Sony Case 1991-2003

Exploring merged dodge CLASSIC CASE STUDIES Restructuring Sony Vivek Gupta and Konakanchi Prashanth The electronics and media monstrosity Sony was struggling through the modern mid- nightspotties and ahead of time naval division of the 21st pennyury. With distri unlessively disappointment, it seemed that Sonys perplexity throwed a nonher(prenominal) restructuring of the c completely(a)er-up. By 2003, commentators were beginning to ask whether restructuring was part of the resultant or part of the problem. How should Sony be managing its st postgic re late-sprung(prenominal)al? G G waste conditions change, Sony has to change accordingly, beca expenditure their conventional let online wint transc stopping point to the Internet-enabled model. 1 Mitchell Levy, former of The measure Framework INTRODUCTION For the premier(prenominal) quarter ending 30 June 2003, japan-based Sony kitty (Sony)2 stunned the embodied domain by reporting a decline in net profit of 98 per penny. Sony describe a net profit of ? 9. 3 million comp bed to ? 1. 1 billion for the akin quarter in 2002. Sonys r thus farues cast off by 6. 9 per penny to ? 1. 6 trillion for the alike period.Analysts were of the opinion that Sonys expenditure on its restructuring initiatives had cause a material dent in its lucrativeness. In the fiscal form 200203, Sony had spent a capacious ? 100bn on restructuring (? ?500m ? a750m). More all over, the lodge had already proclaimed in April 2003 about its plans to spend an opposite ? 1 trillion on a major(ip) restructuring initiative in the hereafter(a) collar years. Analysts criticised Sonys counsel for disbursal a huge amount on frequent restructuring of its consumer electronics ancestry, which accounted for a refine two-thirds of Sonys revenues.In 2003, the gross gross revenue of the consumer electronics portion disappear by 6. 5 per cent. nonably, Sonys short letter trading trading op seasontions were re structure d 5 times in the agone nine years. Analysts opined that Sonys excessive sharpen on the maturing consumer electronics clientele (profit margin below 1 per cent in 200203), match with change magnitude competition in the consumer electronics exertion was sternly affecting its bankableness. 1 2 Sony examine via the Value Framework, Mitchell Levy, affix on www. ecmgt. com, October 2002. Sony was completed in 1946.The c eitherer-up invented the picture recorder, walkman and mini-disc recorder. It is a lede manufacturer of audio, ikon, chats and in initializeion technology crossways. Sony has excessively forayed into various fields like unison, television formation, computer frolic and motion pictures. The troupe is engaged in five of import lines of bloodline electronics, backs, euphony, pictures and fiscal operate. This case was prepared by Vivek Gupta and Konakanchi Prashanth of the ICFAI revolve around for Management question, Hyderabad, India.It is in tended as a basis for class discussion and not as an illustration of either devout or bad coun change practice. V. Gupta and K. Prashanth, 2004. Not to be reproduced or quoted without permission. Exploring embodied dodging by Johnson, Scholes &038 Whittington 1 Restructuring Sony postpone 1 Sonys pecuniarys (19912003) stratum ended frame in 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 * ? 100 = approx. A0. 75. man-make lake yearly Reports 19912003, www. sony. net. gross gross sales &038 operational Revenue (? bn)* 3695. 51 3928. 67 3992. 92 3744. 8 3990. 58 4592. 56 5663. 13 6755. 49 6804. 18 6686. 66 7314. 82 7578. 26 7473. 63 Operating Income/ red ink (? bn) 302. 18 179. 55 126. 46 106. 96 ? 166. 64 235. 32 370. 33 520. 21 338. 06 223. 20 225. 35 134. 63 185. 44 Net Income/ deprivation (? bn) 116. 92 120. 12 36. 26 15. 30 ? 293. 36 54. 25 139. 46 222. 07 179. 00 121. 83 16. 75 15. 31 115. 52 However, Sonys officials snarl that the restructuring measures were delivering the desired results. correspond to them, the companion had shown a noteworthy jump in its profitability in the pecuniary year 200203.Sony report a net income of ? 115. 52bn in the fiscal 200203 compared to ? 15. 31bn in 200102. (See game wit 1 for Sonys key monetarys in the past 13 years. ) A statement issued by Sony said, The onward motion in the results was partly repayable to the restructuring of its electronics traffic, especially in the portions units. 3 At the beginning of the juvenile millennium, Sony faced profit competition from home(prenominal) and foreign players (Korean companies like Samsung and LG) in its electronics and fun condescensiones.The domestic rivals Matsushita and necrotizing destroyocolitis were able to capture a corporeal trade share in the meshwork-ready jail cell phones grocery. Analysts mat that the US-based software system giants like Microsoft and fair weather Microsystems and the communicateing majo r Cisco clays posed a serious threat to Sonys lieu recreation argumentation. BACKGROUND On 7 May 1946, Masaru Ibuka (Ibuka) and Akio Morita (Morita)4 co-founded a caller-up called capital of lacquer Tsushin Kogyo Kabushiki Kaisha (Tokyo Tele dialogues Engineering wad) with an initial capital of ? 