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Steinway & Sons: Internationalizing the piano business

Steinway & Sons: Internationalizing the piano businessPaper Details
Read the attached Case Study – Steinway & Sons. In a brief (1-1.5 pages) essay provide answers to the following questions:

1) If you performed marketing research for Steinway in a new country that they haven’t started exporting to what primary and what secondary data (learning module 3) you would collect for them?

2) What theory(ies) of internationalization (learning module 2) appear(s) to be most applicable to Steinway case? Why?
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CASE
STUDY
I.5
Steinway & Sons:
Internationalizing the piano business
Steinway & Sons (www.steinway.com)
remains one of the best-known producers
of concert pianos in the world. Throughout
the course of its 150-year history the
company has shown a distinctive talent
for innovation and quality workmanship,
as evidenced by its 120 patents. In an age
of mass production Steinway continues
to build a limited number of handmade
pianos.
Steinway & Sons was founded in 1853
by German immigrant Henry Engelhard
Steinway in Manhattan. Henry was a master
cabinet maker who built his first piano in the
kitchen of his Seesen home in Germany. By the time
Henry established Steinway & Sons he had built 482
pianos. The first piano produced by the company,
number 483, was sold to a New York family for $500.
It is now displayed in New York City’s Metropolitan
Museum of Art.
By 1860 Steinway & Sons had built a manufacturing
facility at 52nd Street and Fourth Avenue. Here
350 men produced 30 square pianos and five grand
pianos per week. In 1864 the firm opened a showroom
on 14th Street. In 1865 sales topped $1,000,000.
From the beginning Steinway & Sons faced intense
competition from rivals such as Chickering & Sons and
Mason & Hamlin in the United States, and Erard and
Broadway in Europe. Facing this competition, the firm
sought to highlight not only the unique construction of
the Steinway piano but its ‘superior’ sound.
Music historians consider the competition at the
1867 Paris Exhibition the turning point in the piano
industry because it was there that the ‘American’ system
of cast-iron frames, heavier strings, solid construction
and more powerful tone took the competitive honours
from European pianos. The jury awarded Steinway the
prestigious ‘Grand Gold Medal of Honour’ for excellence
in manufacturing and engineering. With this recognition,
Steinway’s domestic piano sales and exports grew
rapidly, requiring greater production capacity. In 1870
the firm purchased 400 acres of remote farmland in
Queens with the idea of moving the factory from
Manhattan. By 1873 the new factory was operating.
Virtually its own town, Steinway Village had its own
foundries, factory, post office, parks and housing for
employees. In 1875 the firm opened a showroom in
London. In 1885, to build an early global presence, the
firm built a factory in Hamburg, Germany. Pianos manufactured
there were marketed in Europe and exported to
the rest of the world. Today these two factories remain
the firm’s only manufacturing centres.
Steinway had a steady growth until the world economy
entered a depression in the 1930s and the firm’s
survival was at stake. To market pianos to people of
more modest means, with smaller homes, Steinway
developed and introduced two new models – the 5ft
1in-‘baby grand’ and a 40-in upright piano. At the
outbreak of the Second World War, production was
stopped.
In the 1960s new competition emerged from Asia.
Yamaha and Kawai began exporting thousands of
pianos to the United States. A Yamaha piano sold for
about one-half the price of the equivalent size Steinway
model. By the early 1970s the Japanese threat raised
questions about the future of Steinway & Sons and the
entire US piano industry.
In 1972 the firm was acquired by CBS and merged
into the CBS Musical Instruments Division. CBS sold
Steinway & Sons and the rest of its musical instruments
division in December 1985 to John and Robert
Birmingham, two brothers from Boston who had
made their fortune through a family-owned heating-oil
business.
In 1991 Steinway & Sons introduced a new line – the
Boston pianos – designed to compete in the mid-range
piano market. This line was designed by Steinway &
Sons and manufactured at Kawai’s factory in Japan.
Steinway dealers had suggested that a logical step-up
Source: www.ManUtd.com. Manchester United Limited.
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Part I The decision whether to internationalize
strategy to a Steinway piano was needed. The availability
of many competent lower-priced pianos made making
a Steinway sale to a novice pianist harder to justify.
