Sony Ericsson Strategy: Proactive vs Reactive Approach

The mobile phone and telecommunications industry is one of the fastest-changing industries in the world. Within short periods of time, new technologies and designs appear on the market, and it is often a challenge to keep pace with them. Furthermore, the latest changes have shown a certain shift from the primary objective of such a product — communicating at all times — transforming it into a product that carries visual and sonic devices as well.

According to David Mery, the mobile phone market has five main characteristics, of which two are of particular interest here. Mobile phones target a "mass-market of consumer, enterprise and professional users," and "manufacturers need to differentiate their products in order to innovate and compete in a fast-evolving market." These two characteristics will have a certain impact on the final strategic decision examined in this paper.

In 2005, forecasts were more than optimistic, both in terms of supply and demand. According to "Humming Along: 2005 Mobile Phone Market Forecast," manufacturers were set to produce nearly 720 million units in 2005, representing an increase of 5.8% since 2004. Sales were also estimated at around $112 billion in revenue generation.

Looking at the main competitors in the mobile phone market, the first place in terms of market share was occupied by Nokia, with 30.4% of the market, followed by Motorola with 15.3% and Samsung with 12.7%. In this list, Sony Ericsson occupied sixth place with 6.2%. The mobile phone market thus had an uncontested leader in Nokia and two challengers in Motorola and Samsung, with Sony Ericsson playing perhaps the surprise card.

As the industry became more and more challenging, the importance of lower costs became fundamental, and Nokia began to lose from its once 37% market share due to the entrance of significant competitors from South-East Asia, most notably Samsung and, on a smaller scale, LG. The problem, as identified by Nokia's communications director, was that the company's portfolio did not cover all areas of the market, which meant that there were large niches to be filled by Asian producers. A proper extension of the product portfolio was the best answer for the Finnish company. Globalization and trade liberalization clearly play a significant role in the mobile phone industry as well. Companies that are able to relocate their production to areas of the globe where the workforce and overall production costs are much lower tend to sell at more competitive prices. This trend is most likely to continue on an ascending path into the future.

The social and cultural external factors play a fundamental role in the evolution of demand and future sales. Increasingly, different cultural tendencies are shaping the market. One of the most relevant is the demand from consumers for additional functions on the mobile phone beyond basic communication — including video cameras, audio devices, and similar features. From this point of view, there are no signs that this trend will come to an end in the near future.

Sony Ericsson has defined its place in the constantly changing telecommunications and mobile phone market according to its motto. The people at Sony Ericsson are working to "establish Sony Ericsson as the most attractive and innovative global brand in the mobile handset industry." The two pillars of Sony Ericsson's strategy at this time can be evaluated from this mission statement: brand attractiveness and constant innovation — that is, the capacity to bring new products and services to market before other companies do.

One of the most important pillars in the attractiveness component is phone design. A phone design operates both on the rational level — for example, in terms of utility, when referring to phone size or battery lifespan — and on the emotional level. Sony Ericsson works on design at its Creative Design Centre, with studios in Lund (Sweden), London, the USA, Asia, and Japan. Design has two important components worth considering: industrial design and graphic design.

Industrial designers appeal to the rational level, as they develop the shape and size of the product. At the same time, a fully operational phone that appeals to all the senses requires coordination with graphic designers, who work on the emotional level by implementing icons, graphical components, and similar elements.

In terms of financial results, Sony Ericsson performed successfully during the second quarter of 2005. Sales grew from 1,289 million euros in the first quarter to 1,614 million euros in the second quarter, representing an increase in sales of 25.2%. According to the company's own evaluation, the increase in sales volume was mainly due to "new products started shipping." This meant that the company's overall strategy gradually evolved to expand the product portfolio and, especially, the range of customers reached by the products the company commercializes, achieving a wider range of price segments.

Following the analysis of the external environment and the main future trends, as well as this brief internal analysis of the company, several courses of action for Sony Ericsson can be identified. The company has a choice between a reactive and a proactive strategic approach. Each implies different considerations in terms of resources, advantages, disadvantages, and future projections.

A reactive strategy basically implies that the company "changes in reaction to changes by a competitor." In Sony Ericsson's case, this would mean that the research and development department would be neglected in favor of more efficient production flows, with possible economies of scale and cost reductions. Under such a choice, all strategic and tactical movements that Sony Ericsson might make would come only after innovatory moves from competitors, as a reaction to them.

One of the most important advantages of a reactive strategy is that many components of the company can be reduced in size and cost. The research and development department is a prime example: because the company has chosen a reactive strategy and will not base its evolution on any innovatory moves, products, or services, the R&D department loses its most important function and becomes less critical.

Deriving from this is the cost advantage. In general, leading a reactive strategy is assumed to be much less expensive than a proactive one. It seems logical that adapting decisions to already-known market variables costs far less than creating those variables. Furthermore, revenues are not necessarily hurt, because the company can specialize its production on specific consumer segments that will always be interested in less expensive products — made available through smaller production costs — and that will remain a step behind the leading market trends.

In terms of disadvantages, the most obvious concerns the company's image. A company pursuing a reactive strategy will always be considered one of the less important players on the market, and it is questionable whether a company like Sony Ericsson can afford such a perception. Because it has always been associated with a leading, innovative strategy, switching to a reactive strategy may have a negative impact on the company's loyal consumers, who have always chosen the brand for its innovative characteristics.

Second, as noted above, the mobile phone market and industry is an extremely dynamic one. Even in poorer countries, the mobile phone has become a necessity, and it is often the case that the mobile phone per capita indicator exceeds the fixed phone per capita figure. In an industry so dynamic and so open to changes and new developments, adopting a reactive strategy may call into question the future of the company itself.