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iRobot CoRpoRation, founded in 1990 in delawaRe, has designed and built a vast array of behavior-based robots for home, military, and industrial uses, and is among the first companies to introduce robotic technology into the consumer market. Home care robots are iRobots most successful products, with over 5 million units sold worldwide, accounting for over half of its total annual revenue. iRobot also had a long-standing con-

tractual relationship with the U.S. government to produce robots for military defense. The company is fully gauged toward first-mover radical innovation with an exten- sive R&D budget. Made up of over 500 of the most distinguished robotics professionals in the world, it aims at leading the robotics industry. By forming alliances with com- panies like Boeing and Advanced Scientific Concepts, it is able to develop and improve upon products that it otherwise is incapable of obtaining solely through its own technology. The company also has a healthy financial position with an excellent cash and long-term

debt rate.

Despite these competencies, iRobot still has serious concerns. Although the robotics

industry is not highly competitive, iRobot needs more competition to help build up the total scale and visibility of the fledgling industry it has pioneered. Home care robots, its biggest revenue source, is a luxury supplemental good. Times of economic recession, however, could prove to be a problem for the sales of iRobots consumer goods, given that discretionary bud- gets are likely decreased. In addition, iRobot had over 70 patents, many of which will begin to expire in 2019. In a rapidly advancing industry, technology can also become obsolete quickly and render patents useless. Additionally, iRobot is highly dependent on several third-party suppliers to manufacture its consumer products. It also depends on the U.S. government for the sales of its military products. Any volatility in its supply chain or in government fiscal policy will have grave consequences upon the companys future.

Company History

In the late 1980s, the coolest robots in the world were being developed at the MIT Artificial Intelligence Lab. These robots, modeled on insects, captured the imagination of researchers, explorers, military, and dreamers alike. iRobot cofounders, MIT professor Rodney Brooks and graduates Colin Angle and Helen Greiner, saw this technology as the basis for a whole new class of robots that could make peoples lives easier and more fun. In 1990, iRobot was incorporated in the state of Delaware.1

After leaving the MIT extraterrestrial labs, the three entrepreneurs focused their busi- ness on extraterrestrial exploration, introducing the Genghis for robotic researchers in 1990. In 1998, the founders shifted their focus onto military tactile robots and consumer robots after landing a pivotal contract with the U.S. Defense Advanced Research Project Agency (DARPA). This contract provided funding for the necessary R&D to develop new technolo- gies. As a direct result, iRobot delivered the PacBot to the government in 2001 to assist in the search at the NYC World Trade Center. In 2010, thousands of PacBots were serving the country on the war front.

In 2002, iRobot began selling its first practical and affordable home robot, the Roomba vacuuming robot. With millions of Roomba vacuums sold, iRobot has continued to develop and unveil new consumer robots such as a robotic gutter cleaner and a pool vacuum. In 2005, iRobot raised US$120 million in its IPO and began trading on the NASDAQ stock exchange.

iRobots Products and Distribution

iRobot designs and builds robots for consumer, government, and industrial use, as shown in Exhibit 1. On the consumer robots front, the company offers floor cleaning robots, pool cleaning robots, gutter cleaning robots, and programmable robots. iRobot sells its home robots through a network of over 30 national retailers. Internationally, iRobot relies on a network of in-country distributors to sell these products to retail stores in their respective countries. iRobot also sells its products through its own online store and other online stores like Amazon and Wal-Mart.

Home robots have been the companys most successful products, with over 5 million units sold worldwide. Sales of home robots accounted for 55.5% and 56.4% of iRobots total revenue in 2009 and 2008, respectively.2 Currently, iRobot is exploring new tech- nological opportunities, including those that can automatically clean windows, showers, and toilets. The potential to fully clean ones house using automated robots is appealing to customers.

