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Chapter18 The Strong-Willed Schein

The Strong-Willed Schein

Harvey Schein (center) in a meeting with Iwama and

In September 1972, a year after the San Diego plant was completed and production of Trinitron TVs began, a US national was appointed president of Sony Corporation of America. The new president, Harvey L. Schein, was from CBS Records, Inc. and had played an instrumental role in the establishment of the CBS/Sony joint venture by suggesting the original idea to Sony. Iwama left the United States the same year that Schein became president, but he remained the company's chairman. When Shigeru Inagaki left the post of vice president, Iwama sent orders for Raymond J. Steiner, sales manager for the US market, to assume the post. With these two appointments, Americans filled both the position of president and vice president.

Actually, Schein was the second American president of SONAM. In 1966, Ernest Schwartzenbach, who was a member of the Smith Barney team when Sony issued ADRs, joined Sony upon his retirement. Morita had insisted that he join and had great confidence in Schwartzenbach saying, "He knows Sony inside out." Unfortunately, Schwartzenbach suddenly passed away in 1968. Iwama succeeded him and spent several years in the United States, as Morita had done years before. After his initial period in the United States, Iwama spent most of his time as president shuttling back and forth between the US and Japan. Despite Iwama's absence, steady expansion within the US market was realized thanks to the efforts of Inagaki, who was then SONAM vice president. Inagaki had been in the United States since the founding of Sony Corporation of America in 1960, providing steady support for thirteen years. Fortune magazine wrote that Inagaki was the force behind Sony's US sales growth from $300 thousand to $100 million in just ten years, and his appointment to the post was one of the most instrumental factors for the company's success.

Morita believed that SONAM needed American management to make it a truly US company. It had to break away from its dependence on Japanese managers. The hiring of Schein, and later Steiner, were logical steps in Sony's localization of management.

Schein's management objective was very clear: to generate profits. He introduced comprehensive American-style streamlining and budget controls. He also believed in short-term profits. It was inevitable that such a firm believer in drastic cost cutting to increase profits would soon clash with his Japanese staff and the Sony management in Japan. Unlike Schein, they believed that investing from a long-term perspective was of primary importance. This included an emphasis on strengthening the company through such means as training personnel, advertising, restructuring customer service systems, and building spare parts warehouses.

Morita had given Schein a free reign, but tried to persuade him of the importance of investing for the future, saying, "Chasing short-term profit will consume all we have built-up over the years." Morita tried incessantly to make Schein change his approach.

When Betamax was introduced, the head office in Tokyo gave permission to SONAM to invest as much in advertising as was necessary to promote the new concept to the market, but Schein brushed off the expense as "unnecessary." Schein was a truly unique and strong-willed man.
When Schein attended budget meetings, raised voices and banging on the table were common. Schein had been attracted to Sony, and he was working to achieve the first mission of private companies, which was basically to "turn a profit." He believed that that was the mission he was given by Morita. Thanks to Schein, Sony gained a keen awareness of costs. SONAM's transformation into a modern US company can be attributed to him. US businesses are often run by a chairman also acting as the CEO; this gives the chairman authority over the chief operating officer, who is usually also the president. Iwama had continued to stay on as chairman of Sony Corporation of America after returning to Japan, but there was a movement to appoint an American to this post as well. In July 1977, Schein and Steiner were promoted to chairman and president respectively, and the helm was thus completely handed over to Americans.

Unfortunately, this did not last long. Steiner passed away in January 1978 and Schein retired in February of the same year. However, this was probably one of the first instances in which a wholly owned US subsidiary of a Japanese company was managed entirely by Americans.

From Minor to Major League

The introduction of Trinitron color televisions led
Sony's expansion into the US market.

In the 1970s, full-scale production in the US began, and Sony started the process of hiring American managers. Sony established sales channels throughout the United States, a country twenty-three times the size of Japan, with SONAM at the center of the network.

The introduction of Trinitron color televisions was the first major step in Sony's US expansion. When Trinitron was introduced in the United States, Morita, who was then Vice President of Sony, insisted on inviting over two hundred US distributors and dealers to Japan for a ten-day Sony Convention in Tokyo. This was the first such experience for Sony, and it was unusual for the industry as well. Masaru Okumura and his group, the SONAM Department, spent approximately two months in the International Division preparing for this event. Thanks to their hard work, the convention was a success. It provided an important opportunity to exhibit what sort of company Sony was and the products that it produced such as the Trinitron television. The know-how obtained from this convention later became the foundation for Sony's future sales promotion events.

