BALDWIN CYCLE CASE STUDY

OVERVIEWSynopsis of caseDefinition of ProblemPossible Alternative SolutionsAnalysisRecommendations

SYNOPSIS• Baldwin Bicycle Company (BBC)• Hi-Valu Stores Inc, discount retail chain• Hi-Valu proposes a private label agreement• Challenger Line Bicycles• Proposal deviates from normal practiceWants to be sold at lower prices than BBC’s

normal ratesHi-valu wants large access to inventories

BALDWIN’S CURRENT PROFILEImage of being above average in quality and

price, but not top line productSales through independently owned retailers and

bicycle shops10 models75% of its shift capacity utilization (bicycle boom

flattened out and poor economy sales volume fall )

It is profitable but only modestly soHeavily leveragedStrategic niche is eroding away

HOW HI-VALUE'S PROPOSAL WAS DIFFERENT THAN BALDWIN'S NORMAL BUSINESS

Ready access to large inventory (transfer of title when BB moves from Hi Value's regional warehouse to particular retail store/ 4 months old in the warehouse, payment within 30 days)

Challenger price lower than the brand name but same dollar gross profit margin

Somewhat different in appearance from Baldwin's other bikes (frame & mechanical components same; fenders, seats and handlebars, on tire name molded on sidewalls) ( BB's purchasing , inventorying and production cost increases over and above its volume benefit)

- Thus, for the cosmetic difference Baldwin buyers will be paying more ($67) than Challenger buyers

FINANCIAL POSITION PARTICULARS $ AMT (THSDS)

SALES REVENUE 13179

COST OF GOODS SOLD 9775

GROSS MARGIN 3404

SELLING & ADMINISTRATION EXP

2835

INCOME BEFORE TAXES 570

INCOME TAX EXPENSES 263

NET INCOME 370

KEY FINANCIAL RATIOS

Return on asset 0.03

Return on equity 0.08

Inventory turnover 2.92

Total asset turnover 1.34

Current ratio 0.54

Debt to equity 1.50

Porter’s Five Force Model

Substitutes

•Hi - Valu already establishing house brands in many products.

•If no bicycle manufacturers accept offer, may simply establish offers in other popular sporting goods segment.

Buyers

• Significant power• Realized bicycle market is depressed

to exert pressure on manufactures.• Imposed buying price - not open to

negotiation

Suppliers

• May be able to offset incremental materials cost by credit arrangement with suppliers

• Short term profitability crucial to maintaining supplier relationships and credit.

Potential New Entrants

•Bicycle industry not attractive in early 1980s.

•Relatively large capital outlay to enter market.

•Relatively difficult to exit market due to large capital investment.

Rivalry Among Competing Sellers

- May lose 3,000 unit sales to competitor who accepts Hi - Valu offer.

- Depressed bicycle market, other producers may accept Hi - Valu's offer if Baldwiin does not

PROBLEM STATEMENTShould Baldwin accept the offer from

Hi- Value Discount chain?

STRATEGIC ALTERNATIVES WITH BALDWIN

Accept offer from Hi- Value Current niche plus Hi- Value deal Go entirely to Hi - value niche

Decline the offer Stay in their current niche Go to the premium segment Try to find new product opportunities in the value

niche (mountain bikes etc.)

ANALYSIS

IF BALDWIN CYCLES ACCEPTS THE OFFER

BENEFITS TO BALDWIN

Baldwin is geared up for a much higher level of sales than it is now achieving and that reasonable profit levels hinge on much higher volume levels ( Strategy dependent on scale of economies)

Added volume and Utilizes excess capacity Hi Value would buy its house brand bicycles only from BB for 3 yrs

and can be extended YOY Opens new channels of distribution for Baldwin that is a growth

market

 

IF BALDWIN CYCLES ACCEPTS THE OFFER

RISKS OF ACCEPTING THE OFFER TO BALDWIN CYCLES 

Accepting will alienate the Baldwin's current dealers, they might ask for the similar deal or might leave Baldwin

Trying to be a significant supplier simultaneously in two price segments with substantially identical product

Might loose its premium price by making itself readily available in Discount chains

 

This might drive Baldwin much more heavily toward the growing low end bike segment and away from the declining mid value segmenta. Contribution margin will fall to $23 from $44 because

of Taiwanese and Koreans competitionb. Breakeven point will become 170 K units (130 % of one

shift capacity, currently 84K)c. Just to earn 15% ROE , the firm will have to reduce its

fixed costs by more than 40% in the short rund. Under continuous pressure from foreign firms VC has

to be reduced, else margins will fall and overhead will have to be cut even more

IF BALDWIN DECLINES THE OFFERROE is inadequate (approx. 8%)Middle market is slowly shrinkingFirm has lost all hopes of resurgence in a

gradually dying market segmentIf Baldwin declines the offer then someone

else will accept it and thereby further eroding Baldwin’s niche

Entering into new niche will take far more money than BBC could muster

RECOMMENDATIONS

RECOMMENDATIONS Segment Target Positioning

Segment its market Choice Based Segmentation

Other Discount retailers and Renegotiate Terms with Hi-Value Explore alternative Discount retailers

Develop New Products that lead to competitive Advantages Innovative new products

Identify and Exploit Operating efficiency optimal use of its resources critical activities

THANK YOU