Sony Ericsson from Joint Venture to Wholly Owned Subsidiary Essay

The Sony Ericsson joint venture is a case study that can be used to explore key international business strategies and concepts.

1. Sony & Ericsson’s motivations behind the joint venture (JV) The Swedish telecommunications company Ericsson, one of the “Big Three” mobile handset manufacturers in the 1990s, started to reach difficulty as it entered the new millennium. In 2001, Ericsson’s sales dropped by 52%, recording a $1.39 billion loss which preceded an announcement that would lay off 20% of their workforce. Ericsson found itself losing market share to “Big Three” rivals Nokia and Motorola and eventually even to Siemens.

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Analysts attributed this downfall to Ericsson’s stagnant phone designs, slow time to market and their inability to foresee market movement.

Kurt Hellstrom, Ericsson’s CEO at the time, also stated that Ericsson needed a deeper understanding of consumer electronics, entertainment, audio, video and design. The personal consumer technology giant Sony saw immense opportunities in the early mobile phone industry. Sony predicted the industry’s movement towards multi-media broadband and foresaw the future consumers’ needs of mobile handsets with multi-media content such as movies, pictures and games.

It was a perfect market for Sony to venture into with its expertise in consumer technology. Previously, Sony had missed entering the mobile phone market with the introduction of the GSM network in the early 1990s and held a mere 2% share of the worldwide mobile market.

However, they identified an opportunity with the arrival of the 2000s also came a new mobile network called 3G, and Sony was determined to not make the same mistake as it did with GSM. Sony’s previous successful products, such as the Walkman, had all been independent ventures. However, the mobile phone industry required close co-operation with mobile carriers, which presented a challenge for Sony, known to be historically independent. Hence, in order for Sony to break into the mobile market, it needed to create a strategic alliance with a mobile operator that was already integrated well into the telecommunications market.

The increasingly competitive mobile handset environment forced both Sony and Ericsson to address the weaknesses of their core competencies. Incidentally, both firms had the competencies that the other firm did not – Sony’s strengths in design, consumer electronics expertise, branding, and multi-media content and Ericsson’s established market share and skills in technological knowhow and distribution.

2. Alternatives to JV 2.1 Licensing One rationale for the JV was to combine Sony’s consumer products expertise with Ericsson’s extended knowledge in mobile technology. By licensing, Sony can acquire the mobile technology of Ericsson and exploit the multimedia technology into the handsets in order to strengthen Sony’s image beyond traditional multimedia boundary. However one drawback the companies face is difficulty transferring the tacit knowledge including negotiation of the transfer price and monitoring the transfer outcome. However it is difficult to internalise Ericsson’s tacit knowledge given the rapid developing nature of the mobile industry.

Also as the handset technology is a main competitive advantage of Ericsson, they might not be willing to engage in licensing to prevent opportunistic acts of learning. Licensing for Ericsson has the benefits of less investment on R&D but still maintain a strong ability of product development. Major competitor Nokia was able to dominate as it succeeded to keep up with the recent trends of technology. However, as licensing does not provide the control on production, this was not an appropriate strategy to adopt. Ericsson might also face difficulty in internalising the tacit knowledge, slow learning and a risk of leakage of technology know-how.

2.2 OEM Contracts Sony could have achieved the objective by using an OEM contract as it would benefit from the technology transfer of Ericsson and learn the knowledge. However there are drawbacks of Sony losing of product control which can weaken the ability to maximize the product potential and the risk of opportunism.

2.3 Franchising One motive for the JV was for Sony to get access to foreign market to increase market share. In case of licensing, Sony could acquire Ericsson’s handset technology but it does not provide the operation know-how and enter to the European market. Franchising can allow for independent operation of the product. Sony can enter the European market with lower investment and lower risks. The problem is Sony only had 1.5% of the global market share and hardly any presence in the US. It is difficult to compete within the market because “Sony had failed twice on earlier attempt to enter the global market and was under pressure to find a new hopefully successful approach”.

2.4 Wholly Owned Subsidiary Wholly Owned Subsidiaries is characterized by full control over local operation and a high level of resource commitment. This is an option for Ericsson as telecommunication technology is its core competence and competitive advantage. Ericsson can fully control the operation through WOS, reduce the risk of business secret leakage thus maintain competitive advantage. However it includes a high level of risk and resource commitment. A large of amount of capital is required and also there is a culture gap between Japan and Sweden. Culture difference has been always a vital element which affects the success of FDI.

3. Joint Venture A joint venture was chosen considering the circumstances of both firms. It is in the nature of the mobile industry where the increasing technological content of mobile has forced firms to seek for technology partners who can provide the additional technology required such as multi-media and digital cameras. A joint venture with Sony allows a large R&D division focusing on mobile, which is vital to ensure its network business stays in touch with consumer demands. Sony has a strong reputation on the domain of digital and audio technology. However, Sony was a marginal player in the handset industry with 2% of market share.

Previous attempts to enter the US and European markets both failed due to poor knowledge on mobile technology. Sony was too slow to move away from its traditional businesses such as music stereos, televisions, VCR and DVD, hence a partner who could provide expertise knowledge was needed. Joint ventures have further benefits. Joint ventures are based on sharing individual ability and resources for the purpose of achieving a mutually beneficial objective. Sony gains access to Ericsson’s market share and their network of infrastructure and handset technology. Ericsson can acquire Sony’s experience on consumer electronics, fashionable designs and production processes. Hence, the joint venture overcomes Sony’s low market share and strengthens Ericsson’s ability of research and product development.

