Strategic analysis of sony

Strategic Analysis of Sony

Table of contents

Table of contents.......................................................................................................... I

List of Figures............................................................................................................... I

1 Introduction...........................................................................................................1

2 Sony’s consumer electronics division....................................................................1

3 External Analysis...................................................................................................2

3.1 PESTEL Analysis............................................................................................2

3.2 Five Forces Analysis.......................................................................................2

4 Internal Analysis – Value Chain Analysis..............................................................4

5 SWOT Analysis.....................................................................................................6

6 Conclusion............................................................................................................9

List of references......................................................................................................... II

Appendix....................................................................................................................VI

Statement of Authorship.............................................................................................XI

List of Figures

Figure 1: 5-Forces Analysis of Sony's consumer electronics division..........................3

Figure 2: Value Chain Analysis of Sony's consumer electronics division....................4

Figure 3: SWOT Analysis of Sony's consumer electronics division.............................7

I


1 Introduction

Once Sony was seen as the centre of Japanese innovation and technology, but has

rapidly lost ground to its competitors like Apple and Samsung (New York Times,

2012). As the creator of the Walkman, the Trinitron television and the PlayStation,

the company suffers since the slowdown of the global economy in 2008 (Sony,

Annual Report 2009 - 2011).

To remain competitive and operate successfully in the future, it is vital for any

company to be aware of its status quo (Body, 2011; Allen, 2001). Thus, the purpose

of this report is to analyze Sony’s current situation within the electronics industry. The

essay tries to evaluate the present most important external and internal factors which

affect Sony’s electronics business. The macro environment is analyzed very briefly

by the PESTEL and Porter’s Five Forces analysis and the internal analysis is based

on Porter’s Value Chain. Finally the SWOT analysis is used to conclude strategic

recommendations.

2 Sony’s consumer electronics division

The Sony Group comprises three main businesses: electronics, entertainment and

financial services (Sony, 2012c). However, this paper focuses only on Sony’s

consumer electronics division including the business units television, audio and

video, digital imaging, mobile communication and games (Sony, 2012e). Nearly 50

percent of Sony’s total revenues, roughly 6.49 billion Yen, are generated through

these consumer products (see Appendix 1 and Appendix 2).

As Sony recently suffers with declining profits (Financial Times, 2012) in the

electronics segment, it aims to reposition itself together with its stakeholders (Sony,

2012c). According to Sony’s CSR report in 2012 their most important stakeholders

are customers, suppliers, employees and shareholders, as Sony is a publicly traded

company (Sony, 2012d).

1


3 External Analysis

The external environment of Sony includes both, general external factors analyzed

by the PESTEL analysis (see Appendix 3) and industry factors appraised by Porter’s

Five Forces. Both analyses help to identify opportunities and threats for Sony’s

electronics division (Analoui et al. 2003; Cowe et al. 2011). Only those factors which

have the most significant impact on Sony are described in the following sections.

3.1 PESTEL Analysis

In terms of economical factors the effect of changes in the exchange rates is a

significant external impact. Japan’s strong currency has been unfavourable for Sony

2007 onwards (Sony, 2010) and deters investors. Moreover, Sony is negatively

affected by the current recession which led to a decrease in consumer electronics

sales around the world and an increasing price competition (Sony, 2012c).

Another crucial external impact on Sony is the fast changing technology. A PWC

study in 2010 shows that the demand of consumer electronics is shifting from

dedicated toward multi-functional devices like smart phones. Sony’s declining sales

reflect this movement. On the other hand the 3D-technology, the trend toward linked

devices and cloud computing could be an opportunity for the Japan based company

(Teulade, 2010; PWC, 2012).

On the social and environmental side, Sony faces an ageing population and stricter

regulations on electronic trash. Sony’s largest market is Japan which accounts for

43 percent of sales (Sony, 2010). However, the average age of Japanese is 45.4

years, which is significantly higher compared to other developed countries like the

United States accounting for 37.1 years or the United Kingdom accounting for 40.2

years (Central Intelligence Agency, 2011).

Also new regulations on electronic trash (Greenpeace, 2011) require additional

procedures and certification which increase costs and affecting supply chains.

