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Sony PC: Entry into the US
“Sony Electronics is looking to revive its PC business, formerly one of its most prosperous product
categories, with its new summer lineup of desktops. As expected, Sony announced the new crop of
desktops Tuesday. The company has loaded the systems with features such as DVD-rewritable drives,
digital video recorder software and advanced components. Sony, which has seen its PC business slide
lately, is looking to use the same high-end strategy that allowed it to establish itself as a significant player
in the PC market early on. The PCs will be available next month, the company said. According to research
firm IDC, Sony shipped 790,000 units in the fourth quarter of 2002, down from 1.03 million during the
same period the year before. During the company's year-end earnings call in late April, its Tokyo-based
parent reported disappointing results, causing its stock to reach a 52-week low. Sony cited the decrease in
sales of Vaio PCs and CRT (cathode ray tube) televisions as part of the reason for the results. However,
instead of lowering prices significantly and going for market share like many PC makers do, Sony is
sticking to its guns and offering more expensive systems that allow consumers to perform multimedia
activities. "Our goal is not to achieve 40 percent of the market--but we don't want to lose share, either,"
Hideyuki Furumi, director of desktop marketing at Sony, said in an earlier interview with CNET
News.com. "We won't do anything crazy to gain 10 percent...gaining share is important, but creating a
philosophy is equally important." Sony is offering seven new desktop Vaio PCs as part of its lineup.”
-- Exerpted from “Sony looks to revive PC business,” CNET News.com, May 20, 2003
On the other hand….
“Sony’s channel strategy to reach its small- and midsize-business segments was gaining momentum. Its
channel sales of the VAIO notebook line grew by 283% and enlisted almost 4,000 authorized resellers in
2002 and was working on adding solution provider incentives on service and sales. Sony was offering
financial incentives to solutions providers that move the entire Sony brand—VAIOS, Clies (PDA), displays
and storage devices.”
-- Excerpted from “Sony channel strategy gains momentum,” Computer Reseller News, June 9, 2003
In 2001, the PC industry, with world wide annual sales of $150 billion and 125 million units shipped, was in
terrible shape. For the first time since 1985, sales actually fell and did so precipitously. The combined HP and
Compaq lost $1 billion on PC-related sales of $27 billion. IBM did no better than break-even on PCs. Gateway,
amidst a massive restructuring, lost $1 billion on $6 billion in revenues. Charles Smulders, a top PC analyst at
Gartner Dataquest called it a “sick industry.” On the other hand, Dell made $1.8 billion in profit on revenues of $31
billion and Sony was the fastest growing major PC maker in the world. Sony moved from No. 12 in worldwide
market share to end the year at No. 8. Shipments of its VAIO PCs in the US retail market were up 300% in the first
six months of 2002, compared to the same period in 2000, the pinnacle year for PC shipments. As Sony strived to fit
the PC into a larger business model that included the sales of digital cameras, MP3 players, camcorders, TVs, cell
phones and PDAs, the latter half of 2002 turned out to be financially very challenging for the PC business and
analysts were questioning the sustainability of Sony’s successful entry and establishment of its PC business in the
US.
Professor Jay Rao of Babson College prepared this case as a basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation.
Copyright © by Babson College 2003. To order copies or request permission to reproduce materials, call (781) 239-6103
or write Case Development Center, Olin Hall, Babson College, Wellesley, MA 02157. No part of this publication may be
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The PC industry, like virtually all of its computing antecedents and successors, had its
epicenter in the US. US companies enabled its birth, promoted its growth and dominated in its
maturity. This domination of the US PC market confounded oft-repeated predictions of invasion
and victory by Japanese PC firms, whose national brethren had been so successful in numerous
US markets, from automobiles and television sets to all manner of electronic devices (Exhibit 1).
Several times in the late 1980s and early 1990s, Japanese companies such as Canon, Epson,
Matshushita, NEC and Sanyo rolled out new PCs and fresh campaigns to the trumpeting of the
business press that warned of the slaughter to follow. Yet, other than Toshiba in the laptop
segment, these campaigns had failed.
Pundits offered multiple reasons for the failure of these large, well-established firms to
penetrate the PC arena prior to 1995: (1) reliance on proprietary architectures rather than Wintel
standard; (2) complexity of US PC distribution channels—distributors, Value Added Resellers
(VARs) and System Integrators (SI)—compared to channels for retail electronics; (3) inability of
Japanese firms to turn over the reins to senior-level US managers; (4) distraction resulting from
fierce competition in the Japanese domestic market and (5) contentment with profitable position
in peripherals and components market in US.
After two years of rapid expansion (43% in 1994 and 20% in 1995), US PC sales growth
slowed in 1996. That year, five Japanese firms—Sony, Hitachi, Fujitsu, Toshiba, and NEC—
announced renewed efforts to sell PCs in the US in a coincidental timing attributed to a variety
of factors: (1) The Japanese were emboldened by the success of other Far-East PC firms such as
Acer and Mitac; (2) The PC market in the mid-1990’s was increasingly consumer-driven—an
area of Japanese strength; (3) The importance of a strong presence in the US market, which
represented 40% of worldwide sales and the hub of PC innovation, was critical to success in the
global PC market; and (4) Japanese consumer electronics giants’—Sony, Toshiba—felt their turf
was being threatened by audio-visual features—CD, DVD—that US firms were integrating into
their PCs.
