From the article it seemed that Baldwin Bicycle Company competed somewhere between a cost leader and a differentiator. Baldwin had been a bicycle manufacturer for almost 40 years. The article illustrated that Baldwin Bicycle had the image of being above average in quality in price, meaning to say that it was not low cost competitor. Besides, Baldwin had never before distributed its products through department store chains of K-Mart, which is well-known for its low price. However, no obvious evidence showed that Baldwin had targeted a particular market segment as a differentiator.
To begin with, the company seemed trying to attract all range of customers—its product line involved 10 models which targeted from small beginners’ model with training wheels to a deluxe 12 speed adult’s model. Moreover, over a long term operation, Baldwin Bicycle seemed not created any superior competitive advantage that could be identified by customers to be apart from its competitors, such as brand loyalty, customer service, product feathers or technology. Above all, Baldwin Bicycle had not clarified its strategic orientation currently.
b If Baldwin took up Hi-Valu’s offer, how might this change the way Baldwin competes? In particular, think about the effect on Baldwin’s costs and distribution channels(i.e. the retailers).(45%)
If accepting the offer, Baldwin’s strategy may be restructured more like a cost-leader. Before drawing a draft cost analysis, several assumptions should be considered. a) Selling price should remain consistent.
b) Variable and fixed costs should remain constant. Direct material and labor costs remained the same in the current range, and no idle time allowed. c) Estimation of that Hi-Value would purchase 25.000 units and Baldwin would lose 3000 units should be accurate. Incremental cost and revenue if accept Hi-Value’s offer
Baldwin got capacity to accept the offer since 75% capacity had been used. Total capacity would be 131,721 units so Baldwin was able to produce extra 25,000 units. While sales volume was estimated to be 100,000 units less 3,000 units deduction plus 25,000 units=122,000 units, which quite near to its total capacity, fixed and variable costs level would change. Contribution margin was calculated as $12.47 after tax. Deducting one time added costs per unit of $0.2 , increased working capital $4.33 per unit and margin on lost margin(3,000units loss), total incremental effect would be $2.72. Effect on profit was total $68,000.
Although Challenger’s offer could guarantee additional revenue, incremental costs would put burden on Baldwin’s current financial position provided accounts receivables from Hi-Value increased, making Baldwin had no extra money to develop its own product, such as new technology and feathers. As a result, to take the offer made Baldwin’s own products harder going up to the top.
Currently Baldwin only distributed its products in speciality bicycle shops. After the offer being accepted, more distribution channels in Hi-Value stores at lower price than well-known bicycle brand such as Trek. Lower price with no significant new feathers or brand image, Challenger seemed more like low cost product.
Customer and competitor reactions
Accepting the offer would to some extent damage Baldwin’s brand image. Lower price and more discount distribution channel would pull Baldwin down from “above average in quality and price” speciality bicycle manufacturer to lower price manufacturer, causing a potential loss of customers and sales. Some competitors would follow Baldwin’s step, seeking for new investment or cooperation with department stores like Hi-Values . In the long run, this may share Baldwin’s current estimated sales or even, Hi-Value would cease the contract after 3 years and turn to someone else who offered lower price than Baldwin. By contrast, similar manufacturers may go to the opposite side- develop new technology, add up fresh feathers and advertise as top products to a be differentiators. In this term Baldwin may suffer from such an embarrassing brand image from long run perspective.
In addition, in terms of break-even point and safety margin, Baldwin was on the edge of losing sales due to the poor economic, resulting in a closer distance of the break-even point. To avoid the risk of making a loss rather than a profit, Baldwin should take the offer. However, before that Baldwin should also think about its cash flow. From the income statement it seemed that Baldwin could not bring out enough cash to the project. Besides, since production would increase, more warehouse space would be required which would incur further costs.
Besides, above assumption didn’t include risk of losing more sales .Moreover, based on the current debt equity ratio, high leverage level would happen if Baldwin financed by loan since majority of its loan were short- term rather than long- term. To sum up, before taking the offer, it was essential for Baldwin to clearly define its strategy and consider the effect on it about accepting the offer.
c Using Miles and Snow typology, speculate on Baldwin Bicycle Company’s strategic positioning.(45%)
From Miles and Snow typology, Baldwin was projected to be a reactor. Since prospector should be highly innovative and analyzer’s domain is a mixture of stable and changing product or market, apparently Baldwin would not be one of those by maintaining in the current market and product line. Problems arose whether Baldwin was a defender or reactor. From strategy’ point of view, Baldwin behaved more like a reactor. Mile and Snow typology defines three reasons for an organization to be a reactor. 1. Top management of Baldwin had not clearly articulated the organization’s strategy. As talked in Question a, over 40 years Baldwin chose to act somewhere in between. No clear strategy made Baldwin respond only when it was forced to by macro environmental pressures , in this case the poor economy.
2. Management does not fully shape the organization’s structure and processes to fit a chosen strategy. Compared to defender strategy which intends to secure and stable current market by offering a limited range of products, or offer better quality products or customer service, though selling and admiration expense was relevant high, Baldwin just sit there offering all range of products without improve product quality . No internal reshape had been carried out , but response to external Hi-Value’s offer as it occurred.
3. Tendency for Management to maintain the organization’s current strategy-structure relationship despite overwhelming changes in environmental conditions. Al though risk of losing sales in the current economic situation and consideration of Hi-Value’s offer arose, top management seemed did not intend to restructure their strategy—to a definite cost leader or absolute top product. Above all, Baldwin was speculated to be reactor.