2


3.2 Five Forces Analysis

After analyzing the boundaries of the industry, the Porter’s Five Forces Model helps

to identify the rivalry within the electronics business. The following figure shows the

position of Sony in the consumer electronics industry and displays the power of

suppliers, buyers, competitors and newcomers (see further explanation in Appendix

4).

Degree of rivalry Oligopolistic markets

Declining market sales growth

Price competition

High innovation in the industry

High exit barriers

Low switching costs

High price sensitivity

Increasing prices through Yen

No forward integration

Large number of customers

Small number of sellers

Low supplier concentration

Various Joint Ventures

In-house production of high valuable components

Low possibility of suppliers buying forward

Short product life-cycle

High R&D costs

Lack of Differentiation

All-in-one devices (e.g. smart phones like Iphone)

Large economies of scale

Very high capital requirement

Expected price and production retaliation

Strong brand loyalty

Barriers through patents

High

Bargaining Pow-er of customers

High

Market Entrants Low

SubstitutesMedium /

High

Bargaining Po-wer of suppliers

Low

Figure 1: 5-Forces Analysis of Sony's consumer electronics division1

With various strong competitors (e.g. Samsung, Panasonic, Philips, Apple, etc.), a

generally short product life cycle, a high bargaining power of customers and a slow

industry growth, the competition within the industry is considered to be intense. The

battle for market shares across Sony’s vast range of products is mainly based on

continuously launching innovative products and on price (Bloomberg, 2012a). As

1 Own illustration based on Porter (1985)3


such, Nintendo’s cheaper Wii gaming console witnessed faster sales than Sony’s

PlayStation 3, even though Sony offers superior quality (Bloomberg, 2012d).

Moreover, convergent devices or rather all-in-one solutions like Apple’s Iphone are

identified as a threat of substitution (Bloomberg, 2012d). As already mentioned in the

PESTEL Analysis this is due to the fast technological pace of the industry. However,

Sony has a significant advantage over its competitors by having the possibility to gain

synergy effects across its business units like gaming, music and films.

4 Internal Analysis – Value Chain Analysis

After focusing on Sony’s industry structure and key external activities, the Value

Chain Analysis helps to understand Sony’s key internal operations. In particular,

Porter’s Model is used to identify Sony’s capabilities in order to derive strength and

weaknesses of its electronics division (Wickramasingeh, 2007).

The subsequent illustration shows the internal drivers. Only the key activities which

are subdivided into primary and secondary functions are described in the following

paragraphs.

Firm Structure

Human Resources Management

Technology

Procurement

Inbound Logistics Operations Outbound

LogisticsMarketing

& Sales Service

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Margin

Figure 2: Value Chain Analysis of Sony's consumer electronics division2

Firstly Sony’s financial situation (see Appendix 5), which is a supporting activity, is

considered as a key factor for future success. However, Sony’s credit rating was

recently lowered one level by Standard & Poor’s (S&P). The rating company put the

2 Own illustration based on Porter (1985)4


firm’s long-term rating from BBB+ to BBB, S&P’s second-lowest investment. The

outlook is set negative because of four straight annual losses and concerns about an

earnings recovery in the electronics segment (Bloomberg, 2012e; Sony Annual

Reports 2009 - 2012). Sony’s net sale of 7.2 billion Yen in 2009 dropped to 6.49

billion Yen in 2012 and within the same period the net loss rose from 40.8 billion to

456.7 billion Yen. In the segment of consumer electronics, which accounts for almost

50 percent of the company’s revenues, sales in 2012 dropped by 23 percent to 3.14

billion Yen compared to 2011. The electronics division reported a loss of 229.8

million Yen, which highlights that Sony’s profit margin has been eroded significantly.3

The negative trend over the last few years is displayed in the stock price (see

Appendix 6). On the other hand, being a relatively successful company during the

last two decades, Sony has still cash reserves (Sony, 2012c).

Secondly, Sony adopted an extensive multidivisional firm structure over the last

years. Each division is further divided into smaller, specialized business units, for

example electronics in: television, cameras, audio & video, etc. (Sony, 2012c).

Thereby, Sony tries to serve customers with a range of diversified products, specific

in its function. However, the drawback could be that cooperation and knowledge

transfer across the segments might suffer. Sony’s empire might also cause a

slowdown in innovation.

