sony & games consoles · edexcel as business studies units 1, 2 & 3: june 2004 © tutor2u...

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EDEXCEL AS BUSINESS STUDIES UNITS 1, 2 &3

Case Study Toolkit - June 2004

SONY & GAMES CONSOLES © Tutor2u Limited 2004: All Rights Reserved

Edexcel AS Business Studies Units 1, 2 & 3: June 2004

© tutor2u 2004 (www.tutor2u.net) Sony & Console Games Revision Notes of 49

CONTENTS

Introduction ....................................................................................................................................................3

Unit 1 – Business Structures, Objectives and External Influences.....................................................................................4 The Structure of Business....................................................................................................................................................................................................................... 5 Business Objectives and Stakeholders................................................................................................................................................................................................. 10 Economic Influences............................................................................................................................................................................................................................. 15 Legal, Political and Social Influences.................................................................................................................................................................................................... 21 Internal Organisation............................................................................................................................................................................................................................. 23 Motivation in Business .......................................................................................................................................................................................................................... 24

Unit 2 – Marketing and Production ....................................................................................................................... 26 Nature and Role of Marketing ............................................................................................................................................................................................................... 27 Market Research .................................................................................................................................................................................................................................. 30 Product, Brands and Quality ................................................................................................................................................................................................................. 35 Pricing, Promotion and Place................................................................................................................................................................................................................ 38 Operational Efficiency........................................................................................................................................................................................................................... 41

Unit 3 – Financial Management........................................................................................................................... 43 Financial Accounts................................................................................................................................................................................................................................ 44 Budgeting.............................................................................................................................................................................................................................................. 47 Classification and Analysis of Costs ..................................................................................................................................................................................................... 49



Introduction This guide is designed to help you prepare for the three 60-minute case study papers for your Edexcel AS Business Studies exams In June 2004 your three exams are all based on the same pre-issued case study materials describing the console market and the activities, structure and organisation of Sony Corporation We’ve provided a range of example questions and answers that illustrate how the examiner might test your understanding of the pre-issued materials – and relevant business studies concepts. These example questions focus mainly on the skills of application (Level 3) and evaluation (Level 4) which are the skills that earn you the highest marks in the exam. Don’t forget too that the Units 1-3 exams also test more straightforward knowledge (Level 1) and understanding (Level 2). So you need to use this toolkit in conjunction with your textbook, classroom and revision notes. For Level 1 and Level 2 questions , be prepared to give short, relevant and accurate definitions of business studies terms –a dn be able to provide a good example to demonstrate you know what each means. Please note, that this resource is not meant to provide a complete list of ALL the possible questions that the examiner might throw at you. It is up to you to make sure that your revision covers all the main areas you have studied on the course. However, this guide will help you see how the information in the pre-issued materials can be used to respond to the kind of questions you will be set. Good luck! Jim Riley tutor2u™



Unit 1 – Business Structures, Objectives and External Influences This unit aims to introduce students to the:

Structure of business and business objectives External influences and constraints on business which affect the achievement of objectives Internal organisation of business, with specific reference to the motivation of employees

As you enter your Unit 1 exam you should be able to: Understand, interpret and analyse data relating to structures and objectives Analyse and evaluate data referring to external influences on business Assess appropriate strategies for the organisation and motivation of employees in a business organisation



The Structure of Business

Revise these areas - Primary, secondary and tertiary sectors - The mixed economy – private and public sectors - Legal form of business - Activities of a business: production, marketing, finance - Competitive influences

Example Questions Key Points to Make

Make the point that Sony operates in two of the three main kinds of business sector

1 Secondary sector: manufacturing activities E.g. Consumer audio and visual products; personal computers

What business sectors does Sony operate in?

2 Tertiary sector: service activities e.g. Recording media (Sony record label); Sony feature film division

Does Sony operate in the private or public sector? Sony is a private sector company. It is owned by its shareholders. Be careful not to confuse Sony’s status as a public company with the “public sector”. A public company simply means that the shares of the company can be bought by the general public

Define what is meant by a subsidiary company A subsidiary company is a limited company that is owned by another company (referred to as the “parent company”) Most subsidiary companies (“subsidiaries”) are wholly-owned by a parent company – i.e. the parent company owns 100% of the shares of the subsidiary. But this doesn’t have to be the case.



Analyse the advantages or disadvantages of Sony operating as public company

Advantages: - Source of finance: Sony has huge requirements for finance (e.g. to fund research and development; to fund working capital requirements of its manufacturing operations; to fund the creation of big-budget feature films). Being able to raise money by selling shares on a stock exchange is vital to Sony - Credibility: being such as large, valuable public company makes it easier for Sony to obtain bank and leasing finance and to enter into commercial deals and partnerships - Method of incentivising management and employees; part of the pay package can include things like share options, where employees benefit financially if the performance of the company leads to a long-term increase in the share price - Allows employees and customers to own shares; helping to build employee and customer loyalty Disadvantages: - Costs: increased administration costs due to the need to provide the stock exchange and investors with regular financial information. For Sony, these costs are much higher since their shares can be bought and sold on many stock exchanges - Loss of control: other individuals and businesses can buy the shares of the company. If they build up a big enough stake they may be able to takeover the company or influence its decisions [note: in reality for Sony, this is unlikely since the value of the business is so high] - Visibility of performance: competitors have access to much more detailed information about the company than if it was a private company

Make the point that most “quoted” or “listed” public companies only have their shares available for sale on ONE stock exchange. However, the really LARGE multinational/global businesses increasingly trade their shares on more than one stock market. Why

Explain why Sony has its shares listed on 16 stock exchanges

1 Makes it easier to raise finance – more liquidity in the shares



2 Makes it easier for institutional and private investors in each country to buy shares from their own stock exchange

Explain why Sony would have set up a separate subsidiary company in the UK

Multinationals usually set up separate subsidiaries in countries where they have operations. The advantages of doing this include:

- Local customers and suppliers may find it easier to trade with the local subsidiary

- There can be substantial tax advantages (e.g. Sony may pay a lower rate of corporation tax in the UK than it would if it simply passed the profits back to Japan)

- Local incentives (e.g. government grants) may be available; but these usually require the setting up of a separate company

According to the case study, in 1999, the seven British games developers listed on the London Stock Exchange were collectively worth £1.8 billion. How would this value have been calculated?

