Restructuring Sony
The electronics and media giant Sony faced struggles during the late 1990s and early 21st century. Each disappointment led to Sony’s management launching another company restructuring. Commentators started questioning by 2003 whether restructuring was the solution or part of the problem for Sony. The question arose on how Sony should manage its strategic renewal. In the first quarter ending on June 30, 2003, Sony surprised the corporate world by reporting a 98% decline in net profit.
Sony’s net profit for the same quarter in 2002 was ? 1. 1 billion, but in the current quarter it dropped significantly to ? 9. 3 million. Additionally, Sony’s revenues for the corresponding period fell by 6. 9 per cent, amounting to ? 1. 6 trillion. The decrease in profitability was attributed to the significant expenditure of ? 100bn on restructuring initiatives in the financial year 2002–03. Furthermore, Sony had already announced its plans to invest ? 1 trillion in a major restructuring initiative over the next three years by April 2003.
Sony’s management has received criticism for frequently restructuring its consumer electronics business, which accounted for nearly two-thirds of its revenues. In 2003, the sales within this division experienced a 6.5% decline. It is important to highlight that Sony has undergone five business restructuring efforts in the past nine years. Analysts argue that Sony’s excessive focus on the consumer electronics sector, which had a profit margin below 1% in 2002-03, combined with increasing competition within the industry, has greatly affected its profitability.
Despite believing that the restructuring efforts were producing desired outcomes, Sony executives announced a substantial rise in the company’s profitability during the fiscal year 2002-03. In contrast to the prior year’s net income of ? 15.31bn, Sony achieved a net income of ? 115.52bn in 2002-03 (refer to Table 1 for Sony’s financials throughout the previous 13 years). Sony released a statement accrediting this improvement to the restructuring of its electronics business, particularly within the components units.
At the start of the new millennium, Sony encountered heightened competition in its electronics and entertainment divisions from both domestic and international players. Korean companies such as Samsung and LG emerged as strong rivals, while Matsushita and NEC gained a significant market share in the internet-enabled cell phone market. Additionally, industry analysts expressed concerns about the potential threat posed by US-based software giants like Microsoft and Sun Microsystems, as well as networking major Cisco Systems, to Sony’s home entertainment business.
Background: On 7 May 1946, Masaru Ibuka (Ibuka) and Akio Morita (Morita) co-founded Tokyo Tsushin Kogyo Kabushiki Kaisha (Tokyo Telecommunications Engineering Corporation) in Nagoya, Japan. With an initial capital of ? 190,000, they emphasized product innovation and aimed to provide innovative, high quality products to consumers. Their product introductions included the magnetic tape recorder and the ‘pocketable radio’. By the 1960s, the company had become established in Japan and rebranded as Sony Corporation.
In the 1960s, Sony focused on globalization and entered the US and European markets. In the 1970s, Sony established manufacturing units in the US and Europe. This period also saw the development and successful introduction of the Walkman, which greatly increased Sony’s sales in the 1980s. Europe marketing of Sony’s consumer products was done through subsidiaries in the UK, Germany, and France by the mid-1980s. In 1989, Norio Ohga became the chairman and CEO of Sony, succeeding Morita. Under Ohga’s leadership, Sony placed a greater emphasis on process innovations that improved efficiency and controlled product costs.
By 1994, Sony had three main divisions – Electronics, Entertainment, and Insurance and Finance (Table 2). Each division had its own product groups. The Electronics division had four product groups offering a diverse range of products. The Entertainment division included the music group and the pictures group, focusing on music videos and motion pictures. The Finance division encompassed Sony’s life insurance and finance operations. Sony’s expansion was driven by the introduction of groundbreaking products and its entry into the music and film industries.
Under Ohga’s leadership, Sony underwent a restructuring of its electronics business in 1994. From 1990 to 1994, the company had minimal growth of 2 percent in sales and operating revenues. However, there was a significant decline of 87 percent in net income and 67 percent in operating income. Analysts attributed this decline to factors such as stagnation in the electronics industry, the recession in the Japanese economy, and the appreciation of the yen against the dollar.
