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Skull Candy Strategic ReportExecutive Summary Skullcandy started from humble beginnings with big dreams of becoming an all- encompassing consumer electronic magnet, producing head and earphones that offer three main benefits: affordability, durability, and customization. To differentiate itself from...

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Skull Candy Strategic Report

2 Executive Summary Skullcandy started from humble beginnings with big dreams of becoming an allencompassing consumer electronic magnet, producing head and earphones that offer three main benefits: affordability, durability, and customization. To differentiate itself from its competitors, Skullcandy converged on four goals representing its values and direction for the next decade. The four goals are penetrating the domestic retail channel, accelerating the international business, growing premium product offering, increasing online business. Additionally, the company's mission is to offer unmistakable style and exceptional performance by offering a wide array of products. Upon going public in 2011, the company stock price sank. After conducting a SWOT analysis, we identified a weakness within the company's internal controls to better understand the decline. For example, Skullcandy is in contact with two manufacturers in China. When pandemic mandates were enforced globally, Skullcandy encountered an abrupt halt in production and failed to meet deadlines. This vulnerability presents the company with an opportunity to enhance its online presence and build a wholesome e-commerce platform. Externally, Skullcandy's poor stock performance suggested its inability to deliver to investors; therefore, it elected to go private under Mill Road Capital Management. The company reinvented itself under the direction of new CEO Darling, improving its product design and marketing campaign, which increased its sales and market share.

3 Introduction and Company Overview Skullcandy Inc. established itself at the "intersection of music, sports, technology, and creative culture"(Skullcandy, 2021). In 2003, founders Rick Alden and Chris Williams introduced the first Skullcandy product, the Portable Link, allowing users to listen to music from a portable audio device while making and receiving calls through their cellphone ("Skullcandy" n.d.). The product line has since grown and expanded. Skullcandy designs and markets headphones, audio accessories, and backpacks with built-in combo speakers and is sold worldwide through retailers, specialty outlets, and online (Inc., 2018). In January 2011, the company filed for an IPO and increased net sales from "$9.1 million in 2006 to $232.5 million in 2011, representing a compound annual growth rate of approximately 91%" (Skullcandy, 2011). However, after purchasing Astro headphones during the 2nd quarter, the company's stock price tanked due to retailer bankruptcies resulting in sales dropping 10% (Green, 2016). Then, in the same year, an acquisition deal with mobile phone case manufacturer Incipio fell through. As a public company, the negative news coupled with decreasing sales drove share prices even lower, diminishing the company's value. As a final opportunity to salvage its base, Skullcandy merged with private equity firm Mill Road Capital, finalizing a deal on October 3, 2016, for $196.9 million at $6.35 per share (Berman, 2016). According to Goldberg (2019), "going private in 2016 freed up Skullcandy to again be a lifestyle brand that can connect with edgy new artists favored by its customers." In addition, the parent company, Mill Road Capital, revived Skullcandy by "divesting unrelated operations, streamlining the cost structure, and enhancing digital capabilities" (Mill Road Capital, 2021).

4 Mandate Mission and Purpose Skullcandy's mission statement is to "revolutionize the audio arena by introducing headphones, earbuds, and other audio and wireless lifestyle products that possess unmistakable style and exceptional performance" (Skullcandy, 2021). The company marketed its products to the action sports and youth lifestyle segment to differentiate itself from its competition—it offered a wide array of bold color schemes and creative packaging. Quickly, consumers noticed the distinctive logo and loud patterns in an otherwise monochromatic space, and sales doubled from "$196 million in 2011 to $210 million in 2013" (Skullcandy, 2011). Vision and Goals The company has four primary goals and strives to achieve them in the next decade. They are: penetrating the domestic retail channel, accelerating the international business, growing premium product offering, increasing online business. First, the plan to penetrate the U.S. domestic retail channel is to increase shelf space by increasing the number of creative in-store product presentations and attract new customers. Second, the company has recently launched a marketing campaign aimed at global customers by replicating successful elements of its domestic model. The plan is to sponsor athletes, musicians, and artists to produce localized marketing content to drive sales. Third, Skullcandy's products have a price tag in the $20 to $70 range, which is more affordable than its competitors. Currently, it released a "$150 Aviator headphone and a $300 Mix Master headphone" (Skullcandy, 2011). This shift towards premium gives higher-income customers options to purchase higher-priced Skullcandy products. Lastly, Skullcandy has an active user base online through multiple channels. It produces sports and music content for its fanbase while offering an online shopping

