Creative Technology Ltd

A case study on Creative Technology Ltd

Objective:

Remaining competitive in the IT market – Focusing on Audio Technology

History:

In 1981, Creative Technology Limited was incorporate in Singapore by Mr. Sim Wong Hoo who is currently the CEO and Chairman of Creative Technology.

Creative Technology Limited had a humble beginning. Creative started off as a computer repair shop in a shopping centre. While running the repair shop, Mr. Sim developed an add-on memory board for the Apple II computers. Mr. Sim also customized Personal Computers adapted in Chinese. Other than customizing Personal Computers to be adapted in Chinese, Mr. Sim also included enhanced audio capabilities into the Personal Computers which allowed speech and melodies to be played.

Since incorporation, Creative Technology Limited's greatest achievement is the creation of the Sound Blaster line of audio cards. This has enabled Creative to leverage on its leading-edge audio technology, huge user base and strong brand name to expand and introduce its products into the exciting lifestyle of the Personal Digital Entertainment market.

In June 1994, Creative gained public listing on the main board of the Singapore Stock Exchange (SGX: C76).

To date, Creative Technology Limited has more than 5,000 employees worldwide. Creative has earned its reputation through the years to become a household brand name in Singapore.

2. Time line – Key Events (1990-2008)

Mid 1990s –

Creative ventured into the CD-ROM market and made a loss of close to US$100 million in inventory due to inflow of cheaper alternatives.

April 1999, Creative launched the NOMAD line of MP3 players which was later re-introduced as the MuVo and ZEN series of MP3 players. Creative dominated the MP3 player market until the entry of Apple Inc. with their iPod.

2001-2005 –

Creative applied for U.S. Patent. ZEN Patent was awarded to Creative for the invention of user interface for portable media players. This opened the way for potential legal action against Apple's iPod and other competing players.

2006 –

Creative took legal actions against Apple. Apple paid Creative $100 million for the license to use the Zen patent. Creative will also join the “Made for iPod” program which opens new opportunities for the company.

2007 –

Creative voluntarily delisted itself from NASDAQ.

2008 –

Creative Labs' technical support center located in Stillwater, Oklahoma, laid off several technical support staff due to Creative's financial situation in 2008.

3. Their business

Creative Technology Limited started off by marketing their Sound Blaster sound cards. They later moved on to produce digital entertainment products such as portable audio players (MP3 players).

Creative's innovative hardware, proprietary technology, applications and services enabled consumers to experience high-quality digital entertainment-anytime, anywhere.

The targeted consumers are consumers who are in the Personal Digital Entertainment market. In order to successfully target the Personal Digital Entertainment market consumers, Creative offers a complete, high quality digital entertainment experience through its hardware, software applications and services. Creative strives to have equilibrium between style and sophisticated technology.

Creative is also actively expanding the power of the personal computer with a wide range of interactive personal digital entertainment product that comprises of MP3 players, portable media centers, multimedia speakers and headphones, digital and web cameras, graphics solutions, revolutionary music keyboards and PC peripherals.

This has allowed Creative to cater to the needs of their consumers with exceptional design and technology to provide high-quality digital entertainment experience.

a. Major Customers

One of Creative's major customers is the music lovers who use the MP3 players. Creative is also the supplier for sound cards and other hardware to major IT related companies such as International Business Machines Corporation (IBM). In addition, Creative facilitates the suppliers of computer sound cards for events such as the annual World Cyber Games (WCG).

b. Major Suppliers

The major suppliers of Creative are “Philips” and “Yamaha”. These 2 companies provide essential material (sound chips) in the manufacturing of Creative's products.

4. Competitive Strengths

Creative has forged partnerships with some of the industry's top technology companies and developers worldwide, fortifying their strength and leadership in product innovation and research & development.

5. SWOT analysis

Creative Technology Limited

Strengths

1) Creative has won numerous awards to prove and show that their products are good.

2) Creative would do facelifts for their products to present consumers with the latest and trendiest designs.

3) Creative maintain their product prices at an affordable range. They are able to target consumers who have no monthly income (students). Example: Creative MP3 players are price at $90-$350; Creative webcams are price at $20-$150.

4) Creative products cater to all age groups of people (students to working class adults). Students would like the trendy MP3 players and working class adults would like the speaker systems that Creative has.

5) Prime location. Creative has outlets in the heart of Singapore (Plaza Singapura). Creative also distributes their products to major electronic stalls like Best Denki and Courts.

6) Creative is one of the pioneer companies that start producing MP3 players and various audio products and enhancements. This would give the public confidence in their products.