Table 3 indicates that sales of video and audio equipment in the electronics industry either declined or stayed constant. Nevertheless, there was a favorable shift observed in the television and ‘Others’ sector. This particular category experienced a notable increase of nearly 40 percent and encompassed computer products, video games, semiconductors, and telecom equipment. In April 1994, Sony implemented significant modifications to its electronics business structure to prioritize sectors with substantial growth potential.
Sony’s management determined that the ‘Group’ structure, which had driven the company’s growth in the 1980s, was no longer necessary in the rapidly changing business environment of the 1990s. They reorganized the electronics businesses into eight divisional companies: the Consumer Audio & Video Products Company, the Recording Media & Energy Company, the Broadcast Products Company, the Business & Industrial Systems Company, the InfoCom Products Company, the Mobile Electronics Company, the Components Company, and the Semiconductor Company.
The restructuring exercise had a particular emphasis on the products categorized as ‘Others’. Each divisional company had its own set of objectives and was in charge of all operations including production, sales, and finance. The presidents of the divisional companies had the authority to determine investments up to a specified limit. They also had the power to make decisions concerning HR matters for all employees up to the position of divisional director. Additionally, they were held accountable for the financial performance of the companies under their leadership.
Sony’s presidents, who were similar to CEOs, were responsible to shareholders. The goal of restructuring in Sony’s electronics business was to enhance the company’s concentration on promising products and expedite decision-making, thereby increasing its adaptability to evolving market conditions. Consequently, the decision-making hierarchy was streamlined from six layers to a maximum of four layers.
Ohga commented on his responsibilities in the new structure, stating that he wants divisional presidents to operate their companies as if they were presenting to shareholders at an annual shareholders’ meeting. Ohga’s role will involve assessing their strategies, addressing any concerns, and offering advice as needed. A memorandum titled ‘The Introduction of the Company within a Company System’ outlined the main objectives of Sony’s newly implemented organization system (refer to Table 4).
Ohga explained the purpose of the new system as follows: Sony intends to introduce attractive products to the market more quickly while also enhancing cost competitiveness across the entire company. In 1995, following the adoption of a divisional company structure in the electronics business, Sony announced changes to its management structure. According to the new framework, a group of top-level executives would lead Sony. This team consisted of the Chairman & CEO, Vice Chairman, President & Chief Operating Officer (COO), Chief Officers, and presidents of divisional companies.
Analysts believed that Sony’s management implemented this action to decrease the company’s dependency on a solitary leader. In March 1995, Nobuyuki Idei (Idei) became the President and Chief Operating Officer of Sony. However, despite these organizational changes, Sony experienced a decline in its financial performance in 1995. For the fiscal year ending in March 1995, Sony reported a significant net loss of ?293.36bn. This loss was attributed to the write off of goodwill during 1994, the underperformance of the Pictures group, and the strength of the yen.
During 1994, the yen reached a record high against the dollar, causing Sony’s exports to be uncompetitive. Furthermore, analysts believed that Sony’s consumer electronics business lacked fresh and innovative products. In light of this underwhelming financial performance, Sony’s top management made the decision to integrate the company’s various domestic and global business functions, including marketing, R&D, finance, and HR. Consequently, the functions previously divided among multiple divisional companies became directly overseen by headquarters. Idei also opted to reinforce the existing eight-company structure and prioritize R&D in the IT sector.
He believed that Sony should concentrate on developing IT-related enterprises. As a result, Sony’s management restructured the current framework to establish a new ten-company system. This new structure, implemented in January of 1996, replaced the previous eight-company structure (refer to Table 5). In this fresh framework, the former Consumer Audio & Video (A&V) company was divided into three separate companies: the Display Company, the Home AV Company, and the Personal AV Company.
