STRATEGIC ANALYSIS ON SONY CORPORATION

November 2010

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Completed By

Woo Gim Chuan Marcus

1 S/N SUBJECT PAGE 1 About Sony: History, Culture & Products 2 2 Internal Analysis: Resources 3-6 Value Chain Analysis 7-9 Summary of Strengths & Weakness 9 Core Competencies 10 3 External Analysis: PESTL 12-13 Analysis of Industry 14 Analysis of Competitive Forces – Porters’ Five Forces Analysis 15 Stakeholders Management 16 Product Life Cycles – BCG Matrix, 17-18 Marketing & Customer Segmentation 18 Competitors Analysis 19-20 Summary of Opportunities & Threats 20 4 What can Sony do to overcome its weaknesses? 21 5 What can Sony achieve by exploiting its strengths? 22 6 What strategic actions should Sony take to support its business- 23-24 level differentiation strategy? 7 Can Sony sustain its success? 25-26 8 What are Sony’s success factors? 27 9 What are the reasons that contributed to Sony’s decline? 28 10 What are Sony’s future challenges and what can it do to 29-30 overcome them? 11 What can Sony do to overcome threats? 31 12 What is Sony’s corporate-level strategy and how does it help 32 create values? 13 Sony’s International Corporate-Level Strategy: Modes of 33-34 Entry, Benefits and Challenges 14 Additional questions to stimulate the brain before exam!!! 35

2 SONY CORPORATION

About Sony

Sony is a multinational conglomerate corporation and the world's largest media conglomerate with revenue of US$72 billion (as of fiscal 2003). Its principal business operations include Sony Corporation (Sony Electronics in the U.S.), Sony Pictures Entertainment, Sony Computer Entertainment, Sony BMG Music Entertainment, Sony Ericsson and Sony Financial Holdings. Sony is also a leading manufacturer of electronics, video, communications, video game consoles and information technology products for the consumer and professional markets. These make Sony one of the most comprehensive entertainment companies in the world. The company's slogan is “Sony. Like no other”.

History and Culture

The current Sony Corporation has a unique culture which is firmly rooted in her history especially in relationship to her two founders, Masaru Ibuka and Akio Morita. Ibuka and Morita were both dedicated electrical engineers and geniuses above their business talents. Both gave insights and visions in what the company should make and how it should be made. Ibuka, especially, gave constant advice and suggestions to the engineers involved in projects from the earlier on transistor radios to Walkmans. This created the umbrella strategy in which Sony operates under where the top management, especially Ibuka, Morita and now Norio Ohga gave the general direction in which the lower engineers actively learned, developed and improved on the vision/idea. Therefore, although there is a planned direction, the actual product development through launching is emergent with great flexibility.

Although the research and development section of Sony differs greatly from other companies with its great flexibility, Sony, in its essence is still a traditional Japanese company in many ways. There is life-time employment, with strong norms and values which in turn create strategies through their actions. Status is given (the crystal award) instead of bonuses (not significant amount) for superior achievement. There is also the strong seniority system such as the mentor and apprentice relationship that is typical of a Japanese firm. All this can be classified as the cultural school in which strategy formation is of collective behaviour. Collective vision and stress on human resource, which is typical of many Japanese, can be clearly seen in the mission statement "Management Policies".

Sony Products

Sony has a variety of products ranging from electronic devices, games and entertainment. Briefly, Sony’s products can be categorized in the following major product categories:

Television and Projectors Hand cam video camera Mobile phones Home video Computer Peripheral Storage and Recording media Home Audio Portable Audio Batteries and Charger Home Theatre system Game Other Accessories Digital Photography In-Car entertainment

3 INTERNAL ANALYSIS

Sony, which is the world’s largest consumer-electronics company, has become a consumer-electronics company since 1946. At the threshold of the much anticipated world of “total digital convergence”, the electronics maker turned media and communications giant seems to have it all – next generation Internet-aware gadgets and compelling content to pump through them, a vibrant culture of innovation resulting from cutting-edge research and development (R&D) as well as a world-class marketing acumen that has made Sony a global megabrand. Thus, what are the possible core competencies to ensure that there is quantum leap to success in a world of digit convergence? The internal analysis on the company below will answer the question. a) Accounting Ratio Analysis

Sony’s 2002 operating profit margin accounting ratio is merely 0.018 (0.045 in year 2001), return on stockholders’ equity reflects a miserable 0.006 (0.007 in year 2001) and return on total asset reveals only 0.002 (same as year 2001). The high rate of investment also does not represent corresponding growth in profitability. These poor results may indicate that the company had not been managed certain aspects of the operations well and thus is unable to achieve even average returns.

The debt-to-asset ratio1 in the last 2 years was high and increasing moderately too. As a matter of fact, in 2002, it was 0.71, which was comparatively higher than some consumer-electronics manufacturing companies. Sony’s high debt-to-asset ratio shows that the company is highly leveraged (not highly liquid) and thus put itself in danger if the company’s creditors start to demand repayment of debt. b) Finance Resources

Sony’s net sale of US$53 billion (3% above the previous year) for 2001 is an all- time high record. However, the operating income of US$1.01 billion earned in the same year represents a 40% deduction compared to the previous year’s figures. This highlights that Sony’s profit margin has been eroded significantly. In fact, based on the company’s annual reports, Sony’s net income had dropped drastically from ¥121.83bn in the fiscal 1999-2000 to ¥16.75bn in the fiscal 2000-01. Its net income in fiscal 2001-02 was ¥15.31bn, a further decline compared to 2000-01 results.

The end of 2002 showed that Sony had a relatively huge reserve (cash and cash equivalents) of ¥683.8bn. Being a company that is endowed with a large reserve, Sony has the necessary financial resources to continue build an extensive international infrastructure that provides its multinational customers with the diversity that is required. This is probably a strategic competitive advantage that any new entrants to the market cannot offer.

c) Organisational Resources (Organisation Design/Structure)

1 Debt-to-Asset = Total debt / Total asset 4 With continuing growth and success, Sony adopted the strategic business unit (SBU) form of the multidivisional structure to implement its related linked diversification strategy, Sony’s corporate-level strategy – the SBU form consists of 3 levels comprises the corporate headquarters, strategic business units and SBU divisions.

Sony is broadly divided into 6 SBUs (electronics, game, music, pictures, finance services and communication network), each further divided into smaller business units, and commonly named as divisions. The divisions within each SBU are related in terms of shared products or markets or both, but the divisions of each SBU have little in common with the divisions of the other SBUs. Atypically, Sony’s headquarters exercises financial and strategic controls over its SBU. The SBU form of multidivisional structure is a proper match to Sony’s strategies as it inherent benefits allows the company to manage diversification’s many demands better. However, there is a drawback to the SBU structure. If coordination between SBUs is needed (as is required between Sony’s SBUs), problems arises because the SBU structure, similar to the competitive form, does not readily foster cooperation across SBUs. Unlike the divisions included in the cooperative structure, divisions that are part of the competitive structure do not share common corporate strengths. As a result, they do not develop integrating devices for use. To foster cooperation between SBUs, Sony could increase the frequency of direct contacts between division managers, establish liaison roles in each division and form temporary work teams or task forces around projects that also focus on extracting and sharing competencies that are embedded within several divisions – work teams/task forces should also be made to report to top management. To ensure that the various initiatives mentioned early are successfully executed, Sony is also required to evaluate its divisional managers’ performance on the basis of how well they have facilitated interdivisional cooperative efforts. Sony’s reward systems should also emphasise on the overall company’s performance, besides the outcomes achieved by individual divisions to help overcome problems associated with strategic business unit form.

Sony also ensures a proper match between its international strategies and organisational structure exists so the company could effectively coordinate and control its global operations. To this end, Sony uses the worldwide product divisional structure to implement the global strategy. It allows the company to achieve economies of scope and economies of scale on a global level. Sony pursues economies of scale further by outsourcing as it allows the company to have better cost control. However, Sony faces challenges of the global strategy/worldwide structure combination such as difficulty involved with coordinating decisions/actions and the inability to quickly respond to local needs and preferences. Fortunately, the solutions that are meant to help overcome problems associated with strategic business unit form are also applicable to challenges of the global strategy/worldwide structure combination. d) Physical Resources

Despite an already extensive domestic and international industrial infrastructure, Sony still continues to invest heavily in infrastructures so that the company has sufficient capacity to meet the growing needs and demands of their customers. For example, Sony acquired U.S.-based CBS records in 1988 and Columbia Pictures in 1989. The two companies were renamed to Sony Music Entertainment and Sony Pictures Entertainment respectively and eventually emerged as two of the world's largest content producers. Sony also invested substantially in the game business and entered into the industry to take on 5 established players like Nintendo and Sega directly. Sony dominated the market subsequently. In 2001, Sony went into a joint venture with Swedish telecommunications company Ericsson to form Sony Ericsson to manufacture mobile phones as well as launched Sony Bank (an Internet-based bank for middle-class Japanese investors).