Industry observers offered contrasting predictions regarding the latest Japanese effort.
While some business press titles proclaimed “Tsunami scare!” and “Your next PC is Japanese,”
others maintained that sector and timing differences would likely constrain a repetition of Japan
Inc. successes in other industries. During this period NEC bought Packard Bell and re-introduced
its desktop line for the home segment. Toshiba and Sony “re-entered” the home desktop market,
and Fujitsu and Hitachi introduced assembled PC machines for the first time in the US. Four of
these firms were worldwide PC leaders in 1995 (NEC—#2 in desktops; Toshiba—#1 in
portables; Fujitsu, NEC, Hitachi and Toshiba—#4, #6, #9 and #10 in servers and Sony was the
leading consumer audio-visual electronics- and most-recognized brand in the US).
Except for one notable niche success—Sony—this Japanese PC invasion amounted to
little more than a skirmish, fought on the wrong battle field and with the wrong weapons, and
ending in several rapid withdrawals and overall defeat. The 1995-96 (re)entry efforts and results
of the major Japanese firms will be detailed after a description of the US PC history and the US
PC market environment and developments in the period 1995-2000.
A Brief History of the US PC Market—1975-1995
In April 1975 Edward Roberts, William Yates and Jim Bybee of MITS (Micro
Instrumentation and Telemetry Systems), Albuquerque, NM, sold the Altair 8800 and started the
PC revolution. The price was $375, and contained an Intel 8080 CPU, a board set, front panel
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(without switches), four slot backplane and a 1KB memory board with 256 bytes (not 256K!) of
RAM chips and featured a BASIC code written by Bill Gates and Paul Allen (MITS was
Microsoft’s first customer). There was no case, no power supply no keyboard, no display, and no
auxiliary storage device. Companies like Icom, Tarbell, and Micropolis filled the void with
diskette subsystems. The Altair was followed by machines like the IMSAI, SOL, Morrow,
Godbout/Compupro, Dynabyte, Cromemco, and Vector Graphic (Exhibit 2). By 1977, there were
at least 30 firms making PCs, including Apple, Tandy (Radio Shack), Atari, Commodore, Texas
Instruments, and Heath. The market shifted from hobbyists to small business. Machines like the
Apple, Sol-First, Osborne, Kaypro were smaller and had integrated keyboards and video were
used in home, school, and business.
With a built-in operating system and a productivity tool—the VisiCalc spreadsheet—the
success and longevity of Apple II (1977), established Apple as a major player in the PC industry.
Further, Apple II’s greatest strength was its backward compatibility. While backward
compatibility is taken for granted today, in the early days of personal computing it was not
always easy or even possible to move documents or programs from an old computer system to a
new one. However, this early strength of the Apple II might have actually contributed to its later
demise. It presented major difficulties in making improvements to keep up with the advances in
technology in the 1980s and 1990s. Some other early computer makers found it easy to design
improvements that created a better machine, but sometimes they did so at the expense of their
existing user base (Commodore’s PET [tapping into the “pet rock” craze!], the Vic 20, the
Commodore 64, and finally the Amiga, all were completely incompatible with their previous
models).1
Simultaneously, software began to vie for center stage with the emergence of the first
word processor WordMaster (1976), the first spreadsheet VisiCalc (1977) and the first database
Vulcan (1979). By 1981, an estimated million PCs had been sold in the US with half of them to
businesses and the rest to students, hobbyists and scientists. However, the landmark event for the
PC was the 1981 launch of the IBM PC (Exhibit 3). Selling for about $3,000, the PC was
assembled from mostly non-proprietary components and its operating system information was
available to the public. Judged by most experts as no technological breakthrough, it was full of
technical shortcomings and hardly the best PC available at that time. However, its “open
architecture” immediately brought in scores of software developers and “IBM compatible” PC
imitators. In 1982 and 1983, 18 new companies introduced 125 distinguishable new PCs each
year, and in 1983 PC sales grew 50%. In the same year, numerous early contenders, such as
Commodore, Atari, Texas Instruments, Timex-Sinclair, Osborne, Coleco, and Mattel, ran into
severe business difficulties and exited the PC business.2 By 1984, IBM had displaced Apple for
the #1 market share spot in the US (please see below table).
1
2
1980 Market Share
1984 Market Share
Apple
18.19%
IBM
49.00%
1989 Market Share
IBM
14.00%
Compaq
1994 Market Share
12.80%
2001 Market Share
Dell
27.80%
Tandy
15.77%
Apple
13.00%
Apple
10.70%
Apple
12.20%
Compaq
15.30%
HP
12.54%
DEC
6.00%
Tandy
4.80%
Packard Bell
10.80%
HP
9.89%
IBM
8.27%
Tandy
4.00%
Compaq
3.80%
IBM
10.20%
IBM
8.18%
Tektronix
3.99%
Compaq
3.06%
Packard Bell
3.70%
Gateway
5.10%
Gateway
6.31%
http://apple2history.org/index.html
Mastering the Dynamics of Innovation, by James Utterback, HBS Press, 1996
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Low-barriers to entry, the simplicity of the PC assembly process and the availability of
standardized components, enabled a host of IBM clones to enter the market in the mid-1980s.
