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MGMT 3101 – Case study essay The formation and evolution of Sony Ericsson alliance Creativity and flexibility is required in order to succeed in the mobile-phone industry. No other industry changes faster, or experiences more sudden and rapid changes to fortunes (Bowman 2006, pg 1). The industry was shaken by the alliance of two consumer electronic giants in October 2001, Sony Corporations and Ericsson AB. Sony Ericsson mobile communications is a fifty-fifty joint venture between Japan’s Sony Corp. nd Sweden’s Ericsson AB. Their mission is to establish Sony Ericsson as the most attractive and innovative global brand in the mobile handset industry (Sony Ericsson website) through combining Ericsson’s mobile technology alongside Sony’s expertise in consumer electronics (Kristine 2005). With headquarters located in London, Sony Ericsson became the sixth largest global mobile phone corporation in 2005 following closely behind competitor Nokia (Kristine 2005).
Motivations for the joint venture alliance as well alternatives to a joint venture will be explored, concluding with an examination of the problems and strategies used throughout the alliance to aid Sony Ericsson to become a world renowned mobile supplier. Complementary asset sharing and knowledge transfers were among several reasons motivating the alliance. Ericsson was heavily criticized in the past for poor manufacturing capabilities (Manuel 2002) as Ericsson previously outsourced its production procedures to Flextronics in order to reduce costs (Electronic Times, 2001).
Alongside that, Ericsson was associated with poor designs in terms of aesthetics and was unable to attract a large pool of consumers especially teenagers and young adults. Furthermore, due to the ever changing industrial environment of the mobile-phone industry, Ericsson was forced behind due to its inability to keep up-to-date with the market and as a consequent, slowly loosing its already minimal market share (Manuel 2002). However, the joint venture with Sony expected it to assist Ericsson fill in the gaps (Lamar L, 2001).
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Sony was the pioneer in the portable consumer electronics industry due to its ability to master design and marketing techniques (Electronic Times, 2001). Its expertise in digital camera and walkman made the 3G phone outstanding and provided Sony Ericsson with an initial competitive edge, as the features of digital camera and music functions were the basic requirements for the new generation of mobile phones (Alfred H, 2004). Sony also enjoyed Ericsson’s world-class knowledge of radio frequency technology and its existing distribution channels around the world.
Exploiting Ericsson’s knowledge, Sony was able to build lasting relationships with wireless carriers across the world (Mark V, 2001) which aided Sony to re-enter the U. S and European market in response to its expansion project. It was an extreme challenge and near impossible for Ericsson or Sony alone to compete with the worlds leading telecommunications corporation Nokia, due to their relatively small market share they both experience (Electronic Times, 2001).
The joint venture in 2001 saw Sony and Ericsson combining key competence resources and capabilities such as capital, management and technological skills to enlarge their market share together in hope to compete with telecommunications giant, Nokia. The pivotal reason behind the alliance by Sony Corp. and Ericsson was to combine Sony’s world-class technological skills in audio, video and communications with Ericsson’s technological leadership to challenge Finland’s Nokia and United State’s Motorola in gaining the markets leading position as the world’s most advanced global telecommunications corporation (Ericsson Annual Report, 2001).
The alliance allowed both parties to enjoy the resources and technology of each party. Ericsson was at the leading edge in communication systems and protocols, whereas Sony enjoyed leading strengths in consumer electronic production processes, including design and product planning, as mentioned briefly earlier. According to Ericsson’s 2001 Financial Report, both Ericsson and Sony were in desperate need of a deal to secure skills and tactic knowledge which the opposing company possessed in hope to expand their market share to compete with Nokia and Motorola.
It is clear that instead of a joint venture, Sony and Ericsson could have chosen an alternative method to collaborate and form Sony Ericsson, as long as its objectives and motivations were not at any risk. One method was acquisition where we would see one company acquiring the other. A joint venture is a legal entity formed between two or more parties to undertake economic activity together (Hill C, 2005). An acquisition on the other hand is when one entity takes legal control over another in the same target market (Hill C, 2005).
A joint venture and acquisition experience the same advantages and benefits of access to foreign markets and technology a company may not have. The main feature that distinguishes joint venture from acquisition is the company’s share of profits and losses. A fifty-fifty joint venture signifies both parties will share the profit and losses, whereas an acquisition the entity that acquired another company is obliged to overcome all the losses and gains solely. It is suggested that this aspect of an acquisition alliance was what turned down both companies from acquiring each other.
The initial stages of strategic planning and formation between Sony Ericsson saw both companies with the objective of expanding their individual market into the opposition’s territory and to reap benefits off each other. Neither Sony nor Ericsson was willing to invest large amounts of money and capital to acquire the other entity, so in essence, the method of a joint venture could possible be the best form of international alliance between the two parties. The industry’s fast and ever-changing environment saw many mobile-phone companies struggle to keep up-to-date and secure its existing market share.
