Sony's Business Failure & Strategy

7/28/2019 Sony's Business Failure & Strategy

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Sonys Business Prepared by Bonnie Thomas EPGP - PT. EB-11

Son commonly referred to as Sony, is a Japanese multinational conglomeratecorporation headquartered in Knan Minato, Tokyo, Japan. Its diversified business is

primarily focused on the electronics, game, entertainment and financial services

sectors.The company is one of the leading manufacturers of electronic products forthe consumer and professional markets. Sony is ranked 87th on the 2012 list ofFortune Global 500.

When you think who will lead us in the coming years, it always comes back to

Google, to Apple, to Microsoft. Why not Sony? Ten years ago it would have been

inconceivable to think of the world of technology and not consider Sony a key driver.

Today many consider it to be what one calls "just another electronics company."

What happened?

Before putting in my strategic decisions for the restructuring of Sony corp let us take

a look at the present scenario of the company and what factors led to it.

1. Financial Analysis.

Sinking Market Cap.
http://www.notenoughshaders.com/?attachment_id=3669


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H igh Debt.

Total liabilities are the total amount of all financial obligations (short term and longterm) of a company. This includes all creditor claims on company assets.

Total Liabilities as of June 2012:(Sonys Total Liabilities : $135.61 Billion)!!!Electronic Arts Total Liabilities: $ 2.27 Billion (for comparative purpose)Googles Total Liabilities : $ 21.33 Billion Apples Total Liabilities : $ 51.15 Billion Microsofts Total Liabilities : $ 54.91 Billion Sony has more total liabilities than Microsoft, Apple, Google, and Electronic Arts

combined.

Total Assets as of June 2012:Total assets include cash in the bank, property, accounts receivable (money owed to

the company), equipment, and inventory.(Sonys Total Assets : $166.22 Billion)!!!Googles Total Assets : $ 86.05 Billion (for comparative purpose)Apples Total Assets : $162.90 Billion Microsofts Total Assets : $121.27 Billion

Since total assets include everything that Sony owns (cash, buildings, divisions,

intellectual property, etc.)Sony would have to sell over 80 percent of their total

assets (Total Assets = Every single thing Sony owns including cash) just to pay off

their total liabilities.


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The biggest problem here is that Sonys total liabilities show no sign of declining.

They keep increasing and eventually, this bubble is going to pop. Its important tounderstand that not all liabilities are inherently toxic. Companies are expected to havesignificant liabilities at all times. Its when we compare Sonys liabilities to assets

ratio with that of other major corporations that it suddenly becomes clear thatsomething has gone wrong.

Back in black.

Sony had eked out an annual profit for the first time in five years, thanks to belt-tightening and the weakening yen. A weak yen helps Japanese exporters by makingtheir goods less expensive overseas and by inflating profit when foreign currency is

brought home and converted to more yen. The dollar, for example, buys 20% moreyen than it did months ago. It had booked a net profit of 43 billion yen, or $435million, in the financial year that ended March 31. That compares with a loss of 456.7

yen billion ($4.6 billion) a year earlier. Sales grew 4.7 percent to 6.8 trillion yen($68.4 billion). (But is this actual profits earned out of healthy operations???)

Asset / Stake Sales.

Sony sold its U.S.headquarters building on New York's Madison Avenue in January2013, to investors for $1.1 billion, according to Bloomberg. The sale is expected togenerate net cash of around $770 million for Sony, the firm will also record a windfall

profit in its accounts, as the building is being sold at a gain of 685m, compared withthe price that Sony originally paid for it in 2002, with which Sony is working to cutlosses across the board. The company will continue occupying the 37-story buildingat 550 Madison Avenue for up to three years, leasing from new owners the Chetrit

Group. Sony hopes to complete the sale in March perhaps not coincidentally the endof its fiscal year, by which it has predicted a return to profit. The company is said to

be currently re-evaluating its predictions based on the sale, however, so we may wellsee more positive results for the year than previously expected. Following Nokia'ssimilar sale of its Espoo headquarters, it seems cash-strapped companies have hit on anew way to raise funds. (Is it the right thing to do? Showing Profits in P&L bydisposing its assets.)

