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History of the Bike Industry
Several years ago the government set up five bicycle manufacturing firms in an attempt to stimulate economic growth, investment and create employment. This initiative was consistent with their policy of developing clusters of firms that could build up competence in high-margin niche markets. The bicycle industry was selected because of its close ties to the growing outdoors and health-conscious consumer market. Consumers in these markets have high discretionary income, and will freely buy any bicycle which suits their individual needs. In order to protect their investment, the government banned the importing of bicycles and bicycle components from other countries in all segments except for the low cost commuter segment (where a number of bicycles and components were being produced very cost effectively by some third world countries).
All five firms were built from nothing and attempted to maximize economic benefits to the community by all producing one identical bike - the Adventurer. All factories were set up identically and produced an even quota of the Adventurer. Anyone wanting a new bike had to buy an Adventurer or a cheap import and therefore there was virtually no competition since these products appealed to quite distinct market segments. Although there was an effective monopoly for the Adventurer segment, firms were regulated to ensure that the companies did not make excess profits at the consumers expense.
As the government's policy started to work and the financial strength and competence of these manufacturers increased, the government initiated stage two of its master plan. A prohibitive import duty was imposed on all imports, effectively killing demand for cheap third world imports and leaving both segments available to the local manufacturers. With this change to the Erehwon bicycle market, the government also decided to privatize the manufacturing companies. The firms were snapped up by investors who were able to spot a good opportunity and cheap resources.
You have been recruited as the management team of one of the firms. Your general knowledge of bicycles will prove useful, but you should remember that you are dealing with new bicycles only in the domestic market and are selling them to retail shops at wholesale prices i.e. retail less the distributor margin. A research team has also been hired to investigate the market further and its report follows in the next section.