The magic of ipod case study

CASE 21: Logitech: Finding Success through Innovation and Acquisition

Alan N. Hoffman

Bentley University and Rotterdam School of Management, Erasmus University

Logitech is a long-standing company with a reputation for quality personal computing products offered at a reasonable price. Additionally, Logitech’s reputation for being on the cutting edge of technology in the computer peripherals industry is second to none. This offers the company the enviable position of being at the top of its industry. However, the recent recession accompanied by the changing face of the personal computing industry offer significant challenges for the future. Logitech may have to find new ways to compete in a world where its products have become standard fare on most personal computing devices. With a reputation for leading the industry, will Logitech find new technologies to conquer, or will it find itself struggling to survive?

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 formally established in 1981 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 Maclntosh computer launched in January 1984. Logitech viewed the mouse as a growth opportunity, and this 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 1988, Logitech’s executives decided to take the company public to help finance its rapid growth.

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. Throughout 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 introduced under the Logitech name, the company also continued innovation in its core mouse business. New and revolutionary technologies developed by Logitech allowed it to continue as an industry leader in the mouse and keyboard business.

© Vividfour / Shutterstock.com

In the mid 1990s, the PC market exploded due to the popularity of the Internet and new home/office software applications. The growth of the PC industry created increasing 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 that point forward, Logitech continued to grow both organically and through acquisition, as new opportunities arose to expand their 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 accomplished strategically to help Logitech position itself in all aspects of the personal peripherals world.

In addition to achieving significant growth 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, including cordless gaming controllers and a personal digital pen.

Logitech provided consumers 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.

Strategic Direction

Logitech is in the business of designing and selling the world’s best personal peripherals. The company continues to expand both internally and through acquisition to grow their portfolio of peripheral products while maintaining the strength and quality of its core technologies. Logitech is “driving innovation in PC navigation, internet communications, digital music, home-entertainment control, and gaming and wireless devices” (Logitech, 2007).

Logitech strives to continually “deliver landscape changing technology, while keeping a focus on even the subtlest of design details that makes its products personal and its brand cherished by millions of customers worldwide. Logitech will continue to help make interaction with the digital world more personal and rewarding for entertainment in the living room, communications on the go, and personal computing in the office” (Logitech, 2007).

As a publicly traded company on both the Swiss Exchange and the NASDAQ Exchange, the organization’s overall corporate objectives are growth and earnings. Throughout its entire existence, Logitech has continuously grown through both innovation and acquisition, while maintaining positive earnings. To date, the company has done well at accomplishing its key objectives. Growing out of these main objectives, Logitech has set several additional objectives, including:

· Product leadership

· Continued innovation

· Award-winning industrial design

· Strong price performance

Logitech is extremely proactive when it comes to innovation. Along with incremental improvement of its core technologies and products, Logitech is also continuously, radically innovating new technologies in the peripherals industry. When Logitech sees a business or electronics industry that is growing rapidly or quickly gaining recognition, it finds ways to design and create innovative peripheral products to complement the products that make up the specific industry. For example, when the gaming industry began to experience recognition and rapid growth, Logitech designed and introduced its first gaming console controller in 2000 (the Logitech GT Force racing wheel for Playstation 2).

Another of Logitech’s significant innovations was the Logitech io Personal Digital Pen. This invention “merges the use of a traditional pad of paper with the digital world.” In today’s business world, a significant amount of information and documentation is stored and archived electronically. This new platform – the digital pen – will “enable the automated transformation of hand-written data into archived information for both consumers and professionals” (Logitech, 2007).

Through new product developments such as these, it is clear that Logitech is very proactive when it comes to innovation. The company wants to be the number one provider of all personal peripheral products in the world, and it strives to be the first to introduce any new and exciting peripheral technologies.

