CASO DE INNOVACION SONY

ICMR Center for Management Research

Sony Corporation - Future Tense?

This case was wriften by Indu P, under the direction of Vivek Gupta, ICMR Center for Management Research. It was compiled from published sources, and ¡s intended to be used as a basis for class díscusston rather than to ¡Ilústrate either effective or ineffective handling of a management situation.

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This case was the first prize winner in the 2009 John Molson MBA Case Writing Competition.

Sony Corporation - Future Tense?

"Sony may be remembered as the largest consumer electronics company failure in history. No other company had the Sony brand at that critical period in the late 1990s and early this decade when most of the producís that domínate the market today were born."

- Douglas A. Mclntyre, Editor 24/7 Wall Street, in July 2009.

SONY REPORTS LOSS

In May 2009, Japan-based multinational conglomérate, Sony Corporation (Sony) announced that it had posted its first fúll year operating loss since 1995 and only its second since 1958, for the fiscal year ending March 31, 2009 . Sony announced an annual loss of ¥ 98.94 billion ; with annual sales going down by 12.9% to ¥ 7.73 trillion (Refer to Exhibit I for Sony's Consolidated statements of income and Exhibit II for Sony's balance sheets for the financial years 2005 to 2009). The company, which had reported a net profit of ¥ 369 billion for 2008, also warned that with consumers worldwide cutting back on discretionary spending in light of the recession, the losses could touch ¥ 120 billion for the year ending March 2010.

Sony had been a dominant player in the global consumer electronics industry since its inception in Japan in 1946. Over the years, it had introduced some path-breaking producís including the Walkman and the PlayStation. However, by the early 2000s, it had lost its leadership position in some of its key products like televisions and media players. In fiscal 2009, almost all its product lines were reporting losses (Refer to Exhibit III for operating income/loss by business segments of Sony Corporation). Analysts attributed the losses to its 'silo culture' , which carne in the way of cooperation between the different divisions in the company. This resulted in Sony failing to bring out innovative products on time to suit the changing needs and preferences of consumers, though it had all the required competencies. Other reasons attributed for the losses included economic recession in Sony's key markets and the appreciating Yen against major currencies.

Howard Stringer (Stringer), who became the first foreigner to head Sony (in 2005), tried to address the silo culture issue and bring the different divisions together. But just when his efforts were beginning to show results, Sony was confronted with problems caused by recession that began in the US in late 2007 and had gripped most of the developed countries by late 2008. According to a BusinessWeek article in August 2009, "Over the past few months, the financial crisis and economic downturn have dealt a setback to Chairman and CEO Howard Stringer's efforts at restoring the company to profitability."

However, according to industry experts, Sony faced far more challenges than just those posed by the recession. According to Jonathan Nelson, Head of prívate equity firm Providence Equity, "The challenge of changing the culture of an iconic Japanese company is even more difficult than dealing with the current challenges of the consumer electronics industry."

BACKGROUND NOTE

Sony was founded in 1946 as Tokyo Tsuchin Kyogo by Masaru Ibuka and Akio Morita (Morita) . The company began with 20 employees and a capital of ¥ 190,000. Sony started off manufacturing telecommunications and measuring equipment and then began making transistor radios and tape recorders. Its focus, right from inception, was on product innovation and on offering high quality products. The company's ñame was changed to Sony Corporation in January 1958 to fit in with its global expansión plans. It set up a subsidiary in the US in 1960. In 1972, it set up manufacturing facilities in the US — the first Japanese company to do so.

Sony believed that there was a huge demand for innovative products and henee it did not pay much importance to market research. However, it suffered a major setback in 1975 on account of its Betamax video cassette to be used in its home video cassette recorder. Before the Betamax technology could establish itself in the market, it lost out to VHS, which was backed by top studios in Hollywood (Refer to Exhibit IV for the details of Sony's format failures over the years). Sony then realized that the technology used in such products was largely determined by the owners of contení. It entered the contení developmenl business and in 1988, acquired CBS Records and renamed ií Sony Music Eníeríainmení. In 1989, ií acquired Columbia Pichares (which included Trisíar) and renamed ií Sony Picíures.

