Schwinn hits the skids

Summary

This case study looks at the extent to which Schwinn, a long-time bicycle manufacturer, was able to identify and execute its critical success factors following a change in management.

Introduction

In the USA, Schwinn is a brand that rings nostalgia. American baby boomers remember the classic Schwinn models and reminisce fondly about riding their Schwinns around town. So, what was it that caused a venerable company with a widely recognized brand to fail? The sad reality is that the company’s team did not execute on its industry’s critical success factors (CSFs).

Before we begin the Schwinn story, let’s first identify the CSFs in the bicycle industry. Sometimes, those factors depend on the nature of the strategy a company pursues. In bicycles, as in most mature manufacturing industries, there are three broad strategic approaches, as Treacy and Wiersema point out:

• Operational excellence, i.e. ‘providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience’. Such a strategy seeks to lead the industry in price and convenience.
• Customer intimacy, i.e. ‘segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches’. This strategy is focused on individualized service to each customer, based on an intimate understanding of what that customer needs.
• Product leadership, i.e. ‘offering customers leading-edge products and services that consistently enhance the customer’s use or applications of the product, thereby making rivals’ goods obsolete’. Product leadership companies seek to provide a continuing flow of state-of-the-art products or services to remain at the cutting edge of their industry.

What CSFs are required to effectively carry out each of these strategies? According to Treacy and Wiersema, here’s what each strategy requires:

Operational excellence

• minimize costs in every regard;
• optimize business processes for extreme efficiency and effectiveness.

Customer intimacy

• Gather detailed information about each customer so that they may be assigned to a micro-segment in which the offering is tailored carefully to that segment’s needs. Sometimes, the segmentation is so precise that offerings are tailored to market segments of one.

Product leadership

• creativity, to recognize and embrace ideas that may originate outside the company;
• optimize business processes for speed, in order to bring these creative ideas to market quickly;
• relentlessly pursue new solutions that may obsolete those that the company has just introduced. If anyone is to render the product leader’s technology obsolete, then the product leader prefers to do so itself.

In addition to the one or two CSFs pertinent to each strategy, another CSF applies to manufacturers regardless of strategy:

Effective, efficient value-chain relationships. Without effective and mutually beneficial relationships with suppliers and resellers, any manufacturer will face an uphill battle. From suppliers, manufacturers need reliability, quality and on-time delivery at an affordable price. From resellers, they need commitment and sell-through – a commitment that a manufacturer wins by being a reliable supplier of quality products itself.

Let’s see if Schwinn executed on any of these CSFs.

A changing American market for bicycles

One day in the late 1970s, a group of Schwinn engineers paid a visit to a small California bicycle factory called Fisher MountainBikes. Back in 1974, Gary Fisher had built a dozen ‘klunkers’, as he called them, bikes cobbled together from sturdy bike frames found in thrift shops, but fitted with the latest European parts – fancy ten-speed gears, thumb shifters, motorcycle brake levers, knobby dirt-grabbing tyres and so on. The purpose? To enable Fisher and his buddies to ride their bikes up and down the dirt tracks among the hills along Northern California’s dramatic coast.

Fisher, though still not 30 years of age, now had a real company, and he and others like him were building bikes like none built before. The engineers from Schwinn, long the leading bicycle brand in the USA, were there to take a look at the mountain bikes Fisher had crafted, including one made from an old Schwinn Excelsior. As Fisher recalled the scene some 15 years later, ‘This guy in his 50s was looking down at me like I was some jerk kid who didn’t know anything. The Schwinn engineers are going, “We know bikes. You guys are all amateurs. We know better than anybody”’.

It was Fisher who knew bikes, not Schwinn. As had happened in the 1970s, when Europe’s lightweight ten-speed road bikes invaded the American bicycle market, and later with motorcross-inspired BMX bikes, Schwinn was left in the dust. By the end of the 1980s, mountain bikes like Fisher’s would account for 60 per cent of a booming American market for bicycles, and Schwinn would be on its way toward bankruptcy court. Was the Schwinn team able to execute on the CSFs entailed in a product leadership strategy in the 1970s and 1980s? Consistently not. Let’s see how Schwinn fared on the other success factors.

Trouble at Schwinn

While Schwinn had been a trendsetter in the bicycle industry for 80 years, by the 1970s the family-run company had lost its ability to gauge the market. In October 1979, Ed Schwinn, aged 30, took over the presidency of Schwinn Bicycle Company from his uncle Frank V. Schwinn. At the time, Schwinn had a 12 per cent share of the American market and was by far the most trusted name in bicycles.