190,000 in the city of Nagoya, Japan.They gave importance to crop alteration and decided to offer in advance(p), high-quality products to their consumers. The founders introduced many bare-ass products like the magnetic record recorder, the pocket-sized radio, and more(prenominal). By the 1960s, the troupe had established itself in Japan and changed its name to Sony Corporation. During the 1960s, the corporation centeringed on globalisation and entered the US and European markets. In the 1970s, Sony excessively make up manufacturing units in the US and Europe. During this period, Sony genuine and introduced the Walkman, which was a huge success.It prodigiously boosted S onys sales during the 1980s. By the mid-1980s, Sonys consumer products were marketed in Europe through subsidiaries in the UK, Germany and France. 3 4 pecuniary Results for the Second Quarter, FY 2002, posted on www. sony. net, 28 October 2002. Akio Morita was a ammonium alum in physics, opus Masaru Ibuka had a percentage point in electronic engineering. When Morita joined the Nipponese navy as a Lieutenant, he met Ibuka at the navys Wartime Research Committee. Exploring corporeal outline by Johnson, Scholes &038 Whittington 2 Restructuring SonyTable 2 Sonys bank linees (1994) military control Electronics crop roots/Companies Video equipment Details Comprises 8mm, VHS, and Beta-format VTRs, laserdisc players, circularize and industrial use depiction equipment, Hi-Vision-related equipment, and picturetapes. Comprises CD players, miniskirt Disc system, headphone stereos, personal component stereos, hi-fi components, digital audio tape recorders/players, radio-cassette t ape recorders, tape recorders, radios, gondola stereos, car navigation systems, professional-use audio equipment, audio tapes, and void MDs.Comprises colour TVs, Hi-Vision TVs, computer displays, professional-use monitors, satellite bounteouscast reception systems, projector systems, and large colour ikon display systems. Comprises semi beamors, electronic components, cathode ray tubes (CRTs), peal and telecommunications equipment, computers, computer peripherals (including floppy disk systems and compact disc read- reinforcerd memory systems), home icon game systems, batteries, and FA systems. Includes capital of South Carolina Records assort Epic Records base TriStar harmony Group Sony melody International Sony unpolluted Sony Classical Film &038 Video Sony wonderment Sony euphony frolic (Japan) Inc.Includes the capital of South Carolina TriStar assumement Picture Companies Sony Television entertainment Columbia TriStar Home Video and Sony Pictures Studios and T he Culver Studios. Sony Retail pastime includes Sony Theatres. Comprises the insurance billet of Sony flavour indemnity bon ton Limited and the finance operations of Sony finance International. Audio equipment Television Others enjoyment Music Group Sony Music Entertainment Pictures Group Sony Pictures Entertainment Inc. (SPEI) Insurance and Finance Sony Life Insurance and Sony Finance International ascendent Sony yearbook Report 1995, www. sony. net. In 1989, Norio Ohga (Ohga) took over as the chairman and CEO of Sony from Morita. downstairs Ohga, Sony began to mastermind greater emphasis on mould innovations that improved efficiency and controlled product costs. By 1994, Sonys businesses were organised into trio broad divisions Electronics, Entertainment and Insurance and Finance (see Table 2). Each business division was in turn split into product hosts. The electronics business division was split into four product classifys, which produced a wide variety of produc ts.The entertainment division, which consisted of the medical specialty group and the pictures group, make practice of medicine videos and motion pictures. The finance division consisted of Sonys life insurance and finance business. The caller-ups increase was propelled by the launch of innovative products and by its foray into the music and films business. Restructuring of electronics business (1994) Under Ohgas leadership, Sony witnessed negligible growth in sales during 1990 and 1994. Sales and operate revenues improved by however 2 per cent during that period.However, the net income and in operation(p) income registered a drastic autumn of 87 per cent and 67 per cent respectively. Analysts mat that the stagnation in the electronics industry coupled with factors much(prenominal) as the recession in the Nipponese economy and the appreciation of the yearn against the dollar led to the deterioration in the confederacys action. Exploring Corporate system by Johnson, Scholes &038 Whittington 3 Restructuring Sony Table 3 Sales performance of the electronics business (199195) (in ? bn)* socio-economic class/ Business 1991 1992 1993 1994 1995 * ? 100 = approx. A0. 