According to the new management team and the CSR report in 2012, one of the key

drivers for success is Sony’s employees. The official webpage sates that Sony offers

a variety of training programs to equip employees with superior knowledge and skills.

The Japan-based company not only provides a career-building program for

engineers and managers, but also curriculums which are tailored to local needs. In

addition, Sony established the Sony University in 2000, an educational institution

designed to cultivate global managers. In 2012, a branch of Sony University was

opened in Singapore which is specialized in developing global managers for

emerging markets (Sony, 2012c).

3 According to Sony’s annual report in 2012 this was caused due to the impact of foreign exchange rates, the Earthquake and the floods in Thailand, and the price competition resulting from product commoditization.

5


Besides the published facts about Sony’s good internal training programs, Sony

employees face a workforce reduction of up to 10.000 by the end of 2013 due to the

harsh situation in the electronics business (The Verge, 2012).

Technologically, Sony was first in many areas such as Trinitron, the Walkman or the

Camcorder. Some of these products have created new markets of their own and the

patents for those innovations are still valuable for Sony. Their R&D department is

setting industry standards for video and picture quality and is well established over

years (Sony, 2012e). However, Sony faces increasing competition from devices like

smart phones or tablets, which are seen as a threat (Bloomberg, 2012d).

Furthermore, Sony generally manages its in- and out-bound logistics well. They

select suppliers that obey laws, are financially solid, are innovative, offer competitive

prices and protect the environment. To respond on environmental customer needs,

Sony introduced a green procurement (Sony, 2012e). To lower production costs, the

company is producing in low income countries like Thailand, China and Indonesia.

Thailand was recently affected by floods which led to a shutdown of production plants

and caused delay problems for the PlayStation 3 (Bloomberg, 2012f). In addition,

Sony possesses automated out-bound logistic activities and well managed

distribution networks in every continent (Sony, 2012c).

Finally, over the years the company positioned itself as an innovator and a maker of

high quality products with good designs. Sony is recognized as one of the best

known and most valuable companies in the world with an annual advertising budget

of roughly five billion US-Dollars (Financial Times, 2009). It is ranked on the 17 th

place among the top 100 brands in the world by a survey from Sync Force in 2012.

The great marketing campaigns (e.g. $50 million for PlayStation 3), the brand centres

and the established service activities (service centres, warranty, installation, etc.)

help to further improve the brand image (Sony 2012e).

5 SWOT Analysis

The following SWOT analysis examines the internal strengths and weaknesses in

light of external opportunities and threats. It is mainly based on the outcomes of the

PESTEL, Five Forces and Value Chain Analysis and the starting point for the

following strategic recommendations.

6


Strengths• Good supplier system

• Large sales network

• Great brand image

• Technology

Threats

• Exchange rates

• Political dispute with China

• Hacker attacks

• Greater competition

Weaknesses

• Financial situation

• Product portfolio

• Organizational structure

Opportunities

• New CEO

• Strategic alliances and acquisitions

• 3D technology

• Technical know-how

INTERNAL

EXTERNAL

Figure 3: SWOT Analysis of Sony's consumer electronics division4

Strengths:

According to Sony’s CSR report the company established a well managed

supplier system with suppliers acting conform to law, protect the environment

and deliver quality at a competitive price.

Furthermore the company possesses a wide sales network with sales offices

in over 120 countries around the globe (Sony, 2012e).

Sony’s after-sales service is a strength, too. Almost all products carry a

warranty and customer information centres are maintained in main markets

(Sony, 2012f).

One of the most outstanding strengths of Sony is its great brand image. This is

highlighted by the fact that the company was tagged by Asian consumers as

the most valued brand in 2011, despite the losses and the network security

breach (Edge, 2011). Sony’s consumer products are best known throughout

the world and considered to have high quality and good designs.

A great product portfolio and the know-how behind is another advantage. The

product variety minimizes the risk of failure and makes Sony simply less

dependent on a particular product or service. As a result to this, the capability

4 Own illustration based on Cowe et al. (2011)7


to cross-sell or rather cross-market products is another benefit (e.g. movies,

DVDs, games, etc.).

Weaknesses:

The current financial situation is considered to be unfavourable for the

company. Decreasing sales, slow recovering profitability and underperforming

stocks are deterring investors.

