Sony Downsizes its Ambitions

The “Musketeers” Come Up Short

The decline of Sony Corporation’s electronics business began in April 2003 with the dramatic collapse of the company’s stock shares. The manufacturing giant took drastic measures in 2005, which included the company’s CEO and president simultaneously stepping down to accept responsibility for poor business results and the resignation of the entire Board of Directors. Sony adopted the dual stance that electronics, backed by greater television sales, were the key to the company’s recovery. The introduction of sweeping changes brought in a new management team led by Sir Howard Stringer and Chūbachi Ryōji.

Stringer, who held the top position at Sony USA, became chairman and CEO of Sony Corporation, while Chūbachi was promoted from vice president to president. Stringer came to the job from a background in the entertainment business, whereas Chūbachi had specialized in materials, such as batteries and videotape.

The other key member of Sony’s new corporate management team was CFO Ihara Katsumi, who was promoted from his position as one of the company’s vice presidents. Stringer referred to this management trio as the “Three Musketeers.”

Oddly, however, not one of the “musketeers” knew much about Sony’s electronics business, including televisions that were so essential to the company’s comeback. A decade on we can see that Sony’s electronics business, far from being back on its feet, has continued to hemorrhage profits since the new management team took the reins in 2005. In fact, the talk now has turned to whether the company will be split up and sold off in parts.

This is not to say that during his tenure Stringer sat idly by with his arms crossed. He took over as president in addition to his duties as CEO and also brought in four young executives in 2009 who were dubbed the “Four Musketeers.” But these steps failed to turn the company’s fortunes around. In fact, performance only worsened. Starting from 2008 Sony remained in the red for four straight years. When it comes to management performance is everything, and Stringer ended up resigning his post in 2012.

Standardization, Not Unique Products

Stringer nominated the highly lauded Hirai Kazuo, who was one of the Four Musketeers, as his successor. After joining Sony Pictures, Hirai advanced through the ranks at Sony Computer Entertainment, eventually being appointed executive vice president at Sony’s headquarters. The appointment, however, meant the electronics powerhouse has had three consecutive CEOs—Idei Nobuyuki, Stringer, and Hirai—with no technical knowhow.

During the Stringer era, Sony’s manufacturing reached a major turning point. One factor in this was that the company’s electronic products were failing to garner much attention. Another factor was a trend toward a horizontal division of labor.

Stringer held the view that consumers would only embrace products if they were integrated with contents and services via networks. Based on this view, he felt  there was no need for Sony to rely solely on its expertise to develop products, but rather should throw its weight behind products created through open technologies. From this perspective, televisions and other home electronics were seen simply as “terminals.” What consumers were looking for from Sony products was accessibility in terms of standardization and ease of use. Stringer thought that Sony’s products would be of little use if they were unable to meet these standards.

At the time I asked Stringer whether, based on this logic, he wouldn’t mind if televisions were made by Panasonic instead of Sony. He responded by saying “Yes,” but then, after a bit more thought, added, “But Sony TVs would be better, since they are better made.”

From Market Leader to Also-Ran

With Sony shifting its aim to producing standardized products, it was natural for the company to move toward a horizontal division of labor, making it easier to outsource production to other companies. With Sony turning its back on product development after years of emphasizing the merits of creating its own products, it comes as no surprise that the company has failed to come up with the sort of unique creations that once propelled markets, such as the Walkman or the WEGA flat-screen cathode-tube television.

Sony has adopted the approach of entering lucrative markets opened by competitors. For example, after Apple came out with the iPhone, Sony launched its Xperia phone. It took this same approach in the tablet market as well, launching its own model (later called the Xperia tablet) to compete against Apple’s iPad. This approach differs sharply from the original “Sony spirit,” which was to do what cannot be imitated and what has never been done before.

For the past 10 years Sony has been annually shedding large numbers of employees. A rough calculation based on publicly announced figures shows that this systematic reduction in personnel potentially exceeds 70,000 employees. The problem with these job cuts is they have centered on development, manufacturing, and sales, which are the main pillars of Sony’s operations. Such an approach raises the question of how the company intends to revive its electronics business.

