Sonybmg Case Study Essay Example

to distribute the constantly changing music.

Getting into the physical industry (selling CDs) is fairly easy, but succeeding on a global scale requires an immense amount of luck, ability, and financial backing. The market structure, like most established and large industries, is an oligopoly. There are four major music producing companies that are producing at least eighty percent of the market’s music.The industry is hard to get into because of the high capital needed to produce national and even global awareness of their products.

While it is possible for a small company to produce several records for their niche markets and compete with the Big Four locally, it is quite unlikely that other companies are able to compete on a global, national, or even state-wide scale against the Big Four. Another resource that is taken up quickly by the main four companies is the human resource.The best singers and musicians are likely to be given much better contracts and promised much better exposure to their customer base by going with the Big Four. This is also a problem for gaining entrance into the industry. The four main companies in the industry are as follows: Universal Music Group owning 31. 61% of the overall music industry market and 34.

37% of the albums market, Sony BMG owning 27. 44% of the overall music industry market and 28. 13% of the albums market, Warner Music Group owning 18. 14% of the overall market and 16. 5% of the albums market, and finally Thorn/EMI owning 10. 2% of the overall market and 9.

23% of the albums market (Cashmere, 2007). The largest trend in all industries around the

world is the use of technology and the music industry is no different. New technologies are causing an uproar by recording companies and applause by consumers. Programs such as the infamous Napster, Kazaa, and the now prominent iTunes are allowing easier distribution of single songs and whole albums at prices much less than originally believed possible when compared to albums on CDs.These new programs (iTunes excluded) originally started out as free-ware: a program that is downloaded for free and doesn’t require a fee for downloading songs.

In 2006, through the use of programs like those and other freeware it is estimated that around five billion songs were illegally downloaded (IBISWorld, 2008) causing around sixteen billion dollars worth of damage to the economy each year (RIAA, 2008) . After much litigation by recording companies, this form of illegal downloading has mostly been stopped.People are now slowly beginning to pay for their music on programs such as iTunes, but the main damage has been done. Consumers have become accustomed to the easy accessibility and cheap pricing for their music. New programs such as BitTorrents have become the new “free” way for consumers to gather their favorite music. BitTorrent programs are starting to run rampant and now the RIAA, who represent the recording industry of America, is legally battling the websites offering the programs (RIAA, 2008).

One website in question is able to evade being taken down due to Swedish laws and is even going so far as to post legal threats against them and openly mock them on their website (The Pirate Bay, 2008). Common copyright laws that are broken in the US are: Burning a CD for

your friend, uploading your music you bought on the internet, downloading music from illegal share programs. The RIAA has been using the full extent of the law to enforce these rules and have been slapping five year, $250,000 penalty fees on those they catch (RIAA, 2007).The main problem for the RIAA now is that they are unable to stop the servers in Sweden. BitTorrenting is legal in Sweden and they cannot take down the servers in the country due to a loophole in the systems (the BitTorrent is providing the location of the file, not actually providing the file so it is legal).

Looking at the generations that are currently buying/downloading music and the generations that are to come, it is easy to say that the record companies should be concentrating on technology.Both Generation Y (Ages 10-26) and Z (Ages 1-10) are the two main demographics that record companies are looking to attract. Generation Y, the current generation, is buying from record companies while generation Z is currently controlling their parent’s spending habit. Both these generations are technologically savvy.

Several facts found in a large survey include: 97% own computers, 94% own a cell phone, 97% have downloaded music on a peer-to-peer network (48% regularly), and 44% read blogs (Juno and Mastrodiscasa, 2007).They also represent the largest consumer base currently at 70 million people. Both, especially Generation Z, look toward the internet first when they have questions about anything and sometimes they only look toward the internet (Schmidt and Hawkins, 2008). The internet has become their guide, their knowledge, and their power.

These generations have both helped the music industry to expand greatly on the

internet, whether the record companies wish for it or not.Many recording companies are beginning to work with iTunes, Rhapsody, and other programs that require their customers to pay a fee to download songs, albeit a much cheaper fee then buying albums on CDs. They are working out promotional contracts with companies such as Pepsi that allow customers to download songs for free when they buy Pepsi products. Also, recording companies are beginning to take advantage of other technological avenues such as selling cell phone ringtones (Reuters, 2007).

Ringtones have been growing year after year.In 2007 the US sold 220 million ringtones worth $550+ million (ITFacts, 2008) and European ringtones totaled $1. 1 billion (ITFacts, 2007)! Also, new technologies have been coming out that allows converters to changing the formats of music to be able to be played on cell phones. This is one feature that Sony should definitely take advantage of.

