Managing the Value Chain at Sony - Case Study Example

MANAGING THE VALUE CHAIN AT SONY There is ample empirical evidence that Japanese firms in general are laggards in international production compared with their American and European counterparts. A survey conducted by JETRO (the Japanese External Trade Organization) in December 1995 found that the ratio of overseas production as a percentage of total output, the so-called overseas production ratio (OPR), was 26 percent for American firms, 16 percent for European firms, yet only 8 percent for Japanese firms. Compared with all manufacturing, Japanese electronics firms have been substantially more exposed to international production. Yet they still lag behind their American and European rivals.1 This is true even for early pioneers in international production, such as Sanyo and Sony. American PC companies, by contrast, generate roughly 40-50 percent of their total production value in East Asia. Seagate, the current market leader for hard disk drives, is estimated to generate around 75 percent of its overall production value in East Asia, primarily in the triangle that comprises Singapore, Malaysia, and Thailand. European electronics multinationals have fairly high OPRs, but only in the last decade have major European electronics firms discovered East Asia (Lasserre and Schuette 1995). We estimate that during the early 1990s major European electronics firms generated roughly 15-20 percent of their total production value in Asia. The geographical location and other factors such as proximity to low cost labor markets dictate a different value chain for japanese companies. That is the reason why I have decised to focus on Sony and have a closer look on the supply value chain as well as customer value chain creation. The scope for centralized control at Sony diminishes with increasing distance; once Sony extends its value-chain across national boundaries, it is faced with complex coordination problems and the risk of abrupt disruptions.. While production-related disruptions decline with increasing product maturity, demand-related disruptions and abrupt changes in management decisions brought on by financial markets do not. Sony was faced with a very different challenge; they had hesitated too long in moving production of products to East Asia (Ernst and O'Connor 1992). Under the impact of the yen appreciation, Sony risked losing market share in the United States and Europe, especially to the aggressive new competitors from Korea. A quick response on a massive scale was required to roll back these new challengers. Production ramp-up had to occur quickly, and cost and quality had to be tightly controlled. Under such conditions, centralized management control was a perfectly rational choice. Developing local capabilities and linkages through "trial-and-error" would have been a time-consuming process, and thus had to be discarded. It is important to note that specific features of consumer electronics are important for the organization of Sony production networks. Lower end consumer devices have a variety of characteristics that are conducive for the establishment of global export platform mega-plants. They are homogeneous products with large economies of scale in which close interaction with customers is not required. They are characterized by a high divisibility. Different stages in the value-chain can be easily separated, and fundamental changes in design methodology and the shift from metallic to plastic parts have facilitated offshore production, even for relatively complex components such as drums, video heads, and small motors.2 With but few exceptions (such as picture tubes), most components and subassemblies are also characterized by low transportation costs, and can be easily moved between different locations.3 There is ample empirical evidence that Japanese firms in general are laggards in international production compared with their American and European counterparts. A survey conducted byJETRO (the Japanese External Trade Organization) in December 1995 found that the ratio of overseas production as a percentage of total output, the so-called overseas production ratio (OPR), was 26 percent for American firms, 16 percent for European firms, yet only 8 percent for Japanese firms. Compared with all manufacturing, Sony products have been substantially more exposed to international production. Yet they still lag behind their American and European rivals.4 This is true even for early pioneers in international production, such as Sanyo and Sony. American PC companies, by contrast, generate roughly 40-50 percent of their total production value in East Asia. Seagate, the current market leader for hard disk drives, is estimated to generate around 75 percent of its overall production value in East Asia, primarily in the triangle that comprises Singapore, Malaysia, and Thailand. European electronics multinationals have fairly high OPRs, but only in the last decade have major European electronics firms discovered East Asia (Lasserre and Schuette 1995). We estimate that during the early 1990s major European electronics firms generated roughly 15-20 percent of their total production value in Asia. 18 5 Another factor that explains the closed and Japan-centered nature of Japanese production networks in Asia is proximity, which has facilitated centralized control. The scope for centralized control diminishes with increasing distance; once a firm extends its value-chain across national boundaries, it is faced with complex coordination problems and the risk of abrupt disruptions. 