Why Japan Lost the Flat-Panel TV Wars

Why Japan Lost the Flat-Panel TV Wars An Analysis Based on the Dynamic Strategy Theory Chapter 1 Tadahiko Kawai, Chuo University Japanese Companies Lost on the Grounds of Strategy 1. Japanese Companies Facing a Rout Since appearing on the market at the turn of the century, flat-panel TVs have spread almost instantaneously, replacing the cathode ray tube (CRT) TVs that were the product of the 20th century. Although flat-panel TVs were initially extremely expensive, their prices have decreased so significantly over ten years that sales are soaring even in emerging countries. They have now grown into a giant mass merchandising product, with annual sales volume surpassing 200 million units worldwide. TVs are a product that provide identities to respective electronics manufacturers, and have traditionally been positioned as an essential driver of their corporate brands and corporate images. This is the very reason why companies have conducted fierce competition on what is dubbed as the flat-panel TV wars! By now (2012), however, the outcome of the wars has arguably been determined. The obvious winner is Samsung Electronics of South Korea, and LG Electronics may also be considered to be on the winning side. In contrast, Japanese manufacturers have un-fortunately faced a rout, leaving a long track-record of battles lost. Market Share Changes and Corporate Performance Probably, the most direct criteria to determine the winners and losers of the flat-panel TV wars are the TV market shares of the respective companies and the accumulated profits from the release of the product. Since the data of the latter is not readily available, let s take a look at the former the global market share of respective companies in monetary terms. Figure 1-1 indicates the changes in the global market share in monetary terms between 2003 through 2011. A glance at Figure 1-1 reveals that, except for Sony expanding its share through 2008, the share of such representative Japanese manufacturers as Sharp, Panasonic and Sanyo have plunged, while the share of the South Korean manufacturers (Samsung Electronics

and LG Electronics) rapidly increased particularly for Samsung Electronics. The company s market share was ranked fourth at 10.0% (in units sold of LCD-TV) and third at 12.6% (in units sold of PDP-TV) in 2005, but soared to 23.8% (in sales revenue of LCD-TV and PDP-TV) in 2011, leaving Sony (10.6%), Panasonic (7.8%) and Sharp (6.9%) in its dust. LG Electronics also boasted a large lead over Japanese companies, with a 13.3% share in the same year (the market share of Toshiba was 6.9%). Table 1-1 Market Share (World) LCD -TV 2003 2005 (2003-2005) % of units sold (2007-2001) % of sales revenue FLAT -TV 2007 2009 2011 No.1 Sharp (48.1) Sharp (20.0) No.1 Samsung (19.0) Samsung (23.4) Samsung (23.8) 2 Sony (13.7) Philips (13.6) 2 Sony (13.9) Sony (12.5) LG (13.7) 3 Panasonic (13.7) Sony (13.3) 3 Sharp (9.5) LG (12.4) Sony (10.6) 4 Samsung (10.1) Samsung (10.0) 4 LG (9.5) Panasonic (8.5) Panasonic (7.8) 5 Toshiba (5.6) Panasonic (7.6) 5 Panasonic (8.8) Sharp (6.3) Sharp (6.9) PDP -TV 2003 2005 No.1 Panasonic (36.3) Panasonic (35.3) 2 Hitachi (17.4) LG (14.5) 3 Sony (15.5) Samsung (12.6) 4 LG (13.1) Philips (10.8) 5 Pioneer (11.0) Hitachi (7.9) (Source) Nikkei Market Share (Note) FLAT TV = LCD-TV + PDP-TV The defeat of the Japanese companies may be evident just by looking at the changes of market share. In fact, they lost the game in a way much worse than is suggested by the gap of the market share one could argue that they were smashed to smithereens by the two South Korean firms. Let us examine how bad the defeat was by looking at the operating results of respective companies for the fiscal year ended March 2012, which might represent the final settlement of the flat-panel TV wars, as shown in Table 1-1.

Table 1-1 Consolidated Operating Results of Respective Companies -(Year Ended March 2012) (billion yen) Net sales Operating income/loss Net income/loss Sharp 2,455.9-37.6-376.1 Panasonic 7,846.2 43.7-772.2 Sony 6,493.2-67.3-456.7 Hitachi 9,665.9 412.3 347.2 Toshiba 6,100.3 206.6 73.7 Samsung Electronics 11,340.0 (165.0 trillion won) 1,110.0 16.25 trillion won 900.0 (13.7 trillion won) LG Electronics 3,700.0 (54.2 trillion won) 29.0 (430 billion won) (Note) The yen/won exchange rate as of the announcement date of the operating results was used for the conversion. The table reveals that Samsung Electronics was by far stronger than others, and the Japanese manufacturers would have failed to beat it even if they were combined. For net income, the three major companies Sharp, Panasonic and Sony recorded a largest-ever deficit ranging 400 to 800 billion yen; in contrast, Samsung Electronics alone posted profits of 900 billion yen. With regard to operating income or loss, both Sharp and Sony had a deficit and, although Panasonic generated a thin profit, all of them are no match for Samsung that recorded a profit of over 1 trillion yen. Although the Table seems to indicate that both Hitachi and Toshiba were in good shape, this does not mean that they were winners in the flat-panel TV wars. On the contrary, Hitachi achieved good results just because it restructured its flat-panel TV business and left from the front line, while Toshiba, which still holds its ground in the arena but has been a partial participant in the race since the start (as explained later), did well only because its businesses other than liquid crystal display (LCD) TVs performed well. As such, there is no doubt that the Japanese companies faced a rout on the whole. What is more, they were seriously beaten unimaginably from the operating results figures shown above. In particular, the effect was so heavy for the three home electronics manufacturers (Sharp, Panasonic and Sony) who placed TVs as their main business over the years that even their existence as ongoing concerns might be threatened. Let us then investigate the situation of the Japanese companies in more detail with a focus on these