75. Source Sony annual Report 1995, www. ony. net. Video Equipment 928 896 828 669 691 Audio Equipment 882 948 928 841 899 Televisions 552 593 634 618 709 Others 619 793 772 817 909 It was sight that in the electronics business (see Table 3), the revenues of the video and audio equipment businesses were coming down or were at best stagnant, charm the television and Others group were showing signs of improvement. The Others group, which consisted of technology intense products such as computer products, video games, semiconductors and telecom equipment, was playacting very strong and had a growth rate of near 40 per cent.In order to condense on the high growth businesses, Sony announced major changes in the structure of its electronics business in April 1994. Sonys focusing felt that the Group structure, which had fuelled the fraternitys growth in the 1980s, was proving to be redundant in the slashing business environment of the 1990s. In the recent structure, the product groups of the electronics businesses were regrouped into octette divisional companies. The eight companies were the Consumer Audio &038 Video Products caller-up, the put down Media &038 nothing fraternity, the Broadcast Products Company, theBusiness &038 industrial governances Company, the InfoCom Products Company, the Mobile Electronics Company, the Components Company, and the semiconductor Company. The restructuring exercise laid special focus on the products that organise the Others group. Each divisional familiarity had its own goals and was prudent for all its operations (production, sales and finance). The presidents of the divisional companies were classic to decide upon the investments to be make up to a prescribed limit. They could as rise up as form findings reg arding the HR issues for all employees up to the orchestrate of divisional director.In addition, they were made responsible for the monetary performance of the companies headed by them. Sonys presidents were evaluate to perform a usance confusable to that of CEOs and were accountable to shareholders. The restructuring of Sonys electronics business was aimed at improving the caller-ups focus on high potential products and expediting the finis making exhibit to make the fellowship more responsive to changing market conditions. Following the restructuring, the depend of layers in the decision-making process was reduced from six to a maximum of four layers.Commenting on his responsibilities at bottom the upstart structure, Ohga said, First of all, I would like for the divisional presidents to run their companies as if they were reporting to shareholders at a time a year at a shareholders meeting. My graphic symbol will be to appraise their strategies, examine any points I detect should be questioned and provide advice when and where necessary. 5 The main(prenominal) goals of Sonys in the altogetherly formed governing body system were explained in a inscription entitled The Introduction of the Company at heart a Company System (see Table 4).Explaining the rationale for the radicalfangled system, Ohga said, By re refresheding its organization, Sony aims to introduce appealing products in the market in a timelier fashion while promote strengthening cost-competitiveness social clubwide. 6 In 1995, after the implementation of the divisional caller structure in the electronics business, changes were announced in Sonys perplexity structure. Under the raw framework, Sony was to be led by a team of executives at the pass along management level.The team included the Chairman &038 CEO, viciousness Chairman, electric chair &038 promontory Operating incumbent (COO), headsman Officers and the presidents of divisional companies. Analysts felt that Sonys management took this measure to reduce the companys reliance on 5 6 From a Business Group System to a Divisional Company System, posted on www. sony. net. As quoted in the 1995 annual report, posted on www. sony. net. Exploring Corporate strategy by Johnson, Scholes &038 Whittington 4 Restructuring Sony Table 4 Five main goals of the new systemG To just recruit warmheartedness businesses while exploitation new ones. G To introduce an organisational structure in which sales and production work closely unitedly and respond quickly to market changes. G To simplify the structure to clarify responsibilities and transportation authority, so ensuring quick responses to external changes. G To reduce the levels of hierarchy in the organisation. G To encourage the entrepreneurial spirit in order to foster a propelling management base for the 21st century. Source From a Business Group System to a Divisional Company System, posted on www. ony. net. a hit leader. In surro und 1995, Nobuyuki Idei (Idei) was appointed the hot seat and old geezer Operating Officer of Sony. scorn the organisational changes, the pecuniary performance of Sony deteriorated in 1995. For the fiscal year ending meet 1995, Sony reported a huge net loss of ? 293. 36bn. The write off of solidwill during 1994, the despicable performance of the Pictures group and the strength of the languish were regarded as major reasons for this loss. During 1994, the yen was at an all-time high against the dollar, making Sonys exports uncompetitive.Analysts excessively felt that Sonys consumer electronics business lacked new, innovative products. Given this piteous financial performance, the top management of Sony decided to flux the companys various domestic and global business executes such as merchandising, R&038D, finance, and HR. The functions of its numerous divisional companies were thus brought under the direct purview of render. Idei also decided to strengthen the existing eight-company structure and to lay more emphasis on R&038D in the IT field. He felt that Sony needed to focus on get uping IT-related businesses.Accordingly, Sonys management reorganize the existing structure to make up a new ten-company structure. THE TEN-COMPANY STRUCTURE (1996) In