Sony at a Crossroads: Why ‘Muddling Through’ Is No Longer Enough

walkman

For generations raised on portable music made possible by the Sony transistor radio and Walkman, the Japanese firm’s decline is almost unfathomable. Yet, today’s young consumers hardly know what Sony manufactures, let alone have much interest in owning its products.

The hard reality for Sony Corp., decades after its innovation and marketing made it a household name worldwide, is that the company is no longer a leading global brand in electronics.

“Sony is finished and there is no hope it can turn around. The hardware side is completely finished,” says Sea-Jin Chang, a professor at the Business School of the National University of Singapore and author of the book, Sony vs. Samsung: The Inside Story of the Electronics Giants’ Battle for Supremacy. “Older people like me still appreciate the Sony brand, but I have to explain to my students at the university what Sony is.”

Sony’s retreat is striking, says Benjamin Cavender, principal and senior analyst on consumer electronics at China Research Group, based in Shanghai. “If you go to any consumer electronics market in Asia — in Singapore, Hong Kong, mainland China — you are not seeing Sony much anymore. You are seeing Samsung everywhere,” he notes. “If you look at Sony stores and Apple stores in China, the Apple stores are all nicer. If you look at billboards, Samsung billboards are all bigger than Sony billboards. There is nothing to make you think Sony is the first choice anymore.”

“It used to be an extraordinary company that attracted very good people. They all left Sony.” –Sea-Jin Chang

Having ceded prime electronics gadgetry territory to Apple and Samsung, Sony is getting by on profits earned by its entertainment and financial businesses. Sony Life Insurance contributed about 85% of the Sony Group’s operating profit and about 12% of revenues in the nine months that ended on December 31, 2013. The company’s life insurance, banking, music and movie businesses are keeping the company afloat, but just barely. Sony CEO Kazuo Hirai promised two years ago that he would turn the loss-making electronics business to profit, but so far that goal has proved elusive.

Losing Money and Talent

Sony announced on May 14 a group net loss of 128.4 billion yen in the financial year that ended March 31, worse than an earlier forecast of a 110 billion yen group net loss. It forecasted a 50 billion yen group net loss for the current financial year, which ends on March 31, 2015. “This time, the difference [in strategy going forward] is that our structural reform includes withdrawal from businesses. In previous years, the restructuring was mostly within the business units and in manufacturing,” chief financial officer Kenichiro Yoshida said at the news conference on the financial result. 

Also in February, the company announced that it had concluded a memorandum of understanding confirming an intent to sell its Vaio PC business to Japan Industrial Partners, a Japanese private equity firm. In addition, Sony has decided to split off its TV business and operate it as a subsidiary. Sony also plans to trim 5,000 jobs — 1,500 in Japan and 3,500 overseas — within a year. “I hope this puts a period to structural reform of this scale,” Hirai said at a February 6 earnings press conference.

Analysts say Sony’s best hope for survival is to focus on the financial- and entertainment-related businesses that are its best performers. Hirai also said in February that the company will focus on gaming, smartphones and imaging products after selling Vaio and spinning off TV manufacturing. But even that may not be enough. Chang predicts that Sony eventually will divest from all of its hardware businesses in the future, keeping only the music, movie and financial services divisions.

One of Sony’s biggest problems has been its brain drain. Many of Sony’s best marketing, technology and salespeople have left: Koichiro Tsujino, developer of the Vaio PC, for example, moved to Google Japan in 2009 after 22 years at Sony. A top marketing executive went to Fast Retailing, maker of the Uniqlo brand of apparel. “It used to be an extraordinary company that attracted very good people. They all left Sony,” says Chang.

Some fault Hirai for lacking vision. But others say Sony’s problems date back to the departure of founder Akio Morita, who died in 1999. It was technology breakthroughs and consumer-oriented innovations conceived in their generation that made Sony the landmark brand of the late 20th century, an icon on a par with Toyota’s ascent as an industrial power.

