by Adam Hartung | Sep 17, 2014 | Current Affairs, Disruptions, In the Whirlpool, Leadership, Lock-in
Sony was once the leader in consumer electronics. A brand powerhouse who’s products commanded a premium price and were in every home. Trinitron color TVs, Walkman and Discman players, Vaio PCs. But Sony has lost money for all but one quarter across the last 6 years, and company leaders just admitted the company will lose over $2B this year and likely eliminate its dividend.
McDonald’s created something we now call “fast food.” It was an unstoppable entity that hooked us consumers on products like the Big Mac, Quarter Pounder and Happy Meal. An entire generation was seemingly addicted to McDonald’s and raised their families on these products, with favorable delight for the ever cheery, clown-inspired spokesperson Ronald McDonald. But now McDonald’s has hit a growth stall, same-store sales are down and the Millenial generation has turned its nose up creating serious doubts about the company’s future.
Radio Shack was the leader in electronics before we really had a consumer electronics category. When we still bought vacuum tubes to repair radios and TVs, home hobbyists built their own early versions of computers and video games worked by hooking them up to TVs (Atari, etc.) Radio Shack was the place to go. Now the company is one step from bankruptcy.
Sears created the original non-store shopping capability with its famous catalogs. Sears went on to become a Dow Jones Industrial Average component company and the leading national general merchandise retailer with powerhouse brands like Kenmore, Diehard and Craftsman. Now Sears’ debt has been rated the lowest level junk, it hasn’t made a profit for 3 years and same store sales have declined while the number of stores has been cut dramatically. The company survives by taking loans from the private equity firm its Chairman controls.
How in the world can companies be such successful pioneers, and end up in such trouble?
Markets shift. Things in the world change. What was a brilliant business idea loses value as competitors enter the market, new technologies and solutions are created and customers find they prefer alternatives to your original success formula. These changed markets leave your company irrelevant – and eventually obsolete.
Unfortunately, we’ve trained leaders over the last 60 years how to be operationally excellent. In 1960 America graduated about the same number of medical doctors, lawyers and MBAs from accredited, professional university programs. Today we still graduate about the same number of medical doctors every year. We graduate about 6 times as many lawyers (leading to lots of jokes about there being too many lawyers.) But we graduate a whopping 30 times as many MBAs. Business education skyrocketed, and it has become incredibly normal to see MBAs at all levels, and in all parts, of corporations.
The output of that training has been a movement toward focusing on accounting, finance, cost management, supply chain management, automation — all things operational. We have trained a veritable legion of people in how to “do things better” in business, including how to measure costs and operations in order to make constant improvements in “the numbers.” Most leaders of publicly traded companies today have a background in finance, and can discuss the P&L and balance sheets of their companies in infinite detail. Management’s understanding of internal operations and how to improve them is vast, and the ability of leaders to focus an organization on improving internal metrics is higher than ever in history.
But none of this matters when markets shift. When things outside the corporation happen that makes all that hard work, cost cutting, financial analysis and machination pretty much useless. Because today most customers don’t really care how well you make a color TV or physical music player, since they now do everything digitally using a mobile device. Nor do they care for high-fat and high-carb previously frozen food products which are consistently the same because they can find tastier, fresher, lighter alternatives. They don’t care about the details of what’s inside a consumer electronic product because they can buy a plethora of different products from a multitude of suppliers with the touch of a mobile device button. And they don’t care how your physical retail store is laid out and what store-branded merchandise is on the shelves because they can shop the entire world of products – and a vast array of retailers – and receive deep product reviews instantaneously, as well as immediate price and delivery information, from anywhere they carry their phone – 24×7.
“Get the assumptions wrong, and nothing else matters” is often attributed to Peter Drucker. You’ve probably seen that phrase in at least one management, convention or motivational presentation over the last decade. For Sony, McDonald’s, Radio Shack and Sears the assumptions upon which their current businesses were built are no longer valid. The things that management assumed to be true when the companies were wildly profitable 2 or 3 decades ago are no longer true. And no matter how much leadership focuses on metrics, operational improvements and cost cutting – or even serving the remaining (if dwindling) current customers – the shift away from these companies’ offerings will not stop. Rather, that shift is accelerating.
