BUSINESS STRATEGY REPORT

MSc. Business &Management
September 2010 – September 2011

PREETHI SANKARAN DINESH VERMA

Page 1

EXECUTIVE SUMMARY
The report assesses three sub-businesses of Sony Corporation - Sony Playstation 3, Sony Reader and Sony Vaio. First, it reviews the external environment of the firm within current climate. The report then breaks down the analyses per sub-businesses, examining where each product stands in comparison with competitors, brings out the causes for the same, and explains sources of profitability. The level of competitiveness in each industry is analysed, following which a main competitor analysis is carried out. It then undertakes an internal resource based analysis to determine the quality of resources and capabilities of the firm with respect to each sub-businesses, whether they are allocated appropriately, and suggests changes to this. Based on said internal and external analysis, it recommends strategic options for each business. This is followed by a brief financial analysis with respect to competitors. Finally, an internal review of the firm is undertaken with respect to the culture and human capital to assess the level of strategic fit with the goals and direction of organisation as a whole. To conclude, it recommends a strategic path for the sub businesses that aims to leverage the strengths and improve on the weak areas within the larger context of the organisation, which will ultimately augment profit margins and maximise shareholder value, and most importantly increase value for the consumer. The report finds that PlayStation is gaining market share, edging closer to rival XBOX360, however, it needs to focus on integration of technologies and service, and implement some damage control in order to regain trust. eBook readers are rapidly growing, and Sony must push its product more aggressively, adding features that appeal to the multi-capability movement that is arising within the industry. Sony Vaio must focus on cutting costs – a cost advantage is a better strategy here. It must also implement regional advertising campaigns, to gain regional market share, a strategy that was successful in the past. Finally, Sony needs to implement then Japanese principle of Kaizen throughout its organisation, in order to ensure reliability of goods and services as perceived by the customer, increasing product value and upholding brand image.

Page 2

TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................................................... 2 OVERVIEW ........................................................................................................................................... 5 PESTLE Analysis ............................................................................................................................... 5 1. SONY PLAYSTATION 3 .............................................................................................................. 7 1.1. 1.2. 1.3. 1.4. 2. External Environment & Industry Analysis ........................................................................... 8 Competitive Analysis ............................................................................................................ 10 Internal Environment Analysis ............................................................................................. 12 Option Analysis .................................................................................................................... 13

SONY READER ........................................................................................................................... 15 2.1. 2.2. 2.3. 2.4. External Environment & Industry Analysis .......................................................................... 15 Competitive Analysis ............................................................................................................ 17 Internal Environment Analysis ............................................................................................. 19 Option Analysis .................................................................................................................... 20

3.

SONY VAIO ................................................................................................................................. 21 3.1. 3.2. 3.3. 3.4. External Environment & Industry Analysis .......................................................................... 21 Competitive Analysis ............................................................................................................ 22 Internal Environment Analysis ............................................................................................. 24 Option Analysis .................................................................................................................... 25

FINANCIAL ANALYSIS .................................................................................................................... 26 MARKET TRENDS AND FORECASTING ....................................................................................... 27 STRATEGIC ALIGNMENT WITH CULTURE ................................................................................. 29 RECOMMENDATION ........................................................................................................................ 30 BIBLIOGRAPHY ................................................................................................................................. 33 APPENDIX ........................................................................................................................................... 37

Page 3

TABLE OF FIGURES

Figure 1 Number of active units ................................................................................................ 7 Figure 2 Year-on-year sales ....................................................................................................... 7 Figure 3 Porter's five forces (PlayStation 3) .............................................................................. 8 Figure 4 Console gaming business ............................................................................................ 9 Figure 5 Strategic grouping chart - gaming ............................................................................. 10 Figure 6 Console sales by quarter - 2011................................................................................. 11 Figure 7 Comparative analysis - Consoles............................................................................... 12 Figure 8 Resources and capabilities mapping .......................................................................... 13 Figure 9 Weighted option analysis – PlayStation 3 ................................................................. 14 Figure 10 US adult Ereader installed base, 2009-2012............................................................ 15 Figure 11 eBook reader market share ...................................................................................... 15 Figure 12 Porter's five forces - eBook reader .......................................................................... 15 Figure 13 eBook Reader Industry ............................................................................................ 16 Figure 14 eBook Reader- Strategic Grouping Chart................................................................ 17 Figure 15 Comparative Analysis - eBook Readers .................................................................. 18 Figure 16 eBook & Print book Industry CAGR ...................................................................... 19 Figure 17 Resources & Capabilities Mapping - Reader .......................................................... 19 Figure 18 Weighted Option Analysis - Reader ........................................................................ 20 Figure 19 Laptop Market Share ............................................................................................... 21 Figure 20 Porter's five forces analysis - Laptop ...................................................................... 21 Figure 21 Strategic Grouping Chart - Laptops ........................................................................ 22 Figure 22 Comparative Analysis - Laptops ............................................................................. 23 Figure 23 Resources & Capabilities Chart - Vaio ................................................................... 24 Figure 24 Weighted Option Analysis - Vaio ........................................................................... 25 Figure 25 Share Price Comparison .......................................................................................... 26 Figure 26 Net income as a percentage of revenue ................................................................... 26 Figure 27 Country Breakdown Of Device Ownership ............................................................ 27 Figure 28 Working for Sony .................................................................................................... 29

Page 4

OVERVIEW
This report aims to undertake a strategic review of Sony Corporation, with a focus on the sub-businesses of Sony PlayStation3, Sony Reader & Sony Vaio. First, the external environment of the corporation is analysed within the current climate. Using this as basis, the report breaks down into the three sub-businesses and examines them within an external and internal context, and ends by recommending strategic options based on findings, market research & forecasting.

PESTLE Analysis
First, a PESTLE analysis has been carried out to assess the external market Sony operates in. Political Factors: • Japan‟s current transition from single to double party system abstracts resulting implications for Japan-based multinational corporations, in terms of future legislation, government & trading policies.