Competitors

As a specialized company, Logitech is exclusively in the industry of personal peripherals, which it sells to retailers as well as major computer manufacturers. The demand of such an industry often depends strongly on the economic stability and income of its consumers, as well as the profitability of its business customers. This is because technology products like the ones offered by Logitech are often expensive, and individuals and companies are reluctant to buy them unless they have the income to do so. Within this industry, there are a number of factors that affect Logitech’s competitiveness and price structure. With respect to market competition, Logitech has three major competitors: Creative Technology Ltd., Microsoft Corporation, and Royal Philips Electronics N.V.

Creative Technology Ltd. is 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 (Creative Technologies Ltd., 2010). The Creative Technology product line includes 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 provides software/hardware products and solutions worldwide. Founded in 1975 by Bill Gates and Paul Allen, Microsoft’s core business is to create operating systems and computer software applications (Daily Finance, 2010; Rovi Corp., 2010). Microsoft has since expanded into markets such as mice, keyboards, videogame 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 is a Netherlands-based company that focuses on improving people’s lives through innovation. Philips is a well-diversified company with products in many different industries. Products offered by Philips include 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 (Philips, 2010). With this diversified portfolio of products, Royal Philips had FY 2009 revenues of $30.76 billion and a gross profit of $11.59 billion (Yahoo! Inc., 2010).

Logitech is the only company of this group exclusively focused on personal peripheral products, whereas all of its competitors have products and resources invested in a wide variety of other industries.

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, innovative, and collaborative experience for their customers. As Logitech has always been on the forefront of mouse and keyboard technology, it has also been a leader in video conferencing technology since the early stages of its mountable computer camera development. Instead of following market trends, Logitech has often created them.

From 1998 to 2004, Logitech made many important strategic acquisitions in order to enhance future portfolios and expand the depth of its 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 Logitech’s current video conferencing division. The second successful acquisition was the 2001 purchase of Labtec, Inc., an audio peripheral maker.

Following the Labtec acquisition, the company developed a hunger to expand its product focus. In 2004, Logitech acquired Intrigue Technologies, Inc. This acquisition positioned Logitech as a leader in advanced remote-control production. With this, peripherals suddenly were able to accommodate more than just computer and videogame uses. This positioned them for their next acquisition, Slim Devices in 2006, a manufacturer of music systems. Logitech used these two acquisition to expand its multi-business 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 their peripheral products with the software, video effects, and security features Paradial offered (Logitech Acquires Paradial, 2010). This allowed Logitech to deliver a complete and intuitive HD video conferencing experience for companies of any size.

Future industry trends revolve around content strategy and consumer expectations regarding mobile web and Smartphone applications. Content strategy involves decisions about what information and features to include in a product, including those that provide the most benefit or fulfill the most needs; for Logitech, anything else is just noise and dilutes the product. In terms of mobile web and smartphone application trends, Logitech has three options: (1) develop closed partnerships with specific platforms (iPhone or Blackberry); (2) produce apps for each platform; or (3) produce “platform-neutral” apps by using the mobile web.

Global Presence

As the global economy expands and becomes 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/visual communication over the Internet, and PC-based video security. The company’s products combine essential core technologies, continued innovation, award-winning industrial design, and excellent value that are all necessary to come out on top of a rapidly changing and evolving technological industry. Since its inception in 1981, Logitech has been a growing player in the technological product market and has distributed products to over 100 different countries.

For Logitech, opportunities arose as the desire for global communication increased. The trend of wireless and portable communication, such as Skype and Apple’s Facetime, has opened a window of opportunity for new and more advanced products to enable video communication and conferencing.

As computers have aged, Logitech has been able to sell add-on peripherals for users who want to add newer applications to their older computers. Logitech successfully continues to sell products at the end of the product life cycle, such as mice and keyboards, and to generate profits to fund new product development, such as the new Logitech Revue with Google TV. As consumers become more globally conscious and connected, Logitech is able to tailor its products toward the many uses of video communication and high speed Internet capabilities.

Since its founding, Logitech has 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 European, Middle Eastern and North African 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 also has maintained reasonably priced products. In 2009, 67% of their sales stemmed from products that were priced under sixty dollars. This innovative mindset, accompanied by reasonable prices, has contributed to booming sales, and in the end, Logitech’s good financial health as a company.

