Javier Cobo

Strategy I Final, Page 1 of 9

Steinway & Sons Analysis

Steinway & Sons Analysis

Javier Cobo
Strategy I Final

In 1995, two former Investment Bankers purchased the renowned piano maker, Steinway & Sons from
CBS for approximately $100 million. On April 19, 1995, a New York Times article ran stating
“...people familiar with Steinway and the piano industry's problems, said they were amazed the
company fetched that much.” The article went on to mention a myriad of problems surrounding the
company and the health of the industry in general.

This paper will focus on the concert grand piano business in 1995 and will show that Steinway's
Manufacturing, Operations, Marketing and Sales were all sustainable competitive advantages for this
segment of Steinway's business. First, it will review the market conditions of the U.S. Piano industry
as a whole in 1995 using “Porter's Five Forces” framework. It will then analyze the company's
activities/resources along the value chain for concert grand pianos and review the sustainable
competitive advantages of both its manufacturing/operations and its sales and marketing for these top
of the line instruments.

Analysis of the Piano Industry in the United States Circ. 1995

The following industry analysis1 using Porter's Five Forces will show that the industry is unattractive to
new entrants due to the degree of rivalry among existing firms and the closeness of substitutes to key
products in the industry. At the same time, incumbent companies in this disciplined oligopoly enjoy
low threat of entry by new players, sell to buyers with low bargaining power and purchase from
suppliers with only medium bargaining power. These industry conditions make it possible for highly
differentiated incumbent companies to remain profitable.

1The analysis will use Steinway & Sons as representative of the industry and will compare competitors to that firm.
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Steinway & Sons Analysis

Degree of Rivalry Among Existing Firms – MEDIUM/HIGH

The United States piano industry, segmented into vertical and grand pianos, was mature in 1995. A
history of consolidation had left only a few players owning most of the market share which should have
resulted in low competition. The key driver for rivalry was the decrease in demand in the industry.
Sales of vertical pianos were in decline while grand piano sales remained only constant, with a slight
increase in dollar sales due to price increases. The industry was not attractive for new players, but top
companies were able to remain profitable due to continued demand from concert halls, universities and
recreational piano players. The decrease in demand drove companies to further differentiate and
compete intensely for market share. Below is a graphic representation of industry sales.

U.S. Piano Sales U.S. Piano Sales

In Dollars - All Brands Number of Pianos Sold - All Brands
$800,000
200000
$700,000 180000
$600,000 Vertical 160000 Vertical Unit
Dollar Sales Sales
$500,000 140000
Grand Grand Unit
120000 Sales
$400,000 Dollar Sales
Total Dollar 100000 Total Piano
$300,000 Sales 80000 Sales
$200,000 60000
$100,000 40000
20000
$0
0
1988 1990 1992 1994
1987 1989 1991 1993 1995 1988 1990 1992 1994
1987 1989 1991 1993 1995

Key Competitors
The market leader in the piano industry was Steinway & Sons and Yamaha was its closest competitor.
Other competitors included Baldwin, Kimball, Kawai and Bosendorfer. Used pianos, especially those
of Steinway & Sons, were also considered competitors.

Steinway & Sons major rival was Yamaha. Yamaha company managers said, “We are chasing hard, we
want to catch up with Steinway.” Yamaha engineers would break apart Steinway pianos and study
them. Steinway was considered the premier company, with the best pianos, while Yamaha worked to
make itself comparable in quality while automating operational activities to produce a better value for
customers.

Yamaha also replicated Steinway marketing activities, like Yamaha's “Artist Program”, an attempt to
copy Steinway's “Concert & Artist Program.” Yamaha tried to differentiate itself by paying for Artists
transportation fees, which could amount to $100,000/year, but, in 1995, had not been able to attract
most top pianists. Ninety-seven percent of top artists were loyal to Steinway, illustrating the clear
dominance in reputation Steinway had over Yamaha. Yamaha gave up the program in 1990.
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Steinway & Sons Analysis

Even so, Yamaha was able to compete effectively due to their value proposition in the small grand
piano and vertical piano markets. Many buyers of these products were willing to purchase a Yamaha.
The company was able to leverage it's operational know-how from its presence in other industries to
significantly automate processes and reduce costs using assembly-lines.

Other rivals, including Baldwin, Kimball and Kawaii, competed with Steinway on the basis of price
and generally were known for mid-tier pianos of acceptable quality. Bosendorfer and Fazioli were
considered comparable in quality to Steinways, but were more expensive. They produced a small
fraction of the number of pianos produced by Steinway and followed traditional piano construction
methods that made it difficult to mass produce.