Weaknesses

1) Not effective budgeting and management of cost. Example: Management is spending large amount of funds on Research & Development when they are making a loss already.

2) Competitors are coming up with similar designs and marketing their products at a lower price. Creative's cost of production or mark-up might be too high.

3) Reputation. Creative's reputation has been affected to a certain extend after its law suits with Apple Inc.

Opportunities

1) With the rapid growth of technology in the market, Creative is able to take this opportunity market their product through internet marketing.

2) Economy is not doing well and people are spending lesser on entertainment products. Creative can take this opportunity to have promotions on their products such as “buying the second product at 30% discount”.

3) Collaboration with other audio product companies to gain economy of scale and at the same time cut cost.

Threats

1) Industry competitors. Apple Inc. has been coming up with new and trendy products. They combine their iPod with the phone technology to create the iPhone.

2) Competitor's MP3 players have more features than Creative's. Competitor's MP3 players allow user to take photo, surf the net and even play games.

3) Prices. Creative product prices are not as competitive as their other industry players. Companies like Shinco produces MP3 players that has the same features as Creative's but markets their product at a much cheaper price.

6. Achievements

Since incorporation in 1981, Creative product innovations have won numerous international recognitions.

Creative has received awards such as the award from the Consumer Electronics Show “Best of CES” award for four consecutive years for Prodikeys PC and music keyboards.

7. Financial Highlights

A comparison of accounts in the financial statements: Fiscal year 2007 and 2008

An extract of the financial statement for fiscal year 2008:

Years ended June 30

2008

USD'000

2007

USD'000

Net Sales

$ 736,848.00

$ 914,906.00

Cost of goods sold

$ 572,946.00

$ 737,203.00

Gross Profit

$ 163,902.00

$ 177,703.00

Less Operating expenses:

Selling, general and administrative

$ 141,148.00

$ 175,180.00

Research and development

$ 63,872.00

$ 63,646.00

Other charges

$ 9,666.00

Chairman's gift of shares to employees

$ 3,774.00

Operating Loss

$ (54,558.00)

$ (61,123.00)

Gain (loss) from investments

$ 18,761.00

$ (1,880.00)

Interest income

$ 10,679.00

$ 9,916.00

Interest expense

$ (5,644.00)

$ (10,245.00)

Others*

$ 12,762.00

$ 114,622.00

(Loss) income before income taxes and minority interest

$ (19,734.00)

$ 51,290.00

*In 2007, other income included a $100 million paid-up license by Apply Inc.

Analysis of financial statement:

Gross Profit –

Gross profit in 2008 was $163,902,000. There was a decrease in gross profit of 7.77% as compared to the figures in 2007 of $177,703,000. This decrease in gross profit is acceptable as the world was facing the economy crisis and consumers tend to be more conservative in their spending. Despite the economic downturn in 2008, Creative managed to minimize their decrease in gross profit. The 7.77% decrease in gross profit is acceptable.

Operating Expenses –

Selling, general and administrative expenses have decreased by 19.43% (a comparison between fiscal year 2008 and 2007). The decrease in the selling, general and administrative expenses has proven that the management's cost cutting efforts are effective. The decrease in selling, general and administrative expenses was also due to the reduction in overall sales.

Research and development (R&D) expenses has increased slightly by 0.35% (a comparison between fiscal year 2008 and 2007). The R&D expenses have increased in year 2008. This could be due to Creative's effort to come up with new products to improve its sales.

Other charges –

In fiscal year 2008, Creative's management introduced a series of cost-cutting measures. This included restructuring charges to reduce the business operation. The restricting charges comprises of employee severance costs and other exit costs pertaining to lease cancelations. Creative laid off approximately 220 employees in 2008.

Gain (loss) from investments –

In fiscal year 2008, Creative made a gain from their investments. This has shown that Creative is able to generate a reasonable amount of income even if the overall sales is low. Creative's efforts in trying to make profits are remarkable as there was a change in trend from this account. In fiscal year 2007, Creative made a loss, however, in 2008, Creative made a profit.

Interest expenses –

Interest expenses has decreased by 44.91% (a comparison between fiscal year 2008 and 2007). This effort by Creative is remarkable as well. The reduction in interest expenses has shown that Creative's loans from other financial institutes have decreased. The reduction in loans has decrease Creative's chances of facing liquidation if they are unable to pay their loans.

Others –

The figures in fiscal year 2007 was inclusive of the $100 million paid-up license from Apple Inc. If there wasn't this paid-up license, Creative's other income would not be so high in 2007.

