Beating the west at its own game

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Commercial success with innovation depends less on the innovations themselves than on the other qualities of a firm. Sony’s use of Bell Labs technology is the classic example.

Akio Morita, one of the founders of Sony, died two weeks ago. If we were to compile a list of the great business leaders of the century, Morita is the Japanese name most likely to be on it. Partly because his love of publicity and Manhattan socialising – unusual in a Japanese businessman – made him the first, and still almost the only, such person to be well known outside his native country. But also because his company has entered the Western imagination as no other Japanese firm has done, and his firm have real claims to be founders of the modern consumer electronics industry.

So what was the secret of Sony’s success? The history of the company* is full of lessons for the nature of competitive advantage in business. We might begin with its founding prospectus, which proclaims that the purpose of incorporation was “creating an ideal workplace, free, dynamic and joyous, where dedicated engineers will be able to realise their craft and skills at the highest possible level” and goes on to assert “we shall eliminate any untoward profit-seeking, shall constantly emphasise activities of real substance, and shall not seek expansion of size for the sake of size.”

Since we are often told today that no institutional investor would want to invest in a company with aims like that, it is worth recording that an early buyer of Sony stock would have become exceedingly rich – the Morita foundation’s stake in the company is worth more than $5 billion. Nor would such a buyer necessarily have done better if the firm’s objective had been to maximise shareholder value through growth from a programme of strategic acquisitions. It was Morita’s flirtation with Wall Street values that led to Sony’s principal acquisition and greatest debacle, the purchase of the Columbia studios

Sony’s organic growth was based on technology based product innovation – transistor radios that would fit in a pocket, televisions with true to life colours, the ubiquitous walkman, the compact disc, the playstation. Yet innovation as such is rarely a sustainable source of competitive advantage.

Sony’s leap to the big time came through its development of the transistor radio, using a licence bought from Bell Laboratories. It was purchased for a $25,000 advance that stretched both the company and the Japanese government’s readiness to release foreign exchange. The transistor is probably the most important invention ever made in a commercial research establishment. But it made almost no money for A.T. &T, which owned Bell Labs. The underlying physics was in the public domain, and the practicalities of commercial development and the particularities of the parent company’s market dominance dictated a generous licensing strategy. The benefits of fundamental innovation are difficult to appropriate. For these reasons, if Bell Labs had been a truly commercial venture, rather than the technological flagship of a huge telephone monopoly, it would probably not have been carrying out such research at all.

That lesson – the difficulty of appropriating the benefits of innovation – was learnt by Sony when it sought to keep the Betamax standard for video records to itself. Its strategy was comprehensively routed by JVC, which preferred open licensing for its VHS system. This was the company’s second largest mistake.

It was a mistake Sony did not repeat with compact discs – where it generously conceded a half share in the outcome to its rival Philips, and licensed the standard freely. Nor could that error have been repeated with the Walkman, an innovation so simple that once seen, anyone can reproduce it.

Competitive advantage in innovative industries does not usually follow the quality of the innovation itself, and this is not how Sony became one of the world’s great companies or Morita one of the world’s great businessmen. Sony’s competitive advantage is based on two factors. The establishment of an environment that produces an endless stream of consumer oriented innovations. And the development of complementary skills and assets – marketing flair and ultimately a brand – which secures ready acceptance of these innovations in the market place.

It is usually wrong to personalise the achievements of businesses, but broadly we could associate the first of these with Morita’s founding partner, Masaru Ibuka, and the second with Morita himself. It was Ibuka who wrote the founding prospectus and who created the joyous environment that produced not only joy and Nobel prizes for Sony engineers but also great joy for Sony distributors, customers and shareholders.

And it was Morita who made shirts with larger pockets so that his transistor radios were truly pocketable, who saw the need for an international brand for a Japanese company, who understood the overwhelming importance of the US consumer market, who invented the Walkman. Others in the company derided the Walkman because it depended on no new technology. Still, it is today the product most closely identified with the Sony corporation.

Commercial success with innovation depends less on the innovations themselves than on the other attributes a firm brings to the process of developing and marketing innovation. That is why Japanese firms, Sony pre-eminent among them, have outdistanced their European and American rivals in consumer electronics. And why Sony’s purchase of a film studio was an absurd diversion from its real competitive strengths.

* John Nathan: Sony – the Private Life. is published by Harper Collins on October 18 1999, Price £19.99

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