Ila Singh Roll no.

01/2011 Section-C

Restructuring Sony Case analysis

Introduction
The case discusses the organizational restructuring carried out by the Japanese electronics and communication giant Sony Corporation (Sony) between 1994 and 2003. Sonys business operations were restructured five times within nine years. The case describes each of the five restructuring exercises in detail and examines their implications for Sony. It also discusses the impact of these structural changes on the financial performance of Sony.

Case analysis
Early Links between Restructuring and Performance By the mid-1990s, Sony was a fairly diversified conglomerate, with operations in several countries. Prior to the 1994 restructuring of its electronics business, it was divided into four product groups video equipment, audio equipment, televisions and others. Each product group in turn produced a number of products, both small and large. It became very difficult to manage the operations of the entire product portfolio. In order to effectively manage the entire product portfolio, the product groups had to be grouped into companies with clearly defined product categories and customer bases. This was the main reason for the 1994 restructuring. Another reason for the restructuring was the deteriorating financial performance of maturing businesses like audio equipment and video equipment while few new businesses were showing promising results. It was noticed that during 1990 and 1994, in the electronics business, the revenues of the video and audio equipment businesses were coming down or were at best stagnant, while the television and Others group were showing signs of improvement. The Others group, which consisted of technology intensive products such as computer products, video games, semiconductors and telecom equipment, was performing very well and had a

growth rate of nearly 40%. In order to focus on the high-growth businesses, Sony announced major changes in the structure of its electronics business in April 1994. With the objective of enhancing the performance of the existing businesses while placing more emphasis on emerging businesses, Sony created an eight-company structure. Each company targeted specific product categories and customer bases. The companies enjoyed reasonable functional and operational autonomy and had clearly defined objectives and were made accountable for their financial performance. The objective of the entire exercise was to enable quicker decision making. While the idea of the divisional company structure was right, Sony needed a proper corporate hierarchy to effectively supervise the operations of the divisional companies. This probably explained the development in 1995, when Sony created a new management framework. Sony was to be led by a team of executives at the top management level. The team included the Chairman & CEO, Vice-chairman, President & Chief Operating Officer (COO), Chief Officers and the presidents of divisional companies. This development marked the beginning of the mid1990s streamlining efforts of Sony. The Sony reshuffle in 1996 resulted in the creation of a 10company structure. This involved regrouping companies with related business operations (excluding combining the Infocom Products company and Mobile Electronics company to form Personal and Mobile Communications Company) and creating new companies that made IT-intensive products (excluding the recording media and energy company). The negative financial performance of Sony in 1995 was not due to poor organizational structure implementation. Sony was also affected by macro-economic factors such as recession in Japan. From 1995 to 1999, Sonys electronics business (on which the restructuring efforts were focused) grew at a compounded annual growth rate (CAGR) of 8.55%. The music business had a CAGR of 10.5% while the pictures business had a CAGR of 17%. Significant gains were, however, recorded by the games business and the insurance business. The games business registered a CAGR of 215%, while the insurance business registered a CAGR of 31%. The games business was boosted primarily by the PlayStation video games console, Sonys all time best-selling product.

Later Links between Restructuring and Performance In the competitive business environment in the late 1990s, Sony faced several challenges. These challenges included: To effectively compete with cash rich companies like Microsoft (Microsoft was planning to launch the Xbox games console to compete with Sonys PlayStation) and other leading

companies which had already realized the significance of the Internet revolution. To maintain its leadership in the games business, with its star product the PlayStation video games console. Even though the PlayStation was still making waves in Western countries, it reached a near maturity stage in Japan. Sonys increasing reliance on the games business might negatively affect the company in the long run. During the late 1990s, Sonys profit margins declined significantly due to the economic recession in Japan and the Southeast Asian economic crisis. Sony, along with several leading Japanese companies, was severely affected by the recession. Sony had to catch up with the digital revolution. The mantra of the time was convergence developing complementary products and distributing them through common sources (Microsoft distributed its products like Windows, Internet Explorer, MS Office, etc., along with its PCs). Sony had to do a similar act distribute its content (music, movies and games) through its diverse products like TVs, audio systems, movie theatres, PCs, etc. Through this, it could create further demand for its already mature businesses like the audio and video business. To effectively face the challenges, a major restructuring was required, emphasizing not only autonomy, but also cost cutting. This was what prompted the 1999 restructuring. Sonys first task was to become leaner and more centralized, so that effective control could be achieved in the operations. For this, the 10-company structure was dismantled and four autonomous units were created. Each unit received funding for its R&D activities and was made accountable for its financial performance. The head count at the headquarters was drastically reduced. The staff of Sony across the world was cut by 10%, with a number of factories being closed. Sony converted Sony Computer Entertainment, which was jointly owned by Sony and Sony Music Entertainment (Japan), into a wholly owned subsidiary of Sony. The purpose behind this was to cut down on overhead and communication time, as the company was at an advanced stage in the development of the next generation PlayStation video games console, PS2. It wanted to speed up the development process, as Microsofts Xbox rollout was also on the cards. To strengthen the management capability, Sony clearly demarcated the roles of headquarters and the newly created network companies. The role of the headquarters was restricted to supervise the various company units and look towards attracting investments, instead of managing the units. Accordingly, a distinction was made between the strategic and support functions. Sonys headquarters was split into two separate units Group Headquarters and Business Unit Support. The role of Group Headquarters was to oversee group operations and expedite the allocation of resources within the group. The support functions, such as accounting, human resources and general affairs, were handled by the network companies so that they could enjoy more autonomy in their operations. Significant long-term R&D projects were directly supervised by the headquarters, while the immediate and short-term R&D projects were transferred to the network companies concerned.