Sony sold its entire stake in social-game website operator DeNA Co., the electronicsmakers fourth major asset sale in the financial year 2012 13, as it tries to avoid afifth straight annual loss. The worlds third-largest TV maker expects to book a 40.9

billion-yen ($438 million) gain this quarter from the sale of 17.7 million DeNA sharesto Nomura Holdings Inc. Sony also plans to sell-off of its chemicals division, andcutting 10,000 jobs.

On June 27th, 2012, Sony held an annual meeting with over 9,303 shareholders inTokyo, Japan. After years of multiple disappointing quarters, some of Sonys

shareholders began to release their anger on Howard Stringer the then CEO.

On April 15th, 2012,investingdecoded.com wrote, When subtracting deposits in itsfinancial services arm, Sony still has 87 cents in liabilities for every dollar in assets.This rising debt balance has lead to increases in the firms interest expense. Sony is onthe cusp of being deemed non-investment grade by Standard and Poors, which

rates the firms credit as BBB+. Sony burned through 12.8% of its cash in the 1st 3quarters of FY11.


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On August 6th, 2012, Moodys Investors Services placed Sony Corp. under review fora possible second downgrade for this year. At the current moment, Sonys credit

rating is three levels away from being declared junk. Moodys is unsure whether

Sonys restructuring will even help. Moodys commented on Sonys restructuring

process by saying, Sony has not been able to deal with these issues effectively.Moodys added, concern that weak consumer sentiment, especially in Europe and

China, and a strong yen versus the euro may hinder the timely recovery of Sonysearnings and leverage.

On June 2009, Sony only had 40.6% debt and 59.4% equity. By June 2012 (3 yearsLater) Sonys debt is now 50.1% of their capital structure, and their equity shrank to49.9%. In three years, Sony went from a company that used to be mostly equity, to acompany that is now 50/50 on debt and equity.

Dimini shing ROA & ROE

ROE:Its a basic test of how effectively a companys management uses investorsmoney ROE shows whether management is growing the companys value at an

acceptable rate.

ROA:Return on Assets reveals how much profit a company earns for every dollar of

its assets. Assets include things like cash in the bank, accounts receivable, property,

equipment, inventory and furniture.

The chart below uses data from the year 2002 all the way through June 30th,2012.Youll notice that the red line (ROE) is rapidly sinking, the orange line (ROA) isslowly declining since 2009, and the blue line (total liabilities) is skyrocketing out ofcontrol. When you look at all three of these things on the chart, it makes Sonys

financial situation look worrisome.


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2. Sonys Revenue Structure.

FISCAL YEAR ENDED MARCH 31YEN IN MILLIONS

Companies 2011 2012 2013

Imaging Products & Solutions 52,439 18,592 1,436

Game 48,494 29,302 1,735

Mobile Products &Communications 5,321 7,246 -97,170

Home Entertainment & Sound -73,205** -203,211** -84,315**

Devices 34,893 -22,126 43,895

Pictures 34,893 -22,126 43,895

Music 38,927 36,887 37,218

Financial Services 118,818 131,421 145,807

All Other -13,838 -54,082 91,003

0000 in red indicates loss.**The Operating losses on Home Entertainment & Sound devices does not include restructuring charges.


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3. Strategic Direction

1.Financial Restructuring:Sony needs to immediately restructure their finance. With huge debt thecompany will not sustain longer. Interest costs are dragging bottom lines stillfurther. Although not a preferred option, Sony needs to cut back on their workforce urgently. Sony has currently decided to cut almost 10,000 jobs from theirvarious factories. Existing loans should be converted into low cost interestloans. Sony can even convert some of their debt into equity as well.

Cost cutting is something which Sony has not looked into for several years.This has been mentioned by many expert financial analysts and fundmanagers. Sony has the highest cost of manufacturing when compared withtheir peers like Samsung or LG. Sony should shift their key manufacturing

bases to low cost manufacturing sites like India or China to cut costs. Japan isand will always be expensive for manufacturing. This has been done by allreputed brands extensively, but Sony has been slow in this strategy. To cutcosts, Sony should analyze which products arent adding much value, theyshould then decide either to drop those products, or figure out ways to reducecosts through collaboration. They should also transform their business

portfolio to cut costs and make profits.


