Shimano Inside
Sebastian Barth Esteban Colombo Luis Costa Alessandro Lonardo Adriano Pe droti Peter Ross
Shimano Shimano Ins Ins ide
Executive Summary In the last 20 years the bicycle industry underwent dramatic changes. These changes were triggered triggered by a radical shift in customer preferences. The stagnant and mature business of the late 70’s was revolutionized by the introduction of sophisticated high performance bikes capable of rolling down mountains and the need for high quality components, which suited this extreme usage.
This revolution led to a change in the bicycle supply chain: the vertically integrated manufacturers, which dominated the market before the consumers changed their preferences, lost their dominance due to a slow adoption rate of the new trends and the lack of the technology required to manufacture components for these high performance bicycles. The parts manufacturers showed intense R&D capabilities and a superior adaptability to the new trends. They reduced the prior industry leaders to scaled down assemblers, with the latter capturing only the remaining low end of the value chain. It was the time for the parts manufacturers, who began capturing the most significant portion of the willingness to pay of the emerging high-end customers.
In this dynamic era for the bicycle industry, one of these part manufacturers stood out among the crowd. Shimano, a former bicycle manufacturer of Japan, was gaining recognition for the quality and the innovative design of its products. Shimano’s success can, in essence be attributed to the following factors: First, its strong focus on R&D; second, a sophisticated marketing strategy, based on bundling products; third, integration of systems incompatible with competitor products; fourth, continuousl y changing product specifications and finally a superior management of the dealer network and a high profile.
During its long history Shimano Shima no had acquired capabilities, capabil ities,
which allowed the company to successfully implement implement the above strategy.
This report will examine the sources of Shimano’s competitive advantage in detail and evaluate evaluate the response of competitors to the company’s quasi monopoly in the component business.
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Table of Contents EXECUTIVE SUMMARY
2
TABLE OF CONTENTS CONTENTS
3
1 - HISTORY OF THE B ICYCLE INDUSTRY
6
S HIMANO ’S MONOPOLY S ITUATION IN THE BICYCLE INDUSTRY
7
2 - THE BICYCLE VALUE CHAIN AND INDUSTRY DYNAMICS
7
MARKET TRENDS AND CUS TOMER NEEDS AFTER AFTER WWII
7
THE BICYCLE INDUSTRY IN THE LATE 60 AND 70 ’S
8
CHANGING CONSUMER NEEDS
8
DISINTEGRATION OF THE BICYCLE VALUE CHAIN
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THE BICYCLE VALUE CHAIN AFTER THE MOUNTAIN BIKE
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3 - SHIMANO SHIMANO
11
COMPANY HISTORY
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FROM CORE COMPETENCES TO COMPETITIVE ADVANTAGE
12
A BILITY TO SPOT TRENDS
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A CULTURE OF INNOVATION THROUGH STRONG FOCUS ON RESEARCH
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A TRADITION OF EXCELLENCE WITH A COST ADVANTAGE
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4 - SUSTAINABILITY OF ADVANTAGE
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MARKETING STRATEGY
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COST DRIVERS
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5 – THE OVERALL REACTION OF THE COMPETITION
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CANNONDALE
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COMPANY HISTORY
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K EY SUCCESS FACTORS
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CANNONDALE’S REACTION
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R EASONS FOR FAILURE / SUCCESS OF THE ATTEMPT S
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CURRENT POSITION
21
SCHWINN
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COMPANY HISTORY
21
SCHWINN ’S REACTION
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CAMPAGNOLO
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COMPANY HISTORY
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CAMPAGNOLO’S REACTION
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CAMPAGNOLO’S STRATEGY
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SUMMARY OF THE OVERALL REACTION OF COMPETITION
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6 – INDUSTRY OUTLOOK
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KEY LEARNINGS
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BIBLIOGRAPHY
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1 - History of the Bicycle Industry The first attempts to create a two-wheeled man propelled machine can be traced as far back as th
the 15
century. Growing through various shapes and technical phases, the bicycle eventually
established itself in its present configuration -two wheels, pedals and a steering- during the end of the nineteenth century. The modern bicycle industry was born at the same time.
At first, bicycles were an everyday means of transportation, representing the affordable alternative to the other equally young vehicle: the automobile.
For about half a century the industry was characterized by continuous technological improvement,
taking
advantage
of
metallurgical
developments
and
new
mechanical
manufacturing processes. All these led to increasingly lighter and more robust products.
In the late 1960s a new type of more sturdy bicycles, specially made for the off-road use, became popular. These motocross bicycles were designed for children, and where mostly made up of custom-built parts.