On the government and industrial robotics front, iRobot offered both ground and mari- time unmanned vehicles, selling the vehicles directly to end-users or through prime con- tractors and distributors.3 Its government customers included the U.S. Army, U.S. Marine Corp, U.S. Army and Marine Corps Robotic Systems Joint Program office, U.S. Navy EOD Technical Division, U.S. Air Force, and Domestic Police and First Responders. For 2009 and 2008, 36.9% and 40.3% (respectively) of iRobot total revenue came from the U.S. government.

Competition

The robot-based products market is an emerging market with high entry barriers because it requires new entrants to have access to advanced technology, as well as large amounts of capital to invest in R&D. As a result, the market has relatively few companies competing with each other.

iRobot competes with large and small companies, government contractors, and government- sponsored laboratories and universities. It also competes with companies producing traditional push vacuum cleaners, such as Dyson and Oreck.

Many of iRobots competitors have significantly more financial resources. These in- clude Sweden-based AB Electrolux, German-based Krcher, South Koreabased Samsung, UK-based QinetiQ, and U.S.-based Lockheed, all of whom compete against iRobot mainly in the robot vacuum cleaning market and the unmanned ground vehicle market. The iRobot product (for example, its Roomba vacuum robot) is not the most expensive product, but is rated the highest across the majority of comparison points.

AB Electrolux

Founded in 1910, Electrolux is headquartered in Stockholm, Sweden. It does business in 150 countries with sales of 109 billion SEK (US$15 billion), and is engaged in the manu- facture and sales of household and professional appliances. Its Electrolux Trilobite vac- uum cleaner competed with the iRobots Roomba vacuum cleaner in international markets. Although Electrolux Trilobite is currently unavailable in the United States, it will likely soon be sold on the companys website. An Electrolux Trilobite is priced at about US$1800, much more than a Roomba, which retails for between US$200 and US$500.

Alfred Krcher GmbH & Co.

Founded in 1935, Krcher is a German manufacturer of cleaning systems and equipment, and is known for its high-pressure cleaners. Krcher does business worldwide, with sales of 1.3 billion (US$1.7 billion). In 2003, it launched Krcher RC 3000, the worlds first autonomous cleaning system, which competes with the iRobot Roomba vacuum cleaner in international markets. Krcher RC 3000 is not currently sold in the United States but can be purchased and shipped directly from Germany for approximately US$1500.

Samsung Electronics Co., Ltd

Founded in 1969, Samsung is headquartered in South Korea. It is the worlds largest electron- ics company, with a revenue of US$117.4 billion in 2009. It is a prominent player in the world market for more than 60 products, including home appliances such as washing machines, refrigerators, ovens, and vacuum cleaners. In November 2009, Samsung launched Tango, its autonomous vacuum cleaner robot, which is available in South Korea. In March 2010, the company premiered the Samsung NaviBot, an autonomous vacuum cleaner, in Europe. It was priced at 400 to 600 (US$516 to US$774).

QinetiQ

Founded in 2001, QinetiQ is a defense technology company headquartered in the UK with revenues of 1.6 billion (US$2.4 billion). It produces aircraft, unmanned aerial vehicles, and energy products. iRobots stiffest competitor in the unmanned aerial vehicles market is QinetiQ, which has 2500 Talon robots deployed in Iraq and Afghanistan. iRobot had delivered more than 3000 PackBot robots worldwide.

Lockheed Martin Corporation

Based in Maryland, the U.S.-based Lockheed is the worlds second-largest defense contractor by revenue and employs 140,000 people worldwide. It was formed by the merger of Lockheed and Martin Marietta in 1995, and competed with iRobot in the unmanned ground vehicle market.

Research and Development at iRobot

Research and development (R&D) is a critical part of iRobots success. The company spends nearly 6% of its revenue on R&D. In 2009, its total R&D costs were US$45.5 million, of which US$14.7 million was internally funded, while the remaining amount was funded by government-sponsored research and development contracts. iRobot believes that by utilizing R&D capital it will be able to respond and stay ahead of customer needs by bringing new, innovative products to the market. As of 2009, iRobot had 538 full-time employees, 254 of which were in R&D.4

The companys core technology areas are collaborative systems, semi-autonomous opera- tions, advanced platforms, and human-robot interaction. Each area provides a unique benefit to the development and advancement of robot technology. Research in these fields is done using three different methods: team organization, spiral development, and the leveraged model.