By 2003, Sony owns 55 manufacturing plants after shutting down 15 worldwide. In addition, Sony has 12 home-grown manufacturing based plants in Japan. It also has radio factories in places such as Shannon (Ireland). On this note, it can be deduced that the physical resources that Sony possesses are likely to generate value-creating competitive advantage which is the company’s strength. e) Technological Resources

Sony was first in many areas such as the Trinitron, the Walkman, the Betamax, the Camcorder, the Compact Disc, the MiniDisc, the venerable PlayStation (PS) and the robot dog Aibo. Some of these Sony’s technological creations have created new markets of their own. Sony also patents its revolutionary innovations that include the trademark ‘Walkman’ and video tape ‘beta video format’.

Technologically, Sony is more advanced in producing consumer-electronics products than its competitors. For instance, its PS2 offers a substantial jump in performance and versatility, with new features like “Emotion Energy” and Graphics Synthesizer” making possible more complex effects such as facial expressions and clothes fluttering in the wind. Sony also set industry standards for TV design and picture quality. In short, Sony’s strength is also about the ability to leverage on technologies well and ahead of its competitors to create innovative and high quality products for its customers so as to increase sales and revenues. f) Human Resources Management

Sony’s official website often stresses that the development and vitality of Sony's employees drives dynamic growth for Sony. So far, Sony is able to provide comprehensive training programmes worldwide to train its employees to equip them with superior knowledge and skills. In addition, the company provide curriculums that are tailored to local needs for engineers and managers. Sony also possesses the ability to identify high calibre managers to take over top management positions so that the company would continue to be well managed and the innovation culture proliferated. The past and present CEOs all possessed the necessary psyche and managerial capabilities to infuse innovation and creativity.

Sony also built a framework that promotes regular communication between employees and managers regarding work contributions. This in turn helps establish the basis of a compensation system that fairly and satisfactorily evaluates the contributions of each employee. Sony’s outstanding employees are recognised by receiving awards (such as the crystal and MPV awards) from the top management. In Japan culture, receiving awards directly from top management elevates an employee’s status in the company and as such it is something that most staff sorts after. In short, Human Resources Management, particularly the ability to motivate and improve productivity of the staffs is certainly Sony’s strength.

6 g) Innovation Resources (Product Development)

Innovation is one of the two central pillars of the Sony establishment – marketing is another. This pillar was put in place by the company's founders, who, through their complementary skills and enthusiastic leadership, set the foundations of a true culture of innovation at Sony. So far, through innovation, Sony had produced many revolutionary products that include the first magnetic tape and tape recorder in 1950; the transistor radio in 1955; the world’s first all-transistor TV set in 1960; the world’s first colour video cassette recorder in 1971; the Walkman personal stereo in 1979; the Compact Disc (CD) in 1982; the first 8mm Camcorder in 1985; the Minidisk (MD) player in 1992; the PlayStation game system in 1995; Digital Mavica camera in 1997; Digital Versatile Disc (DVD) player in 1998; and the robot dog Aibo as well as Network Walkman digital music player in 1999” (Sony.com/en/corporate). These innovations had created new markets of their own. The ability to continuously innovate and come up with revolutionary innovations that boost sales and helps widen profit margins shows that Sony possesses substantial quality innovation resources (including scientific capabilities) that are hard to imitate and valuable. h) Reputation Resources

In 1999, XXX said that “Reputation is one of the significant intangible resources for Sony that differentiates themselves from the competitors for them to charge a premium price for their innovative products and quality.” On the same year, for the third year in a row, Sony was recognised as one of the world’s 100 Best Managed Companies by XXX magazine. In 2002, Sony Corporation was proclaimed as the world’s largest consumer-electronics company, a significant player in the media industry and the fastest- growing computer and communication equipment maker. Sony was ranked 21 in the XXX list of World’s 100 Most Valuable Brands with as estimated value of US$14 billion – and the 1st among its industry peers. The company’s tagline for its electronic audio and video products “It’s a Sony” simply is a stamp of quality, cutting-edge technology and reliability. In short, the “Sony” brand is one of the world’s most recognisable and trusted brands. Given the positive perceptions of Sony’s reputation, the brand name is certainly the company's strength. i) Risk Management

In general, the types of risks Sony faces include: (1) pure risk; (2) price risk; and (3) credit risk. Firstly, Sony purchased insurance policies to mitigate pure risk. Secondly, Sony utilises several derivative instruments such as foreign exchange forward contracts, foreign currency option contracts, interest rate swap agreements and currency swap agreements to hedge the potential downside risk on the cash flow from the normal course of business that caused by market fluctuation. Price risk and credit risk are being mitigated this way. So far, Sony’s holistic approach to risk management effectively is viewed favourably by its stakeholders most of the time, especially the shareholders.

7 Value Chain Analysis

The value chain analysis is used to evaluate the value of every primary and support activity that is added to Sony’s products or services. a) In-bound Logistics

Sony engages in a series of complex in-bound logistics activities that the company either possess or provided by 3rd parties. As the company expands, Sony also begin to engage 3rd parties such as Flextronics and Solectron to manufacture some of its product components so that the company will continue to possess sufficient wave length to engage in its core businesses and core competencies. To lower its cost of production, Sony also restructured and shut down some manufacturing facilities. In fact, the company has shifted some of its production plants to low cost countries such as China to take advantage on the cheaper labour cost. The ability to manage the complex and geographically dispersed in-bound logistics activities is certainly Sony’s strength. b) Operations

Sony’s businesses span across different continents. It production empire alone is spread from Asia to the U.S and to Europe. The details are as follows:

(1) Almost 50% of the electronics segment's total annual production during the fiscal year 2002 took place in Japan (approximately 65% of the annual production in Japan was destined for other regions). (2) China accounted for slightly more than 10% of total annual production (approximately 70% of which was destined for other regions). (3) Asia, excluding Japan and China, accounted for slightly more than 10% of total annual production (approximately 60% destined for Japan, the US and the EU). (4) The U.S and Europe together accounted for the remaining slightly less than 25% of total annual production (most of which was destined for local distribution and sale).

Generally, Sony has been able to manage its businesses well and hence is able to achieve successes with some of its products. For instance, Sony was able to make a capture a sizable market shares in the video, PC and television markets in just a few years after entering the markets.

On the other hand, company’s music business, advertising business and location- based entertainment business have not been doing well. In fact they had been making losses. Although piracy is partly responsible for the poor performance, there are also challenges that Sony somewhat cannot find better solutions to address them. For instance, the respective business units within the organisation are still not communicating and cooperating (although there were some improvements) with one another enough and this has affected inter-operative synergy and productivity. Sony’s inability to address the inter-operative related issues is a cause of concern and therefore could possibly be the company’s weakness. c) Out-bound Logistics 8 Sony is well connected to the distribution networks that every country possesses. In fact, to ensure that Sony’s products and services are delivered and reached their destinations on time, Sony has invested heavily to automate parts of the out-bound logistics function to track sales orders, movement of products and payments. In addition, Sony also allows its music and pictures to be distributed through the broadband networks.

In 2002, it was also reported in prominent magazines such as InfoWorld and PC Magazine that many customers felt that Sony’s products and services were among the best in the world and their staffs were well trained to handle the various operations and services. As such, the possession of the capability to train employees and business partners to manage the complex and geographically dispersed out-bound logistics activities to enhance the various operation protocols is surely Sony’s strength. d) Marketing and Sales

Sony's marketing strategy is to position itself as an innovator and a maker of high quality products which enable it to sell its products at a premium higher than its competitors. To achieve these goals, the company’s innovations are commonly backed by massive and zealous marketing efforts which have had helped to create several successful sub-brands such as Trintron, Walkman and WEGA. These successes in turn further strengthen the brand “Sony”.

Sony is very sensitive towards its competitors’ actions and reactions. To ensure that the company solidifies its image and reputation as well as achieves the desired sales and revenues targets, it has no qualms of incurring exorbitant expenses. For instance, the Walkman brand (MiniDisc format) was re-launched in 2000 at an estimated cost of US$30 million and it was supported by massive broadcast, print and on-line advertising, Internet and dealer events and promotions as well as Grass-roots public-relations campaigns to target the Generation Y target market. The re-launch was a great success.

Sony’s marketing shrewdness had to the No. 1 brand rating in the United States by Harris poll (2000). Sony was also named as the world's 21st most valuable brand in the same year. In short, Sony’s possession of a world-class marketing acumen that has made Sony a global mega brand is certainly a strength that is hard to imitate and valuable. e) Service

Sony has established many service related activities that are designed to enhance customer satisfaction – that is the feeling that a product or service has met the customer expectation. These activities are mostly carried out at Sony service centres and call-in stations that are manned by friendly and knowledgeable customer service offices. At the service centres, exchanges of defective or broken merchandise are carried out speedily. In order to meet customers’ expectations, warranty and installations are provided by the company. Given that Sony is able to provide and manage the service activities well, it helps in further enhancing the “Sony” brand.