As the children grew up and kept the interest in these bikes, the industry realized the market potential for interchangeable parts and accessories, to be assembled onto larger frames and wheels.
Thanks to the possibility of picking the single components of the bicycle, customers could now choose to stress the aspects that were most important for them. So, if someone would prefer to have more comfort, then he would choose a sophisticated suspension system, whereas if someone else would rather forgo ride comfort to keep weight at a minimum, just limiting herself to the bare essentials, she would go for ultra-light titanium components.
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Shimano’s Monopoly in the Bicycle Industry In 2001, Shimano celebrated its 80th anniversary as the world's largest producer of bicycle parts. The firm focuses on driving and braking parts, transmissions and brake systems. The company supplies parts to bicycle makers worldwide, making Shimano the world's best-known brand for bike parts. Shimano currently holds a 70% share of the domestic and nearly 80% of the global market for bicycle components.
2 - The bicycle value chain and industry dynamics Market trends and customer needs after WWII In the aftermath of World War II, bicycle manufacturers did not invest much into the development of bicycles with the exception of racing bicycles. In developing countries kids used bicycles as toys and in developing countries some people relied on them as a means of transportation. The innovative field in the industry was race bicycles in Europe. Racers started using , for example, the five gear derailleur and later the 10 speed to climb mountains. In the late 50’s and 60’s, materials used for the aerospace industry like dura-aluminum were increasingly used to achieve weight reduction.
Consumers in the post-war period were little concerned with performance of bicycles, as children represented the majority of users in industrialized countries. Children paid little attention to quality and design of components. Only some specialized segments, like racing bicycles needed more specialization but these represented only a small part of the market.
As a result, specialized parts were less important. There was virtually no customization of bicycles. Integrated companies like Schwinn benefited from this consumer behavior as they offered reliable, standardized bicycles, which could be produced at a low cos t.
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The bicycle industry in the post-war era was an attractive industry for the incumbents. Due to the integration of the bicycle value chain, consumers identified the names of large integrated players such as Schwinn or Peugeot with quality bicycles. As a consequence, these companies had little rivalry in the industry and, thanks to significant economies of scale, were able to capture hefty margins. Barriers to entry were relatively high, because entrants needed high capital investments in machinery and distribution channels. The big companies had built a brand equity, which made it difficult for potential entrants to obtain recognition. Internal rivalry was low, with the integrated players such as Schwinn boasting a market share of 25% in the Sixties (Forbes, 12/21/1992). Even the threat of substitution was minor. Kids were the number one users of bicycles so there was no real threat from cars and motor bicycles. A summary of the five forces in the post-war bicycle industry is given in the exhibit below.
The bicycle industry in the late 60 and 70’s
Threats of entry Medium Capital intensive, but R&D and innovation not key. Vertical integration does not allow part manufacturers to capture key part of value chain
Supplier Bargaining Power Low Industry is vertically integrated Suppliers not specialized
Industry Rivalry Low Few players in the biggest markets
Consumer Bargaining Power Low Atomized consumer base
Substitutes and complements Medium Cars and motorbikes as other means of transportation
Changing consumer needs Consumer trends changed dramatically in the 1970s, when young Californians discovered that it was actually fun to go up and down hills with bicycles. For this pursuit, however, Schwinn’s Page 8 of 30
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traditional balloon tire bicycles were inadequate. In fact, the first off-road mountain bikes were highly customized vehicles consisting of pre-war frames taken from junk-yards, hubs and drum brakes from tandems, balloon tires and brake levers from motorcycles (Buensdorf, “Designing clunkers: demand side innovation and the early history of the mountain bike, February 2001).
Gary Fisher, a California entrepreneur, launched the mountain bike industry in 1979 building his bikes on the frame of a 1937 Schwinn model. Interestingly enough, a team of engineers, dispatched from Schwinn to assess the in novation potential, dismissed it as a fad. Similarly, most producers of bicycle components did not take the mountain bike seriously in its early days.
The consumer value diagrams before and after can be represented as follows: Late 60’s
Late 70’s
Relative Importance
Relative Importance
Comfort
Weight
Performance Innovation Response to customer needs
Disintegration of the bicycle value chain The change in consumer demand gave rise to the disintegration of the bicycle value chain. At the beginning of the mountain bike craze, users and producers of mountain bikes were identical. After 1976, some riders began to assemble and sell some of their bicycles. A crucial step in the development of a mountain bike industry was the manufacturing of frames and parts specifically designed for off-road use. According to Buensdorf (2001) this trend ‘…was motivated by a diminishing supply of used parts, and in particular sturdy frames, which was due to the increasing number of clunker riders, and the heavy toll taken by the manhandling in downhill races’. Page 9 of 30
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As a consequence, the structure of the bicycle industry started to change dramatically. Before the mountain bike, the integrated incumbents had enjoyed high barriers to entry and little rivalry in the industry. Mountain bikes, however, required highly specialized components and this provided smaller companies with the opportunity to come up with innovative designs and specialized parts. The value chain disintegrated with different companies providing different components and services.
