There was a time not so long ago when the Sony brand was synonymous with "cool," its products coveted as much as the latest iPhone. Today, its balance sheets bathed in red, Tokyo-based Sony is fighting for its survival against the likes of Korea's Samsung Electronics, and the battle with Apple was lost before it ever began.
What is Sony's latest idea? Designing televisions in strong reds and blues for the Indian market, according to a recent TV documentary by Japan Broadcasting Corp., or NHK. The program focused on CEO Kazuo Hirai, who replaced Howard Stringer in April, and it showed Hirai touring markets in India. Hirai is more international than most Japanese executives, having spent many years in the U.S. before college and studying at International Christian University, where classes are taught in English. Even so, there is no guarantee that he understands Asian or other markets, says Midok Kim, a professor of the School of Management and Information Science at Tama University.
The vibrant-colored TVs are among the reforms Hirai is championing as the Japanese electronics giant revamps its product line and marketing in a belated attempt to counter the challenge from Samsung. Too bad the idea is neither new nor timely, says Sea-Jin Chang, a professor at the NUS Business School of the National University of Singapore and author of the book, Sony vs. Samsung: The Inside Story of the Electronics Giants' Battle for Supremacy. "Sony should have done this in the late 1990s or early 2000s," Chang said. "It is too late to do it now."
Korean companies like Samsung and LG began focusing on selling specially designed new products in different emerging markets in 2002, conducting extensive research and fashioning fresh products for each market. As a relative newcomer to high-tech consumer electronics, Samsung had little choice but to study and innovate. Meanwhile, Sony and other dominant Japanese electronics makers stuck to their usual game plan of serving the Japanese market, usually with myriad variations on a particular product. "In 2002, Japanese companies were not interested in those emerging markets at all. They are finally doing it, but it is too late," said Kim of Tama University, who authored the Japanese book Why Korean Companies Win in the World. Since Indian consumers favor the color red, Samsung designed a red refrigerator. For Muslim markets, Samsung designed a mobile phone programmed with the text of the Koran that can notify users when it is prayer time, said Kim, a Japan-born Korean.
Samsung Sails, Sony Suffers
The results of this more flexible, pro-active approach are reflected in the two companies' contrasting financial results. Samsung posted its fourth straight record quarterly net profit, 6.56 trillion won, in the latest quarter, a 91% increase from 3.44 trillion won in the same period a year earlier, due to strong sales of its Galaxy flagship smart phone.
Meanwhile, Sony reported its seventh straight quarterly loss on falling demand as consumers flocked to Apple and Samsung devices. Sony announced a net loss of 40.1 billion yen in the April-September period, only a slight improvement over its 42.5 billion net loss in the same period a year earlier. Of course, Sony is not alone in the bloodletting. Other Japanese consumer electronics makers, such as Panasonic and Sharp, are also suffering big losses.
Sony is cutting 10,000 jobs and selling off assets as Hirai focuses on mobile devices, games and digital imaging after four consecutive years of annual losses. Still, on November 8, Moody's cut its rating on Sony's debt to the lowest level above junk, warning of possible further downgrades. "Overall earnings will stay weak, due largely to prolonged operating losses in TVs and mobile phones as well as a significant decline in earnings from digital imaging products and gaming," the ratings agency said in a statement.
Samsung had a 32% world smartphone market share in the third quarter, followed by Apple with a 15.5% market share and Sony with a 5.1% market share in terms of shipments, according to market research firm Canalys.
Hoping to 'Roar Back'
CEO Hirai seems confident, though, that Sony will manage a comeback, just as Apple did. "You know, there have been ups and downs for a lot of brands that are in the leadership position today, but may have lost that edge during their history. A great example is obviously a great competitor of ours, Apple. If you look at their situation maybe 10, 12, 15 years ago, it is quite different from the leadership position they had in a certain sense back in the 1970s or 1980s. Now they have obviously roared back and it is a premium brand once again," Hirai said in an interview with Business Week in August. "I'm fully confident that given the imaginative team I have in place as of the first of April, … the renewed commitment … to product development and bringing quality products that really excite our customers, we can take the brand to a higher level," he added.