But somewhere along the way, Sony lost that edge. In 2005, the company made Howard Stringer, a Welshman and former head of U.S. broadcaster CBS, Sony’s CEO, hoping to replicate Nissan Motor Co.’s successful turnaround under Carlos Ghosn. Just as expected, Stringer carried out cost cutting and restructuring. He sought to focus the company more on movies, music and gaming. But Sony failed to come up with game-changing products under his watch. Stringer spent most of his time at Sony’s New York headquarters with his management team, instead of at the company’s Tokyo home base.

Like many leading Japanese manufacturers, observers say what Sony failed to foresee was the transformation of consumer electronics from aspirational durable goods to commodities, and the growing prowess of the Koreans and Chinese in making them even more cheaply than before. Under Stringer, Sony failed to pursue the smartphone business, instead seeking to expand market share in handsets in its joint venture with Ericsson. By the time Sony bought out Ericsson, Apple and Samsung had already become the leading smartphone makers. Stringer was replaced as CEO by Hirai in 2012.

Losing the Thread

Sony needed to be more aggressive in its approach, says Lawrence G. Hrebiniak, emeritus professor of management at Wharton. He points to Hitachi, an electronics maker that spun off old, unprofitable businesses such as computers and TVs, and instead focused on big-ticket money makers like power plants and water treatment facilities. “It was a bold strategic move and one that seems to be working,” Hrebiniak notes. “In contrast, Sony didn’t address its problems forcefully. It didn’t change aggressively. It kept old products that consistently lost money – for example, TVs. Its corporate strategy was more of a ‘muddling through’ or business-as-usual approach, rather than a significant focus on strategic change.”

“[Sony’s] corporate strategy was more of a ‘muddling through’ or business-as-usual approach, rather than a significant focus on strategic change.” –Lawrence Hrebiniak

While the commoditization of TVs, PCs and other electronics has doomed Sony’s hardware business, the company’s “software” businesses of entertainment content and gaming largely remain profitable. But Sony reported an 8.1 billion yen operating lossin gaming in the financial year that ended March 31, compared with a 1.7 billion yen operating profit in the same period a year earlier.

Sales of Sony’s PlayStation 4 totaled six million units from the time of its launch in November until March 4, outpacing sales of machines from Microsoft and Nintendo. But the PlayStation does not have much of a future, experts note, since gaming increasingly is done using smartphones rather than set-top boxes. “PlayStation 4 is a dedicated gaming device. That market is shrinking to only hard-core game players, since regular people will want to play on their mobile phones,” says Chang. “To play virtual reality games, 3D-type games, you need the PlayStation 4. But the mainstream is switching to mobile phones.”

In movies and music, Sony’s movie division, Columbia Pictures Entertainment, which it bought for $3.4 billion in 1989, reported 51.6 billion yen operating profit in the financial year ending March 31, up from 47.8 billion yen in the same period a year earlier. The division is coming off the commercial success of American Hustle and Captain Phillips, both of which were nominated for the best picture Oscar, though the award ultimately went to 12 Years a Slave.

Sony Music Entertainment has thrived, thanks partly to the legacy of CBS Record Group, purchased in 1987 for $2 billion, which holds the rights to the catalogue of Michael Jackson. Its music business operating profit rose to 50.2 billion yen in the financial year ended March 31, from 37.2 billion yen in the same period a year earlier.

One of Sony’s best performers is its life insurance business, a pet project of Morita’s. The company has adopted what for Japan is an innovative approach, using life planners rather than traditional salespeople. While the market is shrinking about 3% a year as the population ages and declines, Sony Life is growing the value of its policies in force by about 4% a year, according to a presentation of Sony Financial Holdings Inc. Sony Life ranked seventh in the industry in Japan, with a market share of 4.1% as of March 31, 2013. In recognition of the company’s financial fortitude, although Moody’s cut the credit rating of Sony Corp. to junk status in the first quarter of 2014, it left Sony Life Insurance’s rating at Aa3. Sony Life was put under Sony Financial Holdings in 2004, so it can thrive even while the core electronics business flounders.

