Business Ecosystem Change Takes Time

The case we published this week is The Birth of Sony (members only). I want to make a short, tangential observation about it.

I live in Singapore. In Singapore, as with many other countries in the region, we often complain about our lack of engineering excellence, our lack of a healthy startup ecosystem, the lack of ‘proper’ government support, or perhaps the low level of innovation; take your pick. I know that Singapore is better on all of these measures when compared to neighbouring countries (I am Malaysian and I’ve spent five years operating in Vietnam; I keep loose tabs on the ecosystems in both countries) — but I am generally sympathetic to the complaints, regardless of which country it applies to. I know they are real, and mostly valid.

But, comparatively, all of us have had it good.

Sony started in the ruins of post-war Japan.

Ibuka started his company on the third floor of an old, bare building in the heart of bomb-torn Tokyo. He had seven employees who had followed him from his previous business, and together they sat in this empty space, discussing what their new company could make. Ever the visionary, Ibuka wanted to build something ‘new’. However, he also knew that the young business needed to establish a financial base first. At this point, the company’s only source of capital was Ibuka’s personal resources. He was keeping the new business afloat with the small sum of money he was earning through the sale of voltmeters by his old company. 

After toying with the idea of opening miniature golf courses or making sweet bean paste cakes, the group settled on making a rice cooker. The device was a wooden pot with spiral shaped electrodes on the bottom. It was simple enough to make, but the team could not get the cooker to work consistently. Even after multiple iterations, it still produced rice that was either overcooked or undercooked. Left with a bitter taste in their mouths (literally!), the employees of the struggling company desperately needed cash. So as a stopgap measure, they started making and selling heating pads. These pads were essentially wires stitched to cloth, and were already popular in the street markets. They sold reasonably well.

Source: Gizmodo

But Ibuka had not left his old company to sell heating pads. He had a more interesting idea that was better aligned with his vision for the new business: a shortwave adapter unit to attach to old radios. At the time, radios were very popular in Japan. During the war, the government made important announcements such as air-raid warnings through radio broadcasts. Crucially, all these announcements were medium wave broadcasts. Listening to longer range shortwave broadcasts was strictly prohibited. With a shortwave receiver, a person would be able to listen in on broadcasts from distant lands — something that the wartime Japanese government absolutely did not want. As a result of this dynamic, by the end of the war, most people had radio sets which were designed to only receive medium wave band broadcasts. However, the ban on shortwave broadcasts was lifted shortly after the war — and Ibuka noticed that there was rising demand to listen to long range, shortwave broadcasts. Since a large majority of the population still had functional war-time radio sets, he spotted an opportunity to make a device for this market.

Ibuka designed a simple shortwave adapter unit that, once attached to any standard radio, would enable it to receive shortwave broadcasts. The adapter unit itself was a wooden box with a radio circuit that needed only one vacuum tube. Initially, this tube had to be procured from the black market — which was a difficult, expensive affair — but the adapter unit became popular across Tokyo, giving the young company much-needed cash. More importantly, it gave them a shot of confidence.

On incorporation, Ibuka wrote the following section into Sony’s Founding Prospectus:

Purpose of Incorporation

a) To establish an ideal factory that stresses a spirit of freedom and open-mindedness, and where engineers with sincere motivation can exercise their technological skills to the highest level

b) To reconstruct Japan and to elevate the nation's culture through dynamic technological and manufacturing activities;

c) To promptly apply highly advanced technologies which were developed in various sectors during the war to common households;

d) To rapidly commercialize superior technological findings in universities and research institutions that are worthy of application in common households;

e) To bring radio communications and similar devices into common households and to promote the use of home electric appliances;

f) To actively participate in the reconstruction of war-damaged communications network by providing needed technology;

g) To produce high-quality radios and to provide radio services that are appropriate for the coming new era;

h) To promote the education of science among the general public.

These are some ambitious goals for a company that started out with rice cookers and heating pads.

I’m not going to say “oh, look, how amazing it is that they had all these lofty ideals: they wanted to reconstruct Japan and uplift its technological culture; they wanted to create a company where ‘engineers with sincere motivation can exercise their technological skills to the highest level’.” How silly it must’ve seemed to the first group of engineers. No, the point I want to make is a little more nuanced than this.

Let’s continue with the case (bold emphasis mine):

Many people suggested to Ibuka that the newly incorporated company should produce radio receivers because the demand for radios in Japan was still high. Ibuka refused because he believed that the more established electronic companies — who were still recovering from the war — would be able to beat them in this race far too easily. In their search for a new product to build, Ibuka and Morita were guided by their vision for the company. In Morita’s own words:

“Ibuka and I had often spoken of the concept of our new company as an innovator, a clever company that would make new high technology products in ingenious ways.” 

But once again, on the road to fulfilling these lofty ideals, the founders had to find a way to keep the company afloat. They had sold enough radio adapter units to learn that a lot of Japanese people had held onto their phonographs through the war. As new American jazz and swing records started becoming popular, these people wanted to use their phonographs — but the components needed to repair and upgrade these old machines were very hard to come by. After recognizing that a market to make phonograph parts existed, Ibuka and Morita’s new company started producing exactly that.

This juxtaposition between lofty ideals and harsh business reality pops up again and again in Sony’s early life. The company took a long time to get going. Its first ‘high-technology’ product — the primary focus of our case — was its tape recorder. This took the good part of two years, and contained a painful lesson:

With the tape and the tape recorder ready, Ibuka and Morita were convinced that they were on the verge of success. But they couldn’t have been more wrong. In Morita’s words:

“We were in for a rude awakening. The tape recorder was so new to Japan that almost no one knew what a tape recorder was, and most of the people who did know could not see why they should buy one. It was not something people felt they needed. We could not sell it.” 

