CASE 11 Logitech (Mini Case) Alan N. Hoffman Company Background LOGITECH, HEADQUARTERED IN ROMANEL-SUR-MORGES, SWITZERLAND, was the world's leading provider of computer peripherals in 2010. Personal computer peripherals were input and interface devices that were used for navigation, Internet communications, digital music, home-entertainment control, gaming, and wireless devices. Derived from the French word logiciel, meaning software, Logitech was originally established as a software development and hardware architecture company by two Stanford graduate students in Apples, Switzerland. Shortly after establishing itself as a quality software development company, Logitech saw a new hardware product opportunity that was emerging in the mid 1980s, the computer mouse. The mouse was standard equipment on the original Macintosh computer launched in January 1984. Logitech viewed the mouse as a growth opportunity and it became a turning point for the company's future. Logitech introduced its first hardware device, the P4 mouse, for users of graphics software. An OEM sales contract with HP followed, and in 1985 it entered the retail market, selling 800 units in the first month. In July of 1988, Logitech's executives decided to take the company public to help finance its rapid growth. Then, in the early 1990s, while facing increasingly strong competition in the mouse business, Logitech identified a larger market opportunity for computer peripherals and began growing its business beyond the mouse. In the next few years, Logitech introduced products such as (1) computer keyboards, (2) a digital still camera, (3) a headphone/microphone, (4) a joystick gaming peripheral, and (5) a web camera on a flexible arm. While these new products were being introduced under the Logitech name, the company also continued innovation in its core mouse This case was prepared by Professor Alan N. Hoffman, Rotterdam School of Management, Erasmus University and Bentley University. Copyright 2010 by Alan N. Hoffman. The copyright holder is solely responsible for case content. Reprint permission is solely granted to the publisher, Prentice Hall, for Strategic Management and Business Policy, 13th Edition (and the international and electronic versions of this book) by the copyright holder, Alan N. Hoffman. Any other publication of the case (translation, any form of electronics or other media) or sale (any form of partnership) to another publisher will be in violation of copyright law, unless Alan N. Hoffman has granted an additional written permission. Reprinted by permission. RSM Case Development Centre prepared this case to provide material for class discussion rather than to illustrate either effective or ineffective handling of a management situation. Copyright 2010, RSM Case Development Centre, Erasmus University. No part of this publication may be copied, stored, transmitted, reproduced, or distributed in any form or medium whatsoever without the permission of the copyright owner, Alan N. Hoffman. 11-1 11-2 SECTION D Industry OneInformation Technology business. New and revolutionary technologies that were being developed by Logitech allowed it to continue to be an industry leader in the mouse and keyboard business. In the mid-1990s, the PC market exploded due to the popularity of the Internet and new home/office software applications. This growth of the PC industry created demand for the peripheral products that Logitech produced. The Internet allowed computer users to access new areas such as music, video, communications, and gaming. From this point forward, Logitech continued to grow both organically and through acquisition as new opportunities arose to expand its portfolio of products. Between 1998 and 2006, Logitech made a number of significant acquisitions to expand its product portfolio. It acquired companies such as Connectix for its line of webcams, Labtec for its audio business presence, Intrigue Technologies for its \"Harmony\" remote controls, and Slim Devices for its music systems. All of these acquisitions were done strategically to help Logitech position itself in all aspects of the personal computer peripherals world. In addition to growing significantly through strategic acquisitions, Logitech also continued to innovate and grow its core business. Logitech made significant innovations in the area of cordless mice and keyboards. It also introduced the industry's first retail pointing device with Bluetooth wireless technology. Logitech then expanded its Bluetooth technology to many other products in the digital world such as cordless gaming controllers and a personal digital pen. Logitech provided consumers with cutting-edge innovation while maintaining its product quality. Logitech maintained its product leadership by combining continued innovation, award-winning industrial design, and excellent price performance with core technologies such as wireless, media-rich communications and digital entertainment. Competitors Within the specialized personal peripherals industry, Logitech had three major competitors: Creative Technology Ltd., Microsoft Corporation, and Royal Philips Electronics N.V. Creative Technology Ltd. was one of the worldwide leaders in digital entertainment products for the personal computer (PC) and the Internet. Creative Technology was founded in Singapore in 1981, with the vision that multimedia would revolutionize the way people interact with their PCs. The product line offered by Creative Technology included MP3 players, portable media centers, multimedia speakers and headphones, digital and web cameras, graphics solutions, revolutionary music keyboards, and PC peripherals. Creative had a net profit margin of (29.58%) in FY 2009 and (32.82%) in the first quarter of 2010. Microsoft Corporation provided software and hardware products and solutions worldwide. Founded in 1975 by Bill Gates and Paul Allen, Microsoft's core business was to create