Bang & Olufsen Strategic Analysis 2011

Introduction: The aim of this report to analyse business environment consists of micro and macro environment of Bang & Olufsen (B&O) a Danish company that manufacture and designs an exclusive range of luxury products, which includes music systems, loudspeakers, multimedia products and telephones with the combination of technological excellence and emotional appeal (Admin, 2007). B&O products sold over 100 countries by more than 1000 dealers in which more than 70% are exclusive B1 stores (Olufsen, 2011). Company mainly focus on premium segment customers who expect combination of exclusive quality and design with technological solutions. B&O suffered 20% downfall in turnover in its main markets of Germany, Great Britain and Denmark. Main reason of this downfall was, firstly, company was lacking in new successful product launches and, Secondly, due to the financial crisis in year 2008. Previously, B&O use too get 25% (approx.) turnover from new product launches which reduced to 10-16 percent since 2007. Technological transition affected consumer electronics market as a result product life cycle shortened due to rise in new technologies like high definition protocols for televisions. In august, 2008, Karl Kristian (kalle) Hvidt Nielsen appointed as a new CEO for B&O who was CEO for Bruel & Kjaer (a Danish microphones and electronics manufacturer) for six years. Company announced new strategy with the appointment of new CEO, names as 'Pole Position Strategy', the name taken from Formula One racing. This strategy enables B&O to focus on its product range and profitability by clear goal and task for each team member, a sense of urgency in organization. Strategy is a word originated from military concept by Chinese Sage called Sun Tzu; his book 'The Art of War' addresses strategy as a military tool. In today's business environment, almost all businesses started developing strategies to gain competitive advance. In a lay man term, strategy is a plan for future in present, after analysing past with present. There are many strategic frameworks which are used to evaluate strategy for both internal and external analysis. This report used two strategic frameworks; Porter's five forces for external business environment analysis and Value Chain for internal environment analysis to evaluate B&O strategy. Careful and systematic analysis of strategic tools helps organisation to develop competitive advantage over other companies in the market. External Analysis of Bang & Olufsen using Porter's Five Forces Model: External environment is dynamic which keeps on changing that's why analysis of external environment for any company is important and factor to analyse is both diverse and complicated. External analysis helps organisation to examine threats and opportunities that exists in the business environment. It is important for every organisation to build up understanding of how changes in macro environment likely to impact company. Porter's five forces framework helps to analyse competitive forces in an industry in order to identify threats and opportunity confronting a company (Hill & Jones, 2007). Figure: Porter's Five Forces 10016555 1

Bang & Olufsen Strategic Analysis 2011

Source: S A Y

KE N G LE E , K N OWL E D G E A DV EN T U R E R & T EC H N O L O GY

Competitive Rivalry Within An Industry Competitive rivalry helps to identify the competition within the industry. B&O operates in competitive market of high end audio/video businesses with high-end life style goods segment. There are many suppliers in this competitive market like Sony, Philips, and Samsung which provides various ranges of products to all type of customers. In high end audio-video market, Bang and Olufsen has direct competition with Loewe and Bose. Both companies manufacture high end luxury audio/video products for premium segment customers, B&O get the competition from Loewe in video products and from Bose in audio products. Television industry is completely changed from analogue televisions to the bigger flat screens and high definitions with the introduction of new technology. Flat screen television market is growing at very fast because of popularity of bigger screen and high definition solutions. Due to the increase in popularity, flat screen television becomes common good for every household. Many companies entered in this market with cheap solutions which create challenges for B&O to develop more innovative products by which customer can feel the sense of 'magic' which use too be the strength of B&O. The company's chief executive, Kalle Hvidt Nielsen told Forbes," In a market that's shrinking, existing players will be pushing hard to gain market share and it will be difficult to strengthen our position in that sector (Espinoza, 2009)" In October 2009, B&O introduced BeoVision 10, a 40 inch LED television developed according to the new strategy where company changed their idea from 'television sculpture' to 'broadcast painting' for the living room. Because of the square design of BeoVision 10, B&O can include more loudspeakers which provide better sound quality then standard LCD televisions. Still, television market faces high competition and pressure with fewer profit margins. B&O needs to continuously work on its 'magic' feeling which gives customers an unexpected features or functions. Threats of New Entrant