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Hirai the current CEO of Sony announced a plan to cut 10,000 jobs at Sony,reduce the number of TV models, and exit out of PC-use optical drives. Sonyannounced cutting 15 percent of the mobile phone workforce. Some of Sonysasset managers think Sonys strategy of cutting costs isnt enough to make the

company profitable.

Sony should sell some of its fixed assets to raise money. Sony is currentlyselling two of its offices, one in Tokyo and other in New York for huge

profits. This money should be used partly for clearing debts and also torestructure their product portfolio and innovating manufacturing process toreduce costs.

Sonys cash cows Sony Life Insurance, Sony Assurance, Sony Bank, SonyBank Securities and Sony Life Insurance (Philippines) which is the onlysegment that is showing increasing revenue year after year for the past three

years. Sonys major profit comes from its Life Insurance Business. Butrecently there were expert opinion on Sonys management not giving adequateattention to their financial arm and instead trying to put in all their efforts intheir ailing electronics division to turn it around.

Although Sony is known for their electronic products, their financial arm isthe bread & butter at the moment. They should give their undivided attentionto this sector as well. Competition from Dai Ichi life & Nippon lifeinsurance is also hotting up. Sony Life currently having operations only inJapan should look at spreading their business to other continents as well toincrease volumes and profitability. They should come out with tailor made

policies catering to specific customers needs. They should also (if fundspermit) look at launching their products in new markets outside Japan(something which should have been done long back when they were

financially sound).

Sony should also think of isolating their financial arm from their otherbusiness. It should be made into a separate entity altogether with a capablemanagement. Since Sony lacks the financial discipline (looking into the history of

financial management at Sony) required to run the financial business it would besafe to handle it separately. It will also alleviate the fears if any, of investors in

its financial business due to the poor performance of its electronics division. Itwill also reduce the cross subsidizing of funds among companies in the longrun.

2.Reducing product Line & Restructuring product portfolio.Sony has an extensive range of product line. For Example: 76 models ofheadphones. The value on sales of these products is very low. With increasingmanufacturing costs and logistics, they should look into their sales data andcut back or discontinue on their unprofitable or low sales volume products.


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Car & Marine Audio consists of 62 models. All car manufacturers todayprovide Original equipment audio systems along with the car. Customers donot intend to replace the car audio which are provided by the auto companies.

Moreover auto companies void warranty if the standard audio players are

replaced with aftermarket ones. In this case replacement market for car audioplayers is very minimal. Sony should think of associating with carmanufacturers to provide their audio systems as OE equipments. This willcreate volumes for the company. But at the same time cutting costs will haveto be looked into, as auto companies look for the cheapest pricing.

Home audio components have 54 models. They comprise of mostlycomponent and home theatre systems. Sales revenue from this segment has

been falling steadily. By looking at the product line, Sony mainly caters to thelow end audio buffs. But component systems are not known for their soundquality. Sony should introduce a mid to high end product in a different product

line or brand with superior audio and technology. Companies like BOSE,DENON, MARANTZ etc cater these markets. They get a premium for these

products and have a quality branding to them. Sony audio products are knownfor their cheaper pricing hence people who value quality, stretch their budgetand go for the reputed brands. Also they have competition from their Koreancounterparts in the pricing front. Hence they are losing out in the lower pricedas well as higher priced products.

Sony's TVdivision has been making a loss for the past nine years, hurt by thelikes of Samsung which has been steadily increasing its global market share.This has been a major impact on Sonys bottom line. The following excerpthas been taken from a famous tech review magazine Sony's products are

good but they just keep redesigning and developing rather too many products

too quickly. Not everyone can afford to change their tech every year which you

would have to do to keep up. 3D is really not worth the outlay so they must

have gotten their fingers burned over that one. For the general public cheaper

TVs are just as good as more expensive ones and there is a lot of competition

out there. You have to be very fussy to prefer one TV over another. My

preference is for connectivity - lots of HDMI connections and a simple

interface on the remote.

They just keep redesigning and developing rather too many products tooquickly. The main problem in Sony. They are always in a race to create thefirst innovative product that no one else has created. They develop, launch andcreate a fuss about it and leave it to die. They put in little effort to upgrade ormarket it successfully. Best example is Apple they have very limited productline, Ipod, Ipad, Iphone, Macbook air, Macbook Pro, Mac Desktop. But the

products are so innovative and user friendly it has taken the market by storm.They also constantly upgrade their products from time to time. Compare thatto Sonys product line comprising of 100s of models.