operating systems and computer software applications. Microsoft expanded into markets such as mice, keyboards, video game consoles, customer relationship management applications, server and storage software, and digital music players. In FY 2009, Microsoft Corporation had annual sales of $58.4 billion and a net income of $14.5 billion. Royal Philips Electronics was a Netherlands-based company that focused on improving people's lives through innovation. Philips was a well-diversified company with products in many different businesses: consumer electronics, televisions, VCRs, DVD players, and fax machines, as well as light bulbs, electric shavers and other personal care appliances, medical systems, and silicon systems solutions. With this diversified portfolio of products, Royal Philips had FY 2009 revenues of $30.76 billion and a gross profit of $11.59 billion. Logitech was the only company exclusively focused on personal computer peripheral products, whereas all of its competitors had products and resources invested in a variety of other industries as well. CASE 11 Logitech (Mini Case) 11-3 Trends Logitech implemented a strategy of innovation, mixed with strategic acquisitions, to enhance its products with the technologies and software of other companies in order to create the most advanced, safest, and most innovative and collaborative experience for its customers. As Logitech had always been on the forefront of mouse and keyboard technology, it had also been a leader in video conferencing technology since the early stages of the Logitech mountable computer camera. From 1998-2004, Logitech made many important strategic acquisitions in order to enhance future portfolios and expand the depth of the peripheral product lines. Its first acquisition was the video camera division, QuickCam PC, of Connectix Corporation. This led to an influx of peripherals such as cameras and wireless cameras, and served as a very early introduction to the current video conferencing division of Logitech. The second successful acquisition for Logitech was Labtec Inc., an audio peripheral maker, in 2001. Following this acquisition, with a hunger to expand product focus, Logitech acquired Intrigue Technologies Inc. in 2004. This acquisition positioned Logitech as a leader in advanced remote control-making, allowing peripherals to accommodate more than just computer and video game uses. This positioned it for its next acquisitionSlim Devices, a manufacturer of music systemsin 2006. Logitech used these acquisitions to expand its multibusiness unit corporation into a diverse and specialized company appealing to a large group of technology users. Finally, with its acquisition of Paradial AS, Logitech was able to combine its peripheral products with the software, video effects, and security features of Paradial. This allowed Logitech to deliver a complete and intuitive HD video conferencing experience for companies of any size. Future industry trends revolved around content strategy and consumer expectations of the mobile web and smartphone applications. Content strategy involved the decisions about what information/features to include in a product, including those that provided the most benefit or fulfill the most needs; anything else was just noise and diluted the product. In terms of the mobile web and smartphone application trends, Logitech had three options: (1) develop closed partnerships with specific platforms (iPhone or Blackberry); (2) produce apps (applications) for each platform; or (3) produce \"platform-neutral\" apps by using the mobile web. Global Presence As the global economy has expanded and become more reliant on technology, Logitech has seen an increase in the desire for ease of use when it comes to portable computers, games, and video conferencing technology. Logitech has consistently expanded its product offerings to satisfy this growing demand for computer peripherals. In FY 2009, 85% of its revenue came from retail sales of peripheral products such as mice, keyboards, speakers, webcams, headsets, headphones, and notebook stands. Logitech has also seen global demand sharpen for devices designed for specific purposes such as gaming, digital music, multimedia, audio and visual communication over the Internet, and PC-based video security. The company's products combined essential core technologies, continued innovation, award-winning industrial design, and excellent value that were necessary to come out on top of a rapidly changing and evolving technological industry. Since its inception in 1981 in Apples, Switzerland, Logitech has been a growing player in the technological product market and distributed products to over 100 different countries. For Logitech, opportunities arose as the desire for global communication has risen. The trend of wireless and portable communication, such as Skype and Apple's Facetime, has opened up a window of opportunity for new and more advanced products to enable video communication and conferencing. 11-4 SECTION D Industry OneInformation Technology As computers age, Logitech has been able to sell add-on peripherals to users that want to add newer applications to their older computers. Logitech has been able to sell products at the end of the product life cycle such as mice and keyboards and generate profits to fund new product development such as the new Logitech Revue with Google TV. As its consumers became more globally conscious and connected, Logitech was able to tailor its products toward the many uses of video communication and high speed Internet capabilities. Logitech created a global presence and reputation for its brand and products. In 2009, Logitech's sales were distributed globally with 45.3% in the Eastern Europe, Middle East, and North Africa regions; 35.6% in the Americas; and 19.1% in Asia Pacific. By expanding its presence globally, Logitech became the leading provider of personal peripherals in the world. In