Time will tell. The key to Samsung's recent success was strong leadership that makes decisions very quickly, says Choong Y. Lee, a professor of marketing and management at Pittsburg State University. "Samsung is owned by Mr. Lee Kun-hee, his other companies and his family members. So it is practically 'his' company. Samsung can make quick decisions," Lee says. Chang agrees: "Samsung's speed comes from decisive leadership, which is top-down and very centralized." Samsung's success also comes from manufacturing different types of commodity products. For certain types of commodities speed is very important. "This is true of all the products Samsung is good at, such as memory, flash memory, LCD panels and mobile phones," says Chang of NUS.
Decisiveness, however, can carry risks, says Benjamin Cavender, an associate principal and senior analyst on the electronics sector at China Market Research Group, based in Shanghai. "That works if they are making good choices, but if they make bad choices, they could become very bad quickly." Samsung is well positioned in the markets they are strongest in at the moment. "They are doing well in televisions and doing well in appliances in some markets. They are doing quite well in their smart phones, but their cameras are pretty much disasters," Cavender says.
The 'Early Bird'
Samsung's main strength lies in its process technology: The overall processing power of its computers doubles every 18 months, notes Chang. "They a have clear technological trajectory," he says. "Every 18 months there is a new product in DRAM (dynamic random access memory) — a 1G DRAM, 4G DRAM, 16G DRAM. In that kind of market Samsung is always first. Its strength is speed." Samsung takes the "early-bird" premium by being first in the market every time.
Samsung is weaker, though, in product technology, where Japanese companies tend to excel — for example, in OLED (organic light emitting diode) technology. "The OLED technology comes from all different sources, and Samsung did not invent any OLED technology. It has been mastered by many competitors. But Samsung can make them quickly and efficiently with higher yields," Chang says.
Japanese electronics companies, including Sony, mainly focus on the Japanese market, where consumers demand high technology and many value-added functions. Therefore, Sony, Sharp and other Japanese smart phone makers turn out products with many functions and launch several new versions in each of the four seasons in Japan, a habit the Japanese call the "Galapagos phenomenon," because of the parallel with the unique species that have evolved on that island.
Since they are obsessed with perfecting each variation on the same product theme, the Japanese companies tend to stick with one standard that works for the home market but may not be useful in other markets. The mobile phone standard is a typical example. "The reason why Japanese mobile phones were not competitive is they did not look at the global market, but they focused mostly on Japanese market with [telecom service provider] NTT DoCoMo's standard," says Chang. "Samsung is very much marketing driven … but not as driven by the Korean market as Japanese companies are driven by the Japanese market."
Ironically enough, the preoccupation with churning out ever complex permutations on the same theme has resulted in products which may be too complex even to meet the tastes of persnickety Japanese consumers.
Companies that cannot effectively serve their home market are going to be at even more of a loss regarding overseas markets. "Japanese companies did not do enough market research to find out what global markets or emerging markets would like and what kind of specific needs they have," says Masatomo Inuzuka, professor in the Department of Business Administration and the Graduate school of Economics at Soka University in Tokyo.
Sony does not understand what U.S. customers want, contends Cavender. "They have all these different cameras or phones, a tiny bit different from each other," he says. Consumers might not understand the differences or may even feel overwhelmed by the complexity of choices on offer. Although it is not a problem unique to Sony, it is a significant issue for Japanese consumer electronics products that require users to navigate through complex manuals to accomplish such mundane tasks as toasting bread or heating up milk.
That lack of "user friendliness" is the polar opposite of Apple's "We know what you want better than you do" approach. "If you organized your product portfolio a bit and made it a little bit more focused, it would make clear for the consumers what they should buy so that they actually would spend their money rather than getting confused and opting not to spend [anything]," Cavender says.
Scooped by Competitors
One of Sony's biggest handicaps is its slowness in making decisions and turning out products. Time and again, the company has been scooped by its competitors. Yasunori Tateishi wrote in his book titled, Good-bye, Our Sony, that he told Sony's then-president Kunitake Ando that Sony's PDA product CLIE should have a mobile phone function so a user would not have to carry both a PDA and a mobile phone. In essence, back in 2000, he was telling Ando they should make a smart phone. Ando disregarded that suggestion, perhaps viewing the PHS – or "personal handy phone system" — installed on the CLIE as adequate for email or web browsing. The failure to thrive of the PHS, which was developed by NTT Laboratory and launched commercially in 1995 in Japan, is well known. PHS cell phone services, with their limited range and meager roaming abilities, are being phased out, having long since lost out to GSM.