Although most of these competed by offering lesser quality products at lower prices, Compaq, in
Nov. 1982, initially targeting the portable (luggable) market, quickly gained a reputation for high
quality and joined IBM in the top ranks. Although IBM introduced a portable in 1984, Compaq
continued to dominate the portable segment and outsold IBM 10-1 in 1985. Simultaneously,
Compaq started building itself a compelling distribution network by selling exclusively through
full-service computer specialty stores. It nurtured the loyalty of its 3000-dealer network with
high margins, access to marketing programs, inventory financing and the absence of a direct
sales force. By the end of the decade, IBM was emulating Compaq’s distribution strategies and
exerting its powerful marketing muscle. For Compaq, in addition to fighting off IBM at the highend, 2nd tier firms like Samsung, AST, Dell, and Packard Bell had established themselves in the
market place, as real and perceived differences in product quality between the leaders and the
low-end clones declined significantly, and had started to go after its low-end customers.
Compaq, after suffering a drop in sales in 1991, adjusted quickly to the new business
environment. It quickly revamped its product design, assembly process and supply chain. Drastic
reduction in the number of parts, standardization of components, snap-together assemblies,
global sourcing, efficient logistics and a well-established distribution network helped it to
introduce its first sub-$1000 PC in 1992 and this enabled it to compete with Dell and other
clones at the low end. IBM was less agile in making this transition, and in 1994, after more than
a decade of market leadership IBM lost its top position in the US PC market to Compaq.
Competitive Environment in 1995-1996
By the mid-1990’s, in any given price range, virtually all brands of PCs offered similar
functionality in terms of microprocessor speed, memory, storage, audio-video features, and
software bundles. Rapid product performance improvements, falling component prices, coupled
with advances in assembly and logistics contributed to PC prices falling from about an average
of $2500 in 1991 to $1500 in 1995. This forced many PC firms out of business in the early
1990’s. Of the dozens of US companies that entered the decade with measurable market share,
only five major players remained by 1996: Compaq, Dell, Gateway, HP and IBM.3 These
survivors were left in a high volume-low margin business that required management of a
worldwide procurement and logistics system. Large inventory levels, either internally or in the
channel, created huge liabilities. Excess inventory was worthless and failure to introduce the
latest processors quickly led to lost market share.
Market Segments
In 1995 the $53 billion US PC market could be segmented by market—commercial,
small business and consumer—and by product type—server, desktop and portable. The
commercial market was big businesses purchasing large quantities of machines and typically
standardizing purchase of servers, desktops and laptops from a single vendor to enhance
integration and facilitate service. Compaq, IBM, HP and Dell were the principal players in the
commercial PC desktop and server segments. The PC server segment, of which the four leaders
held 70% share, was the fastest growing market. In commercial laptops Toshiba was the leader
with a 20% share. This segment was projected to grow 28% in 1996 and to maintain a
significantly faster growth rate than desktops, reaching 35% of PC sales by 2000 up from 26% in
3
Packard Bell, which was also a major player in the consumer PC market, was acquired by NEC in 1996.
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1996. Many commercial accounts were supplied and serviced through national distributors and
VAR’s (Value Added Resellers) and also secured services directly from vendors. The Small
Business segment, often called SOHO (Small Office Home Office) was more akin to the
consumer market.
PC Distribution
By 1995, there were two primary distribution models. The indirect channel consisted of
several different categories: traditional mass PC assemblers (Compaq, IBM, HP), Original
Equipment Manufacturers (OEMs), national distributors and VARs. (Exhibit 4). Companies
using the “direct” model (Dell and Gateway) sold PCs directly to end-users employing a direct
sales force and/or taking phone orders.
In the indirect channel, in addition to doing their own assembly, mass assemblers—
Compaq, HP and IBM—also used OEMs such as Acer and Mitac to do complete assembly for
them. The OEMs sold their own brand PCs as well. VARs had direct relationships with
businesses and offered an array of services—product customization, software installation, system
integration, etc. The direct model offered the most efficient approach to handling time-sensitive
inventory and it was putting increasing pressure on the indirect model, which involved 3 or 4
additional steps. Channel markups, inventory buybacks, product obsolescence, market
maturation all contributed to higher costs for indirect competitors.
Dell and Gateway were the only two major competitors who were solely direct. Dell had
an outside sales force that courted the large and mid-size businesses; it’s primary markets. All
consumer and small business sales were handled by internal phone sales and also, after 1995, the
Internet. The second half of the 1990’s witnessed the triumph of the direct model. By 2001, Dell
was selling more than $50 million per day through its website (more than 50% of its $31 billion
per year) and delivering more than 50% of technical support over the web. Dell held less than 5
days worth of inventory. It received payment from customers before it paid its suppliers,
providing a negative cash conversion cycle of 8 days and helping to give it a 12% cost advantage
over rivals. Since 1999 Dell also had held the #1 rank in customer satisfaction as it aggressively
used the information it captured through the direct-customer contact model to segment its
customer base and closely align its products, technical resources, support and service to those
segments. Dell displaced Compaq to become the #1 US PC vendor in 2001.
