Analysis of Industry Sony has a strong business case to support its foray into the game business.

Goldman Sachs has predicted the global sales of games to be US$17.5 billion and consoles to be US$8.7 billion in the year 2002. The former is expected to equal the total box office revenues of the firm industry and eventually catch up even with the saes of music CDs. The sales of games are expected to overtake music CD sales in Europe in 2005. Given Sonys strong presence in the games industry, this presents vast opportunities to enlarge the companys market shares. The consumer-electronics businesses are closely linked to economic activities in the world. As such, Sony needs to be cognisant with the business cycle so that it can to take full advantage of such effects especially when there are changes in discretionary income and consumer spending patterns. As a matter of fact, the music and film companies are losing money as the global economy slowdown due to recession that hit many countries in 2001. Growing digital piracy also compounded the problems and these companies saw their profits further eroded. Apprehensions of terrorist attacks and an unstable geopolitical landscape are set to test the industry as well as Sonys resilience as a global corporation. From the Porters Five Forces analysis, it is also deduced that competition in the consumer electronics industry is intense and therefore will not be attractiveness (i.e. profitability) to potential entrants. However, the overall industry attractiveness does not imply that every company in the industry will return the same profitability. If Sony is able to apply its core competencies, business model or network well, the company can still achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Moving forward, there is still a silver lining in the gloomy sky. Due to its recession-proof nature and lucrative prospects, the gaming industry is the next big frontier for many entertainment companies, including Sony. In addition, despite the economic slowdown, Sony's Pictures business still managed to record 15% increase in sales and more than sevenfold increase in operating income suggest that firm business may be a defensive industry.

Analysis of Competitive Forces - Porters Five Forces Analysis a) Threat of Substitute Products (LOW) The possibility threat of substitutes is moderately low; since there are few substitutes from other industries (if any); and most of them are seemed to be obsolete or have on foot out of the door, e.g. digit camera in the place of film camera and fax machines in place of overnight mail delivery. Consider that Sony has built a good reputation and strong customer loyalty, it effectively position the companys products against product substitute to some extent; this is a surplus for the company. Bargaining Power of Buyers (HIGH) The power of buyer is high due to almost no switching cost for customers to switch from one brand to another. The access to the internet also allows customers to have all the information on prices charged by the different companies. The possession of this information may cause price sensitive buyers to switch to buying from companies that offer cheaper prices. On-line shopping has also increased the bargaining power of buyers. Bargaining Power of Suppliers (LOW) The suppliers do not have an upper hand (low bargaining power) due to large number of suppliers and customers. Moreover, Sony operates in big global supply chain management and its suppliers are not concentrated. Comparatively, they are also much small in size and thus normally have weak bargaining power. Sony usually engages in direct negotiation with its suppliers in order to secure reliable supply at lower prices. Threat of New Entrants (LOW) Threat of new entrants is low as the entry into the industry requires high capital, economies of scale, product differentiation as well as technology and innovation knowhow. Moreover, the industry is regulated that every potential entrant is required to obtain approval from the relevant authority of the particular country before the company is allowed to be operated. Every new entrant that infringed into the big players territories can expect strong retaliation from them. Therefore, it also serves as a deterring effect to potential entrant. Intensity of Rivalry (HIGH) Industry rivalry is high due to relatively intense competition and high exit cost. The high intensity of rivalry is also largely due to the numerous and equally balanced competitors in the markets, generally short product life cycle as well as high R&D, fixed and storage costs. The industry growth is slow and thus further heightens the intensity of competition

b)

c)

d)

e)

From the analysis above, it can be deduced that competition in the consumer electronics industry is intense and therefore will not be attractiveness (i.e. profitability) to potential entrants. However, the overall industry attractiveness does not imply that every company will return the same profitability. If Sony is able to apply its core competencies, business model or network well, the company can still achieve a profit above the industry average. A clear example of this is

the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Products Life Cycles Analysis BCG Matrix The market growth axis correlates with the product life cycle paradigm and predicates the cash requirement a product needs relative to the growth of that market. Reference to the BCG Matrix appended in Diagram 1, the vide-game console produced by Sony is definitely in the Star sector since the companys business has achieved high growth rate as well as acquired comparatively larger market share.

