Core Competence- Sony

Q “Core Competence”, needed to provide the competitive advantage. Sony is losing ground in its Consumer
Electronics business to their long times partners in Korea. Especially in the field of LCD’s Sony
experiences trouble. What do you think is the cause? Please describe a possible scenario for Sony and
especially for the R&D management of Sony to overcome this problem.

Sony had been in a commanding position in the consumer electronics market for many decades. The primary
focus of Sony had always been on the final consumer and a variety of products such as, digital and video
cameras, Walkman stereos, TVs, and semiconductors are produced through its over thousand subsidiaries. In the
recent years it has also been involved in entertainment. Sony Music Entertainment, Sony Pictures Entertainment,
Sony Digital Production, Sony Pictures Home Entertainment, and Sony Pictures Television make up a different
set of assets than the conventional electronics company [1]. Even though Sony is involved in diverse businesses,
it had profited mainly from consumer electronic segments over the years. In the past decade Sony had invested
in networking technologies attempting to create synergy between hardware and software such as music and
movies. Sony had believed that hardware and software are complimentary as the wheels of a cart and tried to
blend the two together to invent futuristic products [2]. However, their R&D efforts on key technologies in the
recent years had not been what it used to be.
Innovative products such as Trinitron in the 60’s and WEGA during ‘90s embodied the state of the art
technology at the time and kept Sony at the number one place in Television market. But, with the advent of the
digital age, Sony had not been able to continue its legacy in being the best seller in the digital TV market.
Former CEO and Chairman of Sony, Nobuyuki Idei had warned his employees that, “the 40 and over
generations still buy products by brand, but brand loyalty is becoming weaker daily among the younger
generation. It’s hard to give the digital product a special character or uniqueness. Still, however, we’ll fall
behind if we idle around, not making something new, something unique that only Sony can make”[3]. His
aspirations never became a reality as in the recent years, the Korean competitors Samsung and LG have been
able to win more market share than Sony, especially in Television market. Sony can no longer rely solely on its
trademark to convince customers to buy televisions that look beautiful but actually same technology or even
inferior at a premium price. Let us first compare the market situation of LCD televisions today.

According to an Industry report by Asia Pulse [3], Samsung and LG Electronics have topped the world's flat-
screen TV market in 2010. Flat-screen TV market include liquid-crystal display (LCD) TVs and plasma display
panel (PDP) TVs. Samsung Electronics had secured 18.7% of the flat-screen TVs sold in the global market in
2010, followed by LG's 13.1%. Sony had only managed 10.3% of total flat screen market share. Samsung had
also become the world's top TV maker by revenue, accounting for 22.3 % of global sales of flat-screen TVs,
according to the report. LG had become the second-largest global TV supplier in terms of revenue with 13.5%
of the global TV revenue and surpassing Sony for the first time. Sony had claimed 12.4% of the world's TV
revenues at the third place. The flat panel TV market segment is said to have expanded more than 30 % since
2009 to 210 million units in 2010 [3]. This publication reiterates our topic, that Sony is losing ground to Korean
counterparts in LCD displays. Let us first analyze the current technological situation in the TV market.

Sony has offered 30 models of Bravia TV line currently in the market. The state of the art of Sony LCD TV has
3D capability with on demand internet video. “X-Reality PRO” video processing circuitry has replaced the
previous Bravia engine. This technology is capable of enhancing input content such as low resolution images.
MotionFlow XR technology upto 960Hz is capable of motion compensation. Other impressive features include
local dimming with intelligent peak LED, skype, music search, three second quick start and ability to connect to
devices such as iPhone,iTouch and Android phones.

Samsung, on the other hand claims to offer “the world’s first Internet-enabled touch-control TV remote.” The
key features include Micro Dimming Pro circuitry and Bluetooth-linked 3D glasses. It also has the smart TV
features such as Wi-Fi, Skype video calling, Samsung Apps Store access, web browser, media search and
connected media storage devices including networked PCs and mobile devices. More technical features include
Samsung’s Motion Adaptive Dimming algorithm which is able to reduce power consumption up to 20 percent
by controlling the LED brightness, according to motion vectors in the picture. The other key technology feature
is 1080p/240Hz LED edge-lighting. Therefore Samsung’s UND8000 series is packed with more advanced
technology than the latest of the Sony’s Bravias. If the technological competitive position of Sony is compared
against Samsung, according to the current situation, Samsung would be the winner. This is based on the key
technologies that Samsung had mastered through R&D in LCD technologies. Motion adaptive dimming and
edge-lit LED LCD TVs immensely increase the competitive edge of Samsung. Let us first look into what
Samsung had done in the past years in order to achieve this position.

Samsung had focused on manufacturing core hardware parts throughout the years. If we analyze the production
of televisions at Samsung, it first produced Black and White TV’s in 1969 in collaboration with Sanyo. They
entered semi conductor manufacturing in 1979, produced microwaves in collaboration with GE in 1982. But
Samsung had been mostly an assembler throughout the ‘80s and depended heavily on Japanese know how and
technology [3]. It had been an obscure OEM supplier but now has a brand value more than Sony in some market
segments. Samsung is now one of the most admired companies for its innovative products and its global
management [4].

