Gopro case study strategic management

Read in your textbook Case #7: GoPro in 2017: Will Its Turnaround Strategy Restore Profitability?"

· Write a 5–7 page paper answering the questions below.

· At least 2 references of an academic or scholarly source is required for this case study paper.

· Use APA writing style for in-text citations and each reference source that you use. Remember, all wording that is not your own must be cited.

· Use headings to format the paper (not the questions).

· Use 12-point Times New Roman font, 1-inch margins, and double-spacing.

In addition to the above listed requirements, assignments are graded using the Case Study Rubric available in the online classroom.

1. What are the strategically relevant factors in GoPro’s macro-environment? What does a PESTEL analysis reveal about the action camera in 2017? Does the external environment of the drone industry present attractive opportunities to GoPro?

2. What is your assessment of GoPro’s business model and competitive strategy? Does its approach to delivering customer value contribute to a sustainable competitive advantage?

3. What are GoPro’s key resources and competitive capabilities? What is the competitive power of its most important competitive assets?

4. What is your assessment of GoPro’s financial performance the past three years? (Use the financial ratios in the Appendix of the text as a guide in doing your financial analysis.)

5. Based on the preceding analysis, and the first quarter 2017, statement of operations, what is your overall evaluation of GoPro’s business situation as the company moved into 2017? Does the company’s strategy have the potential to provide the company’s shareholders with an opportunity for above-average market returns in the next 3–5 years?

6. What strategic actions could Mr. Woodman take to reestablish GoPro’s financial and market performance?

NO Plagiarism

References must be able to be verified

Class: GEB4891: Strategic Management and Decision Making
Book: Essentials of Strategic Management: The Quest for Competitive Advantage

GoPro had been among the best examples of how a company could create a new market based upon product innovations that customers understood and demanded. However, by late-2015, the action camera product niche appeared saturated. The company had grown from a humble beginning as a homemade camera tether and plastic case vendor in 2004 to an action camera vendor with $350,000 in sales in 2005 (its first full year of operation) to a global seller of consumer electronics with revenue of $1.6 billion in 2015. The company’s shares had traded as high as $98 in October 2014, just months after its initial public offering (IPO) in June 2014. In 2014, GoPro was ranked number one most popular brand on YouTube with more than 640 million views, and an average of 845,000 views daily. In 2015, average daily views were up to 1.01 million.

Abruptly, in the third quarter of 2015, GoPro’s magic disappeared and, by the fourth quarter of 2015, its revenues dropped by 31 percent from the prior year. In addition, its net income fell by 128 percent to a net loss of $34.5 million. By the end of December 2015, the stock traded at less than $20. The plummet continued, and by the end of December 2016, revenues had dropped another 27 percent to $1.2 billion from $1.6 billion in 2015. In addition, the company recorded a net loss of $419 million in fiscal 2016, helping drive its share price to less than $9.00 in December 2016. A summary of the company’s financial performance for 2011 through 2016 is presented in Exhibit 1. The performance of GoPro’s shares from June 2014 through July 2017 is presented in Exhibit 2.

The company launched a turnaround plan in early 2017 to reverse its decline, with its first quarter sales in 2017 increasing by 19 percent from the first quarter 2016 and its operating expenses declining by $50 million. Its adjusted EBITDA improved from a $87 million loss in the first quarter of 2016 to a $46 million loss in the first quarter of 2017. The improvement was driven by a trade-up program that provided GoPro owners with $100 off a HERO5 Black or $50 off a HERO5 Session when they traded in a previous generation GoPro camera and growth in international markets. The HERO5 Black was the best-selling digital image camera in the United States in the first quarter of 2017 and GoPro’s drone Karma with the HERO5 camera was the number-two selling drone priced over $1,000 in the United States. During first quarter of 2017, 60 percent of the company’s revenue was generated outside the United States and between 70 percent and 90 percent of GoPro camera users in international markets used cameras in their local language. In addition, its Quik mobile video editing app had been installed 5.2 million times in the first quarter of 2017 and its active users had increased by 160 percent from the same period in 2016.