three firms. Sharp Among the Japanese companies, Sharp battled to the end with its LCD TVs. However, the firm posted a net loss of 376.1 billion yen, the largest deficit in its history, as well as an operating loss of 37.6 billion. The loss was primarily due to stagnant sales of flat-panel TVs caused by such factors as the global recession stemming from the European sovereign debt crisis and the termination of the eco-point system for home electronics products. In addition, the company suffered a heavy blow from the expense of restructuring its flat-panel TV business and expenses recorded in accordance with the reduced operations at its Sakai plant where liquid crystal panels were produced. The Sakai plant had started operations in 2009 as a state-of-the-art production facility Sharp had pride in, but was forced to reduce production in order to reduce inventory. However, Sharp s flat-panel TV sales were too stagnant to recover by such measures of that level, and the company made a difficult decision: it determined to spin-off the Sakai plant, which was organized as its manufacturing subsidiary, from the parent and work to restore it under the management of an operation company Sharp would establish in partnership with another company. For the partner, Sharp chose Hon Hai Precision Industries, the world s largest EMS (electronic manufacturing services) based in Taiwan. Indeed, the decision represented a drastic shift in management, as it meant a denial of the so-called vertical integration model (producing everything within the company instead of buying from external companies) that was hailed as the source of Sharp s strengths. Mr. Katsuhiko Machida (President of Sharp from 1998 through 2007), who was the commander in chief during the company s flat-panel TV wars, commented on the decision and on the defeat of Japan. The Japanese digital home electronics industry has reached its limit. Looking at five years to ten years from now, it would mean we just sit and wait for death to come if we stick to the way we did before. A bit of technological advantage will have no meaning when overwhelmed by size. (Note 1) It is also our aim in the arrangement to jump ahead as a global company. The Japanese home electronics manufacturers including Sharp have

become somewhat conservative because of the successes they have experienced since the middle of the 1950s. So we hope to utilize Hon Hai s sense of speed in conducting business and its way of thinking into Sharp that was our thinking. (Note 2) In addition, Sharp decided to shift approximately 80% of the production capacity at its Kameyama Plant No. 2, a powerful production base for liquid crystal panels along with the Sakai plant and known as the Kameyama brand, to medium- and small-size liquid crystal products for Apple s smart phones (high-function mobile phones) and tablet terminals. Sharp also announced a policy to quickly commercialize higher-function liquid crystal panels, taking the opportunity of the production adjustment conducted at the Sakai plant. Panasonic Following Sharp, Panasonic competed well particularly in the earlier stages of the liquid crystal wars. Like Sharp, however, the company posted a record-high net loss of 772.2 billion yen for the fiscal year ended March 2012. The loss was almost twice as large as its previous record high deficit, and was second largest in the history of major home electronics manufacturers after the 783.7 billion loss Hitachi posted for the fiscal year ended March 2009. Moreover, the aggregated net income/loss of Panasonic for the ten years before the said fiscal year was 450 billion yen in the red. In fact, Panasonic achieved operating income of 43.7 billion yen for the fiscal year ended March 2012, successfully maintaining positive profits for ten consecutive years. In spite of this, however, the company recorded a huge loss for the fiscal year. This was partly because, in addition to the factors similar to Sharp s, revenues decreased due to widespread damage from flooding in Thailand and other causes and the company had to amortize the goodwill of Sanyo Electric which had been turned into a consolidated subsidiary, among other things. Still, the most important factor of the loss was the recording of restructuring expenses associated with the stagnant flat-panel TV business. The company s flat-panel TV business presumably posted operating loss of at least 100 billion yen (not disclosed) for the fiscal year ended March 2012, marking the fourth consecutive fiscal year with a deficit. The loss was due to stagnant consumer demand and a steep drop of sale prices at shops, with the well-selling 32-inch models priced at around

