Friday, April 29, 2005

SONY’S NEW “KNIGHT IN SHINING ARMOR”

Can Sony’s newly anointed Chairman and CEO Howard Stringer revive the Sony Spirit?

S

ony recently announced a management revamp with Howard Stringer taking over from Nobuyuki Idei as chairman and CEO, and the resignation of seven Directors from the Board, as the current management was believed to be lethargic in their pursuit of innovations and initiatives, Sony’s two core competencies. The 63-year-old Mr. Stringer has the responsibility of developing the strategic linkage between the entertainment and electronics businesses, and furthering the company’s content businesses worldwide. Prior to joining Sony in May 1997, Mr. Stringer worked as a journalist, and later as President at CBS. A native of Wales, Sir Howard received the title of Knight Bachelor in 1999.

Sony is currently undergoing a major restructuring phase as it faces several performance challenges. Sales increased marginally to $72.1B (up 0.3%) and operating profits went down to $0.95B (down 46.6%) during fiscal year 2004. Sony’s core electronics performance deteriorated in fiscal year 2005. The results clearly prove the complexity of the turnaround task of Japan’s best-known electronics company’s new top-management. The new management team will likely have to refocus the electronics business around fewer products and concentrate research and development on more profitable areas. The firm’s concerns in this regard are apparent from the recent initiatives including the joint venture with Samsung and technological advancements in flat panel, LCD and HDTV televisions. The increase in sales of PlayStation software have been offset by a decrease in hardware sales due to price wars from competitors, but the new PlayStation Portable hardware is expected to increase hardware sales. The sales of portable audio equipment are also expected to decline due to a change in the competitive environment (Apple iPods) unless Sony develops new appealing products in this segment. The pictures business had a substantial increase in operating income due to success of “Spider-man” and increase of DVD sales. Despite the downward revision of earnings for this year, Stringer has promised a return to 10% operating margin by March, 2007. This would require quick execution of a strategy to streamline Sony’s operations and cohesively revitalize its diversified business.

Business Description

S

ony Corporation is one of the world’s leading consumer electronics firm headquartered in Tokyo, Japan and operates in many countries worldwide. It generates revenues through its six business divisions: electronics (63.5%), game (10%), pictures (10%), financial services (7.5%), music (6.5%) and others (2.4%).

Sony is synonymous with innovation, and is credited with several ‘firsts’-- transistor, all-transistor radio, Trinitron Color Television, color video-cassette, The Betamax VCR home use video system, Walkman, CD player, consumer camcorder; 8mm video, and digital VTR. Sony’s growth has come by way of several innovations, diversifications and acquisitions. A SWOT analysis on the firm is as below:

STRENGTHS

Strong brand presence

Consolidation of operational bases

Internal sourcing of key components

Strategic alliances

WEAKNESSES

Heavy exposure to consumer electronics segment

Weak performance of music division

Decline in revenues from game business

OPPORTUNITIES

Semiconductors

Lithium ion batteries

Broadband market

THREATS

Strong competition

Piracy

Pricing pressures in gaming business

Sony’s major competitors include Hitachi, Philips Electronics, Matsushita Electric, EMI Group, DreamWorks SKG, Nokia Corporation, Toshiba and Samsung Corporation

Management Revamp

H

oward Stringer, currently the Vice Chairman and Sony Group Americas Representative, has been on the board since 1999 and has been managing Sony’s entertainment business. Attention is now focused on potential emphasis on this business under the new management structure. Mr. Idei as CEO was aiming for integration between hardware and content, but under Mr. Stringer the. business will likely be built more around content

In view of the analysts, the new management’s statements that Sony cannot recover without its electronics’ recovery are clearly correct, and they have high expectations that the firm can develop ‘hardware to leverage its content’ and create new markets. Analysts believe that the financial markets are likely to respond positively to the change, since they hold the outgoing management team responsible for the poor performance of Sony’s electronics business in recent years. The big question is about what reforms the new team instigates, how it executes in practical measures, and whether it changes the company’s strategy in a way that has a tangible impact on earnings. Associated risks include major changes of strategy by the new management team.

Managing Diversification

B

oth internal and external logic of acquiring music business (Sony Music Entertainment) in 1988 and film business (Sony Pictures Entertainment) in 1989 was to seek synergies across the electronics and contents businesses. By the late 1990s, Sony was in a great position to introduce new businesses that combine electronics and entertainment, with nearly one third of asset and revenue coming from its entertainment arms. In fact, Sony’s stock price soared in the year 2000 reaching an all-time high $150 (currently trading in the range of $32 - $42) with such expectation. The rest is history. Sony’s profit and stock price plunged and has not recovered since. Apple has come out with sensational product and service, iTunes and iPod, with SonyConnect (online music service) and Network Walkman only achieving marginal market share.

With its legendary gadget manufacturing and cutting edge designing capabilities, why wasn’t Sony able to create its own “iPod” business? Many point out that Sony’s ownership of contents and its own DRM (digital rights management) technology actually inhibited their ability to launch a universal and easy-to-use online music service and digital music player. Sony was initially reluctant to make other music labels’ songs available on its online service. And its early version of Network Walkman only allowed songs with Sony’s DRM encryption to be downloaded.

While these explanations are persuasive, the strategic decisions were all made by the management team at Sony’s corporate headquarter in Tokyo. Prior to Howard Stringers, all Chief Officers (Executive, Financial, Operating) had no background in contents business. While they were all competent in the electronics business, they did not realize that Sony’s brand does not mean anything in the contents business and failed to capitalize on the first mover advantage to gain an initial market share in the online music and the digital music player business where the network externality effect is high.

Can Sony count on Sir Howard Stringer? With his diplomatic skills and the understanding of the contents business, he is the best bet that Sony has got.

Research Sources

- Interview with an erstwhile Sony Corp employee

- Analyst Reports: Deutsche Bank, Morgan Stanley and Smith Barney Citigroup

- Datamonitor’s latest report on Sony

- Wall Street Journal

- Financial Times

- Business Week online

- Economist.

Submitted by: Shigeru Kusunoki, Pooja Vivek , Atima Bhatnagar.

1 Comments:

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