In addition Sony’s diversified empire might operate in too many parts of the

entertainment value chain. The various product lines and the organizational

structure behind those lines not only caused the company’s innovation and

flexibility slowdown, but also impaired specialization.

Another weakness of Sony might be the lack of cooperation between business

units, a result of the poor organizational culture. The lack of collaboration can

be seen in the products, which cannot be networked.

Opportunities:

The new CEO, Kazuo Hirai, might turn around the declining sales and bring

more focus to the company’s product lines (Sony-PlayStation, 2012).

The harsh competition from competitors like Apple, LG or Samsung could

result in more integration within the electronics and software industry. Sony

may take this opportunity to acquire competitors and build strategic alliances

in order to gain synergy effects or rather new competitive advantages. Sony

already bought off its entire Sony Ericson joint venture to act independently in

the booming smart phone and table market (Sony, 2012g).

Further, the company can take advantage of its excellent technological know-

how within the business units and create new products by combining the

knowledge of the different segments (e.g. 3D technology).

Threats:

As Sony operates across the world it is more sensitive to exchange rates

which are out of Sony’s control (Sony, 2012c).

8


The political island spat between China and Japan might also have further

affects on Sony’s supply chain. They already had had to close factories based

in China (Bloomberg, 2012b).

In addition Sony’s excellent reputation is threatened because of a security

breach in the PlayStation network and the Sony Online Entertainment

properties (Bloomberg, 2011).

Finally, the company has to face an even more intense competition from firms

that may be more specialized (e.g. Canon) or have greater resources (e.g.

Samsung).

6 Conclusion

Based on the SWOT Analysis, the most important challenges for Sony’s consumer

electronics division are the harsh competition within the industry, the fast product life-

cycles, the slowdown in innovation and the macro-risks like exchange rates. The

following brief strategic recommendations aim to cope with these challenges.

Facing highly specialized competitors within each business unit, Sony need to

concentrate on certain businesses (e.g. smart phones, cameras/camcorders and

games), restructure the electronics division around the focused segments and get rid

of less profitable segments like TV. By allocating the resources from other divisions

(e.g. R&D, marketing, logistics, etc.) to the focused businesses, Sony will achieve a

competitive advantage over its rivals. This is simply because no other firm has a

comparable mix of know-how in the variety of segments in which Sony operates.

To keep up with the highly innovative and go-getting competition and the movement

towards convergent devices (all-in-one solutions e.g. IPhones), Sony should focus on

innovation and user-centred design to generate a Unique Selling Propositions (USP).

The upcoming 3D-trend and the so called “eco-prestige” of customers could be an

opportunity in this case. Green products represent added value to customers. Thus

Sony should focus on a strong sustainability strategy and create “green” products.

Once Sony has focused on certain markets, they should also start to build strategic

alliances, joint ventures or acquire within the segments. This helps Sony to have

access to new technology, enhance economies of scale and get market share.

9


Finally, Sony might be able to utilize their Financial Services to reduce risks of

exchange rates and overcome this external factor by financial instruments like

currency swaps.

10

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IV


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V


Appendix

Appendix 1: Proportion of sales by business

Source: Sony (2012a), Business Highlights – Proportion of Sales, Available at:

http://www.sony.net/SonyInfo/IR/financial/ar/2012/financial/, Accessed: 08.11.2012

Appendix 2: Sales and Operating Income by Segment

Source: Sony (2012b), Business Highlights – Sales by Segment, Available at:

http://www.sony.net/SonyInfo/IR/financial/ar/2012/financial/page02.html, Accessed: 08.11.2012

VI


Appendix 3: PESTEL analysis of Sony’s electronics division

Political Factors

Japan: transition from single to double party system may have

consequences for Japan-based multinational corporations, in terms of

future legislation, government & trade policies (New York Times,

2012b).

Sony had to close factories in China as the island spat between

China and Japan escalated (Bloomberg, 2012b) influence on

Supply Chain.

Economic Factors

The recession has had a negative effect on consumer electronics

sales worldwide increasing price competition.

As a result of overwhelming public debt of 225.8% (Central

Intelligence agency, 2011) along with deflation and weak public

demand, Japan faces global pressure to cut public debt over recent

months. Ratings agencies (Fitch, S&P, etc.) deducted Japan in credit

rating (Manager Magazine, 2012).