30,000 yen. The fall in prices was caused primarily by oversupply that resulted from intense competition among companies in capital investment. Anticipating such an outcome in advance, Panasonic announced the following measures to reconstruct the business in October 2011. First, the measures called for suspending production of plasma display panels at the Amagasaki No. 3 plant, and for sale of the Mobara plant. Second, the company would review the product configuration of its larger-screen TVs. This meant a shift from the high added value lines, such as high definition TVs and 3-D TVs, the company had promoted based on its leading-edge technologies to large screen lines centering on 50-inch TVs. These were followed by a series of additional measures, in which the company decided to lower its annual TV sales target to 18 million sets, a decrease of 1 million sets from the initial target. Another focus of the measures was to squeeze the number of plasma TV models to be newly introduced by one third from before, and to expand purchase of liquid crystal panels from external vendors for its LCD TVs, greatly reducing the proportion of its self-made panels to be incorporated. The company s capital investment plan for fiscal 2012 (ending March 2013) totals 250 billion yen, a decrease by some 20% from the previous year s results. The figure was almost a half of the latest peak (494.3 billion yen) recorded for the fiscal year ended March 2009 and lowest since 2002. A larger portion of the capital investment was allocated to white goods (large home appliances) that are selling well in emerging countries and batteries that are expected to produce good results, while semiconductors as well as stagnant TVs received a smaller portion. For TVs, the capital investment mainly comprised the 30 billion yen spent to install a demonstrative production line for organic electroluminescence (EL) displays at the Himeji plant where liquid crystal panels are produced. The above illustrates how Panasonic fought the war. Looking back, Mr. Fumio Otsubo (President and CEO), who directed the company s struggle together with Mr. Kunio Nakamura (President and CEO), commented as follows. Sony Let us then look at Sony. The company posted operating loss of 67.3 billion yen for the

fiscal year ended March 2012 and, like Sharp and Panasonic, recorded the largest net loss in its history, totaling 456.7 billion yen (marking the fourth consecutive fiscal year in the red). The loss was primarily due to recording of restructuring expenses for reducing production facilities and cutting workforce (10,000 people) accompanying the slump of flat-panel TVs, etc., on top of reversal of deferred tax assets due to stagnant sales of TVs and video game consoles in the U.S. In particular, its flat-panel TV business was in a serious slump, posting operating loss for eight straight fiscal years with an accumulated deficit exceeding 600 billion yen for the period. For the said business, Sony had already announced a reduction in workforce totaling over 16,000 people worldwide in December 2008 following the Lehman Shock and decreased the number of production bases (plants) from nine to four, but was again forced to carry out restructuring. Indeed, this is the fourth (!) round of restructuring the company had to conduct in only ten years or so after entering the 21st century. Also of note, the company cancelled the joint venture agreement of S-LCD, a flat-type liquid crystal panel manufacturing subsidiary established jointly with Samsung in 2004 and sold its equity in it to Samsung Electronics. This was an event symbolizing Sony s failure in the flat-panel TV business. Along with the above mentioned reconstruction measures in terms of production, Sony made a major shift in its strategies. First, the company revised its sales target significantly downward: it lowered the medium-term sales target of TVs from 40 million sets annually as of November 2011 to 20 million sets annually in March 2012. Second, the company changed its product strategy, significantly reducing the number of new TV models to be released to the market in 2012: from 40 models available in 2011 to 22 for the U.S. market, from 30 to 18 for the European market and from 39 to near the figure in the U.S. for the Japanese market. The decision was intended to reduce products in the lower price ranges, given the intense price competition in the U.S. and other advanced markets, and focus on middle- to superior-class models that feature high picture quality. (On the other hand, the number of product models was to be maintained for emerging markets that continue to show growth). With regard to Sony s major strategic shift as explained above, Mr. Kazuo Hirai, the company s new president and CEO who once was responsible for its TV business and could not turn the business into black,

commented: We should have started selecting and concentrating on our core competence much earlier. Furthermore, Sony s capital investment plan for fiscal 2012 (ending March 2013) was 210 billion yen, a year-on-year decrease of approximately 30%. As explained above, each of the three major companies posted a record loss as they struggled and lost the war, and it would have been inevitable that CEOs (and chairmen) of all these companies were superseded. Each of the top management holders more or less expressed intention to stay with his position, and some may have made elaborate underground preparations to that end. However, they had no choice but to resign in the face of strong criticism from both within and outside of their companies. Arguably, this would rather be a deserved outcome (Note 8). Hitachi and Toshiba Aside from the situations of the three major companies stated above, let us briefly cover other companies, starting with Hitachi and Toshiba the heavy electric companies that were engaged in flat-panel TVs earnestly but with less commitment than the above home electronics manufacturers. TVs were not a mainstay business to begin with for Hitachi and Toshiba, and their scars from the defeat were not as severe as the three major companies. Still, the fact remains that they also faced a hard time. Hitachi proactively worked on flat-panel TVs from the start, with an aim to recover its ground on TVs lost during the CRT-based television era, won the early battles of the wars and did so well as to capture the top share once. As the three home electronics manufacturers made a full-scale entry into the market, however, Hitachi was gradually forced to recede and eventually announced a de facto retreat from the production of liquid crystal panels in 2007 and from the production of plasma panels in 2008 (Note 9). From then onward, the company continued to sell products purchased from an EMS in Taiwan, and more than 90% of its TVs sold in and outside Japan were EMS-made by 2011. In August of the same year, Hitachi announced a full retreat from in-house production, shifting the rest to outsourcing from the EMS vendor. Toshiba, which also focuses on heavy electric machinery (and semiconductors) and conducted outsourcing of liquid crystal panels early on, disclosed its policy in 2008 to fully