Although the first quarter offered promising signs of a turnaround, it was far too early to know if the first quarter 2017 improvement was sustainable. Many investors and industry observers viewed the action camera market as an overly saturated niche. In fact, the first quarter improvement in financial performance page 308had yet to reverse the company’s downward trend in its stock price performance as of mid-2017.

Company History

GoPro began as the result of business failures. GoPro’s founder, Nick Woodman, grew up in Silicon Valley, the son of wealthy parents (his father brokered the purchase of Taco Bell by Pepsi). Woodman started an online electronics store, EmpowerAll.com, which failed, and subsequently started an online gaming service, Funbug, that failed in the dot-com crash of 2001, costing investors $3.9 million. Woodman consoled himself after the failure of Funbug with an extended surfing vacation in Indonesia and Australia. While on vacation, he fashioned a wrist strap from a broken surfboard leash and rubber bands to attach a disposable Kodak camera to his wrist while on the water. Woodman’s friend and current GoPro creative director, Brad Schmidt, joined the vacation, worked page 309with the camera strap, and observed that Woodman needed a camera that could withstand the sea.

After his vacation, Woodman returned home and focused on developing a comprehensive camera, casing, and strap package for surfers. Originally incorporated as Woodman Labs, the company began doing business in 2004 as GoPro. Woodman found a 35-mm camera made in China that cost $3.05, and sent his homemade plastic case and $5,000 to an unknown company, Hotax. A few months later, Woodman received his renderings and a 3-D model from the company, and sold his first GoPro camera in September 2004, at an action-sports trade show. Also that year, GoPro hired its first employee, Neil Dana, who was Woodman’s college roommate.

The two-man company grossed $350,000 in 2005, the first full year of operation. Woodman wanted to keep the company private as long as possible: he invested $30,000 personally, his mother contributed $35,000, and his father added $200,000. In a fortunate coincidence for GoPro, in fall 2006 Google purchased a then-small company, YouTube, and in spring 2007 the GoPro HERO3 with VGA video was launched. According to Woodman, the competing name-brand cameras available at the time did not have good video quality. The combination of GoPro’s HERO3 video quality and the increasing popularity of YouTube caused GoPro’s sales to triple in 2007.

In 2007, although the company had revenues in the low seven figures, Woodman began to question his ability to take the firm further. He negotiated a deal to turn the company over to a group of outside investors, but before the deal was finalized (which was at the beginning of the 2008 financial crisis), the investors wanted to lower the valuation of the company. GoPro was profitable, and Woodman did not believe that the company was having any ill effects from the economy. He refused to negotiate the company’s value down, and the company’s sales were over $8 million that year. The company’s growth continued and in 2010, Best Buy began carrying GoPro products, which was a clear indication that the company was accepted in the market.

In May 2011, GoPro received $88 million in investments from five venture capital firms (including Steamboat Ventures—Disney’s venture capital company) which enabled Woodman, his family, and some GoPro executives to take cash from the company. Also in 2011, GoPro acquired CineForm, a small company that had developed a proprietary codex that quickly and easily converted digital video files among different formats. CineForm had used this codex in several movies including Need for Speed and Slumdog Millionaire. As part of GoPro, CineForm altered its 3-D footage tool into an editing program that became the company’s first desktop application, GoPro Studio.

In December 2012 a Taiwanese manufacturing company, Foxconn (trading as Hone Hai Precision Industry Co.), bought 8.8 percent of GoPro for $200 million, which brought the value of the privately held company to about $2.25 billion, and Forbes reported Woodman’s personal net worth to be about $1.73 billion. GoPro sold 2.3 million cameras and grossed $531 million in 2012; and in December of that year, GoPro replaced Sony as the highest-selling camera brand at Best Buy.

