Recent Advances in Energy and Environment Integrated Systems
A Comparative Study on the Horizontal and Vertical Integration Business Models: The Possibility of Turnaround of Panasonic and Sony
PARK, Yousin Department of Business Administration, Ube National College of Technology, Tokiwadai, Ube City, Yamaguchi Pref., JAPAN [email protected]
CHEN, Yunju Shiga University, Faculty of Economics, 1-1-1 Banba, Hikone City, Shiga, JAPAN [email protected]
This paper discusses the horizontal and vertical integration business models and turnaround management of Japan’s electronics manufactures in the view of groups’ interorganizaitonal relationships. We visualize and examine the group structures of Panasonic and Sony by social network analysis before the massive losses last year. Our findings will give insights for examining the turnaround possibility of Japanese electronics manufacturers in the future.
Key-Words: Horizontal and Vertical Integration Business Models, Social Network Analysis, Panasonic, Sony, ROIC, Turnaround
1 Introduction performance, they have to reevaluate their Japan’s electronics, one of the world’s most interorganizational relationships because in Japan competitive industries, has recorded massive losses companies generally engage in long-term after-tax in fiscal 2011. It was primarily the result of transaction relationships. Up to now, there are few sluggish performance in the production of TV sets, researches of corporate turnarounds providing such Japanese manufacturers’ flagship products. Some point of view for analysis. newspapers pointed out that Panasonic and Sony’s Panasonic restructured its group businesses after late actions for concentration in core competence 2001, but the slump in 2011 was due to Panasonic’s among large amounts of businesses were the main failure in concentrating its core competences. We reason leading to the massive losses. Other would like to set our first research question: What competitors such as Hitachi and Toshiba shifted were the structural conditions of Panasonic and their core businesses to profitable domains at an Sony group then in before 2011? Here we use kinds early stage so that they could avoid the losses. of quantitative analysis: ROIC (Return on Invested Panasonic (formerly known as Matsushita Capital) and Social Network Analysis (Centrality Electric Industrial Co., Ltd.), the leading TV sets Analysis). Index of ROIC is provided to review the manufacturer in Japan, especially urged to escape relationship between the shifts of performances and from the current slump. Many economists predicted turnarounds (primarily restructuring). Social it would be hard for Panasonic to recover this time, network analysis is an effective quantitative method whereas it is not the first crisis that Panasonic has to to make whole interorganizational relationships of a cope with. In the past, this company’s drastic corporate group visible and countable. turnaround was successfully achieved and well- The second research question: Do the group known as the “2001 Reform”. Panasonic recovered structures affect the result of turnarounds? Since its profitability by concentrating its core business Panasonic and Sony Groups represent two different and changing the relationships with its subsidiaries kinds of organizational structures, we compare their and other cooperative firms [1][2]. Our researches differences by social network analysis and discuss indicated that if Japanese companies want to attain their implications for corporate turnarounds. Our substantial and consecutively positive change in paper ultimately aims to answer the turnaround
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possibility of Japanese electronics manufacturers, 3 Research Methods and Data and thus is an exploratory study to reveal the group In this study, the research methods include 2 relationships of Panasonic and Sony’s before 2011. kinds of quantitative analysis. First, we calculate the index of ROIC each year and then review the correlation between ROIC and the number of 2 Outlook of the Previous Researches employees in the same year. ROIC can refer to the Turnaround refers to a situation that companies index of performance, which is defined as net recover their performance while they suffer serious operating profits less adjusted taxes (NOPLAT) profit decline, business crisis etc. So far many over the invested capital of the enterprise (IC), researchers have studied the various factors of crises where IC is the sum of the company’s equity and and strategies/methods of turnarounds [3]. For debt [6]. We describe the calculation of ROIC in example, Slatter & Lovett (1999) indicated seven more detail below: factors for recovery process: stabilization of the crisis, leadership, stakeholder’s supports, strategic ROIC = NOPLAT/IC focus, organizational reform, reform of core- process, financial restructuring [4]. Although Slatter NOPLAT = revenues – cost of goods sold – & Lovett pointed out that organizational reform and operating expenses – depreciation charges – reform of core-process are essentials for corporate adjusted taxes growth during the turnaround period, they did not IC = value of shareholders’ equity + value of debt provide insights into the management of organizational structures. In addition, in these By examining the