The overall income of Creative in 2008 was ($19,734,000). As mentioned above, in 2007, there was a paid-up license income of $100 million. This paid-up license income is a onetime payment by Apple Inc. and Creative would not receive such income in future years, it would not be meaningful to include this figure to compare.

After removing the $100 million from the 2007's income, the overall income of Creative in 2007 would be ($48,710,000). By comparing the figures in 2008 and 2007, it could be seen that the loss Creative made in 2008 was much lesser as compared to 2007. If this trend continues, the 2009 overall income would be a positive figure.

Shares:

In fiscal year 2007, the highest value of Creative stock being traded in NASDAQ and SGX-ST is 7.31 and 11.40 respectively. The lowest value of Creative stock being traded in NASDAQ and SGX-ST is 4.78 and 7.20 respectively. In fiscal year 2007, Creative Technology Limited has been delisted from NASDAQ voluntarily and the delisting from NASDAQ has not affected the shares in SGX-ST.

8. Future plans

Long-term business strategy:

Creative makes strategic equity investments in companies that can provide Creative with technologies or products that management believes will give Creative a competitive advantage in the markets in which they compete in.

Products:

Creative's short term plans for the next few years ahead is to turn their business back into profitability state by continuing the growth in their audio and MP3 player businesses as mentioned in the financial report for 2007.

Percentage of Net Sales

for fiscal years ended June 30

2008 2007 2006

Personal Digital Entertainment 53 % 63 % 65 %

Audio 13 % 13 % 13 %

Speakers and Headphones 26 % 18 % 15 %

All Other Products 8 % 6 % 7 %

**It could be seen that a large portion of sales income comes from the Personal Digital Entertainment (MP3 players).

They would also be focusing on the high-growth and higher-margin segments of the speaker and headphone market. Although the MP3 player business does not bring in large amounts of profit (low profit margin), Creative would still continue to focus on that sector of their business.

Creative also sees a significant growth in opportunities in one of their audio enhancement product, the X-Fi. The X-Fi-enabled products seen in previous years are just the beginning of newer opportunities that can be expanded and used in other products such as a more advanced Speaker Systems, Headphones, Portable Music and Video Players and Digital Entertainment Products. Creative sees market potential for their X-Fi Audio Enhancement Products in the “Made for iPod” program which they are participating in.

Operations:

Creative would continue to explore more strategic alternatives to improve in areas such as the supply chain, procurement and inventory management. Creative aims to reduce the overall level of operation expenses as they gain economy of scale in future years.

Business debts:

In order to concentrate on turning Creative back to profitability, Creative has repaid a $100 million outstanding balance of its syndicated term loan in 2008. With this repayment, Creative would be practically debt-free, with no outstanding bank borrowing. This would position Creative well to take advantage of the opportunities offered by the new product line and business module (leveraging on the technologies that Creative has mustered over the years which will help Creative set a new trend in the industry and open up new opportunities).

Sale of Building:

Creative sold its headquarters building in Singapore at a price of $181 million with a leaseback of the whole building for a period of five years with an option for additional periods of three years and two years.

Creative has made a gain on the sale of the building of $148 million. This has improved Creative's cash position and get ready to take advantage of any opportunities that lies ahead.

9. Conclusion

Creative was one of the first companies that started producing portable audio players. This has helped them built their reputation and gain public confidence. Creative was so successful that other industry players wanted to use the same idea to make a profit out of it (Apple Inc.). Creative took this opportunity to demand for payment to use their idea when they attained the ZEN Patent in 2005.

Despite the setbacks in the recent years due to the economic downturn and strong competitions from the other industry players, Creative has continued to preserver through this hard time. Mr. Sim Wong Hoo, CEO and Chairman of Creative Technology Limited have mentioned in the Creative's 2008 financial statement that they need a wide breathing space to prepare the company for the exciting opportunities ahead. Creative's business strategies would help Creative to tide through the economic downturn.

Creative has move into the other segments of the audio entertainment market, producing musical instruments and audio speakers. With this, Creative would not heavily rely on the profits made through the sale of portable audio players.

From the financial highlights, Creative's cost cutting efforts has proven to be effective. Creative would be able to breeze through this economy crisis and return back to profitability in no time.

10. Reference

http://sg.creative.com/welcome.asp

www.sgx.com

www.apple.com

www.samsung.com.sg

http://photo.ghajar.ir/archives/Creative%20Technology.jpg

http://www.spotlightingnews.com/gfx/1434_1.jpg

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