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Threat of entry depends on the barriers present in the market. In the market B&O operating is the luxury segment of audio and video products. Consumer in this market expects premium quality innovative products from manufactures with brand name. Barrier for enter in this market is high with high investment required in terms of both product development and technology. However, company might face competition from existing companies who is in the market of audio and video products like Sony, Phillips, LG and Samsung etc. These companies focus on all segments of customers and they can create new line of products which is especially for luxury segment customers. But according to current market condition, none of the audio and video companies want to take chances in terms of changing product lines; they prefer to focus on new technology development instead of creating new lines of products. This shows that, there is entry in barriers for existing companies in the market where B&O operates. Threats of Substitutes Threat of substitutes exists when demand of product is affected by price change of other substitute products. Product price elasticity is affected by substitutes products available in the market, more substitutes makes demand more elastic because consumers have more alternatives (Porter, 1998). A substitute for B&O audio and video products is computing devices which include desktop computer, laptop, palmtop and now tablet devices. Company started manufacturing audio solutions like BeoSound 8 series, BeoPort, BeoPlayer for computers, iPods and other mp3 players (Olufsen, 2011). This helps B&O to expand its product line and increase its market share in increasing computing market. In video products market, computers are the substitutes for televisions but we cannot get the viewing experience which we get in televisions. Televisions and other video products like blu-ray player are essential part in consumer lifestyle. B&O providing home integration solution for its customers by BeoLink which offers integration of video and audio system helps customers to get full utilisation of entertainment system (Olufsen, 2011). B&O knows about these threats of substitutes and they are developing products like home integration which gives customers a completely different experience from its products. Bargaining Powers of Customers Bang & Olufsen divided its business activities in three different business areas which include: - B&O audio/ video business which develops and sells luxury audio/video products in large number to luxury hotels, property projects and high income group customers. - B&O sales and development of sound systems for automotive industry. - ICEpower, which manufacture, develops and sells compact digital amplifier solutions to major companies. Figure: Bang & Olufsen Business Areas

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Bang & Olufsen Strategic Analysis 2011

Source: Bang & Olufse, Right issue 2009 Bang & Olufsen own large number of B1 and shop in shops which provides customer a very different experience of Bang & Olufsen products. All staffs in shops are trained by company. The bargaining power is low for B&O customers because there are only few competitors in luxury audio/ video segment markets. B&O get the closet competition from Bose and Leowe in this segment. However, the customers of this segment hardly care about products comparison with other competitors, and they have limited choice as well. Business to Business: B&O automotive sells luxury sound systems for high end car segment. These sound systems are highly recognised in automotive industry. B&O collaborates with Audi (Germany), sports-car manufacturer Aston Martin (UK) and Mercedes-AMG (Germany). Company also newly signed contract with BMW to develop advance sound system for a range of BMW vehicles (Karl Kristian Hvidt Nielsen, 2011). The bargaining power is high in this segment because they buy products in bulk and have long contract of orders. Luxury hotel or hospitality segment also have bit high bargaining power because of the quantity of orders they give to B&O. It is concluded, bargaining power among private consumer is low but bargaining power in business to business is high but not much due to limitation in choices.

Bargaining power of Supplier Every manufacturing company depends on its suppliers for the supply for components; none of the companies in consumer electronics market manufactures all of its product components. That's why analysis of bargaining power of supplier is necessary in strategic analysis. B&O currently have 220 suppliers in which 40 of which account 90% of the total procurement budget (B&O, 2009). Bang and Olufsen official announced that they entered into partnership with Intel, this corporation going 10016555 4

Bang & Olufsen Strategic Analysis 2011
to help B&O and Intel in sharing technology and ideas in both directions (Meagher, 2011). B&O is highly dependent on its supplier and some of company key suppliers are also competitors for them in audio and video segment market. This is a risk for B&O and over the time relationship become strong that it would be difficult to change suppliers. B&O faces high bargaining power from supplier which is also a risk for the company.

