Unit 6 Project: Business Policy and Strategy

Unit VI Project 

Implementation Plan: Part 2

In Unit IV, you started to create an implementation plan. You selected a company and analyzed their strategy and mission. In Unit VI, we will continue your work with this company and develop a SWOT analysis. 

Remember that a SWOT analysis identifies strengths, weaknesses, opportunities, and threats of an organization. This is an important analysis for any organization as it can be used for strategic planning. Your SWOT analysis must be a minimum of two pages in length. Once you have completed your SWOT analysis, write a minimum of one page, explaining how this information could be used by the company. 

Please use the template below to complete the SWOT analysis and explanation. Save the template using your last name and student ID. For example, John Smith whose student ID is 12345 would save his assignment as Smith12345. The information you need to complete this analysis can be found in the case studies located in your textbook on pages 372-636. Outside research is not a requirement. 

Click  here  to access the Unit VI Project template. 

Much of the information you will need to complete this segment can be found in the case study in the textbook. However, you are welcome to conduct further research as needed. 

David, F. R., & David, F. R. (2015). Strategic management: A competitive advantage approach, concepts and cases (15th ed.). Upper Saddle River, NJ: Pearson.

Netgear, Inc., 2013

www.netgear.com  , NTGR

Headquartered in San Jose, California, Netgear develops and markets Ethernet switches, wireless controllers, storage devices, routers, media services, and other products associated with connecting users with the Internet. All Netgear products are produced through third-party manufacturers and marketed through thousands of retailers worldwide. Netgear prides itself on developing and marketing high performance devices that are dependable and easy to operate in homes. But this “desired competitive advantage” is difficult to maintain because consumers widely believe such products are a commodity (like gasoline). For businesses, Netgear provides networking, storage, and security devices that are cheaper and easier to use than comparable products offered by rival firms. Netgear products are sold in more than 28,000 retail locations around the world and through about 42,000 resellers. Netgear has operations in 25 nations and has 850 employees, of which 352 are in sales, marketing and technical support, 251 in research and development (R&D), 128 in finance, and 119 in operations.

Netgear’s revenues for 2012 were $1.27 billion, up 7.6 percent from 2011. The company reported revenue for Q2 of 2013 of $357.7 million, up from $320.7 million the prior year when the company’s new acquisition, AirCard, was not in the numbers. Q2 2013 net income was $14.0 million, down from $21.5 million the prior year. During Q2, Netgear grew its Retail Business Unit (RBU), led by its 802.11ac upgrade cycle, as well as the rollout of the Smart Home for developed markets. The integration of the AirCard business into the company’s Service Provider Business Unit (SPBU) went well. On a year-over-year basis, Netgear’s RBU revenue was up 3 percent. The company’s strong Q2 2013 year-on-year growth for RBU in North America and Asia was offset by weakness in the European region. The company’s SPBU revenue was up 58 percent sequentially, and up 20 percent over the prior year quarter. The company’s Commercial Business Unit (CBU) revenue was up 25 percent sequentially, and up 10 percent over the prior year quarter.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Netgear was incorporated in 1996 as a subsidiary of Bay Networks and was purchased by Nortel in 1998. The company became fully independent from Nortel in 2002 and remains independent today. Back in 1996, the Internet was in its infancy, especially high speed and wireless devices. As an industry pioneer, Netgear has kept tight inventory controls and used off-the-shelf hardware and software products from existing companies. Founder, chairman, and CEO Patrick Lo was quoted in 2004 as saying: “We do the system integration and let the contracted firms do the grunt work of designing circuit boards.” Netgear went public in 2003. Since then, the company has grown into a $1.2 billion in sales firm. In 2011, Netgear combined its North, Central, and South U.S. salesforces to form a new Americas territory as a means to increase operational efficiencies. Today, the company operates in three distinct geographic territories: (1) Americas, (2) Europe, and (3) Middle East and Asia Pacific.

To get a flavor of what Netgear develops and markets, in late 2012, the company introduced its CG4500TM Voice/Data Gateway that received the CableLabs® DOCSIS® 3.0 certification. This unit has the capability for 24 × 4-channel bonding and is the firm’s most advanced DOCSIS 3.0 Voice/Data Gateway integrating in one device. The new product allows concurrent 802.11n dual-band wireless networking that provides up to 900 Mbps (450 + 450 Mbps) aggregate speed and with simultaneous dual-band technology helps mitigate interference ensuring sustained throughput and reliable connections. With integrated MoCA, the CG4500TM Gateway enables seamless data and video distribution over the in-home coax network.