Our Goal Is to Entertain

I have pondered the question of Sony’s strategy for some time. I finally received a clear answer when Sony laid out its policies at its corporate strategy meeting on February 18 of this year.  

Sony had previously announced that for the first time since being listed on the Tokyo Stock Exchange it would not pay dividends to investors. The company based this on its failure to meet any of its corporate goals over the mid-term period from 2012 to 2014 as well as the fact that annual losses have topped ¥100 billion for two straight years.

At the meeting, Hirai for the first time offered concrete ideas concerning the future direction of the company, saying that moving forward his focus would be on entertainment, such as video games, music, and films. In short, the company has decided to relinquish its role as one of the world’s premier manufacturers of audiovisual devices.

Low Expectations for Audiovisual Sector

Under Hirai, Sony’s has divided its business into three domains: (1) growth, (2) revenue stability, and (3) business risk-control. Video games and content are part of the first domain and positioned as the pillars of the growth strategy (to expand sales and profits on the basis of concentrated investment). In contrast, the audiovisual business has been divided between domains (2) and (3), as it is seen to have a low potential for growth. As an example, audiovisual targets for the three-year plan starting in fiscal 2015 have been set below 2014 levels for each of the plan’s three years.

In the case of products grouped under domain (2), such as the Walkman and other audio devices as well as camcorders and digital cameras, they have all been deemed as existing resources that can be split off to secure revenue rather than being targeted for large-scale investment. Hirai justified this strategy of splitting off divisions by saying it would “speed up decision-making by reducing organizational layers, thereby also clarifying responsibility for results,” but not many media and industry representatives interpreted the company’s moves in this light.

As Sony has been readily shutting down or selling off divisions that are performing poorly, onlookers have assumed that the company is breaking up. This was a natural conclusion considering that the company made it clear it has not ruled out the possibility of doing away with its mobile device operation, which includes smartphones, or its television business. In short, the company is in the process of settling the accounts of its audiovisual business.

Betting on Games and Contents

As the home electronics market has been shrinking year after year, there appears to be some logic behind the views of Hirai and other Sony executives as to the poor outlook for the audiovisual business. Given this situation, it seems to me that the response should be to build a new category of audiovisual business that has the potential to open up new markets. But Sony’s leaders appear not share this view.

Meanwhile, can it be said that the video game and contents division has a bright future? Even though PlayStation 4 is selling well and represents the mainstream for console games in North America, most of the video games in China and other rapidly emerging markets are being played on smartphones.

Sony’s role in the movie business is also looking bleak as it becomes increasingly difficult for Hollywood to crank out blockbuster movies.

The first Walkman, TPS-L2, released in 1979. (Photograph courtesy of © Sony.)

One thing that seems certain is that even if Sony is able to come up with a moderately innovative product, it lacks the prowess to develop the sort of audiovisual products that drive markets forward. There seems little hope of the company returning to the heyday it enjoyed during the years that the Walkman was king.

The dilemma Sony faces is not unique: Panasonic and Sharp are also struggling amid slumps in their home-electronics businesses. Panasonic is finding it hard to rebuild on the basis of its business-to-business transactions, just as Sharp is struggling to revive itself with its liquid-crystal displays. The current situation for these Japanese companies resembles the era when such European and US home-electronics makers as Thomson (France), Philips (Holland), and RCA (United States) withdrew from the business—driven out of the market by their thriving Japanese counterparts.

Today, Chinese makers are the ones driving out the once dominant Japanese companies. Much like their European and American colleagues, Japanese electronics companies failed to lay the groundwork for new businesses while they reigned as the most powerful and technically advanced players in the market. And now they are paying the price for their complacency.

(Banner photograph: President Hirai Kazuo explaining Sony’s corporate strategy at a press conference in Tokyo on February 18, 2015; photograph courtesy of © Jiji Press.)