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OVERVIEW

Synopsis of case Definition of Problem Possible Alternative Solutions Analysis Recommendations

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 practice Wants to be sold at lower prices than BBCs normal

rates Hi-valu wants large access to inventories

BALDWINS CURRENT PROFILE


Image of being above average in quality and price, but

not top line product Sales through independently owned retailers and bicycle shops 10 models 75% of its shift capacity utilization (bicycle boom flattened out and poor economy sales volume fall ) It is profitable but only modestly so Heavily leveraged Strategic niche is eroding away

Ready access to large inventory (transfer of title when BB

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

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 SALES REVENUE COST OF GOODS SOLD GROSS MARGIN SELLING & ADMINISTRATION EXP $ AMT (THSDS) 13179 9775 3404 2835

INCOME BEFORE TAXES


INCOME TAX EXPENSES NET INCOME

570
263 370

KEY FINANCIAL RATIOS


Return on asset Return on equity Inventory turnover Total asset turnover Current ratio 0.03 0.08 2.92 1.34 0.54

Debt to equity

1.50

Porters Five Force Model


Substitutes Buyers 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. Significant power Realized bicycle market is depressed to exert pressure on manufactures. Imposed buying price - not open to negotiation
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

Suppliers

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.

May be able to offset incremental materials cost by credit arrangement with suppliers Short term profitability crucial to maintaining supplier relationships and credit.

PROBLEM STATEMENT
Should Baldwin accept the offer from HiValue 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.)

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 segment
a. b. c. d.

Contribution margin will fall to $23 from $44 because of Taiwanese and Koreans competition Breakeven point will become 170 K units (130 % of one shift capacity, currently 84K) Just to earn 15% ROE , the firm will have to reduce its fixed costs by more than 40% in the short run 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 OFFER


ROE is inadequate (approx. 8%)
Middle market is slowly shrinking Firm has lost all hopes of resurgence in a gradually

dying market segment If Baldwin declines the offer then someone else will accept it and thereby further eroding Baldwins niche Entering into new niche will take far more money than BBC could muster

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