Sales of GoPro cameras at snow-sports retailers increased by 50 percent for the 2012–2013 ski season. GoPro almost doubled its revenues in each of three consecutive years, from $234.2 million in 2011, to $525 million in 2012, and $985 million in 2013, according to the U.S. Securities and Exchange Commission (SEC). Although revenues increased 87 percent in 2013, in that year the decrease in revenue growth became obvious. According to its IPO filing, as of December 2013 the company had not derived any revenue from the distribution of its content on the GoPro Network; however, it announced plans to pursue new streams of revenue from the distribution of GoPro content. GoPro formed a new software division in 2013. Also in that year, the National Academy of Television Arts and Sciences recognized the company with a Technology and Engineering Emmy Award in the Inexpensive Small Rugged HD Camera category.

In June 2014, GoPro went public at an IPO price of $24.00 which valued the company at $2.7 billion. The IPO included a lockup agreement that prevented the Woodmans from selling any shares of GoPro stock for six months; four months later on October 2, 2014, the Woodmans made a donation of 5.8 million page 310shares of GoPro stock into the Jill and Nick Woodman Foundation. A press release about the foundation stated that details about its mission would be announced at a later date, according to CNN. Share prices dropped 14 percent after the announcement and angered investors. Also, GoPro failed to meet investors’ expectations when it released its first earnings report in August 2014.

GoPro increased emphasis on software and video sharing in 2015. In that year, GoPro tied with Apple on the Google Brand Leaderboard, which measures the most popular brands on YouTube. According to Google, more than 4.6 years of content was uploaded to YouTube in 2015 with GoPro in the title, an increase of 22 percent from 2014. Also in 2015, the company launched the GoPro Channel on Amazon Fire TV and Fire TV Stick with a custom-designed streaming channel that was a one-stop destination for delivering on-demand GoPro videos to Amazon customers.

Another 2015 development was the GoPro Channel on the PlayStation Network which allowed PlayStation owners to stream GoPro content on-demand, and browse GoPro cameras and accessories. PlayStation joined GoPro’s growing roster of distribution partners including Amazon Fire TV, Roku, Comcast Watchable, Sky, Vessel Entertainment, Xbox, LG, and Virgin America. The GoPro Mobile App was downloaded 2.75 million times in the fourth quarter, totaling almost 24 million cumulative downloads; Q4 installs of GoPro Studio totaled nearly 1.7 million, totaling over 15 million cumulative installs, with average daily video exports of over 49,000 in the fourth quarter.

GoPro purchased Kolor, a French company with experience making software for capturing and displaying virtual reality in 2016, and acquired Replay and Splice, two leading mobile video editing apps. Replay was video editing software that GoPro rebranded as Quik, and Splice was an app that promised desktop-level performance for editing video on an iPhone. The Kolor group assisted in the launch of a virtual reality social media platform that functioned both on the web and as an app. According to The Verge (June 2, 2016), Woodman understood that “the hardware-first chapter of GoPro” was coming to the end. He recognized that market saturation had created the problem, explaining it as “content guilt.” According to Woodman, “Most people don’t even watch their GoPro footage.” He blamed the company for creating the problem by solving the capture side but leaving customers hanging in postproduction.

In April 2016, the investment bank Piper Jaffray reported that GoPro was gaining market share in a declining market, and that action camera ownership declined to 28 percent among teenage consumers, down from 31 percent a year previous, and 40 percent in 2013. This trend clearly indicated the need for GoPro to transform into something more than an action camera company. The GoPro brand and reputation had been made as a hardware company, and moving that reputation to a new market (i.e., software) would be difficult. Although GoPro created the market for wearable cameras, it found the content-creation software field crowded. Plus, The Verge (June 2, 2016) pointed out that the company had no clear way to monetize its software. According to Woodman, building the software team had been the most time-consuming project the company had undertaken. He believed that the benefits of success would be large because the amount of video being consumed was huge, and the market research company NPD Group reported that more than 80 percent of smartphone users stream video. Woodman also believed in the potential of Karma, GoPro’s camera drone, scheduled for release in early 2016.

