Sayonara Sony – How Industrial, MBA Management Killed a Great Company

Who can forget what a great company Sony was, and the enormous impact it had on our lives?  With its heritage, it is hard to believe that Sony hasn't made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!

After World War II Sony was the company that took the transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio.  Under co-founder Akio Morita Sony kept looking for advances in technology, and its leadership spent countless hours innovatively thinking about how to apply these advances to improve lives.  With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call "consumer electronics:"

  • Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
  • Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
  • Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch.  Sony also expanded the size of Trinitron to make larger sets that better fit larger homes.
  • Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
  • Sony pioneered the development of camcorders, for the first time turning parents – and everyone – into home movie creators
  • Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed – for the first time – people to take their own recorded music with them, via cassette tapes
  • Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
  • Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made "home gaming" a market.

Very few companies could ever boast a string of such successful products.  Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance.  To Mr. Morita financial results were just that – results – of doing a good job developing new products and markets.  If Sony did the first part right, the results would be good.  And they were.

By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing.  Not only consumer electronics, but automobiles, motorcycles, kitchen electronics and a growing number of markets.  Politicians referred to Japanese competitors, like the wildly successful Sony, as "Japan Inc." – and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to "beat" American manufacturers.  Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.

So what went wrong for Sony?

Firstly was the national obsession with industrial economics.  W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization.  Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper.  Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s — and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.

Unfortunately, this narrow obsession left Japanese business leaders, buy and large, with little skill set for developing and implementing R&D, or innovation, in any other area.  As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets

The Vaio, as good as it was, had little technology for which Sony could take credit.  Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs – rather than exciting products.  Sony's evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.

In mobile phones Sony hooked up with, and eventually acquired, Ericsson.  Again, no new technology or effort to make a wildly superior mobile device (like Apple did.)  Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung.  Lacking any product or technology advantage, Samsung clobbered Sony's Industrial strategy with lower cost via non-Japanese manufacturing.

When Sony updated its competition in home movies by introducing Blue Ray, the strategy was again an Industrial one – about how to sell Blue Ray recorders and players.  Sony didn't sell the Blue Ray software technology in hopes people would use it.  Instead it kept it proprietary so only Sony could make and sell Blue Ray products (hardware).  Just as it did in MP3, creating a proprietary version usable only on Sony devices.  In an information economy, this approach didn't fly with consumers, and Blue Ray was a money loser largely irrelevant to the market – as is the now-gone Sony MP3 product line.

We see this across practically all the Sony businesses.  In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes.  In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost.  Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions.  Yet, Sony won't give up and intends to stay with its Industrial strategy even as it loses more money.

Why did Sony's management go along with this?  As mentioned, Akio Morita was an innovator and new market creator.  But, Mr. Morita lived through WWII, and developed his business approach before Deming.  Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony's products highly competitive against older technologies.  The products led, with industrial-era tactics used to lower cost. 

But after Mr. Morita other leaders were trained, like American-minted MBAs, to implement Industrial strategies.  Their minds put products, and new markets, second.  First was a commitment to volume and production – regardless of the products or the technology.  The fundamental belief was that if you had enough volume, and you cut costs low enough, you would eventually succeed.

By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company.  Sir Howard Stringer made his fame running Sony's American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.  

Mr. Stringer's Industrial strategy was to be obsessive about costs. Where Mr. Morita's meetings were 85% about innovation and market application, Mr. Stringer brought a "modern" MBA approach to the Sony business, where numbers – especially financial projections – came first.  The leadership, and management, at Sony became a model of MBA training post-1960.  Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else's technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs.  Be zealous about cost cutting, and reward it in meetings and with bonuses.

Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products.  Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.)  And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will  react to ongoing losses by – you guessed it – another round of layoffs.  This time it is estimated to be another 10,000 workers, or 6% of the employment.  The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to – somehow – save its way to prosperity with an Industrial strategy.

Japanese equity laws are very different that the USA.  Companies often have much higher debt levels.  And companies can even operate with negative equity values – which would be technical bankruptcy almost everywhere else.  So it is not likely Sony will fill bankruptcy any time soon. 

But should you invest in Sony?  After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on "numbers" rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon. 

As an employee, facing ongoing layoffs why would you wish to work at Sony?  A "me too" product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place.  And offers little promotional growth. 

And for suppliers, it is assured that each and every meeting will be about how to lower price – over, and over, and over.

Every company today can learn from the Sony experience.  Sony was once a company to watch. It was an innovative leader, that pioneered new markets.  Not unlike Apple today.  But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara.  Sell Sony, there are more interesting companies to watch and more profitable places to invest.