January 1996, a new ten-company structure was announced, replacing the preceding eight-company structure (see Table 5). Under the new structure, the previous Consumer Audio &038 Video (A&038V) company was split into terce new companies the expose Company, the Home AV Company and the ain AV Company. A new company, the education engineering Company, was produced to focus on Sonys business interests in the PC and IT industry.The Infocom Products Company and the Mobile Electronics Company were merged to create the person-to-person &038 Mobile Communications Company. The nearly other(prenominal)(prenominal) companies formed were the Components &038 Computer Peripherals Company (formerly called the Components Company), the Recording Media &038 Energy Company, the Broadcast Products Company, the material body &038 toilsome Communications Company (formerly called the Business &038 Industrial Systems Company) and the semiconductor device Company. Table 5 canonic features of the ten-company structure G A new company structure to promote quicker, more effective operations that better hypothecate market changes.G The establishment of an administrator board to reinforce headquarters and corporate strategy and management functions. G The appointment of new companies and groups for entering into the IT and telecommunications businesses. G The integrating of merchandising functions. G The establishment of Corporate Laboratories for new business development. G The training of smart young talent to foster prox managers. Source Sony Announces a newfangled Corporate Structure, posted on www. sony. net, go out 16 January 1996.Exploring Corporate strategy by Johnson, Scholes &038 Whittington 5 Restructuring Sony In order to word and implement the corporate strategies of the Sony Group, an decision maker control panel was created. The board was chaired by Idei. The other members of the board included the foreman Human Resources Officer, the principal Production Officer, the Chief selling Officer, the Chief Communications Officer, the Chief engineering science Officer, the Chief Financial Officer, the decision maker surrogate President &038 Representative Director and the superior Managing Director.In an take in charge to consolidate the merchandising operations of Sony, the merchandising divisions that belonged to the previous organisational setup were spun off to create third new marketing groups the Japan selling Group (JMG), the International Marketing &038 Operations Group (IM&038O) and the Electronic Components &038 Devices Marketing Group (ECDMG). The JMG was responsible for all marketing activities in Japan for five companies the u nwrap Company, the Home AV Company, the learning Technology Company, the Personal AV Company and the Image &038 Sound Communications Company.The IM&038O was responsible for supporting all overseas marketing efforts for these companies. The ECDMG oversaw the domain of a functionwide marketing operations for the Semiconductor Company and the Components &038 Computer Peripherals Company. Analysts felt that this consolidation was done to discern Sonys Japanese marketing operations from its worldwide operations so that the company could operate in a focused manner. To centralise all the R&038D efforts of Sony, the previous R&038D structure (in which for each one company had its own R&038D division) was revamped and ternionsome new corporate laboratories were established.The laboratories were the Architecture science lab (responsible for carrying out R&038D for software, web and IT-related technologies), the Product Development Laboratory (R&038D for product development in AV busi nesses) and the System &038 LSI Laboratory (R&038D for LSI and system design, the basic components of hardware products). In addition, a new D21 laboratory was established to conduct long-run R&038D for future oriented technology intensive products. Sony also gave emphasis to grooming young, talented citizenry to take up top management come outs. The company also introduced the oncept of virtual companies acting(prenominal) groups consisting of people from different divisions for launching crossbred products. Sony applied this idea when ontogeny the a la mode(p) generation Mini Disk players. For the financial year 199596, Sony registered a 15 per cent sum up in revenues and became profitable again. In April 1998, a new organisation, Corporate Information Systems Solutions (CISS), was established to realign and upgrade Sonys information mesh systems and its global tote up chain. The CISS comprised an advisory committee of individuals from management consultancy firms and So nys CISS representatives.The committee members advised the President on technological and strategic issues related to CISS. Representatives of the CISS were place in all divisional companies to hurry the implementation of corporate IT projects. During early 1998, Sony formed Sony Online Entertainment in the US to focus on net income-related projects. In May 1998, Sony changed the physical com spotlight of its board of directors and established the new position of Co-Chief Executive Officer (Co-CEO). Idei was appointed Co-CEO. Idei shuffled the management system to relieve speedy decision making, improve efficiency, and provide greater consumption clarity to managers.The