“The greater a firm‟s ownership extends over successive stages of the value chain for its product, the greater the degree of vertical integration” (Grant, 2010, pp354). The consumer electronics industry value chain is depicted below:
Thus a firm can be said to be vertically integrated if it owns and operates each of these stages of the value chain. The consumer electronics industry has many players who produce goods for purposes such as entertainment, communication and work. There are many determinants of success, including technical innovation, price competitiveness and brand awareness. The degree of integration in the value chain can influence success within the industry. Examples of firms who manage the value chain differently include Apple, who integrates their product design and retailing, but outsources the manufacturing & assembly of their products, whereas Dell keeps its product design and assembly in-house, whilst using market contracts for component manufacturing and retailing. This report focuses on the consumer electronics division of Sony, a well-known brand in the industry, whose five different stages of the value chain (same as above chart) is analysed in more depth below. 1. Product Design The first stage of the value chain is Product Design, which Sony keeps in-house. The company emphasises on “building high-performance, easy-to-use and beautiful products with a distinctive Sony flair” (Sony, 20111). Within the consumer electronics value chain, there are numerous benefits of the vertical integration of product design. Evidence suggests there is strong correlation between the launch of new products and market performance (Souder and Sherman, 2004). Consequently, new designs and products can capture and retain market shares and increase profitability (Tidd et al., 2001). Thus by having ownership over the product design and innovation stage, Sony can maintain complete control in creating its own competitive advantages to have an edge in the market. Due to the nature of product design, outsourcing would be unrealistic; Sony is likely to have Proprietary product technology unique to the firm e.g. their 3D technology. Consequently, there is incentive for the contracted company to behave opportunistically (Williamson, 1973), such as expropriating the technology and maybe even leaking it to rivals (Rao & Novelli, 2010; Business Week, 2009), and so contracts of vast complexity would need to be written and agreed to prevent such opportunism, which is expensive (Williamson, 1973). Also, for the contractors to be incentivised to come up with the best technology or design, the contracts will have to be designed in such a way that the agency fees that the contractors will receive will be correlated to the market performance of the designed product, and this is extremely hard to measure or enforce in contract. Thus, the potential transaction costs (Coase, 1991), risks and complexity associated with Product Design far outweigh than the administrative and labour costs of vertical integration which makes outsourcing an unfavourable option. However, there are risks associated with keeping the product design process in-house. Most significantly, there is the risk of not having the flexibility, skills and capability to come up with groundbreaking technology and therefore fall behind your competitors. For instance, Sony failed to anticipate the trend towards mp3 technology which led to loss of market share in the portable music devices market in the early 21st century (Uggla and Verick, 2008). Further, the administrative costs of product design in-house are high, with Sony's investment in R&D activities amounting to JPY432 billion ($4.6 billion) in FY2010 (Datamonitor, 20111). On balance, vertical integration with respect to Product Design is the best strategy for Sony to adopt. Innovation within the technology industry is the key to success, and so Sony need to keep complete control over this process. 2. Manufacturing &...
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