It has been 80 years since Harvard professor Joseph Schumpeter described “creative destruction” as the process in which new technologies obsolete the old, and the creativity of new competitors destroys the value of older companies. Unfortunately, not many CEOs are familiar with this concept. And even fewer ever think it will happen to them. Most continue to hope that if they just make a few more improvements their company won’t really become obsolete, and they can turn around their bad situation.
For employees, suppliers and investors such hope is a weak foundation upon which to rely for jobs, revenues and returns.
According to the management gurus at McKinsey, today the world population is getting older. Substantially so. Almost no major country will avoid population declines over next 20 years, due to low birth rates. Simultaneously, better healthcare is everywhere, and every population group is going to live a whole lot (I mean a WHOLE LOT) longer. Almost every product and process is becoming digitized, and any process which can be done via a computer will be done by a computer due to almost free computation. Global communication already is free, and the bandwidth won’t stop growing. Secrets will become almost impossible to keep; transparency will be the norm.
These trends matter. To every single business. And many of these trends are making immediate impacts in 2015. All will make a meaningful impact on practically every single business by 2020. And these trends change the assumptions upon which every business – certainly every business founded prior to 2000 – demonstrably.
Are you changing your assumptions, and your business, to compete in the future? If not, you could soon look at your results and see what the leaders at Sony, McDonald’s, Radio Shack and Sears are seeing today. That would be a shame.
by Adam Hartung | Apr 8, 2014 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership
“Car dealers are idiots” said my friend as she sat down for a cocktail.
It was evening, and this Vice President of a large health care equipment company was meeting me to brainstorm some business ideas. I asked her how her day went, when she gave the response above. She then proceeded to tell me she wanted to trade in her Lexus for a new, small SUV. She had gone to the BMW dealer, and after being studiously ignored for 30 minutes she asked “do the salespeople at this dealership talk to customers?” Whereupon the salespeople fell all over themselves making really stupid excuses like “we thought you were waiting for your husband,” and “we felt you would be more comfortable when your husband arrived.”
My friend is not married. And she certainly doesn’t need a man’s help to buy a car.
She spent the next hour using her iPhone to think up every imaginable bad thing she could say about this dealer over Twitter and Facebook using various interesting hashtags and @ references.
Truthfully, almost nobody likes going to an auto dealership. Everyone can share stories about how they were talked down to by a salesperson in the showroom, treated like they were ignorant, bullied by salespeople and a slow selling process, overcharged compared to competitors for service, forced into unwanted service purchases under threat of losing warranty coverage – and a slew of other objectionable interactions. Most Americans think the act of negotiating the purchase of a new car is loathsome – and far worse than the proverbial trip to a dentist. It’s no wonder auto salespeople regularly top the list of least trusted occupations!
When internet commerce emerged in the 1990s, buying an auto on-line was the #1 most desired retail transaction in emerging customer surveys. And today the vast majority of Americans, especially Millennials, use the web and social media to research their purchase before ever stepping foot in the dreaded dealership.
Tesla heard, and built on this trend. Rather than trying to find dealers for its cars, Tesla decided it would sell them directly from the manufacturer. Which created an uproar amongst dealers who have long had a cushy “almost no way to lose money” business, due to a raft of legal protections created to support them after the great DuPont-General Motors anti-trust case.
When New Jersey regulators decided in March they would ban Tesla’s factory-direct dealerships, the company’s CEO, Elon Musk, went after Governor Christie for supporting a system that favors the few (dealers) over the customer. He has threatened to use the federal courts to overturn the state laws in favor of consumer advocacy.
It would be easy to ignore Tesla’s position, except it is not alone in recognizing the trend. TrueCar is an on-line auto shopping website which received $30M from Microsoft co-founder Paul Allen’s venture fund. After many state legal challenges TrueCar now claims to have figured out how to let people buy on-line with dealer delivery, and last week filed papers to go public. While this doesn’t eliminate dealers, it does largely take them out of the car-buying equation. Call it a work-around for now that appeases customers and lawyers, even if it doesn’t actually meet consumer desires for a direct relationship with the manufacturer.