By 1999, Sony had developed a product similar to an MP3 player, in essence a prototype of the iPod, which Apple introduced in 2001. Sony failed to bring its own players — a memory stick version of the once wildly popular Walkman and a Vaio music clip — to market because they received unfavorable reviews, both in-house and externally, and because its music division objected. Sony's personal audio company and its Vaio Co. developed the two products separately, without any cooperation or communication, says Chang. By the time Sony released its new "Network Walkman" in 2004, the sleek and shiny iPod was already a hit and MP3 players had become mainstream products. "Since Sony owned a music business and was far more sensitive to illegal copying and sharing digital music files than Apple was, it made the Network Walkman incompatible with the MP3 format," Chang writes in his book. Meanwhile, Sony's involvement in music and other content, meant to be a strategic asset, is actually hindering its product development, says Tomoo Marukawa, a professor at the Institute of Social Sciences at Tokyo University. "This may be the biggest reason why it is not coming out with new, bestselling products," he says.
The music player problem also illustrates the difficulty of conflicting or competing interests between Sony divisions, which do not communicate or coordinate well on executing global corporate strategies, says Cavender. "So there is not much sharing of technology or marketing platforms on the sort of message going to consumers. They do not do well cross-selling products, whereas Samsung's different divisions do manage a bit more," he says. Although there is competition between Samsung's consumer electronics division and its parts-making divisions, which makes components such as chips for Apple products, there is a relatively clear division of labor and a common purpose, says Choong. "Sony was organized into independent divisions, and the management system created conflicts between those divisions," he says. While charismatic co-founders Akio Morita and Masaru Ibuka were still alive, they managed to keep the problem in check. Their successors failed to control it, Choong notes.
Samsung's Looming Issues
Although it appears to have the upper hand at the moment, Samsung does face challenges of its own. The company is heavily dependent on its smartphone business, which accounts for 70% of its profit. "It is a risky situation, and Samsung should worry about too much dependency on the smartphone and mobile phone business," says Chang.
"For now, while other product lines like LCDs are weak and the DRAM business is suffering due to overcapacity, Samsung is also still doing well in flash memory," he says. Samsung is also vulnerable to any change in its relationship with Apple, one of its biggest customers. It also would suffer if Apple were to shift its microchip sourcing to another location, like Taiwan.
Samsung faces heavy competition in chips for smart phones and tablets. Relations have also been strained by disputes over intellectual property that Apple alleges Samsung has stolen. "Apple is pulling away from Samsung as a chip supplier. The relationship has not been that great for couple of years," says Cavender. Hence Samsung's strong product offensive with the Galaxy. "The question is whether or not they can compete on features, not just on value," he adds. While Samsung can manage slightly lower costs, supplying low-cost chips for its competitors is not a winning strategy. "I am not sure how well they are going to do two or three years from now."
Samsung is well aware of these looming issues, having seen what happened to Nokia, which was the No. 1 mobile phone maker for years, until suddenly in the age of smart phones, it lost that distinction, Choong points out. "Samsung is very concerned about the next 10 years. They created a new division to develop new innovative electronics products totally different from existing products," he says. "The top management is looking ahead to the next 10 or 20 years from now."
Can Sony overtake Samsung? To a certain extent, it all boils down to speed, says Chang, who previously worked as a systems engineer at Fujitsu. "With these commodity products, if you come up with a new product earlier than your competitor, you make money. If you are late, you do not make money."
Although Sony may recognize what needs to be done, it is hindered by the Japanese tendency to always seek consensus in decision-making. "Nobody wants to take responsibility, so there is no strong leadership," says Chang. "There is no reason why a Japanese company cannot do well. The Japanese have great technology and everyone works very hard. How come they are doing so poorly?" he says.
For a start, Sony will have to decide which direction it plans to pursue. "Does Sony want to stay with its traditional electronics business, or does it want to go into the entertainment business like music and movies?" asks Choong. They have to decide, and soon, he says.