Finance

The recession in 2008/2009 hit Logitech hard. For the full fiscal year 2010, sales dropped to $2.0 billion, down from $2.2 billion in fiscal 2009. Operating income was $78 million, down from $110 million, and 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 percent compared to 31.3 percent 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. The iPod peripherals (speakers, docks, and headphones) made the increasingly popular iPod easier to use. But by 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; it needed to reinvest its net income back into R&D and product advertising, and also have available capital for strategic acquisitions.

Logitech has outlined very specific financial objectives that it seeks to achieve. It aims to realize sales growth between 13–19% with a gross margin between 32–34%. Logitech also intends to invest 5% of its sales revenue to R&D and 12–14% to marketing. By continuously investing resources in research and development, Logitech has taken a strategic approach to maintaining long-term growth and profitability.

Marketing

Logitech began manufacturing mice for Apollo Computers, and later, for HP. These relationships were built at industry trade shows and became particularly important for Logitech’s growth and expansion because such clients were not buying just one or two mice at a time – they purchased 25,000. This gave Logitech strong sales right out of the gate. Logitech also developed a logo for its brand that became well known among both corporate customers and the general public as a symbol of innovation and quality within the personal peripherals industry.

In 2004, Logitech also signed an agreement with Global Internet Telephone Company and Skype to co-market and promote their products in the United States, Canada and Europe (Logitech and Skype Announce Marketing Agreement, 2004). Pursuant to this agreement, a Logitech headset and 120 Skype minutes were bundled together into one package and offered to customers. In addition, the two companies also cross-promoted one another on their respective websites. This was a wise marketing decision for Logitech because it expanded the brand name and promoted its product to more users, as Skype was also a booming and expanding company.

Logitech has also made very strategic decisions regarding the marketing of specific products. Logitech recognized that women were a segment typically not targeted by technology fields in general, and it saw this as a prime opportunity for the Logitech Quick Cam product (Buchanan, 2005). In 2005, Logitech launched commercials for the Quick Cam that targeted businesswomen, showing a traveling mother using the Logitech Quick Cam product in her hotel room to say goodnight to her children and husband. Logitech recognized that women do, in fact, embrace technology when it fits their needs, and demonstrated in its commercials how its product could fit those needs.

On a smaller scale, Logitech also made a wise marketing decision by giving products a recognizable and memorable logo. The Logitech logo and branding is visible on all of its products and has become a recognizable symbol of quality and innovation in the peripherals and technology industries.

Logitech initially had a limited marketing budget when it first introduced its mouse in the early 1980s. This small budget limited promotional activities available to Logitech. However, the company made a few key marketing decisions early on that allowed it to wisely implement the budget it had. Logitech chose to position itself at industry trade shows, particularly at Comdex in Las Vegas. This allowed Logitech not only to get the Logitech name out within the industry, but gained it several key clients that allowed it to expand and grow.

Operations

One of the initial weaknesses 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 the facilities were located in countries where it was expensive to operate, and the labor costs for qualified employees were high. Logitech realized in the early 1990s that the personal computer industry was becoming increasingly competitive. Logitech thus made two primary operations decisions that allowed it to significantly increase its competitiveness. First, Logitech consolidated manufacturing, which was once widely dispersed throughout China. This helped the company maintain lower prices on its products, increasing its competitiveness. In addition to its China manufacturing facilities, Logitech established a second center for R&D in Cork, Ireland – a prime location for innovation in the technology and IT sectors. Second, Logitech also knew the industry was changing rapidly and that it would no longer be able to compete simply by manufacturing computer mice. Logitech thus made a strategic operational decision to expand 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 they also positioned the company for success during the personal computing industry boom in the mid- to late-1990s, when the Internet and online industries took off. Even by that time, Logitech was known as a leading personal peripheral provider. Logitech 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 along with the industry.