In 1999, each of these seven games developers was a business that had its shares listed on the stock exchange. So it would be possible to calculate the market value of each company by multiplying the share price by the number of shares in issue. This calculation gives you what is known as the “market capitalisation” of a company – i.e. the market value. The total market capitalisation of the seven British games developers was £1.8 billion at the time.

Define what is meant by the term “multinational” A multinational is a business (usually a company) that has production and other facilities in several countries outside its home nation. A multinational is often also called a “transnational”. As the major industrial and service markets have been affected by globalisation, it is increasingly important to be a multinational in order to compete effectively. Most of Sony’s main competitors in each of its markets are multinationals.

Sony is a highly diversified business, operating in many global consumer and electronic industries. Explain why a business like Sony adopts a strategy and outline the main advantages and

Start by quickly defining diversification: this is the move by a firm into new areas of business where it has no current activities. Sony has consistently entered new markets and developed leading positions in each of them. Why does a business diversify? There are many reasons, including:



disadvantages of diversification - To achieve economies of scale (e.g. greater buying power) - To exploit knowledge and assets (e.g. production capacity) - To reduce risk of relying on a small number of products or markets - To avoid declining industries - To provide management with new challenges Advantages of Diversification for Sony: - Economies of scale (e.g. Sony will have developed extensive global distrubution networks that it can use to introduce and distribute new products rapidly) - Information advantages (e.g. it learns how markets are similar and how they differ; it obtains better information about changing cultural, social and technological trends from its activities in various markets) - Sony’s shareholders benefit from the company investing in high growth markets Disadvantages: - Risk that diversification is pursued as an end in itself – i.e done for the wrong reasons- Sony might enter markets that it does not really have the capabilities to succeed in - Too much diversification can lead to a loss of focus

Assess the role of research and development in a business like Sony

The key to this question is to address the topic in several ways: for example… What is research and development (“R&D”)? R&D is a term used to describe all the activities associated with discovering new knowledge and applying it to new or improved products Why is R&D important generally?

- Because it is a key way of achieving competitive advantage - Because it enables a business to acquire knowledge and skills that can help the

business survive and grow in the long-term -



Why R&D is important to Sony - Sony has reputation for innovation (e.g. Walkman, PlayStation) and high quality

(e.g. televisions, computers) - Sony operates in markets that are signficantly affected by rapid technological

change - Sony also operates in highly competitive markets where profit margins are low.

R&D helps the business achieve the most efficient production costs - Sony needs a constrant stream of new products and product enhancements to

stimulate sales - If Sony is not a the forefront of technological change, then it risks losing

grounds to other global competitors



Business Objectives and Stakeholders

Revise these areas - The nature, role and importance of objectives - The hierarchy of objectives - The role and importance of profits - Stakeholders in business and their role in setting of objectives in business


Give two reasons why a business like Sony has a mission statement

A mission statement is a concise summary of the fundamental purpose of a business or organisation. So a mission statement can have several purposes: For example:

- Provide a common sense of purpose to direct and inspire the people working in the business

- Focus the business on what is perceived to be most important (e.g. growth targets; desired quality levels; attitudes and behaviour towards staekholders)

Distinguish between the aims of a business and its corporate objectives

An aim or goal is a statement of purpose. Business aims or goals describe the overall rationale of the business; its raison d’etre; the reasons why the firm is in business. An objective is a quantifiable statement of an expected outcome an organisation is trying to attain through its business activities eg increase market share to 25%. Objectives are usually quantifiable ie SMART to allow monitoring and evaluation. Objectives need to be SMART eg increase Sony wants to achieve a market share for PlayStation2 of 55% within two years of launch. SMART stands for: - Specific: ie one named person is responsible for delivering the objective - Measurable: ie set in terms of a number value eg sales, market share etc - Achievable: ie the target can be met - Realistic: the target must be achievable in terms of financial and human resources available.



- Timed: ie within a given period of time eg 12 months

1 Growth say by increasing sales and/or market share eg from 35% to 40% by 2005 in a key consumer market. Growth allows Sony to enjoy the benefits of - Economies of scale and the competitive advantage that comes from the resultant lower unit costs. - Market leadership and the enhanced ability to set a price that meets objectives - Higher profits which mean higher salaries for managers and a higher share price for Sony shareholders

2 Profitability – e.g. increasing return on capital employed to 5% by 2004 or improving earnings per share to maximise shareholder value and generating funds to support investment further and growth. Note: As part of Sony’s recent global restructuring announced in March 2003, Sony management have set an objective of achieving a group operating profit margin of at least 10% (i.e. operating profit divided by sales0

State THREE possible short-term objectives of Sony?

3 Cost control: cut fixed costs and overheads to meet a target fixed cost to sales ratio

Select three from possible objectives such as:

1 To be one of the world’s leading consumer brands

2 To provide customers with a wide range of attractive products, content and services

3 To develop innovative new technologies (possibly in partnership with other businesses ) that will support the long-term success of the business

4 To act in a responsible way with business stakeholders

Apart from making a profit for its shareholders, state THREE other objectives a company such as Sony might have

5 To achieve a high quality and customer satisfaction rating

Analyse why profits are important to Sony Think about the role that profit plays in a business like Sony: For example: - To provide finance (retained profits) to fund continued investment in research and



development - To finance the investment in capital expenditure (e.g. new factories) - To finance entry into new markets and the launch of major new products (e.g. PlayStation2) - To provide a return that can be distributed to shareholders Think also about how profit is used by some stakeholders as a measure of Sony’s performance: - Shareholders, potential investors and investment analysts focus on the profit level to see ow the business is doing (you will see from Sony’s web site that the company has to report on sales and profits achieved every three months) - Management and employees are concerned with profit – since it is likely that their own remuneration is partly linked to profit (e.g. share options, bonus targets)

Evaluate the importance of corporate social responsibility to Sony

Start by defining corporate social responsibility “CSR”): CSR is about the overall relationship of the “corporation” (e.g. a business or organisation) with all its stakeholders. These include customers, shareholders, lenders, government, suppliers and competitors. Examples of corporate social responsibility include investment in community outreach, employee relations, creation and maintenance of employment, environmental responsibility and finance performance. Then describe some examples of how Sony might address CSR: A good point to make is that Sony is a multinational business that operates in several global markets – so it needs to have strong CSR policies and procedures that are followed consistently by it hundreds of businesses around the world. That is quite a challenge in itself. You could then outline three possible ways in which CSR can be applied: Example 1: Using CSR to build relationships with customers: Sony will have measures designed to continually improve product and service quality from the customer's perspective. The objective of these is to provide a high level of customer satisfaction, trust and confidence. For example, as products offer more advanced functions and gain in complexity, Sony needs to ensure that usability is an important aspect of product quality and that is makes products that are easy to use for all users, regardless of age or ability.