Internal Issues

Vision and Mission

Netgear’s mission statement is: “To be the innovative leader in connecting the world to the Internet,” recently changed from, “To be the preferred customer-driven provider of innovative networking solutions for small businesses and homes.” There is a statement on the company’s website that may be their vision: “Our goal is to be the leading provider of innovative networking products to the consumer, business, and service provider markets.”

Location

Netgear’s primary administrative, sales, marketing, and R&D facilities consist of 142,700 square feet in an office complex in San Jose, California, under a lease that expires in 2018. Netgear’s international headquarters comprise 10,000 square feet of office space in Cork, Ireland, under a lease that expires in 2026. Netgear’s international salespersons are based out of local sales offices or home offices in Austria, Australia, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, New Zealand, Poland, Russia, Singapore, Spain, Sweden, Switzerland, the Netherlands, the United Arab Emirates, and the United Kingdom. Netgear has operations personnel in Hong Kong, and R&D facilities in Atlanta, Chicago, Beijing, Guangzhou, Nanjing, and Shanghai, China, and in Taipei, Taiwan.

Organizational Structure

Netgear is managed in three specific business units: (1) retail, (2) commercial, and (3) service provider. The retail business unit consists of home networking, storage, and digital media products to connect users with the Internet and their content and devices. The commercial business unit consists of relatively low-cost business networking, storage, and security solutions. The service provider business unit consists of made-to-order and retail proven, whole-home networking solutions sold to service providers for sale to their customers.

Netgear recently combined their North American, Central American, and South American sales forces to form the Americas territory. Thus, the firm is today organized into the following three geographic territories: (1) Americas, (2) Europe, Middle-East, and Africa (EMEA) and (3) Asia, Pacific (APAC).

Exhibit 1  provides a diagram of Netgear’s existing organizational structure. Note there is no Chief Operations Officer. Some analysts contend that the company is too dependent on Lo, with no other person being groomed as an eventual successor.

EXHIBIT 1 Organizational Chart

Source: Based on company documents.

Products

Netgear products that target businesses are designed with metal cases and are capable of faster speeds, up to 10 gigabits per second, and higher port counts to allow more users. Products targeting homes are designed with more pleasing aesthetics and are often offered at much lower prices than the more robust higher security business models. Netgear plans to develop a home network that will enable all devices to be connected to the Internet at all times.

Netgear’s products can be grouped into three categories: (1) commercial business networking, (2) broadband access, and (3) network connectivity. Commercial business networking products include (a) Ethernet switches and wireless controllers such as routers used in WiFi applications, (b) Internet security appliances that enable Internet access with capabilities such as anti-virus and firewalls, and (c) network-attached storage, which provides file sharing with multiple PCs over a businesses own local area network.

Netgear’s broadband access enables customers to move digital content over high-speed networks rather than traditional low-speed telephone lines. Products in this segment include: (a) routers, which allow the home or office networks to connect wireless to the Internet via a broadband modem, (b) gateways, which are routers integrated into a modem, (c) Internet Protocol (IP) telephony products, which enable voice communications over a network, and (d) media servers, which store multimedia content for use on PCs laptops, smartphones, and other devices.

Netgear’s connectivity products enable resource sharing and include wireless access points, wireless network interface cards, Ethernet network interface cards, media adapters, and power line adapters.

R&D

High technology firms spend anywhere from 5 to 15 percent of revenue on R&D. In 2012, Netgear spent $61 million, up 25.5 percent, on R&D to develop new and improved products and respond to changing technology in a timely manner. The $61 million was 4.8 percent of Netgear’s revenues, up from 4.1 percent the prior year. Netgear works closely with their technology suppliers to develop products using a methodology such as Original Design Manufacturer (ODM) or In-House Development. Under ODM, Netgear defines the product and specifications and coordinates with suppliers who develop the product. On development of a prototype, debugging and testing begins, and the product is ultimately released for production after passing final measures. The In-House Development model is similar to ODM, except entire development is coordinated by Netgear engineers.

Manufacturing

Like Apple, Inc., Netgear outsources all of their manufacturing to third parties, such as Cameo Communications, Delta Networks, Hon Hai Precision (more commonly known as Foxconn Corporation), and several others. Almost all Netgear products are manufactured on mainland China or in Vietnam. Products are sometimes tested in a pilot basis in Taiwan. Netgear component parts such as connector jacks, plastic casings, and physical layer transceivers are all purchased from a few sources, making reliance on a few suppliers a threat. If any third-party manufacturers experience any delay, disruption, or quality control problems in their operations, Netgear could lose market share and the Netgear brand could suffer. Netgear outsources warehousing and distribution logistics to five third-party providers, located in California, Hong Kong, Netherlands, and Australia. Netgear does not have long-term contracts with any of their third-party manufacturers, some of whom produce products for competitors.