Record companies that wish to survive in the future must recognize that the internet and file-sharing programs are going to be the CD killer in the same way that the CD was the cassette killer and the cassette was the A-Track killer.By using new technology in new ways, instead of letting the new technology and illegal activities take advantage of it, the record companies will be able to stay ahead in the industry. Strategic Evaluation After analysis the team believes Sony BMG’s mission statement is to shape the future of recorded music by focusing on the central business of identifying, developing and marketing the best artists in every genre. (Sony BMG, 2008) Sony BMG original mission statement was quite good, but broad. The team

believes the new mission statement is brief but improved, because they are focusing on customer outreach and satisfaction.

The goals of Sony BMG are simply to offer the widest variety of music in as many different formats and locations as possible, commitment to security and customer ease, and a creative environment and continual growth for employees. After further researching these goals the team believes Sony BMG has set it sights at the right height. Sony BMG is involved in seven genres ranging from R&B to Christian, they are partnered with such corporations as Google, Amazon, and MySpace to spread their music globally thus hopefully increasing market share.Sony BMG is a growing company hoping to challenge its employees to be the best in the music industry, and think outside of the box to create new innovative ideas moving them from the second largest music company to the first. These goals are attainable and can be reached.

Hopefully with these goals Sony BMG will be able to develop new strategies to stay in these digital days, and procure greater customer loyalty. They may not always be first in the area of innovation but they are fast to join in on new trends and stay afloat with the digital age.Head of Bertelsmann Music Group, Thomas Rabe, believes Sony BMG’s core competency is discovering and developing artists, and bringing their music to audiences worldwide through a variety of products and distribution channels (Rabe, 2008). This could be considered broad for a company who has many competitors; with only 6 North American record labels, compared to the 21 North American labels which belong to Universal Music Group. After analysis, the team

feels Sony BMG’s core competency is there online music community.

MyPlay. om is a prime example of this; it is revamped and re-branding of Sony's Musicbox site which presents Sony BMG's artists, allowing free access to artist’s videos and music worldwide. Users can create lists of their favorite artists as well as review their music. None of their competitors have used such resources, as to create a place where music lovers of all ages can come together to talk about their passion, music. Sony BMG holds a few distinctive competencies which can be seen through discovering artist, developing artists, customer loyalty to developed artist, and customer responsiveness.Unfortunately, Sony BMG may have an advantage with MyPlay but they are still slow to innovate in other areas.

Allowing the team to believe they have a follow the leader mentality. With decreasing CD sales Sony BMG followed in the footsteps of other music companies, trying to stay ahead of the digital age. Earlier this year they were the last record label to sell downloads without copy restriction (Lieberman, 2008). Also within the past year, Sony BMG has been trying to ensure customer responsiveness by signing into a joint venture with Warner Music Group, Universal Music Group and MySpace to allow music to be played on MySpace Music.This allows for another solution in the digital age which will let people listen to songs and watch videos for free on the Web, in addition to selling merchandise, concert tickets, and music through downloads (Holohan, 2008). Sony BMG takes pride in providing limitless entertainment choices, developing new artists, and having a variety of genres for their customers.

After analysis, the team

saw Sony BMG having a clear competitive advantage through differentiation and easy access. They have a very strong marketing strategy in which they aim at pleasing people worldwide.This also fits with their strategy of diversifying there products in terms of genres. Sony BMG has a corporate strategy in which they listen to their employees in terms of innovation and listen to what the customers have to say in terms of keeping up with the times. Sony BMG does not contradict themselves in strategies and after analysis the team believes the mission statement, goals, and objectives fit well together, as well as saw Sony BMG leans more on the distinctive competencies they have retained over the years other than there core competencies.

Management AnalysisSince the merger of Sony and Bertelsmann, the organization has struggled with the infighting between executives from both sides (Leeds, 2006). Executives have clashed on issues such as marketing and promotion strategies along with executive salaries. Since the venture, top management has been able to integrate many of Sony and BMG’s international business units, but the two companies’ American labels have continued to run as separate companies (Leeds, 2006). Sony BMG’s management structure is setup with a board of six directors, divided evenly between the two companies.With this unordinary setup, executives from both sides are forced to at least try to live in harmony.