Example 2: Use CSR to build improve the quality of supplies Through its procurement policy (the rules that determine which suppliers Sony uses), Sony could require that all its suppliers to be serious about the reduction of environmental impact and the observance of related laws and regulations. Sony could also insist that its suppliers observe all relevant laws (e.g. minimum wage legislation, health and safety). It would check this through a series of supplier audits. Example 3: Use CSR to develop close relationships with local communities According to Sony’s web site, the emphasis of these activities is on fostering closer relationships between Sony operations around the world and local communities by making good use of Sony's resources, such as technology and knowledge. Activities range from support for science, culture and the arts to participation by employees in local community projects. One program of particular note is SOMEONE NEEDS YOU (or S.O.N.Y. for short), which aims to promote voluntary participation by Sony’s employees in projects globally

Analyse with reference to business stakeholders whether console manufacturers should licence violent games for their machines

A good approach to this kind of question would be to examine the main issues raised by violent console games for manufacturers, developers and other stakeholders: For example: Manufacturer and developer issues: - Should major console (Microsoft, Nintendo, Sony) makers have a restriction for the type of games made for their system? Does this represent censorship or a sensible approach to corporate social responsibility? - What would the impact be on sales and profits if there were restrictions on games content (the assumption is that such restrictions would lead to lower sales)? - Could a restricitive approach to content become an advantage for a console manaufacturer (e.g. Nintendo?) - Should developers be required to cut down on the level of violence in order to retain the right to develop games for particular console platforms?



Retailer issues: - Should retailers of console games take the lead and refuse to sell games with inappropriate content? - If they did this, would console manufacturers have the market power to refuse to supply these retailers with other games (note: the retail market is highly fragmented – who has the most negotiating power?) Other Stakeholders: - Are there any stakeholder groups whose views are sufficiently important for the console manaufacturers, games developers and retailers to take note? - Parents? Churches?

1 Reduce the environmental impact of manufacturing and other operating activities. For example, control the emission of greenhouse gases and improve the efficiency of its production processes (less waste)

2 Manufacture products using environmentally friendly materials (e.g. vegetable based plastics rather than petroleum-based plastics)

Suggest three ways in which Sony can demonstrate a corporately responsible approach to the environment

3 Collect and recycle end-of-life products (e.g. old televisions)



Economic Influences

Revise these areas - The role of markets - Micro-economic factors – the market forces of supply and demand - Impacts on business


Define what is meant by an exchange rate. An exchange rate is the price (rate) at whichone currency is exchanged for another. The actual exchange rate at any one time is determined by supply and demand for that currency.

Describe three ways in which the sales and profits of Sony be affected by changes in exchange rates

A good way to approach this question would be to look at the three different areas of Sony’s business that involve exchange rates: For example; Sony as an Exporter: - Sony has production and sales operations in many of its consumer markets. However, for some countries it will export product rather than manufacturer locally. - A change in exchange rates will affect the selling prices that can be achieved in export markets - For example, assume that Sony exports a product priced in Yen to another country. If the Yen exchange rate with that country appreciates (strengthens) then customers in that country will need to pay more local currency to be able to buy the Sony product (i.e the price rises). Other things being equal demand for Sony products will fall. - This is one reason why Sony likes to manufacture locally in its export markets – it is a good way to reduce or eliminate the effect of exchange rates on selling prices Sony as an Importer: - In many of its production countries Sony will buy in raw materials and components



from suppliers overseas - Sony may have to pay these suppliers in their local currency - If the currency of the supplier changes, then the cost of supplies to Sony will change. For example, it the supplier currency appreciates (strengthens) then Sony will benefit from a lower cost of supply. Other things remaining equal, this will result in an improved profit margin for Sony Sony as a Multinational Group: - Sony operates subsidiaries all round the world - These subsidiaries will earn profits (hopefully not losses) in their local currency - E.g. Sony’s UK subsdiairies will report their profit in pounds (Sterling) - When Sony reports its profitability to its shareholders, it needs to do so in one currency (Yen). So Sony has to translate (i.e. convert) the profits of each of its subsidiaries into Yen at the end of the accounting period. - If exchange rates change, then the value in Yen of profits earned overseas changes

1 Use material and parts procurement, design, and manufacturing operations outside Japan.

Explain two ways in which Sony could reduce the risk of changes in exchange rates on its sales and profits 2 Use foreign exchange forward contracts and foreign currency option contracts to

hedge against foreign exchange risks that arise from export and import transactions

Assess the main factors that affect the demand for Sony’s products in the UK

Think about different ways in which demand might be affected for items such as consumer and electronic goods, music and films. The answer to this question is not just about the amount of money that consumers have available to spend (although this is an important part of the answer!) You could produce a good answer using a structure like this: Factors Affecting Consumer Disposal Income:

- Level of income tax (e.g. a rise in income tax rates would reduce the amount of money that consumers have to spend on products sold by Sony)



- Interest rates (e.g. an fall in interest rates would make borrowing cheaper which might lead to increased demand for products. It would also lower household mortgage repayments – which would boost the amount of money households have to spend)

- Rates of increase in wages and salaries (the amounts consumers get paid) - The level of inflation (e.g. if prices are rising faster than wages and salaries,

consumers have relatively less available to spend on consumer goods and services)