All-in-all, in the corporate segment, Compaq was characterized as having “Unmatched
Product Scale,” HP as having a “Diversified Product Strategy,” and Dell as having a “Unique
Distribution Strategy”4. IBM, the former “king of the hill” was still a significant force, especially
in the portable segment. These four players owned the corporate segment, where their product
breadth and quality and their dominance of the direct and indirect distribution channels created
significant barriers to entry. Dell became one of the leanest firms in the world, setting the
standard for numerous measures of operational efficiency. IBM, Compaq and HP developed and
maintained close relationships with distributors and VARs, effectively shutting out new entrants.
Compaq and Packard Bell dominated the retail consumer and SOHO segments,
competing fiercely for retail shelf-space market. Compaq’s business model—its global sourcing,
efficient inventory management, channel assembly and market tracking skills—enabled it to
make profit even in the $999 category, where other assemblers could barely survive. Packard
Bell was the low-price leader. When HP entered the retail arena in 1995, squarely targeting and
soon surpassing Packard Bell, that channel became more difficult to penetrate. Dell, which did
4
NatWest Securities, PC Industry Outlook, Jan. 2, 1996
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not focus on the consumer market until 1996, became the dominant force in the direct channel.
Gateway, which always had a niche in the direct end-consumer and SOHO markets also offered
an alternative to consumers with its Country Stores, a place for novices to visit and try out
machines.
Significant events—1995 - 2001
PC prices continued their downward trend in the late 1990’s. At the end of 1996, Compaq
and Packard Bell introduced sub-$1000 PCs capable of handling all popular software programs.
The price point, which was soon matched by competitors, brought in several million first-time
buyers. Overcapacity in DRAMs and hard drives, the entry of AMD, Cyrix and IDT into the
low-end of the market with cheap microprocessors, the reduced speed and power requirements of
the new “killer app (application),” the Internet browser, and the reluctance of businesses and
consumers to upgrade machines all contributed to lower prices. By April 1999, sub-$1000 PCs
accounted for 68% of all retail PC purchases, with sub-$600 category growing quickly.
Additionally, as the Internet boom accelerated, new firms entered the market with a business
model that virtually gave away PCs in return for Internet-connection contracts.
Until the mid-1990s, personal computers were primarily used as productivity tools to run
spreadsheets, word processing and presentations. With the advent of the Internet browser in late
1994, PCs became communications devices; powered by the killer apps of email, web browsing,
and Instant Messaging. The consumer segment exploded in 1994, accounting for 40% of the total
market. By 1995, 35 million homes had a PC, and another 30 million homes were expected to be
first-time buyers by 1998. Post 2000, the PC was to become a visual entertainment device with
killer apps such as MP3 and MPEG.
By 2000, PCs had penetrated into more than 60% of the US households and more than
50% were connected to the Internet. After 3 years of brisk growth, the industry saw its first pull
back in 2000, and sales fell off precipitously in 2001. Exhibit 5 gives the revenues for each of the
5 market segments for the years 1995-2001. It was during this period that several leading
Japanese PC vendors attempted to enter or intensify their efforts in the US PC market. Exhibit 6
and Exhibit 7 show the revenues and market share for the top 5 US and top 5 Japanese firms for
the period 1996-2000. Exhibit 8 provides the percentage of the market grabbed by each firm in
the growth period 1996-2000.
Japanese firms’ in the US PC market and their 1995-2000 efforts
NEC
NEC Technology originally entered the US desktop market in 1984. Leveraging its
strength in DRAM chips, it became the fourth largest supplier by 1988 and by 1992 accounted
for 1.5% of PCs shipped in the US, putting it in the top ten. The company also captured a
significant share of the monitor market, where its MultiSync brand was top-rated in 1994. In
early 1995, NEC announced plans to (re)introduce the Ready line, a desktop product initiative
for the consumer market that had floundered when first launched in 1992. For the first quarter of
1995, the company made significant gains in the reseller channel. A new marketing team and
channel development efforts, combined with missteps by competitors, enabled NEC to move
from 8th to 4th place in the reseller channel with 133% growth in laptop sales and 150% growth in
desktops.
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In mid-1996, NEC acquired Packard Bell as part of four-way merger/acquisition deal that
also involved units of Groupe Bull and ZDS. Together, they offered a full range (breadth and
depth) of products: Packard Bell/NEC at the low-end of the retail market and the NEC product
lines at the high-end (both retail and corporate) and server markets. In the US, NEC PC
manufactured NEC machines as a subsidiary of Packard Bell. NEC Technologies continued to
operate independently as a supplier of monitors and other peripherals, reporting to NEC Japan. In
spite of a corporate message that split responsibility between Packard Bell and NEC for the
home and commercial markets respectively, the NEC division unveiled a new line of Ready PCs
for the home and SOHO markets soon after the merger. The NEC division also appeared to
distance itself from the Packard Bell name, which carried a reputation for poor quality and worse
customer service.
By 1997, NEC and Packard Bell were rated at the bottom in PC World’s Reliability and
Service rankings (Exhibit 9). Simultaneously, its efforts to cut costs by moving to a direct buildto-order model, dubbed NEC Now, also floundered and NEC/Packard Bell sales declined
precipitously. In 1998, NEC garnered high points for reliability in the PCWorld surveys but was
always dragged down by poor service. PC World’s comment on NEC was, “Best-built PCs;
support still a question mark.” In 1999 NEC fell down further in the PCWorld survey and never
recovered. Instead of gaining access to the retail market, NEC was tarred by Packard Bell’s poor
reputation and eventually drained of $1 billion by the time it dissolved the merged company. By
late 2000, NEC had lost more than $5 billion in market share over a 5-year period during which
the market grew by $15 billion (Exhibit 8).