Apple’s direct-to-consumer retail stores were key to saving the company
Distribution is always a tricky question for any consumer good. Apple wanted to make sure its products were positioned correctly, and priced correctly. As Apple re-emerged from near bankruptcy with new music products in the early 2000’s Apple feared electronic retailers would discount the product, be unable to feature Apple’s advantages, and hurt the brand which was in the process of rebuilding. So it opened its own stores, staffed by “geniuses” to help customers understand the brand positioning and the products’ advantages. Those stores are largely considered to have been a turning point in helping consumers move from a world of Microsoft-based laptops, Sony music products and Blackberry mobile devices to new iDevices and resurging Macintosh popularity – and sales levels.
Attacking regulations sounds – and is – a daunting task. But, when regulations support a minority of people outside the public good there is reason to expect change. American’s wanted a more pristine society, so in 1920 the 18th Amendment was passed prohibiting alcohol. However, after a decade in which rampant crime developed to support illegal alcohol production Americans passed the 21st Amendment in 1933 to repeal prohibition. What seemed like a good idea at first turned out to have more negatives than positives.
Auto dealer regulations hurt competition, and consumers
Today Americans do not need a protected group of dealers to save them from big, bad auto companies. To the contrary, forced distribution via protected dealers inhibits competition because it keeps new competitors from entering the U.S. market. Small production manufacturers, and large ones in countries like India, are effectively blocked from reaching American customers because they lack a dealer base and existing dealers are uninterested in taking the risks inherent in taking these new products to market. Likewise, starting up an auto company is fraught with distribution risks in the USA, leaving Tesla the only company to achieve any success since the dealer protection laws were passed decades ago.
And that’s why Tesla has a very good chance of succeeding. The trends all support Americans wanting to buy directly from manufacturers. At the very least this would force dealers to justify their existence, and profits, if they want to stay in business. But, better yet, it would create greater competition – as happened in the case of Apple’s re-emergence and impact on personal technology for entertainment and productivity.
Litigating to fight a trend might work for a while. Usually those in such a position are large political contributors, and use both the political process as well as legal precedent to protect their unjustified profits. NADA (National Automobile Dealers Association) is a substantial organization with very large PAC money to use across Washington. The Association can coordinate election contributions at national and state levels, as well as funding for judge elections and contributions for legal defense.
But, trends inevitably win out. Today Millennials are true on-line shoppers. They have no patience for traditional auto dealer shenanigans. After watching their parents, and grandparents, struggle for fairness with dealers they are eager for a change. As are almost all the auto buyers out there. And they are supported by consumer advocates long used to edgy tactics of auto dealers well known for skirting ethics and morality when dealing with customers. Those seeking change just need someone positioned to lead the legal effort.
Tesla wins because it uses trends to be a game changer
Tesla has shown it is well attuned to trends and what customers want. When other auto companies eschewed Tesla’s first entry as a 2-passenger sports car using laptop batteries, Tesla proceeded to sell out the product at a price much higher competitive gas-powered cars. When other auto companies thought a $70,000 electric sedan would never appeal to American buyers, Tesla again showed it understood the market best and sold out production. When industry pundits, and traditional auto company execs, said it was impossible to build a charging grid to support users driving up the coast, or cross-country, Tesla built the grid and demonstrated its functionality.
Now Tesla is the right company, in the right place, to change not only the autos Americans drive, but how Americans buy them. It’s rarely smart to refuse a trend, and almost always smart to support it. Tesla looks to be positioning itself as much smarter than older, larger auto companies once again.
by Adam Hartung | Feb 18, 2014 | Current Affairs, Games, In the Swamp, Leadership
Microsoft has a new CEO. And a new Chairman. The new CEO says the company needs to focus on core markets. And analysts are making the same cry.
Amidst this organizational change, xBox continues its long history of losing money – as much as $2B/year. And early 2014 results show that xBox One is selling at only half the rate of Sony’s Playstation 4, with cumulative xBox One sales at under 70% of PS4, leading Motley Fool to call xBox One a “total failure.”
While calling xBox One a failure may be premature, Microsoft investors have plenty to worry about.
Firstly, the console game business has not been a profitable market for anyone for quite a while.
The old leader, Nintendo, watched sales crash in 2013, first quarter 2014 estimates reduced by 67% and the CEO now projecting the company will be unproftable for the year. Nintendo stock declined by 2/3 between 2010 and 2012, then after some recovery in 2013 lost 17% on the January day of its disappointing sales expectation. Not a great market indicator.