Economic Factors: • • Reduction in disposable income resulting from recession has had a negative effect on consumer electronics sales worldwide, increasing price competition. As a result of overwhelming public debt of 225.8% (Central Intelligence Agency, 2011) along with deflation & frail public demand, Japan faces global pressure to cut public debt over recent months. Ratings agencies have warned Japan of possible reduction in credit rating (The Economic Times). The effect of changes in currency exchange rates has been unfavourable for Sony 2007 onwards, stripping away billions of yen (Sony, 2010) and such unfavourable currency exchange rate is deterring investors.

Social Factors • Sony‟s largest market is Japan which accounts for 43% of sales (Sony, 2010), however, it is an ageing population, with a median age of 44.8 years (Central Intelligence Agency, 2011). Loss of trust from customers following security attack & failure to notify immediately has tarnished Sony‟s brand image.

Technological Factors • • • Consumers are moving toward multi-functional devices, meaning the demand for dedicated devices is reducing. The market for 3D related technologies is growing rapidly. Industry-wide movement toward networked products & services and cloud computing.

Page 5

Legal Factors • • • Age and content restrictions from international regulatory bodies (USK &PEGI). EU warnings over privacy issues following security breach on PSN network & Sony Online Entertainment properties. (CNET, 2011) US parties press for legislation of uniform national security and data breach standards for notification.

Environmental Factors • Some of Sony‟s manufacturing activities were suspended after recent tsunami (Sony), resulting in share price drop of 9% (Yahoo Finance). Regulations on the impact of electronic trash by Restriction of Hazardous Substances and Waste Electrical and Electronic Directive. The additional procedures and certification required as a consequence of these regulations have been increasing costs, and affecting supply chains.

Page 6

1. SONY PLAYSTATION 3
Video gaming wallet share for households has reduced from 9.3% in 2009 to 8.5% in 2010. (Nielsen, 2011). Although PlayStation 3 reached 50m sales in April 2011 (SCEI), its active installed base is at 42m as seen from graph below:

Figure 1 Number of active units

Wii clearly dominates the console war, and Xbox360 dominates the US market but its global sales are not as high, allowing PS3 to exceed its sales for fiscal year 2010, as seen from graph:

Figure 2 Year-on-year sales

Although Kinect had helped boost Xbox360‟s sales, in Japan, the PS3‟s Move has been outselling Kinect almost at 1:2. (NextGen) However, according to recent NPD analyst data,

Page 7

over 2/3rds of Xbox360‟s sales included bundles with Kinect, compared to PS3‟s 1/5th. Moreover, top selling Kinect software has outsold their Move counterparts and while PS3‟s global sales have increased 12% year-on-year, it still falls short compared to Xbox360‟s 27% and Wii‟s 14%. (NPD, 2011) From cumulative sales (see Appendix A.1), the calculated industry concentration is 0.35, which signals high concentration and extreme competitiveness. The Herfindahl–Hirschman index for the industry is calculated to determine the industry concentration using ∑ , where s represents the market share.

1.1.

External Environment & Industry Analysis

The figure on the right depicts Porter‟s 5 forces with complements, as a basis for understanding the competitiveness in the industry. Ostensibly, it affirms the high concentration value, and further explains the sources of such stiff competition - overall, the industry is unattractive for new entrants, and the main concerns are competitors and the increasing number of substitutes. The explanation for each of five Figure 3 Porter's five forces (PlayStation 3) forces can be found in the Appendix (A.2). In terms of substitutes, PC gaming poses an interesting issue because the hardware is readily accessible in most cases, lowering overall cost. Moreover, the global online gaming market one of the largest amongst the main online entertainment markets (music, games & video). Along with mobile phone gaming, which is currently challenging the portable gaming console market, and the ever growing social gaming market, these substitutes are widely absorbed by casual gamers. The factors increasing rivalry overpower the effect of brand loyalty, making it an extremely competitive business to operate in. TVs and games are pre-requisites to console game play, and form the complements in the analysis, as can be seen from the figure below. Sony‟s ownership of developing studios and the SCEI developing its own games maintains some control over the games that are playable on the PS3, however, third party developing studios produce games for both XBOX360 and PS3, mitigating the hold over the software market for PS3.

Page 8

Figure 4 Console gaming business

The above diagram breaks down the console gaming business and helps understand sources of profitability. Sony‟s PlayStation business makes most of its money from royalties from licensing of gaming software. For example, every $60 game sold would render $7 profit to Sony, with the rest absorbed by the retailers, distributors and the publishers who pay the associated advertising agencies and developers (Los Angeles Times). Sony has strong support from in-house developing teams and 3rd party developers that help drive profit for PlayStation. Game play experience can be broken down to the quality and performance of each of its components: the console, the game and the TV. Therefore, if any one of the elements are delimiting, it would affect the collective experience. By understanding this relationship & perceptions and expectations of the gamer, key success factors are discerned: 1. Price – is the product competitively priced? 2. Innovation – does it offer innovative technology and game play? 3. Online platform – does it have an extensive collection of online games? 4. Reliability – how reliable are the hardware and platform? 5. Exclusive games/ support of 3rd party developers – how strong is this? 6. Technology – how high-tech are the systems and products? 7. Timing – launch at appropriate time? To understand how the competitors are performing with respect to these, a competitive analysis is undertaken next.

Page 9

1.2.