To better understand the activities through which Sony develops a competitive advantage and creates shareholder value, the business system is separated into a series of value-generating 9 activities referred to as the value chain. The processes of transferring inputs into finished products and services (operation) seem to have run into some problems that require Sony’s immediate attention. If the various operation-related issues mentioned above are not adequately and quickly addressed, they may affect the operational efficiency and effectiveness of the primary activities (out-bound logistics, marketing and sales as well as service) downstream. The lack of inter-unit coordination and synergies due to the company’s mix are diverse businesses are properly the two grounds that have affected operation efficiency and effectiveness. Although Sony has reported that it has witnessed a dramatic increase in internal cooperation between the hardware and software managers, more work need to be done and continuous surveillance is still required. The practice of good networking must eventually become a culture of Sony for the company to sustain its competitive advantage.

The summary of strengths and weaknesses of AirAsia is appended in Table 1 below:

Strengths Weaknesses • With such huge reserves means that Sony is capable of • Sony’s high debt ratio (highly leveraged) generating internal funds to finance any expansion. could put itself in danger if the company’s creditors • Possession of the necessary physical resources is likely to start to demand repayment of debt. help Sony generate value-creating competitive advantage. • Weaknesses of divisional structure that • Ability to leverage on technologies well and ahead of its include: (1) duplication of functions at the different competitors to create innovative and high quality products "levels" that resulted in high cost in maintaining the for its customers so as to increase sales and profit margins. management structure; (2) competing business • Ability to motivate and improve productivity of the staffs. units allow office politics instead of sound strategic • Ability to innovate and come up with revolutionary thinking to affect its view on such matters as innovations that mesmerise customers into buying them. allocation of company resources; and (3) Sony’s business units allow compartmentalisation to settle • Positive perceptions of Sony’s reputation that help to boost in that lead to lack in communication and sales and revenues. • cooperation. This in turn runs the risk of in Ability to manage the complex and geographically incompatibilities of its products and services. dispersed in-bound and out-bound logistics activities well. • Possession of a world-class marketing acumen that has made Sony a global mega brand. • Possess capability to train employees and business partners to manage the complex and geographically out-bound logistics activities to enhance operations protocol.

Table 1: Summary of Sony’s Strengths and Weakness

10 Core Competencies

The analysis on Sony’s resources as well as primary and support activities are evaluated using the Resources-Competency Model as shown in Table 2 below.

Functional Capabilities Bundle of Resources involved Activities Ability to conduct the various complex in-bound logistics Technology + Human + Inbound activities well to facilitate smooth operations and Financial + Innovation + Logistics productions. Infrastructure The religious zeal to innovate coupled with tacit knowledge Technology + Human + Operations to build revolutionary products that mesmerise customers Financial + Innovation + into buying them. Infrastructure Possess the capability to train employees and associates to Technology + Human + Outbound manage and perform the vast and complex out-bound Financial + Innovation + Logistics logistics activities that enhance operations protocol. Infrastructure Marketing & Possession of a world-class marketing acumen and tacit Human + Financial + Sales knowledge that has made Sony a global mega brand. Innovation Able to integrate the various resources and functional Technology + Human + Services activities to meet the needs (innovative, quality and reliable) Financial + Innovation + of global customers. Infrastructure Possess the necessary physical resources to help generate Infrastructure & value-creating competitive advantage as well as a large Human + Financial + Finance reserve that can be leveraged to invest in infrastructure to Innovation + Infrastructure further lower costs. Able to leverage on financial resources to provide Human competitive numeration packages and training that help to Human + Financial Resources motivate and incentivise. Staff who shows managerial potential is cultivated to take over leadership posts. Technology + Human + Able to leverage on technologies well and ahead of its Technology Financial + Innovation + competitors to create innovative and high quality products physical Possess procurement know-how that leads to quality input at Technology + Human + Procurement lower costs. . Financial + Innovation

Table 2: Resources-Competency Model used on Sony’s Resources, Primary and Support Activities

To determine whether Sony has any core competencies (sustainable competitive advantages), the company’s capabilities are assessed based on the four criteria – valuable, rare, difficult to imitate and non-substitutable. The evaluation results so far revealed that three core competencies below:

(1) The religious zeal to innovation coupled with tacit knowledge to produce revolutionary products by leveraging on strong R&D and new technologies.

(2) Possession of a world-class marketing acumen and tacit knowledge to plan and execute marketing strategies/plans extremely effectively that goes to build lasting well-known brands.

The evaluation conducted on Sony’s capabilities is appended in Table 3 below: 11 Difficult to Non- Competitive Performance Capability Valuable Rare imitate substitutable consequences implications Average Ability to conduct the various complex in- Temporary returns to bound logistics activities well to facilitate Y Y N N Competitive Above- smooth operations and productions. Advantage average returns The religious zeal to innovation coupled Sustainable Above- with tacit knowledge to produce Y Y Y Y Competitive average revolutionary products by leveraging on Advantage returns strong R&D and new technologies. Possess the capability to train employees and associates to manage and perform the vast and Competitive Average Y N N N complex out-bound logistics activities that Parity returns enhance operations protocol. Possession of a world-class marketing acumen and tacit knowledge to plan and Sustainable Above- execute marketing strategies/plans Y Y Y Y Competitive average extremely effectively that goes to build Advantage returns lasting well-known brands. Able to integrate the various resources and functional activities to meet the needs Competitive Average Y N N N (innovative, quality and reliable) of global Parity returns customers. Possess the necessary physical resources to Average help generate value-creating competitive Temporary returns to advantage as well as a large reserve that can Y Y N N Competitive Above- be leveraged to invest in infrastructure to Advantage average further lower costs. returns Able to leverage on financial resources to provide competitive numeration packages and Competitive Average training that help to motivate and incentivise. Y N N N Parity returns Staff who shows managerial potential is cultivated to take over leadership posts. Able to leverage on technologies well and Average ahead of its competitors to create innovative Temporary returns to and high quality products Y Y N N Competitive Above- Advantage average returns Possess procurement know-how that leads to Competitive Average Y N N N quality input at lower costs. . Parity returns

Table 3: Evaluation of Sony’s Capabilities

12 EXTERNAL ANALYSIS

PESTL Analysis - Macro Environment a) Political

Government policies are important drives for the success of almost every country in the world. In the late 1990s, there was increase privatisation and deregulation of the consumer-electronics as well as media and technology industries globally. It was noticeable that many countries established open trade agreements while others had lowered the entry of foreign direct investments. However, as of mid-1990s, governments’ intervention and regulation remained substantial. For instance, being a Japanese company, Sony was not allowed to set up broadcast networks in the United States due to the policies established by the government. In some countries such as Russia, China, Brazil and Ukraine, the government also failed to take effective interventions to address the piracy matter and thus caused movie and music companies to lose billions of dollars a year. b) Economics (Global-Geographic)

The era of globalisation in the 1990s has the interconnectedness of the various markets, thus leading to emergence of worldwide production markets. Consequently, it allows a broader access to foreign products for consumers and companies. This helps fuel demand for consumer products globally. A study by the XXX (2002) confirmed that the U.S., China, Europe and Asia would continue to offer attractive conditions for the consumer goods, including electronic industry. It estimated that the demand for innovative electronics and network centric products will double by 2010. Although rapid growth and increased trade and businesses may intensify competition (entrance of other competitors) and even lead to ‘non-standard’ competitors enter into the industry to complete, it can present opportunities for consumer-electronics companies like Sony to enlarge their markets.

The early 2000s recession although was not as bad as many predicted it would be, nonetheless it still affects people’s buying power. Globally, Sony was severely affected by the slowdown in the IT industry during 2000-01, which led to a decline in the demand for its computer-related products. As a result, in spite of a 9.4% increase in revenue in the fiscal 2000-01 (mainly due to the improved sales of the PS games console) Sony’s net income dropped significantly from ¥121.83bn in the fiscal 1999-2000 to ¥16.75bn in the fiscal 2000-01. Despite the opportunities the era of globalisation, the overall economic prospect does not look promising in the near future as it is being dampened by the impact of recession. This is likely to affect Sony’s sales and revenues negatively.

c) Socio-cultural & Demographic

Socio-cultural. A survey by Goldman Sachs revealed that 60% of Americans played video games and 61% of these game-buffs were adults; 43% were women and their average age was 28, implying that this form of entertainment was now mainstream. Similar trends were observed in Europe and Japan too. In fact, it was stated that price and 13 quality of the products were the two most important considerations that influenced consumers’ decisions and of course this included without having to compromise on quality and service. In addition, increasingly over the years, the more adventurous Y- Generation is also looking to make their possession of innovative product increase further. This presents an opportunity for all media and technology companies to increase their revenues by offering innovative products and services at reasonable prices.

