Sayonara Sony: How Industrial, MBA-Style Leadership Killed a Once Great Company

Who can forget what a great company Sony was, and the enormous impact it had on our lives?  With its heritage, it is hard to believe that Sony hasn’t made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!

Sony was once a marketplace creator, and leader

After World War II Sony was the company that took transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio.  Under co-founder Akio Morita Sony kept looking for advances in technology, and company leadership spent countless hours innovatively thinking about how to apply these advances to improve lives.  With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call “consumer electronics:”

• Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
• Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
• Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch.  Sony also expanded the size of Trinitron to make larger sets that better fit larger homes
• Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
• Sony pioneered the development of camcorders, for the first time turning parents – and everyone – into home movie creators
• Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed – for the first time – people to take their own recorded music with them, via cassette tapes
• Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
• Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made “home gaming” a market.

Very few companies could ever boast a string of such successful products.  Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance.  To Mr. Morita financial results were just that – results – of doing a good job developing new products and markets.  If Sony did the first part right, the results would be good.  And they were.

The origin, and impact, of “Japan, Inc” on Sony

By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing.  Not only consumer electronics, but automobiles, motorcycles, kitchen electronics, steel and a growing number of markets.  Politicians referred to Japanese competitors, like the wildly successful Sony, as “Japan Inc.” – and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to “beat” American manufacturers.  Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.

So what went wrong for Sony?

Firstly was the national obsession with industrial economics.  W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization.  Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper.  Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s — and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.

Unfortunately, this narrow obsession left Japanese business leaders, by and large, with little skill set for developing and implementing R&D, or innovation, in any other area.  As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets.

The Vaio, as good as it was, had little technology for which Sony could take credit.  Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs – rather than exciting products.  Sony’s evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.

In mobile phones Sony hooked up with, and eventually acquired, Ericsson.  Again, no new technology or effort to make a wildly superior mobile device (like Apple did.)  Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung.  Lacking any product or technology advantage, Samsung clobbered Sony’s Industrial strategy with lower cost via non-Japanese manufacturing.

When Sony updated its competition in home movies by introducing Blu-Ray, the strategy was again an Industrial one – about how to sell Blu-Ray recorders and players.  Sony didn’t sell the Blu-Ray software technology in hopes people would use it.  Instead it kept Blu-Ray proprietary so only Sony could make and sell Blu-Ray products (hardware).  Just as it did in MP3, creating a proprietary version usable only on Sony devices.  In an information economy, this approach didn’t fly with consumers, and Blue Ray was a money loser largely irrelevant to the market – as is the now-gone Sony MP3 product line.

We see this across practically all the Sony businesses.  In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes.  In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost.  Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions.  Yet, Sony won’t give up and intends to stay with its Industrial strategy even as it loses more money.

Sony’s Leadership was a willing conspirator to the failed strategy

Why did Sony’s management go along with this?  As mentioned, Akio Morita was an innovator and new market creator.  But, Mr. Morita lived through WWII, and developed his business approach before Deming.  Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony’s products highly competitive against older technologies.  The products led, with industrial-era tactics used to lower cost.

But after Mr. Morita Sony’s other leaders were trained, like American-minted MBAs, to implement Industrial strategies.  Their minds put products, and new markets, second.  First was a commitment to volume and production – regardless of the products or the technology.  The fundamental belief was that if Sony had enough volume, and cut costs low enough, Sony would eventually succeed.  Without any innovation.

By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company.  Sir Howard Stringer made his fame running Sony’s American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.

Sony’s Industrial Strategy was cost-cut first, products are less meaningful

Mr. Stringer’s Industrial strategy was to be obsessive about costs. Where Mr. Morita’s meetings were 85% about innovation and market application, Mr. Stringer brought a “modern” MBA approach to the Sony business, where numbers – especially financial projections – came first.  The leadership, and management, at Sony became a model of MBA training post-1960.  Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else’s technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs.  Be zealous about cost cutting, and reward it in meetings and with bonuses.

Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products.  Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.)  And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will  react to ongoing losses by – you guessed it – another round of layoffs.  This time estimated to be another 10,000 workers, or 6% of employees.  The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to – somehow – save its way to prosperity with an Industrial strategy.

Sony may not go bankrupt – but avoid it

Japanese equity laws are very different that the USA.  Companies often have much higher debt levels.  And companies can even operate with negative equity values – which would be technical bankruptcy almost everywhere else.  So it is not likely Sony will fill bankruptcy any time soon, if ever.

But should you invest in Sony?  After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on “numbers” rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon.

As an employee, facing ongoing layoffs why would you wish to work at Sony?  A “me too” product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place.  And offers little promotional growth.

And for suppliers, it is assured that each and every meeting will be about how to lower price – over, and over, and over.

Every company today can learn from the Sony experience

Sony was once a company to watch. It was an innovative leader, that pioneered new markets.  Not unlike Apple today.  But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara.  Sell Sony, there are more interesting companies to watch and more profitable places to invest.

Clash of the Cultures: Sales vs. Engineering

on April 5, 2012

by Aaron Levie

It has long been a maxim of the technology industry that companies have to choose between building a culture around either sales or engineering. For those of us focused on the enterprise, the question is even more poignant, yet far less practical. And while Ben Horowitz contends that sales isn’t dead, startups keep trying to kill the sales function.

I’m often asked where Box’s culture falls and how that allegiance dictates our product and go-to-market philosophies, with the implication that any attempt at a middle-ground approach would dilute both culture and execution.

Unsurprisingly, the Valley has a strong bias towards hacker-centric engineering cultures. After all, isn’t the reason we build technology companies in the first place to avoid the hassle of unnecessary human interaction and friction? The Web is the great intermediary, theoretically negating the need for phone calls, price quotes, resellers, and so on. Self-service is the way of the future, and for many of us, it already represents an important part of our present. Sales organizations, then, are a relic approach, running counter to the promise of the Web, where software can be streamed on-demand.

We even go so far as to assume sales forces exist to compensate for inferior technologies. I’ll admit that before we had a sales team at Box, I assumed that companies that required sales to win were making up for some kind of product deficit. Just look at Oracle, SAP, or IBM: They move slowly, rarely innovate, and don’t build technology that users love. And they have remarkably strong sales organizations. Coincidence?

But this is where Silicon Valley and the rest of the world diverge. While everyone supports reducing friction, customers want the power to define what friction means to them. On Zappos, I can purchase shoes instantly with zero human interaction, but I can also call them if I have questions. And in the world of enterprise technology, buyers often want to be navigated by a product expert and have a representative voice when it comes to problems or suggested enhancements.

Do startups really have to choose? Can all-night hackathons, customer calls at 9am ET (a time unknown to any engineer), and face-to-face meetings with buyers coexist within the same company? Is it possible to take the innovation-driven engineering mindset of the consumer Internet and merge it with the go-to-market might that led Oracle and Siebel to global dominance?

Clash of the Cultures

When we decided in 2007 that our future at Box was selling to enterprises, terror set in. I imagined our culture would change overnight, and we’d wake up to an army of guys named Chuck and Chester* rolling around in Porsches, rocking gold watches and toting briefcases with smaller briefcases inside them. What would these new colleagues do to our vision and product?

My assumptions were extreme, but the underlying fear was real. We’ve seen it happen many times before in sales-centric enterprise software organizations: End of quarter deals that need just “one extra feature” drive product roadmaps off course. Firefighting issues in a litany of customer environments takes precious engineering time off of critical innovation initiatives. Worse, updates are promised based on customer timelines, with little consideration for what the engineering team is capable of meeting.

Given the fast-paced, transaction driven nature of sales, these organization often have little incentive to see through the long-term ramifications of such approaches to product design and development. Product perfection and value in the horizon is effectively traded for near-term profit. And so the dismantling begins.

