Fitbit report

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FitBit, Inc. in 2017: Can It Revise Its Strategy and Reverse Mounting Losses?

Assignment Questions 1. How would you assess the forces that impact competition in the activity tracking industry? Prepare a Five Forces Model of Competition to support your conclusions 2. What are the key success factors for companies operating in or seeking to enter the activity tracking industry? 3. What are the most important elements of Fitbit’s competitive strategy? 4. Perform a SWOT analysis for Fitbit. Based on your assessment of these, what are some strategic options for Fitbit going forward? 5. Analyze the company’s financial performance. Do trends suggest that Fitbit’s strategy is working? 6. What recommendations would you make to Fitbit management to address the most important strategic issues facing the company?

I am providing you with this memo for Fitbit 2017. Again, I strongly suggest that you answer the case questions. These questions

should assist you in the proper use of tools of strategic analysis. DO NOT USE THEM AS A CRUTCH. You are provided with a series of questions that once adequately addressed will allow you to provide an in-depth case analysis. The focus of this case is of course material from Chapters

1 – 5. Please use the analytical tools from these chapters.

Please use the format below;


2. ANALYSIS (use analytical tools)

3. RECOMMENDATIONS (plan of implementation)

Fitbit Inc. CEO James Park has employed you as a consultant to assess the company’s overall situation and recommend a set of actions to improve the company’s future prospects. Please prepare a report to Mr. Park that includes: (1) an evaluation of competitive forces in the activity

tracking industry, (2) an assessment of Fitbit’s strengths, weaknesses, opportunities and threats, (3) an evaluation of Fitbit’s financial and operating performance as displayed in case Exhibits 5 and 6, and (5) a set of action recommendations that Fitbit management should deploy to strengthen

the company’s competitive position and financial performance. Your report should be 5-6 pages plus it should include an assortment of original (not copied from the case!) charts, tables, and exhibits to support your analysis and recommendations.

After all the information I have provided above, all I need is the 6 page double spaced report and if possible brief answers on the assignment questions.Use the Fitbit case file i attached

