Paul Carrol and Chunka Mui asserted that there are seven ways to fail. Although there are several ways to fail, the authors clarified the root cause of the error as choosing the wrong strategy and not the failure in execution (Carrol & Mui, p.2). This also suggests that at first glance these seven strategies are so alluring that CEOs and corporate leaders would want to use them not realizing that a brilliant strategy can also be the recipe for disaster.
Sony Corporation is one company that had to learn the hard way – an example of how an enterprise can use an alluring strategy at the wrong place and the wrong time. Sony Corporation did not file for bankruptcy but in the eyes of various stakeholders there was a time when it failed big.
In the case of Sony Corporation the failure to see the weakness of the strategies employed was due to a faulty belief system coupled with a notion that it is an enterprise that is so dominant that it can never fail. The root cause of the problem is the failure to adapt to a changing world and yet forced to remain profitable.
As a result the company was forced to consolidate with other companies. From these two missteps Sony started a chain reaction that led to 1) Consolidation Rush; 2) Staying the Course; 3) Wrong Technology Bets; 4) Synergy Mirage; 5) Pseudo Adjacencies; and 6) Faulty Financial Engineering. The only thing that the company avoided was to gobble up small players to increase its brand power.
Consolidation Rush
In latter part of the 20th century it was difficult to find a city in America where there is no walkman or a color TV set made by Sony Corporation. This once fledgling electronics manufacturing company has conquered the world with its miniaturized and portable music machine.
Music lovers can use their walkmans to enjoy music whenever and wherever they like it. At the same time the quality of the picture that comes out of a Sony Trinitron was without equal. As a result Sony became the undisputed leader in electronics and was considered as a savvy innovator with a knack for knowing what the people really wanted when it comes to consumer electronic goods (Nathan, p.10). But their success became their weakness.
It was difficult to change something that is very profitable. Therefore, when the huge profit stream began to dry up, the company had to find a way to remain solvent. Most of the time, a conglomerate like Sony Corporation can easily solve the problem by buying up the competition or purchasing a company that they believe can help them increase brand power.
The corporate leaders at Sony decided that the best way to go about it is to expand it already significant operation in the U.S. mainland and purchase began to move into the lucrative U.S. entertainment industry. As a consequence they are not only selling TV sets, they were also selling what can be seen on it. The company acquired Columbia Pictures.
Staying the Course
While the former CEOs of Sony dreamt of making a great deal of money by venturing into the entertainment industry, the other half of the company continued to produce consumer electronic goods. But when the world was adapting to the impact of globalization and the entry of competitors, Sony decided to stay the course.
Analysts listed some of the problems that Sony had to deal and yet the company responded poorly: a) severe pressure on prices; b) missed opportunities; c) need to buy components; d) threat of new format wars; e) inflexibility when it comes to proprietary aspect of software and hardware (Nakamoto, p.25).
Richard Lynch on the other strengthened the argument made by Nakamoto when he said that Sony’s woes can be traced to two developments: threat from low-wage labor manufacturing and the inability to invest in innovative technology such as liquid crystal display (LCD) screens (p. 108). Sony stubbornly believed that their Trinitron color TV sets are far superior to others.
Wrong Technology Bets
The failure to innovate led to the wrong assumptions when it comes to technology. As a result Sony Corporation was caught flat-footed in the fast transition to new technologies. Therefore, “…Sony, which had not invested in manufacturing LCD panels, was forced to buy them from competitors” (Nakamoto, p.12).
It was too late in the game when Sony realized that it was betting on the wrong technology. As a bitter consequence the proud leader has now become a follower and forced to buy component parts from its competitors to stay relevant in the flat-screen TV war.
The rush to consolidate forced the company into a corner. Take for instance the purchase of CBS Records. Since this company is in the business of producing music, Sony could not develop a portable music device that can digitally store and copy music from a compact disc or other devices.
As a result Sony’s corporate leaders were adamant to “discourage the electronics division from marketing a portable player that could download music from the internet” (Nakamoto, p.14). Sony should have technology and the resources to develop a device similar to iPod. But this was not the case.
Synergy Mirage
The rush to consolidate was based on the faulty idea that the company can create synergy with other acquired companies. The move can be compared to a successful restaurant that tried to create a competitive advantage by buying a farm. Business experts would challenge the wisdom of buying a ranch just to have a steady supply of beef and vegetables since one can just buy from suppliers at practical costs. But in this case the strategy was so alluring it blinded the eyes of the leaders.
Many of Sony’s top executives believed that was the best move to purchase companies that does not share the core values of the organization when it comes to developing innovative electronic precuts.
An analyst explained why they believe it was the right thing to do and he wrote, “The strategic logic here was that of developing a vertically integrated company – from the service that develops the pictures and music to the machines that deliver them in individual’s homes” (Lynch, p.207). When one looks back at the deal, it is difficult to understand why “vertical integration” is possible since buying a Sony TV does not automatically compel the same customer to buy DVDs made by Columbia Pictures.
Pseudo Adjacencies
Due to the rush to consolidate, Sony was now forced to sell new products to their old customer base. Sony began to sell movies. At the turn of the 90s, problems began piling up, specifically in relation to the acquisition of CBS Records and Columbia Pictures (Spar, p. 378).
Consider for instance that in the 1990s Sony Pictures and Sony Music began to hemorrhage money. There was a time when the company announced a 37% decline in operating income. Sony invested in a movie called Last Action Hero and used up $60 million in production costs only to discover later that the movie was a major disappointment.
Faulty Financial Engineering
In the rush to consolidate and to make money the company was forced to develop faulty financial engineering strategies. An example is the acquisition of Columbia Pictures:
On September 24, 1989, Sony […] bid $3.4 billion in cash for Columbia Pictures Entertainment Inc. It was the highest bid ever by a Japanese company for any U.S. property […] In addition to the cash price, the Japanese electronics giant assumed nearly $2 billion in debt and contractual obligations (Spar, p. 368).
This was followed by producing movies and promoting them without the assurance that the film would make money for the company. In many instances Sony was unable to recoup the investments that were made. At the same time it was forced to invest in the production of music that was not profitable in the time when digital music can be easily downloaded and copied.
Conclusion
The root cause of the problem is the failure to innovate and the need to remain profitable. This has resulted in a consolidation rush, in the belief that merging with other companies can create synergy and the creation of products that can help Sony stay on top. But the acquisition of Columbia Pictures and CBS records did not create the competitive advantage that corporate leaders hope for.
Looking back Sony Corporation should have adapted to changing times instead of trying to acquire companies. Sony should not have stayed the course. If this was done in the first place then the company could have avoided faulty financial engineering to increase their revenue.
Works Cited
Lynch, Richard. Shaking Up Sony: Restoring the Profits and the Innovative Fire. IN: Indiana University Press, 2006.
Nakamoto, Michiyo. (2005). Caught in Its Own Trap: Sony Battle to Make Headway in the Networked World. UK: Financial Times, 2005.
Nathan, John. Sony: The Private Life. New York: Houghton Mifflin Company, 1999.
Paul Carrol & Chunka Mui. Seven Ways to Fail Big. MA: Harvard Business, 2008.
Spar, Deborah. Managing International Trade and Investment.UK: Imperial College Press, 2003.