Demographic. Based on the XXX’s records, the world’s population stood at close to 5 billion as of 2002 and is expected to increase. The average disposable income has also increased over the last 30 years. With the expected increase in the working population globally, it can be anticipated that the disposable income will continue to growth. This spells good news for all companies as they can look forward for more opportunities to improve their sales and revenues. d) Technological

New services such as Internet Telephony and the increase in the use of telecommunications services (such as online shopping) provide Sony with the opportunity to leverage on new technologies to increase their sales. In addition, e- commence and internet-based activities (such as online banking and insurance purchases) are other areas where Sony can derived ancillary revenues from. Better still, in some instances, technology advancements also means having opportunities to reduce operation costs such as savings on commissions for sales agents when sales are done online.

Sony also needs to be cognisant with the fact that other electronic firms would be able to copy Sony's technology in a much shorter time while offering more competitive prices. Typically, a product usually takes a few years to develop but the time is left to reap the results and profits may be much less. As seen in the VTR example, both the VHS and Beta were developed by Sony. However, in a short time, Matsushita came up with a competitive product based on Sony's technology. The margin for technology advancement is therefore diminishing. e) Legal

Intellectual property and intellectual property rights creation as well as commercialisation and protection have given Sony a significant source of comparative advantage of enterprises.

14 Analysis of Industry

Sony has a strong business case to support its foray into the game business. Goldman Sachs has predicted the global sales of games to be US$17.5 billion and consoles to be US$8.7 billion in the year 2002. The former is expected to equal the total box office revenues of the firm industry and eventually catch up even with the saes of music CDs. The sales of games are expected to overtake music CD sales in Europe in 2005. Given Sony’s strong presence in the games industry, this presents vast opportunities to enlarge the company’s market shares.

The consumer-electronics businesses are closely linked to economic activities in the world. As such, Sony needs to be cognisant with the business cycle so that it can to take full advantage of such effects especially when there are changes in discretionary income and consumer spending patterns. As a matter of fact, the music and film companies are losing money as the global economy slowdown due to recession that hit many countries in 2001. Growing digital piracy also compounded the problems and these companies saw their profits further eroded. Apprehensions of terrorist attacks and an unstable geopolitical landscape are set to test the industry as well as Sony’s resilience as a global corporation.

From the Porter’s Five Forces analysis, it is also deduced that competition in the consumer electronics industry is intense and therefore will not be attractiveness (i.e. profitability) to potential entrants. However, the overall industry attractiveness does not imply that every company in the industry will return the same profitability. If Sony is able to apply its core competencies, business model or network well, the company can still achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Moving forward, there is still a silver lining in the gloomy sky. Due to its recession-proof nature and lucrative prospects, the gaming industry is the next big frontier for many entertainment companies, including Sony. In addition, despite the economic slowdown, Sony's Pictures business still managed to record 15% increase in sales and more than sevenfold increase in operating income suggest that firm business may be a defensive industry.

15 Analysis of Competitive Forces - Porter’s Five Forces Analysis a) Threat of Substitute Products (LOW) The possibility threat of substitutes is moderately low; since there are few substitutes from other industries (if any); and most of them are seemed to be obsolete or have on foot out of the door, e.g. digit camera in the place of film camera and fax machines in place of overnight mail delivery. Consider that Sony has built a good reputation and strong customer loyalty, it effectively position the company’s products against product substitute to some extent; this is a surplus for the company. b) Bargaining Power of Buyers (HIGH) The power of buyer is high due to almost no switching cost for customers to switch from one brand to another. The access to the internet also allows customers to have all the information on prices charged by the different companies. The possession of this information may cause price sensitive buyers to switch to buying from companies that offer cheaper prices. On-line shopping has also increased the bargaining power of buyers. c) Bargaining Power of Suppliers (LOW) The suppliers do not have an upper hand (low bargaining power) due to large number of suppliers and customers. Moreover, Sony operates in big global supply chain management and its suppliers are not concentrated. Comparatively, they are also much small in size and thus normally have weak bargaining power. Sony usually engages in direct negotiation with its suppliers in order to secure reliable supply at lower prices. d) Threat of New Entrants (LOW) Threat of new entrants is low as the entry into the industry requires high capital, economies of scale, product differentiation as well as technology and innovation know- how. Moreover, the industry is regulated that every potential entrant is required to obtain approval from the relevant authority of the particular country before the company is allowed to be operated. Every new entrant that infringed into the big players’ territories can expect strong retaliation from them. Therefore, it also serves as a deterring effect to potential entrant. e) Intensity of Rivalry (HIGH) Industry rivalry is high due to relatively intense competition and high exit cost. The high intensity of rivalry is also largely due to the numerous and equally balanced competitors in the markets, generally short product life cycle as well as high R&D, fixed and storage costs. The industry growth is slow and thus further heightens the intensity of competition

From the analysis above, it can be deduced that competition in the consumer electronics industry is intense and therefore will not be attractiveness (i.e. profitability) to potential entrants. However, the overall industry attractiveness does not imply that every company will return the same profitability. If Sony is able to apply its core competencies, business model or network well, the company can still achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

16 Stakeholder Management

Through an established set of public relation protocols, Sony uses a broad set of communication activities that are employed to create and maintain favourable relationship with the various stakeholders that include employees, shareholders, suppliers, media, educators, potential investors, financial institutions, government agencies and officials as well as society in general. Stakeholders who need any information concerning Sony, they could retrieve them readily from the company’s website. In this way Sony creates a common platform (touch-point) where mutual relationship with its stakeholders is facilitated, including serving the wishes and demands of its customers.

Sony satisfies its customers by offering innovative products without having to compromise to quality and reliability. This helps to attract new customers as well as retain existing ones. In order to ensure that all specific needs are met, Sony set up sales and marketing offices in every place that the company has businesses in. Sony’s CEO, Nobuyuki Idei, also played a key role in forging a closer between the company and its stakeholders. For instance, he launched a Sony’s image campaign, "Do you dream in Sony?" and helped coin the term "digital dream kids." The premise of the campaign is to provide shareholders, customers, employees and business partners who come into contact with Sony with the opportunities to create and fulfil their dreams together. All these efforts probably explain why Sony has always enjoyed strong support from its stakeholders and thus helped propel it to become a global megabrand.

Sony’s resounding success with the PlayStation also speaks well of Sony’s ability to meet (or even exceed) the expectations of its business partners and customers. Owing to the dominant position of Sega and Ninetendo in the console market, game developers were initially reluctant to support Sony’s new format. However, Sony was undaunted and pushed forward with PlayStation and eventually managed to convince the developers of the system’s superior design and capabilities. By the year 2000, the PlayStation gained tremendous support from customer world-wide and went on to dominate the market to become the world’s largest selling game console, with 70% share and 80 million units sold.

Besides that, Sony also strives to build strong relationship with the government agencies and officials as well as society. Since 1976, Sony has had an Environmental Conference. Sony's policies address their effects on global warming, the environment, and resources. Thus far, Sony has taken steps to reduce the amount of greenhouse gases that its companies produced as well as regulating the products they get from their suppliers in a process that they call "green procurement". In this way the company establishes good relationship with the various government agencies and officials as well as societies and hopefully through these pro-active initiatives maintain good relationship can be maintained so as further reinforce Sony’s good image. This probably also explain why Sony is able to establish its businesses in the various part of the world readily. In early July 2002, Sony ranked 11th on the Greenpeace chart "Guide to Greener Electronics." This chart graded major electronics companies on their environmental work.

17 Products Life Cycles Analysis – BCG Matrix

The market growth axis correlates with the product life cycle paradigm and predicates the cash requirement a product needs relative to the growth of that market. Reference to the BCG Matrix appended in Diagram 1, the vide-game console produced by Sony is definitely in the ‘Star’ sector since the company’s business has achieved high growth rate as well as acquired comparatively larger market share.

Diagram 1: BCG Matrix

However, although generally ‘Stars’ are leaders in high growth markets and tend to generate large amounts of cash, Sony must be mindful that they also use a lot of cash because of growth market conditions. In addition, Sony also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market as growth markets attract new entrants. For instance, if capacity exceeds demand, then a particular market may become a low margin one and therefore becomes unattractive.

The positions of Sony’s existing products are elaborated below: a) Dog A product becomes a dog due to low market share and a low growth rate and when the product neither produces nor uses up bulky amounts of cash. Walkman and CD players fall under this category. Some analysts opined that Sony’s excessive focus on the maturing consumer electronics business (profit margin below 1 per cent in 2002–03), coupled with increasing competition in the consumer electronics industry was severely affecting its profitability. b) Question A product becomes a question when they have a lower market share and they do not generate much profit or cash. Sony products that fall under this category include semiconductor, music player, VAIO computer and CRT-TV. Due to aggressive competition from its competitors such as Samsung Panasonic and Matsushita, these products could not make as much sales as they expected and their market shares now range between 10-14%, comparatively lower the competitors. c) Star A star is when huge quantities of profit are produced because of the powerful market share and high growth rate. Sony’s digit camera, LCD TV, DVD player and play stations fall under this category. Their market shares range between 25 to 40%, way ahead of its competitors. 18 d) Cash Cow Sony Ericsson W980 from Sony walkman series is a cash cow. We say a product is a cash cow when the product show signs of that the return on assets is better than the market growth rate, and makes more cash than they use. In case of Sony Ericsson W980, it’s a phone with touch sensitive music controls and 8 gigabytes of internal memory. This means one can store up to 8000 songs. Sony Ericsson W980 helps to position Sony Ericsson as a market leader in the music world.