Yet engineering-centric cultures aren’t much better at serving customers fully than their sales-centric counterparts. Amnon Landan, the early CEO of Mercury Interactive once said, ”R&D guys are the smartest group in any company…But their logic is often wrong for customers.”  To deliver the best possible value for customers, you instead need a mix of different personalities and perspectives. Some of our greatest innovations at Box emerge from engineering tinkering, yet many others come directly from our customers – often steps ahead of vendors in their needs and desires for technology.

The product metrics and KPIs that startups live and die by these days tell us a tremendous amount about what users do within the confines of our technology, but they dramatically understate or miss entirely the contexts in which customers use our technologies. What challenges do people run into after they use your tool? What are your product’s bleeding edge use cases, which customers have discovered but aren’t even on your radar yet? A strategic sales organization can become a competitive advantage, not a distraction.

Building a Customer Centered Culture

We decided that there had to be a better way to build a sales organization, by combining a customer-centric culture with a business model that was far more aligned with customer success, and using sales to shorten the feedback loop for customer insights.

We’re not alone in striving for that elusive harmony between sales and engineering.  Companies like Workday, GoodData, Yammer, Zendesk, and many others have created environments where engineers are immersed in, rather than shielded from, the business model and needs of customers. These are environments where sales people are thoughtful of the needs, challenges, and priorities of the engineering team. David Ulevitch describes the cultural balance at OpenDNS as “a business culture driven by engineers.”

And with this model, you can take advantage of recurrent touch-points with customers and prospects to discover their needs and your gaps. Instead of siloing sales and engineering, turn proximity into a competitive assault by dramatically shortening the distance from customer feedback to product execution. Our ongoing investments in security, mobility, and platform have all been driven by constant conversations with customers. Incumbents like Oracle or Microsoft, however, take years to absorb customer feedback from the field, resulting in products that are misaligned with customer needs or far behind the realities of modern business.

Of course, it’s easy to say all of this when you’re small and nimble, but the question will be how to scale this kind of atmosphere and culture, as a company grows and conflicting demands increase. Fortunately, the SaaS business model naturally keeps the sales organization in check. The elastic and disposable nature of “rented” cloud solutions precludes selling something that isn’t real or isn’t successful, and it also keeps engineering on the hook for shipping what the customer paid for. Perverse incentives cannot survive in this model, at not for very long. The only way to succeed as a vendor is to deliver customer success.

When it comes to culture, balance doesn’t mean compromise. Companies that can align both sales and engineering around customer needs will have better insight into the innovations that will keep them relevant and the motivation to build them.

Gripevine To Civilize Angry Twitter Mobs With Its Customer Complaint Platform

by Erin Griffith
on April 6, 2012

We’ve seen what social media can do to a company’s reputation. One little slip-up, like a PayPal Ruins Christmas rant, or a Chapstick social media death spiral, can damage years of precious brand building. More importantly, it can kill a company’s stock price.

Take United Breaks Guitars, a YouTube video that musician Dave Carroll made after United Airlines refused to reimburse him for breaking the neck of his checked guitar. It’s up for debate, but some have argued that the video, which has been viewed more than 11 million times, caused the company’s stock price to drop 10% to the tune of $180 million.

That’s enough to get a CEO’s attention. It’s enough to get a VC’s attention, too.
Carroll of broken guitar fame has joined forces with Richard Hue, head of Harbour Capital Management Group and developer Chris Caple, to form Gripevine, a customer complaint platform that helps companies manage customer service to better serve their customers.

They’ve raised $1 million in seed funding from angel investors and Hue’s contacts to build it.
You’ve no doubt come across Twitter-stream complaints to airlines, hotels, or cable companies. And then there’s Yelp, where anyone with an Internet connection, money for a meal, and an engorged sense of entitlement can damage a small business’s reputation with one-star reviews.

