Question

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?

Fitbit, Inc., in 2017: Can Revive Its Strategy and It Reverse Mounting Losses? connect ROCHELLE R. BRUNSON Baylor University MARLENE M. REED Baylor University 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. Correspond- ingly, Fitbit's revenue declined from $505 million dur- ing the first quarter of 2016 to $299 million during the first quarter of 2017. The accelerating collapse of Fit- bit's competitive advantage and financial performance created a crisis for founders James Park and Eric Fried- 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 ubiq uitous 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 sucecessful IPO (initial public offering) in 2015 that boosted liquidity by $4.1 billion and recorded revenues of $1.86 billion man, who were now faced with promptly establishing new strategic course to save the company. Background on Fitbit 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 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 sen- sors 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, its number of devices sold increased from 21.4 million Park and Friedman addressed the TechCrunch 50 in 2015 to 22.3 million in 2016. However, the com 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. pany'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 oper- ating 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 Copyright2017 Rochelle R. Brunson and Marlene M. Reed. All rights reserved case 272 Part 2 Cases in Crafting and Executing Strategy A study in 2015 by Diaz et al, published in the The product Park and Friedman developed was called an "activity monitor" which was a wireless- enabled wearable technology device (see Exhibit 1) 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 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 between clinic visits. The research indicated that the Fitbit One and Fitbit Flex reliably estimated step counts and energy expenditure during walking and run ning These researchers abso found that the hip-based Fitbit outperformed the Fitbit watch. Another study in 2015 by Cadmus-Bertram et al 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 published in the American Joumal of Preventihe 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 Thereafter, the company developed a number intervention for postmenopausal women. Their con clusions 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. 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 pre- diction algorithm to correct this consistent underes- timation of activity in order to maximize the physical 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 activity benefits for weight management and other health-related concerns." Mission of Fitbit According to Fitbit, "The mission of Ftbit 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." The Activity Tracking Industry 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 Source: Denis Kortunowitbit, Inc Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? Case 4 273 EXHIBIT 2 Activity Tracker Devices Developed by Fitbit Name of Device Capabilities and Options Date First Unit Sold Device with a clip to fit on clothing Fitbit Tracker Sensed user movement Measured steps taken, distance walked, calories burned, floors dimbed In black and teal only 2008 Digital clock Stopwatch Altimeter that measured slope of floors "Chatter" messages that occurred when Ultra moved New colors of plum and blue Fitbit Ultra 2011 Fitbit Aria 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 2012 Fitbit One September 2012 Fitbit Zip Size of a quarter Tracked steps taken, distance traveled, and calories burned Included a disposable battery Lower price than other Fitbits September 2012 Fitbit Flex Worn on the wrist Tracked movement 24 hrs a day including sleep patterns May 2013 Fitbit Force LED display showing time and daily activity Tracked activities in real time Vibrating alarm October 2013 Fitbit Charge Replacement for Fitbit Force Wristband displayed caller ID October 2014 Fitbit Surge Similar to a smart watch Monitored heart rate Tracked pace, distance, and elevation using GPS October 2014 Fitbit Blaze Similar to a smart watch Focused on fitness first Colored touchscreen 2016 Exchangeable strap and frame Fitbit Alta HR PulsePure heart rate tracking: Sleep tracking: 7-day battery life Four colors and three sizes 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 quar- ter among makers of wearable tracking devices. Xiaomi, a Chinese company, shipped 15.7 million wearable activity trackers in 2016. That gave the com- pany 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 Cases in Crafting and Executing Strategy 274 Part 2 shipments growing by 16.9 percent when compared to 2015. The market was segmented between single- EXHIBIT 3 Fitbit Watch function products and smart wearables, many running third-party applications. An activity tracker indus- try observer noted, "Like any technology market the wearables market is changing. Basic wearables started out as single-purpose devices tracking foot steps and are morphing into multi-purpose wearable devices, fusing together multiple health and fitness capabilities and smartphone notifications." New entrants to the industry such as Fossil cre- ated new fashion segments within the activity track- ing 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 Source: Tom Emrich/Fibit, Inc. worn trackers such as earpieces and clothing items with activity tracking sensors. Such devices made up only I percent of industry sales in 2016 but reflected the continuing growth opportunities in the industry An analyst for IDC Mobile Device Trackers com- mented in mid-2017, "With the entrance of multiple 1.1 million units and garnered only 4 percent of the world market share. 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. 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) algo- rithm. This invention allowed physicians the ability to create a cluster map of brain activity with infor- mation that was gleaned from one electrode. This 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. 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. 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 Demand for wearable devices continuedtoincrease through 2016 with shipments growing to 33.9 million units in the fourth quarter of 2016 alone and annual When this occurred, Fitbit offered the consumer replacement or repair of the unit. 2 Case 4 Fitbi, Inc., in 2017: Can R Revive Its Strategy and Reverse Mounting Losses? 275 EXHIBIT 4 Top Five Wearables Vendors by Shipments and Market Share, 2014-2016 (units in millions) 2014 Unit Shipments 2014 Market Share 2015 Unit Shipments 2015 Market Share 2016 Unit Shipments 2016 Market Share Vendor 26.8% 220% Fitbit 10.9 37.9% 22.0 225 Xiaomi 4.0 % 0.0 % 12.0 14.7% 15.4% 1.1 15.7 00 Apple Garmin 11.6 14.2% 10.7 10.5% 20 7.1 % 58 7.0% 6.1 5.9% 9.2 % Samsung 2.7 3.2 39% 4.3% 4.4 Others 12.0 41.9% 27.4 33.4% 43.0 420% Total 28.8 100.0% 81.9 100.0% 102.4 100.0% Source: IDC Wordwide Quarterly Wearable Device Tracker February 23 2016: March 2, 2017 Allergic Reactions stated that users' movements and health data were being tracked by the company and sold to third parties without their knowiedge. Schumer asked that the U.S. Federal Trade Commission undertake the regu lation 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 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. 