retreat from production of the panels and outsourced production of low-priced liquid crystal TVs, its mainstay products, to an EMS in Taiwan, with Toshiba itself specializing in producing high-end products (producing them by flexibly gathering low-cost parts). Taking advantage of the agility stemming from this strategy as well as its strong video technology, the company had remained in the black for its TV business since the second half of fiscal 2007 while other companies suffered from deficits, hailed as a model case for Japanese companies to survive. Though it reported an operating loss of around 50 billion yen for the fiscal year ended March 2012, the company still holds its ground in the battle, doing fairly well with its global market share remaining in the upper tier of rankings. In this sense, the company may be better not be classified as a loser. However, if we define the flat-panel TV wars as a conflict among main players that compete primarily in the world s advanced markets, making huge investment to grow flat-panel TVs into a mainstay business, it would be hard to call Toshiba a winner as a main player of the wars because the company soon avoided a head-on clash and shifted to the above-mentioned strategy. Another reason why Toshiba could hardly be regarded as a winner is that it does not seem to have implemented such a strategy intentionally from the start, and that the profits the company earned might be far smaller than those of Samsung Electronics or LG Electronics that have won the flat-panel TV wars through in-house production (Note 10). Other Companies Next, we pick up two telecommunication and computer manufacturers Fujitsu and NEC. They both focus primarily on computers and communication equipment (and semiconductors for NEC), with TVs outside the scope of their core business. However, the two companies made research and development endeavors in liquid crystal and plasma displays as well as TV panels, as they were connected to computer displays, and contributed to the advancement of these products. As such, both Fujitsu and NEC saw opportunities to make a full-scale entry into TV business and in effect started selling flat-panel TVs through their subsidiaries at around the outbreak of the flat-panel TV wars. Aside from the panel business, however, neither of them had invested in TVs in a

full-fledged manner in the end, and retreated from selling TVs even through their subsidiaries as other major players entered the market in full-scale. With regard to the panel business on which they placed a larger focus, they were overwhelmed by the Japanese large companies and even larger Samsung and LG Electronics, etc. and dwindled away, eventually retreating from the business. The outcome was partly due to the fact that panels as well as TVs were not their mainstay business anyway, as stated above. However, a major reason why they could not make a good use of the given opportunities is that they had no more room financially to do so as they were left behind by South Korean and Taiwanese manufacturers in the 1990s in their mainstay business areas such as telecommunication equipment, computers and semiconductors. In particular, as described in the next chapter, it was a pity that Fujitsu failed to grow its plasma TVs into a powerful business, although the company had been ahead of others globally in the technology. Those who were in the top management team at that time should take the blame for such failure. Among other participants in the flat-panel TV wars were Pioneer and Victor Company of Japan (JVC, currently JVC KENWOOD), two of the audiovisual equipment manufacturers, which garnered attention by introducing high-quality TVs based on their superior technologies. Inferior in terms of business size, however, they were not able to cope with the abrupt fall in prices caused by the intense competition in capital investment among larger manufacturers, and eventually left the battlefield as both of them were forced into tie-ups with larger companies. Finally, another company, Funai Electric, was unique in its approach. The company had no production capacity for flat-panel TVs from the start, and the products were outsourced on an OEM basis. In particular, the company made its presence felt by focusing on sales through major retailers in the U.S. Nevertheless, Funai was forced into retreat in the face of thrusts by larger manufacturers. Furthermore, U.S. company Vizio was successful in the flat-panel TV business based on the strategy of outsourcing products on an OEM basis in the same manner as Funai did or rather Vizio was the first in taking the approach. The company is still doing fine but it is slightly out of the interest of the author for the same reason as explained for Toshiba: not being a main player in the flat-panel TV wars. Because of this and due to lack of

information, the company is just briefly mentioned in this book. 2. Samsung on a Strong March Then, how did the winning South Korean firms Samsung Electronics and LG Electronics especially the former perform in terms of operating results? Let us have a look at their financial achievements in comparison with those of the Japanese companies. (Since the fiscal year of South Korean firms is from January to December and different from Japanese companies (April March)operating results for the entire fiscal year ended December 2011 and for the first quarter of 2012 (January March) have been investigated below). Operating Results of Samsung Electronics and LG Electronics For the entire fiscal year ended December 2011, Samsung Electronics posted operating income of 1,110 billion yen, its second largest after that which was achieved in the previous fiscal year, and net income of approximately 900 billion yen. The global economic stagnancy stemming from the European sovereign debt crisis caused the company s sales of semiconductors and liquid crystal displays (LCDs) to decrease by approximately 10%, but the decrease was offset by its telecommunication device section which, featuring the well-performing Galaxy smart phones, generated more than 50% of the firm s operating income. The company s LCD TVs sold strongly in both developed and emerging countries. Backed by this achievement, the company set up a very aggressive sales plan of flat-panel TVs for 2012 to total 50 million sets, a year-on-year increase of approximately 16%, presenting a sharp contrast to the Japanese manufacturers that were forced to conduct significant downsizing. A point to note was that, contrary to the Japanese manufacturers, Samsung decided to produce all of its flat-panel TVs at its own plants, suspending outsourcing that had occupied around 5% through 2010. Another was the policy it poised to place smart TV, which allows downloading of applications via the Internet, as the mainstay product and increase to about half of its entire flat-panel TVs. Moreover, it was also worthy of special mention that Samsung announced its intention to launch large-sized, 55-inch organic electroluminescence (EL) TVs by the end of 2012, in competition with LG Electronics.

