Sony Corporation (Sony), the Japan-based consumer electronics and entertainment group, has become synonymous with breakthrough technology products, including the Walkman, Trinitron TV, Compact Disc Player and PlayStation video consoles. Over the course of more than half a century, Sony has developed into a world-class brand representing high quality and advanced technology in consumer electronics. However, during the past ten years, and with the exception of the PlayStation (PS2 and PS3) consoles, Sony has been more of a laggard in consumer electronics innovation, for example in the fields of LCD technology and MP3 players. It has not been able to keep up in the marketplace with Sharp in LCD technology, or with Apple in MP3 players, or with Nokia in mobile phones, though it has remained successful in areas such as digital cameras and gaming consoles.[i]
Why was Sony unable to keep pace with changes in the consumer electronics industry?
How does Sony manage its research and development?
Sony’s history of technologically innovative products
During World War II, Masaru Ibuka, an electronics engineer, met Akio Morita, a physicist, and they became close friends. In 1946, together with Ibuka’s father-in-law, Tamon Maeda, they established Tokyo Tsushin Kogyo (Totsuko), or the ‘Tokyo Telecommunications Research Institute’, with around 20 employees. The company conveyed its focus on developing technologically innovative products in its founding prospectus: “We shall be as selective as possible in our products and will welcome technological challenges. We shall focus on technologically sophisticated products that are highly useful in society, regardless of the quantity involved. Moreover, we shall not establish any clear demarcation between electronics and mechanics, but shall create our own unique products uniting the two fields, demonstrating a determination unmatched by other companies. We intend to keep our business operations small, go forward in technology, and grow in areas where large enterprises cannot enter because of their size.”[ii]
The company soon introduced Japan’s first magnetic tape recorder in 1950 and Japan’s first transistor radio in 1955. The company was renamed Sony in 1958. Guided by the philosophy set out in its initial prospectus, Sony invested heavily in R&D. For many years, Sony invested 6–10 per cent of its sales into R&D.
In the next three decades, Sony continued to launch innovative new products in the global market, such as the personal headphone stereo Walkman in 1979, the world’s first compact disc (CD) player and a single-unit broadcast-use camera in 1982, the single-unit video camera in 1985, the HD Trinitron television in 1990, the ‘Kirara Basso’ series with Super Trinitron picture tube in 1991 and the PlayStation in 1994. Such innovations established Sony as the innovator in the consumer electronics industry.
Going international
Sony started to internationalize its activities as early as the 1950s, but in an incremental and cautious way. Morita explained the rationale for this strategy: “you must first learn about the market, learn how to sell to it, and build up your corporate confidence before you commit yourself. And when you have confidence, you should commit yourself wholeheartedly.”[iii]
Following this strategy, Sony started by exporting products through foreign agencies or its own sales offices when entering foreign markets. It set up manufacturing plants close to markets only when sales took off, and ultimately also internationalized its R&D activities. For example, Sony established Sony Corporation of America (SONAM) in 1960 to oversee Sony’s marketing activities in the US, but only started to build its first US plant in San Diego in 1971, beginning with a simple assembly operation, with all components shipped from Japan. In Europe, Sony set up Sony Overseas, S. A. (SOSA), in Zug, Switzerland, in 1961, and a sales subsidiary in London in 1968. Only in 1974 did Sony establish it first European manufacturing facility, in Wales.
Again moving incrementally, Sony then established overseas technology centres (R&D centres) once the overseas sales and manufacturing subsidiaries were successful. Until the early 1980s, these centres were set up either by Japanese business divisions/labs, or by foreign subsidiaries without the direct involvement of corporate headquarters, as Sony believed that foreign subsidiaries should ultimately conduct their own manufacturing, marketing, service, financing and R&D activities. Sony established its first overseas R&D centre in San Jose, California, in 1977, and the second in Basingstoke, UK, in 1978. The main reason Sony’s foreign subsidiaries established R&D activities was to solve problems faced by local sales and manufacturing activities, especially requirements to modify products for local markets and to provide technological support to overseas plants. For example, in the area of broadcast and industrial applications, Sony established Sony Broadcast
Ltd (SBC) in the UK in 1978, which initially focused on sales and service. SBC gradually expanded from sales and service to design and development serving local needs. Later, SBC and development teams in the US together developed broadcast-use video equipment.[iv]
At that stage, top managers at the overseas labs had substantial autonomy. Even though the overseas labs were initially established with the support of Japanese business divisions/labs, the latter did not exercise stringent control over the overseas subsidiaries. As a result, top managers at the overseas labs could decide for themselves what R&D projects to pursue.[v]
During the 1980s and the early 1990s, Sony gradually internationalized its R&D activities. By the early 1990s, Sony operated around 20 overseas R&D centres, including 11 major labs. In 1996, these overseas labs employed approximately 500 workers. This represented only a small fraction of Sony’s total R&D, whereas overseas production accounted for 30 per cent of Sony’s total production and foreign sales represented 70 per cent of Sony’s sales.
