12 - Sony Corporation – more restructuringBetween 1994 and 2003 Sony, the electronics and media giant, undertook several restructurings in attempts to turn round its poor financial performance. In March 2005 Howard Stringer became the company’s first non-Japanese CEO and embarked on a further restructuring. But why should this one work?

On 27 October 2005, Japan-based Sony Corporation (Sony) announced its financial results for the second quarter ending 30 September 2005. The results showed that the trend of dismal financial performance at Sony was continuing. These results were announced after the declaration of the new restructuring plan in September 2005, under the new CEO Howard Stringer.

Sony had been subjected to a spate of restructuring programmes beginning in 1994, all of which had failed to revive its dwindling fortunes. Analysts attributed Sony’s problems to the company’s bloated cost structure, investments in non-core businesses and lack of new-age products.

Stringer’s predecessor Nobuyuki Idei (Idei) became the CEO of Sony in June 1999. Idei stepped down from this position due to the failure of “Transformation 60”, a three-year restructuring plan through which he had proposed to improve significantly the financial performance of Sony. In September 2005, Stringer announced a restructuring plan for Sony. As part of the plan, Sony announced reduction of its global workforce by 6.6 per cent and sale of non-core assets valued at ¥120bn (€766m).

Background Sony was started in 1946 as Tokyo Tsuchin Kyogo by Masaru Ibuka and Akio Morita (Morita) in war-ravaged Japan. Initially, the company had 20 employees and capital of ¥190,000. Since its inception, Sony focused on product innovation and high quality.

Sony started off manufacturing telecommunications and measuring equipment and went on to manufacture transistor radios and tape recorders. In 1968, it introduced Trinitron Color TV, which was highly successful. Another highly successful product was the Walkman launched in 1979. Path breaking products introduced by Sony included the world’s first CD player (1982), Camcorder (1982), Discman portable CD player (1984), PlayStation (1994) and Digital Handycam (1995). Sony introduced several other products like home electronic equipment and 3.5 inch floppy disks.

From the beginning of the 1990s, in spite of a moderate increase in its operating revenues, the operating income and net income of Sony witnessed a decline. After the restructuring of electronics business in 1994 implemented by CEO Norio Ohga (Ohga), the company’s performance deteriorated further and Sony reported a loss of ¥293.36bn in 1995. This led to another round of restructuring in 1996, in which Sony was organised into a 10 company structure. However, this restructuring did not lead to a sustainable improvement in the company’s financial performance and for the financial year 1998-1999 the net income dropped by 19.4 per cent.

Another round of restructuring was proposed in 1999 in order to enable Sony to exploit the opportunities offered by the Internet. Though some of its products like the PlayStation were profitable, a majority of its other businesses like electronics, movies, mobile telecommunications and personal computers were not performing well. For fiscal 1999-2000, Sony’s net income fell to ¥121.83bn, a decline of over ¥58bn compared with the previous year.

With none of the restructuring efforts proving fruitful, Sony decided to revamp its top management. In 1999, Idei became the Chairman and CEO of Sony and the Head of the company’s PC division, while

Kunitake Ando was made President. During 2000-2001, despite the increase in revenue due to higher sales of the PlayStation, net income dropped to ¥16.75bn from ¥121.83bn in the previous year. At this juncture, Idei came up with another round of organisational restructuring in 2001. This plan aimed at transforming Sony into a broadband network solutions company. Sony’s operating income declined by 40.3 per cent in 2001-2002, while revenues increased by 3.6 per cent. In April 2003, Sony presented its quarterly results, posting a quarterly loss of US$970m. In June 2003, Sony reported a net profit of ¥9.3m, which was 98 per cent lower than the profit reported in the corresponding quarter in 2002. In October 2003, Idei came up with yet another restructuring plan called “Transformation 60”.

Transformation 60 Transformation 60 was a three-year restructuring plan, which required Sony to layoff 13 per cent of its workforce or about 20,000 people by March 2006. Sony planned to reduce costs by downsizing and consolidating manufacturing, distribution, customer service facilities and also by streamlining procure-ment. Through these efforts, Sony aimed to achieve cost savings of ¥300bn by March 2006. By Sony’s 60th anniversary in 2006, the company aimed at achieving a profit margin of 10 per cent. The key underlying theme was the need to create convergence between separate products. For example, in the electronics business, converging television and games; in entertainment converging movies, music and games; and so on. To enable convergence a new organisational structure was created (see Exhibit 1). The company was reorganised into seven business entities - four network companies and three business groups. Exhibit 2 shows the responsibilities of each of these business units.

Exhibit 1: Sony organisational chart (as of 1 April 2003)

The implications

The above plans were not successful mainly due to the significant drop in sales of conventional televisions and portable audio products. Sony’s electronics business witnessed losses for two consecutive years. The decline in sales of Sony’s electronics products was prominent in Japan, where the demand for Vaio personal computers and cathode-ray-tube televisions fell significantly. The games division also did not fare well with sales of PlayStation 2 consoles falling rapidly. By December 2004, Sony’s films division registered growth due to DVD and VHS sales of Spiderman II and Seinfeld. PlayStation Portable (PSP), which was released in December 2004, witnessed robust demand.