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 mar- gins in 2016. The two new products that Fitbit sug- gested it would launch in 2016 were Fitbit Blaze and 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 tech- nology, information from the Fitbit could be uploaded to the web in order to track energy expended and com- pare one's performance with other Fitbit users. How- ever, the company discovered in 2011 that users who recorded their sexual activity (time spent, not activity) were sharing their information with the world unknow- ingly. Therefore, Fitbit realized that sharing all of a 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.1 Financial Performance 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. 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 Privacy Issues U.S. Senator Chuck Schumer declared in August 2014 that Fitbit was a "privacy nightmare." He further adjusted EBITDA (earnings before interest, taxes. Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? 277 EXHIBIT 6 Fitbit, Inc., Condensed Consolidated Balance Sheets, 2015-2016 Assets December 31, 2016 December 31, 2015 Current assets $ 301,320 S 535.846 Cash and cash equivalents 404.693 Marketable securities 128,632 Accounts receivable, net 477,825 469,200 230,387 178,146 Inventories Prepaid expenses & other current assets 66,346 43,530 Total current assets 1,480.571 1.355.414 Property and equipment, net 76,553 51,036 27,521 174,097 44,501 Goodwill 22.157 Intangible assets, net Deferred tax assets 12,216 83.020 10.448 1,758 $1,519,066 Other assets $1,820,226 Total assets Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity Current liabilities $ 260.842 Accounts payable Accrued labilites $313,773 200.099 390,561 Deferred revenue Income taxes payable 49.904 44,448 7,694 2,868 Total current liabilities 761,932 508,257 Other liabilities 59,762 29,358 Total liabilities 821,694 537,615 Stockholders' equity Common stock & paid-in capital 859,368 737,841 (978) 691 Accumulated other comprehensive income Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 140.142 242.919 981,451 998.532 $1.820.226 $1,519,066 Source: Ftbit, Inc, 2016 10-K market standing and turn around the company's rapidly deteriorating financial performance. It was After all, Park had recently commented, "The next big leap will come when we tie into more detailed clini a common comment among analysts that Fitbit needed to be more than a one-product company Since the activity tracking feature was being used in many other devices by a varicty of companies, Fitbit had to think of new uses of the tracker as well as new cal research and create devices that can make light- weight medical diagnoses. You look at blood glucose meters today. I wouldn't necessarily say that those are the most attractive or consumer-friendly devices. I would say consumer-focused companies, whether it's us or Apple, probably have an inherent advantage in the future." One possibility for the company was to become a platform-rather than just a product devices. As one journalist suggested, "Standalone fit- ness trackers are iPods in a world that's moving to iPhones- 278 Part 2 Cases in Crafting and Executing Strategy That would entail moving into niche markets with devices that are designed for very specific and unique purposes. Some of the possibilities would be moving further into health care and corporate health care. 15 be a flawless strategy that was executed with great proficiency in the six years leading up to its 2015 IPO However, the market's rapid transition had surprised Fitbit's management team who, as of mid-2017, had yet to adjust its strategy. It was certain that Fitbit management would need to develop a new strategic approach to restore the company's competitiveness and profitability. Central to these issues was the soundness of the company's competitive strategy and the degree to which it was matched to current industry conditions. Park and Friedman had developed what appeared to ENDNOTES Keith M. Diaz, David J Krupka, Melinda J. Chang, James Peacock, Yao Ma, Jeff Goldsmith, Joseph E. Schwartz, and Karina W. Davidson, "Fitbit: An Accurate and Reliable Device for Wireless Physical Activity Tracking." International Jourmal of Cardiology, no. 185 (2015), pp. 138-140 Lisa A. Cadmus-Bertram, Bess H. Marcus, Ruth E. Patterson, Barbara A Parker, and Brittany L. Morey, "Randomized Trial of a Fitbit-Based Physical Activity Intervention for Women," American Journal of Preventive Medicine 49, no. 3 (2015), pp. 414-418 Jeffer Eidi Sasaki, Amanda Hickey, Marianna Mavila, Jacquelynne Tedesco, Denish John, Sarah Kozey Keadle, and Patty S. Freedson, "Validation of the Fitbit Wireless Activity Tracker for Prediction of Energy Expenditure," Journal of Physical Activity and Health 12 (2015) pp. 149-154 http://www.businesswire.com/news/home/20170302005298lenWearables Arent-Dead-Theyre-Shifting-Focus-Market. 7 Ibid Gary Marshall, "The Story of Fitbit: How a Wooden Bax Became a $4 Billion Company," December 30, 2015, www.wareable.com/fitbit/youre-fitbit-and you-know-it-how-a-wooden-box-became-a-dollar-4-billion-company (accessed March 2, 2016) Ibid, p. 5 U.S. Securities and Exchange Commission, Form 8-K Filing for fiscal year 2015 for Fitbit, Inc "Caitin Huston, "Fitbit's Stock Is Tanking and it May Have More to Drop, MarketWotch, February 23, 2016, www.marketwatch.com/story/fiebits-stock -is-tanking-and-it-may-have-more-to-drop/ (accessed March 11, 2016) 12 bid, p. 3 Fitbit home page, www.fitbit.com/about (accessed March 3, 2016) Betsy Isaacson, "A Fitbit for Your Brain Is Around the Corner, Newsweek.com, April 13, 2016, www.newsweek.com/human-brain-eeg -technology-neuroscience-443368. 13 James Stables, "Fitbit Charge HR Review," Fitbit Review December 15, 2015 www.wareable.com/ibit/fitbit-charge-hr-review (accessed March 1, 2016) 14 tbid 15 bid, p. 7 As quoted in "Wearables Aren't Dead, They're Just Shifting Focus as the Market Grows 16.9% in the Fourth Quarter, According to IDC, Business Wire, March 2, 2017, Cases in Crafting and Executing Strategy 276 Part 2 depreciation, and amortization) to range from $400 million to $480 million for the 2016 fiscal year. suggested that he believed the stock could fall another 50 percent and speculated, "Gradually the market for single-purpose devices (fitness tracker) is head ing toward zero, and there is nothing FIT can do to reverse the trend.In addition, Chowdry com 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 mented 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. Activ However, 2016 proved to become a much more trou- bling 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 ity 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. for 2015 and 2016 are presented in Exhibit 6. Analysts' Assessments Analysts were becoming concerned about Fitbit's long-term viability as carly as February 2016 when its share price declined by 20 percent by month-end. An analyst with Global Equities Research, Trip Chowdry, 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) First Quarter 2017 2016 2015 2014 Revenue $298.942 180,643 $2,169,461 $1,857,998 $745,433 Cost of revenue Gross profit Operating expenses Research and development Sales and marketing 1,323,557 956,935 387,776 118,299 845,884 901,063 357,657 87,785 320,191 150,035 54,167 91,174 491.255 332.741 112.005 30.746 146,903 77.793 33.556 General and administrative Change in contingent consideration (7.704) 209.678 958,349 199,728 Total operating expenses 552,865 (91,379 Operating income Interest income (expense), net Other expense, net (112,465) 348,198 157,929 (1,019 1,096 3,156 (2,222) (15,934) 139,773 533 14 (59,230) (89.750) (109,295) (6,518 $(102,777) Income before income taxes 287,949 Income tax expense (29,671) $ (60,079) 112,272 7,996 $175,677 $131,777 Net income Source: U S. Securities and Exchanoe Commission, Form 8-K, Fitbit, Inc, for fiscal 2015: Form 10-K for 2016: Form 10-0 First Quarter 2017

