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Japan has long since been considered a highly innovative country, once standing at the very top. But this innovative country has gotten a serious contender for the top position in the electronics industry. Within the last decade, a major shift has happened in the electronics industry; Sony has lost market share, while Samsung has been reeling it in. Samsung and Sony are considered to be the two main competitors in a wide range of household electronics, telecommunication devices, semiconductors and computers. In April 2010, Samsung accounted for 20 % of South Korea’s GDP, meaning if either Samsung (or LG) suffers losses, the whole industry suffers a loss. In contrast, Japan has a lot of manufacturers and producers; Panasonic, Sharp, Sony, Toshiba, Canon etc. with Sony being one of the largest conglomerates in Japan. Despite being the largest, Sony has faced some tough challenges this past decade, which has ultimately affected their financial health. However, Sony surprised everyone with their third quarterly forecast in October 2010, expecting a larger profit than last year and reporting a generally positive outlook for Sony. Samsung is, on the other hand, expected to have mixed outlooks, since the demand for chips and LCD displays is expected to fall drastically.

Samsung overtakes Sony

Sony has been considered a big Japanese giant both domestically and internationally in the electronics industry for many years, and for many, Sony equals quality, high technology and innovation. In the case of Samsung, copying Sony was easy, producing the same kind of goods with the same technology and quality was easy, but moving away from the consumers’ perception of Samsung as a “low price, down-market” brand was difficult. Samsung was on the brink of bankruptcy, so when the digital opportunities of electronics slowly presented themselves, Samsung saw an opportunity to reinvent its brand and get a head. Samsung saw this opportunity, seized it and overtook Sony in sales in a matter of year

The graph shows a turning point for Samsung between 2003/ 2004, where Sony no longer had the advantage of sales. This development has continued, causing Sony to step down from its former glory. Samsung is now a leading manufacturer of electronic goods.

In October 2010 this electronics industry landscape experienced a slight, but noteworthy change. Sony and Samsung both announced quarterly results, showing a surprising development from Sony. Sony has reported a significant growth during a period which experienced great losses last fiscal year, despite unfavorable foreign exchange rates. While Samsung is still reporting growth, this appears to have slowed slightly and the financial forecast provided a mixed outlook. Samsung’s chip and LCD products are expected to show great losses in the new accounting year of 2011, and though Samsung says their main source of profits will be the Samsung Galaxy Tablet, analysts question whether this will be enough to make up for the losses in the chip and LCD market. Furthermore, the Won is also expected to turn, which will most definitely have its effect on Samsung profits. Samsung is (obviously) doing something right, something different from Sony. Why are these two companies so different?

Business 101

When British Howard Stringer entered as new CEO of Sony in 2005, it was the first time a foreigner has took over management of Sony, despite its 60 years of existence. An amazing turn-about for Japan, since Japan’s keiretsu and overall market has been very much focused on Japanese CEOs, managers and brands. But Howard Stringer has his work cut out for him. Samsung’s catch up with Sony in recent years is, among other things, attributed to the difference in leadership. Findings show that Samsung has benefited from a strong centralized leadership as well as an execution-oriented organizational structure.  Sony, however, has suffered from a fading leadership and organizational silo effects. It is a huge challenge for Stringer, to change the strong focus inward and vertical information communication, but this change is crucial for Sony’s survival in the coming years. Furthermore complaints of Sony being too traditional in its electronics production are nothing new.

One thing Samsung has going for them is their ability to enter strategic alliances and see the possibilities. February 2005, Hwang Chang Guy, in charge of chips in Samsung went to see Steven P. Jobs to persuade him to use Samsung flash memory chips in Apple’s music players. At first, Jobs was not interested, but Hwang kept pressing and eventually Jobs saw the potential, and so the iPod nano was born, landing Samsung a big order for flash chips. For Sony to imitate this approach they would need to license designs or technology to others. Samsung seems willing to learn, and does not mind entering deals with its competitors, whereas Sony is apprehensive about sharing knowledge. Sony could learn a lot from Samsung, were they willing to look towards Samsung as a business model, not just a competitor.

