WHY JAPANESE COMPANIES MAKE EVERYTHING EXCEPT MONEY

The Importance of Focusing a Brand

May 12, 2003
QwikFIND ID: AAO66P
By Al Ries

Building a brand and building a profitable brand are two different things.

Take Sony, for example. If you did a survey, you would probably

find that Sony is the world's most admired electronics brand. Way ahead of
whoever might be in second place.

Terrific for owners of Sony products. But how about the owners of Sony stock?
Does the company make any money? The sad fact is no. Net profits after taxes
of Sony Corp. are small. Very small.

Tiny profits
In the last 10 years, Sony Corp. had revenues of $519.2 billion. But net profits
after taxes were only $4.0 billion. That's eight-tenths of 1% of sales. It's hard
paying off your bank loans, not to mention paying dividends to investors, with
Sony's best-selling product: The that kind of return.
PlayStation 2 video-game system.
Of course, this is Japan, so who pays off its bank loans, anyway? In 1999, the Bank of Japan cut its benchmark
short-term rate effectively to zero.

Like most Japanese companies, Sony is heavily line extended. Sony puts its
brand name on TV sets, videocassette recorders, digital cameras, personal
computers, cellphones, semiconductors, camcorders, DVD players, MP3
players, stereos, broadcast video equipment, batteries and a host of other
products.

PlayStation
Yet Sony's most profitable product is the PlayStation video game, a brand
which makes only

marginal use of the Sony name. (As powerful as the Sony brand might be,
PlayStation is even a better brand name because it stands for something in the
prospect's mind.)
Compare Sony to Dell, which has a
net profit after taxes of 6.1%.
Compare Sony with Dell Computer Corp. Sony makes personal computers and
a lot of other products. Dell just makes personal computers (until recently, when they added printers). In the last
10 years, Dell had sales of $140.3 billion and net profits after taxes of $8.5 billion, or a net profit margin after
taxes of 6.1%.

Dell's margins
That's not fair, you might be thinking. To compare with Sony, you picked a company (Dell) that is exceptionally
profitable. Actually that's not true. Dell is in a highly competitive business where profit margins are thin. (IBM has
never made money in the personal computer business and Hewlett-Packard's PC business is barely profitable.)
As a result, Dell's 6.1% profit margin is not spectacular.

Net profit margins at the average Fortune 500 company were 4.7% of sales during the last 10 years. (If you leave
out the last two years, which were mostly disasters, the percentage jumps to 5.7%.)

I have preached against the perils of line extension ever since Jack Trout and I wrote Positioning: The Battle for
Your Mind some two decades ago. And ever time I bring it up, someone always says, "What about the Japanese,
they do the exact opposite of what you are recommending and they are extremely successful."

Japanese losses
Are they? In the last 10 years, Hitachi had revenues of $708 billion and managed to lose $722 million. NEC had
revenues of $397 billion and lost $1.3 billion. Fujitsu had revenues of $382 billion and lost $1.6 billion. Toshiba
had revenues of $463 billion and a net profit margin of just 0.15%.
Large unfocused companies make very little after-tax profits. And if you don't make money, you can't pay off your
bank loans. And if you can't pay off your bank loans, the banks are in trouble.

And if the banks are in trouble, a country's economy is in trouble. And if a country's economy is in trouble, the
country's political system is in trouble.

Japanese base is weak

The top of the Japanese economic system is weak because the base is weak. Japanese companies, for the most
part, make everything except money.

Why is it so difficult for large, unfocused Japanese companies to make money? It can't be product quality. Most
Japanese companies have a worldwide reputation for high quality. A reputation that, for the most part, they
deserve.

My conclusion is that line extension inhibits the branding process. When a company makes and markets a broad
range of products under one name, it is extremely difficult to build that name into a powerful brand.

Focused brands make money

Don't any Japanese companies make money? Companies whose brands are relatively focused do much better.
Sharp (1.8%), Toyota (3.1%), Honda (3.3%) and Canon (3.8%).

I have followed the financials of Japanese companies for many years. I find that the average large Japanese
company has a net profit margin after taxes of about 1% compared with the average large American company at
5%.

But even that result is peanuts compared with companies whose brands are highly focused. As a general rule,
the more focused the brand, the higher the profit margin. Some examples: Nokia (10.6%), Intel (21.6%) and
Microsoft (31.8%).

Now tell us again why line extension is such a good thing.

~~~
Al Ries is the author or co-author of 11 books on marketing; the most recent of which is The Fall of Advertising
and the Rise of PR. He and his daughter Laura run the Atlanta-based marketing strategy firm Ries & Ries.