Competitive Analysis

A strategic grouping chart is formed with a view to understand where the firm competes. The chosen axes are x: price and y: performance & gaming experience:

Figure 5 Strategic grouping chart - gaming

From the above, two points can be discerned: (1) in terms of serious gamers, the significant threats to consoles are from PC gaming & portable consoles, and (2) mobile & online gaming is an rapidly growing group, currently already eating away market share from portable consoles, a popular choice amongst casual gamers. According to the latest NPD report, digital game downloads for mobile devices are almost half of all video game (full game) downloads (NPD, 2011). Although a popular choice for hard-core gamers who prefer the flexibility to modify their graphics as they please, the threat of PC gaming may not be that high – as of 2009, computer game sales were a mere 4.80% of total game sales (see Appendix A.2)

Page 10

Figure 6 Console sales by quarter - 2011

After its launch in March 2011, the sales of Nintendo‟s 3DS overtook every other video gaming console, clearly signifying the demand for 3D gaming. Furthermore, the sale of PS3 last year seems to be edging closer to Wii‟s, leaving XBOX360 behind as a result of their regional focus. A Competitor Analysis – Nintendo Wii Nintendo has sold over 86 million units of Wii, a sales figure almost double PlayStation 3„s 50 million units. • Strategy – Build a low cost console with moderate technology and sell it at a lower price to capture the amateur market. It was pure game play that Wii capitalised on – the experience & the technology to enhance it. Objectives – Gain market dominance by appealing to an untapped market segment, do it at a low cost, and earn profit on every console sold from the very beginning. Assumptions – Their main assumption is that the hardcore gaming market is rife with competition and unprofitable; and this has worked brilliantly for them. Resources & Capabilities – Key strengths include innovation, technology and capability to capture and respond to market trends & gaps. Predictions – Following the announcement of Wii 2, the firm is expected to bring something innovative again, as motion sensing as already been adopted by competitors, resulting in decline in sales growth.

• • •

With the main competitor analysis under the belt, it is instructive to understand where PlayStation 3 stands in comparison, and the following table illustrates this.

Page 11

Figure 7 Comparative analysis - Consoles

It can be seen that PlayStation3 markedly falls short in 3 aspects: 1. Price: Sony‟s strategy to produce a powerful console doubling as a „multimedia box‟ providing value for money by offering a huge hard disk, Blu-Ray with wireless capability and free online gaming (at a considerably high price for a console, but cost effective for the features) failed to attract consumers to the degree it hoped – either consumers failed to understand the „value-for money‟ aspect of the product, or weren‟t too inclined towards the propriety format, which was still at its infancy at the time. Four years after its release, PlayStation 3 broke even and started selling at a profit from June, 2010 (IGN, 2010). This is a very long time to break even, considering that gaming console cycles usually last 5 years. The latest slim PlayStation 3 sells for $300, double of Wii‟s $150. Xbox is in between at $200. 2. Timing: Sony lost a lot of ground by failing to launch PlayStation 3 in time, releasing in Europe & Australia 8 months after its Japan & US launch, missing the critical NovemberDecember season. Consequently, market share was lost to Xbox360 who wanted the first-tomarket advantage, even sacrificing Xbox for it. Clearly, competition was underestimated. 3. Reliability: The significance of recent data breach and network down time cannot be overemphasised.

1.3.

Internal Environment Analysis

This involves assessing the resources and capabilities of the firm in terms of strategic importance and relative strength, specific to PlayStation3 (see Appendix A.3 and A.4) (Grant, 2010). The following graph summarises this:

Page 12

Figure 8 Resources and capabilities mapping

Sony should utilise the key strategic strengths technology, R&D, developing studios, product development & online gaming to the maximum and invest in these areas. Avenues that need to be worked on are marketing, patents and brand management to support the above. The next section investigates strategic options that the firm could undertake by leveraging these key strengths.

1.4.

Option Analysis

Based on aforementioned analyses, the following come through as strategic options: 1. Expansion of dedicated gaming studios: A good number of exclusive games are one of the key success factors in this industry. By drawing from R&D and profit derived from existing developing studios, further expansion would prove to be a successful driver of profit, as PlayStation 3 makes most of its money from software sales. 2. Innovation by integration of 3D and motion sensing: This option has an integrated approach that aims to leverage various profit driver aspects. 3D gaming a rapidly growing industry, with an estimated 500% growth rate for 3D TV purchase by 2011 (Accenture, 2011); and motion sensing peripherals have shown rapid adoption, as seen earlier. 3. Target Market Expansion & Focused Advertising: Playstation 3 is not popular across all demographics. In 2010, PS3 primary console female players were 9% and 21% for males Wii takes away a huge chunk of the female population at 80% see Appendix A.13). In order to capture this still underserved market, targeted market diversification, software title expansion toward more interactive, incorporating motion sensing and encouraging group play is suggested.

Page 13

4. Renovating the Advertising Campaign: Revamping the marketing strategy for PlayStation 3, which clearly explains the advantage it has over competitors and explaining the value of the console is suggested. This would also give a chance to do some damage control and place the product in the minds of the consumers. The need for greater mindshare is required. The following table conducts an option analysis to identify the optimal course of action, based on strategic criteria for evaluating alternatives:

Figure 9 Weighted option analysis – PlayStation 3

It can be seen that integration of motion sensing and 3D gaming, and focusing on core game play has turned out to be the most feasible option, that best utilises the current strengths of Sony. This option doesn‟t call for much capital investment either, making it financially feasible given current operating loss.

Page 14

2. SONY READER
The eBook reader industry has shown phenomenal growth over recent years, and this trend is expected to continue. In US alone, it is estimated that eBook reader sales will reach more than 20 million by the end of this year, which is 8.7% of the adult population; and by 2012, this number is expected to go up to 12% (eMarketer, 2011). Amazon‟s Kindle is the market leader in eBook reader industry with the global shipments in Q3 amounting to 1.4 million, leaving Sony behind at 0.23 million, coming in at 4th rank. The industry concentration ratio is 0.24, signifying high competition, with some scope for profitability for new entrants. US absorbs a majority of the global shipments at 72.4%. 2010‟s global shipments are around 10.8 million; and this figure is expected to go up to 14.7 million in 2011, and 16.6 million in 2012 (IDC, 2011).

