Saturday, January 10, 2009

March 2006: Perceived Quality

Less about GM & more about Sony

I was on the way to the train on March 2nd, early in the morning. I was listening to CBS News Radio 880. They reported that for the first time ever, the Consumer Reports Top Ten automotive picks were all Japanese cars, with Honda dominating the list. First I was surprised that this was the first time the Japanese took the Top Ten. First, I just assumed it had already happened a few times before. Second, I was surprised that it was happening now. I was under the impression that the US cars had closed or, at least, narrowed the Quality gap.

What struck me next was the idea of perception. If the rating was done using consumers, it is quite possible that the panelists automatically rated the Japanese cars higher and the US cars lower in both Quality and value, simply reacting to the nameplate. i.e. If all things in terms of performance, price, features, fit and finish were equal, a Japanese car would rate higher that a US car. This perception or perceived Quality was built over a long time and takes an equally long time to change.

This study, however, was not based on perception. The Consumer Reports’ Top Ten Pick’s of 2006 was based on fifty different tests performed by Consumer Reports ranging from fuel economy, accident avoidance capability, to comfort and ergonomics. (

Yet, perceived Quality is important for many products and companies. In the February 20, 2006 issue of Fortune, Carol Loomis wrote an article entitled “The Tragedy of General Motors.” She addressed this perception issue. She was quoting Don Freda who runs an independent auto repair business in the New York City area. “What, he is asked; do you think about GM cars these days? ‘They’re very good,’ he answers, ‘They don’t break like they used to.’ Then immediately, ‘But nobody will buy them.’” After years of selling smoke, people shun the brands. GM has had to rely heavily on incentive programs to move cars. They have used zero percent financing, to rebates, and their most recent “You pay what we pay” promotion in the end of 2005. These incentives move tonnage but erode both margin and brand image. Last year, in spite of these kinds of incentives, both Ford and GM lost share primarily to Toyota and Honda.

I remember back in 2000, I was in the market for a new vehicle. I wanted an SUV for a few reasons. One is that they can easily my music equipment and that of another band member or two. Second, a few times a year, four wheel drive is an absolute necessity in the hilly terrain where I live. Lastly, an SUV is practically a requirement in the town I live in and who am I to buck social convention? I eschewed the gargantuan SUVs, the Expeditions, the Tahoes, and Suburbans. I had my eye on a Toyota 4 Runner, smaller, high quality, I really wanted one. I was driving a 1995 Chevy Blazer that I was giving to son who was a sophomore at Michigan. I ended up buying another Chevy Blazer because the Blazer cost $5,000 less than the Toyota and to top it off GM was offering 0% financing. The overall savings were considerable. I drove my brand spanking new Chevy Blazer off the lot and felt the least happy I had ever felt with a new car purchase. I knew I had made a good financial choice but in terms of perceived Quality, I had compromised.

This letter is not really about cars, it is about Quality and the role in plays in business. Perceived Quality is very powerful. Consider Sony, the company founded and led by Akio Morita. They were the most innovative and successful consumer electronics for many years. They invented the transistor radio, they popularized cassette players, they invented the walkman, morphed it into the CD walkman, and for many years they were the standard for televisions with their Trinitron brand. In their success, the only thing they really stumbled with was the Betamax VCRs and cameras. They had gambled on a proprietary technology, a technology everyone acknowledged was superior. Their thinking was that this superior technology and their company name would win the market. It didn’t. They lost the market to the rest of their competitors who collectively went with the VHF format. This was their only perceivable faux pas for many years.

They repeated this mistake, surprisingly, with digital portable electronics. The world, fostered by college kids with PCs and access to the internet and the emergence of Napster, moved to the mp3 format of file compression for music. Sony decided, through I have no clue as to the logic, to go with their system, ATRAC, or some such thing. Maybe, like Betamax, it was better but I never read or heard that it was.

People like uniform and universal formats. They want to buy a player from anyone and not have to worry about or be bothered with converting their files. Sony missed this point. They missed this point twice. This second time was more devastating.

Sony basically lost the personal portable music market. This was a market they created with their first transistor radio. They further solidified both their image for high quality and outside the box innovation with the creation of the Walkman brand beginning with cassette players and moving then to CDs. But, they lost it to Apple in the most recent market explosion. They let Apple, using really small hard disks and a combination of mp3 and mp4 compression formats; steal the entire market from them.

Sony had a decent player based on the mini-disk. I guess this compounded their mistake. First, they chose a proprietary compression format and second, they chose a storage medium that no one else was using. Apple decided to obsolete the need to change anything be it a cassette, CD or mini-disk. They made it possible for anyone to load, carry around and listen to their entire music collection. The Japanese Quality gurus always talked about QCD: Quality, Cost, and Delivery. Apple delivered a superior QCD product.

In regard to QCD, Quality means two things. It could refer to the design. Was it of high Quality and innovative in satisfying customer needs no one else had thought of? Secondly, was the manufacturing and functional Quality free of defects? Did the product meet or exceed the expectations of the customer over the life of the product.

