Organizations develop mechanisms of enhancing their competitive advantage through various ways. One of such ways is to form mergers and joint ventures in the effort to gain economies of scale. A good example of such an effort is provided by Ericsson, a Swedish phone maker, and Sony Corporation, which is a Japanese phone maker, which pulled together its resources to form Sony Ericsson communications (SEMC) in October 2001 in the form of a joint venture.
However, 10 years down the line, Ericsson and Sony announced their intentions to split. This paper discusses the motivations behind the formation of SEMC, the problems encountered in the joint venture, the strategies used by both organization to address the problems, and the factors, which led to the decision to split SEMC.
Motivation for the formation of a joint venture between Sony and Ericsson
The alliance of Sony and Ericsson was formed by organizations that were established in different nations. Thus, SEMC was an international joint venture.
Scholarly research identifies different motives for the formation of international joint ventures. For instance, Hill argues that firms engage in joint ventures internationally to gain competiveness in the global market, enhance technological sharing, share operational risks, and to develop the capacity to fund strategic mechanisms of success, which are beyond the financial capability of a single firm (27).
SEMC reflects this motivation. According to Harris, strategic factors led to the formation of SEMC alliance (1). For Sony, such factors included the need to gain market excellence to overcome the competitive force of Nokia Corp through increasing the market share for the two organizations.
This goal was to be realized through the development of a knowledge base for wireless technology expertise in the telecommunication industry deployed by Ericsson. Ericsson shared a similar aim. It wanted to enhance its capacity to produce consumer-oriented electronics that would pose a mega threat to the market leader-Nokia Corp (Harris 3). This shared motivation meant that SEMC would be able to develop products, which were technologically innovative, hence enabling the joint venture to become more competitive in the market.
Sony held only a quarter of the market share that was possessed by Ericsson. However, the presence of Sony in the European markets implied that Erickson would gain new markets in other regions apart from Japan. Sony would also acquire market in Japan that was essentially closed by dominance of Ericsson in the Japanese mobile market together with entertainment technology that was in-built within the Ericsson’s products (Dunn 12).
Ericson wanted to have access to the production process deployed by Sony together with video and audio entertainment technology, which led to the production of mobile handsets with the capacity to revolutionalize the mobile entertainment industry innovatively. This would make it possible for the joint venture to penetrate a new market, which was not yet explored.
From the above discussion, it is inferable that both Sony and Ericsson had common interests while indulging in an international business partnership in the form of international joint venture. The two firms sought to gain synergy effects, which produced significant complementary effects (Harris 3).
This meant that engaging in alliance would make each of the organization leap benefits from the other, thus translating into increased sale volume through opening virgin markets. Apart from developing the capacity to cover up the weakness of either of the organizations, SEMC was motivated by the need to overcome and withstand both international and local competition from rivals. Although SEMC was this incredibly beneficial, various problems were experienced.
Problems of the joint venture
International joint ventures present a variety of problems ranging from management structure to the process of arriving at common agreeable strategic initiatives for success. This makes international joint ventures have a high failure rate (Hill 17).
Consistent with this argument, Ericsson and Sony required high levels of integration together with cooperation, hence increasing the number of problems to which the alliance was exposed. Since the establishment of SEMC, some of the problems that SE was subjected to included the loss of market share, rising costs of operation, and negative effects of various economic factors. Even after the formation of SEMC, the two organizations continued to make losses due to the loss of market share.
This loss was attributable to a myriad of problematic aspects inherent in the common joint venture strategy for conducting business. One of such problems was that the products portfolio was limited. It focused on expensive phones while negating the importance of cheap phones to boost sale volumes. Lester supports this assertion by adding that the joint venture only produced music products in the high end of prices such as phones with cameras and music enhancements (24).
This strategic focus of the venture posed a mega problem since the demand of handset consumption was shifting towards cheap and less advanced phone models. The repercussion was a decrease in the growth of the venture as anticipated while increasing rivals’ competition especially from apple whose products were more superior in meeting the demand requirements such as iphones (Lester 24).
Consequently, the efforts of SEMC to gain competitive advantage in the market through the development of a brand that was considered lucrative and expensive by consumers became problematic. This challenge was particularly severe in the Indian market where cheap and simple phones took up the largest market share. Motorola and Nokia were able to respond to this demand, thus securing the biggest Indian market share.
For a joint venture to succeed, it is necessary for coordination and integration of the core decision-making processes to be enhanced. Unfortunately, for the Sony Ericsson’s joint venture, these facets became problematic. Lack of adequate integration and coordination between the operations of the two organizations hindered the exchanged of information.
This had the overall impact of making it impossible for SEMC to read the requirements of markets precisely, accurately, and at a higher pace in comparison with competitors. Hence, market growth of SEMC was massively impaired.