Kawai is the second largest piano manufacturer in
Japan after Yamaha. While the Boston piano is manufactured
under contract by Kawai, Steinway controls
the material handling process and owns the designs.
Boston designs are not available under any other brand
name and are distributed only by Steinway.
On 25 May 1995 Steinway & Sons merged with
the Selmer Company, a manufacturer of brasswind,
woodwind, percussion and stringed instruments, to
form Steinway Musical Instruments Inc. (abbreviated
Steinway in the following). The new company’s strategy
strives to capitalize on its strong brand names and
leading market position.
Steinway Musical Instruments – today
Although best known for handcrafting concert grand
pianos that are played by the world’s most esteemed
musicians, 46 per cent of Steinway’s sales (2005) come
from band and orchestral instruments. Its Selmer
subsidiary is the number one US maker of band instruments,
including Selmer Paris saxophones, Bach
trumpets and trombones, and Ludwig drums. Steinway
sells three lines of pianos in three expense ranges
(the elite Steinway, the mid-priced Boston, and the
new lower-priced Essex) through ten company-owned
showrooms and some 200 independent dealers
worldwide. Chairman Kyle Kirland and CEO Dana
Messina own 85 per cent of Steinway’s voting shares.
Through a worldwide network of dealers, Steinway
Musical Instrument’s products are sold to professional,
amateur and student musicians, as well as orchestras
and educational institutions. The company employs
a workforce of about 2,500.
The company’s net sales of $387 million for the
year ended 31 December 2005 were comprised of
$209 million in piano sales and £178 million in band
and orchestral instruments sales. The total net income
(profit) for Steinway Musical Instruments was $13.8
million in 2005.
Market size and volume trends are difficult to
quantify for international piano markets, as there is
no single source for worldwide sales data. Outside the
United States, Steinway’s strongest market shares are
in Germany, Switzerland, the United Kingdom, and
France. Steinway believes that they hold an average
grand piano market share of approximately 16 per cent
in these countries. They also continue to expand their
presence in former Eastern Bloc countries where they
significantly increased sales in 2005.
Outside of the United States, China is currently the
second largest grand piano market in the world. With
their three piano lines, Steinway believes that their
market share of grand piano units is currently 3 per
cent in China. The unit sales of Steinway in China
increased over 50 per cent in 2005 and they expect a
large portion of long-term growth to come from this
market.
In 2005, approximately 57 per cent of piano sales
were made in the United States, 28 per cent in Europe
and the remaining 15 per cent primarily in Asia.
Steinway’s largest piano dealer accounted for approximately
5 per cent of piano sales in 2005, while the top
15 accounts represented 29 per cent of piano sales.
Piano sales are influenced by general economic conditions,
demographic trends and general interest in
music and the arts. The operating results of this segment
are primarily affected by Steinway & Sons grand
piano sales. Given the total number of these pianos sold
in any year (3,319 in 2001), a slight change in units sold
can have a material impact on the company’s business
and operating results. The operating results of the
piano segment are also influenced by sales of Boston
and Essex pianos, which together represented approximately
50 per cent of total piano units sold and approximately
20 per cent of total piano revenue. The Boston
and Essex piano lines are both manufactured in Asia,
each by a single manufacturer. The ability of these manufacturers
to produce and ship products to Steinway
could also materially impact on the company’s business
and operating results.
The average ex-works unit price for a Steinway piano
in 2001 was $209 million/3,145 units = $66,450. Prices
for the Boston and Essex were lower, whereas prices
for the high-end Steinway pianos were higher (up to
$120,000).
The Steinway reputation
Though Steinway & Sons never offered to reduce the
price of its pianos, it sought endorsements from the
social elite. To this and other groups the firm presented
itself as offering a high-quality product worthy of a high
price. Today the Steinway pianos are the highest priced
in the industry. Often the price is nearly double that
of an equivalent Yamaha, the firm’s most competitive
rival in the United States.
Table 1 Key financial figures for Steinway Musical
Instruments Inc.
