Sony (SNE): The Disadvantages Of Being A Conglomerate

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John Rockefeller of Standard Oil, Alfred Sloan of GM (GM), and Gerald Swope of GE (GE)created the structure of the modern conglomerate. Diversification was meant to cushion economic blows. Being in five, six, or seven relatively unrelated enterprises meant that no one or two could fall to pieces and take the parent down.

The conglomerate may have worked in practice as well as it did in theory. But, it always had one weakness. Keeping track of many businesses which had only modest market relationships to one another became a chore. Executives had to develop encyclopedic knowledge of the entire scope of the economy. If one segment of the conglomerate fell ill, it required inordinate amounts of management time to repair.

Sony (SNE) fell victim to the Achilles heel of all empire building eventually encounters. It has just announced the largest loss in it history, $3 billion for the last fiscal year, and said it will cut several thousand people from its TV manufacturing business.

Sony faces the nightmare of a multi-legged enterprise where each part is broken simultaneously. The new management, with CEO Sir Howard Stringer as the turnaround artist, believed that its PlayStation 3 would fix the firm’s video game franchise. It turned out to be too expensive and the Microsoft (MSFT) Xbox and Nintendo Wii beat it to a pulp in the market.

Sony has always aimed at being the premier brand in the LCD market. It was, but when LCDs became a commodity, being the high-cost, high-quality product lost its charm. The same thing happened in its digital camera unit.

Sony’s most ill-advised step toward diversification was its decision to be in the movie studio business. It made that move just a few years before the digital revolution swamped the profitability of premium content.

Sony is a conglomerate of impressive proportions. Unfortunately, not one of its major divisions is in an industry where it can do well.

Douglas A. McIntyre