The majority of Sony’s R&D takes place in Japan as the development process requires extensive coordination and communication among all parties involved. For example, when Sony developed the Viao 505 laptop in the late 1990s it required tremendous efforts from the R&D centre in Japan with little effort needed from foreign centres. These foreign centres were mainly required to aid in the process of adapting the product to local markets, and this usually involved translation of labels and product information. For Sony, the development process of the Viao 505 required all R&D activities to be located within a narrow geographic area. Face-to-face meetings between concept designers occurred daily to ensure effective communication and continuous evaluation. Once the product was in the stage of component development, designers and engineers were also required to meet face-to-face when developing the product. In addition, suppliers were selected that were located within a short train ride to the Sony technical centre to ensure a strong, ongoing relationship. It was also common for the Sony team to travel to supplier locations to ensure quality of inputs. Finally, monthly meetings took place among members of groups responsible for design, materials, product quality, applied technology, software application, and production. For the above reasons, Sony required its R&D activities to occur in a centralized location in Japan. Similar to Sony’s approach, many firms, R&D activities and innovation development are concentrated in clusters, since tacit knowledge is difficult to transfer overseas.[vi]
Sony’s global R&D labs were developed to provide more sensitivity vis-à-vis end markets; however, the majority of Sony’s R&D capabilities will remain in Japan.[vii]
Managing R&D units
In 1989, at the opening ceremony of the Advanced Video Technology Center in San Jose (US), Morita stated: “We believe it is necessary to develop products locally in order to meet the needs and requirements of the local market. Also, if we could transfer local specialties such as digital technologies from the United Kingdom, or graphics and special effects technologies from the United States to other regions, we would realize a global synergy in R&D.”[viii]
In the late 1980s and early 1990s, two important elements affected the further internationalization of Sony’s R&D. First, Sony felt the need to tap into the advanced knowledge embedded in various foreign locations. For example, the computer and telecommunications industries in the
US and a few other locations were much more advanced than in Japan. As Sony had expanded from its traditional audio-video niches into telecommunications, it needed to establish R&D bases in advanced technology locations so as to access the relevant knowledge. Second, Sony felt it had to increase internal coordination among R&D labs, to improve efficiency and to create synergies.[ix]
In the early 1990s, Sony introduced a regional management system to improve the internal coordination of its worldwide R&D activities. In 1994, it designated the research laboratories in San Jose, California, as the US Chief Technology Office and allocated the role of European head office to its Stuttgart Technology Centre. The Chief Technology Officer (CTO) at the Japanese headquarters became responsible for worldwide R&D strategy, with CTOs in the US and Europe responsible for regional R&D strategy and coordinating R&D activities in their region. Moreover, Sony organized R&D coordination meetings twice a year for the three CTOs to discuss internal collaboration and resource allocation.
However, autonomy at overseas labs remained highly valued under the regional management system. To a large extent, overseas labs retained the power to plan and execute their own projects.
Sony’s standards[x]
Prior to Japan signing the Technical Barriers to Trade (TBT) Agreement in 1995, Sony’s products were developed to raise the level of standards and become a benchmark for others to follow. Most Japanese companies followed the ‘de facto standardization’ approach where firms with large market shares created products that consumers accepted as standards. As early on as 1993, Sony saw the importance of international standards also known as ‘de jure’, and made a strong commitment to follow and establish such standards in Japan, North America and Europe. Japan’s signing of the TBT Agreement and the World Trade Organization’s enforcement of trade standards required individual country’s standards to conform to the international standards.[xi] This development was positive for Sony as the company’s global R&D strategy had already committed to meeting and exceeding international standards. Sony’s initiatives have created products instrumental to developing new international standards, unlike competitors who develop products to meet these standards. Setsuo Harada, head of Standards and Partnership Department, states that “In the future, international standardization will be an essential part of our efforts to gain widespread acceptance of our technologies and create a more convenient world for consumers.”[xii]
Sony’s recent decline
Since the mid 1990s, Sony has shown signs of reduced competitiveness, exemplified by a drop in net income. A corporate restructuring in 1996 did not remediate this situation, nor did subsequent restructuring attempts in 1999, 2001 and 2009. Sony, the former technological forerunner, has become a laggard in many key product categories. Even its successful PlayStation gaming console has faced challenges with the release of the PS3 in 2007.[xiii] Due to the high investment costs required to develop the PS3, it took over four years for Sony to turn a profit on its gaming console. Sony has struggled to stay competitive as it relies on brand prestige to justify its higher prices in an industry that is evolving towards a dominant focus on cost competitiveness.