By the time Sony announced its October-December 2004 results, it was evident that the company was far from reaching the goals envisaged in its Transformation 60 plan. The revenues were 7.5 per cent lower than the revenues during the corresponding quarter in 2003 and the operating income had eroded by 13 per cent. Sony’s profit margins for fiscal 2004-2005 were at 1.6 per cent, far lower than the 10 per cent that Sony planned to achieve by 2006.

Stringer becomes CEO At this juncture, in March 2005, Stringer became the first non-Japanese CEO to lead Sony in its six-decade history. During the five years before he took charge as CEO and President, Sony’s stock price had eroded by 75 per cent. Stringer was head of Sony’s North American business and was known for drastic cost-cutting measures; he had reduced the workforce by 9,000 in Sony US. He played a major role in a group of private equity investors led by Sony acquiring MGM in September 2004.

Stringer brought with him a new leadership style. On the whole, he felt that being an outsider was an advantage. According to Stringer:

In the end, there was an advantage to being an outsider. Sony is built up on a web of interpersonal relationships that go back to the dawn of history. The old boys never go away. But that also makes it very difficult for the insider who has to attack the problems of too much management, and turning that around.

There was overall optimism in Sony about Stringer’s leadership, as one employee commented.

Exhibit 2: Responsibilities of network companies and business groups (2003)

No. Network company/business group Responsibility1. Home Network Company To create a new home environment with networked

electronic devices centred on next-generation TV 2. Broadband Network Company Development of next-generation electronics

devices and linkages to game devices3. IT and Mobile Solutions Network Company To realise a connected world with PC and mobile

devices and strengthen the B2B solutions business 4. Micro Systems Network Company To enhance key devices and modules as core

components of attractive set products 5. Game Business Group To promote game businesses for the broadband era 6. Entertainment Business Group To develop entertainment content businesses based

on pictures and music and develop a new content business model for the network era

7. Personal Solutions Business Group To integrate various business units providing services based on direct contact with customers (finance, retail, etc.). To strengthen synergies and develop attractive new business models for customers through the application of IT

Source: “Sony announces executive appointments and organizational reforms effective as of April 1, 2003”, www.sony.net. 31 March 2003.

“We’ve been blasted the last couple of years for not having a Michael Dell in charge. Here is the face and voice of a powerful figure running a powerful company.”

Challenges for Sony Stringer identified five main challenges for Sony. These were: getting rid of the “silo” culture in Sony, obtaining profitability across businesses, making products in line with industry standard technologies, improving the competences in software and services, and divesting non-strategic assets.

Sony’s movies, music and electronics businesses were facing internal conflicts. The content business wanted to protect its content, forcing device manufacturers to introduce products which prevented content from being pirated. The units operated with incompatible agendas. When the gadgets division wanted to manufacture digital music players that could play in the MP3 format, the music division did not agree. Sony’s divisions were unable to work in tandem even when it was to their mutual advantage. For example, Sony was active in making movies and also in manufacturing devices that played the movies but was not able to integrate them, as Apple had done with the iPod and iTunes.

New strategies On 22 September 2005, Sony announced a new strategy to revive its dwindling fortunes. The strategy concentrated mainly on three sectors electronics, games and entertainment. The electronics business of Sony was to be revitalised through a series of structural reforms (see below) coupled with a growth strategy aimed at achieving group sales of ¥8,000bn by 2008. Sony aimed at achieving a profit margin of 5 per cent and cost reduction amounting to ¥200bn by the end of fiscal 2007-2008.

Products and markets Sony aimed at regaining its leading position in the mobile audio devices market and also to establish itself in the portable video market. In the games business, Sony planned to introduce the PlayStation 3 and position it as the ultimate portable entertainment player, through which Sony aimed at increasing its

market share in the computer entertainment market. Sony was increasingly opting for internally sourced games software. The company also aimed at achieving increased collaboration among different sectors like games, entertainment and software. According to Stringer, “These products are a few of our weapons against commoditization.” Under the new strategy, Sony aimed at reviving the brand “Sony”. With the new products that Sony was planning to introduce, a person with a Sony Walkman, mobile phone or portable PlayStation could watch movies, listen to music and play video games anywhere, anytime.

Sony Pictures Entertainment (SPE) was involved in theatrical releases, television licensing and DVD sales. The digital content assets of SPE were expected to grow with the introduction of new media like UMD and Blu-ray disc. SPE planned to digitise the MGM library. In the music division, the Sony BMG joint venture was going from strength to strength and digital distribution was being explored. Sony was also looking at developing short-form video content for mobile phones. In mobile phones, Sony Ericsson was developing products to help Sony put its entertainment assets to best use. One such product on the anvil was the Walkman phone. In 2005, the financial services division of Sony posted strong results.