In terms of Porter’s five forces, the bicycle industry started looking much less attractive for players. A summary is provided below.
The bicycle value chain after the mountain bike Threats of entry High Driven by R&D parts manufacturers are able to ride the innovation trend in the bicycle industry. Original manufacturers disintegrate and become assemblers
Supplier Bargaining Power High Suppliers become specialized (parts manufacturers). They are able to build brand equity and capture an important part of the consumer WTP. Original manufacturers capture only the low end of the value chain Few suppliers
Industry Rivalry Low Few players in the biggest markets
Substitutes and complements Medium Recreation: Skates, scooters, motor sports Exercise: skates, exercise bikes Transportation: scooters, motor vehicles
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Consumer Bargaining Power Low/Moderate Consumer taste has changed but ti is still an atomized consumer base Industry is pulled Trendy, special needs/wants Limited dealers
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3 – Shimano One of the companies who managed to take advantage of this trend was Shimano.
Company History The company history began in February 1921, when 26-year-old Shozaburo Shimano set up a machine repair shop in Sakai, a city in the Osaka area, Japan.
In 1922 Shimano started producing bicycle freewheels. Shozaburo was a perfectionist and his reputation for producing high quality products resulted in a steady-stream of business, despite the difficult economic climate of the times.
The company was incorporated in 1940 as Shimano Iron Works Co, Lt d. During World War II, when there was huge focus on armament manufacturing, Shimano briefly converted to an arms manufacturer. Shozaburo constantly petitioned the military and other institutions to provide raw materials to the bicycle industry, arguing that bicycles had a role to play in warfare.
After the war, Shimano established itself as a bicycle maker. The Japanese government rationed many raw materials; so producing complete bikes was the only way Shimano could ensure a steady stream of supplies.
Following the death of Shozaburo, in 1958, his eldest son Shozo took over the presidency, closely backed by his two brothers Keizo and Yoshizo. The activity focus within the company shifted from bicycle manufacturing to the development and manufacturing of high quality bicycle components, and in 1959 the introduction of the 3-speed internally geared rear hub signaled the emergence of a strong innovation culture. Shimano headquarters soon turned into a highly efficient center for results-oriented research and development, in an effort to keep the company ahead in the unstable market of gearing systems, brakes and derailleurs.
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In 1965, Shimano American Corp. was established in New York , and by 1971, 67% of Shimano’s revenues (out of $75.8 million) came from exports. Within two years Shimano Europe and Shimano Singapore were established, and factories were opened in Malaysia and Indonesia. The company became listed in the Tokyo Stock Exchange in 1973.
During the 1970s and the 1980s Shimano developed and introduced a variety of new components, and in 1982 Shimano introduced the first complete mountain bike component group: the Deore XT ®. Throughout this period, Shimano developed a strong name all over the world for producing value-added bicycle components of exceptional quality, and the bulk of its business moved away from mass merchants into specialty retailers.
In 1992, Keizo took over the presidency from Shozo (who died as chairman emeritus in 2002). Yoshizo, who currently sits on the board of directors, accepted the position when Keizo died in 1995. Shozo's son, Yozo, is Shimano’s current president.
In 2001 Shimano’s revenues were almost $960 million.
From Core Competences to Competitive Advantage Shimano established itself as a bicycle parts manufacturer throughout the 1960s, and strengthened its position during the 1970s through a consistent focus on customer needs, a culture of product and technology innovation, and a drive to improve manufacturing processes.
Ability to spot trends “We won’t compete with our customers by building complete bikes. But we must keep in mind how our components are going to be used and have a vision of the product that is safe as well as being fun” – Yoshizo Shimano.
Today, Shimano is the world’s leading maker of bicycle parts, enjoying 80% of the market for parts for high-end bicycles.
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The ability to spot early market trends and a history of responding to customers’ emerging needs trough the development and launch of new products, was at the origin of Shimano’s success in outperforming component makers such as Campagnolo.
In Japan, Shimano, is often referred to as the company “with the Big Ear” (Reinmoeller, 1997). The company’s early establishment of service shops, the network of sales representatives, and the strong presence at trade exhibitions and fairs help the company to spot the latest consumer preferences before everyone else.