Over íhe decades, Sony released several cuííing-edge producís. In 1968, Sony iníroduced íhe Triniíron Color TV, which was highly successful. Anoíher producí íhaí did well was íhe Walkman, launched in 1979. Other path-breaking producís from íhe company were íhe world's firsí Compací Disc player, íhe Camcorder, íhe Discman portable CD player, íhe PlaySíaíion, and íhe Digiíal Handycam.

In the early 1990s, while Sony's sales and operating revenues had shown a modérate increase, its operating income and net income began wiínessing a decline. For insíance, in fiscal 1991, Sony reporled sales and operating revenues ai ¥ 3695.51 billion and an operating income ai ¥ 302.18 billion. In 1993, íhough sales and operating revenues increased ío ¥ 4001.27 billion, operating income wení down ío ¥ 130.64 billion. In 1995, operating loss was ¥ 166.64 billion on sales and operating revenues of ¥ 3990.58 billion.

Though Sony went íhrough a resíructuring exercise, it did not yield the desired results. In 1999, net income dropped by 19.4% to ¥ 179 billion. Between the financial years 1995 and 1999, the electronics business registered a compounded annual growíh raíe (CAGR) of 8.55% and íhe music business a CAGR of 10.5% (Refer ío Exhibií V for deíails on Sony's business segmenís as of 2008). Sony banked heavily on ils gaming producí - íhe PlaySíaíion — whose sales regisíered a CAGR of 215% between 1995 and 1999. In 2000, Sony's neí income fell ío ¥121.83 billion.

In íhe early 2000s, Sony coníinued ío reel under problems. In whaí was íermed as 'Sony Shock' by íhe media, íhe company announced a loss of ¥ 111.14 billion for íhe quaríer ending March 2003. For íhe quaríer ending June 2003, ií reported a neí profií of ¥ 9.3 million, 98% lower than íhe profií reported in the corresponding quaríer in 2002. In 2004, Sony's neí profií was ai ¥ 88.51 billion on sales and operating revenue of ¥ 7496.39 billion as againsi a neí profií of ¥ 115.52billion on sales and operating revenue of ¥ 7473.63 billion in 2003. The five years between 2001 and 2005 saw a 75% erosión in Sony's stock price (Refer to Exhibit VI for Sony's stock price chart for October 1999 and September 2009 period).

The year 2005 saw Stringer becoming the first non-Japanese CEO in Sony's six-decade history. Under Stringer's leadership a major reorganization exercise was undertaken in 2005 and Sony started showing encouraging results. For the fiscal 2007, sales and operating revenue increased by 10.5% to ¥ 8.29 trillion as compared to 2006. The trend continued over the next year and for the fiscal 2008, sales and operating revenue grew by 7% to ¥ 8.87 trillion over the previous year (Refer to Exhibit VII for Sony's sales and operating revenue by geographic and business segments). Sony recorded net income of ¥ 369.43 billion in the fiscal 2008 as compared to ¥ 126.33 billion in fiscal 2007. However, the company's improved financial performance did not last long. In December 2008, Sony revised its earnings forecast stating that it would make losses for the fiscal 2009. The company reported a net loss of ¥ 98.94 billion for the fiscal 2009.

THE PROBLEMS

According to industry experts, one of the main reasons for Sony's problems was its slowness in assessing product trends. The problems that it faced with most of its products were due to its silo culture, which prevented coordination among different product divisions. The appreciating valué of the Yen vis-á-vis the US dollar and the recession in Sony's major markets only compounded its problems.

SILO CULTURE

Over the decades, Sony had become an organization of fiefdoms and silos. It had become highly decentralized, with the different divisions competing against each other. This strategy worked well during the first few decades of Sony's inception, when not much interdependence was needed to bring out new products. The fact that such silos had successfully brought out products like the Walkman and the PlayStation only reaffirmed Sony's faith in them. However, as technology and products grew more complex, it became necessary for coordination among different divisions such as hardware, software, design, development, marketing, business development,

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