And Sony Ericsson Mobile Communications is no exception (Bowman R, 2006). Since its formation in 2001, Sony Ericsson Mobile Communications have encountered numerous problems and have overcome them with new strategies and mind-frames. Two challenges and techniques to overcome them will be discussed below. Sony Ericsson’s first major strategy mistake was only targeting a small pool of high end markets (Strategic Decision, 2004) <anonymous author>. Since its creation, Sony Ericsson has targeted the high-end, low-volume market. Initially, mobile phone sales exceeded all expectations and the Sony Ericsson strategy was thought to effective.
However, in the long-run, Sony Ericsson Mobile Communications failed to maintain or increase its market share in high-end and low-volume market, with sales decreasing significantly. Furthermore, the shelf life of each handset alongside the selling price of each handset was also decreasing per year (Strategic Decision, 2004). In September 2003, Sony Ericsson held just 5. 4 percent of the global market share compared to Nokia’s 34. 5 percent (Strategic Decision, 2004). As a result, Sony Ericsson’s strategy of targeting a proportion of the market was seen to be a risky choice.
With its strategy failing to win Sony Ericsson market share and positive profit levels, the corporation has since increased its investment into Research and Development facilities in order to facilitate the continuous improvement and innovation of its products. By doing so, Sony Ericsson is able to provide better quality products in hope they will aid the expansion of its small market share percentage in high end market. Sony Ericsson Mobile Communications believes that this initiative will effectively improve and increase its long-term competitive advantage by being more innovative and creative in such a dynamic industry.
Gaining entry into the high end market alongside its improved product quality by increasing production efficiency will lower any unnecessary production and transaction costs. Following this theory, Sony Ericsson Mobile Communications offered its consumers with better quality at affordable prices it was able to gain entry into the high volume market and increase its overall total market share within the global mobile phone industry. Outsourcing non-core competencies is a move most businesses are now undertaking in belief that it will lower transaction costs and allow the company to concentrate on its core product competencies.
Low cost and low risks are the benefits of outsourced production experienced by Sony Ericsson (Strategic Decision, 2004), however the associated transaction costs such as managing the supply chains can be somewhat high. Such high costs need carefully calculations to ensure it is worth the investment. Sony Ericsson along with Nokia both outsources its non-core competencies but differs in terms of the strategy used, which have resulted in markedly different results (Strategic Decision, 2004). Sony Ericsson chose a vertical model which saw its production manufacturing facilities outsourced.
The manufacturing arm of the company was, as mentioned earlier, taken over by Flextronic in America. The main reason behind this decision was cost benefits along with reduction of risk. However, in hindsight the hidden costs associated with outsourcing were overlooked. In response to its failed strategic choice of outsourcing, Sony Ericsson decided to develop effective management, communication and training channels (Strategic Decision, 2004). Creation of effective communication channels such as corporate intranet, allowed Sony and Ericsson to communicate important facts, updates and knowledge with each other effectively and quickly.
Training programs were also developed to ensure consistency of product quality standards (Strategic Decision, 2004). Another response to this strategy failure was improved commitment from both parties to work towards achieving mutual trust and understanding between the parties as well as with its suppliers. Continuous development and innovation not only creates company competence’s in the Business to Business (B2B) level relationship, but also within the industry in terms of creating completive advantage and sustaining market share in the relevant domains of each business (Strategic Decision, 2004).
Maintaining respectable relationships with its suppliers, Sony Ericsson saw a more effective and efficiently delivery of programs and processes; and reduced opportunistic behaviour between not only Sony Corp. and Ericsson but also among the parties involved in the day-to-day business activities of Sony Ericsson, and so may also reduce the potential of creating future rivalries. Sony Ericsson has encountered numerous challenges, but in response to those challenges, Sony Ericsson has grown, developed and has a better understanding and knowledge of the mobile-phone industry, and what they can expect from the ever-changing dynamic industry.
Sony Ericsson saw the many challenges as opportunities to advance and gain invaluable experience which will assist them with future challenges. The strategies and techniques Sony Ericsson formulated in response to its past challenges have allowed it to sustain a high level of market share up until this present date. Initially, as an infant company they were challenged with no only problems faced in the industry but also with sales and profits. In essence, the formation of Sony Ericsson in 2001 saw the company experience many ups and downs.
This was partially due to the changing environment of the mobile-phone industry, and also to its inabilities to cooperate together effectively. Now that Sony Ericsson has formulated new strategies to overcome the old challenges, and these strategies are continually assisting Sony Ericsson to brighter outcomes, what remains is whether or not Sony Ericsson is able to learn from its strategic mistakes and experience future growth to compete with the other major players within the industry, fulfilling its core objective of forming the alliance.
In 2003 the chief executive announced that Sony Ericsson’s crisis was over, and since then the network businesses have began to enjoy successful operations (Strategic Decision, 2004). Share prices have doubled since April 2003 and cost-cutting procedures will see annual expenses fall by more than half (Strategic Decision, 2004). These figures and recent performance of Sony Ericsson suggests they should able to enjoy long-term success within the industry by learning from past experience and failure and ensuring they do not repeat history. Word Count: 1,878