Figure 10 US adult Ereader installed base, 2009-2012

2.1.

External Environment & Industry Analysis

Figure 11 eBook reader market share

The threat of new entrants, supplier power and buyer power is low for the same reasons as for PlayStation 3. It is important to consider the threat of substitutes, however – Smartphones have shown one of highest growth rates in the industry at 26% (Accenture, 2011). Traditional books, although a viable substitute, have witnessed a decline as a result of rapid growth of the eBooks market. According to Amazon, for the last year, the sales ratio of eBooks-to-printed books was 105:100; with Waterstone‟s reporting similar
Figure 12 Porter's five forces - eBook reader

Page 15

sales. In the UK, the ratio was 242:100. These staggering numbers puts the importance of eBooks into perspective – Amazon has been selling hardcover books for 13 years, and Kindle has been out for just 9 months (Guardian, 2011). However, a caveat – the launch of iPad in April 2010 has skewed the market share of dedicated eBook readers. Compliments are eBooks which are available on company websites linked to major publication houses and some also have independent authors. Connection to these databases via 3G, Wi-Fi or computers is essential to facilitate download and exchange of eBooks.

Figure 13 eBook Reader Industry

The above diagram explains all the actors in the eBook reader business, and indicates sources of profitabilty. It is important consumer to have ease of obtaining ebooks via various channels of connectivity, and exchange of ebooks with other readers. Although Kindle offers a browser, its interface is very archaic and fails to add the value it intended. However, it offers connectivity in Wifi, 3G and via PC, making it superior to the Reader in that aspect. Sony supports both PDF and ePub formats, which Kindle doesn‟t. From the above, the following success factors are arrived at: 1. 2. 3. 4. 5. 6. 7. Range of ebooks – how extensive is the range of ebooks offered? Connectivity – does the product ensure full connectivity? Value added features – does the product offer features that add extra value? Design – how competitive is the product design? Manufacturing capabilities – does it ensure reliablity of products? Distribution and retail – does it product have a sufficiently wide distribution network? Advertising – is the product being advertised adequately?

Page 16

2.2.

Competitive Analysis

The following graph summarises where Reader competes, in comparison to others competes. The chosen axes are x: price & y: product features.

Figure 14 eBook Reader- Strategic Grouping Chart

Clearly, the threat from smart phones and media tablets cannot be ignored. They do the same job, with great functionality. The growth of media tablets is expected to be around 160% and smart phones 26% (Accenture, 2011). A Competitor Analysis – Amazon‟s Kindle Kindle has easily taken over the eBook reader market as founder and CEO Jess Bezos notes: “We had our first $10 billion quarter[...]Kindle books have now overtaken paperback books as most popular format on Amazon.com” (BookSeller, 2011). In 2010, Amazon‟s net sales were up 40% and net sales have increased by 28% to $1.15 billion; its international segment sales were up 26% to $5.74 billion (Amazon, 2011). Whispersync for Kindle is Amazon‟s reply to the movement toward integrated services across devices. • Strategy – Using current resources to provide a profit making product in a rapidly growing industry and it has not changed since 1997 – the „1997 Letter to Shareholders‟ inclusion in every annual report signifies this and re-affirms trust as a stable company. Objectives – To capture the market with a easy to use eBook reader with value added features, and use dominance in electronic commerce, to market it aggressively. They seek to be the “Earth’s most customer-centric company for three primary customer sets: consumers, sellers, and enterprises.” (Amazon, 2011).

Page 17

Assumptions – Amazon recognises that their competitors have greater resources, more customers, longer history and more brand recognition; and also what they‟re capable of doing with it. Resources & Capabilities – It is a mutilnational e-commmerce giant that has diversified products and services with competitive factors: selection, price, convenience, reliability and quality. Predictions – Maintaing market share by focusing on key strengths and international expansion.

The following table assesses where Sony Reader stands in comparison to others in the bussiness:

Figure 15 Comparative Analysis - eBook Readers

It is important to note that although Sony has a global focus its competitors Pandigital and Nook are US centric, with China based Hanvon a close competitor for regional markets. Demand for eBook readers over recent years has been driven by price competition amongst epaper based offerings, the introduction of colour readers, and the expansion of digital books and periodicals across genres and offerings (IDC, 2011). The graph on the next page illustrates current and projected CAGR (Compounded Annual Growth Rate) of eBooks and print books from 2005 onwards – print books‟ CAGR from 2010-14 is expected to decline by 5%, whereas it increases by 40% for eBooks. By 2014, eBooks are expected to have a share of 14% in the industry, overall.

Page 18

Figure 16 eBook & Print book Industry CAGR

2.3. Internal Environment Analysis The resources and capabilities assessment tables can be found in the Appendix (A.6 and A.7); and is summarised:

Figure 17 Resources & Capabilities Mapping - Reader

The main weaknesses of the firm with respect to the Reader are marketing and sales, strategic innovation and brand value. Sony reader fails to capture the mindshare of prospective customers as a result of weak marketing. For a firm that puts much importance on innovation, it falls short in its Reader business by not leveraging those resources to offer a competitive product.

Page 19

2.4.

Option Analysis

Based on previous analyses, the following options are advised: 1. Introducing value added features: Considering that smartphones & tablet PCs pose a serious threat, a sure way to augment market share is by increasing the functionality of the reader. For example, having just a single product from the line offering wireless internet & 3G is not enough – it needs to be a feature of each edition. 2. Advertising Campaign: An aggressive marketing campaign is suggested, one that would successfully educate the consumers about the competitiveness of the product, and absorb the adoption of potential owners of eBook readers. This is mainly because Amazon has an effective vehicle for communication. Therefore, the Reader needs more publicity. 3. Alliances with periodicals: Although they offer periodicals on their library, this needs to be diversified to gain the attention of the market. Having two major publication house‟s support is not enough to compete with a giant like Amazon. The offerings have to be increased, and faster. The table below assesses the options based on strategic factors to recommend a feasible option:

Figure 18 Weighted Option Analysis - Reader

Page 20

Introduction of value added features rank the highest, mainly because the focus here is maximising customer value, and offering it at a competitive price. If Sony wishes to effectively gain from the rapid growth in the eBooks business, it must pull all stops – increase the functionality of the product, ease of access and connectivity and offer the Reader at a truly competitive price.