Millions US$ (Jan–Dec) 2005 2004 2003
Revenue 387 375 337
Net income 13.8 15.9 9.7
Net income as % of revenue 3.6% 4.2% 2.9%
Employees (number) 2,443 2,386 2,283
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Case I.5 Steinway & Sons: Internationalizing the piano business
Steinway & Sons has consistently emphasised its
commitment to the cultural enrichment of the nation
and the world. The firm’s promotions argue, for
example, that the act of buying a piano is not the same
as the act of buying a Steinway. Buying a Steinway
is depicted as an indication of appreciation for high
cultural taste and, hence, a sign of high achievement.
Today more than 95 per cent of all classical music
concerts worldwide featuring a soloist are performed
on a Steinway concert grand piano. This endorsement
has remained stable for many decades.
As we shall see, this high market share at classical
music concerts has not resulted in a high overall market
share in the piano market. The high reputation of the
brand has resulted in many potential Steinway buyers
not only being interested in music, but being greatly
interested in class and status. Their interest in owning a
Steinway would increase if the class and status associated
with the Steinway name was emphasized.
Systematically, the firm has broadened the message
in its promotions. The firm’s advertising has emphasized,
for example, that one does not ‘buy’, but ‘invests’
in a Steinway, and that a Steinway piano is always made
just a little bit better than necessary. Steinway advertising
has been targeted to emphasize family values, the
contributions to art and music of Steinway & Sons,
Steinway’s technical excellence, or a combination of
these. The ‘timeless’ excellence of a Steinway has also
been emphasized.
International marketing of Steinway pianos
The piano market consists of two important segments –
grands and uprights. Grand pianos are larger and give
a louder, more resonant sound. The grands are more
expensive and the market for such pianos is generally
smaller than that for uprights, and fewer firms were
involved in their manufacture.
Historically grand pianos have accounted for the
bulk of Steinway’s production. Grand pianos are at the
premium end of the piano market in terms of quality
and price, with the Steinway grands dominating the
high end of the market. Retail prices in 2005 ranged
from $40,000 to $120,000 in the United States.
Steinway pianos are primarily purchased by affluent
individuals, highly knowledgeable about pianos with
incomes over $130,000 per year. The typical customer is
over 45 and has a serious interest in music. Steinway’s
core customer base consists of professional artists and
amateur pianists as well as institutions such as concert
halls, conservatories, colleges, universities and music
schools. Customers purchase Steinway pianos either
through one of the firm’s five retail stores or through
independently owned dealerships. The institutional
segment of the world piano market, which includes
music schools, conservatories and universities, represented
less than 17 per cent of Steinway’s sales. 80–85
per cent of the firm’s piano sales are to individuals.
In other countries, sales to individuals are a smaller
percentage of the total sales.
Approximately 90 per cent of Steinway unit sales
were made on a wholesale basis, with the remaining
10 per cent sold directly by Steinway at one of its eight
company-owned retail locations (in big cities such as
New York, London, Berlin and Hamburg).
Unlike many of its competitors in the piano industry,
Steinway does not provide extended financing
arrangements to its dealers. To facilitate the longterm
financing required by some dealers Steinway
has arranged financing through a third-party provider,
which generally involves no guarantee by Steinway.
Education as a marketing parameter
Education continues to be an important focus for
Steinway & Sons. William Steinway, managing director
of Steinway & Sons in the late 1800s, is credited with
the development of the Steinway Concert and Artist
Program as well as many other successful marketing
techniques. To foster this sense of creativity the
William Steinway University was created. Through the
Bachelors and Masters Programs offered the company
provides product knowledge and sales skills to the
Steinway & Sons family of dealers.
In order to train its highly skilled technicians to
prepare pianos to Steinway & Sons’ exacting standards,
the company established the C.F. Theodore Steinway
Technical Academy. The academy was a series of
seminars for experienced piano technicians who wish to
upgrade their skills.
New markets in Asia
Since Steinway opened a representative office in Beijing,
China in 1999, it has signed agreements with five piano
showrooms to represent Steinway & Sons in this market.
It expanded this into a Chinese sales subsidiary
in 2002. In 2004, they opened a distribution and selection
facility in Shanghai. This is the same approach as
in Japan – the Asian markets tend to be closed and
Steinway’s penetration of the Japanese market has been
very slow. That was the trigger for setting up a sales subsidiary
in Japan. In 1997 Steinway created a Japanese
subsidiary to expand its distribution to consumer markets
in Japan, one of the largest piano markets in the
world. Since that time 23 dealers have been appointed
to distribute Steinway & Sons pianos in this market.