correlation between the turnaround researches, little was mentioned about employee numbers and ROIC, whether a company the timing that companies take actions for implements layoff or not will be estimated. If layoff restructuring in turnaround process. is effective, there will be a negative correlation Using the social network analysis, Chen and Park between the employee numbers and ROIC. The data (2009), Park and Chen (2010) visualized the stream collected from 2000 to 2008. relationships of Panasonic Group after its corporate The other method is the social network analysis reform 2001 and indicated some critical issues while based on graph theory. According to graph theory, analyzing Japan’s corporate turnaround cases. Such Network Centrality is a concept that can indicate as: how to handle the relationships with long-term which occupies critical positions in the network. cooperative companies and the multi-diversification Centrality is one of the well known indexes in this businesses. Panasonic’s turnaround was found to field. The most frequently quoted Freeman’s (1979) reduce and centralize transactions to some important centrality measures are degree, closeness and affiliated firms in 2002. From the result of network betweenness [7]. analysis, Panasonic was supposed to share important The degree centrality defined as the number of resources only inside the group and prevents a ties that a node has with the others. Indegree along technology spillover to others. with outdegree are two respective measures that As the previous researches indicated, to manage degree centrality has. Indegree is a count of the the turnaround, a company, actually the corporate number of ties directed to the node and outdegree is group has to carry out not only the internal reform, the count of opposite directions. In case of a valued but also inter-firm reform. A corporate group graph, the indegree would be the sum of tie values consists of a parent company, which occupied the flowing into the node. The indegree of node A central position in the group, and subsidiary received from node B is simultaneously the corporations that have the relationships with their outdegree of node B (received from node A). parent in capital, human resource, and transaction Betweenness means a high probability to occur on a aspects. Recently, large companies found many randomly chosen shortest path between two subsidiaries and affiliated corporations through randomly chosen nodes; such concept was capital relations and allocate related businesses to introduced by Freeman. The last centrality of those corporations to pursuit certain growth and closeness is a measure of the length of shortest paths profits [5]. In this sense, the scope of within two nodes. interorganizaitonal relationships is inevitable and The data on capital and transactions relationships necessary for turnaround analysis. In this paper, we of Panasonic Group was collected from IRC’s The adapt the group level view in examining the Actual Situation of Matsushita Group: 2006 edition turnaround management of Japan’s electronics (Panasonic was used after 2009) while Sony’s was manufactures. from the same report series The Actual Situation of
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Sony Group: 2005 edition [8][9]. The data shows No.400000 of employees PROIC25 350000 20 the situation after the treatment of Panasonic and Panasonic's ROIC 300000 Panasonic's Sony for the IT bubble in 2001 but before 2011. We employees 15 250000 use the items of “Main Shareholder” and “Main 10 200000 Customer”, and define the data as “1” if group 5 companies have the relationships with other 150000 0 companies in capital and transaction aspects, 100000 otherwise “0”. In addition, the company name is 50000 -5 based on IRC’s printings. Next, we then input the 0 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 data into matrix table. The data was analyzed by the software UCINET 6.0. Figure 1: The shift of ROIC, and the number of employees of Panasonic and Sony groups
3.1 Case Study and Analysis Figure 1 presents the shift of ROIC and the Japanese management is characterized long-term number of employees of Panasonic and Sony relationships, such as relationships on employment, Groups. Panasonic had a drastic ROIC down in transaction, and capital etc. Panasonic is one of the 2002. After the 2001 reform, Panasonic’s ROIC typical firms which their management styles refer to recovered and keeps growing. Although 30,000 as Japanese management. Founded in 1918, employees were downsized in the 2000-2004 Panasonic has grown in the base of home period, 50,000 employees increased due to the electronics, and then diversified its business into internalization of Matsushita Electric Works Co., non-electronic products and services such as home Ltd. (now Panasonic Electric Works: PEW). The renovation services. It is said that Panasonic is a decrease of the number of employees from 2004 vertical integration company. Panasonic was also again mentions that lay-off was exercised famous for its divisional organization structures continually and effective in Panasonic’s because Panasonic used to let several business restructuring until 2008. Sony also encountered a divisions to produce the same products. This drop of ROIC in 2006. Sony seems to downsize its mechanism increased Panasonic’s market share, workforce after 2001’s IT bubble until 2004, but the however, duplicative business has become serious number of employees still increases even after 2006. problem since the end of 90s. After Panasonic made However, Sony announced the plan for restructuring Matsushita Electric Works Co., Ltd. and Sanyo by downsizing the workforce in 2012. Electric Co., Ltd. wholly-owned subsidiaries in 2011,Panasonic continually faces the problems of integrating its divisions and reorganization. 