5 experience. In addition, it plans to enhance its global e-commerce functionality by providing localized content for its global audience. Values and Ethics Skullcandy defines its values by associating with individuals dubbed the relentless underdogs. These contenders are not the best on the field but work diligently to make their athletic dreams come true. In 2013, Hoby Darling was appointed CEO when "revenue was down almost 30 percent in Q1" (Burns, 2014). Tasked with the onerous responsibility to reinvent the company, Darling focused on disrupting the status quo with "people culture, and values as the foundation for how Skullcandy would move forward" (Burns, 2014). As a result, the team proposed five resolutions to initiate this innovative transformation. First, the team rearranged the office layout at its headquarters in Park City, Utah, with an open floor plan to promote a continuous exchange of innovative ideas. Second, to cultivate a culture that reflects these new values, the company supports employees to stay active and ride their mountain bikes, skateboard, paddleboard, and snowboard beyond lunch hours. Third, on a marketing level, the company, which initially formed around action sports such as skateboarding, snowboarding, skiing, and surfing, expanded into mainstream sports like basketball, football, soccer, and baseball. This approach relieves the company from its "jock" stereotype and embraces a more inclusive base that fosters creativity through music using Skullcandy products. Finally, parent company Mill Road Capital has worked to push for a more gender-neutral business model on the executive level. Previously, the executive team was once all-male; however, nearly "50 percent are female" today (Mill Road Capital, 2021).

6 Stakeholder analysis When conducting a stakeholder analysis, there are two variables to consider that will classify the importance of each participant: power and interest. For example, Mill Road acquired Skullcandy in 2016, intending to identify trends in the current market and devise a strategy to reintroduce the company, differentiate it from its competitors, and deliver to its stakeholders. The main stakeholders are customers, ambassadors, manufacturers, distributors, and employees. First, customers have the most power, as they are the target audience, and need to be informed when a new product or campaign is released. Second, ambassadors also yield a strong power and interest as they are a crucial component of the marketing operations that attract new customers; therefore, they require maximum attention from management. Third, manufacturers strongly influence management and relay product details such as design quantity and quality, requiring maximum attention and interest. Fourth, distribution channels, such as retail shops, have the lowest power but the highest interest since their goal is to sell as many Skullcandy products on their store shelves. Lastly, employees will have significant power and interest from management regarding company direction, responsibilities, and the workplace environment. A visualization of the stakeholder analysis is presented in Figure 1. External Analysis This section will review Skullcandy's opportunities and threats, Porter Five Forces Analysis, and Political, Economic, Social, and Technological (PEST) landscape. Opportunities Skullcandy owes its sales increase to the strength of its brand image and acceptance of its products by the broader market. It also ascribes its marketing strategy as a key factor in developing a range of new product lines and expanding its business. Previously, Skullcandy