3. SONY VAIO
As of 2010, HP commands the greatest percentage of laptop market share at 18.50%, with Vaio not even in the top 5. Although it is one of the profit making businesses for Sony, it doesn‟t hold a great amount of market share in the industry as seen from graph below: The industry concentration ratio is 0.25, implying a high level of competitiveness amongst the top players in the industry. The global PC industry is expected to have a 2007-2012 CAGR of 5.4% by 2012, Figure 19 Laptop Market Share with the slow economy causing reduction in the figure (Datamonitor , 2008). Changes in technology and innovation and the reduction in the performance-price ratio will continue to drive this industry, which is currently facing serious competition from Smartphones and tablet PCs.

3.1.

External Environment & Industry Analysis

The sources of competitiveness in the laptop industry are similar to previous sub-businesses. The swiftly growing tablet PCs, especially the overwhelming adoption of iPad has reduced the number of laptop sales in recent months significantly. Buyer power is high here due to the large number of products in the market & high level of product substitution. Another important point to note is the bulk buying that occurs from other firms for their businesses.

Figure 20 Porter's five forces analysis - Laptop

Page 21

Rivalry will continue to be driven by cost differentiation, as platform standardisation exists in the industry, with the exception of Apple – its unique product differentiation has been vital to its exceptional growth, allowing it to sell at a premium price. Supplier power is limited mainly due standardisation again, with Intel and AMD being the main providers of processors. In terms of threat of new entrants, aspiring firms will face serious competition in both cost and differentiation as top players are huge in scale, with the resources to spend in R&D as well as new talent, which is important for survival in this business. Cloud computing is going to be serious threat to the laptop industry for those who want greater computing power.

3.2.

Competitive Analysis

A strategic grouping chart is formed with a view to understand where exactly the firm competes within the laptop industry. The chosen axes are x: price and y: customer value and product appeal.

Figure 21 Strategic Grouping Chart - Laptops

Although the laptop industry has a wide range of offerings, differing in functionality and price, Vaio mainly competes with Acer, HP, Toshiba and Dell. A Competitor Analysis – HP HP leads the international PC industry in terms of sales and market share (IDC, 2011). The majority of its revenue in Q1 2011 came from laptop sales (The Guardian, 2011). HP sold 64.2 million laptops in 2010, while Sony shipped fewer than 19.1 million VAIO laptops in the same period; and has reported a 14% yoy increase in operating profit. (HP, 2011)

Page 22

• Strategy – Use current market dominance to build innovative product portfolio and “lead the evolution of the industry” (HP, 2011). • Objectives – Move from a multinational firm to a truly global organisation with local expertise, update hardware to include new technologies, expand into the tablet market. • Assumptions – Offering a wide, diversified range to cater to every consumer taste, each offering unique customer value is key to wide acceptance. • Resources & Capabilities – Dominant position in the consumer PC market, experience in handheld devices, financially strong with sound R&D culture and global presence. • Predictions – Use expertise in technology, security, web services and hardware to push cloud computing and networked services. Key industry success factors are summarised in the table below to understand where Sony stands.

Figure 22 Comparative Analysis - Laptops

Data in the table supports the need for: 1. Faster addressing of problems with products: Sony‟s notebook recall due to overheating in 2008, and a similar situation in 2010 greatly affect the reputation of the company as a whole. These issues were not addressed as swiftly as they should have been. In contrast, HP detected battery issues for some laptops that were expeditiously addressed. 2. Innovation: Given that all notebooks use the same core technologies (processors, RAM, etc.) and consumers seem to be looking for “good enough” notebooks and net books, and the average lifetime of a PC has increased. In addition, competition from the tablet PC market means that Sony should invest in introducing radical new concepts in computing.

Page 23

Considering that Vaio aims to compete in the product differentiation, it cannot be ignored that Apple has a clear advantage. Therefore, there is a pressing need to reduce costs by efficient production and manufacturing capabilities; it is losing market share to competitors that offer competitively priced laptops with similar capabilities. If Sony wishes to increase market share, it must recognise this and act accordingly.

3.3.

Internal Environment Analysis

The graph below summarise the resources and capabilities of Sony with respect to Vaio (see Appendix A.8 and A.9 for tables).

Figure 23 Resources & Capabilities Chart - Vaio

Save for specific plants that were recently affected by the tsunami, Sony‟s competencies with respect to Vaio are strong.

Page 24

3.4.

Option Analysis

Based on previous analyses, the following options are recommended: 1. Tablet series: Evidently, the tablet PC market seems to be squeezing the market share of laptops and e-readers, with the growth rate expected to go up by a tremendous 160% (Accenture, 2011). 2. Entertainment laptop series: These powerful, media centric laptops have been a huge hit with a large proportion of the population that want work and play in the same machine. After carrying out a weighted option analyses based on Sony‟s strengths, a conclusive option, also affirmed by market trend as most ideal option is – introduction of tablet PCs (see Appendix A.10).

Figure 24 Weighted Option Analysis - Vaio

Page 25

FINANCIAL ANALYSIS
The graph below illustrates a historical snapshot of share prices of Sony and its main competitors.