GoPro’s third quarter 2016 performance produced large losses, with Woodman firing 15 percent of his workforce. The company’s president, Tony Bates, announced plans to leave the company at year end after little more than two years with the company. The Karma drone, which had been postponed several times, was eventually released in November 2016. Problems quickly became apparent with the drone—it stopped flying and crashed—that required GoPro to issue a recall and discontinue selling the product until February 2017. Shortly after sales resumed, Woodman claimed that the drone was “exceeding our expectations” (Fortune, April 27, 2017). However, GoPro CFO, Brian McGee, said that the bulk of Karma’s sales had come from being bundled with the HERO5 camera. According to McGee, GoPro made more money from the sale of a camera than from the sale of a drone.

page 311In early 2017, GoPro announced a new 360-degree camera, Fusion, but provided few details. The company planned a pilot release of Fusion in summer 2017, and a launch with a limited release at the end of 2017. According to Woodman, professional users would be the main market for Fusion, which was a much smaller market than the traditional consumers that had bought GoPro’s other cameras.

The Action Camera Industry from 2014 to 2017

Sales in the global action camera industry grew 44 percent in 2014, reaching 7.6 million units, and retail value of $3.2 billion. Camera unit sales increased by 38 percent in North America in 2014. However, the largest growth came from the Asia Pacific region, which was up by 114 percent. Sales of action cameras worldwide reached 10.5 million in 2017, up from 8.4 million in 2015. Although the action camera market was expected to enjoy continued sales growth through at least 2019, several factors, including lengthening replacement cycles, were expected to slow the growth rate.

Consumer sales, primarily for extreme sports, had accounted for the largest part of global demand up to mid-2015, but professional sales, primarily driven by TV production, security, and law enforcement, were expected to increase. In 2014, consumers were responsible for 86 percent of action camera sales, with the remainder coming from professional uses. Although GoPro dominated the action camera industry in mid-2015, there was increased competition from other companies, including Garmin, TomTom, Canon, JVC, Ion America, Polaroid, and Sony. Other competitors were focusing on the adjacent market of wearable cameras for security and police officers.

A defining characteristic of the action camera industry in 2015 was the increase in the number of competitors. In early 2015, the market was experiencing rapid growth and attracted many new entrants, which had the expected effect on price (lower), quality (higher), and features (more). A list of producers of action cameras in June 2017 is presented in Exhibit 3.

Another 2015 industry trend was price polarization. Sales of low-end camera models priced under $200.00 and high-end models (including GoPro’s $499.00 HERO4 Black) experienced increasing growth. The action camera industry experienced significant change in early 2015. A Futuresource analyst reported that the 360-degree capture that had recently become available would drive virtual reality applications over the coming months, especially for sports broadcasting. The company envisioned the percentage of 360-degree video action cameras growing from 1 percent in 2015 to 14 percent by 2019. In 2014, 95 percent of action cameras sold could take high-definition video with at least 720p resolution, and approximately 85 percent of action cameras could take HD video in 1080p. About half of cameras sold could record video in ultra-high-definition 2160p, or 4K.

In 2016, the action camera industry experienced adjustments in usage: The demand for action cameras for professional applications had grown exponentially due to the focus on better viewing of sports events. Action cameras were increasingly being used for TV production and to record closer details of sports. The National Hockey League and Fishing League Worldwide had signed major contracts with iON, GoPro, and other vendors, and that professional segment of the industry was expected to have page 312a high growth rate. Also, Global Market Insights pointed out increasing popularity of action cameras among all age groups and advanced product features as other factors providing massive growth potential.

The security industry was also finding increasing usage for action cameras in 2016, which added more fuel to the industry growth. Action cameras and especially drone-mounted action cameras were expected to be used increasingly in security applications globally. A leading vendor in the action camera–drones, Lifeline Response, had developed a smartphone app that could fly a drone to a needed location in emergencies. According to Technavio Research, professional use of action cameras would exceed casual usage by 2020.