The Information Technology Company was established to concentrate on Sony’s business interests in the PC and IT industry. The Infocom Products Company and the Mobile Electronics Company were combined to form the Personal & Mobile Communications Company. Additional companies created include the Components & Computer Peripherals Company (previously known as the Components Company), the Recording Media & Energy Company, the Broadcast Products Company, the Image & Sound Communications Company (formerly called the Business & Industrial Systems Company), and the Semiconductor Company.
The creation of the Executive Board at the Sony Group was aimed at developing and executing corporate strategies. Led by Idei, the board consisted of various key executives such as the Chief Human Resources Officer, Chief Production Officer, Chief Marketing Officer, Chief Communications Officer, Chief Technology Officer, Chief Financial Officer, Executive Deputy President & Representative Director, and Senior Managing Director.
Sony sought to consolidate its marketing operations by spinning off the marketing divisions from the previous organizational setup. This resulted in the creation of three new marketing groups, namely the Japan Marketing Group (JMG), the International Marketing & Operations Group (IM&O), and the Electronic Components & Devices Marketing Group (ECDMG). The JMG assumed responsibility for all marketing activities in Japan for five companies, including the Display Company, Home AV Company, Information Technology Company, Personal AV Company, and Image & Sound Communications Company.
The International Marketing and Operations (IM&O) team had the responsibility of supporting overseas marketing efforts for multiple companies. The Electronic Components Distribution and Marketing Group (ECDMG) supervised marketing operations worldwide for the Semiconductor Company and the Components & Computer Peripherals Company. Experts believed that this restructuring aimed to separate Sony’s marketing operations in Japan from its global operations, enabling the company to operate with more focus. In order to centralize Sony’s research and development (R&D) activities, the previous R&D structure, which had each company with its own R&D division, was overhauled and three new corporate laboratories were established.
The laboratories consisted of the Architecture Laboratory, which was responsible for R&D in software, network, and IT-related technologies, the Product Development Laboratory, which focused on R&D for product development in AV businesses, and the System & LSI Laboratory, which conducted R&D in LSI and system design for hardware products. Furthermore, a new D21 laboratory was established for long-term R&D in future-oriented technology-intensive products. Sony also prioritized nurturing young, talented individuals for future top management roles.
Sony introduced the idea of ‘virtual companies’ – temporary teams consisting of people from various divisions – to release hybrid products. This strategy was employed for the creation of the newest Mini Disk players, leading to a 15 percent growth in revenues and achieving profitability in the fiscal year 1995-96. Furthermore, Sony formed the Corporate Information Systems Solutions (CISS) organization in April 1998 with the objective of restructuring and improving their information network systems and global supply chain.
The CISS was composed of an advisory committee made up of individuals from management consultancy firms and representatives from Sony’s CISS. The committee members provided advice to the President on technological and strategic matters related to CISS. Representatives from the CISS were placed in all divisional companies in order to speed up the implementation of corporate IT projects. In the beginning of 1998, Sony created Sony Online Entertainment in the US to specifically focus on internet-related projects. In May 1998, Sony made changes to its board of directors and introduced the new position of Co-Chief Executive Officer (Co-CEO).
Idei was appointed Co-CEO, where he promptly reorganized the management structure. The goal was to streamline decision making, enhance efficiency, and establish clear roles for managers. This involved segregating policy-makers from operational managers. Within this new framework, Idei assumed the responsibilities of planning Sony’s strategies, overseeing e-business growth, and supervising the entire Sony group’s performance with Ohga. President Ando took charge of the core electronics business, while CFO Tokunaka became responsible for financial strategies and network businesses.
Sony’s global subsidiaries’ top management positions, previously known as Corporate Executive Officers, were renamed Group Executive Officers as part of efforts to make Sony’s management more agile. The electronics business, the main focus of restructuring efforts from 1995 to 1999, experienced a compounded annual growth rate (CAGR) of 8.5% (see Table 6). The music business had a CAGR of 10.5%, while the pictures business had a CAGR of 17%. The games and insurance businesses performed exceptionally well, with the games business registering a CAGR of 215% and the insurance business registering a CAGR of 31%. However, Sony’s financial performance declined in the late 1990s, with a net income drop of 19.4% in the financial year 1998-99. During this period, Sony heavily relied on its PlayStation computer game machines.