Marketing & Customer Segmentation

Sony invests aggressively in marketing predominantly through extensive advertisements and promotions. Through TV we have seen different advertisements of its products such as Sony TV. Sony also advertises its products by targeting those favourable television programs like sports series as well as its own channel called Sony channel TV. Sony uses some events to promote its products as well. Through posters and newspapers like Times, Sony advertises a wide range of products it offers to its customers. In addition, Sony also advertises its Playstation through the English Premiere League. Unlike other consumer-electronics companies, Sony positions itself as a global media and technology company that provides total entertainment products and services (with compromise to quality and reliability) for teenagers and adults in both developed and emerging economies.

19 Competitors Analysis

Sony starts facing increased competition not only from a stable set of rivals (such as Philips, Matsushita, Toshiba, Sharp, LG and Samsung) but also new adversaries as follows:

BUSINESS CATEGORY COMPANY Computer makers HP, IBM, Dell, Apple and Palm network-equipment makers Cisco and 3Com software makers Microsoft and Sun Microsystems media companies AOL-Time Warner and Vivendi Universal game makers Nintendo photographic-equipment makers Kodak and Fuji mobile phone makers Nokia and Motorola

This complex, multidimensional competition is a bitter reality of the world of digital convergence, where boundaries between traditional industry segments have disappeared although new opportunities open up. Competition between the companies is likely to be intense as most harbour grand broadband visions and have also staked their futures on them. Fortunately, most of the competitors at this point in time do not possess completely the same tangible and intangible resources as that of Sony. With that, based on the competitor analysis framework appended in Diagram 3 below, most of Sony’s competitors are concentrated in ‘quadrant II, III and IV’.

Samsung Matsushita LG Toshiba NEC Sharp AOL-Time Warner Philips Vivendi Universal II I III IV Motorola Apple Kodak Microsoft Fuji Nokia Cisco Dell 3Com IBM Nintendo Sun Microsystems Sega Palm Diagram 3: A Framework of Competitor Analysis

Technically, any firm or competitors in ‘quadrant I’ will use their similar resource portfolios to compete against each other. This lead to the conclusion that Matsushita, Toshiba, Sharp and Philips modelled in ‘quadrant I’ are direct competitors of Sony. In contrast, the other competitors modelled in ‘quadrant III’ share few markets although they all possess comparable resources. As such, these companies do not directly pose as strong rivalry to Sony at this point in 20 time. Sony does need to monitor companies that modelled in ‘quadrant II’ and ‘quadrant IV’. The companies that modelled in ‘quadrant II’ share a high degree of market commonality with Sony and if they eventually manage to acquire similar equitable resources, they may become direct competitors. Similarly, the companies modelled in ‘quadrant IV’ may become direct competitors if they diverse their businesses in Sony’s fortes.

Moving forward, Sony must be cognisant with the fact that competition is very intense in the game console market. Although PlayStation 2 have managed to sell well, Sony’s top competitors like Nintendo and Microsoft in the gaming industry are not letting their guards down. Microsoft launched the Xbox in 2001 and has managed to sell 10 million units by the year 2003. Though it is a far second in console market share, nonetheless it posts serious challenge to Sony’s forte. In the television market, although Sony excels but still faces some strong competition, particularly from Samsung, LG, Sharp and Panasonic. Many of these same brands also appear in the DVD player market that Sony is in. As their products and features closely resemble that of Sony’s, the only way customers can differentiate them from their competitors would be on the product prices. In order to maintain or increase market shares, any of these companies may consider lowering product prices to achieve their objectives. However, if this happens, the profit margin of the remaining players will be compressed and the weak one may be drove out of the market (also known as the vicious cycle). In order to cushion stiff competition, Sony should continue to set up alliances with the fellow electronic manufacturers/ competitor so that win-win situation can be achieved to allow the company to continue to sustain its operations.

A short summary on the possible opportunities and threats are appended in the table below. From the analysis of Sony, it can be deduced that the operating environment is highly competitive and filled with many uncertainties – which means that the company has to prepare themselves well during good times. However, amidst the challenges, there are still many opportunities for Sony to explore and exploit so that it continues to lead and be the most profitable media and technology company in the world.

Opportunities Threats • Globalisation trend provides opportunities such as • Unfavourable government policies. entrance to new markets. • Prolonged global recession. • Privatisation and deregulation suggests more • Piracy. opportunities to expand market and increase • Aggressive competition from competitors, market share. especially low-cost imitators. • High growth video-game industry provides presents the opportunity to increase business globally. • Larger working age population; more disposable income. • New services such as Internet Telephony provide all media and technology companies with the opportunity to leverage on new technologies to increase sales. • Technology advancements provide opportunities to reduce operation costs.

21 WHAT CAN SONY DO TO OVERCOME ITS WEAKNESSES?

Sony’s weaknesses are primarily related to cost and organisational structure. If Sony can overcome them, the company will be able to acquire more profits that can be used to fund the various set-ups and operations unique to strategies. Sony may take the following strategic actions to help overcome its weaknesses. a) Reduce Cost To Increase Profit Margin & Repay Debts

Sony’s high debt-to-equity ratio (highly leveraged) could put itself in danger if the company’s creditors start to demand repayment of debt at the same time. The highly leveraged status also reflects unfavourably of Sony as it may make it more difficult to acquire addition loans. Hence, Sony must build creditors’ confidence by apprising them on its financial status periodically as well as paying interests and debts upon due. In the long run, Sony must strive to increase its revenues with lower cost of production so as to achieve higher net profit margin as this allows the company the flexibility to unload more debts to lower the debt-to-equity ratio. b) Create Project-Based Work Teams that Report to Top Management

Sony’s business units operate almost autonomously. At times competing business units allow office politics instead of sound strategic thinking to affect its view on such matters such as allocation of company resources and cooperation. To overcome this shortcoming, Sony may create project-based work teams that report to the top management. c) Centrally Manage Selected Resources

Under a divisional structure, Sony faces duplication of functions at the different "levels" that resulted in high cost in maintaining the management structure. Sony should merge some resources administrative support or office equipment and centrally manage them to help reduce costs and organisational complexity. This allows Sony to utilise resources at their maximum potential. d) Improve Interaction and Communication

It was deduced that generally there is lack of communication and cooperation among the Sony’s business units due to the compartmentalisation, a disadvantage that divisional structure brings. This runs the risk of incompatibilities of Sony’s products and services. Hence, Sony top management should support more opportunities for its business units to interact and cooperate via social interacting activities for staff to help to develop camaraderie and team spirit.

To be successful, Sony’s business units must be well managed by strong executive leadership which understand each business unit as well as is able to provide leadership to the business unit chiefs when introduce new strategic directions and make them partner more effectively partner, across the business units.

22 WHAT CAN SONY ACHIEVE BY EXPLOITING ITS STRENGTHS

By exploiting Sony’ strengths, it helps reinforce the redefined image, brings improvement to product design and features, revives matured sub-brands, quicken production of new revolutionary products as well as lowers costs and increases profits. a) Imprint Redefined “Sony” In Customers’ Mind

Sony could leverage on its marketing know-how to better promote the redefined “Sony” – Sony faces the daunting task of selling its broadband vision and new identity. Sony must first shed the “customer-electronics” image and explain to users features of its new products. Secondly, Sony needs to be more coordinated in explaining what digital convergence means and how Sony’s grand vision fit into it. These processes are vital as the new identity allows Sony to gain better competitive advantage in future. b) Incorporate Customer-Oriented Features To Innovative Products

Encountering the aggressive strategies of its competitors that possess superiority in design and have incorporated customer-oriented features into their products, Sony must do more like encapsulating the “cool” factor in its products. Leveraging on it superior innovation and marketing acumen, Sony should be able to morph its products fairly quickly to meet the changing consumers’ taste/preferences. This helps increase sales/revenues and consequently allows Sony to chart its path back to profitable. c) Revitalise Matured Sub-Brands

Sony could leverage on its marketing know-how to revive its matured sub-brands by re-launching new products or products with new features using the sub-brand labels. d) Increase the Pace of Next Generation Innovations Production

Sony could exploit its strong R&D and technological know-how to increase the pace in producing the next generation innovations such as the paper thin TV display and digital chopsticks concurrently. Maintaining this competitive advantage is crucial in reinforcing the mechanism that fall under Sony’s strategies. e) Be More Profit Oriented

As a mature company, it should continue to be profit orientated and emphasise on market share, especially where Sony's market is shrinking in Japan. Using its strength in innovation and HRM, Sony can aim to deliver quality and innovative products to customers (achieving differentiation); at a level of costs that approach those of its competitors such as Samsung. To achieve this, Sony can impose internal cost leadership through acquiring the core competency of cost-effective service excellence that enshrined in a unique and self-reinforcing system of organizational processes and activities.