7 sponsored top athletes, musicians, and artists to represent its brand. Today, it showcases its fanbase and localized up and coming talent in its marketing campaigns, adding to its authenticity. Moreover, Skullcandy has the "opportunity to step up their game in terms of quality and style" (Biggs 2018). Facing competition from other players, the company has decided to release a premium range of better-quality products tapping into customers interested in quality over price. Lastly, the company has strengthened its online presence to attract customers working from home during the pandemic to increase online sales. Threats Generally speaking, Skullcandy faces threats from three areas. First, consumer electronics brands such as Sony and Bose continue to dominate the stereo headphone market and have more significant resources. Second, established sports and lifestyle brands such as Adidas released headphones intended for active and sports customers. Finally, some retailers have introduced their private label headphones, limiting the demand for Skullcandy products. Recently, the global economy stammered due to Covid-19 and public health measures disrupted production. As a result, manufacturers failed to deliver Skullcandy products on time, which caused a supply shortage and delayed orders. The company's annual report states, "Target and Best Buy accounted for more than 10% of net sales in 2010" (Skullcandy, 2011), and these retailers generally purchase Skullcandy products on a purchase order basis. However, with retail shops closing, BestBuy and Target reduced their orders substantially. Porter Five Forces Analysis This section will evaluate Skullcandy's competitive rivals, potential new market entrants, suppliers, customers, and substitute products that influence its profitability.

8 Risk of Entry: Medium - Skullcandy's affordable and creative headphone design presents potential competitors with a medium risk of entry. The consumer electronics product market constantly upgrades headphone capabilities, making it relatively easy for new brands to enter the space and even mimic Skullcandy's design. Therefore, Skullcandy needs to accelerate innovating and differentiating its product line and brand image to increase entry risk, making it difficult for new entrants. Bargaining Power of Buyers: High - Buyers are both customers and distributors in the consumer electronics product market. Well-established brands such as Sony have longer operating histories and more significant economies of scale. For this reason, the bargaining power of buyers is high because both distributors and customers can choose products from more prominent brands. Therefore, Skullcandy needs to focus on its competitive edge: affordability, durability, and creativity. Competitive Rivalry: High - The consumer electronics product market is highly competitive and saturated with well-recognized brands competing for a more significant market share. Skullcandy faces brands such as Sony, Beats by Dre, Urbanears, and Bose. Skullcandy is a staple in the affordability domain; however, as it begins to offer premium products, it needs to showcase the innovative specs of its high-end headphones. Additionally, its marketing strategy involves highlighting localized talents in various sports and activities and sponsoring local events, garnering broader recognition and fan support. A visualization of this structure is presented in Figure 2. Threat of Substitutes: Medium - Currently, the consumer electronics product market is seeing a rise in earbud popularity. In his article, "Earbuds vs. headphones: Which one should you buy?", Andronico (2021) writes, "Earbuds are generally more compact, more affordable, and

9 more workout-friendly than their canned counterparts." While headphones are still the best noise-canceling electronics on the market, the threat of substitutes is expanding as technological capabilities in consumer electronics improve. Bargaining Power of Suppliers: Low - The bargaining power of suppliers is low in the consumer electronics product market due to the number of suppliers available. For example, Skullcandy can negotiate the cost of making the components of its products and switch suppliers for a better bargain as long as the market for suppliers is ample. PEST Analysis Skullcandy can assess external factors that influence its operations by applying a management tool called PEST Analysis which is an acronym for political, economic, social, and technological. Political Factors: Skullcandy faces two main political risks: a portion of net sales is generated from international customers, and the entire product line is manufactured in China. International sales accounted for "$31.0 million, or 19.3% of net sales in 2011"(Skullcandy, 2011); however, difficulties obtaining governmental licenses on domestic and foreign exports can adversely affect the flow of the operation. For example, if the company fails to obtain timely approvals, it could halt international distribution channels, impacting Skullcandy's sales. Also, regulations relating to tariffs, export and import, and currency rates can change due to the political relationship between the United States and China. For example, if there is tension between the two countries, this could force Skullcandy to seek alternative manufacturing, which will increase operational expenses. Economic Factors: Skullcandy's net sales peak during the holiday seasons, which means gross margins are higher in the third and fourth quarters and lower in the first and second