Marketing

Netgear’s global sales channel includes thousands of value added resellers (VARs), direct market resellers (DMRs), such as CDW, and 37,000 traditional retailers worldwide, such as Best Buy, Walmart, Fry’s Electronics, and Staples in North America; PC World in the United Kingdom; and MediaMarket in Germany, as well as online retailers such as  Amazon.com ,  Dell.com , and  NewEgg.com . Netgear also sells its products through broadband service providers such as BSkyB, Virgin Media UK, YouSee Denmark, Telecom Denmark, Time-Warner Cable, Comcast, TV Cabo Portugal, Telkom South Africa, J:Com of Japan, and Comhem of Sweden.

Best Buy and Ingram Micro each account for 10 percent or greater of Netgear revenues. Netgear works closely with customers on market development activities, such as co-advertising, in-store promotions and demonstrations, instant rebate programs, event sponsorship, and sales associate training. It also participates in major industry trade shows and marketing events. Netgear marketing managers work closely with the company’s sales and R&D people to align product development roadmaps to meet customer technology demands.

Finance

Netgear’s net income declined in 2012 to $86.5 million from the year before value of $91.4 million.

Income Statements

Netgear’s recent income statements are provided in  Exhibit 2 . Note the steady increases in revenues but recent drop in net income.

EXHIBIT 2 

NETGEAR, INC. STATEMENTS OF OPERATIONS (In thousands, except per share data)
	Year Ended December 31,
	2012	2011	2010
Net revenue	$1,271,921	$1,181,018	$902,052
Cost of revenue	888,368	811,572	602,805
Gross profit	383,553	369,446	299,247
Operating expenses:
Research and development	61,066	48,699	39,972
Sales and marketing	149,766	154,562	131,570
General and administrative	45,027	39,423	36,220
Restructuring and other charges	1,190	2,094	(88)
Litigation reserves, net	390	(201)	211
Total operating expenses	257,439	244,577	207,885
Income from operations	126,114	124,869	91,362
Interest income	498	477	426
Other income (expense), net	2,670	(1,136)	(564)
Income before income taxes	129,282	124,210	91,224
Provision for income taxes	42,743	32,842	40,315
Net income	$86,539	$91,368	$50,909
Net income per share:
Basic	$2.27	$2.46	$1.44
Diluted	$2.23	$2.41	$1.41
Weighted average shares outstanding used to compute net income per share:
Basic	38,057	37,121	35,385
Diluted	38,747	37,932	36,124

Source: 2012 Form 10K, p. 54.

Balance Sheets

Netgear’s recent balance sheets are provided in  Exhibit 3 . Note the zero long-term debt.

Segments

Netgear reports operating income by geographic region. Before 2011, the company’s operations in Central and South America were categorized under the APAC segment. Note in  Exhibit 4  that Netgear’s APAC segment was the largest gainer in 2012 versus the prior year, whereas EMEA reported a decline in revenues.

EXHIBIT 3 Netgear’s Balance Sheet

NETGEAR, INC. BALANCE SHEETS (In thousands, except per share data)
	December 31, 2012	December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$149,032	$208,898
Short-term investments	227,845	144,797
Accounts receivable, net	256,014	261,307
Inventories	174,903	163,724
Deferred income taxes	22,691	23,088
Prepaid expenses and other current assets	33,724	32,415
Total current assets	864,209	834,229
Property and equipment, net	19,025	15,884
Intangibles, net	27,621	20,956
Goodwill	100,880	85,944
Other non-current assets	22,834	14,357
Total assets	$1,034,569	$971,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$87,310	$117,285
Accrued employee compensation	18,338	26,896
Other accrued liabilities	126,255	120,480
Deferred revenue	27,645	40,093
Income taxes payable	1,382	4,207
Total current liabilities	260,930	308,961
Non-current income taxes payable	13,735	18,657
Other non-current liabilities	5,293	4,995
Total liabilities	279,958	332,613
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued or outstanding	—	—
Common stock: $0.001 par value; 200,000,000 shares authorized; shared issued and outstanding:
38,341,644 and 37,646,872 at December 31, 2012 and 2011, respectively	38	38
Additional paid-in capital	394,427	364,243
Cumulative other comprehensive income	4	23
Retained earnings	360,142	274,453
Total stockholders’ equity	754,611	638,757
Total liabilities and stockholders’ equity	$1,034,569	$971,370

Source: 2012 Form 10K, p. 53.

