For Sony to continue to maintain their strong brand and influence they have to successfully minimize the systematic and unsystematic risks that they are facing. The following is a list of the risks and key factors for the future success of Sony. The systematic risks that affect Sony are anything that will interrupt consumer spending and change their buying habits. Therefore, the global economic environments, interest rates, the war on terrorism along with many other factors are systematic risks that will affect Sony.
These variables have a direct correlation towards the spending habits of consumers. There are several unsystematic risks that Sony faces. Some of those unsystematic risks are maintaining market leadership in technology, changing strategy to suit the business environment, restructuring the company to better adapt to the changing business environment, and new acquisitions as part of there overall strategy. Historically Sony has been able to demand a premium on its products because they produced cutting-edge technology that was difficult for their competitors to replicate.
However, now that technology is more accessible to their competitors, it will be tougher for Sony to differentiate their products in order to command a premium price. They need to continue to invest in research and development in order to continue to differentiate themselves from their competition. This will keep them on the cutting edge of technology as well as . This will help them to keep the Sony brand value high. There are several examples of how they have invested into research and repositioned themselves to mitigate the risk of decreasing market leadership in technology.
Sales of flat panel televisions have significantly increased in the market over the last year. To keep up with the competition Sony has expanded their flat panel lineups. They have also invested in joint ventures for the production of flat panels (find industry report)[IQ7]. However, they do not have core leadership in these technologies. They are looking to exploit their LCOS and LCD micro-display technologies10 in 2005. They have outsourced much of their manufacturing for mature technologies like CRT displays and the Playstaion.
Sony decided to shut down the production of these in Japan, and they are manufacturing these in China. This has reduced cost of production while allowing them to focus on the development of new technologies. Another example of decreasing the unsystematic risk of technology leadership is with their DVD product. Sony has increased their market share by introducing several new DVD recorder products. They are also on the cutting edge of developing the “blue ray” HD DVD format. At this time they are shipping components to other electronic companies to broaden the support base for the blue ray technologies.
There are several divisions that are adding to the bottom line to help off set the cost of doing research. Their best selling product, digital still cameras, continues to contribute to their profitability. Sony also continued leading the video camera market, which happens to be the most profitable category in the Electronics segment. 11 Other areas that are helping the bottom line their semiconductor products. This category saw an increase in sales of 23. 7% due to the increases in sales of CD-R/RW and DVD-R/RW drives and memory sticks. 12
Another way that Sony is looking to decrease the unsystematic risk is through “reforming” the business organizations. Their ability to implement personnel reduction and other business reorganization activities in its Electronics, Music and Pictures segments should help in reducing risk. The TR60 plan will prove beneficial if it provides a leaner organization that can more easily adapt to the changing business environment. Sony Entertainment continues to contribute by expanding their content and signing key deals to make that content more available for sale.
The entertainment industry is difficult to forecast, because it is dependent on consumer’s preferences. An example of this volatility was the success of Spiderman. Its success busted amplified the financials for 2003, but the absence of a similar success the following year reflected poorer numbers. However, according to Sony the last 10 films they have produced in 2004 were profitable and the home entertainment segment (DVD and VHS) is forecasted to increase by seven billion dollars over the next five years. 13 Sony’s music segment also contains a great deal of risk due to the unknown future of the industry in general.
The music industry as a whole has slowed due to the economy as well as the effects of piracy and other illegal peer-to-peer downloading. Sony needs to look for a better and more profitable business model for this segment. To this end, Sony has shutdown a CD manufacturing facility in the U. S. in order to minimize costs. They have created the joint venture with BMG, Sony BMG Music Entertainment, to increase the amount of content available to Sony to market. One way that Sony is looking to capitalize the illegal distribution of music is through creating a listening device to compete with the iPod.
This way the music may be pirated, but the electronics that consumers listen to them on will not bet. This will also be an effective use for the expanded content created by the joint venture Sony BMG. Conclusion Sony’s financials and the analysis indicate that they are positioning themselves for future growth. It is expected that as the economy turns around Sony will enjoy continued growth at a rate a better than the S;P 500. The recommendation for Sony’s stock is to buy and hold. They should continue to be a good value.