Team organization revolves around small teams that focus on certain specific projects or robots. They work together with all the different lines of the business to ensure that a product is well integrated. Primary locations for these teams are Bedford, Massachusetts; Durham, North Carolina; and San Luis Obispo, California. Spiral development is used for military products. Newly created products are sent into the field and tested by soldiers with an in-field engineer nearby to receive feedback from the soldiers on the products performance. Updates and improvements are made in a timely man- ner, and the product is sent back to the field for retesting. This method of in-field testing has allowed iRobot to quickly improve its technology and design so it can truly fulfill the needs of its end-users.

The leveraged model uses other organizations for funding, research, and product devel- opment. iRobots next generation of military products are supported by various U.S. govern- ment organizations. Although the government has certain rights to these products, iRobot does retain ownership of patents and know-how and are generally free to develop other commer- cial products, including consumer and industrial products, utilizing the technologies devel- oped during these projects.5 The same methodology holds true when designing consumer products. If expertise is developed that will assist in governmental projects, it is transferred to the appropriate team.

iRobots continued success depends on its proprietary technology, the intellectual skills of its employees, and its ability to innovate. The company holds at least 71 U.S. patents, 150 pending U.S. patents, 34 international patents, and more than 108 pending foreign appli- cations. The patents held, however, will start to expire in 2019.

Financial Results

Marketing

Sales, Net Income, and Gross Margins

From 2005 through 2009, iRobots total revenue more than doubled, from US$142 million to US$299 million. Revenues received from products accounted for nearly 88% of total revenue, far greater than the remaining 12% received from contract revenue, though contract revenue showed a record high of US$36 million by the end of 2009. (See Exhibit 2).

Revenues from 2009 showed a decline of US$9 million from 2008 that was mainly attributable to a 6.3% decrease in home robots shipped. This decrease resulted from softening demand in the domestic market. On a more positive note, the total US$30.9 million decrease in domestic sales was partially offset by an increase in international sales (US$23.2 million). Even though revenues declined in 2009, iRobot was able to control its costs and operating expenses, resulting in an increase in net income of over four-fold, from US$756,000 in 2008 to US$3.3 million in 2009.

Cash and Long-Term Debt

iRobot is in a strong financial position regarding cash and long-term debt. In 2009, iRobot increased its cash position by over US$31 million while decreasing the amount of long-term debt by about US$400,000. Its cash position by the end of 2009 was US$72 million versus US$41 million in 2010, an increase of over 77%. This put iRobot in a good position to con- tinue investing in research and development even if sales began to slow. At the end of 2009, iRobots long-term debt was just over US$4 million (see Exhibit 3). iRobots financial status gives it a competitive edge, as it should be able to withstand both current and future unfore- seen swings in sales, supplier issues, and the cancellation of government contracts.

iRobots promotion strategies vary by product group, but neither its defense product group nor its home care product group utilize television or radio advertising. Since defense products are produced solely for the U.S. government, promotion is unnecessary. Home care products, the other hand, need to be marketed to generate public demand. iRobot aggressively utilizes social media tools such as Facebook and Twitter primarily for promoting support services and brand recognition. For example, Facebook had at least 10 fan pages for either iRobot Corpora- tion or selected iRobot home cleaning products like Roomba.