According to estimates, the PlayStation (Games business) contributed approximately 42% of Sony’s operating profits and 15% of total sales during the October-December quarter of 1998. During the late 1990s, numerous companies worldwide aimed to benefit from the internet boom. Sony’s management recognized this trend and sought to establish a connection between its electronics business (TVs, music systems, computers) and its content-related businesses (music, video games, movies, and financial services) by leveraging the internet.
Sony’s management believed that internet-related businesses could potentially outperform consumer electronics in terms of revenue. To capitalize on this potential, Sony announced a reorganization of its business operations and aimed to use the internet as a platform for selling electronic products and content (such as music and movies). Analysts believed that Sony was well-positioned to seize the opportunities presented by the internet, given its existing foothold in the electronics and content industries.
The unified-dispersed management model was introduced by Sony in April 1999. The company implemented this new structure to streamline its business operations and take advantage of internet opportunities. As part of this restructuring, Sony reorganized its key divisions – Consumer Electronics, Components, Music, and Games – into network businesses. Ten divisional companies were reduced to three network companies, including Sony Computer Entertainment (SCE) Company and the Broadcasting & Professional Systems (B&PS) Company (see Exhibit 1).
SCE Company oversaw the PlayStation business, while the B&PS Company provided video and audio equipment for various markets such as business, broadcast, education, industrial, medical, and production. The restructuring had three main goals: bolstering the electronics business, privatizing three Sony subsidiaries, and enhancing management capabilities. Additionally, the restructuring aimed to increase shareholder value through ‘Value Creation Management’.
Strengthening the electronics business, three network companies were established: the Home Network Company, the Personal IT Network Company, and the Core Technology & Network Company. Each network company was overseen by a network company management committee (NCMC) and a network committee board (NCB). The NCMC, consisting of officers and presidents of the respective network company, was responsible for devising management policies and strategies. On the other hand, the NCB was tasked with handling the daily operations of the network company, taking into account the organization’s overall corporate strategy.
Each NCB was led by the President & CEO, Deputy President, President and Representative Director, two Executive Deputy Presidents and Representative Directors, and Corporate Senior Vice President of the concerned company. The objective of the new structure was to distribute the global operations of the company. The network companies were granted autonomy by the corporate headquarters to function independently in their respective sectors. Additionally, the corporate headquarters transferred the necessary support functions and R&D labs to each network company to enhance their operational and functional independence.
In order to enhance Sony’s electronics business, management established Digital Network Solutions (DNS) at headquarters. DNS was responsible for creating a network business model through strategic planning and technological development to maximize internet opportunities. The primary goal of DNS was to build a network infrastructure that would offer customers digital content (such as music and movies) as well as financial services.
Sony made the decision to privatize three of its companies, Sony Music Entertainment (Japan), Sony Chemical Corporation, and Sony Precision Technology. This move was intended to increase their functional and operational autonomy and give more focus to units that were major contributors to Sony’s revenues and profits. Sony Music Entertainment (Japan) specializes in manufacturing printed circuit boards (PCBs), recording media, and automotive batteries. Sony Chemical Corporation focuses on producing printed circuit boards (PCBs), recording media, and automotive batteries. Sony Precision Technology is involved in the manufacturing of semiconductor inspection equipment and precision measuring devices. All three companies are now wholly owned subsidiaries of Sony.
Furthermore, Sony transformed SCE, a company jointly owned by Sony and Sony Music Entertainment (Japan), into a fully owned subsidiary of Sony. This move was aimed at enhancing management capacity. To achieve this, Sony established clear boundaries between headquarters and the newly formed network companies. This involved distinguishing between strategic and support functions. Consequently, Sony headquarters was divided into two distinct units: Group Headquarters and Business Unit Support. Group Headquarters was responsible for supervising group operations and facilitating resource allocation within the group.
