Question

(Related to Solved Problem 12.6 on page 439 ) Sony suffered losses selling televisions from 2004 to \(2013,\) before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of losses? Briefly explain.

Short answer

Despite high demand, Sony might not have been able to increase prices for various reasons: the competitive landscape, product positioning, and production costs. Hence, the assumption that high demand should automatically lead to increased prices doesn't always hold due to these market dynamics.

Step-by-step solution

Understanding Market Conditions

The first point to scrutinize this situation is to understand the market conditions. When the demand for a product is high, ideally, an increase in price should lead to increased profits. However, this is not always the case, and there are several reasons why. A market is not only shaped by consumer demand but also by competition, product positioning, and production costs.

Analyze the Competition

In the case of Sony, they weren't the only company producing plasma, LCD, and LED television sets. There was stiff competition from other players in the market like Samsung, LG, and so on. Due to intense competition, Sony might not have been able to significantly increase their prices without losing market share to competitors.

Inspect Product Positioning

Sony has always positioned itself as a premium brand in the market. However, during the period mentioned (2004-2013), many budget and medium-tier brands entered the TV market providing similar products at much cheaper prices. Even though Sony was a popular brand, customers might have opted for cheaper alternatives, thus making it harder for Sony to increase their prices.

Contemplate Production Costs

Another consideration is the cost of production. The cost of producing plasma, LCD, and LED television sets reduces over time due to improvements in technology and manufacturing processes. This could mean that even with strong consumer demand, the cost of producing the TVs might not have permitted an increase in prices.

Key concepts

Consumer Demand

Consumer demand refers to the desire of customers to purchase goods or services. In the case of televisions, technology advancements have increased the popularity of plasma, LCD, and LED sets, which sparked high consumer demand. It might seem intuitive that with strong demand, a company like Sony could simply increase prices to achieve profitability.

However, increasing prices doesn't always translate to higher profits. It's important to understand that demand is strongly intertwined with consumer expectations and the perceived value of a product. If prices rise significantly, consumers might perceive the product as no longer providing good value, especially if there are comparable alternatives available. For example, if Sony raised their TV prices too high, consumers might turn to competitors offering similar quality at a lower price. Thus, while consumer demand can influence pricing strategies, companies must remain mindful of market conditions and consumer perceptions to maintain a balance between demand and pricing.

Competition Analysis

Competition analysis involves examining the market rivals that a business must contend with. During the years between 2004 and 2013, Sony faced stiff competition from other electronics giants such as Samsung and LG. These companies were not only competing in terms of technology but also in pricing strategies and brand loyalty.

In a highly competitive market, the ability to increase prices is often limited. If Sony had significantly raised prices on their televisions, they risked losing market share to affordable brands. Competitors like Samsung offered similar technology at various price points, capturing a broad consumer base. Hence, Sony had to carefully structure their pricing to remain competitive while still promoting their premium brand image. Competition analysis helps companies understand the pricing and positioning strategies of their rivals, ensuring they do not overprice themselves out of the market.

Production Costs

Production costs encompass all the expenses associated with manufacturing a product. These can include materials, labor, technology, and overheads. From 2004 to 2013, the cost of producing televisions was significant, especially since plasma and LED technologies were evolving quickly. While demand for these products existed, production costs were also high due to the newer technology and research needed.

As technology matures, production processes become more efficient, which typically reduces costs. However, during the initial phases of introducing new TV technologies like plasma and LED, the research and production costs can be high. Even with high consumer demand, these costs can prevent a company from raising prices without cutting into profit margins. Therefore, companies must strategically manage their production costs to align with pricing strategies to stay profitable.

Product Positioning

Product positioning is about crafting the image and perception of a product in the consumer's mind. Sony has traditionally positioned itself as a premium brand, focusing on high-quality electronics. However, during the 2004 to 2013 period, many new players entered the market with budget-friendly options that appealed to cost-conscious consumers.

Even though Sony's brand was synonymous with premium quality, the rising competition provided consumers with diverse choices. Brands positioning themselves in mid or budget tiers offered similar functionalities at lower prices. This made it challenging for Sony to justify significant price increases on their products. To effectively design product positioning strategies, companies like Sony must weigh their brand proposition against consumer expectations and market positioning of competitors. This ensures the product is perceived as valuable without pricing itself out of reach for the target market.