The actions discussed above will in turn bring greater support to the company’s business- level differentiate strategy that focus primarily on achieving differentiation through innovative and quality products.

23 WHAT STRATEGIC ACTIONS SONY SHOULD TAKE TO SUPPORT ITS BUSINESS-LEVEL DIFFERENTIATION STRATEGY

The construct of differentiation strategy emphasises on high quality offerings, significant investments in innovation and staff development and branding. In order to continue to meet these requisites, Sony may adopt the strategic actions as follows: a) Maintain The Leader Position in Product Innovation & Quality

Sony’s approach – doing what others don’t – has paid off, in the form of great products that people covet. Throughout its history, Sony innovations have become part of mainstream culture with the ability to capture the imagination and enhance people’s lives. In recent time (2003), Sony continues to fuel industry growth with the sales of innovative and quality Sony products such as VAIO notebooks (that raise the bar in both form and function) and digital cameras (that allow pictures to be captured on a floppy disk). Considerable inroads have also been made in professional broadcasting such as the production of Betacam. Moving forward, Sony should continue to maintain the market leader position in product innovation and quality through strong R&D, indigenous use of new technologies and superior marketing acumen. b) Invest in Broadband Network

Sony is a corporation with convergence at its very heart. Driven by an integrated business model, the company is well positioned to bring new benefits to consumers by combining hardware, software, content and services. In the company’s view, the Internet is an "e-Playground" with new ways to enjoy Sony products and it opens up opportunities for Sony to produce new revolutionary products in future. Moving forward, Sony has planned to continue to invest heavily in broadband network so as to allow an entirely new form of entertainment such as digitised movies and music as well as Internet content and games to be accessed ubiquitously. Sony took an infant step recently by launching SonyStyle.com, a new information rich e-commerce site designed to build a closer relationship between Sony and its customers. c) Invest in Internet-Enabled Products

Sony’s strategy is focused on four gateways to the networked world. They are the digital televisions and set-top boxes, VAIO personal computers, mobile devices (such as the CLIE handheld devices and digital phones) and PlayStation2 game consoles. To ensure that these products possess internet-enabled capability, Sony has developed new audio-visual applications designed to personalise technology that give consumers easy, ubiquitous access to entertainment and information – no matter whether the content comes from cable, satellite, terrestrial, packaged media or the Internet – the company’s software strategy. d) Reinforce Brand Values & Promote a World Class Brand

Chairman of the Board, Norio Ohga, once said: "... The most valuable asset of all is the four letters, S, O, N, Y. I tell them, make sure the basis of your actions is increasing the value of these four letters..." This underscores the strong emphasis on the importance of reinforcing the brand values at Sony. The company also embarked on the project 24 dubbed ‘Being Sony’ to help the various stakeholders assimilate the brand values better. Sony worked hard in this area and was rated the number one brand in the U.S. by the Harris poll (2000).

The phenomenal strength of the Sony brand worldwide is surely a testament to the company’s reputation for producing innovative products of exceptional quality and value. Sony celebrates brand diversity to connect with consumers across various lifestyle segments. For instance the grand MiniDisc format re-launch under the Walkman brand in 2000 was meant to communicate subtly that Sony is well connected to the world, the lifestyle that people pursue, particularly the Y Generation. e) Encourage Dreams

Sony strives to create things – thins not essential, yet hard to live without – for every kind of imagination with its products that stimulate the senses and refresh the spirit and ideas. Sony describes profoundly on its website “We are not here to be logical or predictable. We’re here to pursue INFINITE possibilities. We allow the BRIGHTEST minds to interact freely, so the UNEXPECTED can emerge” to emphasise the aspiration of creating things from imagery. Sony’s top management knows that creativity is the company’s essence and thus they frequently take chances in innovation work, aiming to exceed the expectations of consumers.

In order to succeed using differentiation strategy, Sony must possess the ability to continuously produce innovative and quality products that exceed customers’ expectations and at costs that approach near its competitors.

25 CAN SONY SUSTAIN ITS SUCCESS?

The large and untapped markets in some regional areas coupled with Sony’s difficult to imitate resources and capabilities would ensure its future success. a) Conducive Environment for Growth

The major macro environment factors suggest a promising environment for the growth of electronics and network service businesses amidst global slowdown. According to XXX (2002), “the demographic fundamentals of large populations that include rising middle classes with increasing disposable incomes as well as the desire for innovative electronics and network centric products, paint an extremely encouraging demand picture in the long run”. The XXX (2002) confirmed that the U.S., China, Europe and Asia would continue to offer attractive conditions for the consumer goods, including electronic industry. It estimated that the demand for innovative electronics and network centric products will double by 2010. b) Strong Finance Resource

Although Sony had not been profitable, its 2002 annual report still showed that the company possessed huge cash and cash equivalents balances of ¥683.8 billion. Sony’s long-term financial status is stable according to credit rating that the Standard & Poor's Ratings Services Company awarded. This is why between 1998 and 2002, bankers had provided funds to help the company in its joint ventures and investments despite global economic slowdown and terrorist threats. Sony’s strong finance resource is vital for growth and ready to wrestle any economic crisis. This in turn sustains success. c) Obsession with Innovation Culture

One of the most important requirements to sustain success in the electronic and networked service industries is to possess a genuine innovation culture. Unlike other electronics and networked service companies, Sony preached innovation with religious zeal. For example, Sony has relentlessly innovated and brought an array of trend-setting electronics products such as Walkman, Compact Disc and PlayStation into the market. All these innovations had created new markets of their own. To further innovate, the company was the first to launch the first entertainment robot, the dog-like “Aibo”, which became a runaway success. Following the success, Sony engineers are now working on intelligent humanoid robots. With such as an obsession with innovation, Sony is certainly poised to sustain its success. d) Disciplined Approach

Sony’s disciplined approach has assisted the company to avoid setbacks. Sony was able to implement cost-focused operations in the media business fast that in turn allowed its TV-series production and movie business to achieve handsome profit margins. The ability to ensure that the central objective of achieving bigger cost advantages than the company’s rivals (by continuously implementing cost reduction measures along its value chain more effectively) allows Sony to achieve continual success.

26 e) Prowess in Marketing

Sony’s prowess in marketing will help sustain the company’s success. The company possess the tacit knowledge and know-how to accompany product launches with highly effective marketing and positioning efforts and this often earns Sony handsome premiums. Sony’s marketing shrewdness had led the company to acquire the No. 1 brand rating in the United States by Harris poll (2000). Sony was also named as the world's 21st most valuable brand in the same year. In short, Sony’s possession of a world- class marketing acumen that has made Sony a global mega brand is certainly a strength that is hard to imitate and valuable.

As the global electronics, media and networked service company that constantly lead innovation and create new markets, Sony is certainly well poised to sustain its success. Moving forward, in order to continue to gain market share and sustain its competitive advantages as an electronics, media and networked service company in the high demanding environment, Sony must develop new ways to manage both customer relationships and suppliers or partners to optimise customer loyalty, supplier relationships, and revenue.

27 WHAT ARE SONY’S SUCCESS FACTORS?

There are four success factors that helped Sony’s ascent to global supremacy in the consumer electronics sector and they are: a) Visionary Leadership

Sony is a classic case to prove the strategic importance of a visionary leader in carrying a brand to dizzying heights. Sony’s management team along with the CEO was responsible to create an environment that nurtured experimentation and innovation. Sony was also one of the early Asian brands to recognize the importance of branding, which was again supported and lead by the management team. b) Religious Zealous to Innovation

Innovation defined the brand character of Sony. Sony grew to global prominence due to its ability to constantly create products before other companies could conceptualise them. Sony also possesses the ability to sense the hidden consumer demand and create an entire product category through its innovative products. For instance, when Walkman was introduced, there was no existing market for portable music but it went ahead to became a very successful innovation. Sony’s innovative culture will help differentiate the company from its competitors for a very long time. c) Pioneer Advantage

Given the innovative edge, Sony emerged as the pioneer in almost every sector that it was operating in. Being the first mover (or inventor) in many cases, Sony has a great leeway in defining the rules of the game. In addition, the brand image was enhanced every time a competitor imitated Sony as it became an indirect way to accept Sony’s leadership position. d) Human Capital

The greatest asset of Sony is of its human capital, especially its engineers which make up the R&D department. Their constant innovation is crucial for a consumer electronic firm which specialises in audio-visual equipment and aim to generate higher profit margin to cover the higher cost needed for its primary and support activities. Subsidiaries are well established in many parts of the world which give Sony hands-on knowledge of the local market. Being an international corporation, Sony also has good access to talents and brings them into the company.