Figure 25 Share Price Comparison

Over the last two years, Sony and competitors are performing similarly; with the obvious exception of Amazon – its share price has grown from $40 in November 2008 to its highest $202 in May 2011; and showing greater volatility, but also the greatest return. Sony‟s forward Price-earnings ratio is 18.96, higher than HP‟s 6.96 but lower than Amazon‟s 51.90. Also, its return on equity is currently at -7.06%, far behind HP‟s 21.54%, Nintendo‟s 5.93% and Amazon‟s 16.26%. (Yahoo Finance)

Figure 26 Net income as a percentage of revenue

Page 26

Operating income as a percentage of revenue over past 5 years is represented in graph above. Clearly, competitors are out performing in terms of the bottom line.

MARKET TRENDS AND FORECASTING
The consumer electronics industry saw a great decline as a result of the global financial crisis. However, the sector has seen a growth of 13% in sales in 2010 and is expected to grow at 10% for 2011 (Consumer Electronics Association). Furthermore, according to a research conducted by Accenture involving equal percentage of gender and age brackets from US, Japan, France, Germany & the BRIC nations, the BRIC nations seem to have an extraordinary appetite for consumer electronics, and are willing to pay for premium prices for new and innovative products and services, unlike their mature market counterparts which have become more price sensitive. Furthermore, although the mature population has more disposable income, they are less inclined to spend on technology. The younger generation, especially in the BRIC nations, are more ambitious. However, they seem to demonstrate lesser brand loyalty and are harder to please (Accenture, 2011). Out of the three, which business is performing the best?

Figure 27 Country Breakdown Of Device Ownership

PCs and laptops show the highest ownership percentage of 93% - 28% of respondents purchased a laptop last year. However, just 17% of them plan on buying one in 2011. The upcoming giants, the smart phone and tablet PCs, seem to show promising growth, taking away from video console gaming and e-reader market share, at a growth rate of 26% and 160% respectively (Accenture, 2011). Evidently, the end of current upgrade cycle is nearing, and being replaced by newer technologies. Another trend is the rise of multi-capability devices - although consumers will use dedicated devices for certain activities, they prefer to use multi-functional devices. For example, in India, emailing from PC dropped from 86% to 67% year on year, and emailing by phone grew from 19% to 34%. Also, the purchase growth rate for 3D televisions is estimated to be 500% in 2011. (Accenture, 2011)

Page 27

So, how important is consumer electronics for the market? (see Appendix A.11) Despite decrease in disposable income, consumer electronics is still the 3rd largest purchase catagory – in fact, in Japan, its the 1st. In 2011, people intend to spend more in consumer electronics than in 2010, with China, India and Russia intending the spend the most (see Appendix A.12 and A.13). So, what is going to be a strong driver of growth for the coming years? Power rankings for the three sub-businesses have gone down by 39% for Computers & 25% for Game Consoles. However, the growth rate is an estimated 133% for e-book readers (Accenture, 2011). Innovation seems to play an important role, with 76% of respondents from the emerging countries said that the perception of having an innovative product was important to them, with 46% agreeing to the same in mature markets. The pressing need for environmentally friendly products is not lost on today‟s youth – 68% of them agree to pay a premium price for one. The need for stronger, sustainable corporate responsibility cannot be overemphasised nowadays, with a generation that is increasingly aware and eco conscious. Development and promotion of products that are environmentally friendly and perhaps with charity schemes on product purchase will help restore Sony‟s faltering brand image and also augment profit margins. Based on market research and forecasting, is it suggested that Sony concentrate on each sub business in the following order: 1. PlayStation 3: Now that it is selling each unit for a profit, the focus needs to be on adding further to the PlayStation network. With the advent of motion sensing and 3D gaming and its swift adoption by competitors, Sony needs to up the ante here, using making best use of the profits thus generated. Furthermore, it needs to invest more on restore faith in the product and the brand. 2. Reader: eBook readers, are showing phenomenal growth. They key here is to tap into the potential consumers – Amazon‟s platform is doing so very effectively. Sony needs to find new ways of attracting consumers that are still wary of reading books on an electronic device. Offering more features will go a long way here – Sony needs to answer to the rise of multi-capability devices. 3. Vaio: Considering that it is one of the main profit making businesses for Sony, it needs more regional focus. Its celebrity endorsement in India worked exceptionally in increasing market share in India. Expanding into tablet series and implementing similar regional campaigns with fashionable regional celebrities would help increase regional market share, especially in the BRIC nations, who are ready to pay the premium price that Vaio commands.

Page 28

STRATEGIC ALIGNMENT WITH CULTURE
Vital components of Sony‟s culture today are quality, innovation and cost. Sony‟s frequent restructuring has been one of the major sources of profit drain, but also has done well to foster the close knit community setting that Sony wishes to uphold in its workplace. The following diagram summarises the employee environment at Sony that encourages free and open thinking, team spirit, innovation, engagement and personal growth, and good work-life balance, which is key to delivering innovative, high quality products:

Figure 28 Working for Sony

According to DeWit and Meyer (2004): “the essence of most uniquely Japanese management practice will be they productivity improvement, TQC (Total Quality Control) activities, QC (Quality Control) circles, or labour relation – can be reduced to one word: Kaizen.” Efficient quality control begins from the human capital, and Sony ensures this by hiring innovative, driven people who have an eye for technology. However, this principle needs to permeate throughout the organisation, especially in manufacturing- in order to truly uphold and reap from Kaizen. The failure to do so, as seen recent years, has caused damage to Sony‟s brand and reputation as a whole – a small fault in one product affects the value of the entire organisation. Reputation is a valuable resource that can create a positive prejudice in the mind of the customer, which makes them prefer the brand (Kotler and Keller, 2006); and this can have a direct effect on the competitive advantage of the firm.

Page 29

Overall, the working environment at Sony is ideal and a testament to the outstanding level of innovation and high quality engineering seen from its products. The same, however, needs to flow through to the rest of the organisation. Sony has a solid back-end (R&D, technology), but its fails to bring it to the customer – its extrinsic capabilities, that are visible to the consumer, needs to be brought up to the same level.