In the late 1970s, sales of the classical 10-speed bike had flattened. At the time some fanatical California cyclists were racing specially geared, custom-made mountain bikes up and down hillsides. The cycling was fun but the bikes were crude. As riders trashed their clunkers one day and overhauled them the next, they scoured junkyards and bike shops for stronger frames, wheels and components. The models that seemed to last the longest were the heavy Schwinn’s (from the major US bicycle manufacturer) from the 1930’s.
At the time when Gary Fisher was experimenting with the first mountain bikes Yoshizo, the youngest of the Shimano brothers, was living in southern California and told his brothers back in Osaka to see if their researchers could come up with something more refined than what was available at the time on the market.
A culture of innovation through strong focus on research Building on culture of innovation that goes back to the 1960s, Shimano introduced in 1982 a complete group of components specially designed for off-road use in mountain bikes consisting of crank sets, gearshifts, hubs and bottom brackets. The original 15-speed version was later followed by a 21-speed version, today the mainstay of mountain bikes. Just as important, the brothers developed a new way to shift the gears without the cyclist's having to let go of the handlebars, as was necessary with the ten-speed derailleur gears. Shimano quickly followed this innovation with a computer-designed, elliptically shaped chain wheel, which increased pedaling efficiency and reduced biker fatigue. Other improvements followed. Page 13 of 30
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In pursuing fast innovation rates, Shimano always invested massively in R&D: while Shimano technology had been protected by almost 500 US patents since 1976, Campagnolo had less than 50.
A tradition of excellence with a cost advantage Shimano focus on high quality, emphasized throughout the 1970s, provided a perfect fit to a new and demanding mountain bike segment. Besides, Shimano manufactured its parts in Southeast Asia, thus achieving labor cost advantages. A second key element of Shimano’s cost management is the focus on process improvement. Faster production at lower costs has been a regular preoccupation since the 1950s .
The unique combination of Shimano’s competences mentioned above and an early mover advantage quickly translated into a competitive advantage that a llowed Shimano to be perfectly positioned for the mountain-bike craze of the 1990s. But how did Shimano capitalize on the mountain-bike business boom to develop and sustain a dominant position as a major component supplier in the bike market?
4 - Sustainability of advantage “People tend not to ask, ‘Who’s the maker (assembler)?’ but, ‘Which grade of Shimano components was used?’ when attempting to determine a bicycle’s capabilities” – Morgan Stanley
Marketing strategy Shimano had developed highly innovative components designed for off-road use in mountain bikes. As mentioned above, this set of high quality products increased customers’ willingness to pay for bicycles. The company managed to sustain this WTP advantage through a sophisticated strategy:
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Bundling of products. Shimano managed to capture more of the consumers’ surplus by offering
its products in bundles. An example of their early bundling of components is the Deore XT®, which was introduced in 1982. This bundle of components contained some of Shimano’s path braking innovations such as the 7-speed thumb shift as well as 7-speed freewheels. Assembly companies that wanted to use Shimano’s thumb shift had to buy the freewheel at the same time as the gearshift. Since everyone wanted Shimano’s 7-speed shift, they also bought the freewheel. Bundling the products allowed Shimano to offer its buyers lower prices due to economies of scale and lower logistics costs. As a consequence of the bundling, Shimano products quickly replaced traditional freewheels and became the standard of the high-end mountain bikes.
Integration of systems and components. Shimano built an integrated system that combined all
of the bicycles major control functions such as steering, shifting and braking. For example, Shimano brakes would only work with Shimano gearshifts. Most of the components of other manufacturers were not compatible with these systems. As a consequence, mountain bike manufacturers had the choice between an entire set of systems from Shimano or not buy from Shimano at all. Since Shimano quickly made a name for itself through superior product quality, it was hard for assembly companies to use parts other than Shimano’s.
Continuous change of specs. By continuously changing the specs of its integrated systems,
Shimano kept its competitors from developing components compatible with its own ones. Replacement of a particular part with that of a competitor’s became difficult and so did customization of the bicycle. In other words, this marketing policy helped Shimano to sustain its cross-selling and lock-in capabilities.
Exclusivity discounts. Shimano further increased its market power by offering 10% exclusivity
discounts to bicycle companies.
Advertising campaign. The company has built brand equity by using targeted advertising
campaigns. For example, Shimano is a large sponsor of bicycle events such as regular mountain bike races. Its bicycle advertisements feature professional racers and regularly win awards. Page 15 of 30
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Also, in combination with its advertising the company clearly marked every one of its components with the company name and logo. This was unusual in the bicycle industry and created awareness
among
customers
as
to
which
components
they
were
using.