Product Life Cycle Factors: - This is an important area for businesses like Sony - Demand will change depending on where a product is in its life cycle - E.g. a brand new product will attract demand from the “early adopters”; but

demand will increase more significantly when the product is taken up by mainstream consumers (i.e. the product enters the growth phase)

- In order to maintain a strong level of demand, it is important for Sony to have a continuous flow of new products and/or product enhancements

Competitive factors: - No business operates in isolation – not even Sony - Demand for Sony’s products is affected by the actions of its competitors - If a competitor launches a product with advantages over Sony (e.g. features,

quality, price) then demand for the competitor is likely to increase and demand for Sony fall. In other words, demand for Sony products is reflected in their ability to maintain or increase market share

Supply Factors:

- Demand can only be fulfilled if there is available supply - Consumers of electronic goods for example, tend to choose from what is

available - Sony needs to ensure that its distribution channels have enough stock to ensure

that customer demand is met (e.g. retailers need to have stocks of the best-



selling products or the ability to quickly order it for customers) - If there are shortages of Sony products in the distribution channels, then

demand for Sony will fall if consumers decide to substitute products of competitors

This is not a complete list of factors affecting demand. You could also develop your answer to include:

- Seasonality (i.e. how demand will vary depending on the time of year) - Fashion & social trends (e.g. the increasing propensity of households to have

more than one television, DVD player etc)

Analyse the main factors that may have led to the fall in value of computer games developers from £1.8 billion in 1999 to just £335 million 18 months later

This question addresses several different areas which you could approach in a structured way: Start by demonstrating that you understand the meaning of what “value” means in the context of the question:

- The eight quoted games developers had a combined market value (“market capitalisation” of £1.8 billion in 1999

- This value reflected stock market investors view of the prospects for these eight businesses

- At the time, investors were taking an optimistic view of the future prospects of games developers, so were prepared to value the businesses at a high rating (price earnings ratio)

Cover the factors that would have supported investor enthusiasm: - New consoles about to be launched (GameCube; Xbox) – this should increase

demand for software titles produced by these developers - Sony PlayStation2 in high demand - Many new customers entering the market, as games consoles move into a rapid

growth phase of their product life cycle - Excitement caused by the “dot.com” boom added to investor enthusiam for “tech

stocks” of all kinds - Risks of investing in games developers were not well understood – so investors

were less cautious than they might be now



Then address what might have changed that led to such a significant fall in market value (to just £335 million 18 months later):

- New consoles have been launched and consumers have bought their games to play (console customers tend to buy a batch of games when they first get hold of their chosen console_

- So consumer rush to buy a console slows, as does the demand for new software titles

- Demand for console titles is concentrated on the most popular games (the market is often said to be increasingly “hits” driven), so not every games developer benefits from a quieter market

- Investors downgrade their expectations for sales and profits growth – which acts to reduce the estimated value of the companies.

- Not surprisingly, the share prices of games developers fall sharply, also caught up in the negative sentiment and fall-out from the dot.com decline

Analyse how UK demand for consoles and console games be affected by an economic recession in the UK

This question is similar to the one on factors affecting demand outlined above. The starting point would be to demonstrate that you understand what a recession is and how it might affect the console market. A recession: strictly-speaking, a recession is where there are two consecutive quarters when an economy shrinks. A recession is more commonly associated with an economic downturn – i.e there is an overall reduction in demand in the economy. This may, or may not affect demand for consoles and console games, depending on what other factors are at play Your analysis should point out that a recession is just one way in which demand is affected. You should then outline the other factors affecting demand (see further above)

Explain why the console market has very high barriers to entry

First, start by defining what barriers to entry are; Barriers to entry are factors that act as a disincentive or hurdle to new competitors entering an industry. Barriers to entry can be:

- Legal (e.g. governments preventing new competition) - Natural (e.g. where the costs of production only make sense for one producer to



be in the market – a natural monopoly) - Tactical –where existing competitors in an industry act to prevent or discourage

new entrants - Competitive – where existing business and brands in a market have such a

well-established product, skills, low-cost production or distribution capability to make it unlikely that a new operator could succeed.

Then go on to describe the key barriers to entry in the console market, distinguishing between those that affect the console manufacturers, and those affecting games developers Barriers to entry in the console market (i.e. compete against Sony/Nintendo) - Need to achieve a large installed games play base to encourage games developers to support the console - Research and development – need to create a console with high level of performance that will at least match if not exceed those of existing consoles - Distribution – the console will need to be supported by retailers (will they want to stock games for more than two or three different types of console?) - Software – need to attract games for the console; games developers need to think that it would be worthwhile investing heavily in the new console. You might conclude from the above (as we do) that the barriers to entry in the console market are extremely high. The barriers to entry for games developers are less high, but still exist:

- Need to have technical capabilities to develop games for one or more consoles - Finance to support the long development time - Retail distribution.

Because the barriers to entry are lower, the games develop market is more fragemented.



Legal, Political and Social Influences

Revise these areas - Legislation as both a constraint and a framework in which business operates - The state as a regulator, as a provider of assistance to business and as a customer - The impact of demographic trends, social structures and lifestyles on business organisations


Start by making some general comments about the importance of choosing a suitable business location: E.g: Business location is about geographic positioning of a business in relation to its customers, suppliers, employees etc Selection of a location is likely to involve detailed and careful analysis Factors that influence location include: - Sources of raw materials, components - Proximity to market and transport costs - Communication and infrastructure links - Availability and cost of land - Access to suitably skilled workforce - Other incentives – e.g. government grants The main reasons why Sony would have chosen Wales would be:

1 Regional grant assistance (probably from the Welsh Development Agency – who can offer substantial financial incentives for manufacturers like Sony to locate in Wales

Assess the possible reasons why Sony decided to locate both of its UK factories in Wales

2 Access to skilled workforce



3 Low land and development costs



Internal Organisation

Revise these areas - Organisational design - The functional areas of management - The internal structure of organisations


Evaluate the advantages and disadvantages of the way that Sony re-organised its organisational structure [described in Appendix 1: lines 22-32]

This question is about organisational structure. Remember that the purpose of organisational structure is to coordinate the assets and activities of a business so that they are directed towards achieving the aims and objectives of the business. This is why Sony would have made the change – because the previous structure wasn’t working as well as needed. Organisational structure can generally be structured around either:

- Main functions (e.g. production, sales, research - Product or service - Location

Sony has chosen to move towards a flatter organisation structure based focused on main product groups Advantages: - Closer to the markets and customer needs: important since these markets are changing so fast (and in many cases converging on each other) - Can share group assets - Faster decision-making in key markets Disadvantages: - Potential duplication of functions - Divisions may become too autonomous



Motivation in Business

Revise these areas - Motivation in business organisations and the role of the various motivation theories - Introduction to styles of leadership - Job design, job enrichment, job enlargement, job rotation


Assess the main methods Sony can use to motivate its management and employees around the world

Start by pointing out the significant challenge facing Sony in motivating and rewarding its employees: For example:

- A global business with over 150,000 employees worldwide - Over 1,000 subsidiaries – each with a separate management team - Eight divisions – each with a management team - Diversity in local remuneration packages because of diverse employment

practices throughout the world (i.e. what employees in the UK expect differs from the Far East in terms of things like basic wage rates, bonus policies, fringe benefits, holidays, retirement ages and retirement benefits)

Main Financial Methods of Motivation: - Sony is a quoted company – therefore likely to have significant and widespread

incentives linked to the financial performance of the business and the share price

- E.g share option schemes and profit-related pay - Production pay likely to be linked also to achievement of productivity and

quality targets Non-Financial Methods of Motivation:

- Empowerment: e.g. giving each young President of the new divisions full



autonomy and decision-making authority - Job satisfaction - High standard of working conditions



Unit 2 – Marketing and Production This unit aims to introduce students to the:

Identifying and satisfying customer demand Producing products of appropriate quality as efficiently as possible

As you enter your Unit 2 exam you should be able to: Apply your knowledge in order to evaluate, analyse and apply the most appropriate marketing and production principles to the pre-issued case study material



Nature and Role of Marketing

Revise these areas - The role of marketing - Marketing objectives and the effect of competition - Marketing mix


Assess whether Sony is best described as a “marketing orientated” or a “production orientated” business

Start by defining terms: The marketing orientation of a business relates to how a business “positions” itself to develop and deliver products and services. Orientation is essentially about the attitude of a business towards marketing. Marketing orientated businesses: focus on what customers want Production orientated businesses: focus on what the business is good at – and hope to produce goods and services that customers want Marketing theory suggests that a marketing orientated business will thrive because: - It focuses on the needs of customers – needs that it understands and responds to - It implements business processes that are designed to meet the needs of customers and get close to customers - All business activities are co-ordinated around the needs of the customer What is the evidence for Sony? On the one hand – lots of evidence that it responds to customers wishes in designing and delivering products and services E.g. Significant new product development; substantial market research before products are launched BUT also Sony believes that it anticipates wants that consumers have yet to realise



(which suggests that Sony has confidence in its production orientation)

Assess whether the console market can be considered a “niche” or a “mass” market.

Start bey drawing the main distinctions between a niche and a mass market: What is a niche market? Niche marketing refers to the exploitation of comparatively small market segments by businesses that decide to concentrate their efforts. Niche segments exist in nearly all markets What is a mass market? Mass markets are mainstream markets where products and services meet the needs of the majority of customers Then make some valid points about the console market: for example, you might point out that: - When consoles were first marketed, they were very much a niche market. The product appealed to an enthusiastic, generally younger and predominantly male customer. - Now, consoles and console games have become more mass market. The latest generation of more powerful consoles and falling prices have attracted new types of consumer to the market in large numbers. - For example, in 2003, Sony’s worldwide sales of PlayStation2 were 30 million units!

Using the “four P’s” framework, evaluate which are the TWO most important elements of the marketing mix for the Sony Playstation2

Start by pointing out that all businesses use each element of the marketing mix: For example:

- Sony’s products are unlikely to be successful if it does not have suitable distribution channels to the end consumer (e.g. retail outlets stocking them)

- A price cut by Sony may increase demand for a product, but only if customers are made aware of it (“promotion”)

But the question asks you for evaluation - it wants your opinion based on sensible analysis. Consider the factors that are most important to Sony for the PlayStation2: In our view, the two most important elements of the marketing mix are: (1) Product



- Technological changes (e.g. rapid improvements in semiconductor technology) are driving significant changes in Sony’s markets – the console market included - It is vitally important that Sony continues to develop its console platform to retain its technical advantage - Each console platform has a relatively short product life cycle – the case study suggests 4-5 years - Games developers need to be informed about console product development so that they can prepared games for the crucial period when a new console is launched - Product quality is hugely important – Sony has a global reputation for excellence in product quality – this needs to be maintained (2) Price - As the case study suggests, the console market is price sensitive - The challenge is to offer a consumer price for the console unit itself that encourages customers to buy it. They will not buy games for a console they don’t own, and the games for the three main consoles (PlayStation2, GameCube and Xbox are not transferable - The launch of the Xbox has increased competition in the market, making it more important that the PlayStation2 is price competitive



Market Research

Revise these areas - Defining the market – market share and opportunities for growth - Market segmentation - The need for, and, purposes of sampling


Define the terms: (1) Market share, and (2) Market segmentations

Market share: - Market share can be defined as the percentage of all sales within a market that is held by one brand / product or company Market segmentation: - Segmentation involves subdividing markets, channels or customers into groups with different needs, to deliver tailored propositions which meet these needs as precisely as possible.

Explain why it is important for Sony to have a detailed understanding of how consumer and electronic markets are segmented

Start by demonstrating that you know what market segmentation is – use the brief definition above There are various points you could then use to explain the importance of segmentation: for example… Better matching of customer needs Customer needs differ. Creating separate offers for each segment makes sense and provides customers with a better solution Enhanced profits for Sony Customers have different disposable income. They are, therefore, different in how sensitive they are to price. By segmenting markets, Sony can raise average prices and



subsequently enhance profits Better opportunities for growth Market segmentation can build sales. For example, customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory, lower-priced product Retain more customers Customer circumstances change, for example they grow older, form families, change jobs or get promoted, change their buying patterns. By marketing products that appeal to customers at different stages of their life ("life-cycle"), Sony can retain customers who might otherwise switch to competing products and brands Target marketing communications In each of its markets, Sony needs to deliver their marketing message to the relevant customer audience. If the target market is too broad, there is a strong risk that (1) the key customers are missed and (2) the cost of communicating to customers becomes too high / unprofitable. By segmenting markets, Sony can reach the target customer more often and at lower cost Maintain high share of the market segment If Sony can continue to have a strong or leading share of a market, it is in a better position to maximise its profitability. In each of Sony’s consumer markets, minor brands suffer from lack of scale economies in production and marketing, pressures from distributors and limited space on the shelves. Through careful segmentation and targeting, Sony usually achieves competitive production and marketing costs and become the preferred choice of customers and distributors.

