Introduction

Bang & Olufsen (B&O) is a Danish brand established in 1925 by Peter Bang and Svend
Olufsen, two engineers who began producing radios. The company progressively expanded into
the design, development and production of audio and video equipment. B&O is a high-end icon
of quality and design excellence, both because of the materials and technology used and because
of the design. bestowing an aura of exclusivity to the brand.
The identity and core competencies of the company are closely related to the products
offered in both B2B and B2C areas. The B2B area focuses on the auto industry, producing sound
systems for Aston Martin, Audi, BMW, and Mercedes-Benz. The B2C area comprises two
segments: audiovisual devices and B&O PLAY, producing portable, stand-alone devices. 

Analysis of industry performance: Porter’s 5 Forces

Supplier power: the industry has a low number of suppliers and small bargaining power.
The Headphone and Earphone Manufacturing industry has grown over the five years leading up
to 2018, as the industry has been able to counter high import penetration through increased
investment in premium products and a rapid expansion in the market for Bluetooth wireless
headphones. Additionally, the rising production costs in China have incentivized many SMEs
that design and market headphones to source their products from the US. 
Threat of entry: threat of new entrants is low because anyone can make headphones,
there are low capital requirements and economies of scale are limited. 
Industry rivalry: many competitors have product placements in TV shows, videos
and/or billboards leading to high competition between the rivals. There is additionally a wide
variety of products and diversification (low to mid to high price range). 
Substitute competition: the only close substitute to headphones and speakers are
speakers even though they serve a different purpose. 
Buyer power: consumers have a high level of loyalty to brands but to a certain degree
they are price sensitive. They also have low bargaining power over the brands but essentially no
switching costs to change from one to the other. 

Industry Analysis: Headphone & Earphone Industry

The industry is in early stages of maturity since there are not many new entries and exits,
rather, competition has shifted to cost and innovation. Demand is increasing but at a lower rate
than before, a change that is external and caused by the consumers. However, demand growth is
stable because it has become more popular to use a handheld electronic device and to stream
music online. Also, innovation in the noise-cancelling technology fuels market growth as well as
a need for higher product differentiation as competition rises. However, counterfeit products
have become more available and can harm market growth and consumer trust. Innovation
regarding noise-cancellation and general sound quality leads to distinguishable product
differentiation. This change is internally driven because brands want to invest in R&D. 
The headphone/earphone industry is separated into four primary categories, in order of
size: Music & Entertainment, Fitness, Gaming, and Virtual Reality. Companies generally focus
on one or two applications and dominate that segment. B&O is currently geared towards music
and entertainment, but we see fitness as one of the faster growing segments to target.

Analysis of Firm Performance 

With the long-standing tradition of manufacturing excellence and innovation, B&O’s
product quality and design has been a main selling point and a competitive advantage.
Aforementioned characteristics make for a distinct product compared to others in the market,
creating the ‘uniqueness’ (lifestyle) factor. This develops strong brand loyalty in both new and
existing customers. They excel at capturing value by exploiting their customers’ high
willingness-to-pay, thus leading to higher profit margin (48.5% gross revenue margin). 

Integration/Diversification
The majority of B&O’s products are made in Denmark; assembly of all products is done
in their own factory. The use of premium materials and avantgarde designs, paired with superb
audio performance, created an impeccable reputation.  Specific to B&O is its factory's "finishing
touch" department - renowned for techniques of anodizing and aluminum. Consequently, B&O
works with intermediate goods, unlike competitors in the same industry. Therefore, it is
vertically integrated to a certain extent. Their commercial activity is done primarily through
retailers - B&O directly owns a few stores.
B&O’s product portfolio is somewhat diversified. It is present in almost every segment of
the audio-visual reproduction industry, focusing on a smaller range of products within each
segment (headphones and speakers being the highest selling) and has well-established
partnerships with Google, as well as renowned carmakers.
Internationalization
Despite a worldwide presence, B&O’s footprint is variable across continents - their main
focus is Europe, followed by the US. Only recently have they expanded into Oceania and Asia.