Cost is again two fold. It refers to the internal development and production costs. If one could keep these lower then the competition, one could offer the product for a lesser price and have an advantage. If one wanted cost parity or even a premium because of the innovative nature of the product, one could make greater profits and have a margin reserve to defend market share if and when a competitor matched the innovation.

Delivery refers to time. First, it is the time it takes to bring the design to market: the product development time. Second, it is the ability to quickly fulfill order: the order cycle time. There is an advantage in being faster at both. In either case one can react faster to strategic and tactical changes in the marketplace faster then the competition.

Regarding QCD, it is generally believed that if one is superior to the competition in at least one of these dimensions and equal in the others, the rational consumer will choose your product. This was the case in the iPod versus the Sony digital players. In the early days of iPod, Sony had two offerings to compete. One was the mini-disk player described above. You could put nine to almost forty CDs per disk depending on the compression option and disk size you chose. The player was about the same size as the iPod and cost about the same as a mid-level iPod. The second offering was a 512MB player. It was incredibly small, about the size of a roll of 35mm film. Both had small displays. Thus given that the players cost about the same as low end iPods, the consumer really was given no choice but to go with the iPod.

Sony then offered an iPod competitor: Sony Network Walkman. It was a late entry and did not have a price advantage. I have never even seen anyone with one. If you go to the Sony website today (, you will see they no longer offer this product! Apparently they could not make a go of it. Their mp3 players are now called just that. They play mp3s though the fine print still says they support the ATRAC format. But they are called mp3 players in deference to the market. They are more reasonably priced but you can still get a 1G player from a competitor for less. In fact, the Sony products are priced between the 1G iPod Shuffle and the 1G iPod Nano. Apple sold something like ten million iPods over the 2005 Christmas shopping season. I wonder what Sony’s sales were in the market they defined and used to own.

The perceived Quality of Sony has been very strong with me. I had bought two Sony cordless telephones for home. They didn’t last long, the batteries seemed to go quickly on both models. When the first died, I still was loyal to Sony and bought another. The newer one fared even worse in terms of battery life and to top it off had a phone book navigation dial that was most cumbersome to use. I returned the newer phone back to Circuit City where I bought it. Even after several months, they gladly took it back as is their policy. The teenage sales person simply said, “Sony phones are crap, try VTech, they’re better.” I bought VTech and have had no problems for four years.

In the 1970s and 80s, Sony’s televisions were top Quality and commanded a premium price. They had a picture tube technology that they branded as Trinitron. They advertised heavily and people knew, perceived, the Quality of Sony televisions.

In the past fifteen years, like most of America, the number of TVs in our home grew. Even with the kids at home, we had more televisions than people. There is the central TV in the family room, which is oddly rarely watched. The TVs in the kitchen and bedrooms command most of the viewing time.

Our TV in the bedroom, a Sharp, began “to go.” Until it warmed up, the picture would often collapse into a quarter inch horizontal line in the middle of the tube. The field fix was to hop out of bed and lightly slap the side of the right side of the TV. The picture would snap back to the full screen mode and hold for an instant or more often as long as it took me to settle back into bed. Needless to say, this was a nuisance in this age of remote controls where we don’t have to cross the room to change the channels.

After waiting the obligatory six months, hoping the TV would “heal itself,” it was time to head down to the local Big Box Circuit City/Best Buy and replace the aging relic. The number of TVs in the stores is impressive. Clearly, the retailers are emphasizing and selling much more of the high ticket large screen plasma High Definition (HD) systems than the traditional picture tubes “sets” as they were called way back when. In fact, we couldn’t even find where the traditional, more modest in size and price, TVs were displayed. We engaged a young sale’s associate decked out in baggy skater pants with de rigueur flat brimmed urbane baseball cap worn properly askew. The young man just assumed we wanted a HD and was a bit disappointed that we weren’t there to spend $8,400 for a home theater system. All we wanted was the biggest regular TV that would fit into the existing TV cabinet in the bedroom.

The salesman took us to the historical section of the television er… video department. There were was easily fifty sets of various sizes. We quickly narrowed the 27” sets that met our dimensional requirement. There was Sony, Toshiba, Samsung and the house brand all within $50 – 75 of each other. We asked the salesman to make a recommendation and he said, “They are all about the same, really. Just pick the one that fits with the color cabinet you like.” Still having one foot in the 1980s, we asked, “What about Sony?” He gave us that “whattya you stupid?” look and repeated, “They are all the same, really” then done with us he added, “Pick the one you want and come and get me.” With that he left, presumably looking for customers who had ten grand to blow on a home theater system.

My perceived Quality of Sony TVs was burst by the candor of a seventeen year old. The category had been commoditized. We bought a Samsung and a combination VHS/DVD player, also a Samsung. We are quite pleased with the products. It should be noted that the Sony TV, by itself, cost more than we paid for the Samsung TV and VHS/DVD player together.

My perceived Quality of Sony, in general, is way down. It will be interesting to see if they can ever change my mind and how long that might take.

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