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case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? ROCHELLE R. BRUNSON Baylor University MARLENE M. REED Baylor University Fitbit revolutionized the personal fitness activity in 2009 with the introduction of its Tracker wearable activity monitor. By 2016 the company was a hit in the marketplace with Fitbit devices becoming nearly ubiquitous with fitness enthusiasts and health-conscious individuals wearing the devices and checking them throughout the day. The company’s sales of activity monitors had increased from 5,000 units in 2009 to 21.4 million connected health and fitness devices by year-end 2015. The company executed a successful IPO (initial public offering) in 2015 that boosted liquidity by $4.1 billion and recorded revenues of $1.86 billion by the conclusion of its first year as a public company. Fitbit’s chief managers expected 2016 revenues in the range of $2.4 billion to $2.5 billion. However, on the last day of February 2016 the price of Fitbit stock plunged nearly 20 percent after the company announced that the sales and earnings in the first quarter would fall short of analysts’ forecasts. The company’s revenues increased by nearly 17 percent from 2016 to 2017 and its number of devices sold increased from 21.4 million in 2015 to 22.3 million in 2016. However, the company’s cost of revenue increased from 51.5 percent in 2015 to 61 percent in 2016. The dramatic cost of revenue increases coupled with rapidly increasing operating expenses resulted in a net loss of $102 million in 2016 for Fitbit. Fitbit’s financial troubles accelerated in 2017 with the company reporting revenue for the first quarter of 2017 of $299 million and a net loss of $60.1 million. While the company’s financial travail in 2016 was related primarily to increasing costs, the weak first quarter 2017 performance was driven by a decline in the number of devices sold. The company sold only 2,956 devices in the first quarter of 2017 compared to 4,842 during the first quarter of 2016. Correspondingly, Fitbit’s revenue declined from $505 million during the first quarter of 2016 to $299 million during the first quarter of 2017. The accelerating collapse of Fitbit’s competitive advantage and financial performance created a crisis for founders James Park and Eric Friedman, who were now faced with promptly establishing a new strategic course to save the company. Background on Fitbit Fitbit was founded in October 2007 by James Park (CEO) and Eric Friedman (CTO). The two men started the company after noticing the potential for using sensors in small wearable devices to track individuals’ physical activities. Before they had a prototype, Park and Friedman took a circuit board in a wooden box around to venture capitalists to raise money. In 2008, Park and Friedman addressed the TechCrunch50 Conference drumming up preorders for their product. Neither man had any manufacturing experience, so they traveled to Asia and sought out suppliers and a company to produce the device for them. Fitbit put its product named “Tracker” on the market at the end of 2009, and the company shipped approximately 5,000 units at that time. They had additional orders for 2,000 units on the books. Copyright © 2017 Rochelle R. Brunson and Marlene M. Reed. All rights reserved. 272  Part 2 Cases in Crafting and Executing Strategy The product Park and Friedman developed was called an “activity monitor” which was a wirelessenabled wearable technology device (see Exhibit 1). The purpose of the Fitbit was to measure personal data such as number of steps walked, heart rate, quality of sleep, and steps climbed. The device could be clipped to one’s clothing and worn all the time— even when the wearer was asleep. Included with the Tracker was a wireless base station that could receive data from the Tracker and charge its battery. The base station uploaded data to the Fitbit website when connected to a computer. This feature allowed the consumer to have an overview of physical activity, track goals, keep food logs, and interact with friends. The use of the website was free for the consumer. Thereafter, the company developed a number of devices utilizing the Tracker technology. These devices are shown in Exhibit 2. Some of the later devices located the sensor technology in a watch that could be worn on the wrist (see Exhibit 3). On May 17, 2015, Fitbit filed for an IPO with the Securities and Exchange Commission with an NYSE (New York Stock Exchange) listing. The IPO brought in $4.1 billion. The stock was initially priced at $20 but shortly thereafter the shares were trading for $35. EXHIBIT 1 Fitbit Ultra A study in 2015 by Diaz et al., published in the International Journal of Cardiology, investigated the Fitbit to see how reliable the device was, and whether it could be used to monitor patients’ physical activity between clinic visits. The research indicated that the Fitbit One and Fitbit Flex reliably estimated step counts and energy expenditure during walking and running. These researchers also found that the hip-based Fitbit outperformed the Fitbit watch.1 Another study in 2015 by Cadmus-Bertram et al., published in the American Journal of Preventive Medicine, had essentially the same outcome as the Diaz study. Their study examined the Fitbit Tracker and website as a low-touch physical activity intervention. They were attempting to evaluate the feasibility