While the company expected it to take some time to
fully develop the market, sales in Japan have more than
doubled from 2000 to 2005, with revenue reaching
$15 million in 2005.
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Part I The decision whether to internationalize
Steinway also opened its own showroom, as property
is at a premium in Japan, and the average piano dealer
in Japan has a showroom probably no bigger than a
living room. Steinway is still slowly developing its distribution
network, and expects the same process to take
place in China. In Japan, Steinway is up against high
volume producers such as Yamaha, which can make
grand pianos a lot more efficiently than Steinway, but
cannot make them the same way that Steinway does. In
Japan, Steinway charges four times more than Yamaha
for a comparably sized piano, and still Steinway sells
around 200 grand pianos there each year.
Competition
In the United States
In the 1960s US piano manufacturers were first confronted
with Japanese piano imports. The Japanese
firms offered consistent-quality pianos at a much lower
price than US manufacturers. By the end of the 1960s
two Japanese firms, Yamaha and Kawai, were selling
10,000 units annually. Together they captured 5 per
cent of US upright piano sales and 28 per cent of US
grand piano sales.
The 1980s saw further significant change in the US
piano market. Yamaha introduced the first all-digital
synthesiser, which could effectively produce a range
of high-quality sounds. Yamaha’s introduction of the
synthesiser effectively undercut the low-end acoustic
piano market.
Yamaha uses innovative engineering and automated
manufacturing to produce its pianos and markets its
pianos worldwide. By the end of the 1980s Yamaha was
the world’s leading musical instrument maker. It commanded
30 per cent of the world piano market.
As a consequence of the Asian competition several
US firms have closed, and currently only two major US
firms, Steinway & Sons and Baldwin, continue to make
pianos.
Founded in 1862, Baldwin is best known for
making grand and upright pianos under the Baldwin,
Chickering and Wurlitzer names. It also makes
ConcertMaster computerized player pianos and
Baldwin Pianovelle digital keyboards. Baldwin has
two manufacturing facilities in Arkansas. After selling
off 11 of its retail stores and its retail finance business,
the company filed for bankruptcy protection in May
2001. Today it is a member of the Gibson musical
family.
In Europe
Although German piano manufacturers make highquality,
high-priced pianos they have been severely
tested by the low-priced Asian competitors. As a consequence
of this competition the number of piano
makers has fallen from several hundred to around ten.
All surviving firms faced financial difficulties in the
1990s.
Wilhelm Schimmel, Braunschweig, is not among the
largest German piano manufacturers. It is a familyowned
business run by the third and fourth generation.
In 2001 Schimmel had about a25 million in total sales.
Schimmel has a close relationship with Yamaha, which
has marketed Schimmel pianos in Japan.
While English firms were world piano manufacturers
during Steinway’s earlier years, today there is
little piano making in England. The manufacturing that
does occur involves subcontracting from non-British
makers. The most prominent is Kemble & Co., a firm
that employs 100 people and makes pianos for Yamaha
(Japan) and Schiedmeyer (Germany).
Steinway market shares
Though 95 per cent of worldwide concert solos are performed
on a Steinway piano Steinway has ‘only’ a little
less than 10 per cent world market share in the grand
piano segment. This ranges from less than 1 per cent in
China to 22–23 per cent in Switzerland. In the United
States Steinway’s market share is about 10 per cent.
In the late 1980s Yamaha chose to enter the concert
piano market in direct competition with Steinway.
Developing new grand pianos provided Yamaha with
the product offering to attack Steinway’s 95 per cent
market share in concert sales.
So there are reasons enough to conduct a review of
the international marketing strategy of Steinway’s
grand piano business.
Sources: adapted from: http://www.cantos.org/Piano/History/
marketing.html ‘Marketing history of the piano’;
http://www.steinway.com; http://www.yamaha.com.
Questions
1 Which of the four cases in Figure 3.6 could fit with
Steinway’s internationalization?
2 What are the core competences of Steinway & Sons?
3 How should Steinway cope with the increasing
competition from Japanese manufacturers (such as
Yamaha)?
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