The model for Sony in becoming a financial services powerhouse would be similar to GE Capital, but only if the company can emerge from its niche approach to adopt a more global strategy than it has so far, says Cavender. “Their business model and everything works for them in Japan, but they have shown in other areas of their business that it is not easy for them to succeed overseas because they do not necessarily understand those markets, or what consumers are looking for.” A 13-year effort to build an insurance business in the Philippines, for example, never got off the ground. “They could have become like a GE Capital, but they need to take that expertise and ability and move it outside of Japan,” Cavender adds. 

So far, none of Japan’s financial services companies have become truly globally competitive, and it’s hard to see how Sony might do so given its domestic-oriented mindset, weak English ability in its workforce and its lack of global expertise in the field, says Choong Y. Lee, a professor of management and marketing at Pittsburg State University in Kansas. “If Sony tries to make its financial services global it will be very tough,” Lee notes. “Nomura Securities Co., Japan’s largest financial services company, is still not a big player in the global market like Goldman Sachs, JP Morgan or Morgan Stanley.”

This struggle for a global presence reflects the difficulties many Japanese industries have in competing worldwide. For financial services, as for electronics, the Japanese market is so big that companies tend to focus solely on product development for the local market. “Sony, Panasonic and Olympus cameras … do well in Japan, but they have horrible sales in the U.S. and in Europe,” Cavender points out. “That is because [the companies] do not know how to market and how to set up retail channels outside their own countries.” Sony tends to think about what will work in Japan and then tries to apply that everywhere, rather than accepting that other markets may have different tastes or needs, he adds. “Japanese companies are notorious for releasing new products with very minor tweaks of features in order to market them as new. This seems to work in Japan, but falls flat elsewhere,” Cavender notes.

“It is almost suicide to focus on mobiles and smartphones while divesting of TVs and PCs.” –Sea-Jin Chang

Walking the Wrong Walk?

Given that tendency, Hirai’s plan to have Sony focus on smartphones, gaming and imaging products may not work. Selling off the TV division makes no sense since smartphones, PCs and TVs are “exactly the same products in different sizes,” according to Chang. All are devices with screens that can connect to the Internet. All need LCD panels, microprocessors and modem devices. “It is almost suicide to focus on mobiles and smartphones while divesting of TVs and PCs,” he notes. “They are the same technology. It makes sense to put all three in one business division.” Both Samsung and Apple are moving in that direction, he adds.

Meanwhile, the smartphone business is growing increasingly competitive, and even more so as Chinese companies like Huawei, Lenovo and Xiaomi gain market share and expertise. Sony’s smartphone business is only growing in Japan, where the leading brand is Apple, with 54% of the market, according to International Data Corp., followed by Sony at 20.5%. In Japan, Samsung lags with only 3.6% of the market, though it leads the global smartphone market with a nearly 29% market share, followed by Apple at about 18%. Huawei, Lenovo and LG rank ahead of Sony in the global smartphone market.

What can Sony do now? One option, experts say, would be for Sony to sell the profit-making life insurance business and use that capital to turn around the loss-making electronics division. In 2002, then-Sony chairman Nobuyuki Idei proposed selling Sony Life to raise cash, but the plan was dropped due to strong opposition within management.

But Sony’s problems run deeper than mere cash flow and structure. “Sony needs to find its future identity as a company. The current restructuring will help in the short term but not in the long term,” says Chang, who questions whether Hirai has a strong enough vision for the company’s future. Beyond that, what the company needs is a game changer like the Walkman, notes Lee. “When people in the U.S. talk about Sony, they still talk about the Walkman. That was over 30 years ago and that was a game changer.”

The question is whether Sony still has the ability to come up with such innovative products after lagging behind for so many years. That will depend on whether the company has the people it needs to turn cutting-edge technology into “have-to-have” products, observers state.

“You have to have really good people at every level of the organization. Otherwise, you may have good products but not know how to sell them, or have bad products people are trying to sell,” says Cavender. “You have to develop a really good team to develop cutting-edge products and also have a good marketing team so that the consumer knows you have cutting-edge products.”

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