Markets are Marvelous things, so participate! – Tablet PCs, iPhone, Kindle

"Amazon Cuts Kindle Price to $259" is the USAToday headline.  This $40 whack is the second price cut this year. Sony is selling its ePocket for $199.  Of course Kindle is pushing that it has more content available and easier wireless access than Sony,- even internationally.  Expectations are for 3 million e-Readers to be sold in 2009 (about 1 million around the holidays.)  Obviously, if you aren't paying attention this is a big deal.  It is changing publishing (books, magazines and newspapers.)  But the impact goes far beyond publishing.

Simultaneously, The Wall Street Journal reports "Just a Touch Away, the Elusive Tablet PC."  According to this article, new devices are being tested that will allow you to do everything from classic PC applications to web interconnection to watch movies – or read books – on a keyboard-less new tablet.  Something that is a cross between an iPhone/iTouch (with a bigger screen) and a PC.  As iPhone users are learning (quickly) you don't need a keyboard or mouse to have an interface to your machine and the world. 

So what will be the future solution?  Will it be one of these, or yet something different?  I don't know.  Do you have a crystal ball?  But the answer to that question really doesn't matter to us today.  We don't need to know that sort of specific to begin growing our businesses.

Not being widget nuts, or platform forecasters, should not stop us from planning for a different sort of future and changing our approach today.  Scenarios for 2013 (you do have scenario plans for 2013, don't you?) should be planning on practically everybody having one of these devices.  And perhaps these devices being so cheap they could be included with sales of every major appliance (like a car, or refrigerator).  If that sounds silly, just look at how cheap a flash (or thumb) drive is now.  Remember when we thought floppy disks were expensive?  Now people exchange flash drives that have more capacity than a 2004 laptop without thinking about cost.   These made tapes, floppy drives, zip drives and a lot of other technology obsolete in a hurry. 

How can your business take advantage of this shift?  Can you replace paper manuals, maybe even user instructions with a tablet?  Or a tablet app?  Can you use an interactive device that grabs input from your appliance to do diagnostics, recommend maintenance, report on failures?  Would this help customers pop for the new frig – say if it helped lower electric bills?  Or could it encourage that new washer by helping set the cycles to lower water cost? Could you build it right into the console on a washer or dryer? Or could you encourage someone to buy a new car by telling them to forget about maintenance logs and just track the car's performance on a tablet?

If you provide content – are you planning for this?  Recently The Economist sent me an email (I've registered on their web site) telling me they were going to start charging for web content.  I've heard News Corp. properties, like the Wall Street Journal, intend to do the same.  I guess they haven't noticed the world is moving in a direction that makes such a plan – well, impossible.  In a recent Harris poll (reported on Silicon Alley Insider "People Won't Pay for News Online") 74% of web users said they'd simply switch sites before paying.  With one of these eReader/Tablets in hand, why would they ever pay for content when another provider is a finger streak away?  As access becomes easier and easier, the willingness to pay will go down and down.  Publishers had better start figuring out how to get paid a different way than subscriptions!

Now is about when executives like to say "so I want to know which format will win before I start doing this.  I only want to do this once."  That old cry for efficiency.  Unfortunately, while waiting for a winner to emerge, the waiter becomes the laggardThe early adopter, that recognizes the value provided to consumers, gets out there and starts using these innovations to drive better customer value.  And to capture more sales.  When you are part of making the market – like Apple in music – you gain huge advantages.  You don't have to know all the answers to compete.  You just have to be willing to Disrupt old notions and use White Space to experiment and learn.

I have drawers filled with obsolete electronics.  How many obsolete cell phones do you own?  How many big old monitors are you recycling to replace with flat screens?  Do you still have a fax machine? I have an old keyboard that used something called "sideband technology" to allow me to interact with people and get news and sports info years before the internet was popular – and before wireless internet was available.  Obsolete now, that device taught me how valuable the internet was going to be when Congress made it available for commercial use.  Fear of throwing away a few products or software – maybe a betamax machine or copy of visicalc – is no reason not to get into the market and learn! 

Markets are marvelous things.  As these articles discuss, nobody knows how we will be using technology in the future.  Not exactly.  It will be some combination of eReader – computer – music player – television – telephone.  But we do know the broad theme.  And if you want to get out of this recession, you can start playing to this market shift now.  You'll never grow if you sit on the sidelines watching and waiting.  Get in the market.  Participate.  Use this technology to create new solutions!  There are countless applications (as the expanding iPhone app base is proving.)  Want to get into the Rapids of growth?  You'll never succeed if you don't become part of the marketplace.  Nothing creates learning like doing!