However, when it came to selling color televisions, marketing methods had to be modified. The concept behind Sony's new sales method was to broaden the contact between the consumer and Sony; in other words, to have Sony sales people explain the product directly to potential customers. Sony stopped selling through independent sales representatives and dealers, replacing them with Sony's own salespeople.

As Trinitron TVs were sold through the newly established channels, Sony's brand image was heightened. Steiner, an avid baseball fan, expressed his joy with the very American statement that, "This will enable Sony to join the major leagues."

The beginning of the 1960s was truly a time of new development. Hoping to sell as many Sony products as he could in order to develop the market, Morita founded Sony Corporation of America and lived in the US to spearhead the operation. If it had been baseball, Sony would have started as a minor league player. From that point, Sony had successfully launched the transistor television, introduced the Trinitron television line, established its own sales and servicing channels, constructed manufacturing facilities in San Diego and Dothan, and hired American management. Through this Sony promoted its brand name and the impressive sales figures prove Sony's success. Basically, Steiner was trying to say that Sony had acquired the power to join the major leagues of the US electronics industry.

The 1970s were a time for laying the foundations for localized management, production and R&D operations. The foundations, built in the US and Europe during this period, greatly contributed to Sony's rapid growth in the 1980s and early 1990s under Morita's principle of "global localization."

Importing Refrigerators

A Sony advertisement in U.S. Time Magazine.

The 1960s and 1970s were not just a time of overseas expansion for Sony. Morita was also pursuing other projects during this time.

One day in May 1972, while the San Diego plant was still under construction, Morita who was then president, and other Sony top management gathered for a brainstorming session on the future course of Sony. Morita's suggestion of importing products from the US took everyone by surprise. Some agreed, others kept quiet, and the rest were strongly against the idea as they were concerned about the hassles their salespeople would face. Tetsuro Yotsumoto, then director of the International Division, was one of the people who strongly opposed the idea. Morita replied to him by saying, "I can see where you are coming from, but it will help Sony Corporation in the end."

At the time, the dollar was still unstable, despite the Smithsonian Agreement on a fixed exchange rate of $1=308 yen. Additionally, the US trade deficit with Japan was showing no signs of decreasing. Protectionism was on the rise in the United States, and Japan was being branded an "economic animal." Many US industries were accusing their Japanese counterparts of dumping and claiming that the Japanese market was closed to them. Neither European nor US companies had much sympathy for Japanese companies. While establishing sales channels in the United States, Morita had been concerned that emotional clashes between the two countries might irrevocably damage their relationship.

Morita was convinced that Japan's export volume would continue to increase and that pressure for Japan to step up imports would rise accordingly. Hence he insisted, "If Sony is a leader in exporting, it should also become a leader in importing. Before the pressure mounts, we should introduce Japan as a market for US and European exports. Let's make a solid push in that direction."

Morita was in the United States when the dollar was devalued and the yen was introduced to the floating exchange rate system. There he experienced the harsh anti-Japan sentiment prevalent in the United States firsthand. This experience led him to think that, "Japan as a country must be more aware of its role in the international community." The Japanese government had just begun to implement such measures as tariff reductions to encourage imports.

Two weeks after the brainstorming session, Morita flew to New York and held a meeting with the public relations and advertising managers of Sony Corporation of America. This was the first step in Sony's preparations for importing items from the US.

On May 31, 1972, Sony placed full-page advertisements in four major US dailies proclaiming, "SONY WANTS TO SELL U.S. PRODUCTS IN JAPAN." The first line of the ad read, "Japan is promising market for US-made products," and announced that Sony would draw on its sales expertise and knowledge of the Japanese market to provide support to US firms wishiang to export their products to Japan. As Sony was known primarily as a company that sold transistor radios and color televisions, the initial response to this ad was one of surprise that a firm such as Sony would venture into the importing business, but the company soon drew support for its efforts. The aim of the ad was simply to deliver the message that in Sony, US firms had a friend thousands of miles away across the Pacific.

SONAM received over 1,500 inquiries following the placement of the advertisement. They were so busy handling the replies that help had to be sent from the International Division in Japan. Morita was delighted with the response, which was much greater than he had anticipated. He announced that Sony would establish a trading firm to carry out the operation in the proper fashion. Hence, in July
1972, Sony Trading Corporation was founded with Taketoshi Kodama as president. A similar advertising campaign was conducted in Europe shortly after the one in the United States, and managers stationed abroad received orders to look out for products that would be suitable for the Japanese market. Morita implemented all the measures he could think of to promote imports to Japan.

The criteria for selection were that the products had to "live up to Sony's reputation for quality, and they had to enrich the lives of Japanese consumers." The first foreign company to sign an agreement with Sony Trading was the Whirlpool Corporation. Shipments of large refrigerators and other electrical appliances were scheduled to begin from January 1973.

