International Joint Venture: Sony Ericsson - Case Study Example

International Joint Venture: Sony Ericsson Contents Contents 2 Introduction 3 Reasons behind choice of Sony Ericsson 3 Constraints to information sourcing 3 Sony 4 Ericsson 4 The Joint Venture 5 Company strategy to form alliance 6 Objective of the collaboration 6 How collaboration supports the strategy 6 Impact of collaboration 7 Failure 7 Judgment of Success 8 Revival 8 Performance Analysis: Sony Ericsson 9 Structural 9 Management 10 Operational 11 Financial 12 Conclusion 13 Reference List 15 Introduction Globalization has increased the pressure on firms to work on their efficiency, continue innovation and improve product and production quality in order to remain competitive in the industry. With short product life cycles and high research and development costs for survival, companies often resort to wider reach in order to remain in business. To do so, companies often come together with a hope of reaching a wider market, strengthening their market position and developing new core competencies by way of joining hands (Yan and Luo, 2000). Sony Ericsson had formed an alliance in October 2001 with a view to change the mobile phone landscape of the world and to emerge as one of the leading mobile phone companies. The companies came together in order to become the world’s most well-known brand in communication entertainment. This, they wanted to do by way of inspiring people not just to talk, but also enable them to entertain themselves by way of creating and participating in entertainment through a single device. This was an attempt towards blurring the lines that demarcated communication and entertainment. Reasons behind choice of Sony Ericsson Sony is a Japanese consumer electronics company, while Ericsson was shaping the future with mobile communication and internet. They had come into a joint venture with a view to combine the technical expertise of the two companies and gain competitive advantage through the alliance. This case forms an interesting study for observing how two companies come together for profits and fail to do so. The case also highlights how the failed joint venture emerged and re-grew from the failure and became a successful collaboration through the years. The two companies had enough apparent synergy to come together and gain technological advantage. The study highlights how unanticipated consequences and careless planning can make things go wrong (Curwen and Whalley, 2010). Constraints to information sourcing The problems faced in sourcing for information were few. This deal happened back in 2001. This meant that tremendous amount of information and sources were available for study over the internet. However, the primary concern of sourcing information over the internet was that there was lack of reliability involved in the process. Moreover, authentic data for the deal announcement and joint venture process was difficult to obtain. Additionally, sourcing of forecasts, which were made at the time of venture, was not available for the purpose of study. Financial information to study the possible impacts of the merger were available on many sources, but again, legitimacy of such information becomes limited, unless authenticated by some reliable data source, primarily because the joint venture ceased to exist in 2008. Sony Sony is a Japanese company engaged in the business of manufacturing consumer electronics. Sony Corporation is renowned all over the world for manufacturing video equipments, communication devices, electronics, video game consoles and information technology related products for the professional markets as well as consumer segment. In the year 2000, Sony Corp was not a very large player in the cell phone segment of the market. Its market share was very marginal and stood at a maximum of 1%. This business for Sony was struggling to survive and had been incurring huge losses and needed revival. Sony was also keen on developing the business segment (Bishop, 2011). Ericsson Ericsson was one of the global leaders of mobile phone manufacturing and also, a large provider of data communication system as well as telecommunication and related services, during the years preceding the joint venture between Sony and Ericsson. Its business covered a wide range of services that largely included the mobile communications industry. The early 90s saw a partnership of Ericsson with General Electronics with a motive to capture the markets in United States of America. The attempt was to create a brand presence and brand recognition in the US. Ericsson sources all of its chips from one single supplier, Philips, whose facility was established in Mexico. In the year 2000, a fire broke out in the Mexico division of Philips, which led to production being stalled for many months. As a result, Ericsson had to face huge production shortages and could not meet the demand. Its key competitor, Nokia, shifted its sourcing immediately and started eating up Ericsson’s market share. Ericsson suffered huge losses, thereby losing its third position in the world mobile market. It also did not produce mobiles that