The network companies handled support functions like accounting, human resources, and general affairs to have more autonomy. The headquarters directly supervised significant long-term R&D projects, while immediate and short-term ones were transferred to the network companies. A value-based performance measurement system was introduced to evaluate the network companies’ performance. Amid its restructuring efforts, Sony began developing internet-compatible products.
Sony made its electronic products web compatible, including digital cameras, personal computers, music systems, and Walkman. Consumers could participate in popular television game shows, listen to music, and download songs and movie trailers through Sony’s website, www.sony.net. Sony expanded into e-business by acquiring Sky Perfect Communications. Additionally, Sony aimed to increase internet penetration in urban areas by offering lower-cost and higher-speed internet connections.
Sony’s restructuring in 1999 received positive feedback from investors, with its stock prices almost tripling after the announcement. This upward trend continued into 2000, with stock prices reaching a high of $152 by March. Additionally, Sony successfully debuted the PlayStation 2 (PS2) video game console in Japan during March 2000, following their prior success with the PlayStation console on the internet. The launch of the PS2 resulted in the sale of 980,000 units within the first three days.
However, Sony encountered difficulties as its other businesses, such as electronics, movies, personal computers, and mobile telecommunications, were not performing well. Analysts believed that the low internet penetration rate in Japan (estimated at 13% in 1999) posed a significant challenge for Sony. As a result, Sony’s financial performance worsened by the late 1990s. In fiscal year 1999-2000, Sony’s net income declined to ? 121.83bn compared to ? 179bn in fiscal year 1998-99. Consequently, its stock prices experienced a significant decrease.
Sony’s stock prices dropped by 40% to $89 in May 2000, a development that analysts criticized as a result of Sony’s inadequate efforts to become a web-enabled company. Analysts argued that the company had focused more on generating hype rather than taking substantial actions. In response to the financial issues, Sony announced a restructuring of its top management team. Idei was appointed as the Chairman and CEO of Sony, while Ando, previously in charge of the PC division, became the President. Tokunaka, who had previously led the PlayStation unit, assumed the role of Chief Financial Officer.
Sony implemented a significant cost-cutting exercise by reducing its global manufacturing facilities from 70 in 1999 to 65 in 2001. The company planned to further decrease the number of facilities to 55 by the end of 2003, which would lead to the elimination of 17,000 jobs. However, employee unions and local governments resisted these measures due to potential job losses. Despite these efforts, Sony did not experience significant financial improvement in 2001.
During 2000-01, the IT industry slowdown had a severe impact on the company, resulting in decreased demand for its computer-related products. Despite a 9.4% revenue increase in fiscal year 2000-01, mainly driven by improved sales of the PlayStation games console, Sony’s net income significantly dropped from ?121.83bn in fiscal year 1999-2000 to ?16.75bn in fiscal year 2000-01. Analysts noted that Sony needed a new business model.
Sony’s management believed it was necessary to implement strategies to improve the company’s net income. They also believed that with the rise of devices like cell phones, audio and video gadgets, and laptops that were compatible with the internet, there was a decrease in interest for PCs. The management perceived that in the future, there would be an increasing demand for these products in the era of broadband. Therefore, Sony’s management concluded that in order to maximize profitability and take advantage of the opportunities presented by the broadband era, organizational restructuring was crucial.
In March 2001, Sony announced a round of organizational restructuring, aiming to transform itself into a Personal Broadband Network Solutions company. The objective was to launch a wide range of broadband products and services worldwide and become the leading media and technology company in the broadband era. The restructuring included the design of a new headquarters to act as a hub for Sony’s strategy, strengthening the electronics business, and facilitating network-based content distribution.
Under the new structural framework (see Exhibit 2), Sony revamped its headquarters into a Global Hub centered on five key businesses: electronics, entertainment, games, financial services, and internet/communication service. The Global Hub, headed by top management, had the primary role of devising the overall management strategy for the company.