Not only has Sony faced challenges internally, but external events have also tested the firm. The 2008 recession hit Sony hard with the company posting a net operating loss of US $2.92 billion, its first full year operating loss in fourteen years. This forced Sony to restructure again and to cut costs by US $3.2 billion in 2009. Operational efficiency became the key focus of Sony as it closed plants in developed markets, cut suppliers, and implemented bids for supplier contracts.[xiv] Contracts were awarded for the best offers that suppliers put forth to gain the right to sell their products to Sony. This provided Sony with more competitive prices from their suppliers. In 2008, the Japanese yen also appreciated strongly against the US dollar putting a further strain on the export-reliant Japanese company. Over 70 per cent of Sony products are sold outside of Japan making foreign exchange risk management critically important.[xv] Mr Chubachi, Sony’s President, stated that each time the Japanese currency’s appreciates with one yen against the US dollar, Sony would incur a loss of US $58.5 million.[xvi] Subsequently, in 2011, a devastating Tsunami hit Japan halting operations and causing plant closures and disruptions in supply change management.
The Sony brand appears to be losing its allure. Ichiro Morimune, marketing manager in the Tokyo region for Yamada Denki, a leading discount retailer, commented, “The strong Sony fans are declining. There are very few people who ask for Sony.”[xvii]
Two major problems in the R&D sphere may have contributed to Sony’s relative downfall. First, Sony has been dominated by a silo structure, with little coordination among divisional managers. There has been insufficient coordination of resource allocation in R&D for improving existing products. Different divisions and product groups under the decentralized structure have been allowed to pursue independent agendas, resulting in waste and duplicated effort. Second, irrespective of problems of duplication and insufficient coordination, Sony’s R&D efforts have simply been less effective than those of rivals, pointing to major problems in the realm of strategic guidance and incentives: “Employees are paid more than peers at Matsushita but deliver less bang for their buck, as does the group’s R&D budget.”[xviii]
Sony’s current strategy
The competitive environment is changing for the electronics industry and joint ventures are becoming a more common and important resource for fostering innovation.[xix] Sony has started to form strategic alliances to increase its technological strengths. For example, Sony, IBM and Toshiba have joined forces to develop Cell, a semiconductor described as a supercomputer-on-achip. To compete with companies in Korea and Taiwan, Sony has teamed up with Toshiba and Hitachi by integrating R&D capabilities to develop small LCD screens.
Moreover, Sony has tried to restructure its R&D operations to create a sense of urgency and to shy away from complacency. In 2005, Sony formulated ‘Project Nippon’ to reduce management layers, improve coordination of R&D and refocus R&D on growth areas. Sony is attempting to create “an over-arching structure for research and development and software spending for all products, rather than the old piecemeal system”.[xx]
Improving operational efficiency will be extremely important for Sony in the coming years as the company tries to turn its profitability trend around. However; Sony is faced with a difficult trade-off between decreasing costs and increasing R&D spending to drive innovation. Due to the
impact of the recession, the company has decreased its R&D expenditures from 2007 to 2011 but remains dedicated to fostering innovation. The company is increasingly focusing, both internally and externally, on ‘open innovation’.[xxi] In 2012, Sony has invested R&D resources to improve the environmental performance of its products as part of its greater focus on corporate social responsibility. In addition, Sony is increasing its R&D spending in the healthcare sector to develop further the use of audiovisuals and magnetic technology.[xxii]
Sony has also begun to outsource specific parts of its value chain in order to decrease its costs. Sony has had difficulties turning a profit on its TV production, with losses for four straight years since 2008.[xxiii] Sony has attempted to decrease costs by closing factories in Spain, Slovakia and Mexico, and has looked to outsource production. In December 2011, Sony dropped out of its joint venture with Samsung to develop liquid crystal display (LCD) screens and may move to cheaper suppliers in Taiwan. A movement towards outsourcing has led to varying opinions on where Sony is headed. Some believe that Sony will focus more on designing rather than manufacturing to compete with companies such as Apple.[xxiv] However, others believe Sony will continue to focus on manufacturing high-end TVs but will outsource production of small and medium sized TVs.[xxv]
In April 2012, Kazuo Hirai replaced Howard Stringer as Sony’s CEO. In the months preceding his new role, Mr Hirai alluded to shifting the strategic focus for Sony to put more emphasis on digital content and networks. Ultimately, Hirai hopes to “bring everything under the Sony Entertainment Network umbrella” and to integrate all of Sony’s devices, users, and data.[xxvi]
QUESTIONS
- How did Sony internationalize its R&D activities? What were the initial motivations for Sony to establish technology centres abroad? How would Kuemmerle categorize the R&D centres at Sony?