Now let us consider what caused Sony to lose its top position in television market. During the ‘90’s the
television underwent a change from analog to digital. Sony had invested heavily on its analog technologies for
the WEGA line, which was top of the class at the time. With the advent of using microprocessors, digital TV’s
became more like Personal Computers rather than analog TVs. Samsung had at the time acquired know how in
the production of DRAM and semiconductors and were in a position to launch into LCD displays. By 1996
Sony had already carried out research in flat panel display technologies in collaboration with Tektronix in the
U.S. But, Sony management decided not to pursue LCD technologies at the time. Sony’s senior managers
believed that PDP and LCD panels were just commodities that could be more efficiently supplied by external
sources, instead focused on developing organic light-emitting displays (OLED) [3]. This decision proved to be
costly for Sony later in 2002. Samsung on the other hand acquired all core competences related to LCD
manufacturing. It was a leading manufacturer of flat-screen computer monitors and had the size bulk to procure
key supplies, such as plasma. The key technologies related to flat-panel display manufacture are more similar to
making semiconductors than regular television sets. Sony was slow to move toward plasma and LCD sets, and
lacked its own manufacturing facilities. As a result, Sony has to rely more on third-party suppliers to
manufacture its TVs. The President of Sony at the time had confessed that the switch from CRTs to flat panels
came sooner than expected. Sony’s inertia to move from analog to digital and not embracing the LCD display
format for flat panels enabled agile upstart companies such as Samsung to eat into Sony's market share. Had
Sony pursued LCD technologies in 1996, the story might have been different. As Prahalad had stated, “When it
comes to core competencies, it is difficult to get off the train, walk to the next station, and then reboard” [5].
OLED was found to be hard to commercialize and Sony had to set up a joint venture with Samsung in 2003 to
secure the supply of LCD panels.

In 2004 Samsung and Sony signed a cross license agreement to share their patent portfolios. However, this
agreement did not cover “Differentiation Technology Patents” and design rights. Examples of “Differentiation
Technology Patents” that were not licensed from Sony to Samsung, are those related to Digital Reality Creation
(DRC), and PlayStation Architecture. Patents not licensed from Samsung to Sony were those related to Digital
Natural Image Engine (DNIe), and Samsung’s Home Networking Technology. Furthermore, the agreement did
not apply to TFT-LCD and Organic Light Emitting Diode (OLED) display patents. Therefore, even though
Samsung supplied the LCD panels that were required for Sony, Samsung was able to protect their own
technology in LCD without transferring the technology to Sony. Sony was at a disadvantage here as they
depended solely on Samsung for LCD panels and did not develop their own capabilities in LCD technologies. It
is as if Sony had thrown the baby with the bath water in its divestment decisions, because the cost of losing the
core competence cannot be calculated fully in advance. Sony had lost on core competence development because
it did not invest in improving the key technologies they possessed at the time. As Prahalad had identified, a
company that fails to invest in building core competence will find it very difficult to enter an emerging market,
unless it will be content simply to serve as a distribution channel [5]. Sony can take a lesson from Motorolla in
this regard. Motorolla had elected to forgo direct participation in the 256K generation of DRAM chips in the
eighties and lost its core competence in the fast changing semiconductor technologies. A large infusion of
technical help from Japanese partners was needed for Motorolla to regain market in 1-megabyte generation of
DRAM. Therefore, if the LCD technologies are already changed too much and mature, Sony can focus on more
novel technologies such as 3D and Internet TVs.

What Sony can do now is to capture key technologies needed for the improvement of its TVs and grow those
key technologies within the Company and use them in new products as soon as possible. It is important to
recognize core technologies needed for the advancement of televisions by their competitive impact and maturity.
Core technologies must be distinguished from non-core technologies very carefully. Mastering the identified
key core technologies should be the next step. Internal R&D would have to play a major role in transforming
these technologies to gain sustainable competitive advantages. Utilizing the developed key technologies
effectively by integrating them with the other success factors of business is also vital to win back the market
share. During the first stage of capturing key technologies, it is vital to identify the necessary technologies and
existing sources. The company should try using these sources and acquire the technologies. In order to identify
possible collaborators in LCD technology we analyzed patents. The figure 1 shows the top assignees of LCD
technologies. Samsung is in a dominant position with over 4000 patents. Sony only has about 1000 patents in
LCD related technologies. The LG-Philips joint venture also has about 2500 patents, which reinforces LG’s
competitive position in the LCD TV market.

Figure 1: Top Assignees of Patents in LCD technologies

We further analyzed the patent landscape using Thomson Innovation tools. Figure 3a shows the themescape
map of patents in LCD which groups related technologies found in patents together. The LCD technologies are
clustered according to different key technologies such as, Light guide incident backlight, Gate semiconductor
insulating film, Beam semiconductor crystallization etc. The themes were then grouped according to the
assignee in figure 3b. The Figure 3b shows how each firm’s technology is spread with respect to the
competitors. Sony might literally see red if they try to pursue the technologies that are protected by a large
portfolio of Samsung patents. However, there are some green dots on the map which indicate Sony’s patents.
These suggest that there might be room for Sony to license its patents and enter into partnership through cross-
licensing agreements. Identifying the core technologies and potential partners who possess them should be the
next step.