Profitability
When compared to the same quarters in previous years, it is clear B&O is not performing
as well as it used to. In the first quarter of the financial year 2019/2020, they experienced a fall in
revenue, EBIT margin and free cash flow all due to a focus on a stronger retail strategy. In the
second quarter of the same year, there was a 31% decline in revenue presumably caused by a
new demand-driven sales model and the fact they were reducing inventory. Finally, in the last
quarter, revenue decreased by 13.6% but new product launches accounted for 20% of total
revenue.

Sustainability
B&O’s brand quality is not only determined by its high-quality products, but also its
operations. Indeed, guided by the UN Sustainable Development Goals, their CSR strategy is built
upon 3 core values: Pride, Persistence & Passion, and 3 core capabilities: Sound, Design &
Craftsmanship. The sustainability strategy focuses on 4 areas: 
1. Environmental and Climate Impact: To reduce its environmental impact, B&O utilizes
recycled materials, sustainable packaging, resource efficiency, reducing CO2 emissions,
and a circular product design.
2. Responsible Employer: The company cultivates employee empowerment and core
competencies development by creating a healthy, safe work environment, encouraging
diversity, and respecting employees’ freedom of association and collective bargaining.
3. Role in Society: B&O aims to create value for its stakeholders through transparency
and sharing its knowledge with different stakeholders. It’s 2020-21 objectives are to
enhance two core aspects. The first is Future Innovators, by encouraging development of
the next generations’ skills in technology, engineering, craftsmanship and design by
facilitating access to its know-how, resources and partnering with other relevant
institutions. The other is Sound & Health and improving people’s quality of life by
building an understanding of how sound can positively affect health
4. Responsible Partner: The company is committed to improving its supply chain by
partnering with suppliers and retailers sharing their ethical and social standards.
Recommendations
B&O is currently positioned as a global luxury and lifestyle brand. Our suggestion is to
further strengthen the lifestyle dimension by starting a wellness/fitness product line at a lower
price point. Consumers are increasingly inclined to lead health-oriented lifestyles and this trend
is reflected by the performance of the fitness industry, which was valued in 2019 at nearly $100
bn globally. Factors supporting this trend include streaming exercises classes, budget-friendly
gyms, outdoor obstacle races, health insurance costs, the new demand for healthy foods and
wearables. Global revenues of the fitness industry currently grow at a rate of 8.7%; in 2017 the
industry generated $87.2 bn of total revenue, $94 bn in 2018, and $99 bn in 2019. At this rate,
expected global revenues will exceed $100 bn in 2020. Moreover, according to Goldman Sachs,
for Millennials wellness is a daily commitment to exercising and eating right; thus, they have a
high willingness to spend money on brands which improve and enhance their active and healthy
lifestyle.
The new product line will focus on headphones and earphones designed to meet the needs
of fitness lovers. Potential products include sweat-proof devices, earphones for swimmers, and
run-friendly headphones. A lower price point will be reached by utilizing the same quality and
technology which characterizes B&O, but using cheaper materials reducing the materials. The
result is a device with the same distinctive features, but with a simpler design and lower price. 
The proposed strategy is coherent with B&O’s financial performance and industry trends. The
former is mainly driven by new product launches; moreover, headphones and speakers are the
two highest-selling segments of their product range. In the industry, competition is focused on
costs and innovations. Additionally, a wellness/fitness product line fits the strategic focus of
B&O: a recognizable lifestyle brand with an innovative product offering. With its technology,
experience, and reputation, B&O is well positioned to successfully implement this strategy. 

Conclusion
B&O takes pride in its image as a high-end audiovisual products manufacturer, a core
value we did not want to change. The recent decrease in sales, however, forces B&O to adopt a
new strategy. We believe the new B&O Wellness line of fitness products will recapture market
share and once again make the company profitable.