- How have the motivations for internationalizing R&D changed over time?
- Why did Sony feel the need to internationalize its R&D activities in the late 1980s and early 1990s?
- How did Sony manage its overseas R&D activities? How did the managerial approach evolve over time?
- What have been the problems with Sony’s way of managing R&D activities?
- Besides in-house restructuring to strengthen its technological capabilities, what did Sony do to rejuvenate its businesses?
- Can you provide an update on the internationalization of Sony’s R&D activities, using materials available on the Web?
NOTES
[i] Daren Fonda, ‘How Sony got game?’ Time 168 (27 November 2006), 54; Michiyo Nakamoto, ‘Sony looks to touch customers’ hearts: the company is struggling to dispel concerns that it has lost touch with both its buyers and investors’, Financial Times (30 June 2003), 26.
[ii] Sony company information, www.sony.net/SonyInfo/CorporateInfo/History/prospectus. html (26 September 2007).
[iii] Arun Khan and A. V. Vedpuriswar, ‘Sony Corporation in 2004’, ICFAI Business School
Case Development Centre (2005), Case number 3050154, 6.
[iv] Sony company information, www.sony.net/Fun/SH/1-16/h1.html (27 October 2007).
[v] Sadanori Arimura, ‘How Matsushita Electric and Sony manage global R&D’, ResearchTechnology Management 42 (1999), 41–51.
[vi] Yasuyuki Motoyama, ‘Innovation and location: A case study of Sony’s Vaio laptop’, The Industrial Geographer 8 (2011) 1–25.
[vii] Sony Corporation, ‘Chapter 19: Globalization of R&D Operations’ (2012).
[viii] Sony company information, www.sony.net/Fun/SH/1-29/h3.html (27 October 2007).
[ix] Ibid.
[x] Sony Corporation, ‘Special interview Setsu Harada’, www.sony.net/SonyInfo/technology/ interview/sp01.html
[xi] Ibid.
[xii] Ibid.
[xiii] Daisuke Wakabayashi and Juro Osawa, ‘Sony PlayStation to mind budget’, Wall Street Journal (Eastern Edition) (31 May 2011) , B.4.
[xiv] Robin Harding and Robin Kwong, ‘Sony to sell TV plant in Mexico’, Financial Times (2 September 2009), 16.
[xv] Daisuke Wakabayashi, ‘Sony’s dollar-yen exposure now ‘virtually zero’, Wall Street Journal (Online) (3 March 2011).
[xvi] ‘Sony to cut costs in effort to mitigate yen’s strength’, Financial Times (4 April 2008), 15.
[xvii] Michiyo Nakamoto, ‘Screen test: Stringer’s strategy will signal to what extent Sony can stay in the game’, Financial Times (21 September 2005), 17.
[xviii] ‘Stringer’s along THE’, Financial Times (21 September 2005), 16.
[xix] Nicole Swengley, ‘The shape of sounds to come’, Financial Times (3April 2010), 9.
[xx] Tim Burt and Joshua Chaffin, ‘The streamliner in charge of “Project Nippon” ’, Financial Times (22 June 2005), 11.
[xxi] Sony Corporation, ‘Sony Group corporate strategy update FY2008-FY2010’, Business Wire (26 June 2008).
[xxii] Nihon Keizai Shimbun, ‘Interview: Sony aims for better use of R&D prowess’, Nikkei Weekly (9 January 2012).
[xxiii] ‘Sony sells its half stake in TV joint venture with Samsung’, The Guardian (26 December 2011).
[xxiv] Kenji Hall, ‘Can outsourcing save Sony?’, BusinessWeek (30 January 2009).
[xxv] ‘Sony sells its half stake in TV joint venture with Samsung’, The Guardian (26 December 2011).
[xxvi] Bryan Gruley and Cliff Edwards, ‘What is Sony now?’, Bloomberg BusinessWeek (17 November 2011).