The criteria for selection were that the products had to "live up to Sony's reputation for quality, and they had to enrich the lives of Japanese consumers." The first foreign company to sign an agreement with Sony Trading was the Whirlpool Corporation. Shipments of large refrigerators and other electrical appliances were scheduled to begin from January 1973.

Meanwhile, Japan's trade surplus was surging and in 1978 a new catch phrase emerged: "US-Japan trade friction." In 1979, Japan was described by the EC as a "workaholic country where people live in rabbit hutches." This prompted other Japanese companies to begin importing activities of their own. They came to Sony to learn about importing. Sony received an award from the Japan External Trade Organization (JETRO) for promoting imports to Japan and won praise for its leadership in the field.

In 1985, the G5 countries met to address how to deal with the yen-dollar currency rate situation and the strong dollar. They signed the Plaza Accord as an expression of their shared desire to avoid increased protectionism. At the meeting Morita exclaimed, "Thank God we made Sony Trading."

In the 1980s and 90s, while Sony was busy expanding abroad, Sony Trading continued to grow under the successive leadership of Tetsuro Yotsumoto, Hajime Unoki, Tamotsu Iba, Toshio Miyamoto, and Haruo Akita. Sony Trading has religiously stuck to its founding principle that "trade should be an interactive and bilateral process" and continues striving to find quality products regardless of their country of origin.

"Global Localization"

Morita speaking about "global localization"

In the 1970s, Sony established production and management facilities in the United States and Europe as it pursued localization of its sales and service channels.

The yen-dollar exchange rate's shift from 200 yen to the 100 yen range made the 1980s a tough period for Japanese firms which relied heavily on exports. For most of the decade, 70% of Sony's sales but only 20% of production had been performed overseas. As the yen strengthened, it became less profitable to manufacture goods in Japan.

The surging yen promoted increased overseas production and Sony expanded into Asia from its bases in Europe and the United States. Sony built nine plants in Asia during the 5 years following the signing of the Plaza Accord in September 1985. This new region constituted a promising market and was relatively protected from the immediate effects of the strong yen.

The situation made increased overseas production inevitable, but Ohga and Morita were looking at Asia from a global perspective. They believed the region would not welcome their building plants merely to benefit from cheap labor costs. Instead, Sony needed to develop its Asian bases as supply centers for high-technology products. In line with this, Sony Precision Engineering Center (Singapore) Pte. Ltd. (SPEC) was established in Singapore to manufacture optical pickups for CD players.

As the yen continued to rise through the 1980s, Sony established a fourth regional operations center in Asia. With this, Sony was both producing and selling in Japan, the United States, Europe, and Asia. A goal to achieve 35% of manufacturing outside of Japan was set for the 1990s.

The next step in Morita's mind was to establish regional R&D and engineering centers. He started this project in the late 1980s by setting up operational headquarters in each region. In the early 1990s Ken Iwaki, general manager of the Corporate Planning Division, implemented specific measures to achieve true globalization based on these principles.

Sony began with Europe and then made moves in the USA and Asia. Sony Europe G.m.b.H was established in Germany in November 1986 as a self-contained operation in anticipation of the planned unification of the EC scheduled for 1992. It was headed by Jakob J. Schmuckli, former president of Sony Deutschland G.m.b.H. In July 1987, Masaaki Morita, then vice president, moved to the United States as chairman and CEO of SONAM. He believed that manufacturing and engineering had to be further strengthened in the United States for Sony to truly become an international manufacturer. His mission was to restructure Sony Corporation of America from a global perspective. In September 1987, it was decided that Sony International (Singapore) Ltd. (SONIS), founded in 1982, would serve as the regional headquarters for Asia.

These operational headquarters were given the authority to make decisions regarding production, sales, logistics, technology, and financing to maximize operational efficiency and meet regional needs.

Sony world headquarters (WHQ) in Tokyo would serve the Japanese domestic market as well as oversee the entire global operation. Japan is often used as the test market for innovative new products, and it would continue to function as the primary center for R&D and the development of new production technology. WHQ would coordinate future activities so that the four regional headquarters would complement each other to enable global collaboration that maximized resources.

At both the General Management Conference in May 1988 and the International Top Management Meeting in July of the same year, Morita, who was then chairman, set a new course for Sony. "Each of our regional headquarters in Japan, the United States, Europe, and Asia must set new goals to localize operations. This process must be conducted in accordance with the unified goal of making Sony a truly global company. I would thus like to introduce the principle of 'global localization' as our future guiding principle. This is a new way of life for Sony, whereby we meet local needs with local operations while developing common global concepts and technologies."