EXHIBIT 4 Revenues by Geographic Segment

	Year End December (in thousands)
	2012	2011	2010	Percent Change
	$	%	$	%	$	%	2012	2011
Americas	$679,419	53.4	$587,056	49.7	$466,542	51.7	15.7	25.8
EMEA	$457,724	36%	$477,713	40.4	$340,249	37.7	(4.2)	40.4
APAC	$134,778	10.6	$116,249	9.9	$95,261	10.6	15.9	22.0
Total	$1,271,921	100%	$1,181,018	100%	$902,052	100%

APAC, Asia Pacific; EMEA, Europe, Middle East, Africa.

Source: 2012 Form 10K, page 41.

Competition

Netgear operates in an extremely competitive industry, with many products being viewed by consumers as commodities, proper position on store floors being critically important, and competitive pricing being essential. Many Netgear products, such as media adapters, Ethernet, and routers, are also made by rivals Cisco Systems, Roku, Western Digital, and Apple in the USA, and by many foreign competitors such as AVM in Europe, Corega in Japan, and TP-Link in China. Netgear also develops and markets networking and streaming products, competing against rivals LG, Microsoft, Samsung, and Sony. Also competing against Netgear are many cable companies that now provide modems, and those companies may soon provide their own routers as part of their service offerings. If Netgear cannot form contracts with various cable providers, then those firms may also become competitors.

Netgear’s principal competitors in the commercial business market include Allied Telesys, Barracuda, Buffalo, Data Robotics, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei, Cisco Systems, the Linksys division of Cisco Systems, QNAP Systems, Seagate Technology, SonicWALL, Synology, WatchGuard, and Western Digital. Netgear’s principal competitors in the home market for networking devices and television connectivity products include Apple, Belkin, D-Link, the Linksys division of Cisco Systems, Roku, and Western Digital. Netgear’s principal competitors in the broadband service provider market include Actiontec, ARRIS, Comtrend, D-Link, Hitron, Huawei, Motorola, Pace, Sagem, Scientific Atlanta (a Cisco company), SMC Networks, TechniColor, Ubee, Compal Broadband, ZTE, and ZyXEL. Other current and potential competitors that Netgear considers include numerous local vendors such as Devolo, LEA, and AVM in Europe; Corega and Melco in Japan; and TP-Link in China. Even consumer electronics vendors are rivals, including LG Electronics, Microsoft, Panasonic, Samsung, Sony, Toshiba, and Vizio, who could integrate networking and streaming capabilities into their line of products, such as televisions, set top boxes, and gaming consoles.

Exhibit 5  provides a comparative summary of Netgear versus four leading competitors. Note that Netgear is a bit larger than D-Link, but much smaller than most rival firms.

EXHIBIT 5 Comparative Data for Netgear versus Rival Firms

	Netgear	Cisco Systems	D-Link	Alcatel Lucent	Western Digital
Number of Employees	791	71.8K	500	76K	103K
Net Income ($)	95.3M	7.36B	41.5M	1.4B	1.9B
Revenue ($)	1.23B	45.6B	1.15B	19.8B	13.8B
Revenue ($)/Employee	1,554K	635K	2,300K	260.5K	134K
EPS Ratio ($)	2.49	1.36	0.06	0.54	7.61
Market Capitalization	1.26B	87.64B	—	—	10.1B
Headquarters	California	California	Taiwan	France	California

EPS, earnings per share.

Source: Based on company information.

Cisco Systems, Inc.

Nearly 40 times the size of Netgear, Cisco is headquartered in the same city as Netgear, San Jose, California. Like Netgear, Cisco structures its operations in the same three geographic segments, with its European and Middle East headquarters in the Netherlands and the Asia Pacific headquarters in Singapore. Also like Netgear, Cisco produces Internet protocol networking and other related devices to support communications and information technology. Cisco’s sales by geographic region reported in its fiscal year end June 2012 were 65, 21, and 14 percent respectively for Americas, EMEA, and APAC. Also like Netgear, Cisco produces cable modems, video software, encoders, decoders, and many more products. Cisco’s Linksys wireless routers compete directly with Netgear routers. As of year-end 2012, Cisco had 66,000 employees, annual revenues of $46 billion, and net income of $8 billion. Also like Netgear, Cisco relies exclusively on contract manufacturers for all their manufacturing needs.