RECOMMENDATION

For a consumer electronics industry, the key profit drivers are (1) Increase sales volume, (2) Reduce unit costs, (3) Reduce overheads or variable costs. Increasing sales volume is a direct consequence of having a good strategy for each sub-business. Cost reduction is unavoidable in today‟s context; and Sony‟s product offerings under study are slightly over-priced in comparison to its competitors. Hence, price reduction by efficient procurement, manufacturing and distribution has to be woven into the fabric of the organisation.

Page 30

From the previous analyses, it can be seen that Sony implements both “inside-out” resourcebased view (Hamel and Prahalad, 1990) and “outside in” positioning view (Porter, 1980); a strategy that is optimal within the rapidly changing environment – integrating both views efficiently utilises resources and maximises capabilities, leading to sustainable competitive advantage (Johnson et al, 2005 and Finlay, 2000). The analysis recognises that the extremely diversified nature of Sony Corporation and its businesses resists any fixed strategic direction. Furthermore, the consumer electronics market witnesses innovation and rapid change in consumer wants at frequent intervals, making the concept of a „set in stone‟, long term strategy both inefficient and destructive to the firm. The very core of the strategy map depicted thus is a „pseudo-strategy‟ with dynamic capability. This would allow Sony to have a flexible framework with a firm strategic direction, at the same time, not stifle change; allow for faster response to market trends – time is invaluable in consumer electronics. R&D Backbone: It is Sony‟s competitive advantage- a legacy. It must be capitalised on and support every product offering. Pervasive access and connectivity: Sony must focus on ensuring that all products have maximum connectivity. Ease of access vital to increasing customer value, as the third era of connectivity emerges– C E 3.0, where the user can access content on any device not just at home, even outside of home (iSuppli, 2010). Market trends, change in consumer needs, opportunities & threats: Constant environmental scanning and immediate response to stimuli is vital to survival in this industry. Preparation for unanticipated events and effective crisis control is important – it relies on both pro-active and reactive control (Finlay, 2000: 241). Sony has almost always been reactive in most of its strategic changes; and losing out on the first mover advantage; and this greatly affects mindshare as Minzberg (1999: 96) notes: “the first product of a class to engage in mass advertising tends to impress itself more deeply in people’s minds than the second, third or fourth”. Quality Control: To ensure that consumers perceive Sony as a reliable and trustworthy company, better, more stringent methods of quality control need to be implemented in the entire organisation to truly reflect Kaizen. Strategic Innovation and Management: Innovating with a purpose – intellectual leadership is essential to develop industry foresight, anticipate likely trends (Hamel and Prahalad, 1994) Sony must translate is strong R&D

Page 31

culture into strategic innovation to effectively cater to emerging gaps in the market, on time. This must develop into Sony‟s competitive advantage –the true sources of advantage are management‟s ability to consolidate business-wide technologies and production into competencies that empower individual businesses to quickly adapt to changing opportunities (DeWit and Meyer, 2004: 326). Communicating Value: The most effective way for a firm to communicate to the consumer is via marketing and its products – Sony must ensure reliability and quality in all of its offerings; so it instils trust in the consumer for Sony as a brand. Marketing must be viewed as a investment, not a cost. The synergy and interplay between different aspects of Sony‟s highly diversified business needs to be considered prior to any strategic change. Although such a setting necessitates fairly fixed strategies for businesses, it is important to account for the strategic direction of the organisation as a whole, and important to recognise that Sony is bigger than the sum of its parts – “unless an organisation takes a holistic, big picture approach in designing the activities of the company, its efforts will backfire” (Markides 2004:9).

Page 32

BIBLIOGRAPHY

Accenture, 2011. Finding Growth: Emergence of a New Consumer Techonology Paradigm. [online] Available at: <https://microsite.accenture.com/landing_pages/EHT/Pages/ConsumerTech2011.aspx> [Accessed 30 May 2011] Amazon, 2011. Amazon.com, Annual Report 2009-2010. [online] Available at: <http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9OTA4OTN8Q2hpbGRJRD0tMXxUeXBlPTM= &t=1> [Accessed 30 May 2011] Video game industy statics. [electronic print] available at: <http://www.esrb.org/about/images/vidGames04.png> [Accessed at 17 May 2011] Campbell Lisa, 2011. Kindle sales outstrip paperbacks as Amazon has first $10bn quarter. [online] Available at: <http://www.thebookseller.com/news/kindle-sales-outstrip-paperbacksamazon-has-first-10bn-quarter.html> [Accessed 30 May 2011] Roth David, 2011. Brandz Top 100 Most valuable global brands. [online] Available at: <http://c3232792.r92.cf0.rackcdn.com/WPP_BrandZ_report_FINAL.pdf> [Accessed 30 May 2011] Central Intelligence Agency, 2011. The World Factbook. [online] Available at: <https://www.cia.gov/library/publications/the-world-factbook/fields/2186.html> [Accessed 11 May 2011] Lowensohn Josh, 2011. EU official says Sony, Apple need to rebuild trust. [online] Available at: < http://news.cnet.com/8301-13579_3-20059493-37.html> [Accessed at 17 May 2011] McGrath Dylan, 2011. CEA: Consumer electronics sales could top $1 trillion. [online] Available at: < http://www.eetimes.com/electronics-news/4211891/CEA--Consumerelectronics-sales-could-top--1-trillion> [Accessed at 17 May 2011] Datamonitor, 2008. PC Industry Profile: Global. [online] Available at: < http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=34402064&site=bsi-live> [Accessed at 30 May 2011] Emarketer, 2011. Sharp Growth in Ereader Penetration.[online] Available at: <http://www.emarketer.com/Article.aspx?R=1008404> [Accessed at 30 May 2011] Grant, R. (2010). In Contemporary Strategy Analysis (pp. 140-146). Gabbatt Adam, 2011. Amazon and Waterstones report downloads eclipsing printed book sales. [online] Available at: <http://www.guardian.co.uk/books/2011/may/19/amazonwaterstones-ebook-sales> [Accessed at 30 May 2011]

