Red giants and white dwarfs.

November 1, 2006

Sony Corporation has just announced the results of its most recent quarter and the numbers are dismal. On revenues of $15.7 billion, net profits after taxes were $14.4 million, or just .09 percen ]]>

Compare General Motors, a company in trouble, with Sony. In the past 10 years, which company has made the most money?

General Motors. GM made $23.5 billion vs. Sony’s $10.1 billion. Since General Motors is some three times the size ]]>

On a percentage basis, GM made 1.3 percent net profits after taxes. And Sony made 1.7 percent. It’s hard to pay off your bank loans, let alone pay dividends to investors, with returns like that. Both companies are in trouble.

General Motors has a portfolio of mostly weak brands. But not Sony. Most consumers rank Sony as the world’s best electronic brand. And they rank Sony’s PlayStation as the world’s best videogame player brand.

Strong brands, strong sales, weak profits. Sony is not the only company that fits that pattern. A “red giant” is what we call companies like Sony.

Corporations are like stars. Towards the end of its life a star the size of the Sun swells up into a red giant and becomes some 100 times as large. As a red giant exhausts its internal energy supplies, it loses its outer layers and finally shrinks to become a white dwarf, perhaps 1 percent of the diameter of a Sun.

Both Sony and General Motors are red giants. Sony because it puffed up its house brand. General Motors because it puffed up each of its car brands until they didn’t stand for anything.

Can either company escape the fate of all red giants which eventually become white dwarfs? Only time will tell, but to escape its fate, Sony must shed many products and refocus on segments in which it enjoys a leadership position. (The same strategy Jack Welch applied to General Electric. Number 1 or number 2 or forget about it.)

Managers have short memories. You might think the dismal performance of conglomerates in the sixties and seventies would have discouraged the recent trend towards “bulking up.” But apparently not. Wherever you look, the emphasis is on growth.

Take and it original slogan, “Earth’s biggest bookstore.” Nice slogan and nice analogy with the world’s largest river.

What is Amazon’s current slogan? “Earth’s biggest selection.” Books have been shelved to make room for 32 other product lines, including Amazon’s latest product introduction, food. (Shades of Webvan.)

In July of 1995 Amazon opened its bookstore on the World Wide Web. In 11 years of operation has sold $32.9 billion worth of merchandise. Not a bad haul.

On the other hand, in 11 years of operation has managed to lose $2 billion. How soon will break even? At current profit levels, it’s going to take another 5.6 years.

What keeps red giants like Sony and in the ballgame? It’s the power of the brands. When you blow yourself up, everybody is impressed: customers, prospects, investors and the media. You generate a lot of favorable publicity. (Think Donald Trump.)

Another company that’s in the early stages of turning itself into a red giant is Google. There’s Google Talk (competing with MNS Messenger), Google Finance (competing with Yahoo Finance), Gmail (competing with MSN and Yahoo email) and Google Checkout (competing with PayPal).

Google’s latest off-the-wall idea is to sell print advertisements that will appear in 50 major newspapers.

“Google. So much fanfare, so few hits,” was the headline of an article in the July 10th issue of Business Week. “An analysis of some two dozen new ventures launched over the past four years shows that Google has yet to establish a single market leader outside its core search business,” concludes the publication.

Then there’s Google’s $1.65 billion purchase of YouTube. Oddly enough, YouTube could turn out to be a big winner provided that Google stops thinking like a conglomerate and starts thinking like a brand builder.

What does build a brand? A narrow focus. Search wasn’t a new idea. The day Google was launched, a user could also search the Internet at Yahoo and other sites. But those sites had an array of features of which search was only one. Google, on the other hand, was totally focused on search.

What Google needs to do is to keep YouTube as a totally separate brand. Separate name, separate website, separate strategy. That’s tough to do. “What! It cost us $1.65 billion and we shouldn’t use our name on the site?”

Right. More companies should emulate the Procter & Gamble pattern and try to build brands around narrow product segments. P&G has more than twenty billion-dollar brands. And incredibly healthy profit margins. In the last 10 year, P&G’s net profits after taxes were 11.0 percent of sales.

Profits seem to be a dirty word in business today. Too many companies are focused on the top rather than the bottom line. Red giants like General Motors and Sony have revenues that exceed the gross domestic product of many smaller countries in the world. Yet they have difficulty making money because they have blown up their brands so they don’t stand for anything.

Growth is the mantra for many businesses today. Yet nature offers many examples of the superiority of slow, not rapid growth. Small dogs outlive large dogs. Slow-growing hardwood trees outlive fast-growing softwood trees.

The oldest living tree is not some giant sequoia, it’s a bristlecone pine that stands just 55 feet tall. Its estimated age is 4,767 years which means that this particular bristlecone has been growing at the rate of 14/100ths of an inch a year. (Your fingernails grow a lot faster than that, around 1½ inches a year to be exact.)

Rapid growth weakens rather than strengthens. That’s true for a brand as well as for a plant or an animal.

The tallest person who ever lived was Robert Wadlow who was 8 feet, 11 inches high. Unfortunately he didn’t live very long. Wadlow died at the age of 22.

One of the strongest companies (and strongest brands) in the world is Nintendo, a company that just markets videogames and consoles. Between fiscal 2000 and fiscal 2006, Nintendo sales actually fell from $5.3 billion to $4.3 billion, a decline of 19 percent.

Yet Nintendo made more money in fiscal 2006 than it did in fiscal 2000. Furthermore, Nintendo’s profit margins are astounding. In the past 10 years, Nintendo’s net profits after taxes were 14.9 percent of sales.

Eat your heart out, Sony.