Develop your answer around the reasons why successful businesses are often market leaders:

Assess the reasons why Sony has dominated the console market since 1995

1 A head start. Sony entered the console market before Nintendo and Microsoft.



It produced a much better product than the incumbent competitor (Sega Dreamcast) and so learned much about what makes a successful product in the market

2 Established console customer base and customer loyalty

3 The best games developers want to develop games for Sony’s products because it gives them the best chance of a commercial success. This create a “virtuous circle”: better games….means more customers…means even more better games…means more customers

4 Sony has innovated by pushing technological barriers back. E.g. the PlayStation2 was a significant improvement on the original PlayStation – which was itself more technologically advanced than the competition when it launched

5 Sony’s brand name (and associated customer loyalty) makes the product an attractive one for retailers

The case study suggests that the console market cannot sustain more than two machines at any one time. Evaluate the reasons why this may be so and the implications for Sony, Nintendo and Microsoft

Start by assessing why there may only be room for TWO successful console platforms: - High research and development costs of developing a new console - Console needs to achieve high unit sales to recover the development

investment - Games developers will want to concentrate on only one or two platforms

(difficult to develop using different software systems) - Most customers already have a console and they may be brand loyal - Retailers want to minimise the number of consoles (and associated games) they

stock Implications:

- Fierce competition amongst console manufacturers if there are too many consoles chasing limited demand

- Competition will be around achieveing the highest possible user base - Price wars likely to feature as part of this battle - The loser is likely to incur heavy losses if there really isn’t enough profit in the

market to go round



- In time, losses will mean that ony the strongest survive. Seag had to leave the market; will it be Nintendo, Sony or Microsoft next?

Describe the kind of market research that Microsoft is likely to have undertaken prior to launching the Xbox into the console market

Remember that Microsoft was trying to enter a new market. Market research likely to be used: - Surveys analysing how customers are using existing products; what works well; what could be improved? This needs to feed into the Xbox product development process - Analysis of the size, structure and key trends in the market (market size, growth, sales and profits by geographical region) - Observation: how consumers interact with prototype versions of the Xbox and games scheduled for publication at release. This involves literally watching how people behave or act and noting down their reactions - Focus groups- perhaps to evaluate the Xbox marketing materials What did Microsoft actually do? Microsoft undertook extensive research to assist with the development of its market entry strategy. The research was concentrated on "core gamers". Core gamers spend more than 25 hours per week playing games, and their views were considered very important, as they are key decision-makers and opinion leaders. If the new product could meet the demands of this group, then these early adopters would have a strong influence on its eventual success within the broader market. Microsoft’s market research identified the needs and wants of the main influencers in the market. The research suggested that the physical design of the product should appeal to a young audience. The key differentiators in terms of the performance of consoles were the speed with which complex games could be played, the quality of the audio experience supported by high quality graphics. The research also suggested that the Microsoft brand, while representing excellence in the PC software market, might not be the best brand to use in the games console market. Rather than introduce a Microsoft Games Console, it was decided to build an entirely new brand – Xbox.



Explain what is meant by “test marketing” [Appendix 1: Lines 36/37] and explain why this is an important part of new product development

What is “test marketing”? Test marketing includes a range of techniques designed to determine a product's viability, its primary success attributes, and likely demand factors prior to formal product launch. Why do test marketing? Because a large proportion of new products fail. So it is important to make sure that the entire marketing mix works as well as possible. For example, consider what happens to one of Sony’s feature films. It is film industry practice to “test market” films before they are made available for general release. This enables Sony to:

- Make changes to the film - Identify whether test audiences object to any part of the film

Other things that can be done with test marketing: - Allow a limited number of customers to trial the product - Let retailers and other distributors see the product to get their responses on

issues such as pricing and promotion So - test marketing is used to optimize the marketing mix prior to launch.



Product, Brands and Quality

Revise these areas - Branding and packaging - Product analysis techniques - Quality


Assess the impact of the product life cycle of consoles on the business of computer games developers

There are two product life cycles to consider: (1) Product life cycle of a particular console platform (e.g. PlayStation) - How long will the console last? - How long will consumers choose to stay with that console (i.e. will they upgrade if a new console is launched) - Will games developed for one console be compatible with new products (Sony recognised the importance of this and made the PlayStation 2 compatible with all games developed for the original PlayStation) (2) Product life cycle of a game - Likely to be quite short - Customers will play a new game for a while but will only keep playing if it is a hit - Early sales determine whether a game is a hit or not - Possible to create a longer game life cycle by developing a “series” (e.g. Tomb Raider)

Console technology is advancing rapidly. Assess the implications for the products of games developers

Like the games consoles they are designed for, console games need to be increasingly complex and powerful. Advancements in console technology, processing power and vastly increased storage capacities of the optical media now used are enabling the development of increasingly:

- Complex gameplay - Large quantities of realistic graphics



- Professional audio The challenge of improving technology for games developers is that games are becoming more lavish and cinematic The leading developers and titles set a standard which consumers begin to expect. Whilst this increases the potential for computer games to appeal to the mass market, the resource required to produce games with such high production values has significantly increased.

Assess the importance of quality in the success of a business like Sony

Quality is an essential part of Sony’s business. Consider what quality means: Quality is first and foremost about meeting the needs and expectations of customers. It is about more than a product simply "working properly". Think about Sony’s customer needs and expectations when they buy a Sony product. These may include performance, appearance, availability, delivery, reliability, maintainability, cost effectiveness and price. Quality represents all the features of a Sony product that affect its ability to meet customer needs.