Finally, used Steinway & Sons pianos posed a major threat to Steinway. Because well maintained
Steinway pianos could last for decades, there was a multitude of such pianos on the market. Because of
mismanagement in the 1970's and early 80's, there was also some question about the quality of new
Steinway pianos which suggested that these old pianos were actually better. While these old pianos
cannibalized sales, Steinway would be able to fight this competition by offering their own refurbished
Steinways and by significantly increasing the price of their grand pianos, reducing the number of
Steinways entering the market while increasing sales (in dollars) slightly.

Issues Reducing Competitive Pressure

There were two issues reducing competitive pressure including variable pricing and little excess
capacity. Pricing on pianos was usually not advertised or openly displayed. Customers would visit a
dealer and speak with a salesperson about pricing and the model that was best for their budget. Since
the members of this piano oligopoly were not competing openly based on price, there was less
competitive pressure. At the same time, because of the time intensive nature of making the pianos,
especially the concert grands, there was little excess capacity. Steinway has only two production
facilities and it was not in the best interest of any manufacturer to overproduce since they would then
have to compete with their own used models in the future.

Issues Increasing Competitive Pressure

In addition to the issue of decreasing demand, high fixed costs and exit barriers and low switching costs
also increased rivalry. High levels of inventory and specialized equipment meant that firms had to
operate at capacity to be profitable and could not easily sell equipment to another industry. At the same
time, it cost buyers very little to switch to a rival and, while products brands were differentiated to the
most discerning consumer, the average purchaser of a vertical or baby grand piano could not tell the
difference in quality among the existing companies so they were forced to compete based on price and
branding.

In sum, rivalry and competition in the piano market in 1995 was fairly strong due primarily to
decreasing demand in the market. This problem was due in part to competition from used and
refurbished pianos. High fixed costs, high exit barriers and low switching costs for customers also
increased rivalry. Variable pricing and little excess capacity only slightly offset the competitive effects.
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Steinway & Sons Analysis

Closeness of Substitute Products - HIGH

Additionally, close substitutes, like electric pianos and synthesizers, added to the competitive nature of
the industry. For high end buyers and those performing in concert, there was no substitute for a
classical grand piano made of fine wood. For home use, however, especially for vertical pianos,
electric pianos provided adequate sound quality at a fraction of the cost. Additionally, by 1995 electric
pianos already offered or in the future would offer unique benefits not available in traditional pianos
including:

1. Additional backup beats and a variety of musical instrument sounds

2. Ease of transportation between venues
3. Smaller size means it didn't take up as much space in a home
4. Easy amplification through the use of speakers
5. Compatibility with headphones so that piano can be heard only by the player
6. Compatibility with computers which would provide:
A. Easy transcription/sheet music production when creating new music
B. Recording of music
C. Training with the aide of computer software

These substitutes had a great degree of influence as they became more popular. They were probably
the cause of the decline in interest in vertical pianos seen in Exhibit 2. Between 1980 and 1994, the
number of vertical pianos sold declined by over 70% from 215,000 to 60,7792. Popular music bands
like Depeche Mode and Erasure also introduced synthesizers in their onstage performances, making
them viable concert level instruments.

Although these synthesizers posed a signifiant threat to the industry in general, they were not a proper
substitute for grand pianos and classical music concerts. Massive technological improvements would
have to be made to even make them comparable and, even then, classical music enthusiasts would not
accept them.

Threats of Entry Posed By New or Potential Competitors – LOW

“I think you can make something that looks like a piano very easily, but to get it to
sound like an instrument is very difficult.” - from “Note by Note” a documentary
about Steinway & Sons.

Brand Loyalty
The craftsmanship, know how and level of talent required to create a piano making company is
very difficult to replicate. As noted in the quote above, creating a musical instrument as
intricate as a piano requires a great deal of artistry and a history of production. As such, brand
loyalty is very high and concert goers, musicians and music students have clear preferences. It

2 Source: Exhibit 9 in HBS Case: Buying a Legend

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Steinway & Sons Analysis

would take years of proven products and marketing to convince buyers to purchase a new
entrant to the market – especially in the higher end pianos.

Incumbency Advantages
Furthermore, in 1995 there were a great deal of incumbency advantages including companies'
dealer networks, their relationships with suppliers and their existing inventory and patents.

Pianos were sold through a network of independent dealers that usually sold a single
manufacturer exclusively. Most of these dealers would not consider selling a new entrant so the
entrant would have to create their own distribution channel or sell through an unconventional
method. They would need knowledgable salespeople since many piano buyers are not
knowledgable and need a high level of assurance and guidance during their purchase.

