By Dr. Frank T. Rothaermel Professor at Georgia Institute of Technology, Scheller College of Business and Robert B. Redrow of Starr and Associates, LLC
In 2001, Apple’s market capitalization was $7 Billion, while Sony’s was $55 Billion.[i] Apple introduced the iPod, a portable digital music player in October 2001 and the iTunes music store eighteen months later. Through these two strategic moves, Apple redefined the music industry reinventing itself as a communication and content delivery mobile device company. Signaling its renaissance Apple changed its name from Apple Computer, Inc. to Apple, Inc. Many observers wondered: Where was Sony? Where was the company that created the portable music industry when introducing the first Walkman in 1979?[ii]
Sony’s strategy was to create value and differentiate itself through the vertical integration of content and hardware driven by Sony’s acquisition of CBS Records (later Sony Music Entertainment) in 1988. It contrasted sharply with the Music division’s desire to protect its lucrative revenue generating copyrighted compact discs (CDs). Sony Music’s engineers were aggressively combating music piracy by inhibiting Microsoft Windows’ media player’s ability to rip CDs and serializing discs. Meanwhile, Apple’s engineers were developing a Digital Rights Management (DRM) system to control and restrict the transfer of copyrighted digital music. Apple’s DRM succeeded, protecting the music studio’s interest while creating value that enabled consumers to enjoy portable digital music.
Sony had all the right competencies to launch a successful counter attack to compete with Apple: electronics, software, music, and computer divisions. Sony’s Electronics Division was the battery supplier for Apple’s iPod. Sony had a long history of creating electronics devices of superior quality and design. However, in Sony’s 2002 Annual Report CEO Nobuyuki Idei shared his frustrations of the cultural differences between the hardware and content divisions. Hard alliances such as mergers and acquisitions, he stated, take years to succeed while soft alliances such as strategic partnerships can be created more easily.[iii]
Cooperation among strategic business units had served Sony well in the past leading to breakthrough innovations such as the Walkman, PlayStation, and the CD but this time each division seemed to have their own idea of what needed to be done. While it may be easy in theory to lead the collaboration of distinct Sony divisions, Idei learned the hard way that the Music division managers were focused on the immediate needs of their recordings competing against the consumer-driven market forces; isolation over collaboration and cooperation. Cooperation among the Sony divisions was also hindered by the fact that their center of operations was spread out across the globe, inhibiting face-to-face communications and making real-time interactions more difficult. Music operations were located in New York City and Electronics design was in Japan.
In contrast, Apple organized a small empowered cross-functional team to produce the iPod in just a few months. Apple successfully outsourced and integrated many of its components and collaborated across business units. The phenomenal speed and success of the iPod and iTunes’ development and seamless integration became a structural approach that Apple applies to its successful development and launches of the iPad and iPhone. In 2010, Apple’s market capitalization had increased by a factor of thirty-three to $234 Billion while Sony’s declined by forty percent to $33 Billion.[iv]
[i] Source Wolframalpha
[ii] Sony Corporation Info, http://www.sony.net/SonyInfo/CorporateInfo/History/sonyhistory-e.html
[iii] Sony Annual Report 2002, year ended March 31, 2002, Sony Corporation, page 9.
[iv] Source Wolframalpha
Reprinted with permission: Strategic Management: Concepts and Cases, Dr. Frank T. Rothaermel, McGraw-Hill/Irwin, ©2013 p387