Another branding strategy used by iRobot education concerns how the company recognized that fewer and fewer American children go into STEM (science, technology, engineering, math) areas. Because of this, it launched the SPARK (Starter Programs for the Advancement of Robotics Knowledge) program to stimulate an interest in science and tech- nology. The program caters to students ranging from elementary school to the university level. iRobot also initiated an annual National Robotics Week program to educate the public on how robotics technology impacts society. The first national robotics week was held in April 2010 in the Museum of Science in Boston.

iRobot developed an education and research robot, the Create(R) programmable mobile ro- bot, to provide educators, students, and developers with an affordable, preassembled platform for hands-on programming and development. Students can learn the fundamentals of robotics, com- puter science, and engineering; program behaviors, sounds, and movements; and attach accessories like sensors, cameras, and grippers. It also runs a unique and multifaceted Educational Outreach Program that includes classroom visits and tours of its company headquarters. This is all designed to inspire students to choose careers in the robotics industry and become future roboticists. Operations

Despite multiple methods of reaching out to current and potential consumers, some industry analysts claim iRobot lacks aggressiveness toward customer acquisition. Many observers believe that iRobot will benefit from more competition to help build industry vis- ibility among consumers.

iRobot is not a manufacturing company, nor has it ever claimed to be. Its core competency is to design, develop, and market robots, not manufacture them. All non-core activities are outsourced to third parties skilled in manufacturing. While third-party manufacturers provide the raw materials and labor, iRobot concentrates on developing and optimizing prototypes.

iRobot

Up until April 2010, iRobot used only two third-party manufacturers for its consumer products: Jetta Co. Ltd. and Kin Yat Industrial Co. Ltd., both located in China. iRobot did not have a long-term contract with either company, and the manufacturing was done on a purchase-order basis. This changed in April 2010, when iRobot entered a multi-year manufac- turing agreement with electronic parts maker Jabil Circuit Inc., which henceforth would make, test, and supply iRobots consumer products, including the Roomba.6

The Robotic Industry

Robots serve a wide variety of industries, such as the consumer, automotive, military, construction, agricultural, space, renewable energy, medical, law enforcement, utilities, manu- facturing, entertainment, mining, transportation, space, and warehouse industries.

In 2008, before the economic downturn, the global market for industry robot systems was estimated to be about 110,000 units.7 Industrial robot sales worldwide in 2009 slumped by about 50% compared to 2008. The sales started to improve from the third quarter of 2009 onward, with the slow recovery coming from emerging markets in Asia and especially from China. In North America and Europe, sales were also seen slowly improving from late 2009.8

The sales of professional services robots, including military and defense robots, were about US$11 billion at the end of 2008 and were expected to grow by US$10 billion for the period of 2009 to 2012.9

Twelve million units of household and entertainment robots were expected to be sold from 2009 to 2012 in the mass market, with an estimated value of US$3 billion.10

New Markets

The 2009 economic recession had negative impacts on consumer spending. iRobot domestic sales of robot vacuum cleaners, predominantly the Roomba, were down comparable to other US$400 discretionary purchases, and its international sales also experienced a slowdown.11 In addition to lower consumer demand, the national and international credit crunches led to a scarcity of credit, tighter lending standards, and higher interest rates on consumer and busi- ness loans. Continued disruptions in credit markets may limit consumer credit availability and impact home robot sales.

If the robot market does not experience significant growth, the entire industry may not survive. Fallout has forced the robotics industry to look outside of its comfort zone and move into emerging energy technologies like batteries, wind, and solar power, said Roger Chris- tian, Vice President of Marketing and International Groups at Motoman Inc. He also predicted growing demand for robotics in health care and the food and beverage industry.12 Under the Obama administration, there were economic incentives devoted to R&D in alternative energy industries. For example, the Stimulus Act passed by Congress in early 2009, a US$787 billion package of tax cuts, state aid, and government contracts, has made some impact on the alterna- tive energy market in favor of robotics.13

In addition to its home care and military markets, iRobot hoped to expand into the civil law enforcement market and the maritime market. It also explored possibilities in the health care market.14 It partnered with the toy company Hasbro to enter the toy market with My Real Babyan evolutionary doll that has animatronics and emotional response software.

iRobot continued to grow its international presence by entering new markets. The per- centage of its international sales rose from 38% in 2008 to 53.8% in 2009.15 Its growing focus on international sales resulted in an increase of US$23.2 million in international home robots revenue for 2009 compared to 2008. iRobot also sold its military products overseas in compli- ance with the International Traffic in Arms Regulations.