While Sonys efforts at convergence of content with its distribution setup were commendable, several analysts were skeptical about the entire exercise. The main reason was that Sony was not a really strong competitor (like Yahoo) on the content side, with marginal performance in the music business and movies business (Sonys Columbia Pictures), with the exception of the games business. On the distribution side, though it still had very good products to boast of, with hundreds of products to distribute, its distribution system was not as thoroughly developed as companies with lesser products, like Dell Computers and Microsoft. Given the scenario, the idea to merge content with distribution, seen as the main logic behind the restructuring exercise, was viewed with much skepticism. Sonys efforts over the next couple of years indicated that it was very serious about its move. It launched new products while at the same time making its existing products web-compatible. Sonys electronic products like PCs and digital cameras had sockets which could be connected to the Internet. Through www.sony.net, the consumers could participate in online versions of noted game shows, download songs from Sony Music albums and also posters of popular Sony Music stars. Through the new Sony Walkman, consumers could listen to songs downloaded over the Internet. Sony even purchased a major share in Sky Perfect TV in 1999, believed to be Japans third largest Internet Service Provider, with a subscriber base of around 900,000. This was Sonys biggest bet at cashing in on the Internet and e-commerce boom in the late 1990s. Sonys restructuring efforts in 1999 were well received by investors. Following the announcement of the restructuring program, Sonys stock prices nearly tripled. This positive trend continued even in 2000. By March 2000, its stock prices were at a high of $152. Having already offered its PlayStation game console on the Internet, Sony successfully launched its PlayStation 2 (PS2) video game console in Japan in March 2000. The PS2 sold 980,000 units within the first three days of its launch. However, Sony still faced problems since its other businesses, including electronics, movies, personal computers, and mobile telecommunications, were not performing well. Analysts felt that the low Internet penetration rate in Japan (estimated to be 13% in 1999) was proving to be a major hurdle for Sony. Consequently, Sonys financial performance deteriorated by the end of 1990s. For fiscal 1999 2000, Sonys net income fell to 121.83 bn compared to 179 bn in fiscal 1998 99. This resulted in a major fall in its stock prices. By May 2000, Sonys stock prices fell by 40% to $89. Analysts were quick to criticize Sonys efforts towards transforming itself into a web-enabled company. They commented that the company had created more hype rather than taking significant steps in this regard. In response to these financial problems, Sony announced another reshuffle in its top management. Idei became the Chairman and Chief Executive Officer of Sony. Ando, who headed Sonys PC division, was made the President, while Tokunaka, who previously headed the PlayStation unit, was made the Chief Financial Officer of Sony. Analysts criticized this move as a mere show-off exercise. Sony also undertook a massive cost-cutting exercise. Its global manufacturing facilities were reduced from 70 in 1999 to 65 in 2001. While implementing these measures, the company had to deal with severe resistance from employee unions and local governments (in areas where jobs

would be eliminated). Despite the above measures, Sonys financial condition did not show any significant improvement in 2001. The company was severely affected by the slowdown in the IT industry during 200001, which led to a decline in the demand for its computer-related products. As a result, in spite of a 9.4% increase in revenues in fiscal 200001 (mainly due to the improved sales of the PlayStation games console), Sonys net income dropped significantly from 121.83 bn in fiscal 19992000 to 16.75 bn in fiscal 2000 01. Analysts commented that Sony required a new business model. The company had to immediately take concrete measures to increase its net income. The terrorist attacks in the US in September 2001 severely affected Sonys sales of its video games, movies and music albums in the US and European countries. This was something which couldnt be controlled by Sony. However, back home in Japan, there were several issues which Sony should have controlled had the company acted judiciously. For instance, in recession-hit Japan, where labor costs were high, Sony was still manufacturing a number of low-margin products like PC monitors and hard disk drives. Instead, it should have either outsourced the production of these products to contract manufacturers in neighboring countries like China or could have even divested them. In 2000 and 2001, Sony started to outsource production of Walkmans and PCs from China, a move which it should have made much earlier. Further, in an era of declining product cycles, Sony was involved in far too many businesses than could be effectively managed, ranging from semiconductors to financial services. Sony didnt possess the management capability of large business conglomerates like GE and IBM, which managed numerous businesses effectively, even during tough times. Sonys management also felt that with the emergence of net-compatible devices like cellular phones, audio and video gadgets and laptops, PCs were losing their charm. It felt that in the emerging age of broadband. the demand for the above products was likely to increase in future. Sonys management felt that in order to boost profitability and exploit the opportunities offered by the broadband era, there was need for yet another organizational restructuring. To meet the demands of the broadband era, Sony announced an organizational restructuring in March 2001. The company aimed at transforming itself into a Personal Broadband Network Solutions company by launching a wide range of broadband products and services for its customers across the world. Under the new structural framework, Sonys headquarters was revamped into a Global Hub centered on five key businesses electronics, entertainment, games, financial services and Internet/communication service. The primary role of the Global Hub (headed by the top management) was to devise the overall management strategy of the company. Sonys management decided to integrate all the electronics business related activities under the newly created Electronic Headquarters (Electronics HQ). In order to achieve the convergence of Audio Video Products with IT (AV/IT convergence), Sony devised a unique strategy called 4 Network Gateway. Under this strategy, the games and Internet/communication service businesses were combined with the electronics hardware business so that innovative products