19 Firms have had only limited success reducing the likelihood of such disruptions (Levy 1994; 1995). While production-related disruptions decline with increasing product maturity, demand-related disruptions and abrupt changes in management decisions brought on by financial markets do not. Although experimentation and "strategic drift" continue to prevail to some extent, most firms appear to be committed to moving toward what I will call "systemic rationalization"-the attempt to move beyond partial rationalization of individual business functions (such as factory automation or JIT procurement systems) to generate closer, faster, and more cost-effective interactions between all stages of the value-chain across all production locations (Ernst 1997a, Chapters II and IV). This effort involves at least three organizational changes of significance to IPNs. First, Sony implements for the first time formal financial control systems; performance is now measured for every plant and every business unit. Tighter financial control is expected to slim down "fat" product portfolios and reduce excessive investment outlays. With stringent financial control systems in place, parent company is now granting greater local decision autonomy, which, sooner or later, will erode the centralized governance structure that has characterized Japanese IPNs. Second, Sony is introducing a strategy of procurement rationalization and internationalization to reduce dependence on high-cost domestic supply sources and to generate larger economies of scale. Rationalization means paring down a company's supply base. Internationalization means that a firm can choose the best suppliers in the world, in terms of cost, quality and delivery performance, no matter where their operations are located. Rationalization and internationalization together mean that the size of each contract on average is likely to increase. As a result, the client firm can request that each supplier offers more favorable unit prices and delivery schedules. If the contract is big enough, the client firm may even be able to ask the supplier to set up shop at a particular location. Firms must make important changes if they wish to reap the potentially huge scale economies of international procurement. For example, at Sony procurement decisions for low-volume, low-cost commodities (especially those with high transportation costs) can be left to regional headquarters or even to individual affiliates. At Sony procurement decisions need to be based on close and continuous interaction among purchasing, engineering, finance, and quality assurance. Improved inter-firm networking and administration are thus increasingly crucial to the effective implementation of inter-firm networks. Sony also started to experiment with new approaches to innovation management, which, again, may have far-reaching implications for the organization of their Asian production networks. Sony is also known for their capacity to reduce the development cycle for new products and thus to accelerate speed-to-market for products that remain within a given technology paradigm. Continuous refinement of product design and process engineering have been hallmarks of Sony approach to innovation management. However, recent research has highlighted that international innovation management strategies of Sony electronics firms lack a clear focus and have been plagued by costly trial and error methods.6 Compared with their American and European counterparts, Japanese firms are still at a relatively early stage of R&D internationalization, and so far have very limited experience in organizing international R&D networks. Moreover, in their attempts to internationalize R&D, Japanese firms face even greater cross-cultural communication problems than for manufacturing, and have failed to integrate ideas and concepts developed abroad into the firm's domestic R&D agenda. 27 Japanese firms are finding it more difficult than their American and European counterparts to recruit first-class non-Japanese researchers, remain reluctant to localize the management of their overseas R&D activities, and thus have failed to fully tap into local and regional science and technology communities. It is quite challenging to understand why Sony decided to expand their overseas R&D activities in Asia and to what degree these activities differ from those they pursue in the United States and Europe. Both in the United States and in Europe, Sony electronics firms seek to improve their access to international technology networks by expanding overseas basic research centers and establishing "satellite R&D centers" that conduct cooperative research with foreign companies, universities, and research institutes. Sony, for example, are under increasing pressure to speed up the growth of their accumulated patent portfolios. It is known that in order to achieve it Sony has to do it the fastest way to do this is to complement their domestic R&D activities by establishing a center in one of those "regional clusters" (Porter 1990) where innovation capabilities and R&D infrastructure are concentrated. In Asia, the innovation management strategies of Sony are shaped by a very different set of objectives-to provide adequate support activities for their expanding IPNs. Overwhelmingly, these networks consist of mass production-type assembly and related component manufacturing. The main driving force for relocating R&D activities to East Asia is this current shift from proprietary components to standard components that can be sourced at lower cost from local or regional suppliers. In order to achieve this goal, Japanese electronics firms have been forced to upgrade their regional and local support services and establish on the spot a capacity for continuous re-design or so-called "adaptive engineering." Since the early 1990s, Sony has attached greater importance to market intelligence and product customization. Asia is increasingly characterized by heterogeneous demand patterns and highly segmented product markets; as a result, Japanese firms have had to adapt their Asian production networks to the idiosyncrasies of each of these markets. These developments "'require high degrees of local adaptation of products, integration of products with local services, and close relationships with component suppliers" (Branscomb and Kodama 1993:86).7 Local affiliates require a capacity for continuous product customization, adaptive engineering and some development activities. According to Kuniji Osabe, the head of Canon's R&D Planning Center, "'the best way to create products which meet local market needs is to perform local research with local talent." A third important objective for Japanese electronics firms is to tap into existing pools of lower-cost human resources. Most countries in Asia pursue aggressive policies to increase the supply of engineers and scientists, especially for software engineering and certain basic assembly technologies, circuit designs and system engineering and integration (Ernst 1997). As a location for Japanese overseas R&D activities, Asia still lags well behind the United States and Europe, where most of these activities remain concentrated. In Asia, R&D has centered on training, some basic manufacturing support services, product customization, and software engineering. Most of these activities are integrated into manufacturing affiliates, and thus do not show up on a count of "R&D