Another incumbency advantage was the relationships with suppliers. Many suppliers created
pieces that were to key piano makers' specifications. Furthermore, incumbent piano makers had
economies of scale since they purchased large amounts of the raw materials.

Finally, incumbent firms had a huge inventory and many patents that protected their designs and
techniques. Steinway & Sons had over $85 million in assets at the beginning of 1995. A new
entrant would have to invest millions of dollars to ramp up the production of any kind of piano
and since profits of even a reputable company like Steinway are only a few million a year, this
investment represents a very high capital requirement. Existing firms patents further exacerbate
an entrants difficulties. Steinway & Sons has over 120. New entrants would have to be careful
of copying existing piano makers in light of these legal protections.

Bargaining Power of Buyers – LOW

Buyers include Universities, High Schools, Orchestras, Concert Halls, and home use. In general, few
buyers purchase multiple pianos at one time, though it is possible. It is usually individuals or a single
institution purchasing from a dealer. Some larger institutions may have limited bargaining power when
buying in bulk. Additionally, no buyers can vertically integrate to produce their own pianos so they are
required to purchase from one of the existing makers.

Buyers have limited influence when selecting which firm within the industry. While there is no
monetary switching cost since a buyer can select any piano, most buyers would not want to purchase an
instrument that is not respected in the music industry. Additionally, some institutions have entire
collections of one brand of piano and may be reluctant to purchase pianos from another maker because:

1) They are familiar with and appreciate the quality of that maker's instruments
2) Their purchases may affect their standing with their customers (students at universities
and concert goers) . They stakeholders have preferences and opinions about each piano
maker
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Steinway & Sons Analysis

Moreover, since there are limited piano dealers throughout the U.S., buyers may be influenced
by the piano dealer that is closest to their home or may be attracted to the piano with which they
have the most experience. Buyers do not have a great deal of negotiating power in this industry.

Bargaining Power of Suppliers – MEDIUM

Most suppliers to the U.S. Piano Industry have low to medium bargaining power. These suppliers
include makers of hammers, keys, plates – any pieces that go into the manufacture of piano. They have
few customers for these products and cannot strong-arm the piano maker. Even if one of these
suppliers threatened to discontinue operations, most companies in the U.S. Piano Industry have
achieved some level of vertical integration so they could make many pieces internally if necessary.
While piano makers appreciate the quality of products produced by these suppliers, they are not
indispensable.

One supplier that does have some significant influence are lumber mills. At Steinway & Sons, lumber
accounted for 7.5% cost of goods sold in the 1980's and we will assume it made up a large portion of
costs in the 1990's as well. Wood of the highest quality were required since high quality wood
produced better sound quality and, in some cases, wood from specific trees were used to create the
pianos. Although wood is a commodity, the piano industry requires that it be free of impurities and
milled well. It would be difficult for a piano company to vertically integrate in this area and, because
of the needs for high quality, substitute vendors were difficult to find.

“Steinway soundboards are made of the highest-grade

close-grained, quarter-sawn Sitka spruce from British
Columbia and Alaska.” - From Steinway & Sons current
marketing materials. This wood is crucial to Steinway
production and it would be somewhat difficult to replace.

Overall, suppliers to the US Piano Industry had a medium level of

bargaining power. Piano Makers could negotiate effectively with
most suppliers, but may have be limited when dealing with high quality lumber mills.
 Graphical Illustration of Steinway & Sons
Major Activities/Resources Along the Value Chain for
Concert Grand Pianos
Infrastructure Production facilities in Long Island, NY and Hamburg, Germany
Independent distributors throughout the U.S.
Human Resources Experienced piano makers, tone regulators – workers averaged 15 years with Steinway
Wood technologists that identify vendors across the world
Independent dealerships and staff to train
Technology 140 year history of production
120 patents
Use of new materials like plastic for keys when it enhances quality of sound
Procurement Highest grade lumber suppliers from around the world
I/B Logistics Operations O/B Logistics Sales/Marketing Service
- Hand crafted Pianos. - Committed dealers
- High grade wood Limited use of assembly - High level of Concert and Artist provided customer
sourced globally line techniques inventory/high cost program: support
- New methods are - Produced in Hamburg,
methodically tested by Germany & Long Island, - 330 pianos in 160 cities - Partnership Program
top professionals and NY - Limited dealerships available for use by 850 provided technical
then patented - 2 years per grand piano reduces costs "Steinway Artists" training to dealers
- Steinway Artists provide - 3000 grand pianos/year,
feedback on new limited production - Handling of logistics for
technology prevents excess capacity artists
- Use of traditional - Key components like
materials (except piano plate and soundboard - Most famous pianists are
keys) produced in house in program
- Limited mechanization - Special drying kilns for - 90% of concerts with
(exp: bellying) wood soloists play on a Steinway
- Pianos are allowed to Partnership Program
have their own "voice", - Limited number of
not all Steinways sound Independent Dealers
exactly the same committed to Steinway
- Merchandising,
Advertising and PR support
- Sales training
- Artist activities
Limited Edition collections
promoted Steinway history
and augmented its prestige
 Steinway & Sons
Sustainable Competitive Advantages in
Concert Grand Pianos