Answer 1

4. SWOT Analysis of Fitbit

• Strengths
  • Strong brand power
  • Big umbrella of loyal customers
  • Profit making company
• Weaknesses
  • Premium pricing strategy of the company, limits the customer base
  • High competition in the segment
  • Market saturation limiting its business options
  • Limited usability
• Opportunities
  • Enhance the product by adding more features
  • Global expansion in third world countries
• Threats
  • Customer switching cost comparatively low
  • Stiff competition in the industry
  • Emergence of mobile app based trends may reduce its customer following

The strategic options which Fitbit may consider are as follows:

• The company can enter into partnerships with fitness studios, gyms, healthcare centers
• The company can develop corporate packages to offer group discounts to companies
• Entering the third world countries can be a good option for expansion
• Conduct a customer needs assessment and incorporate more features in the product, based on feasibility
• Options of diversification can serve to be quite fruitful for the company

5. Studying the financial performance of the company, we can see that the company’s revenue has been on a surge. The revenue of the company had doubled in just 1 financial year. The initial response of the customers to the product was quite good. But with time, this customer response is deteriorating. The customers are opting for mobile based apps or smart watches instead of going for a fitness tracker. This trend is getting reflected in the dwindling stock prices of the company. So, we can say that the strategy of Fitbit cannot be considered effective for future.

6. Recommendations for the company:

• Identify and capitalize on market opportunities, before the competitors
• Try to inculcate the principles of product diversification in the business model. This will help the product have higher market acceptance
• Opt for a new pricing strategy like penetration pricing or value based pricing
• Capitalize on trends in the health and fitness industry and project the same as features of the product