EXECUTIVE SUMMARY

In 1982, Sonance, a high-end audio company, invented a new product category: in-wall

speakers. Long established as the leader in high-end home theatre speakers, by the end of

2005, Sonance was at a turning point. The company attempted to benefit from the flourishing

housing market in the 2000s by further efforts to pursue business with production developers

and mass-market consumers.

While the company made significant investments in R&D, these efforts were never backed by a

well-thought analysis of distribution strategy or an understanding of the value of each customer

channel. Due to lack of experience in selling its products directly to end customers, Sonance

failed to build strong customer relationship with the new market while at the same alienating its

established market with custom dealers. Though growth accelerated till 2003, its relationship

with the high-end audio dealers began to deteriorate. In 2004, Sonance revenues dropped close

to the level as in 1999, from where it initiated its market development.

Founders of the company recently hired new CEO, Shawn Sugarman and Chief Sales Officer,

Ari Supran. Sonance new management and marketing teams struggled to determine the best

strategy for the future. Sonances management team is left with less than a year to plan its

relaunch at the CEDIA (Custom Electronic Design and Installation Association) Expo. CEDIA

offers a platform for electronic product manufacture to develop pathways that move them to

the next level of success in sales and revenues through innovation.

ELECTRONIC MARKET IN US

The US consumer electronics industry is a well-established and consolidated industry.

Electronics industry covers multiple products like TV, video players, home & portable audio

products, mobile electronics, home information products, blank media, accessories and

batteries, electronic gaming, home security. In 2004, electronic sector made a business of

$113 billion as a whole and audio products sector contributed 4.9% ($5.5 Billion) to this

share. The electronic sales in recent years have increased from $ 96.95 Billion in 2000 to $

113.5 billion in 2004. But the sale for audio products has seen a downfall from $ 6.3 Billion

in 2000 to $ 5.5 Billion in 2004. Steep fall in sales is attributed to the lack of product

innovation, difficulty in conveying product features to consumers in most retail settings and

greater interested in video-related categories. However the overall electronic industry sales

will stimulate in near future due to spur in demands of other electronic products.

The audio products industry categorises its sales into three distinct sectors: Custom and

specialized dealers, house developers, and mass retailers. Each sector has a significant role in

revenue depending upon the product category. Luxury home developers opt for custom

dealers, price sensitive customers prefer mass retailers, and house developers is a direct

market for audio manufactures.

COMPANY AND PRODUCT

Sonance, the high-end audio company founded in 1982 by Scott Struthers and Geoff Spencer

to provide an audio solution that could deliver supreme performance. Sonance established

itself as an innovative designer of in-wall speakers. Till 2000, specialised and custom dealers

were the major customer and revenue source of the company. Diversified market strategies

were implemented in distribution channel of the company in early 2000s to overcome lower-

priced competition which resulted in growth at the stake of erosion of brand equity of

company with its core customer base.

DISTRIBUTION CHANNEL FOR AUDIO INDUSTRY

Custom Dealers

Custom dealers account for most high end purchases for electronic installation in homes. The

custom dealers tend to have strong ties to the architectural community. In 2005, nationwide

custom installation revenues were reported to be over $10 billion and top 100 custom

installation companies gathered gross revenues of $703.8 million.

Mass Retailers

Mass retailers offers affordably priced products that appeal to wide range of customers. Mass

market retailers are not necessarily known for selling durable, high-quality merchandise or

for having exceptional customer service, but they do meet consumers' wants and needs, at

reasonable prices. Best Buy and Lowes were two mass merchandise customer of Sonance.

House Developers

Real estate development, or property development, is a multifaceted business process. A

typical product housing project consisted of 80 to over 150 semicustom housing units. The

housing market and its luxury segment were experiencing strong growth and reported a 47%

increase in $1 million plus home sales in 2004.

SITUATION ANALYSIS

Sonance had fairly well customer relationship with over 1000 custom dealers till 2000 having

95% retention ship. Sonance sold a pair of speakers to custom dealers at $140 which provided

65% profit margin to dealers. It alone accounted for 90% (42 million) revenues to the

company.

In 2000, Sonance diversified its marketing strategies to capture more business and compete

with lower-priced companies. Sonance commenced business with mass retailers and focussed

on raising house developers clientele. This marketing move of Sonance soured its
relationship with custom dealers and hold of custom dealers reduced by 50% (500) by 2004.

Though revenue through custom dealer lessened but sales through mass merchandise and

house developers resulted in higher revenues to company from $47 million in 1999 to $57

million in 2003. Sales from Best Buy ($10 million) and Lowes ($6 million) together

accounted for 30% revenues to Sonance Company. However, additional revenue were met at

the cost to Sonances profitability as the average selling price for mass retailers was reduced

to $120 and for production house developers was reduced to $90 to acquire these accounts.