Cost drivers Shimano managed to substantially reduce its cost through a combination of the marketing measures mentioned above and a set of cost reduction policies. There were three major sources of lower costs at Shimano:
Logistic costs. Bundling allowed Shimano to significantly reduce its transportation costs. These
savings could be partially passed on to the bike manufacturers, which in turn had an incentive to buy the Shimano component packa ges.
Economies of scale. Through bundling, systems integration and a continuous change of
products specifications, Shimano managed to sell larger quantities than its competitors and thereby benefit from economies of scale. While Shimano recorded bicycle part revenues of $732 million in 2001, both Campagnolo and SRAM had sales of less than $76 million.
Careful cost control. Shimano built on these cost advantages through a set of measures
designed to reduce costs even further. The company set up manufacturing subsidiaries in Singapore (1972), Malaysia (1990), Indonesia (1991), China (1992) (Nomura, 1999) and the Czech Republic (2002).
Quality and Innovation Quality control programmes.
At the same time as it lowering its cost base, Shimano
continuously strives for high quality of its components. For example, the company has
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successfully implemented a Six-Sigma quality control process and has switched to computeraided design (CAD).
In addition to these programs, Shimano is testing its components in real-life settings. Professionals who are extremely selective in the components they use choose Shimano’s parts in such major world events as the Olympics and the Tour de France. Cooperation with these experts allows Shimano to constantly improve its technology.
There are other stories that illustrate the company’s strong commitment to innovation and quality. For one, Shimano is importing mud from all around the world to test the performance of its parts under any market’s conditions . The company has committed - and continues to do it- a vast amount of resources to research and development. In fact, one-fourth of the company’s 870 employees work in R&D. The Shimano brothers make these teams work on new materials to lighten the bicycle, and on soft-touch derailleurs tailored to female cyclists. As a result, the company has filed more than 500 patents in the U.S. since 1976.
Diversification through globalization. Bicycles are a consumer-oriented business and thus
vulnerable to exogenous factors such as fashion and weather. Through its global presence and 80% (YR2001) market share of high-end components, Shimano is able to ride more smoothly through cycles. Other companies such as SRAM (a competitor that manufactures bicycle components) are more exposed to the volatility of local demand. Also, Shimano was traditionally vulnerable to exchange rate fluctuations, and in particular to the strength of the yen. By outsourcing production to other countries such as China and recently the Czech Republic, the company’s earnings are less exposed to the exchange rate. Currently, only about 60% of the companies sales are denominated in yen (Morgan Stanley, 2001).
Over the past five years Shimano has recorded an operating margin averaging 14%, while bicycle assemblers’ margins have been in the 4-6% range. These statistics provide evidence of Shimano’s advantageous positioning in the bicycle industry and of the extent of added value in its products. Page 17 of 30
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Learning from other businesses. The move into the fishing industry has allowed Shimano to
transfer lessons from manufacturing reels to its bicycle component manufacturing.
5 – The reaction of the competition The competition reacted very differently to the mountain bike evolution and to Shimano moves. In this section three different competitors – one component manufacturer and two bicycle manufacturers – are analyzed. This analysis focuses specially on their reactions to the fast changes in the competition environment and in the demand-side requirements, showing the evolution of the competition from the beginning of the mountain bike revolution to the present time.
Cannondale Company History Cannondale started in a crowded loft above a pickle factory in 1971, by launching the cycling industry's first bicycle trailer. The company grew quickly during its early years, adding cycle apparel and accessory lines along the way, and earning a strong reputation for innovation and quality. That reputation proved invaluable when Cannondale introduced its first bicycle in 1983. The company offered an aluminum bicycle that was both lighter and more resistant to torsion than the steel models that dominated the industry at the time.
Today Cannondale is the leading manufacturer of aluminum bicycles, selling more than 80 models in over 60 countries worldwide. Widely regarded as the bike industry's leading innovator, Cannondale and its bicycles have won numerous design awards. The company has subsequently diversified to encompass Cannondale's 2002 line-up of motor sports products, including four highperformance off-road motorcycles, and four high-performance sport All-Terrain-Vehicles (ATVs).
Based in Connecticut, Cannondale manufactures virtually all of its products at two factories in Bedford, Pennsylvania, and operates subsidiaries in Holland, Japan, and Australia. Page 18 of 30
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Key success factors Product Innovation: Cannondale is known for being a pioneer in the high-end bicycle market
and is the leader in aluminum technology.
“Handmade in USA”: Being the only high-volume aluminum bicycle-manufacturing firm in the
USA, the company uses proprietary manufacturing processes and systems to enhance its manufacturing flexibility.
Selective distribution: The Company sells its bicycles only through the specialty retailers’
channel, which can offer a higher level of service and superior sales assistance.
Strong brand name: The Cannondale name is widely recognized among sports enthusiasts, in
the US and around the world.