10 quarters. This historical pattern allows the company to forecast appropriately. However, economic instability caused by the pandemic halted business and retail shopping, adversely affecting the company's net sales. The pandemic also curtailed transportation of goods, as manufacturers in China shut down, creating difficulty for the company to manage international distribution channels, and carefully forecasting future financial trends. Social Factors: Skullcandy faces tough competition from companies with better brand recognition, more significant financial and marketing resources. As a result, effective advertising from other companies may influence consumer decisions to purchase products other than Skullcandy. Also, the consumer electronics market has a low entry barrier that allows new competitors. As a result, Skullcandy must stay ahead of the course and implement a robust customer engagement strategy and innovative product design. Technological Factors: Skullcandy faces two main technological risks: intellectual property risk to protect its brand name and online presence risk. If the company fails to administer correctly and protect its intellectual property rights, other companies could counterfeit its designs and use its brand name and technology. Also, cybersecurity attacks related to the network systems that operate Skullcandy's website could result in information being accessed without authorization, ending in a security breach. Unauthorized access to private customer information can negatively impact Skullcandy's relationship with customers, retailers, and distributors. In order to measure its profitability, growth, and volatility concerning external factors, Skullcandy must overcome economic risks and mitigate systemic risks. In addition, the company should secure intellectual property rights to offset counterfeits. Furthermore, it should strengthen ties with manufacturers, distributors, and retailers and have an adequate plan to counterbalance

11 any disruption in the operations of goods. Lastly, it should implement proper data measures to protect customer privacy online. Internal Analysis Competitive Advantage There are two main types of competitive advantages Skullcandy needs to address: comparative advantage and differential advantage. Comparative advantage is a company's ability to offer a product of the same value for a lower price. Skullcandy has comparative advantages in two areas: economies of scale and geographic location. First, the company had cut costs internally when Mill Road acquired it without changing its name or organizational structure. Also, Skullcandy manufactures its products in China, where labor and raw material costs are cheaper than in the U.S. As a result, it can increase production, reduce costs, and offer a similar product at a lower price. Second, Skullcandy's headquarters is in the U.S., giving the company the geographic advantage of selling its products from the global epicenter of trade. A differential advantage is when a company offers a product that is more beneficial than its competitors. Skullcandy has a differential advantage in three areas: market share, solid brand identity, and patent-protected products. First, the company maintains the highest market share in low-cost wireless headphones in the United States in 2017, leading by 13% (Valishary, 2021). Second, its distinctive and readily identifiable skull logo is among the company's most valuable assets. Lastly, Skullcandy has been awarded utility patents on certain features and technologies to provide meaningful protection against competitors or competitive technologies (Skullcandy, 2011). A visualization of this structure is presented in Figure 3.

12 Strength Skullcandy's strength are in two primary areas: its product design and marketing. First, the company's product design caught the eye of customers with its bold color schemes and affordable pricing. In addition, the wide array of styles allows customization, giving customers an incentive to purchase headphones that reflect their styles. Next, the product development team employs innovative materials to enhance performance and functionality. For example, Skullcandy headphone models include "in-line microphones and volume control buttons compatible with the latest generation of smartphones, including Apple's iPhone" (Skullcandy, 2011). To add, the company now offers "25 headphone models as well as speaker docks, mobile device cases, apparel, and other accessories"(Skullcandy 2011) to complement their audio products, providing customers a wholesome experience with their product line. Second, Skullcandy's marketing strategy reinforces the brand's authenticity and attracts new customers while retaining old customers. For example, when Darling was hired to reinvent the company, he expanded the sponsorship of athletes, musicians, and artists to include their customers and most loyal fanbase. In addition, the company began to sponsor local events, exposing the company to a regional audience that profoundly affected its net sales. SWOT analysis visualization is presented in Figure 4. Weakness Skullcandy can find itself in a vulnerable situation, exposing the company to increased costs, disruptions in the shipment of products, and material loss. The company's main weakness is its relationship with two manufacturers in China. The company's "two manufacturers, Antonio Precision Products Manufactory and Guangzhou Sun Young Electronics Company, together accounted for approximately 52% and 70% of our cost of goods sold in 2011 and 2010,

13 respectively" (Skullcandy 2011). Also, Skullcandy purchases products on an order basis, with orders "filled between 30 and 75 days after placing our purchase order" (Skullcandy, 2011). With a complete shutdown mandate from the government, many industries ...