Economic down turns influenced the joint venture’s capacity of success. The credit crunch resulted in the decline of demand together with credit availability. This challenge posed immense problems to SEMC especially in the realm of increasing operation costs. Choosing to engage in an international joint venture implies rising the costs of organizations’ operations (Hill 47).
For the joint venture between Sony and Ericsson (SE), it also implied increasing the costs associated with the identification of profitable and viable markets. SEMC also operated in an environment that was characterized by competitors who were using low-cost manufacturing technologies such as Nokia. The models manufactured by rivals were also of a low cost. Hence, SEMC was forced to reduce the selling price of its products to compete with the low-cost brands. This had a direct impact on the profitability of SEMC.
Strategies deployed to address the problems
Problems faced by SEMC made it clear that the joint venture would collapse at some point. As Harris argues, the companies forming the SEMC had different organizational culture. In fact, many scholars lamented that complex integration and collaborations were required for the alliance to remain intact for a long time (2). Hill argues that differences in organizational culture have the possibility of creating inefficient management and work conflicts (107).
Nevertheless, Sony deployed transaction analysis approaches to prove that the joint venture with Ericsson was vital for reasons previously discussed in the section on motivation for the formation of SEMC. To deal with the problems of diminishing market share and sales level for optimal profitability, the two organizations had franchising, OEM (original equipment manufacturing), and licensing as viable options instead of going through the problems experienced in an international joint venture.
Through franchising, Sony and Ericsson would have given independent operators the authority to distribute products in the European market. A careful selection of the franchises would have provided Sony and Ericsson with an opportunity to tap into local technological knowhow together with the development of the capacity to gain links with various local network operators in the new market. Unfortunately, the franchising model works well when an organization has a significant market share (Hill 129).
Sony had only 1percent global market share (Dunn 13). Hence, it would not be able to compete in an aggressive way with market leaders such as Nokia Corp. Although licensing would have made it possible for Sony to gain the advantages it intended to get by forming SEMC, it was problematic. For instance, it could have encountered the challenge of internalizing Ericsson’s tacit technological knowhow. This would have created low and slowed capabilities of learning.
Considering the speed of advertisement and change of technology in the technological industry, licensing was not a viable option. There was also the fear of one organization engaging in learning processes, which are opportunistic. In the case of Ericsson, OEM’s contract strategy also proved problematic. Despite the fact that Ericsson could have developed the capability to enter the Japanese market (Sullivan 19), Sony could have utilized this opportunity optimally to learn and then directly compete with Ericsson.
Factors influencing the decision to split
Joint ventures possess high probabilities of failure. For Sony and Ericsson, failure occurred after10 years of its formation. The joint venture was ideal considering that the two companies would contribute what the other was lacking to gain competitive advantage in the mobile phone market.
Sony was to contribute expertise in the marketing of consumer electronics while Ericsson was to contribute cellular technological expertise (Kantrow 17). However, the joint venture underwent intense challenges related to cultural deviation, logistical issues, market saturation, and brand portfolio, which prompted the decision to split.
When a joint venture such as SE is formed, organizations forming it wish to gain certain earning levels, which are otherwise impossible to gain while operating solely in the global market. Due to the above factors, SE went through a period of reduced profits, often operating at losses. When organizations forming a joint venture fail to achieve their goal, they often consider splitting as an alternative to saving the companies from collapsing (Sullivan 178).
Therefore, for SE, the decision to split was unavoidable. In 2002 and 2008, the CEOs for Sony and Ericsson clearly stated that they would end the joint venture in case it was unable to attain the preset earnings. With the decision to split coming head on in 2011, the single most important contributing factor for both organizations to arrive at the decision was akin to poor earning due to the unexpected problems in SEMC.
Dunn, Douglas. “Sony may take Ericsson’s call- Nokia’s success points to consolidation.” EBN 1.1(2001): 12-13. Print.
Harris, Ellison. “Sony, Ericsson Mix Technology, Marketing Savvy — New Mobile-Phone Brand Aims to Topple Nokia; Just the Logo Is Ready.” The Wall Street Journal 1.1(2001): 1-3. Print.
Hill, Charles. International Business (6th ed.). New York: McGraw Hill, 2007. Print.
Kantrow, Benson. “The Bottom Line: Sony Ericsson Fails To Live Up To Hopes.” Dow Jones International News 1.1(2003): 17-18. Print.
Lester, Robert. Case Studies on Failures of International Joint Ventures. London: London University Press, 2008. Print.
Sullivan, Daniels. International Business: Environments and Operations. New Jersey, NJ: Prentice Hall, 2007. Print.