Furthermore, Samsung s capital investment plan for 2012 was 1,750 billion yen, a year-on-year increase of approximately 9%. Of the total amount, approximately 480 billion yen was intended for displays, and most of it is believed to be meant for organic EL displays (Note 11). Next, let us see the operating results of LG Electronics. The company posted consolidated net sales of approximately 3,700 billion yen for the entire fiscal year ended December 2011, with a net loss of approximately 29 billion yen. The decrease in net sales was only slight despite stagnant world economy because the company s home appliance segment including refrigerators and air conditioners showed growth. In terms of profits, there was a clear difference from Samsung, as LG recorded a net loss (the second straight year of net loss) primarily because it got a late start with smart phones. (As examined in detail later, Samsung Electronics and LG Electronics have almost the same business structures but a major difference is a lack of semiconductor business for the latter). Like Samsung Electronics, LG Electronics established an extremely aggressive sales plan of flat-panel TVs for 2012 to reach 350 million sets, an increase of approximately 20% from the 292 million sets the company sold globally in 2011. Worthy of particular attention, the company works on organic EL TVs as hard as, or rather harder than, Samsung Electronics. It made it clear that it would prepare for introduction of 55-inch organic EL TVs by the end of 2012, ahead of Samsung Electronics, to be honored with the title of world s first model for living rooms (Note 12). What Distinguishes Samsung Electronics from Japanese Companies (1): Level of Profit and Shift of Core Business A comparison between the latest operating results of the two South Korean firms, as described above, and operating results of the three home electronics manufacturers (Panasonic, Sharp and Sony), as stated earlier, gives the following findings. The first is the fact that there is a large gap between the three Japanese companies and the two South Korean firms in the market share of flat-panel TVs that make-up their core business, resulting in a significant difference in respective net income. It might be more understandable if the situation were such that respective profits of the three Japanese companies are approximately one third or a half of Samsung s, as their market share is

also one third or a half of Samsung s. In reality, however, each of the three Japanese companies is in the red, with a combined deficit as large as some 1,700 billion yen, in contrast to Samsung Electronics being in the black at 900 billion yen. This is exactly what the author pointed out earlier by saying that they (the Japanese companies) lost the game in a way much worse than is suggested by the gap of the market share. Second, while the three Japanese companies have been drawing down the line of the flat-panel TV wars, Samsung and LG Electronics have been not only expanding the business further, but also are far ahead in fostering the next core businesses to replace flat-panel TVs. In particular, Samsung seems to have already achieved success in one such new business smart phones that have generated more than half of the company s operating income since 2011, as mentioned earlier. In South Korea, KT, the country s largest telecommunications carrier that had been developing smart phones jointly with Samsung Electronics, started to sell Apple s iphones at the end of 2009 and made a smash hit. This, together with distrust in KT, led Samsung Electronics to develop smart phones on its own and, six months later, in June 2010, the company released Galaxy S, a strategic model targeted at mass merchandising. Samsung then introduced a series of new products one after another, including the successor model Galaxy SII (April 2011), the high-grade (higher-end) model Galaxy Note (October 2011) and Galaxy Nexus (November 2011). All these products became a hit, leading Samsung to succeed in chasing Apple. One of the success factors was Samsung s choice of larger, organic EL panels for the devices, in contrast to Apple s iphone using 3.5-inch liquid crystal panels. On the other hand, each of the Japanese manufacturers is showing a proactive attitude toward smart phones in order to recover from the failure in mobile phones where Galapagosization (developing technologies and standards overly specialized to the Japanese market and not practically applicable to other markets) occurred. Nevertheless, with the industry in Japan still housing six companies even after a shakeout from eleven, the Japanese manufacturers have only a faint presence globally, commanding a combined global market share of as small as less than 3% (Note 13).

