward innovation. And to a large extent, it’s the innovations we’ve developed on design and manufacturing side that allow us to continually bring these exciting new products to the market.” Cannondale tries to be a first mover with offering new products and features to the public.
Strategic choices A differentiator invests its resources to gain a competitive advantage from superior innovation, excellent quality and responsiveness to customer needs- three principle routes to high product differentiation.Cannondale had an ongoing commitment to R&D and had continued to expand and develop its aluminum bicycle line with a series of innovations focusing on proprietary frame designs, suspension systems and component. Cannondale’s know-how and manufacturing skills enabled the company to be a first mover and trendsetter. Its original product, the Bugger bicycle trailer was an industry first that pioneered the entire product category. Cannondale produced the first-ever large-diameter, aluminum-tube bicycle in 1983. It introduced its first mountain bike in 1984. In 1990 the company led the industry in introducing suspension systems in bicycles and in 1996 created lightweight thermoplastic carbon-skin frame that was bonded to a magnesium spine for its new Raven mountain bike. In 2000 the second generation Raven frame was honored as of the “Best of what’s New” products by Popular Science.Cannondale bikes were of supreme quality. It focused on quality by excellence. Each new frame or component innovation went through a twomonth battery of tests in the company’s Q-Lab that included fatigue testing, impact testing, finite element analysis, computerized field testing and brittle-coat testing. Cannondale’s products were designed for cyclists who wanted high-performance, high-quality bicycles. It differentiated its bicycles through technological innovations that made its bicycles lighter, stronger, faster and more comfortable than those of rivals.Cannondale was responsive to customers. We know that
companies can provide a higher level of satisfaction if they differentiate their product by customization and reduction of time to respond to customers. Cannondale’s CAD/CAM system, which automatically calculated specific tube lengths and its computer guided laser tube cutters allowed the company to offer customer fitted bicycles. The company had built customer-fitted bikes since 1994 for its professional racing staff and began to offer customers in Japan, Europe, Australia, Canada and the United States custom-fitted bikes in 1999. Cannondale was expected to introduce custom fitting in the remainder of the 60-plus international markets in 2000. Cannondale charged a $400 Custom fitting fee and could deliver the custom-made bike to the consumer within six weeks. Generally a company pursuing a business model based on differentiation frequently strives to differentiate itself along as many dimensions as possible. The less it resembles its rivals the more it is protected from competition and the wider is it market appeal. Cannondale’s bicycles lighter, stronger, faster and more comfortable than those of rivals. Generally a differentiator chooses to segment its market into many segments and niche’s. Cannondale recognized that the revenue-enhancing ability was dependent on being able to attract more customers willing to pay a premium price in each market segment. Cannondale offered eleven categories of bikes with seventy-one models. Bicycle Category Mountain bikes Full suspension Front suspension Nonsuspended Road bikes Front suspension Nonsuspended Multisport recreational Hybrid Comfort Specialty Tandem Touring Cyclocross Total
Number of models 11 12 03 03 15 02 07 07 05 03 02 71
Because developing a differentiation advantage is expensive, a differentiator has a higher cost structure than the cost leader does. However building new competencies in the functions that sustain a company’s differentiated appeal does not mean neglecting the cost structure. Cannondale costs while preserving the source of its competitive advantage otherwise price would have exceeded what customers were willing to pay. Cannondale’s flexible manufacturing system has enabled them to cost-effectively produce a wide product line and a broad range of models in a single day in order to respond to customer demands. Cannondale’s system reduced its lead-time from 17 days to 3 days from order to the completion of a bike. Its computer-guided laser tube cutting system allows Cannondale to custom-fit bikes for its customers. Cannondale believes one of its greatest strengths is their vertically-integrated manufacturing process, allowing them to control the speed of manufacturing, protect proprietary designs and information, and change product designs and instantaneously introduce those changes to the market-place Cannondale remained a leader in the high-performance segment of the mountain bike industry with innovative products like Jeky11, but its growth during the late 1990s had been severely restricted as the bicycle industry reached maturity during the mid 1990s and grew at an approximate annual rate of two percent during the late 90s. Cannondale’s revenue growth had slowed to an annual rate of 9.7 percent between 1995 and 1999 after growing at a compound rate of 22.3 percent between 1991 and 1995. So Cannondale attempted to move into the motorsports business, producing a line of off-road motorcycles and all-terrain vehicles. Cannondale is attempting to recreate their growth as experienced between 1991 and 1992 when domestic demand for mountain bicycles and aftermarket component parts significantly increased. Cannondale believes that the introduction of a revolutionary aluminum-framed motor-cross motorcycle and electric starter engine will spark interest and increase revenue for the company. Cannondale is shifting from a vertical integration strategy to one more analogous with concentric diversification in as much as they have mastered the fabrication and mass production of aluminum frames and custom modifications specific to individual demand or necessity. FUNCTIONAL STRATEGY