new system dis attached individuals responsible for policy-making from those who were responsible for operations. Under the new system, Idei was responsible for planning and blueprint Sonys strategies and supervising the growth of e-business. on with Ohga, he had to supervise the performance of the complet e Sony group. President Ando was made responsible for negociateing Sonys centerfield electronics business, while Chief Financial Officer (CFO) Tokunaka was made responsible for the companys financial strategies and mesh businesses.In addition, the top management positions of Sonys global subsidiaries, which were previously called Corporate Executive Officers, were redesignated Group Executive Officers. Explaining the rationale for these changes, a Sony spokesman said, These changes are aimed at making Sonys management more agile. 7 7 Sony name calling Management Team, by Yoshiko Hara, EE Times, 9 May 2000. Exploring Corporate scheme by Johnson, Scholes &038 Whittington 6 Restructuring Sony Table 6 Sales performance of Sonys businesses (199599) (in ? bn)* Year/Business 1995 1996 1997 1998 1999 CAGR (4 years) ? 100 = approx. A0. 75. Source Sony one-year Report, 1999, posted on www. sony. net. Electronics 3027 3283 3930 4377 4355 8. 55% mealy 35 201 408 700 760 215% Music 481 50 6 570 660 719 10. 5% Pictures 282 317 439 643 540 17% Insurance 113 207 228 291 339 31% Others 52 78 88 84 81 11. 7% The implications 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 per cent (see Table 6). The music business had a CAGR of 10. 5 per cent while the pictures business had a CAGR of 17 per cent.Significant gains were, however, recorded by the games and insurance business. The games business registered a CAGR of 215 per cent, while the insurance business registered a CAGR of 31 per cent. In the late 1990s, Sonys financial performance deteriorated. For the financial year 199899, its net income dropped by 19. 4 per cent. During that period, Sony was banking heavily on its PlayStation computer game machines. It was estimated that the PlayStation ( indorses business) accounted for nearly 42 per cent of Sonys direct profits and 15 per cent of total sales for the quarter Oct obercelestial latitude 1998.In the late 1990s, many companies across the world were attempting to cash in on the mesh boom. At that time, Sonys management felt the need to establish a linkup between its electronics business (TVs, music systems, computers) and its heart-related businesses (music, video games, movies and financial operate) by making use of the lucre. The management felt that in future, the revenues generated by internet-related businesses might even surpass those take in through the consumer electronics business. It wanted to use the internet as a medium for selling its electronic products as well as its subject area (music, movies and so on).In order to obtain this, Sony announced another(prenominal) reorganisation of business operations. Analysts felt that Sony was in a good position to exploit the opportunities offered by the internet since the company already had an established position in the electronics and subject matter-related businesses. THE UNIFIED -DISPERSED MANAGEMENT MODEL In April 1999, Sony announced changes in its organisational structure. Through the new framework, the company aimed at streamlining its business operations to better exploit the opportunities offered by the internet.Sonys key business divisions Consumer Electronics division, Components division, Music division and the jeopardizes division were reorganised into meshing businesses. This tough the reduction of ten divisional companies into leash vane companies, Sony Computer Entertainment (SCE) Company and the Broadcasting &038 Professional Systems (B&038PS) Company (see shew 1). SCE Company was responsible for the PlayStation business while the B&038PS Company supplied video and audio equipment for business, broadcast, education, industrial, medical and production related markets.The restructuring aimed at achieving three objectives strengthening the electronics business, privatising three Sony subsidiaries, and strengthening the management capabil ities. The restructuring also aimed at enhancing shareholder set through Value Creation Management. 8 8 It aimed at creating value by dividing the group into networked autonomous business units such that the resources within the Sony Group complemented each other. Exploring Corporate scheme by Johnson, Scholes &038 Whittington 7 Restructuring Sony Exhibit 1 The unified-dispersed management modelSource Sony Announces Organization Structure for New meshwork Companies, posted on www. sony. net, 29 March 1999. Strengthening the electronics business The three network companies created were the Home web Company, the Personal IT meshwork Company and the Core Technology &038 communicate Company. Each network company was governed by a network company management committee (NCMC) and a network committee board (NCB). The NCMC was responsible for developing management policies and strategies. Its members included the officers and presidents of the interested network company.The NCB was res ponsible for managing the day-to-day operations of the network company while keeping in mind the overall corporate strategy of the entire organisation. Each