were as cheap as those produced by Nokia. This led to consideration of outsourcing production to other Asian companies, in order to continue manufacturing handsets at cheaper costs. The Joint Venture In the year 2001, when Sony and Ericsson decided to collaborate, the merger was known as the ‘Dream Team’. Sony Ericsson came together in the 50:50 joint ventures for the purpose of manufacturing mobile phones. It was anticipated that when the consumer electronics expertise of Sony would combine with the wireless technology knowhow of Ericsson, the merger would lead to increased market share and benefits for both the companies, than they would have otherwise gained as competitors. The unique position, resulting from the merger, also had the ready access to a lot of music and entertainment companies, which were some of the biggest in the world. Due to this synergy, Sony Ericsson’s strategy was to manufacture mobile phones that were capable of high-end digital photography and cutting edge multimedia capabilities that would allow users to view and download video files, listen to music and manage their personal information all in a single device, called the phone. The decision of the companies to work together was awarded as the fifth best management decision by the Sunday business in 2001. The constant aim of Sony Ericsson was to become the number one in multimedia phones. Such phones were typically high-end cell phones, which combined the wireless technology in communication with digital photography, video downloading as well as viewing and gaming in a single device. The vision of the resultant joint venture company was to become the brand name for communication entertainment. The company has its headquarters in London and its research units in Sweden, China, Japan, Germany, United Kingdom, US, Pakistan and India. The company employed 17500 people globally, as of 2010 data (Careers, 2008). Company strategy to form alliance Objective of the collaboration The primary objective behind the alliance of Sony and Ericsson brands was to integrate the technological knowhow and intelligence of Ericsson and consumer electronics expert knowhow of Sony and serve the communication industry through this combination. Ericsson had recently faced huge losses, in terms of loss of supplier, due to a fire that erupted in the Philips plant, producing chips. Ericsson bought all its chips for its mobile phones from Philips and the fire compelled the chip manufacturing unit of Philips to shutdown, causing huge damages and inability to provide chips to Ericsson, on the supplier’s end. Following the incident, the company had to face huge losses as they were unable to manufacture mobile phones as demanded. These losses were severe enough to create a rumor that Ericsson might want to totally sell off its mobile handset division. Eventually, Sony came to the rescue and both the companies joined hands together in a joint venture. The interest of Sony in the joint venture came from their willingness to enter the mobile phones market. Ericsson was the world number three then in the mobile phone manufacturing business, until the fire at Philips broke out and cut down the supply of mobile chips completely, leading to huge losses for Ericsson. Sony knew that Ericsson had the knowledge, knowhow and expertise it needed to enter the market of cell phones and the joint venture would provide them the necessary boost. After the joint venture, both Sony and Ericsson discontinued making separate mobile phones and worked together to manufacture their joint products. Sony joined hands with LM Ericsson. This joint venture had plans to expand into international markets of Japan, Europe, United States and other parts of Asia. How collaboration supports the strategy The main reason behind a joint venture to take place is the economies achieved in transaction costs. This means that the cost of sole ownership of a business is much higher than that in a joint venture. The case of Sony and Ericsson is somewhat similar, where Sony wanted to move forward in the mobile phone industry, while Ericsson was suffering a slump in its mobile phone division and wanted to revive (Tayeb, 2001). The resource based view is also another reason that motivated the merger between the two companies. Sony and Ericsson wanted to take benefits from the tangible and intangible resources of both the companies, which would give them the required competitive edge. Such competitive advantage becomes inimitable and contributes towards performance enhancement. Sony wanted the technical knowledge of Ericsson, while Ericsson wanted to benefit from the technology of Sony, so as to emerge as market leaders in the mobile phone industry (Wolf, 2000). Another driving force behind the joint venture was knowledge attainment and organizational learning. The two companies wanted to join hands with a view to benefit from skills and capabilities of the other company, in order to work towards innovation and better management of company operations. The core objective of the alliance between the two was to develop a new and innovative product with minimum cost and yield a large