Sony created the Electronic Headquarters (Electronics HQ) to consolidate all electronics business activities. To achieve the convergence of Audio Video Products with IT, Sony implemented the ‘4 Network Gateway’ strategy, which combined the games and internet/communication service businesses with the electronics hardware business. This strategy enabled the development and offering of innovative products for the broadband market. Ando supervised these three businesses.
A management platform was developed to offer support services for various areas including accounting, finance, legal matters, intellectual property, HR, information systems, PR, external relations, and design. The management platform was divided into the EMCS Company which handles engineering, management, and customer service, and the Sales Platform consisting of regional sales companies and internet direct marketing functions based on regions.
Sony’s management platform was led by the newly created Chief Administrative Officer. They also transformed the product-centric network companies into solution-oriented companies by consolidating them into seven entities. The allocation of group resources among these network companies was based on their growth potential. To improve the profitability of the electronics sector, Sony’s management decided to focus on product development efforts. Additionally, they recognized the need to enhance the quality of their electronic devices.
Sony implemented the Ubiquitous Value Network, a unique business model, to connect its hardware, content, and services through networks. The company aimed to create various products that could be interconnected through this network. Not only did Sony focus on electronics, games, and internet/communication services but also ensured the compatibility of entertainment and financial services for efficient electronic content distribution.
In the entertainment industry, music and movies have been transformed into a digital format and distributed online, in addition to traditional channels like music stores and theaters. Japan’s Sony Music Entertainment introduced online music on its website, enabling users to download popular songs for a fee. In the financial services sector, Sony Life Insurance Japan introduced the ‘Life Planner’ consultancy system, providing personalized online financial services to its customers.
Sony Life Assurance Japan also began offering its insurance policies for sale online. Shortly after the reorganization, Sony introduced innovative products for the broadband market. In 2001, the company released a range of mobile phones that could connect to the internet. However, due to software issues with the mobile devices, the product was not successful. In early 2002, Sony had to recall three sets of phones that had been sold to Japanese companies. As a result, Sony reported a loss of $110m in the quarter ending June 2002.
Sony unveiled a significant restructuring plan in April 2003 (to be completed over the next three years) aimed at enhancing its corporate value (see Exhibit 3). Consequently, Sony underwent a reorganization, dividing into four network companies and three business groups (see Exhibit 4). These entities were granted the power to devise both short-term and long-term strategies. However, analysts observed that Sony’s financial performance remained stagnant despite the management’s frequent restructuring efforts.
Sony’s operating income declined by 40.3% in the financial year 2001-02, while its revenues saw a small increase of 3.6%. A BusinessWeek report indicated that sales of Sony’s highly profitable products, the PlayStation and PS2 game consoles, were expected to decrease. In response to Sony’s poor financial performance, management decided to decrease the number of manufacturing facilities and relocate some production activities outside of Japan.
Analysts criticized Sony for its diversified business portfolio, involving multiple industries such as semiconductors and financial services. They recommended that the company focus on profitable sectors like games, insurance, and audio-video equipment, while divesting from unprofitable ventures. Analysts questioned the justification of spending significant amounts on restructuring, especially considering the lack of expected outcomes from previous efforts. In 2001 alone, restructuring had cost the company ? 00bn; and it was anticipated that the proposed restructuring in April 2003 would incur an additional cost of ? 140bn. Additionally, analysts pointed out that the convergence of consumer electronics, PCs, and the internet presented both opportunities and intensified competition for Sony’s core businesses. As Sony bolstered its networking capabilities, it encountered new forms of competition in domestic and foreign markets. For instance, in the US, Microsoft, Sun Microsystems, and several startups were preparing to enter the home entertainment market.
Even Cisco Systems, a company that offers network solutions, has ventured into manufacturing consumer electronics products. According to a BusinessWeek report, Sony does not possess any unique strengths in internet-related industries.