In 2004, Lowes decision to exit the in-wall speaker series dropped Sonance to $47 million

(almost back to the level of 1999).

SWOT ANALYSIS

Strength

Sonance was renowned and reliable brand in market having superior brand equity with its

core customer base. According to Sonances management statistics, Original Series of

Sonance had 25% share of market in-wall speakers in luxury homes. The key strength of the

company play an important role in effective launch of its new products in the market. Product

development by recognized companies have an advantage to establish market with lesser

effort as compared to new firms.

Weakness

Sonance has been a market niche for a long time. Sonances R&D has been lacking behind in

product innovation. Sonance competitor began to focus more on sound system integration,

offering fancy touch-screen control systems and used speaker as a loss leader. Sonance was

not yet participating in the rising control and video segments of the market. Organisation

should develop their product offerings according to the changing need of the market.
 Opportunities

Production house projects were an opportunity to Sonance to cover its sales loss as its

business share with production house continuously raised from 8 in 1999 to 125 in 2004.

Sales in 2005 were directed for another record with 180 deals with developers. For 2006,

sign-ups with developers raised by almost 40 % over the 2005 another remarkable figure to

success in business. The housing market and its luxury segment is experiencing strong

growth which in turn will raise the revenue for the company.

R&D of new products, iPort and Architectural Series, to expand its business is an opportunity

for the Sonance to differ its product offering at CEDIA.

iPort, an in-wall docking station for the apple iPod, with further investment in R&D could

be made compatible with non-Sonance audio systems placing it as unique product in

market.

Architectural series is Sonances first truly flush mount trimless speaker that completed

eliminated sightlines. Its an edge of innovation for Sonance to capture the market.

Focus to revive relationships with lost custom dealers is too an opportunity for the Sonance to

regain its core customer base and business revenue by providing them market offerings better

than its competitor. Sonance still had 75% custom retention with custom dealers (600 in 2003

to 500 in 2004)

Threat

Slow growth in Sonances core product line of in-wall speakers. Sonance profitable niche

seemed to be disappearing, the market share was shrinking under the assault of cheaper

competition. Competitor like Speakercraft was taking advantage of distressed dealer channel

of Sonance by undercutting their price and providing better profit margins (75%) to dealers.

Not standing by the current market offering requirement could lead to phase out of the

company.
CONCLUSION

Sonance is a company with mostly specialised products range that attracts to the customer

better through specialised and custom dealers. Its upcoming product range: Architectural

Series of speakers and iPort can be served well to the customer through specialised and

custom dealers as both requires professional installers. Such products are for the luxury or

tech savvy home makers who prefer quality and brand over price so rely on specialised and

custom dealer channel.

If management has to make a choice among two products under R&D to be launched for

CEDIA then strategically going for Architectural Series is a better decision. Adaptability for

Architectural Series in market is expected to be higher than the iPort, if launched it varying in

the price range of $750 - $800. Even after spending the high amount on designing iPort, it

will cost much higher than iPod and secondly it already has competitor in the market

manufacturing less pricey iPod docking station product. Architectural Series as believed by

Sonance is on the edge of a revolutionary innovative product.

So based on the current situation, present and future product range of the company, Sonance

should focus on reviving its relationship with custom dealers. Sonance shared a high

customer retention with custom dealers in the past which in turn were a source of its major

revenues.

Mass retailers have a lower retention of customer loyalty as compared to dealers. Diversified

market provided short term gains to the Sonance Company and resulted in loss of long term

built reliable customer relationship with dealer.

Sonance should eradicate the mass retail channel to regain the confidence of its lost custom

dealers and maintain its brand equity. Company should reduce the price of Original Series

speakers for custom dealers to provide better profit margins to dealers to rebuild its dealers

clientele and compete with its low-priced competitor like Speakercraft.

 Discussion Questions
1) Evaluate the current strategic situation and options available to Sonance.
2) What should Sonance do to generate profitable and sustainable growth for the company and
sales momentum for its products?
a. Should Sonance change its marketing strategy to target consumers directly? If yes,
should Sonance pursue mass merchandising accounts?
b. Should Sonance aggressively pursue production home development?
c. Should Sonance re-focus its strategy on high-end custom installers and try to win back
the custom installation dealers lost?
d. Should Sonance target architects and interior designers directly?
e. Should Sonance lower the price of its products?
f. Should Sonance be prepared to do something different altogether?
3) If your proposed strategy is a success, what should be the next step for Sonance?

1. Answered in Situation Analysis and SWOT Analysis: Opportunities.

2. Answered in SWOT Analysis: Opportunities and Conclusion

3. Answered in Conclusion