market share. As a part of management, Sony and Ericsson wanted to come together to serve the joint purpose of better management and company profits. Both the companies wanted to enhance their management, so as to deliver competitive edge in mobile phone provision and gain maximum profits. The management had to collaborate to bring in symmetry in strategy towards attainment of this common goal. Impact of collaboration Failure The expectations were very high when the merger was initiated. However, in the very first year, Sony Ericsson incurred losses to the tune of US$ 136 million, when the quarter ended in December 2001. Shareholders were disappointed all through 2002. The joint venture had incurred huge losses, right at the beginning. Sony Ericsson found it difficult to face competition from some of its key competitors and shifted its profit making year to 2003 from 2002. They also slipped down to the 5th position in the mobile phone market. The primary problem associated with the deal was that they had represented their product in an incorrect manner in the market. To be successful with innovations, it is necessary for the company to provide value to its consumers and satisfy their needs. However, what is also necessary is that the product is placed well in the market, such that it creates demand for itself. Consumers always want to be updated with something new and unique. Sony Ericsson mobiles did not have any originality in design, while their handsets were perceived to be highly expensive for the kind of value it offered. Market share for the company sunk to 5.4% in 2002 and called for more influx of capital in the business (Franchini, 2008). Another grave problem associated with failure of Sony in different markets was their inability to work well with customer needs and wants. A joint venture also needs to create products that cater to the needs of customers. Lack of information on consumer needs led to slowdown of company progress. Also, the cultural match within the company was not achieved. Sony and Ericsson found it difficult to combine two product lines as well as engineering culture of Sweden and Japan within the company. This resulted in an uninspired workforce and cultural clashes, thereby leading to a conflicting environment that delayed production processes and hence, low productivity (Hennart and Zeng, 2002). Judgment of Success Revival SE held only about 5.4% of the world market for mobile phones in 2003, while Nokia led with 34.5% market share. Sony Ericsson was last in the list of leading mobile phone companies. To revive, the company adopted the multinational strategy, where they wanted to offer superior quality products to deliver a design that was capable of charging premium prices. Sony Ericsson started by targeting niche markets and putting all efforts towards development of handsets, which offered entertainment for the dynamic market. Such product differentiation strategy was, however, a short-term one, which could work well with premium pricing for Sony Ericsson phones. Sony Ericsson enjoyed a very high bargaining power with the rise in demand for phones as instruments of fashion and multimedia phones started becoming the need of the day. Nokia and Samsung had a different focus and could not compete, despite high competition among the firms. New entrants in the mobile phone market did not possess the technological skills and expertise that Sony Ericsson had and found it difficult to match standards set by the company. In 2004, market share for Sony Ericsson increased to 7% from 5.4% in 2003, owing to innovative product design and features. Year 2005 saw the unveiling of the very popular Sony Walkman, which was unique for offering digital music player in a mobile phone. In 2006, the company won awards and was accepted as the global trendsetter for design and innovation. In 2007, the company acquired the UIQ technology to enhance email, multimedia and webpage experience. In the year 2008, Sony Ericsson launched world’s first 8 megapixel camera in a mobile phone. This worked positively for the business and the company ranked third in the global market of mobile phone technology by 2008 (Turner, 2007). Sony enjoyed the period from 2003 to 2008, prior to the time when it was taken over by LG and Apple revolutionized the market of mobile phones with the launch of smartphones. Until then, Sony Ericsson had to adopt a strategy that launched new product designs and unique product features that were needed by customers, so as to increase their markets share. To be successful in the long run, technological advantages created the scare and the company worked on better technologies to create their market niche. This is because mobile phones market has a very short product life cycle and continuous innovation is the only way to be sustainable in the market (Schenker, 2007). Performance Analysis: Sony Ericsson After the initial problems with the joint venture, the revival for Sony Ericsson was marked by the launch of new and improved products with unique offerings and exclusive design. These new models were designed for digital photography, downloading and viewing