Sonance at a Turning Point

Topics: Marketing, Competition, Price Pages: 6 (2118 words) Published: March 23, 2013
CASE SONANCE AT A TURNING POINT I. Introduction: Problem / General Issue

Sonance is a company at a crossroads, long established as the leader in high-end home theatre speakers, it is at an inflection point where it needs to decide whether it wants to be a high-end speaker producer served through customized dealer channels, or a mass market audio systems maker. The past decade has seen the rise of a new competitive threat, the demise of its dealer channel and the emergence of a highly informed and selective customer base which have all served to hurt the company’s prospects.

In the early 2000s, when price competition prompted Sonance to increase customer variability through retail channels Sonance sacrificed its brand identity. Having no experience in selling its products directly to end customers, Sonance suffered from its own inexperience of appealing to the new market while at the same alienating its established market. While the company made significant investments in R&D, these efforts were never backed by a well-thought analysis of distribution strategy or an understanding of the value of each customer channel.

What follows is an analysis of Sonance’s current situation and the articulation of a strategy, that if implemented, is designed to re-establish Sonance position as the leader in the in-wall, home theatre speaker market.

II. Situation Analysis

In trying to capture the opportunities of the growing consumer electronics market, Sonance’s attempt at expanding into retail ultimately backfired with a decline in revenue from $53mm in 2003 to $47mm in 2004 (almost back to the level of 1999). This situation has brought the company to the edge: with limited funds available, Sonance needs to clearly define its product development and distribution strategy.

By entering the mass retail market channel in 2000, Sonance eviscerated its historical base of dealer customers, losing roughly 50% of its dealers in a 5 year period. While overall revenues declined by only 19% during this period, the composition of Sonance’s revenue stream has changed from a +90% concentration in Dealers to less than a 50% concentration in Dealers, with the balance spread between Retail and Production Housing. Due to this shift, Sonance is not only perilously exposed to the cyclical flows of retailing, but also is much more sensitive to the overall performance of each customer, as the loss of the Lowe’s account in 2004 resulted in a 37% decline in mass market revenue. Ultimately, the move to retail

puts Sonance in a precarious long-term position as its customers have significant buying power as high volume purchasers. In the future it is likely that mass-market retailers will be able to use their purchasing power to drive down the margins Sonance is able to extract on its sales, and ultimately serve to diminish the dealer channel.

The decline of the dealer channel increases Sonance’s long-term risk by locking it out of the market for luxury home theatre systems. While the move to retail offset $10 million of the $17 million of revenue lost through normal dealer installations between 1999 and 2004, it is unlikely that any of the $6 million of highend home theater system revenue could be recouped through mass market retail. As luxury customers are less price sensitive and look to dealers to customize their entire installation, Sonance’s move towards the retail model at the expense of the dealers will eventually find it locked out of the lucrative and sticky luxury market altogether.

Furthermore, Sonance’s dealer base faces further erosion as its main competitor, SpeakerSoft, has taken advantage of Sonance’s wounded dealer channel by undercutting roughly 25% on price and further incenting custom dealers to choose SpeakerCraft speakers over Sonance Original Series speakers in customer projects. This, combined with the alienation from competing with Sonance’s retail offerings serves to further erode Sonance’s dealer channel as...
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