Production Strategy Cannondale uses a flexible manufacturing system. This allows the company to produce small batches of bikes without a high change over cost between models. Cannondale has reduced the amount of time to assemble a bike from 17 to 3 days as a result of this system. The company also extensively uses CAD and CAM technology. Cannondale is committed to finding other ways to shorten its production cycle and reduce manufacturing costs. One of the biggest benefits of Cannondale’s production strategy is its ability to produce custommade bicycles for its customers. Cannondale recently began custom fitting bikes to an individual’s needs. There are over 7000 variations that can be used to fit a bike perfectly to a customer. Cannondale has used vertical integration as another way to improve its production process. Most bike manufactures purchase their bike frames from overseas. The length of time required to get a new bike to the public can be greatly increased because of waiting on the shipment of frames. Cannondale recognized the problem with the slow response time and started to build all of its frames itself at its factories. This has cut down on the time it takes to get bikes out to the market and allow Cannondale to be a first mover when putting out a new product. Cannondale spent over $20 million in research and development from 1997 to 1999. The company realizes that to stay competitive it must continually bring new product innovations to the market place. Cannondale has a team of engineers that works along side its racing team. The company use athletes for inspiration of new innovations. They ask the athletes what would make for a more complete bicycle experience and the work with the engineers to make it a reality. They view their racing team as a means for research instead of solely a marketing tool. Also, many of the engineers that Cannondale hires have racing background. Marketing Strategy The growth rate of the bicycle industry in the United States is currently 2%. Cannondale recognizes that the same opportunities do not exist that were once enjoyed in the US market because of today’s slow rate of growth. The company has now globalized its operation and has moved into other markets throughout the world. In Europe, cycling is the second most popular sport behind
soccer and offers the opportunity to increase the company’s growth. The company has established subsidiaries in Europe, Japan and Australia to become a major player in the world market of bicycles. Cannondale bikes are sold today in over 60 international markets. One of the marketing tools of Cannondale is its partnership with Volvo to create the Volvo/Cannondale Mountain Bike Racing Team. The championships won by this team have given the company a prestigious presence in the mountain bike market. Cannondale has also used magazines as a way to promote its bicycles. The company typically advertises in cycling magazines, along with general magazines that are intended to reach the health conscious. In 1998, Cannondale created a licensing agreement with Tommy Hilfiger, which incorporated both of the companies’ logos on a mountain bike. Company’s Structure and Control Systems At the corporate level strategic managers needs to choose the organizational structure which allow them to serve and identify different business efficiency .In a manufacture base company each and every sector needs its own sets of specialist support function to operate efficiently. It’s a vertical integration component. it developed a proprietary component line under the company’s original design application. Which was growing portion of the production. Product innovation Cannondale’s product designed for cycle list who wanted high performance. high quality bicycle Manufacturing The centerpiece of Cannonndales manufacturing strategy was its flexible manufacturing Purchasing Aluminum tubing was the primary material used to manufacture bicycles. Marketing
Connondale mountain bike racing team ,a media campaign design to attract consumers to specially bicycle retailer . Promotion Print advertising focused on magazine for cycling enthusiastic and general life style magazine to reach upscale adult. With an interest with outdoor and leisure activity. Sales and Distribution Connondale’s distribution strategy was to sale its bicycle through special bicycle retailer who it believed could provide knowledgeable sale assistance regarding the technical and performance characteristics of its products and offer an ongoing commitment to service. Research and development Structural integrity of its design an experimental stresses placed and product during actual riding condition. Information was analyses incorporated into the design of through its computer aided design system. Stress analysis was conducted during production to verify conformance to design specification. Corporate Requirement The structure chosen by the corporate level is the multidivisional structure .the larger and the larger and most diverse the business in the corporate portfolio. Vertical integration is to achieve Economics of integration among divisions. Chief gains from related diversification come from obtaining synergies or economics of scope among divisions. And the benefit of company comes from some transfer of resources the company is following vertical integration. They are following different strategy and enough well of to match strategy and structure. To ensure structural integrity of its design an experimental stresses placed and product during actual riding condition. Information was analyses incorporated into the design of through its computer aided design system. Stress analysis was conducted during production to verify conformance to design specification.
Recommendation 1. Cannondale should focus its resources, both tangible and intangible on increasing market penetration internationally. They may do this by committing resources to global marketing, sales & distribution. Cannondale needs to utilize its strengths in brand recognition and innovation with strategic combinations to aid in the expansion into new markets. This may be accomplished by licensing the company’s name to international firms on the condition that they adhere to specific quality guidelines. As control of licenses and product quality become an issue, Cannondale should acquire smaller international companies which will give them complete control over these issues. Cannondale should also become more concentrically diversified by creating products that extend beyond the scope of performance bicycles, specifically those designed for transportation. 2. The company must continue to devote substantial resources to innovation, for as the mantra states, “Innovate or die!� 3. Include lower cost segment of bicycles. Create another brand of bikes. These bikes will be of the lower cost variety. 4. Change distribution strategy to include major retailers. Lower cost line can be sold in these stores. 5. Include sales over the Internet. These strategic managerial decisions and actions will help the company to sustain their established competitive advantage which will result in above-average returns, leading to greater shareholder wealth.