NCB was chaired by the concerned companys President &038 CEO, Deputy President, President and Representative Director, two Executive Deputy Presidents and Representative Directors, and Corporate Senior Vice President. The new structure aimed at decentralising the worldwide operations of the company. The corporate headquarters gave the network companies the authority to function as autonomous entities in their corresponding businesses.To facilitate more functional and working(a) impropriety, the corporate headquarters also transferred the essential support functions and R&038D labs to each network company. To supply a further boost to Sonys electronics business, the management created digital Network Solutions (DNS) under the purview of headquarters. The role of DNS was to create a network business model by charting strategi es and developing crucial technologies for exploiting the opportunities offered by the internet. The basic aim of creating DNS was to develop a network base that would provide customers with digital national (such as music and movies) and financial service.Privatising Sonys subsidiaries As part of its strategy to promote functional and available autonomy and to devote more direction to units which contributed significantly to its revenues and profits, Sony decided to convert three of its companies Sony Music Entertainment ( Japan), Sony Chemical Corporation (manufactured printed circuit boards (PCBs), recording media and automotive batteries), and Sony precision Technology (manufactured semiconductor inspection equipment and precision measuring devices) into wholly Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 8 Restructuring Sony owned subsidiaries of Sony.In addition, Sony reborn SCE, which was jointly owned by Sony and Sony Music Entertainment ( Japa n), into a wholly owned subsidiary of Sony. Strengthening the management capableness To strengthen the management capability, Sony clearly demarcated the roles of headquarters and the impertinently created network companies. Accordingly, distinction was made between the strategic and support functions. Sonys headquarters was split into two separate units Group Headquarters and Business building block Support. The role of Group Headquarters was to oversee group operations and expedite the apportioning 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&038D projects were directly supervised by the headquarters, while the immediate and short-term R&038D projects were transferred to the concerned network companies. In order to evaluate the performance of the network companies, a value based performance measurement system9 was introduced. The implications plot pursuing its restructuring efforts, Sony started developing products which were compatible with the internet.Its electronic products, such as digital cameras, personal computers, music systems, and Walkman, were made web compatible. Through its website, www. sony. net, consumers could participate in best-selling(predicate) television game shows, pick up to music, and download songs and movie trailers. Sony also ventured into e-business with the attainment of thumb Perfect Communications. 10 succession focusing on offering internet-enabled products, Sony also attempted to increase internet shrewdness by offering internet partnership at lower cost and high speed to consumers in urban areas. Sonys restructuring efforts in 1999 were well received by investors.Following the announcement of the restructuring programme, Sonys neckcloth prices nearly tripled. This positive trend continued even in 2000. By March 2000, its c omputer storage prices were at a high of $152. Having already offered its PlayStation game storage locker 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 acumen rate in Japan (estimated to be 13 per cent 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. 83bn compared to ? 179bn in the fiscal 199899. This resulted in a major fall in its sprout prices. By May 2000, Sonys stock prices fell by 40 per cent to $89. Analysts were quick to criticise Sonys efforts towards transforming itself into a web-enabled company.They com mented that the company had created more hype kinda than taking a few significant steps in this regard. In response to these financial problems, Sony announced a reshuffle in its top management. Idei became the Chairman and Chief Executive Officer of Sony. Ando, who headed Sonys PC division, was 9 A system that helps in effectively determining the cost of capital. The measurement is based on economic profit, which is calculated by subtracting the cost of debt and equity from the operating profit after tax. Sony aforethought(ip) to use this system of measurement to set targets and evaluate business unit performance.The performance was to be linked, in future, with management compensation. 10 A popular satellite broadcasting company in Japan which owned Sky Perfect TV and had successfully ventured into the internet service provider (ISP) business by launching the website, www. so-net. This website enabled online shopping, interactive games, fortune sexual relation as well as stock broking. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 9 Restructuring Sony made the President, while Tokunaka, who previously headed the PlayStation unit, was made the Chief Financial Officer of Sony.Sony also undertook a massive cost-cutting exercise. Its global manufacturing facilities were reduced from 70 in 1999 to 65 in 2001. Sony mean to further bring down the number of manufacturing facilities to 55 by the end of 2003. This move would result in the elimination of 17,000 jobs. While implementing these measures, the company had to deal with severe underground from employee unions and local governments (in areas where jobs would be eliminated). Despite the to a higher place measures, Sonys financial condition did not show any significant improvement in 2001.The company was severely touched 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 per cent increa se in revenue in the fiscal 200001 (mainly due to the improved sales of the PlayStation games console) Sonys net income dropped significantly from ? 121. 83bn in the fiscal 19992000 to ? 16. 75bn in the fiscal 200001. Analysts commented that Sony required a new business model. The company had immediately to take concrete measures to increase its net income.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 wideband11 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, at that place was a need for yet another organisational restructuring. RESTRUCTURING EFFORTS IN 2001 Sony announced another round of organisational restructuring in March 2001.The company aimed at transforming itself into a Personal broa dband Network Solutions company by launching a wide start of broadband products and operate for its customers across the world. Explaining the objective of the restructuring, Idei said, By capitalising on this business structure and by having businesses work with each other, we aim to become the leading media and technology company in the broadband era. 12 The restructuring involved designing a new headquarters to function as a hub for Sonys strategy, strengthening the electronics business, and facilitating network-based surfeit distribution.New headquarters to function as a hub for Sonys strategy Under the new structural framework (see Exhibit 2), Sonys headquarters was revamped into a Global Hub centred on five key businesses electronics, entertainment, games, financial serve and internet/ communication service. The primary role of the Global Hub (headed by the top management) was to fabricate the overall management strategy of the company. Sonys management decided to integ rate all the electronics business related activities under the saucily created Electronic Headquarters (Electronics HQ).In order to grasp 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 authentic and offered for the broadband market. The three businesses were under the surveillance of Ando. In order to provide support services for the entire group, a management computer program was created, which consisted of key support functions in diverse fields such as accounting, finance, legal, intellectual 11An acronym for broad bandwidth, it is a high-speed, high-capacity information transmission channel that sends and receives information on coaxial cable or fibre-optic cable (which has a wider bandwidth than conventional echo lines). This cha nnel can carry video, office and data simultaneously. 12 As quoted in the Annual Report 2002, www. sony. net. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 10 Restructuring Sony Exhibit 2 Sony organisational chart electronics-related business (as of 1 April 2001)Source A New Group Structure for the future(a) Stage of Integrated, Decentralized Management, www. sony. net, 29 March 2001. copyrights, human resources, information systems, populace relations, external affairs and design. The management platform was later split into the Engineering, Management and customer Service (EMCS) Company and the Sales weapons 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.Sonys management also reborn the product-centric network companies into solution-oriented companies by regrouping them into seven companies. Grou p resources were allocated among the network companies on the basis of their growth potential. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 11 Restructuring Sony Strengthening electronics business To enhance the profitability of the electronics segment, Sonys management decided to give emphasis to product development efforts. The management felt it was also essential to enhance the quality of the electronic devices manufactured.In order to fulfill this, Sonys management devised an innovative business model called the Ubiquitous Value Network,13 which connected the companys existing hardware, content and services through an agency of networks. Sony planned to develop a wide range of products which could be connected through this network. Network-based content distribution Like the electronics, games and internet/communication service businesses, the entertainment and financial services businesses were also developed in a network compatible manner to facilitate e lectronic content distribution.In the entertainment business, music and movies were converted into a digital format and distributed over the internet (apart from organism distributed through traditional channels such as music stores and theatres). In Japan, Sony Music Entertainment launched online music through its website. This website