of integrating the Fitbit Tracker and website into a physical activity intervention for postmenopausal women. Their conclusions were that the Fitbit was well accepted in their sample of women and was associated with increased physical activity at 16 weeks. In other words, merely wearing the Fitbit seemed to heighten the amount of physical exercise in which the women engaged.2 However, another study undertaken by Sasaki et al. in 2015 and reported in the Journal of Physical Activity and Health found that the Fitbit wireless activity tracker worn on the hip systematically underestimated the activity energy expended. These researchers suggested that the Fitbit management should consider refining the energy expenditure prediction algorithm to correct this consistent underestimation of activity in order to maximize the physical activity benefits for weight management and other health-related concerns.3 Mission of Fitbit According to Fitbit, “The mission of Fitbit is to empower and inspire you to live a healthier, more active life. We design products and experiences that fit seamlessly into your life so that you can achieve your health and fitness goals, whatever they may be.”4 The Activity Tracking Industry Source: Denis Kortunov/Fitbit, Inc. There were a number of companies that would be considered competitors of Fitbit in activity tracking— companies such as Garmin (originally producing GPS equipment for cars) and Under Armour (originally Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses?   273 EXHIBIT 2 Activity Tracker Devices Developed by Fitbit Name of Device Capabilities and Options Fitbit Tracker Device with a clip to fit on clothing Sensed user movement Measured steps taken, distance walked, calories burned, floors climbed In black and teal only Digital clock Stopwatch Altimeter that measured slope of floors “Chatter” messages that occurred when Ultra moved New colors of plum and blue Wi-Fi smart scale Recognized users wearing Fitbit trackers Measured weight, body mass index, and percentage of body fat More vivid digital display Separate clip and charging cable Wireless sync dongle Used Bluetooth 4.0 Size of a quarter Tracked steps taken, distance traveled, and calories burned Included a disposable battery Lower price than other Fitbits Worn on the wrist Tracked movement 24 hrs a day including sleep patterns LED display showing time and daily activity Tracked activities in real time Vibrating alarm Replacement for Fitbit Force Wristband displayed caller ID Similar to a smart watch Monitored heart rate Tracked pace, distance, and elevation using GPS Similar to a smart watch Focused on fitness first Colored touchscreen Exchangeable strap and frame PulsePure heart rate tracking; Sleep tracking; 7-day battery life Four colors and three sizes Fitbit Ultra Fitbit Aria Fitbit One Fitbit Zip Fitbit Flex Fitbit Force Fitbit Charge Fitbit Surge Fitbit Blaze Fitbit Alta HR Date First Unit Sold 2008 2011 2012 September 2012 September 2012 May 2013 October 2013 October 2014 October 2014 2016 2017 Source: Fitbit, Inc. website. producing undergarments for men). There were also companies such as Apple who produce smart watches that perform many of the same tasks as Fitbit’s devices. Another company entering the market late was Jawbone. This company was formed in 1999, and its consumer devices were Bluetooth headphones and speakers initially and later fitness trackers. With the increased competition in the activity tracking industry beginning in 2015, Jawbone dropped to seventh place in the second quarter from fifth place in the first quarter among makers of wearable tracking devices. Xiaomi, a Chinese company, shipped 15.7 million wearable activity trackers in 2016. That gave the company a 15.4 percent global market share, which was second to Fitbit with Apple, Garmin, and Samsung behind the two leaders. In 2014, Xiaomi had shipped 274  Part 2 Cases in Crafting and Executing Strategy EXHIBIT 3 Fitbit Watch Source: Tom Emrich/Fitbit, Inc. 1.1 million units and garnered only 4 percent of the world market share. The presence of Apple in the market had been almost as noteworthy as Xiaomi’s. The Apple watch was first marketed in 2015, and in that year its market share went to 14.2 percent. This was despite a much higher price for the Apple product relative to either Fitbit or Xiaomi. For many years, neuroscientists had only the electroencephalogram, or EEG, to detect signals that carried different stages of sleep or brain power surges brought about by seizures. This was a very cumbersome process. Then, in 2007, Dr. Philip Low in San Diego invented the Sleep Parametric EEG Automated Recognition System (SPEARS) algorithm. This invention allowed physicians the ability to create a cluster map of brain activity with information that was gleaned from one electrode. This advancement caught the attention of Tan Le, CEO of Emotiv (a company that manufactured EEG rigs for consumers). Le believes wearable activity devices may be the appropriate venue for this new medical breakthrough. This would open up far-reaching new uses for wearable activity tracking devices.5 Demand for wearable devices continued to increase through 2016 with shipments growing to 33.9 million units in the fourth quarter of 2016 alone and annual shipments growing by 16.9 percent when compared to 2015. The market was segmented between singlefunction products and smart wearables, many running third-party