Take Sony, for example. If you did a survey, you would probably
|Sony's best-selling product: The PlayStation 2 video-game system.
Terrific for owners of Sony products. But how about the owners of Sony stock? Does the company make any money? The sad fact is no. Net profits after taxes of Sony Corp. are small. Very small.
In the last 10 years, Sony Corp. had revenues of $519.2 billion. But net profits after taxes were only $4.0 billion. That's eight-tenths of 1% of sales. It's hard paying off your bank loans, not to mention paying dividends to investors, with that kind of return.
Of course, this is Japan, so who pays off its bank loans, anyway? In 1999, the Bank of Japan cut its benchmark short-term rate effectively to zero.
Like most Japanese companies, Sony is heavily line extended. Sony puts its brand name on TV sets, videocassette recorders, digital cameras, personal computers, cellphones, semiconductors, camcorders, DVD players, MP3 players, stereos, broadcast video equipment, batteries and a host of other products.
Yet Sony's most profitable product is the PlayStation video game, a brand which makes only
|Compare Sony to Dell, which has a net profit after taxes of 6.1%.
Compare Sony with Dell Computer Corp. Sony makes personal computers and a lot of other products. Dell just makes personal computers (until recently, when they added printers). In the last 10 years, Dell had sales of $140.3 billion and net profits after taxes of $8.5 billion, or a net profit margin after taxes of 6.1%.
That's not fair, you might be thinking. To compare with Sony, you picked a company (Dell) that is exceptionally profitable. Actually that's not true. Dell is in a highly competitive business where profit margins are thin. (IBM has never made money in the personal computer business and Hewlett-Packard's PC business is barely profitable.) As a result, Dell's 6.1% profit margin is not spectacular.
Net profit margins at the average Fortune 500 company were 4.7% of sales during the last 10 years. (If you leave out the last two years, which were mostly disasters, the percentage jumps to 5.7%.)
I have preached against the perils of line extension ever since Jack Trout and I wrote Positioning: The Battle for Your Mind some two decades ago. And ever time I bring it up, someone always says, "What about the Japanese, they do the exact opposite of what you are recommending and they are extremely successful."
Are they? In the last 10 years, Hitachi had revenues of $708 billion and managed to lose $722 million. NEC had revenues of $397 billion and lost $1.3 billion. Fujitsu had revenues of $382 billion and lost $1.6 billion. Toshiba had revenues of $463 billion and a net profit margin of just 0.15%.
Large unfocused companies make very little after-tax profits. And if you don't make money, you can't pay off your bank loans. And if you can't pay off your bank loans, the banks are in trouble.
And if the banks are in trouble, a country's economy is in trouble. And if a country's economy is in trouble, the country's political system is in trouble.
Japanese base is weak
The top of the Japanese economic system is weak because the base is weak. Japanese companies, for the most part, make everything except money.
Why is it so difficult for large, unfocused Japanese companies to make money? It can't be product quality. Most Japanese companies have a worldwide reputation for high quality. A reputation that, for the most part, they deserve.
My conclusion is that line extension inhibits the branding process. When a company makes and markets a broad range of products under one name, it is extremely difficult to build that name into a powerful brand.
Focused brands make money
Don't any Japanese companies make money? Companies whose brands are relatively focused do much better. Sharp (1.8%), Toyota (3.1%), Honda (3.3%) and Canon (3.8%).
I have followed the financials of Japanese companies for many years. I find that the average large Japanese company has a net profit margin after taxes of about 1% compared with the average large American company at 5%.
But even that result is peanuts compared with companies whose brands are highly focused. As a general rule, the more focused the brand, the higher the profit margin. Some examples: Nokia (10.6%), Intel (21.6%) and Microsoft (31.8%).
Now tell us again why line extension is such a good thing.
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Al Ries is the author or co-author of 11 books on marketing; the most recent of which is The Fall of Advertising and the Rise of PR. He and his daughter Laura run the Atlanta-based marketing strategy firm Ries & Ries.