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The TV business, the worlds third-largest, was unprofi table for a ninth

straight year wi th a loss of 69.6 bi ll ion yen,excluding charges, amid sluggishdemand and competition from Samsung and LG Electronics Inc, Sonys shareof revenue in the market for flat-panel TVs fell to 7.8 percent compared with27.7 percent for Samsung, according to Santa Clara, California-based Display

Search. The main reason being the high cost structure and lower priceofferings from its competitors. They should bring in lower priced TVs whichcan be catered to the mass market.

Sony said it is beefing up its TV lineup, including models with 4K liquidcrystal displays, which deliver even better image quality than current LCDTVs. This is again a wrong move by the company. The 4K TVs are veryexpensive there will be very few takers. People used to pay additional to get aSony Trinitron, But the industry has trained the consumer that any time thereis a new technology, if they wait six months the price will come down. Thesame thing will happen to the 4K. And Sony will be forced to reduce the price

of their TV sets after a few months.

3. Sonys Management Issues.

The War inside Sony: Engineers Vs Executives: Engineers have always been

stars at Sonymore so, perhaps, than their creations. Gizmodo.

Sony always gave full creative freedom to its engineers as a strategy to pushquality and innovation. This is the vision that Sonys founders always hadwhen they created the company. Engineers are treated like rock stars for

creating many of the different products and proprietary formats coming out ofSony. Is it possible that Sonys loyalty to the creative visions of theirengineers might be partially responsible for Sonys financial problems? Itseasy to say that Sony should cut their costs and stop putting out superexpensive products. But the truth is, Sonys culture was built on giving

engineers (not accountants) the ability to make the final decisions on Sonysproducts. By giving engineers so much control, Sony forgot that making aprofit is most important to the overall health of the company.

Sony should change this attitude of their engineering team; it is good to give acertain level of freedom to engineers for bringing in creativity. But in this case

Sonys engineers hardly created products that were profitable. Ego andcompetition among employees will create management problems inside theorganization. The finance department has no control over the R&Dexpenditure. Engineers should be promoted or retained only if they areefficient and work together in a team for the common benefit of the company.Inefficient engineers irrespective of their post should be terminated or givenvoluntary retirement schemes. The finance department should give strict

budget to the R&D departments on their limits of spending each year.Innovative engineers should be awarded and encouraged.


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Failure is Acceptable Policy:

To promote thinking outside the box and innovation above all else, Sonybecame a culture of where failure is acceptable and has little consequence orthreat to most engineers jobs. This is partly because the founders, Masaru

Ibuka and Akio Morita, failed multiple times before having their first majorsuccess. The founders adapted this logic to Sonys culture. This explains why

engineers who have worked at Sony in Japan for a very long time haveamazing job security even after numerous products have failed.

This creates a sense of false security among the employees. They tend to underperform as the management is lenient with them. This leads to unwantedexpenditure and unethical competition among employees at companiesexpense. Sony should curtail this by imposing strict sanctions. A companycannot sustain multiple failed products. (See below a range of failed product line fromSony).

Inward Looking research, Customer feedback not taken.

Sony hardly takes any customer feedback. This results in no productimprovements based on feedback. Sony is not producing what the customerswant; instead it manufactures what its engineers think its the best.

Every retailer who is selling Sony products should follow up on customerfeedback, although online registration of products and feedback forms are

provided along with the product, customers hardly give feedbacks. Retailershould encourage the customers to revisit them from time to time by providing

free service camps or software updates for their products, this will be a goodopportunity to get feedbacks. Sony should have a market research team tocompare the existing products in the market and to find out what is lacking intheir products. Sony believes too much in their capabilities which might not beright always. Their slogan Make. Believe tells it all. Sony believes butcustomers always may not.

Marketing

"I don't think the brand carries as much weight as it used to," William Stofega,

a program director at market researcher IDC, says of the company as a

whole. "They don't really market it as well as they should."

Sony spends a lot of money in marketing, but at the same time they do notlook into the efficiency of the same. The marketing efforts do not reach thecustomers very effectively. Most of the customers do not know the entire

product line of Sony unless they walk into a Sony exclusive customer store.This is yet another problem when you have too much products to offer.Logistics, warehousing and finally reaching the customer become a problem.