Toshiba
Toshiba was the sole Japanese company that had succeeded in capturing and holding a
leadership position in a segment of the US PC market during the early 1990’s. By 1995, Toshiba
was #1 with 18% of the commercial portable segment and #1 with 34% of the retail portable
segment. One key to Toshiba’s success was the decision to locate its market research and product
planning in the US with experienced US managers, who were responsible for marketing and
channel strategy.
In 1995, Toshiba started selling Intel-made desktop machines in Japan, an arrangement
that Toshiba hoped to transfer to the US, where Intel also made PCs for Hewlett-Packard. In
September 1996, Toshiba introduced a desktop for the high-end consumer market. The elegantly
styled machine sported an array of features (phone/answering machine, fax, TV, radio, CDROM, high quality speakers and remote control) and reflected Toshiba’s goal of being a leader in
digital convergence. In early 1997, Toshiba introduced its commercial desktop PCs, machines
that were well rated but were considered to be over-featured for its small and medium-sized
target customers. During 1997, Toshiba added new features such as DVD players and bundled
movie-controller software to both its consumer and commercial models. However, from mid1997 to early 1998 Toshiba started experiencing an unusually high number of complaints, and
owners felt they had been ignored when they sought support. In late 1998, the company
announced that it was pulling out of the consumer desktop marketplace, citing the gap between
its full-featured systems and the increasing demand for low-end machines. Toshiba’s $1,800 $2,700 price points were out of line with the market, where 70% of consumer PCs sold for less
than $1500.
In early 1999, a year later than originally announced, Toshiba introduced its PC server
line, the Magnia LiTE10. As competition intensified in the portable area, strains between
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Toshiba and resellers started to surface, some resellers complained that Toshiba was impossible
to work with. Inflexibility in pricing accommodation, lack of onetime large sale discounts, sales
training support and co-op funds were a few of the channel staples missing from Toshiba’s
portfolio. In May 2000, Toshiba announced that it was planning to pursue a direct-sell approach
and a build-to-order production model, focusing initially on resellers, then business buyers and
finally consumers.
In early 2001, Toshiba had long lost its leadership (fallen to #6) in the consumer portable
segment and having fallen to the 3rd spot in the corporate portable segment, it announced a turnaround strategy with service as a focal point.
Hitachi
In spite of the strong corporate relationships that its Hitachi Data System (HDS) division
had in the mainframe and storage markets, Hitachi formed a new US-based subsidiary, Hitachi
PC Corp., in late 1995 to design, develop, market and sell notebook PCs. Hitachi planned to
capitalize on its capabilities in LCDs, hard disks, semiconductors, AV technology and
multimedia to become one of the top three notebook makers in two years. In early 1996, Hitachi
entered the market with high-end, full-featured notebooks for the corporate segment. Persistent
shortages of Toshiba, IBM and Compaq notebooks in early to mid-1996 gave Hitachi a window
of opportunity, and after only 6 weeks on the market, it sold 19,000 units, giving it the 12 th spot
in the notebook market. Though it rose to the 9th spot within a year, Hitachi could not hold on to
its gains when the leaders struck back in 1998, a year in which the portable market shrank and
prices fell by nearly a $1000. Hitachi leveraged the notebook shortage to enhance its relationship
with VARs. It set up a frequent buyer program that delivered co-op funds, training, leads
referrals, promotions and rebates to resellers and pushed them to manage their own inventory
and set aggressive sales goals. Unfortunately, many resellers remained unconvinced that
Hitachi’s VAR program was better than the competition’s.
Hitachi introduced sleek, futuristic high-end desktops with flat-panel LCDs as well as a
family of PC servers. Few sold. As prices declined sharply it was left stranded with unsold highend products. It encountered a similar fate in the consumer desktop market. In August 1998,
Hitachi PC outlined a new “notebook-to-network” strategy to deliver notebooks, desktops,
monitors, and servers aimed at the mainstream corporate customer. In 1999, Hitachi PC merged
with HDS. In Feb. 2000, Hitachi started selling over the web and expanded its target customer
base from large corporations to small businesses and retail consumers. In 2001, Hitachi sold
about $1.2 million worth of servers and was virtually shut out of the desktop and portable
markets.
Hitachi PC Corp. outsourced its retail after-sales support functions. Hitachi showed up
only once in the PC World’s reliability and service rankings, where it was rated poorly.
Furthermore, historically, Hitachi has never been known for service. In the 1980s, Hitachi Data
Systems entered the high-end data storage market by attracting customers who wanted minimal
or no after-sales support, a strategy adopted by Hitachi due to its inability to compete head-on
with IBM’s legendary service force.
Fujitsu
In 1995, Fujitsu was the #2 PC maker in Japan after NEC and ranked #6 worldwide in the
notebook market, but it sold few PCs outside its domestic market. A foray into the US market in
1993 gained Fujitsu little presence, but the company did become a major seller of components to
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US PC makers. In February 1996, it formed a subsidiary, Fujitsu PC Corporation, to engineer its
reentry into the US PC market, with an explicit goal to capture 5% market share within 2 years.