The effect of changes in currency exchange rates has been

unfavorable for Sony from 2007 onwards (Sony, 2012c). Billions of

yen run off. Such an unfavorable currency exchange rate is deterring

investors.

Social Factors

Sony’s largest market is Japan which accounts for 43% of sales (Sony,

2010). However, it is an ageing population, with an average age of

45.4 years (Central Intelligence Agency, 2011).

Loss of trust from customers due to security attack & failure to notify

immediately has caused a negative brand image.

Technological

Factors

Consumer’s behavior is moving toward multi-functional devices

meaning the demand for dedicated devices is reducing (Bloomberg,

2012d).

The market for 3D related technologies is growing rapidly (Teulade,

2010).

Industry-wide movement toward networked products & services and

cloud computing (PWC, 2012).

Legal Factors Age and content restrictions from regulatory bodies (USK & PEGI).

VII


EU warnings because of privacy issues following security breach on

PSN network & Sony Online Entertainment properties. (Bloomberg,

2011)

Environmental

Factors

Some of Sony’s manufacturing activities were closed after recent

tsunami, resulting in share price drop of 9% (Yahoo Finance)

Regulations on the impact of electronic trash by restriction of

hazardous substances and electronic waste (Greenpeace, 2011).

Additional procedures and certification are consequences of these

regulations increasing costs and affect on supply chains.

__________________________________________________________

Source: Own illustration based on Cowe et al. (2011)

Appendix 4: Five Forces analysis of Sony’s electronics division

Degree of rivalry Oligopolistic markets

Declining market sales growth

Price competition

High innovation in the industry

High exit barriers

Low switching costs

High price sensitivity

Increasing prices through Yen

No forward integration

Large number of customers

Small number of sellers

Low supplier concentration

Various Joint Ventures

In-house production of high valuable components

Low possibility of suppliers buying forward

Short product life-cycle

High R&D costs

Lack of Differentiation

All-in-one devices (e.g. smart phones like Iphone)

Large economies of scale

Very high capital requirement

Expected price and production retaliation

Strong brand loyalty

Barriers through patents

High

Bargaining Pow-er of customers

High

Market Entrants Low

SubstitutesMedium /

High

Bargaining Po-wer of suppliers

Low

VIII


Source: Owen illustration based on Porter (1985).

Additional outcome explanation:

Threats of new entrants LOWo economies of scale– incumbent firms are producing at the lowest-cost; hard for new

entrants to compete on priceo Extremely high capital requirement – Existing firms are highly experienced and the

industry is driven by knowledge and innovative capacity; extensive investment robotics (tools, equipment, machines, etc.) -> e.g. Sony has an extremely advanced quality assurance, where no dust is allowed to touch the production line of its lenses and mirror-house

Bargaining power of buyers -> HIGH o Switching costs are low - Information easily available with online reviews -> buyer

can switch brands without high switching or transaction costs for example in the compact camera sector.

o Price sensitivity is high – buyers can choose a better-priced substitute. Sony tries to

separate their products with better technology. Also the ¥en causes prices to increase for Sony -> reduced profits (Bloomberg, 2012b).

Bargaining power of suppliers LOWo Low supplier concentration –low value component (plastic, chassis, etc.)

manufactures -> high competition -> low price. Sony can force suppliers to cut prices -> best deals for Sony

o Various Joint Ventures for high value components e.g. Panasonic (3D), Olympus

(cameras) ->keep input costs to a minimum -> bundle know how/ experience -> new core competence (Bloomberg, 2012c)

Threat of substitutes HIGH o Short product life-cycle - e.g. cameras, gaming hard- & software.

o Smart phones - Smartphones with integrated high definition cameras, games to

download, video, music, etc. (Bloomberg, 2012d).

Appendix 5: Sony’s financial business highlights

IX


________________________________________________________________________

Source: Sony Annual Report 2012 (Sony, 2012c)

Appendix 6: 5 years trend of Sony Corporation Common Stock

___________________________________________________________________

Source: Yahoo Finance, Sony Corporation (SNE)

X

Strategic analysis of sony

Documents

gain synergy

central intelligence

build strategic

sonys largest

suppliers

consumer electronics

sonys csr

medium high