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Sony should have a good marketing consultant to take care of their marketingactivities. Some of their niche product lines like medical imaging equipmentshould be separated from the existing electronics line. It should have adifferent marketing team altogether. Similarly their top of line products likeDSLR cameras and top of the line HD Televisions also requires a separate

space for marketing. The moment you walk into an exclusive Sony store theentire line of HD televisions and cheaper variants are kept together. Same withthe Cameras.

First Mover Advantage Squandered

Sony's failure to gain traction with the Smart Watch is the latest in a long

line of first-mover advantages the electronics giant has squandered. The

Walkman and Discman dominated the global portable music player market for

decades before the advent of the iPod in 2001

In Sony there were many innovative products and first mover inventions. Butthe company failed to capitalize on the same. They started off with thewalkman, Discman which was a first mover advantage. Although theyimprovised these products, they never thought about technological

breakthroughs creeping behind them. Sony should have been the first toinvent a product similar to the ipod. They had the expertise and money to doit. Even though Mp3 technology was invented in the year 1995, Sony never

believed in this technology. Sony had their version of digital music players butthey played only files encoded with its own proprietary Atrac music fileformat. Its devices generally handle MP3 and other formats by transcodingfiles into Atrac-an awkward process that can be time-consuming, particularlyon devices such as flash players with relatively little storage.

Apple introduced the ipod with Mp3 playback support in the year 2001. It tookSony 3 Years to realize that Mp3 is the technology forward and stuck on withtheir proprietary Atrac format and thus losing market share to Apple. This wasa grave mistake by Sony. If they had come out with similar products like theIpad they would have simply conquered the music player market till date justlike their WalkMan.

4. Summing it up

Sony is a company that has come out of multiple failures. The managementteam at Sony is as good as any other companies. Japanese work culture speaksabout loyalty, hard work and Quality. Sony is capable of coming out of thismess, but it requires major restructuring, pay cuts, job cuts, assets sales andhiving off some products or services.

Most importantly the work culture at Sony needs to change. Sony is still in itsold school thinking where they feel that they are the best innovators in theworld, to a certain sense they are, but they are not comparing existingcompetition. Their engineers believe that whatever they innovate are the way

forward and customers accept them since it is produced by Sony.


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Sony also has to get into the services front. They have a lot of products thatenable them to do that. Since Sony is into Music production (Sony Music),Movie production (Sony Pictures) they can incorporate the content into theirelectronic devices. This enables consumers to access the content on a priority

basis on Sony devices. This could boost sales. Also by looking into the

gaming business of Sony, although its a huge market going ahead, Sony issteadily losing out in that segment also. Sony play station is one of the bestgadgets available, but they are not making a profit out of its sales, because it istoo expensive to manufacture.

The company should look at developing state of the art game softwares that

are multiplayer enabled and accessible from their handheld devices likephones, tablets etc. They should also look at developing their products forknowledge access purposes. Sony should develop softwares using third partydevelopers for content up gradation. They should develop their products notonly for entertainment and communications but at the same time a device that

can be used for learning and knowledge gathering. They should introduceproducts that are low priced but smart enough for students to use. Going aheade-classrooms and e-learning is the way of the future. Sony should capitalize onthis. Sony should stop and think !!

I believe Sony should spend all their resource in thought process. What is theNext big product that can take the world by storm. Its not how manyproductsThat Sony produces, but how many successful products that Sony can

produce. The golden answer to the question whether Sony will survive thiscrisis will depend on this killer product that Sony can showcase in the nearfuture. Believe. Make . . .

SONY SLOGAN: Believe that curiosity is the key to creativity, Believe that

anything you can imagine, you can make real.

1. Failed products from Sony (Data taken from online journal which did a survey onTop 50 failed products. 8 of those products were from Sony)

Sony Clie PDA


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Sony Qualia-017 MiniDisc Player

Sony Network Walkman

Universal Media Disc

Sony VN-CX1A Mouse / VoIP Phone


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PlayStation EyeToy

Sony PRS-700 Touchscreen Ebook Reader:

Memory Stick:


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Sony's Business Failure & Strategy

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