Thus joint ventures resolve the opportunism issue with OEM, licensing and franchising. In addition, both companies gain access to foreign markets. Joint ventures allow Sony to get back to global business by accessing to Ericsson’s long established network while licensing does not provide the opportunity for presence on local market. Moreover, costs associated are shared between two parties to lower the risk of poor investment. Ericsson can also overcome its previous poor performance in brand awareness and product division which are Sony’s strengths. Thus JV with Sony provides a strong financial partner and cost sharing allows Ericsson to invest on R&D while WOS contains a high level of risk and resource commitment.

4. Problems since the JV It was assumed that Sony Ericsson could receive significant synergy effects through the joint venture. However, in this case management capability and other resources did not match between the two tigers, the possibilities of success vanished and it became a “tiger without teeth”.

4.1 Strong competition in the industry For years, the mobile phone industry had to face the external factor of competition. Nokia was the clear market leader at that time, however new rivalry such as Apple and Samsung grew to take most of the market share. Various existing companies including Motorola, LG Electronics, HTC and others were struggling to deliver profits, and Sony Ericsson was no exception. In this short product-life cycle market, Sony Ericsson announced disappointing end of year results in 2003 and it has not achieved the target of 7-10% market share in 2002. The intense rivalry has led to a slow growth in profits and Sony Ericsson resulted in place 4th in 2006 without reaching profitability as planned. Eventually, it forced its owners to plough extra cash into the start-up and closed down some R&D units to reduce costs.

4.2 Cultural gap between two companies Cultural differences between Japan’s Sony and Sweden’s Ericsson were expected, however the serious cultural shock in this case have brought huge harm to production. This led to delayed decisions, poor communication and performance. The idea of “groupism” is rooted in Japanese culture, thus it is common to see the collective goals of company to be important than individual needs, while Ericsson was more bureaucratic with a decentralized competitive work nature and clear functional divisions. The different management styles led to a problematic management style in Sony Ericsson. It believed in the top-down planning approach, however conflicts resulted in character-based trust problems between managers. Decisions involved prolonged discussions between groups and departments, hence slow responses to the dynamic changes in market.

4.3 Lack of trust and challenging technology transfer Sigurdson (2004) highlighted that a successful joint venture requires significant contributions from both partners in terms of financial resources, knowledge or other resources that complement each other. In addition to the cultural problem, both Sony and Ericsson had too many different technology partners which weakened the trust in Sony Ericsson.Distractions led to a low level of commitment from the two companies and hurt mutual trust, particularly the process-based trust. As a result, long duration was taken in designing, developing and releasing attractive products. In 2002, the delay of releasing a mobile internet phone ended in the failure of obtaining a possible “first mover” advantage, although Sony Ericsson started with this invention long before Nokia.

4.4 Weak supply chain management It can be predicted that a weak supply chain management would result from serious cultural and technology transfer problems. These logistic issues have prevented Sony Ericsson in achieving its targets and failed in meeting delivery schedules. In 2002, due to component shortages happened in the supply chain, Sony Ericsson failed to take full advantage of booming pre-Christmas demand. In 2004, Durban stated that Ericsson has inefficiently outsourced its handset manufacturing to Singapore and lost market share. Even though the top management tried to tighten the control over manufacturing and supply chain, the result remained poor as it was inefficient and ineffective in coordinating too many outsourced manufacturing plants. In 2011, Sony Ericsson suffered from component shortages again from Thailand due to massive flooding in October and November. Sony Ericsson’s case proves maintaining a close relationship with suppliers and manufacturers being critical for production. In contrast, its competitor Nokia had favourable results due to a strong supply chain management.

5. Sony’s strategy change from JV to Wholly Owned Subsidiary (WOS) Sony’s strategy change from JV to a WOS can be seen as a good change. The joint venture was not a complete success due to a number of issues, which are related to conflict and inefficient management. By taking over the joint venture Sony can overcome part of these problems. Klijin et al (2010) argues that not all ventures end up a success. In some situations the goals are not achieved when the joint venture actually happens. In these situations the companies need to be proactive to change the original plan to achieve success. One of the important advantages would be that element of control.

Sony’s management will be able to run the company into a more successful venture than when it was run with Ericsson. In addition, Sony can take advantage of the technological competence that has been generated as a result of the joint venture. The two companies went through with the joint venture initially because of the synergies that resulted from the combined firm and these synergies will flow into the WOS. The joint venture has technological advances and patents that will become the ownership of Sony once it becomes a WOS. Uggla and Verick (2008) argue that the joint venture needs to be a strategic branding decision to be successful. The merger of the two companies was going to bring synergies that would result in millions of dollars.

In addition, the joint venture as a result of the wide presence that Ericsson has established in the European markets has increased the coverage of each firm’s geographic markets. These markets will now be open and available to Sony that can now take advantage to increase the markets in which its products are offered and in addition further develop marketing skills. According to Wakabayashi (2011) one of the important advantages for Sony is that it can take advantage of the existing supply chain and infrastructure available for the company thought the joint venture. This deal will also strengthen and improve integration of the company and its portfolio as a whole in the industry that it runs in. While the Sony Ericsson joint venture cannot be considered a complete success, the case study provides key learnings that other multi-national firms should pay attention to when considering changing strategies.

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