The point is not to empower overly entitled customers — they’re more than likely already capable of causing a shitstorm on Twitter or Facebook just fine on their own. The point is to solve customer problems. You can’t post a gripe to Gripevine without including a desired outcome. The company actively deletes gripes that are just pointless rants that “Company X sucks.”

“Yelp is for people to bash a company. What we’re doing is more like, ‘I had a bad experience eating here and I want a credit,’” Carroll said. That’s a good idea, considering Yelp has been sued by small business owners multiple times. (Accusations of extorting small business owners to remove negative reviews have been dropped.) Meanwhile, Gripevine is better for customer service complaints than Twitter, Carroll argued to me, because the entire situation can be spelled out in one message rather than a back and forth.

Knowing the way the Internet works, I think it’ll be extremely challenging for Gripevine to keep its complaints reasonable and out of the “Company X sucks” weeds. But I think it’s an admirable goal. Gripevine is spending a lot of time educating companies that they won’t be victimized by the angry masses on the site, Carroll said.
Gripevine sends the complaints to the company in question, prompting the company to claim its page on the site and resolve the dispute. Notably, Gripevine doesn’t promise anyone’s complaints will be solved, it just tries to improve the process.

The company side is where Gripevine’s business model kicks in. Since CEOs know they have to monitor the social media-chattering masses, they pour thousands of dollars into CRM systems like those from Radian6 to ensure they handle customer complaints properly — before they turn into PR disasters. Gripevine competes with Radian6, but it provides more than just listening tools, Carroll said.

For the 100 companies that have claimed their profiles, Gripevine provides them a dashboard, which they can use to manage their CRM systems. It’s fully integrated with Twitter and Facebook, allowing CRM workers to communicate with each other, prioritize gripes, and follow up, which is helpful in the event of a shift change.

For six months, the enterprise product has been free for customers. It’ll charge a subscription fee after that. Since launching two months ago, companies like HP, Sprint, Verizon, and Walgreens are already on board. More than 3500 users have signed up and more than 800 complaints have been lodged.

Steve Jobs was right: Dropbox is a feature, not a product

by Farhad Manjoo/on February 26, 2012

I’ve always been a big fan and committed user of Dropbox. Over the last couple years the handy file-sync app has gotten me out of many scrapes—when I need to access six-month-old interview notes when I’m out of town, it’s always a thrill to find them in my Dropbox. Along with my sit/stand desk, my Livescribe pen, and my MacBook Air, Dropbox is one of the few genuinely delightful tools I use regularly, and I’m constantly recommending it to friends and family.

And yet I’m extremely skeptical about Dropbox’s business prospects, and totally puzzled by the high hopes that otherwise smart people have pinned on its success. Dropbox is a great little file-syncing app, and founder Drew Houston and crew are already making some nice money out of it. But is it a $40 billion company? I doubt it. And when I hear folks like Benchmark’s Bill Gurley suggesting that it might be, and calling Dropbox “a major disruption,” I wonder if they’ve simply been blinded by the thrill of using an obviously well-crafted utility.

Gurley argues that in a multi-platform world—where we’ll all be carrying more devices that are possibly running a variety of OSes—we’ll clamor for some kind of easy, invisible, automatic way to keep our stuff synced between gadgets.

He’s right about that. We will need something to organize our lives between gadgets. The trouble is, it will be difficult to make a perfect gadget-syncing service that is also a great standalone business. There are two reasons for this. First, the perfect syncing service needs to do more than simply store files. Second, the perfect syncing service should be unlimited and free, or as close to it as possible. Dropbox will have a hard time doing the first of these for technical reasons, and if it does the second, it won’t be a very good business.

In its current form, Dropbox is great at syncing stuff that I’ve saved to my filesystem, but there’s a lot more to device syncing than just what I’ve stored in data files. When I switch from my desktop to laptop to my phone to my tablet, I would really like my device’s “state” to follow me, not just my files.