applications. An activity tracker industry observer noted, “Like any technology market, the wearables market is changing. Basic wearables started out as single-purpose devices tracking footsteps and are morphing into multi-purpose wearable devices, fusing together multiple health and fitness capabilities and smartphone notifications.”6 New entrants to the industry such as Fossil created new fashion segments within the activity tracking industry and helped generate consumer interest in hybrid watches and other fashion accessories with fitness tracking capabilities. The innovations of another group of new entrants included non-wrist worn trackers such as earpieces and clothing items with activity tracking sensors. Such devices made up only 1 percent of industry sales in 2016 but reflected the continuing growth opportunities in the industry. An analyst for IDC Mobile Device Trackers commented in mid-2017, “With the entrance of multiple new vendors with strengths in different industries, the wearables market is expected to maintain a positive outlook, though much of this growth is coming from vendor push rather than consumer demand.”7 Exhibit 4 presents the shipments and market shares of the top five wearables vendors for 2014 through 2016. Problems for Fitbit Antenna There were early problems with the design of Fitbit. For one thing, the antenna did not work properly. In regard to the antenna problems, CEO James Park said, “In my hotel room I was thinking this is it. We literally took a piece of foam and put it on the circuit board to fix an antenna problem.”8 Design Flaw The Fitbit Ultra had a permanently curved shape that allowed it to be clipped onto a piece of clothing. However, the plastic in the unit could not handle the strain at the looped end and would continually break. When this occurred, Fitbit offered the consumer replacement or repair of the unit. Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses?   275 EXHIBIT 4 Top Five Wearables Vendors by Shipments and Market Share, 2014–2016 (units in millions) Vendor Fitbit Xiaomi Apple Garmin Samsung Others Total 2014 Unit Shipments 2014 Market Share 2015 Unit Shipments 2015 Market Share 2016 Unit Shipments 2016 Market Share 10.9 1.1 0.0 2.0 2.7 12.0 28.8 37.9% 4.0% 0.0% 7.1% 9.2% 41.9% 100.0% 22.0 12.0 11.6 5.8 3.2 27.4 81.9 26.8% 14.7% 14.2% 7.0% 3.9% 33.4% 100.0% 22.5 15.7 10.7 6.1 4.4 43.0 102.4 22.0% 15.4% 10.5% 5.9% 4.3% 42.0% 100.0% Source: IDC Worldwide Quarterly Wearable Device Tracker, February 23, 2016; March 2, 2017. Allergic Reactions From the beginning of the company, Fitbit was plagued by problems. When Fitbit added Fitbit Flex and Fitbit Force to its list of products, the company began receiving complaints that the watchband was irritating the skin of consumers. The irritation was discovered to be caused by allergic reactions to nickel, and the products were recalled in early 2014. As many as 9,000 customers were reportedly affected, and the Force was replaced by a new model named Fitbit Charge, which was believed to be allergen free. Unfortunately, customers continued to complain about allergic reactions to the new device as well. Too Much Information One of the greatest strengths of Fitbit from the very beginning was its website. By utilizing Bluetooth technology, information from the Fitbit could be uploaded to the web in order to track energy expended and compare one’s performance with other Fitbit users. However, the company discovered in 2011 that users who recorded their sexual activity (time spent, not activity) were sharing their information with the world unknowingly. Therefore, Fitbit realized that sharing all of a customer’s information with the world was not a good idea, and the company changed the website so that information posted by the users was private by default. Privacy Issues U.S. Senator Chuck Schumer declared in August 2014 that Fitbit was a “privacy nightmare.” He further stated that users’ movements and health data were being tracked by the company and sold to third parties without their knowledge.9 Schumer asked that the U.S. Federal Trade Commission undertake the regulation of fitness trackers. In response to this charge, Fitbit suggested that it did not sell data to third parties and would be glad to have the opportunity to work with Senator Schumer on this issue. Cost of Launching New Products In Fitbit’s Form 8-K filing on February 22, 2016, the company warned that the costs that were related to two new products would negatively affect first quarter earnings in 2016. They further stated that research and development would hurt operating margins in 2016. The two new products that Fitbit suggested it would launch in 2016 were Fitbit Blaze and Fitbit Alpha, and these two products would incur very large manufacturing costs. In addition, Fitbit’s full-year research and development budget included the company’s Digital Health strategy.10 Financial Performance Going into 2016, Fitbit management expected to record revenues of $2.4 billion to $2.5 billion as a result of new products and expansion into new geographic territories. In addition, the company stated that it expected gross margins to range from 48.5 to 49.0 percent. Fitbit also expected adjusted EBITDA (earnings before interest, taxes, 276  Part 2 Cases in Crafting and Executing Strategy depreciation, and amortization) to range from $400 million to $480 million for the 2016 fiscal year. The