The two companies have developed distinct cultures for their music units, so uniting the two has been a difficult task, one that they continue to struggle with (Leeds, 2005). Executives from both sides have remained very protective of their operations. As a result of all the internal conflict, Sony

lost two of its most powerful executives, Michele Anthony (President) and Don Ienner (Chairman of the unit). The resignations of the two came as the company’s new CEO Rolf-Schmidt Holtz was revamping the company (Leeds, 2006).In the beginning of the venture, Andrew Lack (Sony) was the organization’s CEO and Rolf Schmidt-Holtz (Bertelsmann) was chairman of the board.

Conflict appeared in 2006 when Bertelsmann did not wish to renew Lack’s contract due to a series of financial setbacks, including a sharp erosion in market share in the U. S. (Leeds, 2005). Executives at the company, who spoke anonymously, reported that Lack had also alienated some of the people reporting to him through disrespect and poor communication about corporate strategy.Howard Stringer, (Sony’s top U.

S. executive) was a strong supporter of Lack’s position and believed that he would bring a set of “fresh eyes” to the company and be able to tackle the company’s structural problems (Leeds, 2005). Clearly there are conflicting views here between the two sides. The last straw for Bertelsmann occurred when the venture’s chief operating officer and Bertelsmann’s senior executive, announced he would be leaving at the end of the year, upsetting the balance of power on the board of directors (Pfanner, 2005).In an attempt to settle the issue of Smellie’s leave as well as Bertelsmann’s disappointment in Lack’s position, Sony management created a management realignment structure. In this realignment, Rolf Schmidt-Holtz (former Chairman of Board) was named Chief Executive Officer of Sony BMG Music Entertainment, and Andrew Lack (former CEO) became Chairman of the Board (Guetersloh, 2006).

In Schmidt-Holtz’s new position he possesses overall management responsibility for the company and is based

in New York.Lack, is now leading the company’s public policy and industry initiatives, and handles operating responsibility and oversight for the theatrical film business of Sony BMG and is also based in New York (Guetersloh, 2006). This was a good strategy for Sony BMG management in that it enabled an executive from Bertelsmann’s side to possess more power, as well as eliminated Lack from the controversial position of CEO. This shows that Sony is making an effort to try to balance the power between both sides and is trying to be as fair as possible in an attempt to make executives from Bertelsmann happy.Since this realignment structure, there have not been reports of discontent from either sides of management with the executive’s new positions.

So, one would assume that this management realignment approach resolved the issue concerning power. As stated above, with Sony being American and Bertelsmann German, there is a significant difference within corporate cultures. When it comes to corporate culture, both Sony and BMG’s styles, echoes that of their corporate parents.Sony is driven much by a vision in which its various content divisions, including film and music, feeding its hardware operation that makes home electronics and vice versa, in order to propel the conglomerate (Leeds, 2004). Bertelsmann, on the other hand, tends to run its divisions, including publishing, television stations, music and direct marketing, as separate businesses (Leeds, 2004). Sony Music has maintained a centralized structure, with one unit to handle.

Sony’s operation in the U. S. s overseen by a single executive who takes a direct role in planning releases across its major labels, Columbia and Epic. BMG, however, is less centralized.

It is similar to Sony in that its domestic division also reports to one executive. It differs when this executive then lets the other units run with some sort of autonomy (Leeds, 2006).

Because BMG acts as a subsidiary of Sony Corporation of America (Sony BMG Music, 2008) their management is going to possess the majority of the parent company’s traits. This is where the two sides of management are going to clash.Nobody likes change when they are familiar with something. One would assume that this is much how executives of BMG feel. Executives of BMG need to realize that when the merger occurred, the essence of the company changed. They cannot dwell on the way they did things in the past, rather, they need to focus on being open minded and willing to do whatever it takes in order to better the health of their company.

Sony needs to take into consideration the changes BMG executives are dealing with and also try to incorporate as much as they can from each culture.Both sides need to realize that they are not going to be able to run their company exactly the way they were used to running it in the past. They need to be sensitive to the other culture and work on compromising in some aspects in order to create better synergy within the team. Sony BMG maintains a divisional structure. It is broken down into three areas: product, market, and geographic.

Sony BMG operates internationally and tries to market the products appropriately to each geographic location. The product of Sony BMG is much the same for each geographic location being the artists and

music.After analysis, our team feels that this is in fact the best structure for the company because it allows the attention of managers and employees to be focused on results for the product, customer, and geographical area. Because each unit focuses on its own environment it is flexible and responsive to change, and this can definitely be seen as an advantage.