Logitech also has become a leader in the wireless peripherals sector. By closely following consumer trends, Logitech saw early on that the personal peripherals sector was moving into a new digital era, where wireless peripherals were becoming 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 and leading 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 eleven different awards for nineteen products and fourteen categories (see App. IV ). In a market saturated with deep-pocketed competitors like Microsoft and Philips, Logitech has used innovation as its means of survival.

In 2010, however, Logitech faced significant challenge: The way people interacted with their devices had begun to change. The iPhone and iPad used touch screen technology with built-in accelerometers, eliminating the need for mice and Trackpads. Additionally, camera and higher quality speakers had become standard equipment built into the iPhone, iPad, and Windows laptopcomputers; Apple had introduced the “magic pad” to replace the mouse altogether. The need for consumers to buy add-on peripherals was slowly evaporating, as more peripherals became standard equipment designed into new mobile technologies.

As a consequence, Logitech could someday see its peripherals market disintegrate completely. Logitech must decide if it should invest more in video conferencing and television all-in-one remote controls, and/or focus on developing partnerships with computer and telecom manufacturers and mobile carriers such as ATT, Verizon, T-Mobile, and Sprint. Once again, the computer industry is changing, and Logitech will have to formulate new diversification strategies to ensure its long-term survival.

Appendix I: – History Timeline

1981

Daniel Borel and Pierluigi Zappacosta incorporate in Switzerland the company that will eventually be called Logitech.

1982

The company introduces its first mouse, the P-4.

1985

The company enters the retail market with the introduction of the C7 mouse.

1988

Logitech International S.A. is taken public on the Bourse de Zurich; a handheld scanner, the firm’s first non-mouse product, is introduced.

1991

Logitech introduces the first radio-based cordless mouse.

1994

The company opens its manufacturing facility in Suzhou, China.

1997

Logitech gains a listing on the NASDAQ and divests its scanner business.

1998

Guerrino De Luca takes over the CEO position from Borel, who remains chairman; the QuickCim PC video camera division of Connectix Corporation is acquired.

2001

Logitech acquires audio peripheral maker Labtec Inc.

2003

Logitech ships its 500 millionth mouse.

2004

Intrigue Technologies, Inc., maker of advanced remote controls, is acquired.

Source: Logitech, 2007

Appendix II: – Market Segments

Selected 2009 worldwide retail value share by category

Mice

Webcams

PC speakers

Remotes

40.1%

49.4%

34.1%

39.8%

Source: Logitech estimate based on available market data.

Appendix IV: – List of Innovation Awards

· • CES Innovations 2010 Honoree (7 categories)

· • iF Product Design Award 2010 (1 product)

· • CES 2009 Best of Innovations Category Winner (2 categories)

· • CES Innovations 2009 Honoree (5 categories)

· • 2009 red dot Design Award (1 product)

· • Good Design Awards 2008 (4 products)

· • CES 2008 Best of Innovations Honoree (1 product)

· • CES Innovations 2008–Design and Engineering Showcase Honors” (6 products)

· • iF Product Design Award 2008 (2 products)

· • 2007 red dot Design Award (2 products)

Data Source: World Bank, World Development Indicators. Last updated July 26, 2010

Appendix XII: – Logitech Solvency in 2010

SOLVENCY RATIOS

SHORT-TERM SOLVENCY RATIOS (LIQUIDITY)

Net Working Capital Ratio

22.09

Current Ratio

1.8

Quick Ratio (Acid Test)

1.2

Liquidity Ratio (Cash)

0.73

Receivables Turnover

9.6

Average Collection Period

38

Working Capital/Equity

35.3

Working Capital pS

2.02

Cash-Flow pS

0.78

Free Cash-Flow pS

−0.36

FINANCIAL STRUCTURE RATIOS

Altman’s Z-Score Ratio

4.35

Financial Leverage Ratio (Assets/Equity)

1.6

Debt Ratio

37.5

Total Debt/Equity (Gearing Ratio)

0.00

LT Debt/Equity

0.00

LT Debt/Capital Invested

16.0

LT Debt/Total Liabilities

0.0

Interest Cover

0.0

Interest/Capital Invested