Backed by a $25 million marketing budget, Fujitsu introduced a full line-up of 11 portable
models in April 1996, targeting consumers and small and mid-size businesses through the retail
channel. In November 1996, it launched its corporate line and shifted more distribution through
resellers and VAR’s. Rebate programs, up to 2% of total purchases, attracted smaller resellers,
who convinced customers that Fujitsu quality was equal to IBM’s. Fujitsu exceeded its corporate
sales expectations for the first year, due in part to supply shortages and quality problems with the
leading vendors (Compaq, IBM and Toshiba). By mid-1997, Fujitsu had garnered a 1.4% of the
notebook market.
The 1997, 1998 sharp decline in prices left it stranded with unsold high-end products in
corporate laptop and consumer desktop markets. In January 1998, Fujitsu piloted a channel
assembly program for one PC model with MicroAge, a major national distributor. Also in early
1998, Fujitsu embarked on a major restructuring of its assembly processes. Up to that point,
Fujitsu shipped fully manufactured portables and components by cargo ship from Tokyo to
Milpitas, CA, and Hillsboro, OR, for final assembly and packing, a process that required four
weeks from order to delivery. In March 1998, Fujitsu announced the planned conversion to a
configure-to-order and build-to-order system, managed by FedEx and CTI, a US firm with whom
FedEx had experience in subassembly work. The new production system, collocated in
Memphis, Tennessee next to the FedEx hub, was to employ an innovative, computerized
“parallel line” assembly system intended to facilitate mass customization and enhance efficiency
and quality. The goal was to offer a four-day turn-around from order to product delivery. Touted
as a sophisticated system capable of enhancing mass customization, the build-to-order system
launched too late, appeared to be too slow to satisfy the VARs and it further confused the roles
of distributors and Fujitsu’s own sales force.
In June 1999, Fujitsu terminated its relationships with distributors Tech Data, Pinacor and
Ingram Micro, in order to expand online and direct sales to end-users and to some VAR’s and
retailers. Fujitsu’s unit sales fell 25% in 1999, and in March 2000, the corporation closed down
the Memphis center and relocated the operation to Japan, announcing its intention to focus
primarily on corporate customers and VAR businesses which did not require a 3-day cycle time.
Fujitsu failed to introduce a line of desktop machines for the corporate segment, which had been
tentatively scheduled for 1997, and never signaled its intention to enter the server market. For the
retail segment, its out-sourced after-sales service was rated sub-standard in PCWorld’s surveys.
Sony
A Harris poll released in March 1996, identified Sony as the favorite brand name in the
US, ahead of second-place GE and third-place Ford. IBM came in 11th. Starting in the early
1990’s, Sony played a major role in the US PC industry as an OEM, producing portable
computers for Apple and Dell, and as a supplier of CD-ROM drives, SRAM memory chips,
semiconductors and Trinitron monitors. In spite of the company’s prowess in advertising,
marketing, distribution and brand equity, its first attempt to enter the market in 1992 with its own
PC flopped.
In late 1995 Sony announced a new entry initiative with a line of desktops aimed
squarely at home / SOHO PC buyers and sought to differentiate its PC offerings through
technological innovation, design and customer service excellence. Sony’s focus on the consumer
market allowed it to leverage its brand recognition and relationships it already had with specialty
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national audio-video retailers, such as Circuit City and Best Buy, where it was able to access
shelf space for its PCs. Sony also sold products on its Web site but maintained retail store prices
to avoid channel conflict. The principal competitors for the retail shelf space were Packard Bell,
Compaq and HP. Packard Bell, the mass-merchandising king was besieged by quality problems,
slumping sales and dismal after-sales service. Compaq was struggling to maintain its supremacy
and was fiercely battling Dell in the corporate arena. Having entered the home segment only in
1995, HP was still a rookie in this market segment. Further, Compaq and HP’s after-sales service
was at best inconsistent or poor in the period 1994 to 1997.
With its strong position in consumer electronics, Sony planned to lead the digital
convergence revolution, integrating audio-visual, entertainment and telecommunications
functionality into PCs that would be as simple to use as TVs. Its vision was a 4-pronged Internet
strategy—PC, PlayStation, mobile phones and digital TV. The strategy, dubbed “Sony Dream
World,” was to integrate its existing business units—Sony Pictures, Sony Music, and Sony
Electronics—and make its vast array of content available on a variety of networked devices.
Sony’s fully featured machines were priced at the high end, and by 1998 it was selling
close to a million units per year. While Sony’s desktops got a lukewarm reception, it’s VAIO
(Video Audio Integrated Operations) 505 notebooks, gained attention for its slick design and
ultra-small size, which had few rivals and was carving out a viable niche in the portable segment.