Diagram 1: BCG Matrix However, although generally Stars are leaders in high growth markets and tend to generate large amounts of cash, Sony must be mindful that they also use a lot of cash because of growth market conditions. In addition, Sony also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market as growth markets attract new entrants. For instance, if capacity exceeds demand, then a particular market may become a low margin one and therefore becomes unattractive. The positions of Sonys existing products are elaborated below: a) Dog A product becomes a dog due to low market share and a low growth rate and when the product neither produces nor uses up bulky amounts of cash. Walkman and CD players fall under this category. Some analysts opined that Sonys excessive focus on the maturing consumer electronics business (profit margin below 1 per cent in 200203), coupled with increasing competition in the consumer electronics industry was severely affecting its profitability. b) Question

A product becomes a question when they have a lower market share and they do not generate much profit or cash. Sony products that fall under this category include semiconductor, music player, VAIO computer and CRT-TV. Due to aggressive competition from its competitors such as Samsung Panasonic and Matsushita, these products could not make as much sales as they expected and their market shares now range between 10-14%, comparatively lower the competitors. c) Star A star is when huge quantities of profit are produced because of the powerful market share and high growth rate. Sonys digit camera, LCD TV, DVD player and play stations fall under this category. Their market shares range between 25 to 40%, way ahead of its competitors. d) Cash Cow Sony Ericsson W980 from Sony Walkman series is a cash cow. We say a product is a cash cow when the product show signs of that the return on assets is better than the market growth rate, and makes more cash than they use. In case of Sony Ericsson W980, its a phone with touch sensitive music controls and 8 gigabytes of internal memory. This means one can store up to 8000 songs. Sony Ericsson W980 helps to position Sony Ericsson as a market leader in the music world.

Competitors Analysis Sony starts facing increased competition not only from a stable set of rivals (such as Philips, Matsushita, Toshiba, Sharp, LG and Samsung) but also new adversaries as follows:
BUSINESS CATEGORY COMPANY

Computer makers network-equipment makers software makers media companies game makers photographic-equipment makers mobile phone makers

HP, IBM, Dell, Apple and Palm Cisco and 3Com Microsoft and Sun Microsystems AOL-Time Warner and Vivendi Universal Nintendo Kodak and Fuji Nokia and Motorola

This complex, multidimensional competition is a bitter reality of the world of digital convergence, where boundaries between traditional industry segments have disappeared although new opportunities open up. Competition between the companies is likely to be intense as most harbour grand broadband visions and have also staked their futures on them. Fortunately, most of the competitors at this point in time do not possess completely the same tangible and intangible resources as that of Sony. With that, based on the competitor analysis framework appended in Diagram 3 below, most of Sonys competitors are concentrated in quadrant II, III and IV.

High
Market Commona

Samsung LG NEC AOL-Time Warner Vivendi Universal II III Motorola Kodak Fuji Cisco 3Com Nintendo Sega I IV

