A Deeper Look into Sony’s Woes: A Strategic Analysis

Not a long time ago, when a person mentions portable audio equipment and colour television, chances are the people around him will immediately think of Sony. This Japanese company has conquered the local market and then went on to capture a huge share of the electronics market of the Western world.

At one point Sony was the undisputed leader in electronics and was considered as a savvy innovator with a knack for knowing what the people need. But in the 21st century the same could not be said of the fumbling giant.

This paper will look into the reason why this once runaway locomotive – its competitors cannot come even close – is loosing steam and losing money as well. After that, the proponent will offer suggestions as to how Sony can reverse the downward spiral and get back on its feet. The world will want to see that happen because everybody wants a competitive market – meaning breaking up the monopoly, better quality and competitive prices.

Runaway Train

Masaru Ibuka, one of the founding fathers of Sony had a lifelong passion for electric trains (Nathan, 1999, p.1). Thus, it is just fitting to compare the electronics giant to a runaway locomotive when it was at the top of its game. With its phenomenal Walkman and Trinitron TV, Sony was for a long time, way ahead of the pack. Leading in revenues, innovation, and mass appeal. The company endeared itself to countless millions around the world with a parade of electronic products that are both cutting edge and practical.

Wrong Turn

Sony did not look back and continued to charge forward and working hard to dominate the industry that allow people to enjoy maximum musical entertainment as well as viewing pleasure through its portable radio and colour TV. But when it was at its peak it suddenly grew bold and ventured into unknown territory. Before the decade of the profitable 80s ended, Sony decided to expand and took a huge bite of the lucrative U.S. entertainment industry. Now, they are not simply peddlers of television sets; they also wanted to sell what can be seen on it.

The move can be likened to a successful five-star restaurant that is so focused in stomping the competition that it bought its own farm. Many restaurateurs would challenge the wisdom of buying a ranch just to have a steady supply of beef and vegetables since one can just buy from suppliers at practical costs. What is more mind boggling with the acquisition of Columbia Pictures is that it is not even closely related to the electronics business in the same way as the aforementioned restaurant-farm combo.

But at that time, Sony executives believed it was the right move. Richard Lynch explained it this way, “The strategic logic here was that of developing a vertically integrated company – from the service that develops the pictures and music to the machines that deliver them in individual’s homes” (2006, p.207). But looking back it is still difficult to understand why “vertical integration” is possible since buying a Sony TV does not automatically result in a sudden urge to buy Columbia Pictures movies and view it using Trinitron.

There were indeed many that made comments on the disastrous decision of Sony Corp. to deviate from Masaru Ibuka’s original vision. Nathan in his biography of the electronics giant described the driving principle behind the company’s success was, “…foreseeing product application for new technologies and inspiring engineers to overreach themselves in achieving the goals he set for them” (1999, p. 25). In fact, the name Sony was not the first name for the company, it was originally called Tokyo Telecommunications Engineering Corporation, obviously telling the world that they are primarily in technology and hardware. But now, they are making movies.

To provide a clear picture on how far the company has deviated from its core business, Deborah Spar in a case study of Sony corporation dissected the deal to acquire Columbia Pictures: On September 24, 1989, Sony […] bid $3.4 billion in cash for Columbia Pictures Entertainment Inc. It was the highest bid ever by a Japanese company for any U.S. property […] In addition to the cash price, the Japanese electronics giant assumed nearly $2 billion in debt and contractual obligations (2003, p. 368).

As a result, things began to change from bad to worse. At the turn of the 90s, problems began piling up, specifically in relation to the acquisition of CBS Records and Columbia Pictures (Spar, 2003, p. 378), and the highlights are listed below:

1990 – Columbia Pictures Entertainment suffered negative cash flow 1991 – the combined cash flow of Sony Pictures and Sony Music turned negative 1992 – In the third quarter alone, announced a 37% decline in operating income 1993 – The film Last Action Hero a $60 million production, bombed at the box office

One Two Punch

It is one thing for a company to make a wrong purchase and lose some money in the process. It is also another thing to experience negative profit from a company’s traditional cash cows. But this is exactly what is going on at Sony Corp. in the past few years prompting them – among other things – to hire an American CEO to whip them into shape. In 2005, Richard Lynch, relates, “…Sony Corporation of Japan did something almost unheard of in Japanese business. It appointed a Welsh-born American citizen as head of the Japanese company” (2006, p. 107).

Michiyo Nakamoto, writing for the Financial Times, revealed that the crisis surfaced as early as April of 2003 and she added that at the same year, “…Sony revealed a sharp deterioration in its electronics business and weak mobile phone sales. It launched a costly overhaul to regain its competitive edge. Yet barely halfway through that three year exercise […] Sony is again faltering” (2005).

Nakamoto (2005), listed at least five reasons for why the once robust giant is haemorrhaging money from the core: a) severe pressure on prices; b) missed opportunities; c) need to buy components; d) threat of new format wars; e) inflexibility when it comes to proprietary aspect of software and hardware.