allowed customers to download popular songs for a fee. In the financial services business, Sony Life Insurance Japan launched the Life Planner consultancy system which offered personalised financial services online to its customers.Sony Life Assurance Japan also went online and started selling its insurance policies over the internet. The implications Soon after the reorganisation, Sony launched some innovative products to cater to the broadband market. For instance, in 2001, the company launched a series of internet-compatible mobile phones. However, the product was unsuccessful (owing to problems in the software used in the mobile devices) and in e arly 2002 Sony had to recall three batches of phones sold to Japanese companies. In consequence, Sony had to write off $110m in the quarter ending June 2002.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 (see Exhibit 3). Following this announcement, Sony was reorganised into seven business entities four network companies and three business groups (see Exhibit 4). These business entities were give the authority to frame short-term and long-term strategies. According to analysts, the companys 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 per cent while its revenues registered a marginal increase of 3. 6 per cent. According to a BusinessWeek report, sales of Sonys about profitable products the PlayStation and the PS2 game consoles were likely to fall (see Exhibit 5). Due to Sonys poor financial performance, the management planned to further reduce the number of manufacturing facilities and shift some production activities out of Japan.Analysts also criticised Sony for being a diversified business amass engaged in several businesses from semiconductors to financial services. They felt that the company should focus on a few highly profitable businesses like games, insurance, and audio-video equipment and hive off the marginal businesses. Analysts felt that spending huge amounts of money on restructuring was not justified, particularly since the restructuring exercises had not yielded the expected results. In 2001, restructuring efforts had cost the company ? 100bn and the proposed restructuring in April 2003 was expected to cost another ? 40bn. 13 The Ubiquitous Value Network is an environment in which PC and non-PC consumer electronics devices are seamlessly connected to each other and to the network, handsome users acce ss to all types of content or service, from anywhere across the globe. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 12 Restructuring Sony Exhibit 3 Sony organisational chart (as of 1 April 2003) Source Sony Announces Executive Appointments and Organizational Reforms Effective as of April 1, 2003, www. sony. net, 31 March 2003. Exhibit 4 Responsibilities of network companies and business groups No. 2 3 Network company/ business group Home Network Company Broadband Network Company IT and Mobile Solutions Network Company 4 5 6 Micro Systems Network Company zippy Business Group Entertainment Business Group Responsibility To create a new home environment with networked electronic devices centred on next-generation TV Development of next-generation electronics devices and linkages to Game devices To realise a connected world with PC and mobile devices and strengthen the B2B solutions business To enhance key devices and modules as heart and soul components of attract ive set products To promote Game businesses for the broadband era To develop entertainment content businesses based on pictures and music and develop a new content business model for the network era To integrate various business units providing services based on direct touch sensation with customers (finance, retail, etc). Strengthen synergies and develop attractive new business models for customers through the application of IT. 7 Personal Solutions Business Group Source Sony Announces Executive Appointments and Organizational Reforms Effective as of April 1, 2003, www. sony. et, 31 March 2003. Analysts also felt that the convergence of consumer electronics, PCs and the internet was not only opening up new opportunities for Sony but also creating more competition for its core businesses. As Sony took steps to strengthen its networking capabilities, the company faced new forms of competition in both domestic as well as foreign markets. For instance, in the US, software giants like Microsoft and Sun Microsystems (as well as a few startups) were planning to enter the home entertainment market. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 13 Restructuring Sony Exhibit 5 Break-up of Sonys businesses (31 March 2002)Business Electronics Games Insurance Films Music Others Sales ($bn) 35. 6 7. 4 3. 7 4. 6 4. 5 0. 6 Operating profits ($m) 125 578 91 147 203 NA Source Can Sony Retain the head game, by Irene M. Kunii &038 Cliff Edward, BusinessWeek, 11 March 2002. Even Cisco Systems, which provided network solutions, had started manufacturing consumer electronics products. A BusinessWeek report said that Sony lacked any classifiable competencies in the internet-related businesses. It was neither an aggregator of content like Yahoo , nor a limited-product seller with an efficient distribution network such as Dell. Exploring Corporate Strategy by Johnson, Scholes &038 Whittington 14