What Distinguishes Samsung Electronics from Japanese Companies (2): Investment in Next Core Business What makes the prospect of the three struggling Japanese companies even dimmer is the fact that, on top of the abovementioned gap in their latest operating results, there already is a large disparity between the three companies and the South Korean firms, especially Samsung Electronics, in the development of new businesses that should govern their operating results in the near future. One of them is tablet terminals. As is well known, Apple s ipad is dominant in this category, holding approximately 60% of the market. It is being chased after by Samsung Electronics Galaxy Tab, which incorporates the Android operating system (OS) developed by Google, and by the Kindle series of Amazon.com. Even Samsung Electronics has had difficulty, as it fell to the third rank for the fourth quarter (October December) of 2011, replaced by Amazon that quickly increased its market share. However, the presence of the Japanese companies in the tablet terminal area is even fainter than in smart phones. As mentioned earlier, the situation is in flux after Sharp was forced into retreat. At least, there is no doubt that Samsung has got a big lead over the three companies (and other Japanese firms). What is more important are organic EL panels as well as organic EL TVs incorporating them. Samsung Mobile Display, a Samsung Group company, holds approximately 80% of the world market for middle- and small-size organic EL panels and, as stated before, Samsung Electronics has achieved great success by applying them to its smart phones. Continuing to follow the strategy, the company released Galaxy SIII, a strategic model incorporating large, 4.8-inch screens, in May 2012 to succeed Galaxy S and Galaxy SII that sold more than 20 million sets respectively. The model was also equipped with a voice recognition function with an aim to go ahead of Apple s next-generation model succeeding iphone4s and expected to be released in the fall of the year. In preparation for such aggressive policy by Samsung Electronics, Samsung Mobile Display invested approximately 400 billion yen in organic EL panels in 2011, nearly four times as large as what was spent in the previous year. In addition, most of the company s investment in the entire display area for 2012, totaling some 480 billion yen, is understood to be spent in organic EL displays.

With regard to the use of organic EL, the biggest hope hangs on organic EL TVs. Samsung Electronics split its liquid crystal panel division as a separate entity in April 2012, to establish Samsung Display. This move was primarily intended to reconstruct the loss-generating display division by shifting the redundant manufacturing equipment for liquid crystal panels, which uses large glass substrates, to the production of panels used for smart phones and tablet terminals requiring high definition quality. Furthermore, the newly established organization was given another important objective of accumulating experiences in producing organic EL panels, in preparation for Samsung s strategy to be ahead of others in implementing a shift from liquid crystal panels, which are undertaking ever-lower prices, to large organic EL panels for TVs. The above summarizes the organic EL strategy of Samsung Electronics. In relation to this, let us briefly review LG Electronics, which appears to be more aggressive than Samsung in terms of organic EL. As already stated, LG Electronics announced that it would introduce 55-inch organic EL TVs into the market by the end of 2012. In the summer of 2011, LG Display, an LG Group company in charge of producing displays, demonstrated the possibility of starting significant investment in large panels in 2013 and beginning mass production in the latter half of 2014. This was a clear presentation of LG s intention to counter the aforementioned large-scale investment by Samsung Electronics (Note 14). As for the Japanese companies, Sony announced establishment of Japan Display in a joint investment with Toshiba and Hitachi to catch up with the Samsung Group which is out ahead. However, the two South Korean companies may hardly take account of the Japanese manufacturers, as Sony stopped development of organic EL TVs in though it introduced the world s first 11-inch organic EL model in 2007 while Toshiba and Hitachi (as well as Panasonic and Sharp) appear to be still making research of basic technologies. The two South Korean firms place a significant focus on the organic EL TV business just because they position the product as the symbol of their technologies having transcended the Japanese companies (Note 15). 3. Necessity of Dynamic Strategy and Dynamic Strategy Theory The preceding sections have presented the utter defeat of the Japanese electronics

manufacturers in the flat-panel TV wars and what strong advances the South Korean manufacturers, especially Samsung, made as they put the Japanese companies behind them. Now, this section clarifies what this book aims to achieve what the author intends to show through analyzing the causes of the Japanese companies defeat and Samsung Electronics victory. Theories on the Defeat of the Japanese Companies (1): Unfairness or Luck of Samsung Electronics Several attempts have already been made to explain why the Japanese companies were defeated and why Samsung Electronics won the battle. Let us have a look at typical theories of such explanations. The first type is an explanation, or rather a criticism, that cited luck or unfair competition or both as the cause of the victory of the South Korean companies. The theories in this explanation were presented primarily in the early stage of the defeat of the Japanese companies and included the following. One of them insists that the South Korean companies are stronger because the country s major industries were consolidated into a few corporate giants through the government-led industrial reorganization upon the currency crisis in the 1990s, resulting in their cost competitiveness reinforced thanks to economy of scale, and because the government (even afterward) continued to take various measures favorable for them both in terms of taxation and financial policy. Criticism against a weak won allegedly guided by the government may also belong here. Another interpretation insists that the South Korean companies are manufacturing products through reverse engineering of the Japanese companies products, or by scouting Japanese engineers so as to significantly reduce costs of technological development, including fostering of engineers; that is why they are strong. Criticism against the high rate of employee turnover at Samsung Electronics may also be in this category. Furthermore, somewhat similar to the second interpretation above, there was criticism condemning that South Korean companies depend on Japanese manufacturers for product manufacturing equipment (machinery) as well as procuring most of the components they need from Japanese component manufacturers this enables South