Sony is criticized for not being in touch with the market, for having too strong a focus on its home market, so that they completely miss e.g. the American market segment by having too complex features. Samsung is dispatching research teams etc. to get a feel of the market. Thanks to such research, Samsung was able to be one of the first to have digital cameras and music players in cell phones.  Of course Sony is also doing similar studies, but Sony still believes it can invent products behind closed doors and release them to a market at premium prices. What critics say Sony lack isn’t some magic formula, but basic Business 101. Sony relies too much on its brand name and what it used to be, not its consumers. Samsung has taken many steps which analysts believe Sony needs to take; for example collaborating more with partners and simply do a better job at taking cues from the market.

Execution and fragments

Aside from its poor ability of scanning the market and environment, another feature is radically different according to Intel Executive Vice-President Sean M. Maloney:

“When Samsung wants to get something done, the decision comes down from the top, and everybody moves at lightning-quick speed to just do it.”

Where Samsung’s top managers come down hard on their units to make sure they are cooperation to come up with new products, Sony is still ruled by factionalism to a large extent. E.g. Sony’s music, movie and gadget businesses have conflicting agendas and poor cooperating skills. A famous example is Sony’s music division, who kept the consumer electronics from making digital music players and consumers from playing MP3-formats, because they feared piracy. Needless to say, the iPod became a huge success, while the walkman had seen the last of its days.

Sony is facing a very difficult challenge, being one of the largest conglomerates in Japan. Traditional practices are deeply so ingrained within the businesses that it will be easier said than done for Howard Stringer to turn the company and its organizational structure around. But seeing as this is the first time a foreigner has entered as a CEO in iconic company, Sony has already taken a revolutionary and risky step. Japanese companies are risk-adverse, so taking a chance of Stringer is a major step forward.

However Sony has not been good at adapting to a changing environment, and that is part of the reason why they are in the current mess that they are. That being said, as previously mentioned Sony is reporting profits ultimo-2010. Stringer has a different kind of freedom being a foreign CEO. He can issue lay-offs, cut costs, reshuffle management and coax Sony’s fragmented divisions to work together. He can take risks. Stringer has taken steps to better the situation, introducing new strategic units, as well as a new strategy for Sony. He has used the recession as an opportunity to cut down in divisions, employees and manufacturing costs. He knows what challenges and difficulties Sony is experiencing. The question is, does the rest of Sony know that as well? With the internal structure of Sony being too factionalized, do any of them have any sense of real crisis? What turned around Samsung in the first place was their flirtation with collapse.

If it ain’t broke, don’t fix it?

A short-term fix, a new hit, iconic gizmo won’t fix the matter for Sony, which is why Howard Stringer plans to redirect and gather Sony’s strength within 3D televisions and internet (e.g. Google TV).  But the truth of the matter is Sony is stumbling in sectors it once dominated. Apple has taken over portable music players, delivering a huge blow to Sony’s music division. Microsoft and Nintendo are stealing market share in gaming consoles. Samsung is seriously challenging Sony within the television business. This is not news for Sony. Even upstart competitors are making things tough.  E.g. in 2006 when Sony introduced an e-reader, which was quickly replaced by Amazon’s Kindle Reader two years later. Its major selling point was the fact that it had a feature that Sony Reader sorely lacked: a wireless connection. Not only are they out of touch with market trends but even the products they do send out are relatively quickly replicated and replaced.

Sony not only needs to change its internal structure, leadership, still present factionalism but also needs to pay attention to current market trends and its execution. Samsung currently has the competitive advantage in execution of products which represent market trends, where Sony lacks behind.  Furthermore, despite Stringer’s effort to push transformation, the CEO himself admit that he has been hamstrung by the management culture in Sony’s home market, and the repercussions of bad decisions made years ago.  Of course some of the blame also falls upon the recession which has hit Japan and the rise of the yen. But the recession is by far the least of Sony’s problems, Stringer even seem to exploit the recession, treating it as an opportunity to make radical changes. High manufacturing costs, premium prices, lack of market trend comprehension and innovative products that do not stay innovative for long means that Samsung currently has the competitive advantage in firm strategy and structure, price, manufacturing cost and dynamic capabilities. Before Sony can begin to meet the challenges within the consumer electronics industry, it first needs to meet the challenge of changing the culture of an iconic Japanese company.