Page 33

HP, 2011. Annual Report 2009-2010. [online] Available at: <http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9NzkyMjF8Q2hpbGRJRD0tMXxUeXBlPTM=&t =1> [Accessed at 30 May 2011] IDC, 2011. IDC Press Release. [online] Available at: <http://www.idc.com/getdoc.jsp?containerId=prUS22660011> [Accessed at 30 May 2011] Reilly Jim, 2010. PS3 Profitable, Price Cut Unlikely. [online] Available at: <http://uk.gear.ign.com/articles/110/1102504p1.html> [Accessed at 21 May 2011] Oly, 2010. Where Does the $60 You Pay For a Game Go? [online] Available at: <http://www.ps3blog.net/2010/02/25/where-does-the-60-you-pay-for-a-game-go/> [Accessed at 18 May 2011] Microsoft, 2008. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations Annual Report 2007-08. [online] Available at: <http://www.microsoft.com/investor/reports/ar08/10k_fr_dis.html> [Accessed at 18 May 2011] Microsoft, 2010. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations Annual Report 2009-10. [online] Available at: <http://www.microsoft.com/investor/reports/ar10/10k_fr_dis.html> [Accessed at 18 May 2011] Microsoft, 2011. Microsoft Earnings Release FY11. [online] Available at: <http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/Kpi/FY11/Q3/detai l.aspx> [Accessed at 15 May 2011]

Brown Nathan, 2011. Report: PS3 Passes Xbox 360. [online] Available at: <http://www.nextgen.biz/news/report-ps3-passes-xbox-360-worldwide> [Accessed at 17 May 2011]

Tom Ivan, 2011. Move Beats Kinect In Japan. [online] Available at: <http://www.nextgen.biz/news/move-beats-kinect-in-japan> [Accessed at 17 May 2011] Nielsen, 2011. U.S. Video Game Buyers Shifting Entertainment Budgets. [online] Available at: < http://blog.nielsen.com/nielsenwire/consumer/u-s-video-game-buyers-shiftingentertainment-budgets/> [Accessed at 17 May 2011] Nintendo Co., Ltd. 2011. Consolidated Sales Transition by Region. [online] Available at: < http://www.nintendo.co.jp/ir/library/historical_data/pdf/consolidated_sales_e1103.pdf> [Accessed at 17 May 2011] Riley David, 2011. Digital Game Downloads For Mobile Devices Represent Close To Half Of All Video Game Full Game Downloads. [online] Available at: < http://www.npd.com/press/releases/press_110504.html> [Accessed at 17 May 2011]

Page 34

Brightman James, 2011. Kinect Bundles Outsold PS3 Move Bundles 5:1 in February. [online] Available at: < http://www.industrygamers.com/news/kinect-bundles-outsold-ps3-movebundles-51-in-february/> [Accessed at 17 May 2011]

Sony Computer Entertainment Inc. 2011. Playstation®3 Sales Reach 50 Million Units Worldwide. [online] Available at: <http://www.scei.co.jp/corporate/release/pdf/110415_e.pdf> [Accessed at 17 May 2011] Sony Computer Entertainment Inc. 2011. Corporate Information. [online] Available at: <http://www.scei.co.jp/corporate/index_e.html> [Accessed at 17 May 2011] Sony. 2011. Status of Sony Group Manufacturing Operations in Japan Affected by Pacific Coast of Tohoku Earthquake, Tsunami and Related Power Outages. [online] Available at: <http://www.sony.net/SonyInfo/News/Press/201103/11-0322E/> [Accessed at 17 May 2011] Sony, 2009. Annual Report 2009. [online] Available at: <http://www.sony.net/SonyInfo/IR/financial/ar/8ido180000023g2o-att/SonyAR09E.pdf/> [Accessed at 17 May 2011] Sony, 2009. Annual Report 2010. [online] Available at: <http://www.sony.net/SonyInfo/IR/financial/ar/8ido18000003dkyy-att/SonyAR1006.pdf> [Accessed at 17 May 2011] Sony Computer Entertainment Inc. 2011. Unit sales of hardware (since april 2006). [online] Available at: <http://www.scei.co.jp/corporate/data/bizdataps3_sale_e.html> [Accessed at 14 May 2011] Sony Worldwide Studios, 2011. Welcome to SCE Worldwide Studios. [online] Available at: <http://www.worldwidestudios.net/locations> [Accessed at 11 May 2011] Yahoo Finance, 2011. Sony Corporation (SNE). [online] Available at: <http://finance.yahoo.com/q?s=SNE> [Accessed at 11 May 2011] DeWit B. and Meyer R., 2004. Strategy: Process, Content, Context, 3rd Edition: Thomson International Business Press. Kotler P. and Keller K.L., 2006. Marketing Management, 12th Edition: Prentice Hall. Mintzberg, H. et al., 1998. Strategy Safari: The complete guide through the wilds of strategic management: Prentice Hall. Markides, C., 2004. What is strategy and how do you know if you have one?: Business Strategy Review, Vol. 15, No. 2, pp. 5-12. Johnson, G. et al., 2005. Exploring Corporat Strategy: Text and Cases, 7th Edition: Prentice Hall.

Page 35

Finlay, P., 2000. Strategic Management: An introduction to business and corporate strategy: Prentice Hall. Porter, M. E., 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors: New York Free Press. Hamel, G., and Prahalad, C.K., 1994. Competing for future: Harvard Business School Press.

Page 36

APPENDIX A
A.1

A.2

Page 37

A.3

A.4

Page 38

A.5

A.6

Page 39

A.7

A.8

Page 40

A.9

A.10

Page 41

A.11

A.12

Page 42

A.13

Page 43

Sign up to vote on this title
UsefulNot useful