Morita demonstrated the tape recorder before several audiences, ranging from businesses to universities. But he quickly noticed that while they were delighted by the demonstrations, these audiences all thought it was too expensive for a device they perceived to be little more than an entertaining toy. At this juncture, Morita learned an important lesson about running a business:  

“I then realised that having unique technology and being able to make unique products are not enough to keep a business going. You have to sell the products, and to do that you have to show the potential buyer the real value of what you are selling… But at that moment, I knew that to sell our recorder we would have to identify the people and institutions that would be likely to recognize value in our product.”

While searching for potential buyers, Ibuka’s father-in-law Maeda Tamon pointed them in an unlikely direction — the Japanese Supreme Court. In the post-war period, the court system was struggling with an acute shortage of stenographers because a lot of people had been pushed out of school and into war-related work. The tape recorder could help ease their burden. With Tamon’s help, Morita and Ibuka secured an opportunity to demonstrate their product before the Supreme Court. Unlike with Morita’s early demonstrations, this audience saw the value in the tape recorder immediately. The court purchased twenty machines on the spot.

The purchase set Sony on a path towards a stable financial footing. The rest of the case describes how Sony grew on a foundation of tape-related products.

I’m going to stop quoting the case here, because I want to call attention to a small handful of things.

Sony was incorporated in 1946, as ‘Tokyo Telecommunications Engineering Company’. That was when Ibuka wrote the founding prospectus and laid out the principles, above. It launched its first innovative product, the tape recorder, in 1950. It changed its name to Sony in 1958, and launched the first Trinitron colour television set in 1968. It released the Walkman in 1979.

I often say that one way of measuring the passage of time in histories is to do the ‘imagine you have a child at the start of the narrative, and then play out how old that child would be at each subsequent point in the journey’. So: if you had a child in 1946, at the start of Sony’s founding, that child would’ve been four years old in 1950, at the launch of Sony’s first tape recorder. They would’ve been 12 years old when Morita and Ibuka renamed the company to ‘Sony’. They would’ve been 22 years old in 1968, when Sony introduced the first Trinitron colour television, the same year they introduced the TC-100 cassette recorder. They would be 33 years old at the launch of the Walkman.

This is how long it takes for a private company to change things. Upon Morita’s death in 1999, Japanese prime minister Keizo Obuchi described him as “the engine that pulled the Japanese economy (along).” He didn’t mean that Morita was the reason for Japan’s post-war economic growth — that couldn’t have been it, as we also have W. Edwards Deming and the marvel that is lean manufacturing to thank for (this from Toyota, and Honda, and others). No, I think what Obuchi meant was that Sony led the way in changing perception of Japan to one of real innovation. It is difficult to think any differently today, but at one point Japanese products were considered cheap knock-offs — inferior goods with copycat engineering that consumers should avoid. Japanese engineers were seen no differently. Hell, they probably thought of themselves as subpar.

Sony changed that. It changed an entire country’s perception of itself in the process — but it took a good 22 to 33 years to do so.

That time expectation is important. Imagine that you’re in one of these contemporary startup ecosystems today. And imagine that you have, like Ibuka, an idea to start a company to bend the arc of your country’s future. Your first goal isn’t to start contributing to startup events or startup ecosystems — not, at least, for the first few years of your business’s existence. Doing so is frankly rather arrogant. No, your first goal is to build an excellent business. You’ll need to survive over a three decade time horizon if you want to have a shot of changing things. Which means that you need to build a business that can last for at least three decades.

What that means in terms of capital structure and founder involvement and org design and business model is left as an exercise for the alert reader.

And there’s one more thing.

A couple of weeks ago, I met with a bunch of friends who — like me — have been embedded in or associated with the Singapore tech ecosystem for about a decade. The group was exclusively operators. One of them, senior to me, who I have deep respect for, laid out this theory that we are, at the end of the day, a country of system integrators. We have no track record of engineering excellence. We are not great at developing new technology. We do have a track record of putting things together. So perhaps Singapore should just admit defeat? Perhaps we should give up on the dream and settle for system-integrator-type companies?

I thought about it, and eventually disagreed. Not because this core observation was wrong — in fact my friend’s observation was almost certainly right. But what is currently true can be changed. It changed during Morita’s lifetime. It could change during ours. It just takes a lot longer than you might expect.

There was no law of nature that said that Morita or Ibuka had to focus on innovative consumer electronic devices. There was no rule that forced them to continually push the envelope. They could’ve built a perfectly good business making transistor-based subcomponents, perched two-to-three levels up on some supply chain. The two founders simply didn’t want to build laggard products for existing markets. They refused to settle.

Given the path dependence of history, their decisions mattered. There’s probably a lesson, somewhere, in that.

I’m not saying that this will happen, by the way. I’ve seen too many failed attempts to say that. I know multiple founders with high-falutin’ goals for their home ecosystems, who ran meh businesses which subsequently shut down. They contributed to the startup ecosystems for the duration of their company’s existences. They no longer do so today.

What I’m saying is less that this will happen, and more that it already has, which means it could. (Don’t read history for lessons). Due to the constraints of this essay I am presenting just one case, on Sony, but I assure you that similar stories exist across the span of business history, in multiple industries, over equivalently long time horizons.

If you care deeply enough about your home ecosystem, if you complain bitterly about it, you should do as Morita and Ibuka did. You should try. And not in a dumb way. In a way that optimises for an excellent business, and with eyes wide open: you know that this will take you at least 30 years.

This essay is dedicated to Maya and Lila. This is the last I’ll write on this topic for a long while, possibly forever. The best way to advance these sorts of arguments is to live them, not to write them. Running a good business is hard enough; ecosystem change is gravy. But it’s definitely possible. Good luck.

Originally published 11 June 2024, last updated 17 June 2024.