addition to being an innovator in its industry, Logitech has also maintained reasonably priced products as well. In 2009, 67% of its sales stemmed from products that were priced less than $60. This innovative mindset, in addition to reasonable prices, has also contributed to large sales and, in the end, Logitech's good financial health as a company. Finance The recession in 2008-2009 hit hard on Logitech's business: for the full fiscal year 2010, sales were $2.0 billion, down from $2.2 billion in fiscal 2009. Operating income was $78 million, down from $110 million the previous year. Net income was $65 million ($0.36 per share), compared to $107 million ($0.59 per share) in the prior year. Gross margin for fiscal 2010 was 31.9% compared to 31.3% in fiscal 2009. As a result of the economic downturn, Logitech found it necessary to restructure its workforce. In early 2009 Logitech reduced its salaried workforce globally by 15%. Logitech's stock price spiked to $40 in late 2007, as a result of record sales and profits from its successful launch of iPod-capable peripherals. Its iPod peripheralsspeakers, docks, and headphonesmade the increasingly popular iPod easier to use. In 2009, Logitech's operating margin was 5.15%, far below its 2007 high of 12% due to increasing price competition. Logitech did not issue dividends to shareholders so that it could reinvest its net income back into research and development and product advertising, as well as have it available for strategic acquisitions, causing a continuous cycle. Logitech outlined specific financial objectives that it sought to achieve. It wanted to achieve sales growth between 13%-19% and a gross margin between 32%-34%. Logitech also intended to invest 5% of its sales revenue in R&D and 12%-14% in marketing. By continuously investing resources in research and development, Logitech took a strategic approach to maintaining long-term growth and profitability. Operations One of the initial weaknesses that Logitech faced regarding operations was that it had numerous manufacturing locations dispersed throughout the world. The problem with having so many locations was that these facilities were not cost effective. Many of its plants were located in countries where it was expensive to operate and the labor costs for qualified employees was high. Logitech saw that, in the early 1990s, the personal computer industry was becoming increasingly competitive. Having recognized this, Logitech made two primary operations decisions that allowed it to increase its competitiveness. First, Logitech consolidated manufacturing, which was once widely dispersed in China. This allowed the company to CASE 11 Logitech (Mini Case) 11-5 maintain lower prices on its products and increase its competitiveness. In addition to its China manufacturing facilities, Logitech established a second center for R&D, located in Cork, Ireland, a prime location for innovation in the technology and IT sectors. This resolved the issue of Logitech having several expensive locations by moving into fewer, more cost effective facilities. In addition to moving manufacturing, Logitech also knew its category was changing and that it would no longer be able to compete by only manufacturing computer mice. Therefore, Logitech expanded its product line beyond the mouse and introduced a variety of products including a handheld scanner, Fotoman (a digital camera), Audioman (a speaker/microphone), and Wingman (the first gaming peripheral). These operational decisions not only helped Logitech remain innovative and competitive within the industry, but also positioned it for success during the personal computing industry boom in the mid- to late 1990s, when the Internet and online industries took off. Logitech, known as a leading personal peripheral provider, was both innovative, with more than 130 personal computer peripheral products, and reasonably priced. When the PC industry took off, Logitech was already established as an industry leader and its sales soared. Logitech was also a leader in the wireless peripherals sector. By following consumer trends, Logitech saw the personal peripherals sector was moving into a new digital era, where wireless peripherals was a new trend. Logitech created an entirely new product category with the Logitech Cordless Desktop, a wireless mouse and keyboard bundle. By staying on top of consumer trends, Logitech sold over 100 million cordless mice and keyboards. The Changing Landscape Ahead Logitech became a leader in computer peripherals by developing innovative products and focusing on the consumer's experience. Between 2007 and 2010 alone, Logitech received 11 different awards for 19 products in 14 categories. In a market that was saturated with deeppocketed competitors such as Microsoft and Philips, Logitech used innovation as its means of survival. In 2010, Logitech faced a significant challenge in that the way that people interacted with its devices was changing. The iPhone and iPad used touch-screen technology with built-in accelerometers, eliminating the need for mice and trackpads. Secondly, cameras and higher quality speakers became standard equipment built into the iPhone, iPad, and Windows laptop computers. Apple introduced the \"magic pad\" to replace the mouse altogether. The need for consumers to buy add-on peripherals was slowly evaporating as more of the peripherals became standard equipment designed into new mobile technologies. Logitech could see its peripherals market someday disintegrate before its own eyes. Logitech needed to decide if it should invest more in video conferencing and television allin-one remote controls and/or focus on developing partnerships with computer and telecom manufacturers and mobile carriers such as AT&T, Verizon, T-Mobile, and Sprint. Once again, the computer industry was changing and Logitech needed to formulate diversification strategies to ensure its long-term survival