Challenges Ahead

Consumer Marketplace

iRobot was competing in a new and emerging market. Although the industry had relatively low competition, analysts believed iRobot needed more competition, not less, to help build up the total scale and visibility of the fledgling industry it had been pioneering.16 If the demand for the home robots became stagnant or declined, this would greatly impact the vital- ity of iRobot and put it under pressure to remain innovative and adaptive to consumer needs in the event that it did gain widespread popularity.

iRobots consumer products were primarily a luxury supplemental good gauged toward the middle and upper class. iRobots home cleaning robots were reasonably priced from US$129 to US$1000, depending on the model and accessories. Such a price range was com- parable with luxury brands of vacuum machines. However, times of economic recession could prove to be a problem for iRobots consumer goods sales given that discretionary budgets have contracted. To save money, iRobots base customers may revert to manual labor.

Supply Chain

For many years, iRobot had only two China-based manufacturers to produce its home clean- ing robots and no long-term contract with either of those companies. Its best-selling Roomba 400 series and Scooba series, for example, were both produced by Jetta at a single plant in China. This put iRobot in a high-risk situation if Jetta was unable to deliver products for any unforeseen reason, or if quality started to dip below standards.

Fortunately, iRobot was aware of the problem and signed a new manufacturing agree- ment with U.S.-based Jabil Circuit. This relationship provided iRobot with numerous benefits, including diversifying key elements of its supply chain, providing geographic flexibility to address new markets, and expanding overall capacity to meet growing demands, explained Jeffrey Beck, president of iRobots Home Robots Division. Whether this attempt to diversify its supply chain with a new partnership will work out is of crucial importance for iRobot.

Intellectual Property

Continued development of products that are difficult to duplicate through reverse engineering will be the key to success in the area of intellectual property. By maintaining strong rela- tionships and giving superior service to customers such as government agencies, iRobot can create an advantage even if they are unable to ultimately protect their technology from being duplicated. At the same time, iRobot also needs to ensure that its employees will continue to be innovative and create new technologies to keep iRobot competitive for years to come.

Government Contracts

Nearly 40% of iRobots revenues are from government-contracted military robots. As a con- tractor or a subcontractor to the U.S. government, iRobot is subject to federal regulations. Fiscal policy and expenditure can be volatile, not only through a single presidency, but certainly during the transition from one presidency to the next. The volatility and unknown demand of the U.S. government presents a problem. The economic fallout from the reces- sion also impacted U.S. federal budgetary considerations. Emphasis and focus was placed on larger, more troubled industries, with large bailout packages made available to financial and automotive companies. It remains to be seen how these large outlays will affect the federal governments ability to continue to fund contracts for robotics.

Strategic Alliances

iRobot relied on strategic alliances to provide technology, complementary product offerings, and better and quicker access to markets. It entered an agreement with The Boeing Company

iRobot

to develop and market a commercial version of the SUGV that was being developed under the Armys BCTM (formerly FCS) program. It also formed an alliance with Advanced Scientific Concepts Inc. for exclusive rights to use the latters LADAR technology of unmanned ground vehicles. In exchange, iRobot commited itself to purchase units from Advanced Scientific Concepts.

iRobots Challenge

iRobots focus on home cleaning products differentiates it from all the other manufacturers in the robotics industry, which are mainly focused on manufacturing robots for the automotive sector. iRobots focus on two entirely different marketsconsumer and militaryallows it (1) the ability to leverage its core capabilities and diversification, and (2) provides it with a hedge against slower demand in one sector. By introducing robotics to the consumer market, iRobot has created a blue ocean of new opportunities. However, iRobot had numerous com- petitors with more experience in the consumer marketplace.

An analyst wondered if the long-term success in the consumer market would require iRobot to develop more blue oceans. Also, did it make sense for iRobot to continue to develop new consumer products or would it be better off focusing on the military and aero- space marketplace?

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Q1.What are the main challenges that iRobot faces?

Q2.Assess the competitive advantage of iRobot on its market.

Q3.Recommend solutions for iRobot to improve its competitive advantage.