Increased Competition from Asia Piano Manufacturers.

EXECUTIVE SUMMARY:

Statement of the Problem:

Steinway & Sons faced a declining piano market and increased competition from Asia piano manufacturers.

Background:

In 1995 two investment bankers buy legendary piano manufacturers, Steinway & Sons for 100 million dollars. Steinway & Sons are the premier piano manufacturers in the world dominating the high-end market. Shortly before the company changed hands Steinway & Sons began to market an introductory line of pianos under the Boston brand name.

Discussion:

The new owners of Steinway & Sons will face a worldwide market that is in decline due to the prevalence of electronic keyboards and other more modern forms of entertainment. Steinway & Sons will also have to deal with increased competition from Japanese manufacturers, especially Yamaha. The Boston brand pianos were manufactured under contract by a Japanese firm and in no way reflected high standards associated with Steinway & Sons. The new ownership of Steinway & Sons will have to decide whether to focus on the high-end piano market or continue to try to tap other markets as they have began to do with the Boston line.

Recommendation:

* Scrap the Boston line and start another midline effort that focuses on the quality that customers expect from Steinway & Sons

* In order to counteract Yamaha's entrance to the high-end market, begin a marketing campaign focusing on institutions and private consumers reinforcing the ideas that a Steinway & Sons grand piano is the piano of legends.

Introduction

For almost a century, the piano market was dominated by a single family owned company. Steinway and Sons having been producing some of the finest musical equipment for over 100 years, however, in recent years they lost their position as leader in the piano market. After numerous owners and presidents, the company was sold in 1995 for $100 million. The biggest surprise of this story is not the sales price, but who bought this household name company, not a competitor, not a huge corporation, or even people in the music world, it was bought by two investment bankers in their early 30s.

History

The Steinway and Sons Company was founded in New York City in 1853 by Henry Engelhard Steinway, a German immigrant. Steinway, a cabinet maker in Germany, built his first piano in his household kitchen. By the time he founded his company he had already built 482 pianos. Steinway quickly made a name for his company and thrived from their "technical excellence." Not only was it known as one of the best pianos around, the company developed the cross stringing technique with a cast iron frame for the piano. A technique that is now standard on all grand pianos. Over the next forty years, Steinway and six sons developed what became the modern piano. Half of the patents developed by the Steinway Company were created during theses first forty years. Not only were piano makers involved in this process but the "late nineteenth-century inventions were based on emerging scientific research, including the acoustical theories of the renowned physicist Hermann von Helmholtz (www.steinway.com)." From then on, Steinway pianos won numerous awards and commendations for their excellent in manufacturing and engineering. In 1867 they won the gold medal award at the Paris exhibition, the "Grand Gold Medal of Honor," it was the first American company ever to win this prestigious award. From then on Steinway became the piano of choice, from royalty to the world's top pianist.

However, in 1972 the Steinway & Sons Company was sold to the CBS Musical Instruments Division. It was hard option but it was finally decided that the company that had been family owned for 120 years could no longer be a family owned business. Financial factors lead to the sale, company owners were spread throughout the whole family, many who not intimately involved in the company. They were only concerned about profits and were unwilling to reinvest in their own company. After poor return on capital (only about 5%) it was decided the best move for the owners would be to sell the company. CBS was willing to invest the money needed to bring the company back to greatness. Steinway was sold to CBS for $21 million in CBS stock. And Henry Steinway was kept as president for 5 years to ease the move from a family company to corporate owned business and to ensure the Steinway quality would remain. However, CBS was unable to turn the company around. Profits did not increase as much as hoped and criticism came regarding the drop in quality of the Steinway piano. CBS decided to sell the company to two brothers from Boston, John and Robert Birmingham, in 1985 for $50 million.

These two brothers were not obvious buyers; neither had any experience in the music business or even could play the piano. The new ownership was not well received, employee morale dropped and dealers do not want to do business with company with two new owners who had no idea what they were doing. However, the brothers did bring a new manager in, Bruce Stevens, who actually went to the dealers to hear there concerns and figure out how to repair their broken reputation. He published how they manufactured their pianos, so the dealers could see for themselves the immense care and quality that went into a Steinway. He developed a "Partnership Program" with their remaining dealers to increase their support, starting things sales training programs, technical support, and promotional events in stores. They created Steinway Showrooms in the store to increase sales not only for themselves but for the retailers. However, a huge blow to their reputation came when Andre Watts choose a Yamaha grand piano for his 25th anniversary with the New York Philharmonic, even though he was a Steinway artist. It was reported that he was tired of the poor quality of piano, poor service from Steinway dealers, and overall lack of attention to his request. A number of prominent artist began moving too Yamaha as their sponsor, moves that hurt Steinway sales.

Even Stevens' positive changes could not bring financial success back the Steinway Company. The Birmingham brothers decided to sell the company for what they stated as "personal problems" in late 1994. Two investment bankers became interested in buying the company; they issued a bid of $75 million to the Birmingham brothers and made it to the second round of bids, and finally won the bidding war with a final bid of $100 million.