Right now, I happen to be traveling from the Bay Area to Seattle. When I left home, I was typing this article in a Word document on my Windows 7 desktop. The Word window occupied one half of one of my two huge desktop monitors. Splashed across the rest of the screens were several tab-filled Chrome windows, a few IM windows, and my text-based notepad.

When I later opened up my MacBook Air, I could access the Word file and my text notepad through Dropbox. But I had to make my computer do so. In a perfect syncing scenario, my laptop would know what I had been doing on my desktop and would offer to open up the right windows for me, preferably in the identical places on the screen—but Dropdox doesn’t do that. Worse, Dropbox can’t sync my Chrome and IM activity in any way. If I want to get the same tabs that I had on my desktop here on my laptop, I have to rely on Chrome’s own (fantastic) syncing feature. (There’s no way, as far as I know, to keep my IM windows synced between devices.)

I can think of many other things that would be great to keep synced between devices: Desktop icons and images, peripheral drivers (so that when I connect a camera to my work computer, my home computer recognizes it too), and application preferences (I like my Word documents set to 180 percent zoom).

I’m not the only one who’s been asking for this sort of thing. The Verge’s Joshua Topolsky has been yearning for a “continuous client” for years now, since back when he ran Engadget. But I’m hot holding my breath that we’ll see such super syncing anytime soon. Syncing the state of devices rather than just your files presents many difficult conceptual problems: What does it mean to sync windows between two gadgets that might have different windowing paradigms (say an iPad, which runs everything full screen, and your Mac)? What happens when you rely on two different apps to do the same tasks on different devices—for example, how would you sync tabs between Chrome or IE on your Windows desktop and Mobile Safari on your iPad?

Someday, someone will figure out how to make this sort of thing work well, but I suspect it will most likely be one of the companies that makes a major operating system: Either Apple, Microsoft, or Google. Each of these firms has a file-storage and/or syncing solution that it’s pushing, and I expect that those efforts—iCloud, Skydrive, Google’s Chrome syncing and perhaps the mythical Gdrive—will gradually incorporate more and more of the features I’m looking for.

Dropbox is probably working to build many of these features as well. But as third-party app, it’s just not in a very good technical position to do so. In order to sync programs and window states, Dropbox would need access to some of the deeper parts of my various gadgets’ OSes. This is easy for some operating systems and impossible with others—including iOS and probably Amazon’s Kindle Fire. Apple could easily build a way to sync the current browser tabs between my Mac and my iPhone, so that I can switch from reading Pando on my couch to reading it on the train. Dropbox will need to go through incredible hacks to achieve the same functionality, and it probably won’t manage to do so even then.

In fact, even now, as just a simple file-syncing app, Dropbox is frequently stymied by OS- and application-level problems. It won’t sync Microsoft Office files until you exit the application you’re using—if you forget to close your Word file on your home computer, it won’t be in your Dropbox at work. That’s not Dropbox’s fault—it’s Office that locks files that you’re using. But it highlights what I’m talking about: There’s a lot going on your computer, but Dropbox only has control over a small part of it.

You might argue that I’m making too many demands of Dropbox. So what if it doesn’t satisfy all the features I want—won’t people still pay for it if it keeps getting incrementally better as a file-syncing service? Maybe, but remember that online storage is a commodity. Dropbox makes money by charging people for increased storage space. But the price of storage keeps plummeting. It’s tending toward free. With all the competition it faces from firms with huge data centers, Dropbox isn’t going to be able to get people to keep paying $10 a month for 50 GB of space for many more years to come. It needs to add extra capabilities, too.

In 2009, Steve Jobs wanted to pay more than a hundred million dollars for Dropbox. As Houston later told Forbes’ Victoria Barret, when he politely turned down his hero’s offer, Jobs declared that Dropbox was a feature, not a product. Jobs was right: To do what we all want it to do, syncing has to be baked in to all the gadgets we use today. OS companies are warming to that notion—and they don’t need Dropbox to do it.