projections were based on Fitbit’s stellar 2015 fiscal year when annual revenue increased to $1.86 billion from $745 million in 2014 and net earnings increased to $175.7 million from $131.8 million in 2014. However, 2016 proved to become a much more troubling year than managment expected. The company’s 2016 revenues failed to meet expectations, it recorded a loss of $102.8 million, and adjusted EBITDA fell from $389.9 million in 2015 to $30.0 million in 2016. The company’s declining financial performance continued during the first quarter of 2017 with its net loss exceeding $60 million for the three-month period ending April 17, 2017. Exhibit 5 presents Fitbit’s consolidated statements of operations for 2014 through the first quarter of 2017. The company’s condensed consolidated balance sheets for 2015 and 2016 are presented in Exhibit 6. Analysts’ Assessments Analysts were becoming concerned about Fitbit’s long-term viability as early as February 2016 when its share price declined by 20 percent by month-end. An analyst with Global Equities Research, Trip Chowdry, suggested that he believed the stock could fall another 50 percent and speculated, “Gradually the market for single-purpose devices (fitness tracker) is heading toward zero, and there is nothing FIT can do to reverse the trend.”11 In addition, Chowdry commented that unlike Apple, Inc., Fitbit does not have a group of developers or a way of generating income as Apple does. Even though the Fitbit tracker products were much cheaper than Apple’s ($129 as compared to $349 for the cheapest Apple Watch Sport), Apple had an inventory of more products than Fitbit. Activity tracking is just a feature used by Fitbit, and this feature was being used in many other devices by a variety of companies. Leerink analysts were cautious about projections for sales increases at Fitbit and suggested a target price to buy the stock of $18. The analysts suggested that ongoing sales would likely remain sluggish after initial increases related retailer inventory needs for new products were satisfied.12 Fitbit’s Strategic Inflection Point Going into mid-2017, James Park and Eric Friedman were confronted with how best to bolster Fitbit’s EXHIBIT 5 Fitbit, Inc., Consolidated Statements of Operations, 2014–First Quarter 2017 (in thousands) Revenue Cost of revenue Gross profit Operating expenses: Research and development Sales and marketing General and administrative Change in contingent consideration Total operating expenses Operating income Interest income (expense), net Other expense, net Income before income taxes Income tax expense Net income First Quarter 2017 2016 2015 2014 $298,942 180,643 118,299 $2,169,461 1,323,557 845,884 $1,857,998 956,935 901,063 $745,433 387,776 357,657 87,785 91,174 30,746 320,191 491,255 146,903 150,035 332,741 77,793 (7,704) 552,865 348,198 (1,019) (59,230) 287,949 112,272 $ 175,677 54,167 112,005 33,556 209,678 (91,379) 1,096 533 (89,750) (29,671) $ (60,079) 958,349 (112,465) 3,156 14 (109,295) (6,518) $ (102,777) Source: U.S. Securities and Exchange Commission, Form 8-K, Fitbit, Inc., for fiscal 2015; Form 10-K for 2016; Form 10-Q First Quarter 2017. 199,728 157,929 (2,222) (15,934) 139,773 7,996 $131,777 Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses?   277 EXHIBIT 6 Fitbit, Inc., Condensed Consolidated Balance Sh ...
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Fitbit report.
Fitbit has been reported to be the leading wearables manufacturing company that has the
best fitness trackers, but for how long? By the year 2015, all their products were available
everywhere and were worn by many. The company realizes a profit until the year 2016, where
they realized a loss as a result of increasing operational expenses. The losses that the company
made in the year 2017 was as a result of the declining number of sales compared to the previous
years (Fitbit, 2018). This resulted in a crisis and the need to come up with a new strategic course
to help save the company. In the context of this article, I am going to present an assessment
report about the company’s overall situations to be able to a set of actions to improve the
company’s future prospects.
Identification of problem and issues.
Fitbit published its financial earnings for the year 2017 this exposed not only how the
company was faring but also how the wearables industry, in general, was doing. It seemed that
the profits that they realized in the economic year 2015-2016 were not going to be realized again.
This suggests a lot of issues that resulted in this problem, these issues have been elaborated

The antennae. With regards to the design of the Fitbit, reportedly its antennae did not
work properly. However, the CEO made a report that it would be fixed since earlier problems
with the design of the antennae had been evidenced (BRUNSON, 2018).
Errors in the design. To make it easier for this devices to be clipped into cloths, Fitbit
made Fitbit Ultra curved. Since the material used was plastic and could not handle the strain, it
easily got damaged and broke down. However, the company had offered its customers an
assurance that they would repair or replace the broken devices. The error made the product to
have a short life cycle. This has however discouraged the consumers and unless they change their
design, this might negatively affect the company.
Health factors. ...

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