1. Dominant characteristics of the mountain bike industry Many firms; existence of close substitutes; demand is elastic with respect to price Some significant barriers to entry and exit Product differentiation & technological innovation Large capitol investment & cost advantages 2. There is a great deal of competition in this industry. Cannondale is only involved in the high-performance segment of the industry. In this particular industry, the strongest of Porters five forces of competition is threat of substitutes between competitors.
If a Specialized bike is priced higher than a Mongoose, with no apparent advantage, a consumer will have no problem purchasing the Mongoose. On the other end of the spectrum, the weakest competitive force would be threat to entry. Companies looking to enter into this industry would need a substantial capitol investment, as well as access to worldwide distribution channels. The industry has evolved since Cannondale entered, where a garage type operation could prosper.
Now, the demand for innovative products, with a recognizable brand name is crucial for success, making it very difficult for an unknown firm to capture any share of the market. 3. There are some driving forces that have the potential to change the attractiveness of the mountain bike industry. The industry has changed from a low-cost mass produced bicycle market into one driven by innovation. It has become a popular sport and hobby, which forces Cannondale and its competition to focus on technologically, advanced products. The current health kick that our society seems to be in will also bode well for the industry.
4. The strategic group map reveals that Cannondale has differentiated itself through innovation and expenditures on R&D. The competition also imports most of their components from the Far East, which also sets Cannondale apart because of their grow in vertical integration. Cannondale and Trek seem to have set themselves apart from the pack because of their domestic production facilities, as well as their product lines, although Trek leads Cannondale in that category. The strategic group diagram below shows the relationship between the industries competing firms relative to their degree of vertical integration and diversity of their product line.
5. There are several key factors for success in the mountain bike industry. Product innovation seems to be very important. Cannondale has been such a success because they focused on their target market, and what they demanded. Their products are designed for cyclists who want a high-performance, high-quality bike.
The ongoing focus on innovation will differentiate one companys bike from another. Cannondale has successfully developed lighter, faster and more comfortable bikes because of their commitment to R&D. Price is another factor, but not as critical as innovating your product. The top mountain bike companies have certain models that are competitively priced. When I bought my mountain bike, I was focused on quality and the performance features, not on the $15 price difference.
6. Key elements of Cannondales Strategy Product Innovation Cannondale strives to differentiate itself through its innovations. They have made lighter, faster, stronger and more comfortable bikes for their customers. They were the first company to introduce the mountain bike in 1984 and led the industry in suspension systems. This is a definite competitive advantage for Cannondale. Manufacturing The strategy here is to maintain its competitive position by supporting research into further improvements into its manufacturing process, and reducing the time required to design and produce new models.
Cannondales manufacturing takes place domestically, which is another advantage. According to the case, the majority of bike companies buy their models from the Far East, where they produce the same model for different companies, resulting in three similar bikes with different brand names. Purchasing Cannondales purchasing strategy has shifted to use more domestic suppliers. They believe this will reduce lead times and lower their inventory levels. Concentrating on fewer suppliers will also lower costs because they can take advantage of high-volume purchase discounts. Sales & Distribution This is another aspect of their strategy that sets them apart from most of their competition.
Cannondale sells its bikes through specialty retailers. Their reasoning behind this is simple; their customers will get more attention and receive knowledgeable assistance regarding technical and performance concerns. They are also committed to increasing its domestic dealer base by 10-15% per year. R&D I believe that this may be Cannondales strongest aspect of their strategy. Historically, they have been very committed to developing lighter, stronger and more comfortable bikes. They have also been responsible for starting new trends in mountain biking such as front and rear suspensions.
Also, because of their Volvo / Cannondale racing team, they have a reputable testing group; this also benefits their marketing strategy. 7. S.W.O.T. Analysis of Cannondales Position Strengths Product innovation; commitment to improving their designs and products Purchasing; most of the competition purchases their frames from foreign suppliers Vertically integrated; relies less on outside component supplier R&D; reputable testing procedures & commitment to innovation Weaknesses Marketing and Promotions; should take advantage of their reputable R&D tests, and their Volvo / Cannondale Racing team Opportunities Mass Merchandising; Specialized created an independent line under a new name Components; focus on developing Cannondale line with same quality, innovative approach Threats Currency Fluctuations no control over, focused hedging Mountain biking may be a fad; 8. Cannondales financial performance has been steady over the last five years. Their net sales have increased by similar margins over the last three, which is attributed to their goal of expanding the specialty dealer network in the US and abroad. Cannondale also improved their gross profit margin by 8.1% from 1993 to 1995. Their entry into forward currency contracts was also a good idea, if management hires someone who understands how to hedge against foreign currency risks, which they did. After three years of losses, Cannondales net income rebounded to $7.6 million in 1995 9.
Suggested Actions for Mr. Montgomery Concentrate on components; increase the 20% Cannondale components used by continued R&D Given Specialized success, consider developing an independent line, under a new name, that can be distributed through mass merchandisers. Increase the 1.5% of revenue spent on R&D; Cannondale relies on innovation should continue to strive to be the industry leader in technological advancement Continue with the growing vertical integration strategy; expand to components and accessories Marketing; Cannondale has a great source of promotion with their racing team; take advantage of it and increase effort; I have never seen an ad for a Cannondale bike, but I have seen Trek ads.