of videos as well as for personal information management. These turned things around for the company. A brief look at factors, which contributed towards the turnaround, can be observed in its structural, management and operational performance. Structural Partnership with other firms Sony and Ericsson came together in 50:50 joint ventures. The company looked forward to partnerships with other companies to grow structurally. Forming strategic agreements with partners from the side of Sony like, the Sony BMG, helped the company to offer the latest and the best in entertainment to its mobile phone users. They also entered into agreements with the World Tennis Association Tour, which provided them the opportunity to pitch tennis fans and a consumer segment with elite taste, that were fans of this sport. Offering tennis match experiences on their phone was a major selling point for this customer niche. Creation of value-added web capabilities In order to gain customer loyalty towards their brand, Sony Ericsson started providing multimedia communication over its devices. This enabled customers to access an excellent online base through the wide reach of the joint venture. The joint alliance offered a wider customer base, which made it feasible for the company to acquire alliances like, Akamai, in order to provide multimedia solutions to its customers. This partnership ensured that secure, reliable and consistent web services were provided to the entire customer base of Sony Ericsson (Trott, 2008). Management Employee and Customer Focus One of the more important reasons for the success of the Sony Ericsson joint venture was focus of the management towards its employees and customers. The company faced initial cultural clashes between the Swedish and Japanese employees of the two companies. Through strategic role playing and management, the company was later driven by the innovative capability and creativity of their employees. Fair treatment and proper management of employees ensured cost effective, cutting edge innovation. The company’s focus towards its customers was observed in its product offerings. All its innovation was designed to suit the needs of consumers and meet their expectations, such that loyalty was retained (Gannon and Newman, 2002). Research and Development The management decided to invest largely in research and development and had established several research units in various countries. Although it had to close down a few of its research units as a cost cutting initiative, the company’s attempt towards research had been successful, thereby establishing a customer base and market position that it relished. It built a wide product portfolio that gave consumers the choice to select from a wide range of offerings. They had choices in accessories, handsets and applications that enhanced user experience in totality. The joint venture was committed to the task of providing a rich mobile experience and the feel of class associated with its use (Turner, 2007). Operational Supply Chain Management Eight years of operation for the company saw tremendous quality standards because of its rigorous supply chain management. Sony Ericsson suppliers were required to undergo an extensive assessment process, so as to ensure that they complied with the required standards. Such audits of suppliers secured that the procedure with suppliers were correct and all kinds of undesired elements in the supply chain were eliminated. The Supplier Social Responsibility Code charts out expectations that are desired off the suppliers like, safe workplace, retention of human rights and maintenance of ethical standards. The company also worked with suppliers to ensure that standards are maintained and upgraded as required (Jurien, 2007). Concern for the environment On concern over the environmental consciousness, the joint venture of Sony and Ericsson made sure that harmful substances from their mobile phones were eliminated as much as possible and all kinds of environmental damage caused in the production process was minimized to meet the norms of environmental standards. Sony Ericsson phones carry the ‘green core’ by which the company did away with the usage of hazardous chemicals in product manufacturing and design. The MH300 GreenHeart (TM) headset from the house of Sony Ericsson is possibly the most environment friendly headset on the global platform. Financial Figure 1: Sony Ericsson gains and losses over 2003-2009 (Source: Ericsson, 2006) The figure above suggests that Sony Ericsson had seen a rise in sales only after 2003, until which the joint venture had not achieved much success. The growth was phenomenal from 2005 to 2006, when the company had launched its Sony Ericsson Walkman series, which marked the stage for the company. The sales grew at a CAGR of 18%, since 2003 through 2006. The growth pattern continued until 2007, when Apple announced the launch of its iPhone in the last quarter of the same. Sony was overtaken by LG in the beginning of 2008 (Lester, 2007). Services growth was observed by 30% in 2006, the record growth year. This marked the attainment of the 100 million subscriber