Globonomics!

Consulting|Technology|International business

Why I feel SONY BRAVIA pricing is optimum now

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Two economic concepts we learn from the below link of the “SONY way” are:

1. Horizontal division of labor – SONY practices this as is clear from the link – what is horizontal division of labor? The answer can be found at this link.

2. SONY is currently facing a low margin, high turnover business in LCD TV’s and cannot exit it easily. If it reduces prices to match competition (typical of a red ocean strategy), then it has to drive up volumes (on its sales channel) to make up for it’s lost margins.

Source: http://business.nikkeibp.co.jp/article/eng/20081222/181031/

Sony Facing Challenges in TV-Set Business

Reasons why Sony cannot withdraw from unprofitable TV business

12-22,2008

“Stock market players would not be surprised if Sony posts losses for the business year ending March 2009,” said Kazuharu Miura, an electronics analyst at Daiwa Institute of Research. “Sony’s PBR (price to book-value ratio) has already fallen to a low level of about 0.5.”

A PBR of less than one theoretically means that it would be beneficial for shareholders to liquidate the company rather than invest in the company’s growth potential. Sony’s current PBR of about 0.5 indicates that market players are deeply skeptical of the company’s growth potential. In response to this situation, the market’s assessment of the consumer-electronics giant has suddenly become quite severe.

Declining sales are not the only type of damage caused by the current global economic slowdown resulting from the financial crisis. Sony and other home electronics manufacturers are also facing two other serious problems.

One of them is the declining unit price stemming from the reduction in sizes of TV screens and the fierce price-cutting competition. The other is the sharp appreciation of the yen against the dollar.

Sony has recently announced, ahead of other Japanese home electronics makers, plans to downsize its electronics business. The plans include elimination of more than 16,000 jobs, and the shutdown of five or six production bases. The job cuts will affect non-regular employees as well as full-time employees.

By implementing these measures, Sony aims to achieve cost reductions worth more than 100 billion yen by the end of March 2010.

Impossible to make profits from the LCT-TV business as long as horizontal division of labor is in place

An urgent task to be tackled by Sony is the rationalization of its TV-set business.

In FY2002, Sony posted operating profits worth 64.1 billion yen in its TV-set business alone, due to excellent sales of flat cathode-ray tube (CRTs) TV sets.

However, the company lagged behind rivals in the liquid crystal display (LCD) TV business and fell into the red in FY2004.

Although Sony launched the “Bravia” LCD-TV brand in October 2005, it is still unable to generate profits in its LCD-TV business. The company posted an operating loss of 73 billion yen in the business in FY2007. It continued to post a substantial operating loss for the half-year ended September 2008, which amounted to 28 billion yen.

Given this situation, it would seem to be difficult for Sony to make its TV-set business profitable by the end of this business year.

“It is impossible for TV manufacturers to generate profits from the LCT-TV business as long as they use the system of a horizontal division of labor,” said Hiroshige Hayashi, marketing strategy specialist and professor of Doshisha University’s Graduate School of Business.

“On the production front, Sony depends on other companies for parts of its LCD-TV sets, including LCD panels. On the marketing front, it is facing fierce price competition. Because of these two negative factors, Sony is unable to build a source of profits in its LCD-TV business.”

On the other hand, Sharp Corp, Panasonic Corp and Korea-based Samsung Electronics Co., Ltd operate their own LCD panel plants. So they can deal with the declining prices of LCD-TV sets by narrowing their profit margins of LCD panels, according to Kazumasa Kubota, an analyst with Okasan Securities Co., Ltd.

However, Sony, which does not have its own LCD panel plant, needs to procure LCD panels from other companies, and cannot take such countermeasures against declines in LCD-TV set prices.

Moreover, Sony is struggling in terms of its marketing efforts.

“Sony’s flat CRT TV sets were so competitive that they sold well in spite of prices that were 20-30% higher than those of rival companies,” said a former Sony official.

“But in the case of LCD-TV sets, Sony does not have any true advantages over other TV makers.”

In the United States, where Sony attaches the greatest importance as an LCD-TV set market, its TV sets are sold at almost the same prices as those of Samsung Electronics.

Sony announced its medium-term business management plan in June 2008 and as part of that announcement, Sony President Ryoji Chubachi said the company aimed to grab the largest global market share by FY2010.

However, Sony’s share in the global TV-set market was merely 12.9% as of September 2008, according to the U.S. market research firm DisplaySearch. The share was far smaller than Samsung’s 21.9%.

In order to secure profits from the TV-set business, Sony has no choice but to expand its sales volume. But in order to increase its sales volume, the company must cut the prices of its TV sets. If it reduces the TV-set prices, it would need to sell a larger number of TV sets to reach a break-even point.

This means higher sales can be achieved by offering lower prices, while higher prices will likely result in lower sales. Thus, Sony is experiencing the difficulties of a low-margin, high-turnover business.

Market players complain that Sony’s restructuring efforts are still insufficient

The TV set is one of the most prominent home electric appliances. Therefore, withdrawal from the TV business is not an option for Sony, no matter how unprofitable the TV business may become.

Sony sustained its growth by offering high-value added products, such as its series of “Walkman” portable music players. Taking this into consideration, it would be accurate to say that the LCD-TV business is entirely different from Sony’s traditional business model. How can the company manage to survive in the LCD-TV market?

”Sony needs to establish a new business model which enables the company to earn profits by selling low-priced products that have long-term growth potential based on the demand from emerging economies,” said Yuji Fujimori, an analyst at Goldman Sachs.

Many market players point out that Sony’s measures to reduce its fixed costs in its LCD-TV business are still inadequate. The company may be forced to take drastic measures to streamline its LCD-TV business in the near future, for example, outsourcing of production and a scaling down of its marketing system.

(Kenji Toda, Tsunoru Nakashima, and Satoshi Ogasawara, Staff Writers, Nikkei Business)

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Written by Naveen Athresh

February 24, 2009 at 10:24 am

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