could be developed and offered for the broadband market. The three businesses were under the supervision of Ando. In order to provide support services for the entire group, a management platform was created, which consisted of key support functions in diverse fields such as accounting, finance, legal, intellectual copyrights, human resources, information systems, public relations, external affairs and design. The management platform was later split into the Engineering, Management and Customer Service (EMCS) Company and the Sales Platform (which comprised the regional sales companies and region-based Internet direct marketing functions). The management platform was headed by the Chief Administrative Officer, a newly created position. Again, several analysts were skeptical about Sonys new found obsession broadband. Sonys launch in 2000 and 2001 of innovative products like Internet mobile phones proved to be major failures. In April 2003, Sony announced another major restructuring exercise (to be carried out in the next three years) in order to strengthen its corporate value. Following this announcement, Sony was reorganized into seven business entities four network companies and three business groups. These business entities were given the authority to frame short-term and long-term strategies. Sonys financial performance did not improve in spite of the frequent restructuring by Sonys management. For the financial year 200102, Sonys operating income fell by a significant 40.3% while its revenues registered a marginal increase of 3.6%. Moreover, according to a BusinessWeek report, sales of Sonys most profitable products the PlayStation and the PS2 game consoles were likely to fall. In the end, Sonys continuous emphasis on restructuring exercises, rather than concentrating on cutting down on unnecessary product lines, and its continual focus on the consumer electronics business at a time when the industry itself was going through a slump period, could be cited as the primary reasons for its continual dismal performance. Sonys Recent Moves Despite announcing a major restructuring exercise in 1999, followed by another restructuring initiative in 2001, Sony reported dismal performance in fiscal 200203, especially in its consumer electronics business. Sony announced another round of major restructuring in October 2003. The initiative was termed by Sony as Transformation 60, which outlined a series of fundamental reforms which the company contemplated over the next four years. The key elements of Transformation 60 included:
Clarifying the companys operational structure and implementing growth strategy

Sony aims to achieve this through the convergence of the electronics business, convergence of the entertainment business and convergence of the finance business. The convergence of the electronics business would be achieved by designating the home electronics sector, mobile

electronics sector and semiconductor technology sector as core sectors. Convergence of the entertainment business would be achieved by combining assets in pictures, music and games, with the aim of becoming a global media content company. Convergence of the finance business would be achieved by establishing a financial holding company which consisted of three companies: Sony Life Insurance Company Ltd, Sony Assurance Inc. and Sony Bank Inc.
Fundamentally reforming operational profit structure

In Phase II of the new round of restructuring, Sony aims to implement structural reforms covering electronics, entertainment and other major sectors, with the primary objective of improving its profit structure significantly. This would require it to drastically cut down on fixed costs to the tune of 330 bn by the end of fiscal 2006. For this, Sony plans to reduce the head count by 20,000 (of which 7000 would be from Japan), close plants and outsource several products from neighboring countries like China. Through these changes, Sony aims to secure a consolidated operating profit margin of at least 10% (excluding financial business) by the end of FY06. Sony also believes that these changes will lay the foundation for the creation of new value and significant growth from FY06 onwards. Over the next three years, Sony plans to spend approximately 335 bn (300 bn in electronics) to achieve annualized fixed cost reductions of approximately 200 bn (160 bn in electronics) in FY06 compared to FY02. In addition, cost reductions in non-production materials will help to achieve overall total annualized fixed cost reductions of approximately 330 bn (300 bn in electronics) in FY06 compared to FY02. For FY03, Sony projects restructuring costs of approximately 140 bn (electronics 130 bn) resulting in annualized savings of approximately 78 bn (electronics 68 bn) from FY04. Sonys contemplated latest round of restructuring initiatives only confirm its obsession with restructuring, the results of which would be interesting to watch.