If we consider a novel technology such as 3D TV the patent numbers are limited to around 70. Out of which the
top assignee is Philips. Figure 2 shows the top patent assignees in 3D TVs. If Sony can work out a partnership
with Philips and acquire core technologies in 3D arena and further develop them in house there might be a
chance to win back the market share in high end TV market. If Sony can develop the next generation 3D TV by
synergy between hardware and software and through radical R&D in key technologies in 3D TV it might be
able to win back the market share lost in LCD TVs.

If Philips is not willing to enter partnership or license the technology, other options might be to approach patent
vendors, individual inventors or smaller firms such as Equator, Stereo display or Megica who possess certain
core technologies. Establishing partnerships with multiple companies who possess core competences is also
very healthy if those other companies agree. Cross-licensing of Sony’s available patents in LCD, 3DTV and
OLED technologies might be able to attract some firms who are lack some technologies to go into production.
Sony’s competence in other fields such as gaming, entertainment and brand name still can attract many potential
collaborators.

Figure 2: Top Assignees of Patents in 3D TV Technologies

Figure 3. a) Themescape map of LCD technology patents
Figure 3b: Themescape Map of LCD technology patents grouped by assignees.
Legend: Samsung LG Sony

After capturing the required technologies by some means, the second step is to grow the competence in house.
They must transfer the technology to company by licensing, collaborations, hiring RSEs with expertise in those
area and further exploration of the technology. Strategic alliances should be formed aimed at building
competencies rapidly and at low cost. The goal of such alliances should be to internalize partner skills.
Therefore Sony should give priority to develop the core technologies brought from outside and develop them
further. Development should be done quickly to gain a competitive advantage in the market. Strategic alliances
are a much quicker and cheaper method rather than develop the technologies in house from scratch. According
to Prahalad, the real sources of advantage are to be found in management’s ability to consolidate corporatewide
technologies and production skills into competencies that empower individual businesses to adapt quickly to
changing opportunities [5].

Therefore, Sony should leverage on its current capabilities in networking and provide more entertainment
content from its music and movies. Possible integration with the legendary PS2 could make the Sony TV the
ultimate home entertainment device. Such integration would let Sony access a larger market with significant
benefit to the customers and would be difficult to competitors to imitate.

However, to be competitive in the long run Sony must produce goods at lower cost and more quickly than the
Korean companies. In order to meet these it might have to set up factories in China or other suitable country
with efficient labour.

Even though Sony does not rely only on technological competence technological superiority remains a dominant
factor in competition. This is evident in the loss of market share during the past years. Therefore R&D is vital
for technology based manufacturing industry. Consumer electronics is a highly competitive industry where the
position on the global market is always relative to the competitors. Therefore the technological strength is also
relative. Hence, an organization should always be on its heel with regard to key technologies. According to
Prahalad [5], A diversified corporation like Sony can be likened to a large tree, whose trunk and major limps are
core products, the smaller branches are business units, the leaves, flowers and fruit are end products, the root
system that provides nourishment, sustenance and stability, is the core competence. Therefore the core
competence should not be forgotten no matter how important the other businesses and end products might be.
Without the core key technologies it would not be able to differentiate its products from the other manufacturers
especially in the digital era where reverse engineering the microprocessor is ever so easy. In conclusion, I would
like to quote Prahalad again, “You may miss the strength of competitors by looking only at their end products;
in the same way you miss the strength of a tree if you look only at its leaves.” Just because the leaves have
fallen due to harsh winter does not mean it cannot be revived if the root system is kept intact.

In conclusion, it is evident that leadership in the design and development of a particular class of product
functionality is dependent on the core competence that the company possess. The level of competency the
company has in the key technologies required for the particular product range forms the basis of core
competence in a technology driven company. Without continuous R&D in core technologies a company would
lose its competitive position.

References

1. LexisNexis, "Sony, Inc. Company Dossier." LexisNexis (2011): 1. Company Dossier. Web. 01 Mar.
2010.
2. Yonhap Cg. "SAMSUNG, LG LEAD GLOBAL FLAT-SCREEN TV MARKET IN 2010." Asia Pulse.
Feb 21, 2011: via COMTEX.
3. Chang, S-J., Sony vs Samsung: The Inside story of the electronics giants battle for global supremacy,
John Wiley, 2008.
4. Michell, T., Samsung Electronics: And the Struggle for Leadership of the Electronics Industry, John
Wiley, 2010.
5. Hamel, G. and Prahalad, C.K., Competing for the Future: Breakthrough Strategies for Seizing Control
of Your Industry and Creating the Markets of Tomorrow. Boston, MA: Harvard Business School Press,
1994. 327pp.
6. Thomson Innovations: Intellectual Property Research and Analysis,
http://www.thomsoninnovation.com/, accessed Mar.11 2011.