28 WHAT ARE THE REASONS THAT CONTRIBUTED TO SONY’S DECLINE? a) Unrelated Diversification

Many Western and Asian companies such as GM Motor and Samsung that have become global forces to reckon with started from trimmed to become bloated conglomerates. But these companies seem to have learnt the importance of focusing on core competence and trimmed down, channelling its resources around one or two dominant businesses. But Sony still seems to have stuck up in multiple businesses. This sort of unrelated diversification not only drains the resources to a great extent but also diverts the brand focus from the core of the brand. b) Innovation Dearth

The case of Apples’ iPod explains this point very well. Walkman made Sony the undisputed leader in portable music player category. As is the usual case, success breeds corporate complacency and Sony did not follow up with any outstanding and innovative product line to sustain the initial success. Apple came out with iPod that appealed to the younger generation worldwide. This helps established Apple as the undisputed leader in mobile music market and possibly dented Sony’s brand reputation. The innovation dearth is probably the result of Sony’s lack of consumer oriented innovation. c) Lack of Brand Evolution

For Sony to continue to be successful in the current ultra competitive globalised market place, it has to make itself very relevant to the current customer segments. Harping back on past laurels and expecting the customers to still support the brand due to its past glory will be a grave mistake as has turned out in Sony’s case. Sony has not been very successful in evolving as the brand for the new masses of the twenty first century. Apple, Samsung and a few others have hijacked that from Sony. d) Lack of Cooperation

With Sony entering markets such as the VTR with no standards, it might be more beneficial for the company to cooperate with some of its competitors as opposed to competing on conflicting software that supports the system. The new entrants and existing competitors are much stronger than 20 years ago and invariably Sony’s strength will be weakened if the company would to act alone. e) Lack of Strategy

Product development, manufacturing and marketing are all well established but the firm lacks any formal long-term direction. The original mission statement of Sony is also outdated as it references to W.W.II. Its short-term strategy is also lacking as there is little emphasis on profit and accountability of R&D efforts. As s result, Sony although possess strong components but is unable to coordinate in a coherent way to achieve its maximum potential.

29 WHAT ARE SONY’S FUTURE CHALLENGES & WHAT CAN IT DO TO OVERCOME THEM? a) Achieving Seamless Cooperation Between Business Units

The biggest challenge that Sony faces is achieving total cooperation between its business units and buy-in of its network vision. There is little cooperation between the content people in the U.S. and the technical wizards in Japan. As such, the CEO, Idei, works tirelessly to achieve organisational integration by starting an initiative to bridge the hardware and content businesses. He also carried out extensive reorganisation to change organisational mindset. In addition, to foster cooperation between SBUs, Sony could increase the frequency of direct contacts between division managers, establish liaison roles in each division and form temporary work teams or task forces around projects that also focus on extracting and sharing competencies that are embedded within several divisions. To ensure that the various initiatives mentioned early are successfully executed, Sony should also evaluate its divisional managers’ performance on the basis of how well they have facilitated interdivisional cooperative efforts. Sony’s reward systems should also emphasise on the overall company’s performance, besides the outcomes achieved by individual divisions to help overcome problem associated with strategic business unit form. b) Dilemma: What Sony Should Do To Counter Low-Cost Imitators

Low-cost imitators also produce Sony’s mainstream products. To counter them, Sony tries to keep at the forefront of innovation by making innovative interconnected digital multimedia products. Although this helps in mitigating the situation, it brings another set of problems. The content business, already plagued by piracy, is concerned about the implications these new devices for its copyrighted content. The result of using innovative interconnected digital multimedia products to counter low-cost imitators also prevents Sony in making many devices that its competitors already produced. c) Winning The Standards War

In the age of digital convergence, winning the standards war is vital as it can be a winner-takes-all situation. As such, there will be fierce competitions. Sony’s broadband dream can only be a reality if its own standards prevailed. To avoid failure, Sony’s should explore joint alliances for joint standard specification. d) Competition vs Collaboration with Conventional & Non-Conventional Competitors

The world of digital convergence means that Sony has to compete with conventional and non-conventional rivalries. On one hand Sony has entered the terrains of these companies in the media, computer, gaming and networking markets. On the other hand it has also witnessed these very players enter Sony’s traditional fortes. In the age of convergence, it is unlikely that a company can do everything itself but to cooperate selectively with its competitors. The model that involves consumer-electronics companies in operating manufacturing plants also has to be taken by outsourcing that they can concentrate on their core businesses. Sony has already started outsourcing and collaborating with its competitors and it should explore if it can do more. e) The Scourge of Piracy 30 The proliferation of the Internet and digital gadgets translated into easier piracy of digitised copyrighted content. Despite an increase in demand, global music sales paradoxically fell by 9% in 2002. Illegal copies and sales were estimated to cost movie and music companies US$7 billion a year. If this trend continues, Sony’s content divisions may go out of business. In order to stop this trend, Sony teamed up with others to form an association to urge the U.S. government to step up antipiracy measures. f) Technology Adoption

Despite elaborate preparation for the next generation of networked entertainment, the networks themselves remain conspicuously missing. By mid-2003, not a single product from Sony has incorporated any of the next-generation features. There are no elaborate broadband networks in place to support the next-generation features and products. In 2002, about 30% of Sony’s Walkman sales are units that still used the traditional cassette tape, for which the Walkman was first launched in 1979. Sony, having no relationships with telecom companies, can only wait – but not forever. Perhaps, Sony should form alliances with some telecom companies and find ways to expedite progress. g) Defining the Redefined “Sony”

Sony still faces the daunting task of selling its broadband vision and new identity to the customers due to the complexities of the digital convergence industry. An example is Sony’s highly innovative product Airboard, a combination of TV and PC with and LCD screen. Customers do not know what it is, whether it is a PC or a TV or something else. Dealers do not know how to sell it. To accomplish this uphill task, Sony must first shed the “customer-electronics” company image and explain to its stakeholders what digital convergence means and how the company’s product fit into it. Secondly, the company must convince its shareholders and employees of Sony’s grand vision through coordinated buy-in activities.

31 WHAT CAN SONY DO TO OVERCOME THREATS

The threats that Sony faces include unfavourable government policies, prolonged global recession, scourge of piracy and aggressive competition. To overcome them, Sony may take the actions as follows: a) Globalisation – Against Unfavourable Government Policies

In the 1990s, Sony, being a Japanese company, was not allowed to set up broadcast networks in the U.S. Sony then tried to make up for it by investing in satellite broadcasting in Japan (through partnership) and other countries. Given this constraint, Sony globalised production that in turn allowed the company in exploiting a shift in demand in international markets. In short, Sony should continue to use globalisation as a tool to mitigate unfavourable government policies. b) Lower Costs, Generate Extra Revenues – Against Prolonged Global Recession

Lower Cost. To mitigate negative effects of prolonged global recessions, Sony should further lower cost. To achieve this, it should hasten the pace in restructuring its music business and implementing the various cost-cutting measures. It should also explore more low-cost locations where the company can move its manufacturing plants to. Lastly, Sony could continue to outsource its production plants. All these allow Sony to acquire a wider profit margin and thus help fight against sluggish demand.

Generate Extra Revenues. Against a backdrop of prolonged global recess, intense competition as well as the competitors are also able to copy the products in a much shorter time, Sony could use its strong R&D and technological know-how in non- consumer business (business sector and industries) to generate extra revenues; Sony could supply high technology equipment and parts. In addition, Sony could also expand its product range by offering lower priced so that it can also compete head-on with low-cost imitators. This also helps Sony increase country market shares. c) Work with Local Governments Collectively – Against Scourge of Piracy

The proliferation of the Internet and digital gadgets translated into easier piracy of digitised copyrighted content. Illegal copies and sales were estimated to cost movie and music companies US$7 billion a year. If this trend continues, Sony’s content business may be badly affected. To stop this trend, Sony teamed up with AOL-Time Warner and Viacom to urge the U.S. government to step up antipiracy measures. d) Innovation & Strategic Alliances – Against Aggressive Competition

Competitors, especially low-cost imitators that also produce Sony’s mainstream products are threatening the company’s profits. To counter aggressive competition, Sony must try to keep at the forefront of innovation by making innovative and revolutionary products that include interconnected digital multimedia products. In the age of convergence, it is unlikely that a company can do everything itself. More often than not, it has to cooperate selectively with its competitors. To ensure that the company will not encounter a major setback, Sony should work towards joining alliances with its competitors, particularly for joint standard specification.