Cisco spends about 12 percent of net sales on R&D compared to only 4 percent for Netgear. Cisco contains around $17 billion in goodwill on the balance sheet resulting in approximately 40 percent of total stockholders’ equity residing from intangible assets, which is not good, versus Netgear’s 17 percent.

Western Digital Corporation

Headquartered in Irvine, California, Western Digital creates and markets storage devices, home entertainment devices, and networking devices, similar to Netgear. Western Digital is known for their 2.5- and 3.5-inch form factor hard drives under the Ultrastart, XE, WD, and SiliconDrive brand names. Western Digital also produces a wide range of external hard drives in 500-gb sizes, FireWire, and Ethernet connections.

Western Digital is structured based on the same geographic regions both Netgear and Cisco. One notable exception, Western Digital, with $12.5 billion of revenue in fiscal 2012 that ended June 2012, reported that about 58 percent of their revenues come from Asian markets with 23 and 19 percent coming from the Americas and EMEA, respectively, providing the company a significantly more Asian presence than both Netgear and Cisco. The company currently spends 8 percent of revenues on R&D. The firm has $2 billion in goodwill and around 37 percent of all current assets are in inventory.

As of December 2012, Western Digital has a price-to-earnings (P/E) ratio of five, below the S&P 500 P/E ratio of 17.7, and its stock price was up 22.9 percent year-to-date. Western Digital has numerous strengths, such as robust revenue growth, reasonable debt levels, solid stock price performance, impressive record of earnings per share growth, and compelling growth in net income. Western Digital has no glaring weaknesses.

Western Digital recently acquired the hard disk drive operations of Hitachi, greatly increasing its capacity and sales volume. Like rival Seagate Technology, Western Digital has been targeting some acquisitions upstream to better control input costs. Seagate recently acquired the hard disk operations of Samsung.

D-Link Corporation

Headquartered in Taipei, Taiwan, D-Link develops, produces, and markets networking, connectivity, and data communications hardware, offering hubs and switches, adapters, print servers, routers, and transceivers. Other D-Link products include broadband modems, virtual private network/firewall devices, data-storage systems, videoconferencing equipment, Web cameras, and business phones. D-Link sells to individuals and businesses, but the firm specializes in wi-fi and Ethernet components for the small to medium-sized office market. D-Link sells its products through distributors in more than 100 countries, but generates most of its sales in Asia.

The Future

In July 2012, Netgear acquired AVAAK, Inc., a privately-held company that develops wire-free video networking products for a total purchase consideration of $24.0 million in cash. This acquisition bolstered the company’s retail business unit product offerings and expanded their presence in the smart home market. Some analysts however contend that the fate of Netgear’s industry is inexorably tied to the PC and that PCs are in decline as users switch to tablets, which will not need hard disk drives. But there are external storage needs for hard-disk drives that seem to be growing and conventional storage is still cheaper than flash memory.

Every few months or so, Netgear introduces a new or improved product, including the recently introduced Netgear ProSecure® UTM25S Unified Threat Management Firewall, which provides two modular slots that fit optional interface cards, enabling IT administrators to custom tailor the firewall to their specific connectivity requirements. In addition, like other members of the ProSecure UTM family of security appliances, the UTM25S integrates with Netgear ReadyNAS® network-attached storage systems, giving businesses almost unlimited activity log and quarantine capacity for forensic, regulatory and legal requirements.

Netgear also recently introduced the CentriaTM, a powerful, all-in-one automatic backup/media server and high-speed wi-fi router. Centria is a dual-band high-performance router with the added convenience of automatic data backup for both PCs and Macs. The backup capability of the Centria router gives a consumer peace of mind knowing that data is always backed up. If a PC or Mac goes down or is lost, a consumer can still access data from Centria using another computer. Routers are excellent for data backup because they are always on and are the central point of connection for all computers in the home. Centria can also be used as a storage repository for photos, media, and documents that may take up too much space on your computer. Centria uses an internal SATA drive or external USB drives to backup and store data.

There are companies such as Western Digital or Cisco that may be interested in acquiring Netgear. Even D-Link desires a greater market share in the USA. And Netgear itself has a history of making acquisitions. What would be some good acquisition targets for Netgear, to help solidify its competitive position and gain economies of scale.

To remain attractive in this rapidly changing industry, Netgear needs a clear strategic plan going forward.