Internal analysis of Bang & Olufsen using Porter's Value Chain: Internal environment analysis helps organisation to analyse their resources, so that they can act accordingly with the changing external environment. It includes organisation mission statement, culture, leadership style, functional areas, physical facilities and personnel. Porter's Value chain is a strategic evaluation tool used for distinguishing weaknesses and strengths in value adding processes (Audretsch, 1995). According to Lynch (2003), Value chain is defined as the key link between values adding activities and their interface with the support activities. The Value Chain of ang and Olufsen has been demonstrated in the following diagram :

Porter's Value Chain

Appendix: Value Chain of Bang and Olufsen

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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Inbound Logistics Include activities which are concerned with receiving, storing and distributing the inputs, raw material or components to the product or service (Johnson & Scholes, 2005). B&O products are high quality and they need to maintain strategic cooperation with its supplier for high quality components. Company wants to strengthen relations with its suppliers so that they can get access to specialised and new technology. This helps company to focus more on developing its core competences. Design is another inbound logistics of B&O; they work with external designers which helps company to develop remarkable design solutions of audio/video products with cooperation with company internal designers or employees (Olufsen, 2009). Operations Transformation of inputs into the final product or service comes under operations. B&O charge premium prices for its products because of their product design and implementation of latest technology. B&O developed one standardised technology digital platform for all of its products. Company had its own development centre which is responsible for development of new products. Previously, company use too develops separate technology for new products according to their design specification. ICEpower is a Danish research and development company which develops business to business solution for end producers. B&O purchase 100% shares in ICEpower in year 2008, which enables B&O to access new technology produced in ICEpower (ICEpower,2010). This is an advantage for B&O over its competitors. ICEpower R&D division helps in value creation of B&O products. R&D is the most important part of B&O value chain because company is highly dependent on new innovative products, any delay or wrong choice in technology development of successful product with reliable quality and advance functions may adversely affect company turnover and its business. New product launches contributes 25 percent of turnover which reduced to 10-16 percent since 2007.

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Source: B&O, Right issue prospectus, 2009

With the advancement of new technologies, product life cycle among consumer is reduced. B&O new strategy focuses on development of new product more quickly and cost efficiently. In order to make production more cost effective, company needs to outsource some of its production work to other countries where labour is skilled and cheap like China or India.

Source: B&O, Right issue prospectus, 2009

Outbound Logistics Collection, store and distribution of the product from company to customer comes under outbound logistics (corporate strategy, page 137). B&O distribution centre Herning, Denmark established in 2008 which is responsible for distribution of all finished products to all of the markets and dealers (right issue prospectus). If company create assembly centres in each region, then this will help B&O in reducing shipping cost.
Marketing and Sales

Marketing and sales help business to reach its customers, and make customers aware of the business product and services. Bang & Olufsen provides training programmes for shop staffs, dealers, and technicians to strengthen sales and give the customers a good experience of Bang & Olufsen (Olufsen, 2009). In November 2010, there were 687 B1-shops across the world against 690. B&O continues its intensified focus on recruiting new shops and the share of turnover for B1-shops is 82 per cent and the number of shop in shops is 277 (Karl Kristian Hvidt Nielsen, 2012). The world wide sales support made good foundation for B&O to reach its customer as well as growth in sales to a large extent. Services Services are those activities which enhances the value of the products or services (Johnson & Scholes, 2005). Service plays an important role in value creation and differentiates B&O from its competitors. B&O provides customised installation of products with guidance and advice so that customer can get full benefit from new 10016555 7