Dr. Teri Aoki, President of Sony Electronics, articulated Sony’s opportunity: “Most people are
satisfied with PC performance, now the competition is over ease of use and design.” So, Sony
built and staffed a call center that offered superior support and the shortest hold-times. It started
out as a service leader, along with Gateway, in 1998 and captured PC World’s Rookie of the
Year Service Award. In spite of average prices averaging $600 more than its main rivals, Sony
briefly captured the No. 2 position in the retail notebook market, by March 2001, behind
Compaq and ahead of surging Dell. Sony was also aggressively pushing into the PDA market
and held the 3rd position by mid-2001 with a 10% market share. Sony’s popularity in the retail
segment spilled over into the corporate segment where it ranked #5 in portables (ahead of
Toshiba) and had a modest showing in desktops
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Exhibit 1: Japanese Penetration into the US
Products
Total Penetration
Flat Panel Displays (2001)
86%
Tuners, Amps, Receivers (2001)
80%
Home Theater Audio Systems (2001)
72%
Televisions (2001)
70%
Fax Machines (1999)
66%
CD Players (2001)
60%
Copiers (1999)
54%
Car Audio (2001)
51%
Shelf Audio Systems (2001)
50%
VCRs (2001)
42%
Microwaves (1999)
42%
Automobiles (2000)
25%
Personal Computers
5%
Firms
Market Share
Sony
34%
Panasonic
23%
Fujitsu
15%
Pioneer
14%
Sony
28%
Yamaha
17%
Technics
11%
Onkyo, Pioneer, Denon, JVC, Aiwa
24%
Sony
42%
Panasonic
8%
Yamaha
8%
Pioneer, Aiwa, JVC
14%
Sony
19%
Mitsubishi
19%
Hitachi
18%
Toshiba
14%
Sharp
23%
Brother
23%
Panasonic
20%
Sony
39%
Technics
11%
Yamaha, JVC
10%
Canon
29%
Sharp
9%
Mita, Ricoh, Minolta, Konica
16%
Pioneer
20%
Sony
19%
JVC
12%
Aiwa
17%
Panasonic
11%
Sony, Sharp, JVC
22%
Panasonic
14%
Sony
11%
Sharp, Sanyo, Toshiba, JVC
17%
Sharp
31%
Matsushita
11%
Toyota
11%
Honda
10%
Nissan
4%
Sony
2.8%
Toshiba
2.5%
Source: NPDTechworld, TWICE, 17 (01): 26, Jan. 8, 2002; Dataquest, for Fax Machines and Copiers; Appliance,
57 (9): 85, Sept. 2000, for Microwaves; US Business Reporter for Automobiles; and IDC for PCs
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Exhibit 2: Early PCs – 1975-1981
Exhibit 3: IBM PC – 1981
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Exhibit 4: US PC Value Chain
Exhibit 5: US PC Market Revenues 1995 – 2001
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Exhibit 6: US PC Revenues 1995 – 2001 for the top 5 US and Japanese firms
Vendor
1995
1996
1997
1998
1999
2000
$2,936.22
$4,428.06
$7,111.68 $11,173.22 $16,057.67 $18,918.21
$7,562.93
$9,322.11 $12,820.47 $12,600.19 $13,338.84 $13,594.45
Compaq
$2,517.35
$3,384.35
$4,513.09
$5,987.12
$6,215.99
$7,507.93
HP
$4,616.36
$5,573.83
$6,624.81
$6,805.84
$7,105.13
$5,960.00
IBM
$3,173.26
$4,277.48
$5,083.61
$6,022.54
$6,938.74
$6,289.23
Gateway
$0.00
$212.00
$373.37
$470.68
$814.04
$1,583.36
Sony
$2,299.91
$4,099.98
$3,913.18
$2,938.09
$3,286.41
$2,627.26
Toshiba
$6,085.70
$5,872.48
$4,431.94
$4,033.44
$2,334.98
$826.86
NEC
$0.00
$175.02
$540.91
$553.66
$346.18
$228.30
Fujitsu
$0.00
$364.11
$608.51
$341.18
$86.44
$2.18
Hitachi
$24,644.11 $27,000.59 $24,336.47 $24,046.54 $23,865.76 $22,569.71
Others
$53,835.84 $64,710.01 $70,358.04 $74,976.69 $80,390.18 $80,107.49
Total Market
Note: Revenues include all products offered—desktops, portables and servers. Source: IDC
Dell
Exhibit 7: US PC Market Share 1996 – 2001 of the Sample Firms
14
2001
$13,247.07
$7,280.31
$4,704.25
$3,892.42
$3,000.74
$1,346.79
$1,200.84
$173.23
$94.71
$1.41
$12,644.19
$47,585.96
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Exhibit 8: Percentage Market Share Grabbed in the growth years 1996 to 2000
Vendor
Dell
Compaq
HP
Gateway
Sony
IBM
Fujitsu
Hitachi
Toshiba
NEC
Total Market
Sample Firms
Home-DT
$1,274.82
$1,921.67
$3,163.63
$1,858.67
($42.60)
($1,079.34)
$0.00
$0.00
($281.21)
($3,308.49)
$1,963.62
$3,507.15
Home-LT
$438.91
$741.98
$246.90
$149.92
$492.69
$54.96
$34.24
$0.00
($268.01)
($14.11)
$1,813.94
$1,877.48
Commercial-DT
$7,532.24
($220.98)
$42.53
($525.99)
$102.24
($206.32)
$0.00
$0.00
$73.53
($1,068.95)
$3,031.13
$5,728.30
Commercial-LT
$3,355.98
($173.08)
$476.81
$482.43
$819.03
$970.38
$19.04
($364.11)
($1,032.00)
($603.99)
$2,964.27
$3,950.49
Servers
$1,888.20
$2,002.75
$193.71
$46.72
$0.00
$646.49
$0.00
$2.18
$34.97
($50.08)