Reducing costs Sony planned to achieve cost reductions by reducing business categories and product models. It considered downsizing and initiating disposal of assets in 15 business categories. The number of product models was to be reduced by 20 per cent and the number of manufacturing sites from 65 to 54. Sony also planned to dispose of real estate, stock and non-core assets amounting to ¥120bn by the end of fiscal 2007. All these changes were expected to reduce the headcount by 10,000 globally, of which 4,000 would be in Japan. The company was expected to recover the cost of restructuring by 2008.

Focusing resources on high-growth businesses Sony started focusing on high-growth businesses such as HD products, mobile products and semiconductor/key component devices, which were built around customer-driven technologies. It focused on semiconductors, specifically in gaming and imaging. In key components, innovative technologies for system LSIs, next-generation displays and Blu-ray-disc-related products were being developed. In order to maintain user interfaces, the software development business was strengthened by establishing a technology development group. By the end of fiscal 2005-2006, Sony aimed at establishing software development facilities in China and the USA.

New organisational structure (2005) On 7 March 2005, Sony announced a new organisational structure (see Exhibit 3). Stringer assumed responsibility as Chairman, Group CEO and Representative Corporate Executive Officer, Sony Corporation, to run Sony’s overall group business operations. He continued to be the Head of the Entertainment Business Group and Head of Sony Corporation of America. Ryoji Chubachi (Chubachi) was elected as Representative Corporate Executive Officer, President of Sony and CEO of the Electronics Business Group of the company. Katsumi Ihara assumed the role of Representative Corporate Executive Officer, Executive Deputy President and Group CFO, and would also oversee financial matters and support Stringer and Chubachi in corporate strategy and resource allocation.

Exhibit 3: Sony organisational chart (as of October 2005)

When announcing the restructuring plans, Stringer said:

We are battling on many fronts against many competitors, a number of whom have at times proved more agile and more nimble. We can and will compete vigorously. We are going to achieve our goals by breaking down the existing silo walls and eliminating the highly decentralized structure we’ve maintained in the past.

Sony adopted the new organisational structure from 1 October 2005. Sony was reorganised into five business groups, which included the Electronics Business, the Games Business Group, the Entertainment Business Group, the Personal Solutions Business Group and the Sony Financial Holdings Group. Through the new structure Sony expected to achieve coordination across different areas including planning, technology, procurement, manufacturing, sales and marketing.

Restructuring electronics The Electronics Business was brought under the purview of Electronics CEO, Ryoji Chubachi. Exhibit 3 also shows various business units within the Electronics Business. On Sony’s strategy for this business, Chubachi emphasised that the products, the technology and the organisation were all equally responsible for the downturn of Sony’s electronics business. The electronics division had a Product Strategy Committee headed by Nakagawa to look at things from the customer’s viewpoint. The Sales Strategy Committee and Production Strategy Committee were headed by Chubachi while the Procurement Strategy Committee was led by Ihara. Matters of technology were looked after by Kimura, who controlled the Technology Strategy Committee.

To improve the technology, Sony planned to integrate internally sourced components with key products. It started using standardised design and components and aimed at reducing the time needed to come up with new designs. In the field of production materials, it concentrated on procuring from specific suppliers.

In the electronics division, television, digital imaging, DVD recorders and portable audio were the areas that Sony was looking into to establish itself as the leading player in the market. These efforts were expected to be helped by Sony’s plans to develop a semiconductor and key components business. To turn around the television business, Sony planned to increase the number of internally sourced components, centralise engineering functions and reduce and consolidate the manufacturing sites. The company aimed at making the television business profitable by the second half of 2006.

Sony planned to invest around ¥340bn in the chip business over a span of two years. A new division, being developed in association with IBM and Toshiba Corporation, was created for the cell chip. Stringer was of the view that focusing on select products would help Sony regain its leading position in the consumer electronics industry. Cell chips were expected to be used in high-definition televisions, personal video recorders and other devices. The PlayStation 3 was the first product where cell chips were used.

Source: Johnson, G., Scholes, K. and Whittington, R. (2008). Exploring corporate strategy (8th ed.), Harlow, Essex: Pearson Education Limited.

Your tasks

1. Use the material contained in Appendix B of this administration guide (i.e. structural types) to evaluate what type of organisational structure Howard Stringer was attempting to implement in October 2005.

1. Use Goold and Campbell’s five tests of good general design principles located in Appendix C of this administration guide (i.e. choosing structure – specifically use the specialised cultures test, the difficult links test, the redundant hierarchy test, the accountability test and the flexibility test) to determine the appropriateness of Howard Stringer’s structural choice given his desire to make Sony are more innovative and flexible organisation.

2. Assess the risks and benefits of the structural choice Howard Stringer has implemented.