32 WHAT IS SONY’S CORPORATE-LEVEL STRATEGY & HOW DOES IT HELP CREATE VALUES?

Sony’s corporate strategy uses related linked diversification strategy. The company’s revenues distribution (see table below) shows that more than 30% of its revenue comes from outside its dominant electronics business. Sony’s businesses are also found to be related (or linked) to each other in some manners such as transfer of knowledge and core competencies between the business units to develop and exploit economies of scope.

Electronics Games Music Pictures Others 64% 12% 8% 8% 8%

In at least 2 ways, the related linked diversification strategy helps Sony create values as follows: a) Avoid Duplication in Resource Allocation

Firstly, because the expense of developing a core competence has been incurred in one of the firm’s businesses, transferring it to a second business eliminate the need for that second business to allocate resources to develop it. For example, Sony electronics business could transfer its competence in design and manufacturing to video game consoles and information-technology products. In this way Sony has avoided duplication in resource allocation which in turn helps lower cost. If Sony is able to sell its product with higher prices at a cost comparable to its competitors, it would translate to higher profit margin. This brings value to the company and shareholders. b) Allow Business Units To Gain Competitive Advantage

Secondly, resource intangibility is another source of value creation through corporate relatedness. As we know, intangible resources are difficult for competitors to understand and imitate. In view of the difficulty, the business unit that receive a transferred corporate-level competence often gains competitive advantage over its rivals immediately. In this way it helps create value. For instance, in 1995 Sony appointed Nobuyuki Idei, a young executive, to be CEO of the corporation. He then outlined the transfer of corporate-level core competencies so that the company’s standalone products could be transformed to being network-enabled devices. The various business units thus gained competitive advantage from Idei’s knowledge and foresight that are hard for others to understand and imitate.

SONY’S INTERNATIONAL CORPORATE-LEVEL STRATEGY

33 MODES OF ENTRY, BENEFITS & CHALLENGES

Introduction

Sony uses global strategy to offer standardised products across country markets, with competitive strategy being dictated by the home office. This allows the company to achieve economies of scale and offers greater opportunities to take innovations developed at the corporate level or in one country and utilise them in other markets.

Modes of Entry

Primarily Sony adopts multiple modes of entry that include exporting, forming joint ventures with international partners, acquiring a foreign firm and establishing a new subsidiary. It particularly favours joint ventures as the company has a very bad experience after the acquisition of the movie and music businesses in 1988/89. Sony nearly went bankrupt. From that near-death incident onwards, Sony has avoided any mergers and acquisitions. Moreover, the rationale for the merger wave in the late 1990s was the convergence of content and distribution. In Sony’s plan, it has intended to use its own networked devices as the distribution channels for its content. This allows Sony to focus on developing its next-generation gadgets. Nonetheless, to ensure that the company has a strong footing in networked entertainment, Sony actively engages in growing itself larger through strategic alliances. The development of the PlayStation itself was aided by alliances forged between hardware designers and creative game-software developers, the creation of the compact disc with Philips, mobile phone business with Ericsson, online distribution site with Universal Music Group, CLIE operating system with Palm Corporation, internet access with AOL as well as cell microprocessors with IBM and HP. These alliances have provided Sony an alternative to Microsoft products and thus helps keep the company’s licensing costs down which in turn improve financial performance.

Benefits

Through international diversification, Sony has managed to extend some of its products’ life cycles (e.g. VCR and Walkman), provide incentives for more innovation and produce above-average returns. International expansion also helps Sony to achieve lower cost production costs (as portions of its operations could be re-located to low-cost foreign locations), mitigate the risk associated with currency fluctuation as well as lower economic and politic risks. In addition, international expansion has allowed Sony to derive the following benefits and in turn create values for its stakeholder: a) Increased Market Size

Increased market size has allowed Sony to achieve both economies of scale and economies of scope. In additional, it has allowed the company to produce value- creating processes in countries that are strong in science knowledge and with abundant talents.

b) Returns on Investment

34 Investing in international markets has allowed Sony to generate returns the company’s significant investments such as plants, capital equipment and R&D. c) Economies of Scale and Learning

By expanding the company’s markets, Sony is able to enjoy economies of scale, particularly in manufacturing operations. Sony also is able to exploit core competencies in international markets through resource and knowledge sharing between the business units and network partners across country borders. This sharing of knowledge generates synergy, which helps Sony to produce higher-quality products/services at lower cost. In addition, working across international markets has provided Sony with new learning opportunities. d) Location Advantages

Sony relocated some manufacturing plants to countries that offer lower-cost labour to take advantage of location.

Challenges

However, the benefits that Sony has enjoyed may be tempered by political (e.g. unable to get permit to establish a broadcast station in the U.S.) and economic (e.g. prolonged recession in some countries in early 2000s) risks and the problems of managing a complex international firm with operations in multiple countries (e.g. lack of cooperation between Sony’s divisions). In addition, to achieve efficient operations, Sony headquarters have to ensure that its business units share resources and facilitate coordination and cooperation across country boundaries. On this note, Sony’s CEO worked relentlessly to achieve organisational integration. His efforts such as the establishment of the Network Application and Content Service Sector that aim at bridging the hardware and content businesses and extensive reorganisation to change mindset had showed promising results. Sony witnessed a dramatic increase in internal cooperation.

35 USING COOPERATIVE STRATEGIES AT SONY

Sony uses 3 means to grow – internal developments (primarily through innovation), mergers and acquisitions and cooperative strategies. By cooperating with other companies, Sony is able to leverage its core competencies to grow and improve its performance, thus creating more value for its stake holders. In particular, strategic alliance is a primary type of cooperative strategy that Sony uses it very often to create competitive advantage, which in turn helps enhance the company’s marketplace success. For instance, Sony’s corporate-level cooperative strategy with AOL in 2001 seeks to leverage on Internet technologies and services in ways that maximise customer value while improving the company’s position relative to its game console competitors.

Sony also engages in a non-equity strategic alliance with a consortium of 9 companies to push for the adoption of “Blu-Ray” DVD recording standard over a rival standard from NEC and Toshiba. In addition, to accelerate the development of the next- generation “cell microprocessor” technology, Sony enlists business-level cooperative strategy (vertical complementary) and partners with IBM and Toshiba.

Year Company Business Mid-1990s Rupert Murdoch’s News Corp Satellite broadcasting Mid-1990s Games developers PlayStation 1996 Intel Notebook-PC 2001 Ericsson Mobile communication – Sony Ericsson (Joint Venture) 2001 Universal Music Group Online-music distribution – PressPlay 2001 Palm Corporation CLIE handheld computer 2001 Linux Operating system – devices eg. “CoCoon” set-up box 2001 America Online (AOL) Internet services 2001 IBM and Toshiba Next-generation “cell microprocessor” technology 2001 Consortium of 9 companies “Blu-Ray” DVD recording standard (over a rival standard from NEC and Toshiba)

Sony is likely to succeed in its alliances as the company has proven itself to be active in solving problems, being trustworthy and consistently pursuing ways to combine partners’ resources and capabilities to create value. For instance, although Sony Ericsson was still making losses as of 2003, Sony and Ericsson have both pledged more resources into the venture. Having never really been successful in capturing any substantial market share, the joint venture with Ericsson allows Sony to improve the company’s ability to compete in an uncertain competitive environment. The joint venture has allowed both companies to establish long-term relationships and transfer tacit knowledge.

The probable reasons of Sony for strategic alliances by market are as follows:

Market Reason Slow-Cycle • Gain access to a restricted market • Maintain market stability (e.g. establishing standards Fast-Cycle • Speed up development of products and services • Form an industry technology standard • Speed up new market entry • Share risky R&D expenses • Maintain market leadership • Overcome uncertainty Standard-Cycle • Gain market power (reduce industry • Overcome trade barriers overcapacity) • Meet competitive challenges from other • Gain access to complementary resources competitors • Establish better economies of scale • Pool resources for very large capital projects • Learn new business techniques

36 There are 4 cooperative strategy risks that Sony must be cognisant with. Firstly, its partners may exhibit opportunistic behaviour. An example of opportunistic behaviour is an attempt to acquire as much of Sony’s tacit knowledge as possible without offering much in return. Secondly, its partners may misrepresent or exaggerate its competencies to lure Sony into strategic alliances. Thirdly, they may fail to bring promised resources and capabilities to the alliances. This may be caused by different cultures and languages. Lastly, Sony may make investments that are specific to the alliance while its partner does not. As a result, the output from the alliance may be inferior, leaving the alliance objectives unfulfilled.

There are 2 ways in which Sony can carry out cooperative strategies. Firstly, the company can develop formal contracts with its potential partners and put in place an effective monitoring system to reduce risks. However, this approach is costly and can be stifling. Secondly, the company may also adopt less formal contracts and impose fewer constraints on partners’ behaviour. Although this approach is less costly and provides more flexibility, Sony has to trust its partners in executing the agreements properly.

Given the challenges associated with achieving and maintaining superior performance and in light of its general success with cooperative relationships, one might expect that Sony will continue to use cooperative strategies as a path toward growth and enhanced performance.

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