Korean companies to indirectly obtain information on Japanese assembly manufacturers through such Japanese venders especially from the manufacturing equipment makers. Those who gave such a criticism might rather be taking it out on the South Koreans, but let us put this aside. Characteristically, each of the above explanations tries to look for the cause of the defeat of the Japanese companies in external factors that were beyond their control such as South Korea s national policy or unfair competition engaged in by South Korean companies. Underlying this thinking was the confidence that Japanese companies were superior in technological capabilities and production ability (of high-quality products, in particular), and this was not wrong in itself. However, it does not justify that the above explanations are sufficient. Attention must be paid to the fact that the above theories on the defeat of the Japanese companies did not try to look into their internal factors, particularly their strategies, for the cause of the defeat (Note 16). However, of the remarks of the defeated generals (top executives of the defeated Japanese companies) presented in the previous section, the following passages just reveal that the leaders admitted to the lack or inappropriateness of strategies by themselves as the major cause of defeat: It is also our aim in the arrangement to jump ahead as a global company. The Japanese home electronics manufacturers including Sharp have become somewhat conservative because of the successes they have experienced since the middle of the 1950s. So we hope to bring Hon Hai s sense of speed in conducting business and its way of thinking into Sharp that was our thinking. There were too many manufacturers participating in the TV business, resulting to cause an oversupply and we should have started selecting and concentrating on our core competence much earlier (Note 17). Theories on the Defeat of the Japanese Companies (2): Ability to Create Quality Products The second type of explanation on the factors that brought defeat to the Japanese companies and victory to the South Korean companies is somewhat less dogmatic than the first type above, and admits that the Japanese companies also had a problem, insisting that the Japanese companies became weaker because of the decay in what they once had

the ability to create quality products unrivaled by anyone in other countries. This view was presented only after the quality of the South Korean products, believed by the Japanese side to have been inferior, quickly improved and gained a reputation that it was not inferior to the Japanese companies, while Japan struggled in the prolonged (or repeated) defeat. Characteristically, explanations of this type are often demonstrated in the argument of what the Japanese companies should do for the future, rather than in the discussion of why they were defeated, insisting that they should place priority on reinforcing their strength in creating quality products, as that is the only way for Japan to survive and re-enhance the capability of on-site (workplace) staff that is the source of strength. However, assertions of this type would apply only to some certain industries, if any, rather exceptionally and it should be clear that they are off the mark for the electronics industry (Note 18). Even now, the Japanese companies do not seem to be inferior to, but rather have the upper hand over the South Korean companies in terms of producing high-quality products. Moreover, Samsung Electronics itself recognizes that Japan remains strong in components and component manufacturing equipment, among other things, and largely depends on the Japanese companies for their supply. What is to be noted is the fact that, again, discussions in this type do not look into strategies in finding out why the Japanese companies were defeated. However, as stated in the Theories on the Defeat of the Japanese Companies (1) above, the defeated generals themselves cited strategies as the major cause of their defeat, and almost all of the revival (or rather survival!) strategies hoisted by respective companies are related to strategies. In addition, attention should be given to the fact that most of such strategies suggest the necessity of a significant shift from the conventional Japanese way of creating products and development strategies (to a development framework suitable for products meant for emerging countries, for example). The author believes the above analysis has made it clear that arguments that seek the cause of the defeat only in factors other than strategies are misdirected. Still, there did exist some discussion asserting that strategies were the cause of the defeat. Let us examine them next.

Theories on the Defeat of the Japanese Companies (3): Lack of Strategy Development The theories asserting that strategies were the cause of the defeat can be largely divided into two types. One points out the lack strategy of selection and concentration on core competence and the other one cites the lack of development of new products and marketing strategies that meet global needs. Both of these insist that the Japanese companies lacked strategic initiatives which Samsung Electronics is adept at. The former theory arose in the early stage of the defeat, pointing out the problem of the Japanese companies in terms of strategy in comparison with not only Samsung Electronics, but also Western (particularly U.S.) companies. It asserts that the business mix strategy of Japanese companies is omni-directional and lacks selection and concentration on core competence. This leads to excessive competition in every industry, and profits of surviving companies are too small to compete with foreign companies that win and earn huge profits through specialization. Winning a competition inevitably requires investment in production facilities and other areas, but this is where a big difference arises between Japanese companies and such specialized companies. The theory asserts that this big difference arose between Samsung Electronics and the Japanese electronics manufacturers, and the difference surfaced in the form of the gap in cost competitiveness. In contrast, the latter theory surfaced relatively recently, and was presented specifically after Samsung Electronics started to garner attention for the strengths it also gained in areas other than cost competitiveness. The theory says that Samsung Electronics proactively dispatches employees to overseas markets as expatriates to grasp local needs, quickly develops new products and releases them into the market, gains rapidly increasing share and establishes its brand, while the Japanese companies only export products that they produce in Japan. Compared with the first type, this theory focuses more on the gap in the ability of differentiation. These two types are the major theories that cite strategy as the cause of the defeat. They are likely to be to the point, as is suggested by the remarks of the defeated generals. Indeed, the comment that, we should have started selecting and concentrating on our core competence much earlier candidly admits what has been pointed out as the weakness of the Japanese companies for as many as 20 years. Other comments like, there