With the constantly changing market it is vital to have a flexible structure. Each of the three units are an important part of the structure and by allowing them to be focused on separately it can improve the performance of each area.When it comes to management and employee relations, Sony management values communication between the two. This is essential in conveying management policies to employees and encouraging them to voice their opinion (Corporate Responsibility, 2008). In 2006, Sony’s CEO and President visited sites throughout Japan and the world holding meetings and providing chances for them to speak directly with employees (Corporate Responsibility, 2008). After analysis, our team feels that this can be seen as a great way to motivate employees.

When Sony personnel see that their opinions matter to management it can give them a sense of worth and in turn, can motivate them to work harder and improve their on the job performance. It is good that even though Sony’s management structure is centralized, they still take the time to collect feedback from employees. This can benefit the management team in that it can provide insight that manager’s may not have been able to see from their point in the corporation. Sony seeks to obtain adequately trained employees.They do so by offering various training

programs for employees of all levels, from new graduates to senior executives, suitable to each region and business (Corporate Social Responsibility, 2008). This allows the employees to get the proper training they need and, in turn, will improve their on the job performance and aid in the operation of the company running more smoothly.

Sony BMG management is nowhere near perfect, but they can be credited with taking necessary steps in order to fix SOME of the problems within the organization (i. e. management realignment structure).The decision of both sides to merge with each other was a great strategy. Both sides of executives saw the environment changing, with the increase in piracy and saw the opportunity that this merger could provide and they took advantage of this. Schmidt-Holtz said, “If (Sony and BMG) stood alone, we would have to cut artist rosters and even closing activities in smaller countries; This merger is the best guarantee that we can maintain a broad roster of artists in the current environment” (Sony, BMG Agree, 2003).

Marketing Analysis The product that Sony BMG offers is recorded music.This product can be purchased by consumers in two forms which are the physical, hard copy on a CD or the digital version that can be downloaded to a computer, portable music player like an iPod, or even a mobile phone. The product life cycles of these two types are currently in completely different phases. CDs are following the trends of its predecessors, vinyl records and cassettes, by entering the decline stage, with the sales of CDs dropping from 942. 5 million in 2000 to 511. 1 million in 2007.

At the same

time digital downloading has moved past the introduction period and well into growth with 809. million singles downloaded in 2007 (RIAA, 2007). Sony BMG, which has always focused on CD sales, must now manage its strategy to account for future trends and cycles and even deal with the looming future of technical obsolescence for the compact disc. Also, these two forms exist as substitute goods for each other because consumers will decide to purchase their music in one of these ways. The most common complimentary goods would be the devices used to play music such as CD players, mp3 players, and cell phones.

Sony needs to rearrange its priorities in terms of the product mix.The company’s strategies should be adjusted to account for the growth of digital and the decline of CDs. They should allow for the remaining loyal CD market, but focus on the future of the downloading market to come. Price has been a hot topic in the recording industry. Sony BMG likes to employ a price skimming strategy, by charging higher prices for new releases and highly demanded artists for a short period of time and then slowly decreasing the price as demand fades. Keeping premium prices for CDs has been almost impossible for the declining product, however, with sales decreasing exponentially by the year.

The company has also experienced a barrier in the digital realm, with Apple’s iTunes store, accounting for about 70% of the paid digital-music download business, strictly selling all tracks for $0. 99 without compromise (Record Labels Need, 2007). In order to find more price flexibility, Sony has turned to Amazon. com where they can charge variable prices even

for different songs on the same album (Lowry and Burrows, 2008. ) The big fear is that lowering prices too much will devalue the music.The change occurring in consumers seems to point to their preferring to pick and choose single tracks rather than buying an entire album.

This was shown in the U. S. in 2005 when 353 million digital tracks were purchased during the year, but consumers only bought 16 million digital albums (Record Labels Need, 2007. ) This new trend is forcing Sony to adapt its strategy to taking a smaller portion of lower prices in order to get more from increased volume in the end. It seems that the company will always have to compromise in order to use the services of other digital music stores.

Sony BMG’s distribution strategy directly lines up with its previously mentioned mission and goals of delivering a wide variety of music in as many different formats and locations as possible. The company tries to take its wide variety of music and put it in the ears of consumers in any way that it can. Sony BMG’s strategy is to be more of a music entertainment company than just an ordinary record company. Although it is a big part of it, this strategy moves beyond the traditional channels of retail stores for CDs and works through partnerships and ventures with other companies.In the emerging mobile phone market, Sony is the only record company to have deals with all 5 mobile phone companies (Talbot, 2005).

