Sony’s Strategic Missteps

Realizing a complex vision requires highly skilled and consistent execution.
A clear and concise business strategy is essential for setting investment priorities.
Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to realize a firm’s vision.
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As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors. The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has been its greatest profits drag. As the third-largest global manufacturer of TVs, behind Korea’s Samsung and LG Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs, recording nine consecutive yearly losses.

Sony’s corporate vision is to provide consumers easy, ubiquitous access to an array of entertainment content. Sony wants to provide both the content and the means to enable consumers to access the content. However, rather than a roadmap outlining how the firm intends to achieve this vision, its business strategy lists four broad themes or areas in which it will invest. These themes include networked products and services (LCD TVs, games, mobile phones, and tablet computers), 3-D world (digital imaging), differentiated technologies, and emerging markets. The firm intends to become the leading provider of networked consumer electronics and entertainment, consisting of LCD TVs, games, and mobile phones. Sony intends to enable users of these devices to move seamlessly from one product to another to access content such as movies and television programming. Sony can draw on music from 13 U.S. labels and on movies from Sony Pictures Classics, Columbia, and TriStar Pictures.

As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012. Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were valued at $364 billion and $134 billion, respectively, at that time. While whipsawed by a series of largely uncontrollable events, the firm seems to lack the focus to allow it to concentrate its prodigious resources ($17 billion in cash on the balance sheet) behind a relatively few strategic initiatives.

Rather than focus its efforts, Sony’s investments have been wide ranging. In 2011 alone, the firm spent $8.5 billion to acquire nine businesses in an effort to shore up its phone and content businesses. Sony teamed with Apple, Microsoft, Research in Motion, Ericsson, and EMC Corp. to purchase patents owned by Nortel Networks Corp used in mobile phones and tablet computers for $4.5 billion in cash. Sony, along with the Blackstone Group and others, also acquired EMI Music Publishing from Citigroup for $2.2 billion. In addition, Sony bought out Ericsson’s 50% stake in their mobile phone venture for $1.5 billion in order to integrate the smartphone business with its gaming and tablet offerings. Little progress seems to have been made in shoring up its money-losing TV manufacturing business. The firm’s lack of focus or more narrowly defined priorities may be at the center of the firm’s poor financial performance.

Oracle’s Efforts to Consolidate the Software Industry

Key Points:
• Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy.
• A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment.
• Increasingly, the major software competitors seem to be pursuing very similar strategies.
• The long-term winner often is the firm most successfully executing its chosen strategy.
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Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm’s revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation?

The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray.

Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of breed” software, many are moving to purchase suites of applications that are compatible.

In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession.

Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor’s software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders.

In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line.

For example, since acquiring Sun, Oracle has rationalized and consolidated Sun’s manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions.

Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a “me too” strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best.

Investors’ concern about Oracle’s strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity.
-What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry consolidation? Be specific.

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