3.3 The interorganiztional relationships of On the other hand, Sony Corporation business Sony and Panasonic segments consist of audio, video, communications Based on the data provided by IRC, we graph the and information technology products for the transaction networks of Panasonic and Sony by consumer and professional markets. Music, pictures centrality analysis. Table 1 is the list of transaction and computer entertainment operations, finance etc. network of Sony and Panasonic. From the table, we are other respective business divisions in the group. can see that not only the subsidiaries but also the Sony was the pioneer to adapt the divisional suppliers, Panasonic have more numbers of company organization structure in 1994. It is companies in the network than Sony. because Sony is a more highly global-oriented company, and in order to handle many unrelated Sony (2004) Panasonic (2005) businesses, it adapts structures somewhat different Node Class Firms Node Class Firms with Panasonic. However, Sony encountered a Number Number 1-33 Sony Sony Corp., 1-65 Panasonic Matsushita slump since 2000s. How to reorganize the (33) Group Sony Music (65) Group Electric Entertainment Industrial Co., unprofitable businesses and recover the competence etc. Matsushita Electric in information home appliance business are critical Works etc. issues for Sony. 34-467 Sony Matsushita 66-625 Panasonic Alps Electric, (434) suppliers Electric (569) suppliers Kyocera, Industrial Co., Corporation, Cannon, SDS Seiko etc. Instruments, etc. 3.2 The relationship between ROIC and the Table 1: The list of transaction network of Sony and number of employees Panasonic
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nodes inside Sony Group than Panasonic Group. If we broaden the transaction relationships to cooperative companies (suppliers). Matsushita Electric Works and Victor Company of Japan, Limited (JVC) have high indegree in the network. However, PEW became wholly owned subsidiaries of Panasonic in 2011, and JVC was deconsolidated from Panasonic Group in 2008. Table 2 and Table 3 express the degree centrality on capital and transactional relationships of Panasonic and Sony Groups. Table 2 is the degree centrality on capital relationships. The indegree Figure 2: The transaction network of Sony group in were calculated in the number of investments and 2004 rate of total investment amounts, which the former is as absolute frequency and the latter is a relative Figure 2 is the transaction network of Sony in frequency index. The rate of indegree was 2004. Transaction network consists of parent introduced because the sizes of networks are company, affiliated firms (subsidiaries), and different and the rate can indicate the weight of a cooperative suppliers, Figure 2 includes only parent node in a network. company and affiliated firms. Figure 2 presents that Since the degree centrality is defined as the the parent company of Sony, along with Sony’s number of ties that a node connects, it is obviously subsidiaries, such as Sony EMCS Corporation,, that the degree centrality of Sony Corporation (the Sony Energy, Sony Chemical Corporation (now parent company of Sony Group) ranked at the top. Sony Chemical & Information Device Corporation), Other consolidated companies such as Sony Music are the central nodes in the Sony’s network. Among Entertainment Inc., Sony Financial Holdings Inc. the businesses of Sony Group, companies that have also rank high but their numbers of investments are high degree of centrality are observed to be the core much fewer than their parent company. Panasonic divisional companies, material and devices-related almost had the same capital relationship structure ones. with Sony. Besides the parent company, the Figure 3 shows that in Panasonic’s transaction consolidated companies with high degree of network in 2005, Matsushita Ecology Systems Co., centrality were Matsushita Electronic Devices Co., Ltd., Matsushita Battery Industry Co., Ltd., Sansha Ltd., Matsushita Ecology Systems Co., Ltd. Eletric Manufacturing Co., Ltd., and Matsushita The parent companies of Sony as well as Electronic Devices Co., Ltd. are the central nodes Panasonic played as the central role in the capital companies in the network. This means that the core networks. However, the companies with high divisions, material and devices-related subsidiaries degree centrality in Sony Group are non-information had high degree of centrality, whereas it was similar home appliance divisions such as music and finance to Sony’s situation. Nevertheless, the structures of related ones. It is different from Panasonic Group, transaction networks of Sony and Panasonic Group which has high degree centrality in devices and air differed from each other: there were more important conditioner divisions.