Broad product offerings: The Company’s broad product line enables it to offer a well-known
bicycle for each category.
Proprietary products: As we will discuss later in this section, the company also makes its own
component products, thus differentiating its products more from the competition.
Cannondale’s reaction Cannondale has reacted to reduce Shimano’s dominance in the bicycle components market in two ways:
1.
Sourcing their components from SRAM, Shimano’s most relevant competitor, both in terms of market and innovation.
2.
Manufacturing their own components, with brands such as Coda® and HeadShok®.
The second strategy has been the most relevant, with the aim to position Cannondale as a firm that manufactures the whole bicycle, not just taking a frame and putting somebody else’s parts on it. Page 19 of 30
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The parts that Cannondale manufactures and utilizes for its own models are generally replacements of gears and brakes once bought from Shimano. These models, that the company marketed with its own Coda® and HeadShok ® brands components were, according to the company’s sources, better than their Shimano counterparts thanks to superior materials and design. According to Cannondale’s executives, these components offered the customers a superior performance than that of Shimano’s. Therefore, the firm should observe a higher willingness to pay when customers were offered Cannondale bicycles with their own Coda® and Headshok® components. In the next section we will see that this has not been generally the case.
Reasons for failure / success of the attempts Although Cannondale’s experience with its Coda® and Headshok ® brands cannot be regarded as a failure, the company still relies on Shimano to supply it with the biggest portion of its components, and today Shimano remains the main supplier of components for Cannondale.
The main reason why this happened is that the strong brand equity built by Shimano among its final customers has prevented Cannondale from completely removing Shimano components from its line of products and replacing them with their own branded ones. And this despite the research and field feedback that Cannondale constantly receives from its sponsored athletes, which helps the company improve its whole product line.
As a consequence of the above, Cannondale could only replace only certain Shimano parts with their own branded ones in most of their models. By equipping the bikes with their own proprietary components, Cannondale could benefit from a lower component cost, in comparison with the same parts manufactured by Shimano, thus improving the firm’s margins. However, this would be possible only in the low-end products: the usage of Shimano components – especially gear sets – increased customers’ willingness to pay for their higher–end bicycles (according to the users, Cannondale could never match the quality of Shimano parts with their own branded components, so they did not risk using their own gear sets in their high- end models, despite the lower costs associated with this strategy). Page 20 of 30
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Another attempt to reduce Shimano’s dominance by Cannondale was to stress the importance in the innovations on the design and construction of the frames. The firm has 45 patents on its products and its manufacturing processes – one example is the Super V Raven – full suspension system. Thus, Cannondale was able to differentiate its products through technological innovations that made its bicycles lighter, stronger, faster and more comfortable.
Current position As noted before, Cannondale still relies heavily on Shimano as a source of components for their brand products (Shimano is Cannondale’s largest supplier, accounting for 20% of the raw material purchases, even more than their aluminum tubing suppliers).
In 1997, Cannondale, with a 23% market share, was the second-largest US maker of bicycles priced at more than $700 (the company specializes in the high-end segment of the market). Financially speaking, during the second half of the ‘90s Cannondale reported, on average, operating margins of 11% of sales. However, in 2000 and 2001, the company’s results have not been so impressive: Cannondale broke even in 2000, and in 2001 the reported loss was almost 5% of sales. The company attributes this loss to the motor-sports production start- up costs, which were not proportionately offset by revenues.
Schwinn Company History Schwinn was founded in 1895 just when the US was in a great economic boom -and so was its bicycle industry. During that decade the bicycle population soared to over 10 million units. By 1899 there were more than 300 bicycle companies in the US, most of which were only
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assemblers. After the introduction of cars, only 12 of those companies survived, producing low 1
quality and low price bicycles to be sold in department stores . 2
During the 1930s Schwinn invested massively in R&D – more than 40 patents granted – and managed to pull the bicycle industry out of the recession. With high sale volumes, Schwinn had controlled the suppliers and demanded better quality and low price components. With increasing power Schwinn started to back and forward integrate, manufacturing parts internally and using its strong brand with distributors and retailers. By 1973 the bicycle industry was vertical and mature, with sales topping 15 million units in US. Then came the mountain bike revolution…
Schwinn’s reaction Mountain bike is a fad: In the mid 1980s the market of mountain bikes was already 60% of the
entire market. These bicycles were built of lightweight materials such as aluminum and carbon fiber. Once the innovator, Schwinn became the market follower. Schwinn never invested massively in R&D in order to be able to dictate the innovation in mountain bikes. Although Schwinn had great experience in bicycles, it lost its advantage because its management did not respond quickly enough to adapt to the new trends: faster European bikes and mountain bikes.