Even in the face of years of competition from Yamaha and other companies, Steinway & Sons
was able to retain over 90% market share in the Concert Grand Piano segment through 1995.
They were able retain dominance in this category because of sustainable competitive advantages
in Operations, Manufacturing, Sales and Marketing

Sustainable Competitive Advantage: Operations/Manufacturing

Many of Steinway's advantages in operations are not sustainable competitive advantages. While
piano componentry is important, it can be purchased by competitors. Even though Steinway
Artists play on only Steinways in concert, it is likely they would be willing to provide feedback
to a competitor on their model as they do for Steinway if asked or paid. Steinway's key
operational advantages are the patents and processes created over 140 years and the
manufacturing locations that utilize generations of craftsmanship. These advantages are rare,
valuable, and inimitable and has an organization that properly utilizes them.

Patents and Processes

History is hugely important in this industry. There are only a select number of people that know
how to manufacture a concert grand piano. Customers will only accept the best instrument in
this top of the line category. The patents and processes Steinway has developed in creating the
concert grands are rare, as is the nature of a patent.

They cannot be imitated because it would take time and no competitor could or would want to
spend enough money to build up the capability since there is limited growth. Yamaha is the
closest competitor and they compete on value. Since Steinway's processes have very limited
automation, Yamaha's strength in creating automating systems cannot achieve these processes.

They are valuable because they utilize economies of scale while using mainly traditional
methods. Since Steinway already produces so many concert grands, it would be difficult for a
competitor to amp up production without taking severe losses. The traditional methods help
them create an instrument that artists demand.

Finally, Steinways' organization has been taking advantage of these processes for decades and
would continue to do so. Steinway understands the art of creating a piano and let's each piano
have it's own “voice.” This artistic sensibility allows the piano makers to work effectively.

Location
Additionally, Steinway's manufacturing facilities in Long Island, NY and Hamburg, Germany are
rare in this industry. There are no competitors building in these countries. They are valuable
because both locations have a work ethic that takes great pride in detail and craftsmanship.
Moreover, skills are passed from generation to generation and Steinway is a source of pride for
the area.
It is not inimitable because you cannot build up the history built here in another local. It would
be difficult to lure away many Steinway employees because they would not want to leave the
area. Further, it would be too costly for a competitor to create a factory here. Employees would
not defect unless offered significant pay increases and the community would make it difficult to
set up shop. Locations in other other countries could not take advantage of the skilled talent and
know-how as they would have to convince the workers to move. Training new workers is
impossible because they don't have the know-how. The organization has been built around
utilizing these two factories.

Sustainable Competitive Advantage: Sales & Marketing

Steinway & Sons Concert and Artists program is their greatest sustainable competitive
advantage.

Only Steinway has a historic list of the top pianists in the world throughout history. No other
company has or will ever have Irving Berlin, Duke Ellington, Cole Porter or Sergei
Rachmaninoff as life long ambassadors of their piano. No competitor has a program like this one
as Yamaha discontinued their program in 1990.

The program is valuable because if the greatest artists play only on a Steinway, then any
customer who wants to play music approaching their level will want one as well. As top pianists
play in concert, the name Steinway & Sons is prominently displayed to audiences on the side of
the piano. They hear the instrument playing at it's greatest by an amazing artist and they are sold
every time they hear it played in concert.

The program is inimitable because of a combination of the history and the quality of the
instrument. New artists want to be one of the Steinway “legends” and also want to benefit from
the perks of the program. They want access to a high quality Steinway instrument when playing
as they stand to lose their livelihoods if they fall out of favor.

Finally, the Steinway organization is built around the “Concert and Artists” program. Their
Limited Edition collections reinforce the history of the program. Pianos are already situated
across the U.S. to be utilized by it. Marketing materials and sales personal understand it and
promote it enthusiastically.