Matsushita Toshiba Sharp Philips

Diagram 3: A Low Framework of Competitor Analysis

Apple Microsoft Nokia Dell IBM Sun Microsystems Palm

Low

Resourc e

High

Technically, any firm or competitors in quadrant I will use their Similari similar resource portfolios to compete against each other. This lead to the conclusion that Matsushita, Toshiba, Sharp and Philips modelled in quadrant I are direct competitors of Sony. In contrast, the other competitors modelled in quadrant III share few markets although they all possess comparable resources. As such, these companies do not directly pose as strong rivalry to Sony at this point in time. Sony does need to monitor companies that modelled in quadrant II and quadrant IV. The companies that modelled in quadrant II share a high degree of market commonality with Sony and if they eventually manage to acquire similar equitable resources, they may become direct competitors. Similarly, the companies modelled in quadrant IV may become direct competitors if they diverse their businesses in Sonys fortes. Moving forward, Sony must be cognisant with the fact that competition is very intense in the game console market. Although PlayStation 2 have managed to sell well, Sonys top competitors like Nintendo and Microsoft in the gaming industry are not letting their guards down. Microsoft launched the Xbox in 2001 and has managed to sell 10 million units by the year 2003. Though it is a far second in console market share, nonetheless it posts serious challenge to Sonys forte. In the television market, although Sony excels but still faces some strong competition, particularly from Samsung, LG, Sharp and Panasonic. Many of these same brands also appear in the DVD player market that Sony is in. As their products and features closely resemble that of Sonys, the only way customers can differentiate them from their competitors would be on the product prices. In order to maintain or increase market shares, any of these companies may consider lowering product prices to achieve their objectives. However, if this happens, the profit margin of the remaining players will be compressed and the weak one may be drove out of the market (also known as the vicious cycle). In order to cushion stiff competition, Sony should continue to set up alliances with the fellow electronic manufacturers/ competitor so that win-win situation can be achieved to allow the company to continue to sustain its operations. A short summary on the possible opportunities and threats are appended in the table below. From the analysis of Sony, it can be deduced that the operating environment is highly competitive and filled with many uncertainties which means that the company has to prepare themselves well during good times. However, amidst the challenges, there are still many opportunities for Sony to explore and exploit so that it continues to lead and be the most profitable media and technology Company in the world.

Opportunities
Globalisation trend provides opportunities such as entrance to new markets. Privatisation and deregulation suggests more opportunities to expand market and increase market share. High growth video-game industry provides presents the opportunity to increase business globally. Larger working age population; more disposable income. New services such as Internet Telephony provide all media and technology companies with the opportunity to leverage on new technologies to increase sales. Technology advancements provide opportunities to reduce operation costs.

Threats
Unfavourable government policies. Prolonged global recession. Piracy. Aggressive competition from especially low-cost imitators.

competitors,

WHAT CAN SONY DO TO OVERCOME ITS WEAKNESSES? Sonys weaknesses are primarily related to cost and organisational structure. If Sony can overcome them, the company will be able to acquire more profits that can be used to fund the various set-ups and operations unique to strategies. Sony may take the following strategic actions to help overcome its weaknesses. a) Reduce Cost To Increase Profit Margin & Repay Debts Sonys high debt-to-equity ratio (highly leveraged) could put itself in danger if the companys creditors start to demand repayment of debt at the same time. The highly leveraged status also reflects unfavourably of Sony as it may make it more difficult to acquire addition loans. Hence, Sony must build creditors confidence by apprising them on its financial status periodically as well as paying interests and debts upon due. In the long run, Sony must strive to increase its revenues with lower cost of production so as to achieve higher net profit margin as this allows the company the flexibility to unload more debts to lower the debt-to-equity ratio. b) Create Project-Based Work Teams that Report to Top Management Sonys business units operate almost autonomously. At times competing business units allow office politics instead of sound strategic thinking to affect its view on such matters such as allocation of company resources and cooperation. To overcome this shortcoming, Sony may create project-based work teams that report to the top management. c) Centrally Manage Selected Resources

Under a divisional structure, Sony faces duplication of functions at the different "levels" that resulted in high cost in maintaining the management structure. Sony should merge some resources administrative support or office equipment and centrally manage them to help reduce costs and organisational complexity. This allows Sony to utilise resources at their maximum potential. d) Improve Interaction and Communication It was deduced that generally there is lack of communication and cooperation among the Sonys business units due to the compartmentalisation, a disadvantage that divisional structure brings. This runs the risk of incompatibilities of Sonys products and services. Hence, Sony top management should support more opportunities for its business units to interact and cooperate via social interacting activities for staff to help to develop camaraderie and team spirit. To be successful, Sonys business units must be well managed by strong executive leadership which understand each business unit as well as is able to provide leadership to the business unit chiefs when introduce new strategic directions and make them partner more effectively partner, across the business units.