BALDWIN BICYCLE

COMPANY

By :
Amit Tarnekar : 32198
Arun Menon : 32175
Alok Ranjan : 32134
Mansoor Khan : 32172
Nikitta Tekriwal : 32145
Vezoto Theluo : 32300
EXECUTIVE SUMMARY
•Baldwin Bicycle Company (BBC) is a mid-
range full-line bicycle manufacturing company
with 40 years’ experience

•BBC produced 98,791 units accouting for

over $10MM in revenues in 1982, with an
expected 100,000 units for the next three
years.

•Distributed exclusively through

independently-owned retailers and specialty
bicycle shops, BBC bicycles are known for
their above-average quality.
 HI-VALU’S PROPOSAL
A BBC would manufacture the Challenger Line of Bicycles
exclusively for Hi-Valu
B Challenger was to be a low cost value bicycle, sold at a
retail prices under BBC’s normal product lines
C This would result in expected cannibalization of an
estimated 3000 units but incremental sales of 25000 units
Hi-Valu insists that the bicycle be sold to them at a price
D lower than BBC’s normal distributor prices to preserve
Hi-Valu’s Margins
Bicycles would be shipped to Hi-Valu’s regional
E warehouse on consignment and paid only when 120 Days
elapsed or the Bicycle was shipped to a Hi-Valu store,
whicever occurred first
F Payment to be Net 30 Days
• Knott estimated that 25000 units per unit would be sold Accurate
; further, speculated that a unit would sit in the are
warehouse, on average, two months, although Hi-Valu Estimates
would purchase units in the warehouse for four months
automatically
Hi-Valu’s
• Although BBC is operating at 75% of capacity, this
model assumes that workers are not idle; rather, are Efficient
workers are individually working at full efficiency, but Workers
only enough workers to produce the quantity required
are scheduled
• This decision model assumes that variable costs, Linear
such as materials and labour, are linear over the
relevant range; that is, there are no volume
cost are
discounts on material, and that addition of more Variable
labour does not incur further costs.
PRACTICAL ASSUMPTIONS
 FINANCIAL ANALYSIS
• Given Hi-Valu’s Offer at $92.29. Contribution Margin $
Relevant Cost 23.09 ( $ 577,250.00 for 25000 units)
Analysis • Anticipated loss due to cannibilization $ 115,155.16 in
sales ( $38.39 per Bicycle for 300 units )
• Net Increase Revenue is $ 457, 094.84

Capital Working Increase in working Capital if High-Valu’s contract is

Requirement accepted . It would be $31.51 per unit or $ 787,631.94 over
the estimated 25000 units per year.
Renegotiate Although the monthly expenditures would average
Payment ( Cash $65,645.83 per month, Hi-Value would likely make its first
Flow ) Terms payment for the first only after three months.
Present Value of yearly expenses at 18% discount rate
$371,293.16 whereas cash inflow is $ 304, 412.96.
Negative NPV = -$ 66,880.20
Highly Debt-equity ratio of 1.5 exceeds rule of thumb standard of
Leveraged 1.0 by 50 %
Position
 Relevant Cost Analysis
• The relevant costs are those that occur in the future and differ for each
feasible alternative
• These relevant costs should be compared to the current situation at
Baldwin in order to evaluate the decision to join with Hi-Valu:
• Per units cost $83.90
R&D Cost (5000/25000) 0.2
Other variable costs** 18.44
_______
Total added cost /cycle $102.54