Bang & Olufsen Strategic Analysis 2011
products from day one (B&O, 2011). B&O also offers business to business solution for Interior Designers, Architects and branches of the hospitality industry by their expertise in complete system integration. This service increases B&O reliability among customers but side by side also creates extra cost for the company. Long life service support helps customers but create problem for company in reserving discontinued item parts. Conclusion and Recommendation: After analysing Porter's five forces, Value chain, Bang & olufsen director interim reports and information of B&O from other electronic sources like Forbes, Reuter, I concluded that 'Pole Position' strategy is on right track so far. which Bang and Olufsen pre-tax profit in second quarter of 2011 is 36.4 million DKK versus their forecasted profit of 16.8 million DKK. The key driver of this profit is automotive segment which brings Bang & Olufsen back to profits contributed 17% as compare to 10% it the total turnover (Reuters, 2011). However, at macro level, any downfall in world economy can cause problem for Bang & Olufsen in terms of sales. Germany, UK and Denmark are the three biggest market and B&O facing decline in markets of UK and Denmark due to 2008 recession, economy of these companies affected badly which shrank the high end audio/video markets. In order to overcome this problem they should expand and focus on other markets like Asian markets which recorded increase of 15.3% in first half of 2009/10 (Karl Kristian Hvidt Nielsen, 2012). According to Porter's Five Forces analysis, Band & Olufsen heavily dependent on its suppliers and bargaining power of suppliers is very high, which is the big threat for the company. Company should keep on working in strengthening the relation with its strategic suppliers. Since the product life cycle of consumer electronics reduced due to innovation of new technologies, Bang & Olufsen should focus more on product development and in building core competencies so that they can compete in consumer electronics market. Finally, Bang & Olufsen management should make their 'Pole Position' strategy flexible according to the changing market conditions. B&O need to focus on its product portfolio in order to analyse their products performance. Automotive segment is performing well which grew 90 percent in the second quarter of 2011 as compare to audio/video business which recorded 7 percent growth. Automotive enterprise will going to help B&O in building long term contracts with big brands like Mercedes, Audi, Aston Martin and now BMW (mostly for 6 series and concept car) (Reuters, 2011).

Words count: 2700 (approx) excluding diagrams and references

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References:
Admin. (2007). Bang & Olufsen Fan Page. Retrieved 03 16, 2011, from www.facebook.com: http://www.facebook.com/pages/Bang-Olufsen/7329581606?sk=wall B&O. (2011). Bang & Olufsen. Retrieved 03 18, 2011, from http://www.bangolufsen.com/custom-installation B.Audretsch, D. (1995). Innovation and Industry. Cambridge: MIT Press. Bang & Olufsen ICEpower A/S 2010. (2010). Retrieved 03 18, 2011, from http://www.icepower.bang-olufsen.com/en/company/history/ Bang-Olufsen. (2006). Pole Position Strategy 2008. Retrieved 03 16, 2011, from Bang & Olufsen: http://www.bangolufsen.com/UserFiles/File/Investors/pole_position_strategy_2008.pdf Beoworld. (2008). Retrieved 03 16, 2011, from http://www.beoworld.org/article_view.asp?id=201 Espinoza, J. (2009). More Bang & Olufsen For The Buck. Retrieved 03 19, 2011, from Forbes.com 2010 LLC: http://www.forbes.com/2009/02/06/bang-olufsen-ceo-markets-equity0206_luxury_15.html Hill, C. W., & Jones, R. G. (2007). The Five Forces Model. In S. M. Kahn (Ed.), Strategic Management (Third Edition ed., pp. 68-69). Boston: Houghton Mifflin Company. Johnson, G., & Scholes, K. (2005). In Exploring corporate strategy (7th Edition ed., pp. 136137). Harlow: Prentice Hall. Karl Kristian Hvidt Nielsen. (2012). Interim report for the period 1 June - 30 November 2010. Bang & Olufsen. Denmark: Presiden, CEO. Lynch, R. L. (2003). Corporate Strategy (Third Edition ed.). Harlow: Prentice Hall. Meagher, S. (2011). Intel gets into bed with Bang and Olufsen. Retrieved 02 19, 2011, from thinq_: http://www.thinq.co.uk/2011/1/10/intel-gets-bed-bang-and-olufsen/ Olufsen, B. &. (2011). About Us: Bang & Olufsen 2011. Retrieved 03 17, 2011, from Bang & Olufsen 2011: http://www.bang-olufsen.com/about-us Olufsen, B. &. (2011). Digital Media. Retrieved 03 19, 2011, from http://www.bangolufsen.com/digitalmedia Olufsen, B. &. (2011). Home Integration - BeoLink. Retrieved 03 19, 2011, from http://www.bang-olufsen.com/home-integration Olufsen, B. &. (2009). Right Issue 2009. Bang & Olufsen. Denmark: Bang & Olufsen. Porter, M. E. (1998). Competitive Strategy : Techniques for Analyzing Industries and Competitors. New York: New York Free Press . Reuters. (2011). Car market drives Bang & Olufsen back to profit. Retrieved 03 20, 2011, from http://www.reuters.com/article/2011/01/19/bo-idUSLDE70I0D420110119

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