Richard Lynch on the other hand complements Nakamoto’s observation with his own, saying that Sony’s woes can be partially due to the following: a) threat from low-wage labour manufacturing and b) shifting away from innovative products e.g. liquid crystal display (LCD) screens (20006, p. 108)

The following pages will explore Nakamoto and Lynch’s observations in detail.

Price War

Technological breakthroughs in manufacturing have reached a level never before seen, since the Industrial Revolution when the concept of mass production was first introduced. Nowadays, it is not just the speed at which products can be manufactured that brings a smile to businessmen. It is also the speed at which it can be delivered around the world. In connection a factory on the other side of the globe can purchase components from thousands of miles away. And expect delivery in a timely manner.

In other words, there are a lot of incentives for those who would venture in the manufacturing business, especially those dealing with easily assembled electronics equipment. A mother company can send components to a country that offers low labour cost and then shipped back the assembled product to the point of origin, to be repackaged as Made in UK for instance.

It is common knowledge that competition inside a given industry can start a price war that can cause prices of goods to plummet. It is therefore imperative that the leader’s of that said industry to protect its turf and not allow new entrants to become player’s in their field. Porter’s Five Forces a tool to help understand how the competition behaves in a free market economy also explains how a new entrant can get in and play with the big boys.

In Porter’s Five Forces model, one can see that, “If incumbent firms in the industry can keep potential entrants at bay and dissuade them from ever entering the industry, the entire subject of competition and its impact on incumbent firms’ profits becomes moot”(Stahl & Grigsby, 1997, p. 146).

To clarify their point, Stahl and Grigsby used the example of a beloved American product, Harley-Davidson motorcycles’ rude awakening in the hands of brutal competition and they wrote: In the 1970s many Harley executives thought that the barriers to entry into the upscale American motorcycle industry were too high because of the capital requirements and customer loyalty. Consequently, they viewed the competition in terms of other American firms and paid little attention to potential Japanese entrants (1997, p. 146).

In a similar fashion, Sony was not able to anticipate that a time will come when it would be easy to manufacture components to make electronic equipment. This is became reality in the advent of digital technology. It was already too late when Sony executives found out that the “…result of industry-wide changes […] has lowered entry barrier to the sector, increasing competition and spurring price wars” (Nakamoto, 2005). The above-mentioned analysis regarding easy entry into the electronics industry was confirmed by Sony’s chief financial officer himself, Katsumi Ihara, who said, “A big problem right now is that almost anybody can make the finished products, because the key parts are readily available” (as cited in Nakamoto, 2005). It is therefore ironic that a Japanese corporation forgot the lessons learned by Harley-Davidson, a company that was brought to its knees by a rival Japanese firm.

Finally, the low-labour manufacturing scheme that has affected other industries has now plagued Sony as well. Their decision to move some of their manufacturing facilities to countries with low labour is not enough since other factors are keeping Sony from reducing their overhead costs. Buying Components

Aside from the threat of competition and the threat of low labour manufacturing, Sony has another hurdle to overcome. The company was caught flat-footed in the fast transition to new technologies. Therefore, “…Sony, which had not invested in manufacturing LCD panels, was forced to buy them from competitors” (Nakamoto, 2005). This forced move is an attempt to stay afloat and stay relevant but it has made Sony, a follower and no longer the leader.

Missed Opportunities

Sony became a victim of its own success. It came to a point that it was so dominant, it did not care what others were doing. At the same time they were counting on customer loyalty because their products performed very well and there is nothing out there that came close. Until, technology again provided a lift for its competitors, but Sony did not ride the wave, preferring instead to rise on its own power. That was a costly mistake, because what matters is the market – the law of demand and supply so to speak. Recovering Public’s Confidence

Perhaps there was never a good time for this company to innovate than now. In the face of rampaging Apple’s iPods and iMacs plus flat screen TVs from other rivals, Sony has to come to its senses and awaken the same spirit that guided its founding fathers.

Nathan, who wrote an intimate biography of the Nippon conglomerate, provided an insight into the early days of Sony. The word Sony came from the name imprinted on boxes of Soni-tape that the company had been marketing since 1950. Then Morita, one of the founding fathers combined it with the English sonny-boy, “…an expression that conveyed to him the youthful energy and irreverence he wanted at the heart of the company…” (1999, p 52). This same youthful exuberance and disrespect for the status quo has driven Sony to create out of the box concepts and unconventional solutions. This same mindset is needed now.

There are many things that are blocking the path to innovation. The first hurdle can be surprising to most because it is related to their purchase of CBS Records. Since, the newly renamed Sony Music is now creating music, Sony executives could not encourage a technology that could easily copy, store, and share the fruits of their music studio’s labour. The result was again another forced move, “…it worked to discourage the electronics division from marketing a portable player that could download music from the internet” (Nakamoto, 2005).