In addition to increased demand for action cameras for professional applications, the industry was expanding also due to demand from developing countries, with the largest growth in the Asia Pacific region. Increasing disposable income, an increase in social networking, and rapid growth in adventure sport tourism were factors increasing sales in emerging countries. Several action camera vendors sponsored extreme sporting events in various emerging economies to promote their camera brands. Although European growth was predicted to be stable from 2016 to 2023, the global action camera market was projected to grow at an annual rate of 14.6 percent between 2017 and 2021.

The revenue growth rate in the action camera industry was expected to be lower than the growth rate in unit sales, due to a general price decline. The average action camera price is expected to decline to $226.00 by 2020, depressed primarily by a global increase in supply. In the first quarter 2016, Technavio forecast that the value, by revenue, of the global action camera industry, which was $2.35 billion in 2015, was expected to reach about $6 billion by 2020. However, young consumers were increasingly choosing smartphone cameras over traditional, which meant they were less likely to purchase an action camera.

The popularity of social networking sites was a major driver of the action camera industry in 2017 and price polarization continued as a crucial trend. Vendors began “bundling” their products (cameras and numerous accessories) to increase demand for cameras and accessories. Bundle packaging increased demand by offering cost-effectiveness to customers because the bundling reduced or eliminated the need to purchase additional equipment. Other industry trends in 2017 were increasing numbers of new entrants, which reduced prices, and increasing significance of the smartphone with enhanced quality and features which depressed demand. The saturation of the action camera market niche and the declining prices contributed to the June 2017 bankruptcy filing of iON Worldwide, a major competitor in the industry.

The Drone Industry in 2017

According to Gartner, the personal and commercial drone industry as measured by revenue increased by 35.6 percent between 2015 and 2016 to reach $4.5 billion. Gartner projected industry revenue to increase an additional 34.3 percent between 2016 and 2017. Unit shipments in the industry increased by 60.3 percent in 2016 when compared to 2015 shipments and was projected to increase by 39.0 percent between 2016 and 2017. The industry was expected to grow to $11 billion in revenues by 2021.

The majority of personal drones were purchased for video and photography, while commercial drones tended to be used for geographic information system (GIS) mapping or delivery. The civilian drone fleet was expected to grow from approximately one million in 2016 to more than 3.5 million by 2011, while the commercial drone fleet to increase from about 40,000 units in 2016 to 420,000 in 2021.

FAA regulations in 2017 limited commercial drones to a select few industries and uses such as aerial surveying in the agriculture, mining, and oil and gas sectors. However, emerging technologies such as collision avoidance and geo-fencing would make drone flying safer, and make regulators feel more comfortable with larger numbers of drones taking to the skies. The military sector was expected to continue to lead all other sectors in drone spending through 2024, due to the high cost of military drones and the increasing number of countries seeking to acquire them.

page 313While holiday sales of drones priced $50 to $100 helped drive unit sales, drones priced over $300 accounted for 84 percent of industry revenues and 40 percent of unit volume sales between 2016 and early 2017. Drones with premium features such as autopilot capabilities sold nearly five times more quickly than basic feature drones. Among the most popular drone features was autopilot functionality that allowed the drone to follow the user, with sales of such devices selling 19 times more quickly than entry-level drones. The average sales price for a drone was more than $550 in April, which gave them one of the highest average retail prices of all technology categories.

Several of the prominent early drone manufacturers were emerging from outside the U.S. market. Among the foreign manufacturers were the Canadian firm Aeryon, Switzerland-based senseFly (owned by France-based Parrot), publicly traded Swedish firm CybAero, Shenzhen, China-based DJI, and Korea-based Gryphon. DJI had become the number-one selling drone brand through its commitment to innovation and partnerships with Sony for camera components and Apple for distribution in Apple Stores. Parrot abandoned drone manufacturing in mid-2017 to focus on drone software. Exhibit 4 presents the drone industry’s leading brands in units sold in April 2017.