GM and Sony
Compare General Motors Corp., a company in trouble, with Sony. In the past 10 years, which company has made the most money?
General Motors. GM made $23.5 billion vs. Sony's $10.1 billion. As GM is some three times the size of Sony, a dollar-for-dollar comparison is not fair.
On a percentage basis, GM made 1.3% net profit after taxes. And Sony made 1.7%. It's hard to pay off your bank loans, let alone pay dividends to investors, with returns like that. Both companies are in trouble.
Mostly weak brands
GM has a portfolio of mostly weak brands. But not Sony. Most consumers rank Sony as the world's best electronic brand. And they rank Sony's PlayStation as the world's best video-game player.
Strong brands, strong sales, weak profits. Sony is not the only company that fits that pattern. A "red giant" is what we call companies such as Sony.
Corporations are like stars. Toward the end of its life a star the size of our solar system's sun swells up into a red giant and becomes some 100 times as large. As a red giant exhausts its internal energy supplies, it loses its outer layers and finally shrinks to become a white dwarf, perhaps 1% of the diameter of a sun.
Sony and GM are red giants. Sony because it puffed up its house brand. GM because it puffed up each of its car brands until they didn't stand for anything.
What Sony must shed
Can either company escape the fate of all red giants which eventually become white dwarfs? Only time will tell, but to escape its fate Sony must shed many products and refocus on segments in which it enjoys a leadership position. (The same strategy Jack Welch applied to General Electric. No. 1 or No. 2 or forget about it.)
Managers have short memories. You might think the dismal performance of conglomerates in the '60s and '70s would have discouraged the recent trend toward "bulking up." But apparently not. Wherever you look, the emphasis is on growth.
Take Amazon.com and it original slogan, "Earth's biggest bookstore." Nice slogan and nice analogy with the world's largest river.
What is Amazon's current slogan? "Earth's biggest selection." Books have been shelved to make room for 32 other product lines, including Amazon's latest product introduction, food. (Shades of Webvan.)
In July 1995 Amazon opened its bookstore on the World Wide Web. In 11 years of operation Amazon.com has sold $32.9 billion worth of merchandise. Not a bad haul.
Amazon's $2 billion loss
On the other hand, in 11 years of operation Amazon.com has managed to lose $2 billion. How soon will Amazon.com break even? At current profit levels, it's going to take another 5.6 years.
What keeps red giants such as Sony and Amazon.com in the ballgame? It's the power of the brands. When you blow yourself up, everybody is impressed: customers, prospects, investors and the media. You generate a lot of favorable publicity. (Think Donald Trump.)
But too many companies are focused on the top rather than the bottom line. Red giants such as GM and Sony have revenues that exceed the gross domestic product of many smaller countries in the world. Yet they have difficulty making money because they have blown up their brands so they don't stand for anything.
Growth is the mantra for many businesses today. Yet nature offers many examples of the superiority of slow, not rapid, growth. Small dogs outlive large dogs. Slow-growing hardwood trees outlive fast-growing softwood trees.
The oldest living tree is not some giant sequoia, it's a bristlecone pine that stands just 55 feet tall. Its estimated age is 4,767 years, which means that this particular bristlecone has been growing at the rate of 14/100ths of an inch a year. (Your fingernails grow a lot faster than that, around 1½ inches a year to be exact.)
Rapid growth weakens rather than strengthens. That's true for a brand as well as for a plant or an animal.
One of the strongest companies (and strongest brands) in the world is Nintendo, a company that just markets video games and consoles. Between fiscal 2000 and fiscal 2006, Nintendo sales actually fell from $5.3 billion to $4.3 billion, a decline of 19%.
Yet Nintendo made more money in fiscal 2006 than it did in fiscal 2000. Furthermore, Nintendo's profit margins are astounding. In the past 10 years, Nintendo's net profit after taxes were 14.9% of sales.
Eat your heart out, Sony.