centers." On the other hand, there is reason to believe that many of the reported "R&D centers" may not undertake any research at all. Japanese firms are now under increasing pressure from host country governments and firms to broaden the scope of transferred capabilities and thus have a tendency to use the term "R&D" rather loosely to include mundane and routine production-related engineering tasks. The deepening of an international production network implies that an increasing number of stages of the value-chain are shifted overseas. Two activities are of particular importance-changes in the procurement system, and the partial redeployment of some R&D functions. Sony is being challenged to reduce the dependence of their various Asian production subsidiaries on high-cost imports from Japan without losing too much in terms of quality, speed, and reliability of delivery. Important changes have also occurred in the role of Sony's component suppliers. Those firms that produce relatively complex and higher value-added components have substantially increased their investment in East Asia, primarily in Malaysia and Thailand, but also in China. In order to amortize their investment outlays and to gain economies of scale, these affiliates are actively searching for new clients, and frequently supply a number of Japanese firms as well as American, Korean, and some European firms (Ernst 1997). It is necessary to stress the irreversible nature of most of these changes brought about by the yen appreciation. By generating a substantial amount of new sunk investment in East Asia, the yen appreciation has imposed major changes both in the domestic production system and in the Asian supplier networks. It would be very difficult for Sony to return to the status quo ante now that the yen has depreciated again. Sony is equally attracted by supply-side factors such as East Asia's lower labor costs, as well as other capabilities that are increasingly difficult to mobilize at home. Tapping into these resources requires a regional strategy based on specialization among individual Asian affiliates and between them and their local suppliers, which implies concentrating the production of a single product family in one factory that supplies the whole region. In turn, these regional strategies may conflict with a firm's global strategy. Sony has established global information networks that link overseas affiliates with the parent company for crucial stages of the value chain, such as product design, production, procurement, and inventory control, in order to ensure that East Asian affiliates have access to the same information not only as sister affiliates in the United States but also as the parent company. There is still a huge gap between this objective and its implementation. To put it bluntly Sony faces a basic dilemma. If they continue to rely on closed and highly centralized regional production networks, they may create increasingly non-competitive domestic and overseas production systems. If,8 on the other hand, Japanese networks open up too quickly, the resultant transfer of technology and capabilities may create new competitors, not only for low-end, labor-intensive products but increasingly for mid-level and some higher end products as well. Sony Style Store as an example of value chain Value Direction:Business model & method to create Sony Style fan through direct customer contact Objective Enhance total Sony brand image and increase revenue by acquiring Sony Style loyal customers Background Sony Style Europe needed to grow 50% in net sales in FY05, and reach break-even. Strategy of selling with discounts was not working, and was causing channel conflict with sales companies.Officially launched "Value Direction" from FY05 Re-budget Solutions 1. Joint project with Tokyo VAIO team, and knowledge transfer from Sony Style Japan 2. New concept of "Prestige Collection" created to explain new value proposition 3. Method focused on VAIO exclusive models 4. Marketing communications agencies to be committed into delivering the proposition 4. Coordination of marketing functions with Sony UK (Pilot) Results Value direction became basis for Sony Style's framework to generate profit 'FY05 2H: successfully improved GP and first time in history to achieve breakeven Achieved monthly records sales & VAIO weekly quantity record, increased VAIO direct ratio.Collaborative marketing communication with Sales Co.Established and reconfirmed Sony Style's direction and positioning as flagship direct store There is a whole set of actions that Sony undertook: 1. Created a rich cross-product category exclusive offer 2. Focused activities on strategic exclusive models 3. Utilized Voice of Customer and segmented customer database 4. Created "Prestige Collection", a new landmark to appeal value proposition 5. Launched a wide range of activities to build stronger relationship with Sony fans (online partners, webinars, content-population of Sony ODW websites) 6. Shared goal & collaborated marketing activities with key Sales Companies and European Business Groups Value Direction is essential for Sony and helped to crop high profit and net sales. It helpe d Sony to reduce the conflict with sales companies and at the same time make positioning of Sony stores as "Flagship store for Sony". Sony tries to learn from the results that customer acceptance it is something that should be nurtured ovet time and be constantly maintained. The main policy right now is aimed at strengthening retention marketing to increase the number of loyal customers. Bibliography: 1. Bernard, M. and Ravenhill, J. (1995) "Beyond Product Cycles and Flying Geese. Regionalization, Hierarchy, and the Industrialization of East Asia," World Politics , 47(January):171-209. 2. Branscomb, L.M. and Kodama, F. (1993) Japanese Innovation Strategy. Technical Support for Business Visions , CSIA Occasional Paper 10, Center for Science and International Affairs, Harvard University . 3. Cantwell, J. (1995) "The Globalisation of Technology: What Remains of the Product Cycle Model'" Cambridge Journal of Economics , 19:155-174. 4. Ernst, D. (1983) The Global Race in Microelectronics , Frankfurt and New York: Campus Publishers. 5. Lasserre, P. and Schuette, H. (1995) Strategies for Asia Pacific , New York University Press. 6. Levy, D. (1994) "CCT's International Supply Chain," Harvard Business School Case Study, Harvard Business School. 7. Porter, M.E. (1990) The Competitive Advantage of Nations , London: The Macmillan Press. Read More