The new sales leader is Sony, but that should give no one reason to cheer. Sony lost money for 4 straight years (2008-2012), and was barely able to squeek out a 2013 profit only because it took a massive $4.6B 2012 loss which cleared the way to show something slightly better than break-even. Now S&P has downgraded Sony’s debt to near junk status. While PS4 sales are better than xBox One, in the fast shifting world of gaming this is no lock on future sales as game developers constantly jockey dollars between platforms.
Whether Sony will make money on PS4 in 2014 is far from proven. Especially since it sells for $100/unit (20%) less than xBox One – which compresses margins. What investors (and customers) can expect is an ongoing price war between Nintendo, Sony and Microsoft to attract sales. A competition which historically has left all competitors with losses – even when they win the market share war.
And on top of all of this is the threat that console market growth may stagnate as gamers migrate toward games on mobile devices. How this will affect sales is unknown. But given what happened to PC sales it’s not hard to imagine the market for consoles to become smaller each year, dominated by dedicated game players, while the majority of casual game players move to their convenient always-on device.
Due to its limited product range, Nintendo is in a “fight to the death” to win in gaming. Sony is now selling its PC business, and lacks strong offerings in most consumer products markets (like TVs) while facing extremely tough competition from Samsung and LG. Sony, likewise, cannot afford to abandon the Playstation business, and will be forced to engage in this profit killing battle to attract developers and end-use customers.
When businesses fall into profit-killing price wars the big winner is the one who figures out how to exit first. Back in the 1970s when IBM created domination in mainframes the CEO of GE realized it was a profit bloodbath to fight for sales against IBM, Sperry Rand and RCA. Thinking fast he made a deal to sell the GE mainframe business to RCA so the latter could strengthen its campaign as an IBM alternative, and in one step he stopped investing in a money-loser while strenghtening the balance sheet in alternative markets like locomotives and jet engines – which went on to high profits.
With calls to focus, Microsoft is now abandoning XP. It is working to force customers to upgrade to either Windows 7 or Windows 8. As PC sales continue declining, Microsoft faces an epic battle to shore up its position in cloud services and maintain its enterprise customers against competitors like Amazon.
After a decade in gaming, where it has never made money, now is the time for Microsoft to recognize it does not know how to profit from its technology – regardless how good. Microsoft could cleve off Kinect for use in its cloud services, and give its installed xBox base (and developer community) to Nintendo where the company could focus on lower cost machines and maintain its fight with Sony.
Analysts that love focus would cheer. They would cheer the benefit to Nintendo, and the additional “focus” to Microsoft. Microsoft would stop investing in the unprofitable game console market, and use resources in markets more likely to generate high returns. And, with some sharp investment bankers, Microsoft could also probably keep a piece of the business (in Nintendo stock) that it could sell at a future date if the “suicide” console business ever turns into something profitable.
Sometimes smart leadership is knowing when to “cut and run.”
Links:
2012 recognition that Sony was flailing without a profitable strategy
January, 2013 forecast that microsoft would abandon gaming
by Adam Hartung | Nov 6, 2013 | Defend & Extend, Innovation, Leadership, Web/Tech
Can you believe it has been only 12 years since Apple introduced the iPod? Since then Apple’s value has risen from about $11 (January, 2001) to over $500 (today) – an astounding 45X increase.
With all that success it is easy to forget that it was not a “gimme” that the iPod would succeed. At that time Sony dominated the personal music world with its Walkman hardware products and massive distribution through consumer electronics chains such as Best Buy, and broad-line retailers like Wal-Mart. Additionally, Sony had its own CD label, from its acquisition of Columbia Records (renamed CBS Records,) producing music. Sony’s leadership looked impenetrable.
But, despite all the data pointing to Sony’s inevitable long-term domination, Apple launched the iPod. Derided as lacking CD quality, due to MP3’s compression algorithms, industry leaders felt that nobody wanted MP3 products. Sony said it tried MP3, but customers didn’t want it.
All the iPod had going for it was a trend. Millions of people had downloaded MP3 songs from Napster. Napster was illegal, and users knew it. Some heavy users were even prosecuted. But, worse, the site was riddled with viruses creating havoc with all users as they downloaded hundreds of millions of songs.
Eventually Napster was closed by the government for widespread copyright infreingement. Sony, et.al., felt the threat of low-priced MP3 music was gone, as people would keep buying $20 CDs. But Apple’s new iPod provided mobility in a way that was previously unattainable. Combined with legal downloads, including the emerging Apple Store, meant people could buy music at lower prices, buy only what they wanted and literally listen to it anywhere, remarkably conveniently.