Explain the main ways in which Sony can protect its intellectual property rights

The two main ways are: Patents: Patents are concerned with the functional and technical aspects of products and processes. The invention could be a new product, a new process, a new apparatus for performing a process or possibly a new use for a known product. Patented inventions can simply be improvements on an earlier invention. Trade marks These are VERY important to Sony. Trade marks are symbols, signs or even words, sounds or jingles which distinguish the goods of one business from those of others. Trade marks help customers and other businesses recognise a business and identify it



with the quality of product or service for which it is known. They are often the single most valuable marketing tool a business will have, whatever its size, and can be essential in developing a brand. It is vital that the Sony trade mark is protected around the world



Pricing, Promotion and Place

Revise these areas - Pricing methods - Techniques of promotion - Channels of distribution


Evaluate the importance of pricing in the battle for market share between Sony, Nintendo and Microsoft)

There are two key parts to pricing: - Price of the console unit - Price of games

Just as shaving companies make money on blades rather than razors, the games industry works by selling consoles at significantly discounted prices and making a profit on the games, which typically cost £30-40 each. Around £7-8 from each game sold is passed from publisher to console maker as a licence fee. The price of a console has to be sufficiently attractice to encourage customers to choose that console over an alternative. Few customers buy more than one kind of console. Pricing is also crucial for retailers. They will often “bundle” a console with a suite of games and accessories in order to create a package that customers find attractive.

Console manufacturers like Sony and Nintendo subsidise the cost of their machines. Assess the reasons for doing this

The key concept here is that of the “loss leader” A loss leader is an item priced at or below cost in order to attract customers Manufacturers heavily subsidise the cost of the console hardware itself but charge a license fee for each unit of software sold. The console hardware is thus a loss leader for selling games. As a result, manufacturers spend very heavily every five years to promote their new console platforms (e.g. Microsoft has an estimated $500m budget to market the Xbox). Consequently, manufacturers control access to their console platforms very closely through licensing developers and access to development tools, approval of titles at



concept and manufacturing stage and control of the manufacturing process.

Sony makes televisions and it also make feature films. Explain how the promotional mix for these two product groups might differ

Start by thinking about the different nature of the product/service being offered by Sony:

- Televisions are “consumer durable” items; they last a long time and have a high ticket price

- Films are a service that is over 2-3 hours after being bought Promotional mix for a Sony Television: - Focus on product features - Needs to help inform customers prior to purchase, and encourage customers after they have bought that they have made the right choice - Promotion also about building the brand - Main types of promotion: magazine and newspaper advertising; television Promotional mix for a Sony Film - Need to encourage strong cinema attendances in the first week (the key week for film revenues) - Wide range of promotional methods; newspapers, radio adverts



Television Advertising Magazine Advertising Compare the advantages and disadvantages of television and magazine advertising as a way for Sony to inform customers about its products

Advantages: - Allows creative, complex multimedia content - Reaches a wide audience - Can be closely targeted - Also helps build the brand Disadvantages: - Very expensive - Difficult to track effect

Advantages: - Can convey more information (e.g. techynical/specification - Better targeting (e.g. specialist magazine for specialist products) - Lower cost Disadvantages: - Difficult to reach a wide audience - Static, not multimedia

Explain why the development of a national distributor network is so important for Sony in its main consumer markets

Distribution is a key part of the marketing mix. Sony makes a wide range of products for a wide range of consumer markets. It would be very hard for Sony to sell direct into each of these markets. Customers also require a high level of pre and after-sales service. Retail distributors are best-placed to provide this kind of service.



Operational Efficiency

Revise these areas - Methods of organising production - Capacity utilisation - Economies/diseconomies of scale - Stock control - Just in time (JIT) and just in case


In May 2002 worldwide sales of PlayStation2 were 30 million units. Assess the economies of scale that Sony will enjoy from producing at such a high level of output

Economies of scale and the business – a reduction in the cost of producing a single unit of production resulting from an increase in the size of the firm’s operations. e.g. Technical economies - As firms expand they can adopt different techniques to reduce the cost of each unit of production, for example, replacing expensive employees with cheaper technology on production lines. Specialisation economies - As firms expand, they are able to employ people to specialise in different areas of the organisation. Purchasing economies - As firms expand, more supplies will be required allowing better prices and discounts to be negotiated from suppliers.-

Evaluate the reasons why Sony uses Just In Time (JIT) manufacturing techniques

JIT is a manufacturing system that is designed to minimise the cost of holding stocks (e.g. raw materaisl, components, work-in-progress and finished goods). JIT is often described as a business philosophy which is based on doing things well, always looking to improve things (see Kaizan) and removing waste. Done properly (not easy), JIT offers many advantages to Sony:

- Reduced working capital requirements (i.e. hold less stock) - Reduced manufacturing lead times – so the distribution channels have rapid

access to Sony products once they are launched



- Increased productivity of direct labour and support employees in Sony’s dozens of factories

- Better usage of Sony’s investment in plant and equipment - Above all – better quality

Explain what is meant by the term “Kaizan”. Kaizan is a form of management philosophy concerned with achieving requried quality standards. It is based on the philosophy of "continuous improvement" Continuous improvement means just what it says. It is a philosohy that encourages all employees in an organisation so that they perform their tasks a little better every day. It starts from the assumption that business processes (e.g. production methods, purchasing & recruitment) can always be improved. Kaizen is a system for generating and implementing employee ideas developed in Japan. The Kaizen suggestion scheme helped many Japanese companies like Sony improve quality and productivity, which allowed them to offer better products at lower prices and therefore increase their market share. Much of the success of Kaizen came about because the system encouraged many small-scale suggestions that were cheap and quick to implement. They also came from shop-floor employees - who had a detailed appreciation of the benefit each change might make to the process concerned. By implementing many small improvements, the overall effect was substantial. One of the most publicised aspects of the Japanese approach to quality management is the idea of Quality Circles or Kaizen teams. A Quality Circle/Kaizen Team as a group of workers who do similar work and who meet: - Voluntarily - Regularly - In normal working time - Under the leadership of their supervisor - To identify, analyse and solve "work-related" problems - To recommend solutions to management