After just a few months in his new job, Ed decided that the long-time executives who had led Schwinn for years weren’t what the company needed. In April 1980, he arrived unexpectedly at Schwinn’s western sales office in California and said to Max Scott, Schwinn’s vice president for sales and marketing, ‘Max, I’m here to ask for your resignation. We’d like for you to leave the company right now. You can come tomorrow to get your belongings. That’s all I have to say’. Marketing Director Ray Burch was also replaced. The veteran number-two man, Al Fritz, was banished in 1980 to Excelsior Fitness, a small Schwinn division selling exercise equipment. As the veterans left, in came younger family members lacking in business experience. Schwinn’s old guard may have lacked the ability to develop cutting-edge products but they had presided over decades of operational excellence. Would the new team be able to match them?

The year that Ed Schwinn took over, Schwinn’s Chicago factory employees voted to unionize. Rather than continue to work with his experienced but now unionized factory workers, Ed decided to close Schwinn’s Chicago factory. In its place, the youthful Schwinn decided to open a new factory in Greenville, Mississippi. Things went downhill quickly from there.

As Chris Travers, one of Schwinn’s California dealers, said later, ‘Greenville was quickly branded as having an inferior product.’ Other dealers complained that the Greenville-manufactured bikes had parts that did not fit together, wheels that weren’t true, or frames that had mismatched colours. For a while, some bikes even arrived without seat posts. There were delivery issues as well. Long-time Schwinn dealer Joe Russell said, ‘We just couldn’t get the right bikes when we needed them’. Clearly, Schwinn failed to execute on the CSFs for an operational excellence strategy and in doing so was beginning to do irreparable damage to the company’s relationships with its resellers, a major shortcoming on one of the CSFs.

The manufacturing problems in Greenville led to significant operating losses, exacerbated by write-offs of obsolete inventory, equipment and buildings in Chicago. The severance costs associated with laying off all of the Chicago factory employees also proved financially damaging to Schwinn, as did the habitually free spending of Schwinn’s management team, itself a further difficulty in maintaining operational excellence. The result was that the Schwinn Company’s net worth plunged from $43.8 million in 1980 to $2.7 million just three years later.

Seeking to resolve its continuing manufacturing problems, Schwinn transferred most of its production to Taiwan-based Giant Manufacturing Corp. Ed Schwinn was soon captivated by doing business in Asia, even bringing to Chicago a Chinese junk that he would sail on Lake Michigan. The odd-looking boat was a reminder to all of Schwinn’s free-spending culture. Schwinn’s globetrotting executives enjoyed other finer things in life, too: ‘It doesn’t cost that much more to eat well’, commented Vice President of Finance John Barker, after one of his regular trips to China.

Despite the free spending on overheads, the lower Asian manufacturing costs boosted unit profit margins from losses of $5–20 per bike to gains of $20–30. Margins on Al Fritz’s exercise bikes were even better, in the 50 per cent range. Sales of Fritz’s new Air-Dyne exercise bikes doubled, but Schwinn’s corporate team didn’t believe the optimistic forecasts that Fritz was making. As a result, according to Fritz, ‘We never had enough exercisers’. This time it was the new management team who proved unable to deliver on the CSFs required for product leadership. Indeed, the fact that Schwinn didn’t miss the exercise craze completely was due largely to the experienced Al Fritz.

In 1984, Schwinn turned its first profit in four years, earning $3 million on sales of $134 million, due mainly to the booming exercise business. By 1986, Schwinn’s earnings peaked at $7 million, its best in a decade, on sales of $174 million, and they opened swanky new offices.

Schwinn’s troubles go global

Alas, the good news was only temporary. Schwinn’s network had grown to include suppliers in mainland China and Hungary, leading to reduced reliance on Giant, their established Taiwanese supplier, which in 1986 had been producing some 80 per cent of Schwinn’s bikes. What did those decisions do to their value-chain relationships? Giant retaliated with higher prices, cutting into Schwinn’s margins and forcing it to raise prices. Schwinn bikes were suddenly priced $10–20 higher than competing models. ‘When people came in here and saw the price – boom, out the door they went’, said John Pelc, a Schwinn dealer for more than 40 years. To compound the problem, Schwinn had quality problems once again, this time with its new Chinese supplier. Both efficiency and effectiveness had gone out the door.