Recent activities show Sony distributing its music on the internet through collaborations with Myspace, which has 120 million users (Grover, 2008), as well as

others such as Google, Youtube, Yahoo Video-on-Demand, Imeem, and Amazon. Sony has also worked through various other channels for instance reality TV shows like X Factor, Guitar Hero, and Starwood Hotels and Resorts to sell and distribute its artists’ music (sonybmg. om). Although it is great that the company utilizes many different sources, it does not seem like the strategy is focused enough to reach the full potential these outlets have to offer. The promotion strategy of Sony BMG also follows the mission of variety in format and locations.

The company uses more of a pull strategy to create demand with added direct exposure among the consumers. In order to do this, the Strategic Marketing Group of Sony has staged many promotional events and joined with a number other companies for cooperative advertising campaigns.One example was the release of Michael Jackson’s Thriller 25 year anniversary. They arranged to have dancers perform the Thriller zombie dance in public areas all over the world, and these performances were posted on Youtube.

The videos resulted in 1. 5 million downloads on the site where a promotion for the album was viewed over 600,000 times leading to the success of the release (Hill, 2008). Companies that have helped market Sony BMG artists include Hershey, Proctor and Gamble, Victoria Secret, Exxon Mobile, Myspace, Starwood Hotels, and many more (Sony BMG, 2008).One of the most recent marketing initiatives taken by Sony BMG is that partnership with Mozes, an interactive mobile service. Sony utilizes artist interaction with fans for direct marketing through a multitude of ways from texts, e-mails, blogs, voice messages, performances and personal meetings (Sony BMG, 2008). While Sony’s promotional

strategy is also not very cohesive, recent actions have shown some great advancement.

This is one of the areas where it seems Sony is staying current and using the technology to meet with modern consumers on their ground. Production AnalysisThe purpose of a music company like Sony BMG is to sign artists in return for royalties on units sold, which generally run between 12 to 16 percent of net revenues (Music Industry). The production of music is complex and pricey for a music company. The company bears the cost of recording and producing the music, pressing the CDs, marketing, and distribution. Production costs for a particular album are around $125,000, but can easily reach $1 million (Music Industry).

The importance stressed on producing music videos only increases the production costs of Sony BMG and similar music companies.Video production commonly ranges from $100,000 to $250,000. When adding in the marketing expenses that range anywhere from $100,000 to $500,000, a single album can cost a music company $350,000 to upwards of $2 million (Music Industry). The aspects of production costs are unique for each artist.

Two million dollars may not be a major risk for a well established artist. However, Sony BMG will always have the danger of taking a loss on a new artist. The costs of production are similar for all the major music producers. Therefore, the costs are not of any real concern. Sony BMG is made up of 22 individual music producing labels (Sony BMG).Arista, Columbia, Epic, Jive, and RCA are the five most notable ones.

Since Sony BMG holds the second highest market share in the music industry, there are many major

artists represented by them. Currently five Sony BMG artists are in the top ten in both the Billboard 200 and the Billboard Top 100 (Billboard. com, 2008). The Billboard 200 ranks top albums while the Billboards Top 100 concerns single titles.

Jennifer Hudson, T. I. , Pink, T-Pain, and Christina Aguilera are some of those top artists signed by Sony BMG. The success of these artists is a great thing for the company.

Not only are they profiting financially through these individuals, Sony BMG is also being recognized more and more as a top player in the music industry. Quality is an extremely important aspect of production. On a continuing basis, Sony introduces new product quality improvement measures into all processes. Recently, there have been two major measures stressed. First, Sony has assured senior management oversight on improving product and service quality and safety (Product, 2008). This is a great and needed addition.

Now, senior management’s opinions and experience can be utilized more.This assurance has added another level to the checks and balances system of Sony. Second, the company now holds regular Quality Strategy Meetings attended by Sony’s president and top management from each business group. These meetings serve as a platform to discuss and set policies, strategies, and key measures relating to product quality.

Quality is a major aspect of Sony’s products and services. The Quality Strategy Meetings illustrate how valued quality truly is to Sony. With the president and managers from every department within the company present, quality issues can be discussed and actions taken.The importance and attention paid to environmental issues has recently increased dramatically. To encourage consumers to recycle and dispose of

electronic devices in an environmentally sound manner, Sony has established a national recycling program for consumer electronics.

The Sony Take Back Recycling Program allows consumers to recycle all Sony-branded products for no fee. This is the first national recycling initiative in the U. S. to involve both a major electronics manufacturer and a national waste management company (Rothman, 2007).The Sony Take Back Program is part of Sony’s broader global commitment to environmental stewardship, which spans product design, recycling, facilities management and energy conservation across all categories (Rothman, 2007).