The forecasted “numbers” did not predict Apple’s iPod success. If anything, good analysis led experts to expect the iPod to be a limited success, or possibly failure. (Interestingly, all predictions by experts such as IDC and Gartner for iPhone and iPad sales dramatically underestimated their success, as well – more later.) It was leadership at Apple (led by the returned Steve Jobs) that recognized the trend toward mobility was more important than historical sales analysis, and the new product would not only sell well but change the game on historical leaders.
Which takes us to the mistake Intel made by focusing on “the numbers” when given the opportunity to build chips for the iPhone. Intel was a very successful company, making key components for all Microsoft PCs (the famous WinTel [for Windows+Intel] platform) as well as the Macintosh. So when Apple asked Intel to make new processors for its mobile iPhone, Intel’s leaders looked at the history of what it cost to make chips, and the most likely future volumes. When told Apple’s price target, Intel’s leaders decided they would pass. “The numbers” said it didn’t make sense.
Uh oh. The cost and volume estimates were wrong. Intel made its assessments expecting PCs to remain strong indefinitely, and its costs and prices to remain consistent based on historical trends. Intel used hard, engineering and MBA-style analysis to build forecasts based on models of the past. Intel’s leaders did not anticipate that the new mobile trend, which had decimated Sony’s profits in music as the iPod took off, would have the same impact on future sales of new phones (and eventually tablets) running very thin apps.
Harvard innovation guru Clayton Christensen tells audiences that we have complete knowledge about the past. And absolutely no knowledge about the future. Those who love numbers and analysis can wallow in reams and reams of historical information. Today we love the “Big Data” movement which uses the world’s most powerful computers to rip through unbelievable quantities of historical data to look for links in an effort to more accurately predict the future. We take comfort in thinking the future will look like the past, and if we just study the past hard enough we can have a very predictible future.
But that isn’t the way the business world works. Business markets are incredibly dynamic, subject to multiple variables all changing simultaneously. Chaos Theory lecturers love telling us how a butterfly flapping its wings in China can cause severe thunderstorms in America’s midwest. In business, small trends can suddenly blossom, becoming major trends; trends which are easily missed, or overlooked, possibly as “rounding errors” by planners fixated on past markets and historical trends.
Markets shift – and do so much, much faster than we anticipate. Old winners can drop remarkably fast, while new competitors that adopt the trends become “game changers” that capture the market growth.
In 2000 Apple was the “Mac” company. Pretty much a one-product company in a niche market. And Apple could easily have kept trying to defend & extend that niche, with ever more problems as Wintel products improved.
But by understanding the emerging mobility trend leadership changed Apple’s investment portfolio to capture the new trend. First was the iPod, a product wholly outside the “core strengths” of Apple and requiring new engineering, new distribution and new branding. And a product few people wanted, and industry leaders rejected.
Then Apple’s leaders showed this talent again, by launching the iPhone in a market where it had no history, and was dominated by Motorola and RIMM/BlackBerry. Where, again, analysts and industry leaders felt the product was unlikely to succeed because it lacked a keyboard interface, was priced too high and had no “enterprise” resources. The incumbents focused on their past success to predict the future, rather than understanding trends and how they can change a market.
Too bad for Intel. And Blackberry, which this week failed in its effort to sell itself, and once again changed CEOs as the stock hit new lows.
Then Apple did it again. Years after Microsoft attempted to launch a tablet, and gave up, Apple built on the mobility trend to launch the iPad. Analysts again said the product would have limited acceptance. Looking at history, market leaders claimed the iPad was a product lacking usability due to insufficient office productivity software and enterprise integration. The numbers just did not support the notion of investing in a tablet.
Anyone can analyze numbers. And today, we have more numbers than ever. But, numbers analysis without insight can be devastating. Understanding the past, in grave detail, and with insight as to what used to work, can lead to incredibly bad decisions. Because what really matters is vision. Vision to understand how trends – even small trends – can make an enormous difference leading to major market shifts — often before there is much, if any, data.
by Adam Hartung | Apr 20, 2012 | Current Affairs, In the Swamp, Lifecycle, Lock-in, Television, Web/Tech
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.