were too many manufacturers participating in the TV business, resulting to cause an oversupply and technological advantages to a certain degree will have no meaning when overwhelmed by size are also related indirectly to the lack of selection and concentration on core competence. While the comments of such defeated generals do not cover the lack of strategies on new product development and on marketing as Samsung does have, we should not forget the fact that, as described in later chapters, the Japanese companies were defeated by the market-oriented (needs-oriented) differentiation strategy undertaken by Samsung. After these investigations, there appears to be no doubt that the Japanese companies had problems in the strategy-related capabilities their ability to develop and implement strategies. This raises a question: It is true that the Japanese electronics companies were strong before, and it is arguably because they employed good strategies. If so, why could they not employ the above-mentioned strategies especially the strategy of selection and concentration on core competence? This question is discussed below. Success Experiences What is suggestive in investigating the question is the comment of Mr. Machida, former President and CEO of Sharp, as quoted earlier: The Japanese home electronics manufacturers including Sharp have become somewhat conservative because of the successes they have experienced since the middle of the 1950s. The home electronics manufacturers at that time promoted diversification (or rather expansion of product lines) respectively, and competed fiercely with each other in every arena of product. As a result, they achieved such great success with high quality and low prices of their products that the American home electronics industry was extinguished. However, they were satisfied with the success of this experience and became conservative, as he pointed out. In short, they were caught in what is called the success syndrome, a phenomenon in which companies that experienced success in the past become increasingly slower in responding to changes in the business environment because of their cultural inertia (Note 19). This view is probably right, and we should take note of the fact that the heavy electric manufacturers (Toshiba and Hitachi) and the telecommunication and computer manufacturers (NEC and Fujitsu) also had similar experiences. Many of these

manufacturers are also engaged in producing home electronics products, and shared in the success stories of the abovementioned home electronics manufacturers. On top of this, they conquered the global market for computers and semiconductors, among other things, by around the middle of the 1980s, experiencing great success (Note 20). Therefore, most of the major players that participated in the flat-panel TV wars had certain experience with success and, as Mr. Machida pointed out, we can safely say that they became more or less conservative. It is also likely enough that this caused the Japanese electronics manufacturers to be slow in catching up with subsequent shifts in advanced electronics technologies, information technologies (IT) and the era of the Internet, and thus found themselves left behind by Samsung Electronics which picked up on the trend and advanced through bold and timely investment. A conservative swing resulting from success calls for agitating against changing the status quo. One of the reflections of such agitation is the conservative tilt in strategies, meaning that companies either become unable to recognize the fact that their previous strategies are already inappropriate due to changes in the business environment or, even if they do recognize, they are no longer able to make a shift (or are late in doing so) of their strategies. If, as stated earlier, Mr. Hirai, President and CEO of Sony, is right in citing the delay in selecting and concentrating on core competence as the cause of the defeat, Sony that once had many businesses represent the latter case, and its conservative tilt should be responsible for its inability to shift its strategy. On the other hand, the comment of Mr. Machida, former President and CEO of Sharp, may suggest that the company, which was more specialized than others, represents the former. This is because there is a possibility that, in Sharp s case, its conservative tilt prevented it from recognizing the impact on it of the strategy of a company with speed and decisiveness, like Samsung Electronics. Of course, the experiences of the Japanese companies are in effect different among home electronics, heavy electric and telecommunication categories in terms of time and depth, and are different even among respective companies in the same categories, so the story is not so simple. Nevertheless, it seems certain that the successes were one of the elements common to respective companies of their defeat. Based on this understanding, the author attempts to provide categorization of their failures related to strategies especially the strategy of selection and concentration on core competence by type. Before doing so,

however, let us examine another reason why the Japanese companies failed to employ the strategy of selection and concentration on core competence in adopting their strategies. Success Experiences without Strategies The reason why the Japanese companies failed to employ the strategy of selection and concentration on core competence is not that they knew there is such a strategy but they could not employ it but that Japanese companies basically did not have anything worth calling strategies, and thus they did not really understand the necessity of the strategy of selection and concentration on core competence. In other words, the Japanese companies succeeded simply because they were strong in creating quality products and therefore their successes reflect nothing but what they achieved through creating quality products without any strategy. In addition, attention should be paid to the fact that most of the products were originally invented by foreign companies, especially U.S. companies, and already existed and were available for consumers be it automobiles, washing machines or TVs and therefore, the successes of the Japanese companies were achieved only by the use of their strength in offering such products at lower prices in higher quality. Therefore, most of the success stories were not due to the creation of completely original new products that had never existed before, like the series of products starting with Apple s ipod. It should be noted that the success was achieved not in an era where new products were created one after another through speedy innovation, that the Japanese companies could take time to improve quality as each product had a longer life cycle, and that most of the products were suitable for the integral type production technologies which the Japanese companies were good at. It should be remembered that there were few countries capable of such creation of quality products, and that the market was limited to developed countries where there was large demand for high-quality (and inexpensive) products. However, the progress in technological innovations, such as advanced electronics technologies and information technologies, caused a significant change in these situations. New products were released one after another, resulting in the shortening of the life cycle of each model. This shortening was further accelerated by components being provided in a modular format, which was made possible by the arrival of digital technologies. The