Once again, Schwinn’s manufacturing and supply problems showed up on the bottom line. In mid-1989, controller Don Gillard came to Ed Schwinn with an analysis that showed Schwinn was losing money on bikes, and that only the Air Dyne cash cow was keeping it afloat. Gillard was asked to resign soon after. Ed Schwinn just didn’t like hearing bad news.

Meanwhile, Giant decided to expand its own brand and reduce its reliance on Schwinn. When Schwinn bought a $2 million stake in its Chinese supplier, China Bicycles Company, Giant’s president Tony Lo was furious. Lo hired Bill Austin, Schwinn’s recently departed marketing chief. Austin shrewdly offered dealers a better profit margin than Schwinn was offering, along with a compelling story – Giant bikes were made by the same factory that made Schwinn! By 1992, Giant would sell more than 300,000 bikes in the USA, more than half of Schwinn’s 543,000.

The end of Schwinn’s road

By the end of the 1980s, Schwinn was back in the red, losing $2.9 million in 1990 and $23 million in 1991, when it shut down the Greenville factory. The Air-Dyne cash cow disappeared, as its sales plunged by one-third due to lower pricing by competitors. Al Fritz, after complaining of the lack of payrises for his division’s staff, had been dismissed years earlier. By 1991, Schwinn’s lenders were applying pressure once again and Schwinn family members, long accustomed to fat dividend cheques, were growing restless. In 1992, Schwinn’s banks began sweeping cash from Schwinn’s revolving line of credit to pay overdue loans, leaving Schwinn with little money with which to pay Giant and China Bicycles. Schwinn’s debt to these two suppliers ballooned to some $30 million, and Schwinn’s net worth was wiped out. ‘It was like being on a runaway train’, said Dennis O’Dea, Schwinn’s attorney in the bankruptcy that soon followed. ‘It was horrific’. In October 1992, Schwinn filed for bankruptcy. Soon after, its remaining assets were sold to a group of investors. The most respected name in the American bicycle business brought a paltry $2.5 million.

Execution, not

At the beginning of this section, we identified the CSFs entailed in the strategies that Schwinn might have chosen. Let’s summarize how the Schwinn team executed on the industry’s CSFs:

• Did it minimize costs? Hardly. A free-spending culture. A Chinese junk on Chicago’s Lake Michigan. And a swanky new office building.
• Were business processes optimized for efficiency and effectiveness? Certainly not. Severe quality and delivery problems were recurring events.
• Were there detailed customer data for targeting small or expanding segments? None. We saw no evidence of any attempts to tailor the offering to meet small segments’ individual needs.
• Creativity and a willingness to accept new ideas like mountain bikes and bring them to market quickly? No way. From all appearances, Schwinn’s leadership appears to have been about as backward-looking as a management team can get.
• What about organizational processes? Relentless pursuit of new solutions? Were they geared to speed, to support a product leadership strategy? Except for Air-Dyne, Schwinn’s days as a product leader were long gone.
• Value-chain relationships? Cutting out a reliable supplier? Supplying its dealers with faulty products. Inadequate product delivery. Not exactly what most observers would call effective execution.

Sadly, the Schwinn story is a textbook example of ‘management missteps, global mishaps and the pitfalls peculiar to family-owned businesses by third- and fourth-generation executives’. There are lots of phrases one could use to describe the Schwinn debacle, but effective execution on CSFs is not among them.

Lessons learned from Schwinn

To be fair, the bicycle industry when Ed Schwinn took his family company’s helm was not all that attractive. But there were segments – like mountain bikes – where the prospects were bright. But unlike the new mountain bike pioneers like Gary Fisher, Schwinn failed to respond to the trends sweeping the industry.

And, unlike Palm’s Jeff Hawkins, Ed Schwinn seemed not to understand the importance of a good team. Instead of surrounding himself with the best and the brightest, he eliminated key veterans (flawed to be sure, but the newcomers didn’t shine either) and replaced them with young relatives. Al Fritz, who latched on to the fitness trend, was demoted. Don Gillard, the bearer of bad news, was terminated. Family ties are no substitute for a team’s lack of ability to execute on the CSFs.

Worse, Schwinn antagonized key partners – Giant and, later, China Bicycles – apparently not realizing that one’s team includes more than one’s employees. Bankers, suppliers and dealers count, too. Arrogance, rampant at Schwinn, does not breed cooperation and teamwork. Business – as with entrepreneurship – is a team sport, and Ed Schwinn was not a team player.