Unit 3 – Financial Management This unit aims to introduce students to the:

The structure and use of accounting and financial information as an aid to financial management and decision-making As you enter your Unit 2 exam you should be able to:

Analyse the profitability and liquidity of a business by interpretation and analysis of financial and accounting data Assess how this position may have arisen Understand budgeting and cost and break-even analysis



Financial Accounts

Revise these areas - Purpose of accounts & structure and format of the balance sheet and profit and loss account - Capital and revenue expenditure - Profit and cash - Depreciation - Working capital - Interpretation of final accounts & limitations of ratio analysis and of accounting statements

The financial information provided about Sony Corporation in the case study is reproduced and analysed below: We make reference to this table in some of our suggested points. Profit and Loss Information 6 Months 12 Months 12 Months

to Sept 2002 to Mar 2002 to Mar 2001Sales (£m) 18,482 39,886 38,499Net Profit (£m) 533 81 89Net Profit Margin (%) 2.9% 0.2% 0.2%

Balance Sheet Information Sep 2002 Mar 2002 Mar 2001

Other Assets (£m) 25,692 25,397 22,897

Current Assets (£m) 18,597 17,564 18,302Current Liabilities (£m) 13,985 13,466 13,930Net Current Assets (£m) 4,612 4,098 4,372

Other Liabilities (£m) 17,877 17,019 15,082Net Assets 12,427 12,476 12,187

Shareholders' Equity (£m) 12,427 12,476 12,187

Performance Ratios Current Ratio 1.33 1.30 1.31Return on Capital Employed (%) 4.3% 0.6% 0.7%




Note: You are likely to be asked to define one or more of the accounting terms used in Appendix 3; make sure you have covered these Using the data in Appendix 3 you may be asked to calculate some ratios or performance indicators. The obvious ones are: Current ratio (divide current assets by current liabilities) and return on capital employed. These calculations are shown above.

Sony’s many subsidiaries are treated as “profit centres” by Sony management, whereas other activities are treated as “cost centres” Explain what these terms mean and how they provide advantages to Sony

Cost centre – a clearly identifiable area of the business to which costs can be allocated (e.g. Sony’s research and development departments) Profit centre - a clearly identifiable area of the business to which costs and revenues can be allocated and thus profits calculated (e.g. Sony’s UK factories and subsidiaries) Cost and profit centres are a means of allocating overheads efficiently and can be chosen by division, region, department, product, location or person. Cost and profit centres are used to allocate budgets which are then controlled by a manager. Advantages of forming profit and cost centres: Financial reasons – useful to split the financial performance into different areas to make assessment easier – clearer which managers of these areas are hitting their budgets Organisational reasons – helps manage and delegate control of resources – can respond to changes in circumstances e.g. changes in customers needs Motivational reasons – with managers have more control of costs and/or revenues delegated to them they are more motivated

Using the data in Appendix 3, evaluate Sony’s: (1) Profitability (2) Liquidity

Profitability - Net profit margin was very low in 2001 and 2002, recovering slightly in first half of 2003 - Possible reasons: heavy investment in R&D, price wars in main profit earner (games consoles); movements in foreign exchange rates; fixed costs and overheads allowed to get out of control - Would be helpful to have information on gross profit margins and more detailed



analysis of costs to see why margins are so low - Also profitability needs to be compared with competitors – do they also have low margins? - Low return on capital employed (low profit and high investment in assets) – is this acceptable to Sony shareholders? Liquidity: - No major change in current ratio (1.3) - Would be helpful to have a breakdown of current assets so that the acid-test ratio could be calculated - Would also be helpful to have a cash flow statement to see how well Sony is generating cash and what it is being spent on



Budgeting

Revise these areas - The role, purpose, process and features of budgets in financial management - The process, purpose and features of budgeting and cash-flow forecasting


Assess the extent to which the use of budgeting might assist Sony in managing its global network of businesses

Start with a quick outline of the use of budgeting – process of setting budgets is a key part of controlling a business and management accounting Budget – set for either costs or revenue as a target to achieve in a certain time period Management accounting – the process of planning and making decisions about the future Budgets are used in management accounts to help control the business actions in the future. A budget is normally expressed in monetary terms but can be stated in sales or output targets. There will be four main types of budget used by Sony: - Group budget – showing the future profit, revenues and costs of the whole group - Sales budget – prediction of sales volumes, prices and revenue for a specified period - Production budget – output targets normally based on sales budget requirements - Cash flow budget – cash flow forecast (for individual business units and the Sony Group as a whole Benefits of budgeting for Sony These include…

- Main way in which Sony’s senior management can track performance against objectives – which will help them inform stock exchange investors about how the business is performing



- Co-ordinates business actions – e.g. production stock re-ordering based on production budget which is in term based on sales budget

- Motivates staff since it gives them targets and responsibility to achieve them - Makes managers plan for the future - Gives a measure of success and failure from which business lessons can be

learnt. It is worth pointing out that budgeting will not be an easy task for Sony: For example: - Difficult to forecast future events due to changing markets - Uncertainty about how well new products will perform (or those of major competitors) - How will changes in foreign exchange rates and global economic conditions affect Sony’s businesses?



Classification and Analysis of Costs

Revise these areas - Classification of costs - Contribution - Break-even and margin of safety


Explain the difference between fixed and variable costs.

Fixed costs – costs which do not vary with output e.g. rent or other overheads (note: overheads – costs such as salaries, lighting, heating, which cannot be directly attributed to the production of a good or service - also known as indirect costs) Variable costs – costs that vary with the amount of output produced – e.g. raw materials Fixed costs only exist in the short run. The short run is amount of time it takes to vary all the inputs in the production process. For instance it might take six months for Sony to find bigger premises for one of its businesses so in the meantime the rent on the current premises is fixed. The amount the business pays for the fixed cost can vary, but only because the price of the fixed cost changes. For instance the rent can go up in the six-month period, but it has not changed because of the amount of output. Fixed costs are significant because a business has to pay the fixed costs, even if it decides to produce no goods that month. Direct costs are used to help a business work out how much it costs to produce a product each month or year. If the direct costs go up for that time period, then the business is less efficient.

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