$5,624.61
$4,764.94
MarketGrabbed
$
14,490.15
$
4,272.34
$
4,123.58
$
2,011.75
$
1,371.36
$
386.17
$
53.28
$
(361.93)
$
(1,472.72)
$
(5,045.62)
$
15,397.57
$
19,828.36
%Grabbed
94.1%
27.7%
26.8%
13.1%
8.9%
2.5%
0.3%
-2.4%
-9.6%
-32.8%
100.0%
128.8%
DT – Desktop; LT – Laptop (Portable)
The table gives you the values for each vendor the difference between its revenues in 2000 and 1996
The total market row gives you the growth in the market for each segment between 1996 and 2000
i.e. the total market grew by approximately $15 billion in the 5 year period 1996 to 2000
The %Grabbed column indicates the percentage of the total market grabbed by each firm in those 5 years
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Exhibit 9: PCWorld PC Reliability and Service Data
The star rating system corresponded to 5 (Outstanding), 4 (Good), 3 (Fair), 2 (Poor) and 1 (Unacceptable). A firm was not reported if they did not
receive a minimum number of responses. (Note: Blank spaces indicate insufficient responses). Source: PCWorld
Compaq
Dell
Gateway
HP
IBM
Packard Bell
NEC
Jun-94
5
3
3
5
5
4
4
Nov-94
5
3
2
5
5
3
4
Compaq
Dell
Gateway
HP
IBM
Packard Bell
NEC
Nov-98
4
4
4
4
3
3
5
Compaq
Dell
Gateway
HP
IBM
Packard Bell
NEC
Sony
Nov-98
3
5
3
3
4
3
3
4
Compaq
Dell
Gateway
HP
IBM
NEC
Fujitsu
Hitachi
Sony
Toshiba
Reliability
Jun-95
Dec-96
5
5
5
5
3
3
5
5
4
3
3
1
4
3
Jun-97
4
5
3
5
4
1
1
Work PCs -- Reliability
Jan-00
Jan-01
Nov-01
4
4
4
5
5
5
4
4
4
4
4
4
4
4
4
Home PCs -- Reliability
Jan-00
Jan-01
Nov-01
3
2
3
5
5
5
3
3
3
3
3
3
4
4
4
3
4
4
4
Notebooks -- Reliability
Nov-98
Jan-00
Jan-01
Nov-01
3
3
3
3
4
4
4
4
4
4
3
3
3
4
4
4
4
4
4
3
3
4
3
4
3
4
4
3
3
4
Jun-94
4
5
4
3
4
1
3
Nov-98
3
4
3
4
4
2
Nov-98
3
3
4
3
3
1
3
4
Nov-98
3
4
4
Nov-94
5
5
4
3
4
1
3
Service
Jun-95
5
5
3
5
4
1
5
Dec-96
3
5
3
4
3
1
2
Work PCs -- Service
Jan-00
Jan-01
3
3
4
4
3
3
4
3
4
4
Nov-01
2
3
3
3
3
Home PCs -- Service
Jan-00
Jan-01
3
3
5
5
4
3
3
3
3
3
Nov-01
2
4
3
2
3
2
3
3
Notebooks -- Service
Jan-00
Jan-01
3
3
4
4
4
3
2
3
2
3
4
3
2
4
4
3
3
Jun-97
3
5
5
4
4
1
1
3
Nov-01
2
3
3
3
3
2
3
PCWorld has been reporting Reliability and Service data from 1994. However, in 1998 PCWorld changed the variables and mode of survey
significantly. From 1994 to 1997 PCWorld surveyed PC users on 9 reliability and service variables (problem rate, system dead-on-arrival,
component dead-on-arrival, time to reach support staff, time taken to resolve problems and number of unresolved problems, percentage
buying again based on service and support, percentage of respondents reporting lower-than-average satisfaction with service and support,
and percentage of respondents reporting higher-than-average satisfaction). A weighted composite star rating system was created—one for
overall reliability and one for service—based on the relative rankings generated by raw scores in each of the above variables. In 1998,
PCWorld changed some of the variables, added a few more and reported the data from three user categories—Work PCs, Home PCs and
Portables. The new reliability measures included: percent of PCs with problems, problems per year, problems on arrival, dead on arrival,
component failure and satisfaction with reliability. The new service measures included: short hold time, quick resolution, no resolution,
knowledgeable tech support, sincere effort by tech support and satisfaction with service.
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Exhibit 10: American Customer Satisfaction Index (ACSI) for the PC Industry
81
American Customer Satisfaction Index
79
PC Industry Avg.
77
Dell Computer
75
Gateway
73
HP
71
69
IBM
67
Compaq
65
1994
1995
1996
1997
1998
1999
2000
2001
The American Customer Satisfaction Index (ASCI) is complied by the University of Michigan Business School, American Society for Quality
(ASQ) and the consulting firm CFI Group. ACSI measures customer expectations, perceived quality and perceived value. This is combined into
an aggregate customer satisfaction index. Perceived quality is measured through three questions: overall quality, reliability, and the extent to
which a product or service meets the customer’s needs. Perceived value is measured through two questions: overall price given quality and
overall quality given price. Source: http://www.theacsi.org/
Exhibit 11: ACSI for the PC Industry vs. Sales (units)
17