The vertical Schwinn was not prepared to compet e in price and quality with Shimano for parts and with South East Asian bike producers for assembling. As a result, Schwinn's share (by units) 3
of the US bicycle market was eroded from over 25% in the 1960s to just 5% in 1992 .
1
Clockspeed p.51
2
Clockspeed p.52
3
Forbes, 12/21/92, Vol. 150 Issue 14
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Outsourcing: Instead of investing in R&D, Schwinn’s management decided to outsource part of
its bicycles from Japan in order to benefit from cost advantages. But then Schwinn committed another mistake: at that time the Japanese industry was not offering the same cost advantages as the expanding Taiwanese bike industry. It took Schwinn some time to realize that, and they slowly started importing a small quantity of Taiwanese–made Giant bikes. Although cheaper, these bikes had lower quality. Besides, no relevant investment in R&D was made and Schwinn kept following the leaders in the market.
Alliances: In 1981 Schwinn’s workers went on strike at Schwinn's main factory in Chicago.
Realizing the difficulties in competing with its local production Schwinn closed the plant and transferred its engineers and equipment to Giant's factory in Taiwan. One more mistake: Schwinn transferred all the knowledge and technology without acquiring at least part of the Taiwanese company equity.
As part of its new partnership with Giant, Schwinn passed onto Giant its technology, engineering and volume. In return, Schwinn imported the bikes and marketed them in the U.S. under the Schwinn name.
Giant levered its cost advantages and by 1984 had already become a dominant player in the bicycle industry. At that point Schwinn had no control over Giant's strategy. Giant used the knowledge gained about specialty bike dealers to launch its own brand–name in the European market in 1986 and in the American market in 1987.
Today giant is the biggest bike producer in the world, with more than 10,000 Giant shops spread throughout some 50 countries. About 70% of the roughly five million bikes it produced in 2002 were sold under its own name, which is the biggest brand in Taiwan and China, the secondbiggest brand of high-end bicycles in the U.S., and the third biggest in Europe's high-end market.
After the introduction of Giant's brand, Schwinn tried to protect itself by forging a new alliance with China Bicycles Co. It began buying CBC's bikes and selling them under the Schwinn name. This time Schwinn got some equity in the venture with CBC, buying a 33% stake in 1987. Page 23 of 30
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History repeated itself: CBC used all the technology and knowledge transferred from Schwinn to help bolster its business supplying bicycles to European companies. CBC then launched its own brand and acquired a medium-size U.S. bicycle importer and distributor, which owned the Diamond Back name. That provided CBC with its own US brand name and distribution channels. Shortly after Diamond Back started to compete directly with Schwinn.
Recent developments: With Giant, China Bicycles and other competitors taking big bites out of
its market share; Schwinn was finally forced to file for bankruptcy in August 1992. Since then Schwinn was acquired three times and filed again for Chapter 11 bankruptcy protection in July 2001. All that is left of the mystic original company is its brand name that is still strong enough to keep the company competing in the market.
Campagnolo Company History The privately held company Campagnolo S.R.L. makes bicycle parts such as gear shifters, brakes and wheel hubs. Made from highly polished aluminum, titanium and even carbon fiber, Campagnolo parts are venerated by cyclists.
The company was founded by former racer Tullio Campagnolo, the current owner’s father, who, after his wheel stuck on a hard gear while racing up a hill in a snowstorm in the 1927, invented the original derailleur, which allowed to an easier gearshift.
Campagnolo pioneered advancements in multi-speed shifting technologies in the late 40’s and 50’s and then grew to dominate the industry of bicycle parts for decades.
In the mid-Eighties Shimano developed SIS, the first indexed gear shifting system, which became a success in the market. At the same time the bicycle world was shaken by the quick evolution of mountain bike, of which Campagnolo failed to immediately recognize the potential market growth, thus losing momentum to new competitors as Shimano. Page 24 of 30
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Campagnolo’s reaction Introduction of mountain bike parts: The Italian company tried to catch up with Shimano and
rapidly introduced mountain bike parts that lacked Shimano’s quality and reliability.
Despite its efforts, Campagnolo could not match the same quality/price ratio to supply the always growing and price–sensitive mountain bike market, and by the early 1990s Campagnolo had already lost an important part of its market share.
Retract from mountain bikes: After spending great amounts of money and lacking the financial
strength to continue competing in both mountain bike and street racing bike markets, Campagnolo decided to exit the mountain bike market and focus on the road bicycles market where they were the best.
Campagnolo’s strategy Campagnolo’s reaction was then to focus on high–end products. Today much of Campagnolo’s business is what the industry calls after–market sales to enthusiasts. That strategy let Campagnolo eat up market share in the high–end market for top–of–the–line road racing components.
