In 1971 Joseph Montgomery set out to build a company that would be a leader in the cycling community. Not only did the Cannondale Corporation become a leader, but the dominating manufacturer of performance mountain bikes. As any business student graduating from Cal State Hayward would know, the following questions must be raised; How did Cannondale reach the top? Can they sustain their position? What are the key strategic issues, both the internal and the external factors, that the company must bear in mind to achieve a sustainable competitive advantage which will lead to above-average returns and therefore produce greater shareholder wealth?
Strengths: Cannondale Corporation needed more than luck, bumping into walls, and other less-effective forms of management to achieve its position in the market. Cannondale’s primary core competency & strength is stated in the company’s principle philosophy as follows, “We produce a stream of innovative, quality products.” It is this striving for innovation and quality that has propelled the company to the head of the pack. The primary example of this strength can be shown in the company’s core product, performance mountain bikes. As shown in Exhibit 1, the number of mountain bikers in the U.S. rose from 200,000 in 1982 to about 8.5 million by 1997… a staggering 425% increase! Cannondale used its commitment to innovation to develop “the world’s first affordable aluminum bike,” giving Cannondale a first mover advantage the enabled the company to ride the wave of growth which was the developing mountain bike industry. Through continued R&D and innovation Cannondale was able to create very strong brand recognition for their high end performance bicycles. This strong branding will prove to be one of the company’s greatest assets.
Cannondale also developed another strength by vertically integrating its business into an effective and efficient machine. From purchasing and manufacturing to sales and distribution the company excelled. For example, Cannondale took advantage of economies of scale by purchasing inventory from only a few suppliers giving them volume discounts. The company’s innovation wasn’t limited to the product, they also applied R&D to the manufacturing process. These manufacturing innovations allowed the company to dramatically reduce the amount of time needed to produce a bike from 17 days to only 3! Another core competency that Cannondale considered as a strong strategic advantage was the fact that they produced their bicycles in the U.S. This speeds up the production and delivery process along with helping to keep the designs proprietary.
The company’s strong synergistic relationship with marketing and R&D is also noteworthy. For example the company views professional bike races as more than just a marketing opportunity, but the chance to get instant feedback on their products. This fact prompted Cannondale’s VP of R&D to say, “you’ll always find more Cannondale engineers than marketing people at the races.”
Finally, the company’s move into the motorcycle industry looks very promising, especially given that the year it was released, sales exceeded projections by 80%!
Weaknesses: 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 (see Exhibit 1). Though bicycle related activities account for approximately 32% of fitness participation (see Exhibit 2) sales within the U.S. have been stagnant (see Exhibit 3). Cannondale could no longer expect to see the exponential growth in its mountain bike sales as it had during the previous decade. Also, as seen in Exhibit 4, even though 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 as shown in Exhibit 5.
Threats: Cannondale needs to be aware of the potential threats that lie in wait to destroy. As shown in Exhibit 6 there are many “forces” that are potential threats to Cannondale’s market share and bottom line. The five companies listed in Exhibit 6 are anxiously striving to erode Cannondale’s share of the market. Another potential threat is related to the environmental issues. 1996 studies showed that a majority of the National Forests reported problematic issues resulting from mountain biking activities. If these environmental issues are not resolved, the mantra of “No trails, no sales” may prove to be true. Finally there is an ever looming threat of changes in buyer’s tastes. The mountain bike wave that Cannondale rode to the top could come crashing down if consumers abandon their desire for performance mountain bikes.
Opportunities: There are a plethora of opportunities that are within the grasp of Cannondale Corporation. The first opportunity that may prove to be the most beneficial is the combination of the international market with the development of bicycles designed more for transportation. As seen in Exhibit 7, Cannondale’s main source of revenue is from U.S. sales. The majority of these sales are from bicycles used in recreation and racing, even though as shown in Exhibit 8 the strong majority of global bicycle usage is for transportation. Cannondale has the opportunity to use its strengths in innovation, quality, branding, and marketing to develop more “transportation oriented” bicycles which will open up the additional 70% of the market.
Another opportunity lies in the changing demographics of many of the people who have brand loyalty to Cannondale. As the mountain bikers from the 1980’s get older they may desire a Cannondale with the same quality and innovation, but geared more towards an older clientele. Perhaps comfort bikes.
Conclusion: Within the past few years Cannondale has been experiencing problems as the market where the company has its core product, mountain bikes, has become mature and saturated. The following key strategic issues must be taken into account when devising a strategy for Cannondale to attain above average returns: Strong Competitive Advantages: Cannondale has the ability to out-innovate the competition, has strong brand recognition, & market penetration. Cannondale has received a great positive response to its motorcycle line. External Trends: As stated above, the mountain bike market is mature and saturated. The bicycle transportation usage market is strong and has exploitation potential, especially internationally.
Phase 1: Management Strategies: Maintain excellent management, i.e. Status Quo. Phase 2: Turnaround Strategies: Increase size internationally. Become more concentrically diversified. Phase 3: Value Creation Strategies: License the company’s strong name to international companies. Also, a joint venture, merger, or acquisition of firms that presently have an established international presence.
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. Finally, the company must continue to devote substantial resources to innovation, for as the mantra states, “Innovate or die!”
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.