benchmark. In terms of number of units sold, the company saw a rise from 27 million units in 2003 to above 100 million units being sold in 2007, i.e. within a period of 4 years. It was also observed that the company had reached the fourth position, in terms of number of units sold and market share worldwide, by the end of 2007. Figure 2: Sony Ericsson relative market position in 2007 (Source: Eleconomista.es, 2008) Conclusion A joint venture effort can be successful only when both companies have synergy and common set of mission and goals. Such a contract also needs trust building and efforts from both ends to meet the common set of goals. The above analysis clearly highlights that Sony Ericsson faced initial difficulties in the merger. However, eventually things started falling into place after 2003, when both companies started working towards common goals and in 2008, it returned to acquire the 3rd position. Research has suggested that most joint venture fail in the initial years and to this, Sony Ericsson sets an exception story. The 8 years of its existence saw both, failure and revival. To deduce on the whole, the joint venture can be deemed as successful. It had been successful in establishing itself as a global brand for communication entertainment within the mobile phones industry. Their steep fall in earnings as well as market position can be largely accounted to the global financial crisis. Advent of Apple smartphones also contributed towards the failure, later, when the company was overtaken by LG Electronics, a South Korean rival firm. The very initial years of its existence saw that the joint venture had eliminated most of its problems pertaining to employee unrest and operational problems. This had deterred the company’s market position. It had become important to gain market support as much as to innovate the mobile technology. Sony Ericsson brought together the perfect combination of what was required to be a strong growth company. They designed products that were innovative, with the needs of target customers in mind. The company maintained extreme control over quality and performance standards for its mobile technology, accessories and applications. It also exercised strict control over its suppliers and environmental management, such that no loopholes were left to deter their efforts. The efficiency, on the part of strategic partnerships, allowed niche marketing and creating demand for their product. All these collectively brought forth the market position that the company worked for. LG acquired it in 2008 and the success story of Sony Ericsson’s joint venture ended there. Sony Ericsson has been facing a decline, since it has been acquired by LG. In 2001, Sony announced that it would buy out Ericsson’s portion in Sony Ericsson and the deal was materialized for $1.47 billion. The buyout took place in January 2012 and following that, Sony has been working on the Xperia series. The mobile phone market is ruled by smartphones manufactured by the houses of Samsung and Apple. With the advent of Google into mobile phones, it would be interesting to observe how Sony manages competition (Palmer, 2008). Reference List Bishop, J., 2011. The death of the European mobile dream. [online] Available at: [Accessed 24 January 2014]. Careers, 2008. Careers – The Sony Ericsson Story. [online] Available at: < http://www.sonyericsson.com/cws/corporate/company/jobsandcareers/thesonyericssonstory> [Accessed 24 January 2014]. Curwen, P. J., and Whalley, J. 2010. Mobile telecommunications in a high speed world industry structure, strategic behaviour and socio-economic impact. Farnham: Gower. Eleconomista.es, 2008. Gartner Says Worldwide Mobile Phone Sales Increased 16 Per Cent in 2007. [online] Available at: [Accessed 24 January 2014]. Ericsson, 2006. Fourth Quarter Report-Full Year 2006. [online] Available at: [Accessed 24 January 2014]. Franchini, A., 2008. Big Trouble at Sony Ericsson. [online] Available at: [Accessed 24 January 2014]. Gannon, M. J. and Newman, K., 2002. The Blackwell Handbook of Cross-Cultural Management. London: Blackwell Publishers Ltd. Hennart, J. and Zeng, M., 2002. Cross-Cultural Differences and Joint Venture Longevity. Journal of International Business Studies 33(4), 699-716. Jurien, I., 2007. Sony Ericsson PlayNow Arena service. Let’s Go Mobile. [online] Available: [Accessed 24 January 2014]. Lester, R., 2007. No walkover for Walkman phone. [online] Available: < http://www.marketingweek.co.uk/no-walkover-for-walkman-phone/2057276.article> [Accessed 24 January 2014]. Palmer, M., 2008. Omnifone and LG in move to outdo Nokia. [online] Available: < http://www.ft.com/intl/cms/s/0/51d98b84-d90d-11dc-8b22-0000779fd2ac.html#axzz2rIz4BezF> [Accessed 24 January 2014]. Schenker, J. L., 2007. Challenges for Sony Ericssons New Chief. [online] Available: < http://www.businessweek.com/stories/2007-11-09/challenges-for-sony-ericssons-new-chiefbusinessweek-business-news-stock-market-and-financial-advice> [Accessed 24 January 2014]. Tayeb, M. H., 2001. International Business Partnership. New York: Palgrave. Trott, P., 2008. 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