• ** 5.5% of assets
Added estimate of monthly inventory cost to balance sheet info to estimate avg assets
2 months materials
(25000 bikes/12 mo x 2 mo inv) x 38.39 $ 165,833
WIP inv (1000 x 83.90) $ 83900
Finished Goods (500 x 83.90) $ 41950
_______
Increase to assets $ 291697
Present Current assets $ 8092000
Estimated Total Current Assets $ 8383697
Asset Costs (5.5%) per bike 8383697 x.055 461103/25000
$18.44
 Cash Cycle
• Cash flow is a difficult situation currently for Baldwin
• It takes the inventory approximately 125 days to turn
and then another 46 days to get paid. This is a very
long time.
• The Challenger deal states that they would pay within
30 days. This would help with the current 46 day AR
turnover. The contract also keeps inventory days from
going over 120 for the Challenger bikes. Both of these
help turn assets into cash faster by at least 21 days
(approximately 16 + 5)
 Direct Costs
• To produce Challenger there would be
two types of direct costs
1. one-time costs such as costs of
preparing drawings and arranging
sources that were not in current models
and
2. ongoing costs of producing bicycles
such as materials, wages, and
overhead
 Indirect Costs
• Indirect costs would be asset-related
costs based on annual percentage of
dollar value of assets such as cost of
debt and book keeping of receivables
and inventories, insurance and state
property tax of inventory, etc
 Impact on ratios
• Baldwin currently has about an 8% ROE,
which is well below the industry average
of 15%.
• By accepting the offer and using a 50%
tax rate the ROE is estimated to be
around 13%, which is significantly better
but still below the 15% industry average
 STRATEGIC ANALYSIS
• No Clear Segmentation, but
they are probably trying to
Market cater to all customers by
Segmentation offering a full product in the
midrange Segment

No clear • BBC has been operating for

the past 40 years. However
competitive it has not identified any
advantage clear key competitive
advantage
delineated
 COMPANY ANALYSIS
STRENTGHS WEAKNESS

Above-average reliability Apparent lack of bargaining power

 Established distribution channel  Relatively small to pursue low-cost
 Rent equipment as required provider segment : fewer economies
 Non-unionized workforce of scale
 Operating leverage relatively low  Too small to compete with
multinational manufacturers

OPORTUNITIES THREATS

 New wheeled sporting goods, such  Bicycle markets depressed

as skateboards, scooter, etc, can be  “Fads” ( eg. Skateboards, “pogo
introduced as new products balls” and other sporting goods
exploding in popularity in the 1980’s)
 Comparison Shopping : Customer
looking for other branded goods
Income statement for the year ending
Dec 31,1983
In dollar
Sales revenue 13179250.00
Cost of Good sold 9775000.00
Gross margin 3404250.00
Selling and admin charge 2834667.32
Income before tax 569582.68
Income tax expense 261513.80
Net income 307068.89

Increase over 1982 20.42% in Net income

ROI 9.09%
Improvement of ROI 20.39% over 1982
 Key financial ratios

Return on assets 0.03

Return on equity 0.08
Inventory turnover 2.92
Account receivable TO -
Days to collect account receivable -
Total asset TO 1.34
Current ratio 0.54
Debt to equity ratio 1.50
 RECOMMENDATIONS
1. STP

Segment Target Positioning

• It currently • It doesn’t have a

•Catering itself to
Treats its market specific target
the market
as Homogeneous customer which is
•Pushing high
From baby to 12 too generic and
margin products
gear cycles too safe
•Opening
• BBC will spread • A proper target
exclusive Baldwin
itself too thinly of its target
Cycles Outlets
trying to please all customer based
customers on its product
offering
2. Courtother Discount Retailers and Renegotiate Terms
with Hi-Valu :

a Although the discount segment is not BBC’s selected strategic

segment , obtaining incremental revenues through discount
retailers is more of a tactical move to supplement its coffers until
bicycle market regains stronger footing.

b It should explore alternative distribution arrangement (both private

label and BBC branded ) with other discount retailers

c It should investigate possibility of selling its regular products

through discount retailers
 3. Develop New Products that Lead to Competitive
Advantage
a BBC should produce new products. Given the upswing of
the economy and the rate at which the market is growing
consumer will welcome inovative products such as the
bicycle child trailer
b Alternative or other product can also be launched such
skateboards etc.
c Theses new products can be patented, at present none of
the 20 products they have are patented

4. Identify and Exploit Operating Efficiencies

a Currently realizing below-average returns on investment.

These indicates it is not making optimal use of its resources
b Measures such as Pareto analysis can be taken to identify the
few critical activities responsible for most of the inefficiencies.
Thank You
Appendix: Financial Analysis excel

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