This recycling program illustrates the importance Sony places on its social responsibility. It is an excellent program that will help not only the company, but the world as well. Financial Analysis (See Appendix Part E for Financial Statements) To fund requirements from business strategy, Sony utilizes cash flow from operations and cash and cash equivalents.If needed, funds from the financial and capital markets can be obtained. In order to sustain the liquidity needed, Sony has ample lines of credit. Sony’s policy is to maintain a level in the cash balance to cover their working capital needs.

If there is a shortage in the cash balance that is deemed short-term, Sony relies on the issuance of commercial paper. Internal controls are in place to monitor outstanding commercial paper to ensure that Sony does not exceed short-term debt limits, putting the company at risk (2007 Sony Annual Report). Sony’s net working capital increased ? 25,575 in 2007. Accounts Receivable, Inventories, and Other Current Assets net with Notes Payable, Accrued Income, and Other Liabilities resulted in the increase of working capital (2007 Sony Annual Report). The current ratio demonstrated that

for every ? 1 in liabilities, Sony has ? 1. 28 in assets.

The quick ratio is 1. 02 with little change because Sony maintains low inventory levels (2007 Sony Annual Report). Warner’s current ratio is 1. 02 (2007 Warner Annual Report) and Universal’s is . 71 (2007 Vivendi Annual Report) and their quick ratio is .

85 and . 68 respectively.This indicates that Sony’s ratios are above the average of their major competitors. The current ratio is important to short-term creditors because it indicates that Sony can meet short-term borrowing and repayment requirements. To Sony, a high current ratio indicates liquidity, but it could also mean an inefficient use of cash and other current assets. Please see Appendix E for Balance Sheet.

The common size income statement shows that the cost of sales percentage is . 71 for every ? 1 of sales (2007 Sony Annual Report). Sony’s competitors, Warner and Universal are at . 9 (2007 Warner Annual Report) and . 46 respectively (2007 Vivendi Annual Report). Please see Appendix E for the income statement.

Sony competes in an intensely competitive environment, where technology changes rapidly, so cost control is vitally important to the sustainability of the company. Sony’s music business is dependent on developing new artists and the cost associated with their development has experienced significant increases. Sony invests in these new artists with the hope that they will generate a return large enough to cover the cost that is required for their development.This rarely happens. Throughout the music industry, the cost to develop a new artist can range from $350,000 to $2 million (Hill, 2004).

At the same time, they continually

market their established artists and depend upon them to continue to generate revenue. The 2007 Cash Flows were composed of ? 561,028 from Operating activities, (? 715,430) from Investing activities, and ? 247,903 from financing activities (2007 Sony Annual Report). This resulted in a positive net cash flow of ? 96,801 for 2007. This was a significant improvement from a net cash flow of (? 76,005) for 2006.

Please see Appendix E for Statement of Cash Flows. Sony had a long operating cycle in 2007 due to long receivable and inventory periods. This is not necessarily a bad thing because their major competitors also have long operating cycles. After analysis of the cash cycle it is obvious that Sony’s receivables and inventory periods has steadily increased from 2004 to 2007. The payables period has slightly increased. Most companies will have a positive cash cycle and this simply means that the company requires financing for receivables and inventories.

The longer the cash cycle, the more financing required.This lengthening cycle could mean that Sony is having trouble moving inventory or collecting from their customers. Sony’s ROA is at 1. 08% in 2007 and ROE at 3. 75% (2007 Sony Annual Report).

ROE exceeds ROA and this is a reflection of how Sony uses their financial leverage. The stockholders of Sony bear most of the risk. The free cash flow analysis reveals that Sony can pay dividends without resorting to external financing. Sony’s current cash debt coverage ratio is 16. 6%.

It is very unlikely that Sony will have liquidity problems. The cash debt coverage ratio is 7. 2%.This ratio demonstrates that Sony has the ability to repay their

liabilities from net cash provided by operating activities without having to liquidate the assets used in their operations. Sony should be able to pay their debts and be able to survive without external financing.

Sony has a dividend policy that they believe rewards their shareholders. For the past three years Sony has paid an annual dividend of 25. 0 yen per share. Sony utilizes retained earnings after paying out dividends for future investments and growth of the company. This plowback of earnings continues to give Sony a competitive advantage.Information Systems Sony BMG uses Sybase technology for their information systems.