Sony (2004) Panasonic (2005) Firm No. of Firm No. of investments investments (rate) (rate) Sony Corp. 25 Matsushita 41 (54%) Electric (43%) Industrial Co., Ltd Sony Music 3 Matsushita 9 Entertainment (6.5%) Electronic (9.4%) Devices Co., Ltd. Sony Financial 3 Matsushita 6 Holdings Inc. (6.5) Ecology Systems (6.35) Co., Ltd Figure 3: The transaction network of Panasonic Table 2: The degree centrality on capital group in 2005 relationships: Sony and Panasonic
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Sony (2004) Panasonic (2005) Sony (2004) Panasonic (2005) Firm No. of Firm No. of Firm No. of Firm No. of transactions transactions transactions transactions (rate) (rate) (rate) (rate) Sony Corp. 286 Panasonic Corp. 197 KOA 27 Kyosha Co., Ltd. 16 (10.388%) (13.4%) (5%) (5.9%) Sony EMCS 267 Matsushita 146 Yokowo Co., 19 Shimoda Group 15 (9.7%) Electronic Devices (9.9%) Ltd. (3% ) (5.5%) Co., Ltd. SEMITEC 18 Tamura Corp. 14 Panasonic Corp. 215 Panasonic 124 Corp. (2.8%) (5.0%) (7.8%) Communications (8.3%) Enplas Corp. 17 Ontec Co., Ltd. 12 Co., Ltd. (2.6%) (4.1%) Toshiba Corp. 190 Panasonic Mobile 119 Tamura Corp. 17 Shidengen Co., Ltd. 11 (6.8%) Communications. (8.0%) (2.6%) (3.7%) Co., Ltd. Table 4: The Outdegree of transaction networks: Sanyo Corp. 172 Victor Company of 118 (6.2%) Japan, Ltd. (8.0%) Sony and Panasonic Table 3: The Indegree of transaction networks: Sony and Panasonic Ltd., Shimoda Group, Tamura Corp., Ontec Co., Ltd., and Shindengen Co., Ltd.. Table 3 is the transaction networks of Sony and Take a more detail look on the attributes of the Panasonic focus only on the relationships among companies. The attributes of companies with high consolidated and affiliated subsidiaries. In the case outdegree, mean the main suppliers, in the two of transaction network, indegree means the number groups were different from each other. Although of transactions received from other companies in the KOA provided resistors to Sony, companies who network. Companies who have high indegree can provide products to Sony concentrated in materials, be seen as the assembler of the network. In the contents, and services fields. In the case of network of Sony in 2004, Sony Corporation., Sony Panasonic Group, the companies who have high EMCS Corporation, Panasonic Corp., Toshiba outdegree characterized device/production system Corp., Sanyo Corp. had high indegree. On the other (Kyoshy Co., Ltd. is a Printed Wiring Board hand, the companies with high indegree in manufacturer) as well as digital network business Panasonic transaction networks were Panasonic (for example: Panasonic Communications). Corp., Matsushita Electronic Devices, Panasonic Devices and the digital network business in Communications Co., Ltd., Panasonic Mobile Panasonic Group have deep relationships with each Communications Co., and Victor Company of Japan, other. Ltd. The rate of transaction weight listed in Table 3 indicates that the parent company of Panasonic Group weighted 13.4% of the transactions in the 4 Disscussion and Conclusion network of 2005. The weight was much higher than In this paper, we tried to ask two research Sony Corp. in Sony’s network. Panasonic questions. One was: “What were the structural concentrated its transactions heavily on the parent conditions of Panasonic and Sony group then in company and devices-related subsidiaries, while before 2011”? The second research question: “Do Sony diversified its transactions to non-electronics the group structures affect the result of divisional companies. It is obviously that both turnarounds”? Using the quantitative methods of complete products and devices businesses were ROIC and social network analysis, the empirical important in the Panasonic Group; however, the findings can be discussed and summarized as products were assembled and distributed mainly follows. through the parent company. By reviewing the shift of ROIC and the change of Table 4 is the outdegree of Sony and Panasonic’s the number of employees, there was a revision of transaction networks also focus only on the the life-time employment system in Panasonic relationships among consolidated and affiliated because there is a negative correlation between the subsidiaries. Companies with high outdegree mean employee number and performance (ROIC) from that they supply products to other companies in the 2000 to 2008. The decrease of the number of network. In the transaction network of Sony in employees from 2004 again mentions that lay-off 2004, KOA, Yokowo Co., Ltd., SEMITEC Corp., was exercised continually and effective in Enplas Corp. and Tamura Corp. were in high Panasonic’s restructuring until 2008. On the other outdegree. Companies in Panasonic’s transaction hand, Sony also encountered a drop of ROIC in network that have high outdegree are Kyoshy Co., 2006 but the number of employees still increases
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Sony Panasonic centralized and integrated group structure would be Capital Core Parent Parent company as favorable for taking early turnaround actions. Based relationships nodes company as central role in the central role capital network on these findings, we can build up hypothesis and in the then identify how capital, transaction structures of a capital network group affect the result of turnarounds. Attributes Non- Devices and air So far, there is little literature captured the of core information conditioner nodes home divisions differences of group structures between Panasonic appliance and Sony by quantitative analysis tools, nor the divisions Transaction Companies Few More numbers of turnaround situations that Japanese manufactures relationships numbers numbers of subsidiaries and were in. This study shows the possibility for the subsidiaries suppliers than and Sony using of social network analysis on the turnaround suppliers research. The examination between performance Core Core Core divisions, nodes divisions, material and and network relationships, questions about how material devices-related capital, transaction structures of a group affect the and devices- subsidiaries related result of turnarounds etc. are left for the future subsidiaries work. customers diversified concentrated its its transactions transactions heavily on the to non- parent company ACKNOWLEDGMENTS electronics and devices-related This research was supported by the Grants-in-Aid divisional subsidiaries companies for Scientific Research
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