Another barrier to innovation was rather baffling because of the stubbornness of Sony to abandon outmoded proprietary standards. When the rest of the world was using MP3, Sony on the other hand continued to use, “…its own compression software, developed for the MiniDisc and called it Atrac” (Nakamoto, 2005).

Profitable Businesses

Another way to recover the public’s confidence is to refocus on profitable businesses. There are at least three key businesses that Sony has to develop further, making them more competitive and these are:

Sony Ericsson – joint venture with Swedish group was very profitable Sony Vaio – stylish PC with high quality audio and video functions Sony PlayStation – the PlayStation Portable variant’s first 200,000 units was sold out

Porter’s Forces

Other manufacturing firms should learn from the mistakes of Sony. Porter’s five forces could be used to fully understand the lessons that can be gleaned from Sony’s failures. The first one was already discussed earlier and it was the “threat of new entrants”.

The second factor to consider is the “bargaining power of buyers” and with regards to this one, Sony learned that customer loyalty is only possible with a continuous offering of innovative and high quality products.

The third factor is the “bargaining power of suppliers” and with the need to buy LCD components Sony was placed at a disadvantage since it could not make its own. This was a problem easily remedied by a conglomerate that could easily develop this kind of technology.

The fourth factor is the “threat of substitutes” and with the proliferation of cheap and easily manufactured equipment the only way Sony can distance itself from copycats is to be always produce cutting edge technology.

The fifth factor is “rivalry among existing firms” and to be able to lead the pack, the solution is still the same – innovative products. S.W.O.T. Analysis

There is another tool that other firms can use to understand Sony’s woes and in the process learn from it. S.W.O.T. is an acronym that stands for strength, weakness, opportunities, and threats. Sony should focus on its strengths such as, “…miniaturisation and high quality audio technology” (Nakamoto, 2005).

Its current weakness, which other firms should be wary of, is its inability to make unrelated businesses to complement each other. This is because, in the first place it should not have acquired these businesses as was explained earlier.

The opportunities and threats aspect of the S.W.O.T. analysis was amply described earlier with the use of Porter’s five forces strategic analysis tool.

Conclusion

What used to be an innovative company, seemed to have lost its way in the ultra-competitive market of electronics manufacturing. One of the major reasons for its slide into the low achievers group is its reluctance to innovate.

An example of this is its insistence on the use of unique compressions software called Atrac. Sony was mislead into thinking that since they used to dictate the market then it will be the same each time they are going to release a product. Truth is, the market will dictate what kind of products should be manufactured and looking back the consumers preferred efficiency and low cost equipment. Since MP3 is easier to download and easy to use with other equipment, it became the standard for portable audio devices. Sony ignored this fact and it cost them a lot.

What is mind boggling with Sony’s unwillingness to innovate is the fact that it used to be a cutting edge company, willing to go against the status quo. But now it seems content to rest on its laurels. The second reason why it is hard to understand their behaviour is the fact that they already experienced the same problem with Betamax. This was a videotape format pioneered by Sony that eventually did not earn the support of the industry because many preferred a better format called VHS.

The Betamax debacle should have been enough to warn them of the impracticality of trying to force things on the consumer.

But the more significant blunder of the company to date was its purchase of Columbia Pictures and CBS Records. The acquisitions made them loose focus and they deviated from their core business. The intended “vertical integration” did not happen and instead became the cause for a serious loss in revenue.

The acquisition continued to haunt Sony Corporation. A conflict of interest prevented them to develop a product that encourages easy to pass around music files. Therefore, it did not encourage its engineers to create a device that can easily download music. Meanwhile, iPod began to assert itself in the portable audio equipment market and began luring away Sony’s loyal customers with its innovative design, functionality and easy access to the downloadable music.

There are many things that Sony can do to get back on track. But at this point it is imperative that they sell Sony Music Entertainment and Sony Pictures Entertainment. The movies and music department offers very little promise of becoming dominant in their respective fields. If competition in the electronics industry is tough, therefore with the entertainment industry, it is brutal.

At least, with Sony focusing on portable audio devices, coloured TV sets, laptops, and games consoles, it is working within its comfort zone. For decades it has demonstrated its ability to think outside the box and was hugely successful doing so. All is not lost though, since Sony with its decades of experience in the electronics industry possesses the knowledge and facilities to come up with the next big thing.

Judging by the rate at which technology changes, Sony may just be in time to catch the next wave.

References

• Lynch, R. (2006). Shaking Up Sony: Restoring the Profits and the Innovative Fire
• Nakamoto, M. (2005). Caught in Its Own Trap: Sony Battle to Make Headway in the Networked World. Financial Times: London
• Nathan, J. (1999). Sony: The Private Life. New York: Houghton Mifflin Company.
• Spar, D. (2003). Managing International Trade and Investment. London, UK: Imperial College Press.
• Frisch, A. (2004). The Story of Sony. Minnesota, U.S.: Smart Apple Media.
• Stahl, M. & Grigsby, D. (1997). Strategic Management: Total Quality and Global Competition.
• Oxford, UK: Blackwell Publishers, Ltd.