Campagnolo’s move was very successful because its home Italian region of Veneto is well located – it has more than 250,000 registered road racers. Besides, road-racing bicycles are a stable market, and in some parts of Europe sales are even growing by about 2% per year. Europeans, in particular, are crazy for road racing.
Campagnolo seems to have found its niche.
Summary of the overall reaction of competition Shimano and the mountain bike success changed the bicycle industry completely. Schwinn, once the biggest US bicycle manufacturer, lost its leading position, filed for Chapter 11 twice and today Page 25 of 30
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is just one of many players. Cannondale reacted to Shimano’s dominance by producing its own components and bicycles to the high–end market. Campagnolo, the famous Italian bicycle parts manufacturer, retracted from the mountain bike industry and focused on the high-end road bicycle market.
6 – Industry outlook Following the waning craze of the mountain bike, the bicycle industry found itself without new stimuli and new innovating trends.
The markets have reached maturity and all major manufacturers focused on their key skills, trying to increase their competitive advantage.
In the most recent trade fairs, the main innovations have only been brought by improved manufacturing processes or technical refinements of established products: a much quieter scene than that of the bustling mountain-bike years.
Furthermore, European bike producers are increasingly closing the gap to their Japanese counterparts
(notably
Shimano).
Having
reduced
the
technical
supremacy
of
some
manufacturers, the battle is shifting on price.
What the industry is eagerly awaiting is a new product to revitalize this slumping market.
At the moment it is too early to clearly identify in which direction the market will move, but it is possible to detect a new tendency towards commuter bikes.
In the US the sales of so called comfort bikes have steadily grown recently, with an increase in 2001 over the previous year of 13.6 percent of their share of the total US bike market.
Joe Breeze, one of the very pioneers of the mountain-bike era, started the SimpliCity Cycle Company, showing in October 2002 at the International Bike Expo in Vegas his new line of commuter bikes: the Breezers. Page 26 of 30
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Leveraging on the large number of people who had approached biking as a weekend pursuit, and on the increasing unease of commuting by car in congested cities, the commuter bike represents a return to the bike as a simple means of transportation.
These bikes provide all components needed to enhance simplicity of use and ride comfort, offering customers a finished product, complete with all parts needed in a city, like lights, fenders, bell, suspension and even locks and chains. This eliminates the intimidating task of having to customize the bike by choosing its single components.
Another trend in this sector is that of increasing practicability by simplifying not only the operation of the bike, but also its exterior aspect. All mechanical parts are hidden either within the frame or underneath special covers, at the same time protecting the components and preventing the riders from staining their business outfits with grease.
This trend would bring the US more in line with Europe, where the bicycle never lost sight of its function as an everyday means of transportation, and could represent the turn that the industry has been looking for.
Key learnings Shimano built its competitive advantage on a combination of technical, marketing and managerial skills:
Technical
•
Continuous strive for engineering excellence and innovation
•
Steady process improvement
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Marketing
•
Aiming at medium/high end of market, therefore not competing directly with the top niche players, and profiting from a larger market segment
•
Introduction of components branding, achieving high awareness and recognition
•
Trend creation through sponsoring of bike enthusiasts organizations at all levels, from amateurs to professionals
Managerial
•
Choice to manufacture in cheap labor countries
•
Strong entrepreneurial spirit
•
Capacity to extract inputs from any possible source (clients, retailers, trade fairs), allowing to keep abreast of new trends
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Bibliography Reinmoeller, Westney and Yonekura (1997) Hitotsubashi University, Institute of Innovation and Research
Newsweek, 10/19/92, Vol. 120 Issue 16
Forbes, 12/21/92, Vol. 150 Issue 14
Asian Wall Street Journal; New York; Aug 30, 1993
Asian Wall Street Journal; New York; Jan 13, 1994
Asian Wall Street Journal; New York; Oct 13, 1998
Financial Times; London; May 21, 2001
Wall Street Journal, International Edition; December 16 , 1996
The Dancing Chain: History and Development of the Derailleur Bicycle
Designing Clunkers: Demand-Side Innovation and the Early History of the Mountain Bike
Clock speed, The Secret of Life p.50-60
Global Equity Research, UBS Warbug; Feb 8, 2001
Shimano, Morgan Stanley Dean Witter; Jul 16, 2001
The Road War – Shimano vs. Campagnolo, David Diaz Blanco
http://www.totalbike.com
Cannondale 2001 Annual Report
Campagnolo vs. Shimano A Comparison, Kraig Willet; Sept 5, 2001 Page 29 of 30