The Sony BMG project team selected Sybase IQ as the database for its information system after a market comparison and testing phase. Through this they have developed a flexible, powerful system, enhancing its service in an extremely competitive market. The key benefits of this technology are as follows: enables fast ad hoc inquiries, delivers flexibility and speed to evaluate the entire data store, and intuitive solution does not require specialist to formulate query code (Sybase, 2008).Christian Lang reported that this database proved to be very fast, with response times close to those of the host. Through this system the licensing department can offer artists a much better service as well as allowing users to get answers to virtually any query quickly.

It also allows user to carry out ad hoc analyses by track and product number, company, artist, contract and 32 other criteria. This information system does not just provide fast and intuitive queries, but has also proved to be very flexible in other ways, such as adapting to new requirements (Sybase, 2008).Sybase’s business strategy is

stated as follows: Sybase enables customers of all sizes to unwire their enterprises and make information available from the data center to the point of action, and back, anytime, anywhere. Our open, cross-platform software solutions make it possible for companies to optimize and enhance the investments they already own, link the valuable data resources they already have in place, and securely extend the reach of their business-critical information to users on the front lines—giving them a financial and productivity edge across all areas of their business (Sybase, 2008).This particular system appears to work well for Sony BMG.

IT manager for Sony BMG, Germany/Switzerland/Austria, David Hodge, seems to be quite happy with its performance and results. He is in fact so pleased with it that he intends to integrate and store the data from market research, marketing and product information on Sybase IQ in the future. Hodge stated that, “Everything on the basis of which Sony BMG Music Entertainment has to carry out analyses should, insofar as possible, be in Sybase IQ” (Sybase, 2008). This system seems to be a good choice that Sony BMG made.Sybase delivers and processes thousands of financial trades on Wall Street for the top 10 global banks and securities firms. These global banks and securities firms also trust Sybase with their financial exchanges from London to Singapore.

Sybase also ensures that information is securely managed and mobilized to the point of action (Sybase, 2008). With the global banks and securities systems trusting Sybase with their information it is convincing that this system is credible and reliable. Model Analysis (See Appendix Part B and C for models)We used the Porter’s 5 Forces

and the Boston Consultant Group’s Portfolio Matrix to analyze Sony BMG. These models, especially Porter’s 5 Forces, are the best choices because they are able to show what our weaknesses and strengths are and showing what trends are occurring in the industry.

We examined what each model had to offer and then we looked at the sections most vital to our problems. The BCG Portfolio Matrix is great for looking at which sections of our business we need to expand and learn to innovate on, which solves one of our current problems.Seeing the “Star” that is the ringtone market and looking at how high a potential of growth there is we can expand on that market and hopefully push money into R&D and expand on the market. Porter’s 5 Forces is helpful because it confirms the thought that the customers are vital and they have an immense amount of power in the industry.

Also, we can continue to look at Government’s laws (inside the Barriers to Entry section) and delve into how we can stop illegal downloading at its source. Strategic Alternatives Buyout the BMG CEO, Rolf Schmidt-Holtz, and put into place a new CEO who is aggressively interested in improving technology and working for better advertising for the company. •Team Building Retreats for Higher Management and have internal auditors to hold innovation seminars. •Create a new initiative to stop illegal downloading. Begin by working with national governments concerning copyright infringement laws and start with R&D toward better, more effective anti-theft technologies.

Also contact “Above the Influence” and create a marketing campaign to inform people of the damage illegal downloading does. RecommendationLooking at the problems

of Sony it became clear that the main problem the company is the trouble with their management. We feel that if they were able to solve the management problem then the other problems will be less of an issue because with a competent, driven management team behind the company they will be able to concentrate on the other problems they are facing. Because of this analysis, our first alternative we propose is likely the most effective.

We plan on buying out the BMG CEO that has been giving the company problems and hiring Douglas Merrill, the current CIO of EMI, who is specialized in solving our other current problems.This will create a renewed vigor that will help excite both the employees and consumers toward Sony. Getting rid of the CEO that is causing issues within the company will allow a large sense of confusion to be gone. This will allow Sony to concentrate their efforts toward the technological issues and marketing problems they have. By hiring a Douglas Merrill, who was the CIO for Google and a major reason for its early successes, the company will be better able to bring the knowledge of what it takes to stop illegal pirating and what the people want for new technologies that Sony can take advantage of.

In order to stop the pirating problems on a technological level, the programming needs to be strong but also not locked down to the point where consumers have to pay the price for pirating-caused issues. Sony, seeing the problems that DRM has caused for consumers, should recognize that this is a careful balancing act and requires the attention of someone who

knows technology and the pros and cons of the different security checks on their products. The second alternative, while it may be possible to mend the issues with the management, would most likely not be as successful as the first alternative when it comes to solving the other problems.The current CEOs are lacking a technological expertise that is needed in order to understand how to stop, or at least discourage, illegal downloading. They also have no intentions of branching out and spending money on developing new technologies for their customers.

Their marketing plans do not seem to be changing toward marketing their company at all, so in order to create those changes; we suggest the first alternative over the second. We feel the third alternative is a very strong alternative.It certainly takes steps toward solving the illegal downloading issues, and the marketing campaign should create an image of our policies to our customers. With this concentration on a technological issue of illegal downloading Sony can use the opportunity to concentrate on creating newer and more secure systems. While this solves three of Sony’s four problems quite well, it does not quite cover the management issue quite as well as we wish.

Implementation The process of buying out Schmidt-Holtz will be a complicated and grueling task.Schmidt-Holtz will receive a 1. 2 million dollar severance package, along with a prorated target bonus, and access to the Sony BMG’s health and life insurance plan for up to one year after termination. He will also still be bound to any company covenant signed relating to confidential information. Sony BMG will now be looking for a driven innovative CEO, one

which will be able to focus on the problems accumulated over the past 4 years.

After deep analysis the team believes Douglas Merrill will be the perfect fit for the Sony BMG family.Douglas Merrill is a young, successful innovator that tries to bring a fresh perspective anywhere he goes. The highlight of his previous experience has seen him as Vice President of Engineering and Senior Director of Information Systems of Google Inc. He is created for leading Google’s highly successful 2004 IPO. Before Google, Merrill served as Senior Vice President of Charles Schwab and Co.

, Inc. , a multinational financial services company. Schwab gave Mr. Merrill experience in building common infrastructure and human resources strategy and operations.He was also a senior manager at Price Waterhouse and served as an information scientist at the RAND Corporation. His technological studies focused on computer simulation in education, team dynamics and organizational effectiveness.

He holds a BA from the University of Tulsa in Social and Political Organization and an MA and Ph. D. in Psychology from Princeton University (Executive Profile). In 2008 Merrill left Google to become the president of digital business at EMI (Kramer, 2008). Merrill has shown in the past that he has the ability to improve technology and create new digital business models.The music industry is exactly the place for him.

In a 2008 article in Forbes Merrill said, “Music’s been critical to my life from the very beginning,” (Kramer, 2008). Combining this passion for music with his love for challenges and talented background in digital realms would be the perfect fit for the industry following company of Sony BMG. At Sony, Merrill would be

in a higher position to create a new digital business model in the midst of a new, cohesive culture and strategy. The cost of bringing a new CEO is little when compared to the positive changes he can make.Merrill will begin with a base salary of $700,000, signing bonus of $700,000, along with social security, 401K/403b, Disability, Healthcare, Pension, and Time Off.

It will cost an estimated 1. 4 million dollars a year to transition to our new innovative CEO. This plan fits into our analysis of Sony BMG in several ways. First, it is the best and only course of action that will solve the problems that the company faces. By bringing in Merrill the strengths of Sony BMG will continue to be present.

With his technological background our strengths have a great chance to even improve.As a result of this implementation, three of the five listed weaknesses of Sony BMG will be directly addressed. The dysfunction of management will be immediately resolved. Also, the lack of innovation and quality concerns will be combated.

Merrill is a young and driven individual who will tackle Sony BMG’s weaknesses in an attempt to transform them into strengths. Furthermore, his fresh leadership style will bring confidence to the company. The satisfaction of being second in the market will be erased.Merrill and Sony BMG will be eager to attain new technology and become a leader in the industry instead of a follower. The threat of a merger collapse will be minimized as well.

The dysfunction within management is centered on Schmidt-Holtz. With Merrill in his place, Sony BMG can have a cooperative and comfortable organizational culture. Sony BMG

has annual net income of $1. 26 billion as a result; the company does have the resources to make this switch at the CEO position. As mentioned before it will be a pricey endeavor. But, this action is the only solution to the problems Sony BMG faces.

The mission statement of the company is to continue to shape the future of recorded music by focusing on the central business of identifying, developing and marketing the best artists in every genre. The addition of Merrill will only make the statement stronger. As far as the goals are concerned Merrill’s vision will enable Sony BMG to achieve these goals. The environment will improve immediately with his surge of enthusiasm. The follow the leader strategy can then, in turn, be transformed into a first to the market strategy.

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