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SonyCorporationRestructuringContinues, ProblemsRemain

Seven out of eight years, Sony has filed to meet its own initial operating profit forecast. This is probablytheworsttrackrecordamongstmostmajorexporter.Thatmeansthateithermanagementis notabletoanticipatechallenges.Ortheyfailonexecutionalmosteverytime.Eitherway,itdoesnot reflectwellonSonysmanagement AtulGoyal,Analyst,CLSA,inJanuary2009 SONYINCRISIS,AGAIN In May 2009, Japanbased multinational conglomerate, Sony Corporation (Sony) announced that it posted its first full year operating loss since 1995, and only its second since 1958, for the fiscal year endingMarch2009.Sonyannouncedannuallossof98.9billion,withannualsalesgoingdownby12.9% to7.73trillion.Sonyalsowarnedthatwithconsumersworldwidecuttingbackonspendinginlightof therecession,thelossescouldbetotheextentof120billionfortheyearendingMarch2010(Referto ExhibitIAforSonysfiveyearfinancialsummaryandExhibitIBforoperatinglossbybusinesssegment). SonysannouncementcameafterthecompanyhadannouncedamajorreorganizationplaninFebruary 2009. Sonyhadgonethroughaseriesofreorganizationprogramsstartingfromtheyear1994,theaimbeing to improve the financial performance and competitiveness of the company. However, most of them failed to achieve the desired results. Analysts blamed the silo culture, which prevented different divisionsinSonyfromcommunicatingandcooperatingwitheachother,forthecompanysproblems. HowardStringer(Stringer)becamethefirstnonJapaneseCEOofSonyinMarch2005andheannounced a major reorganization in September 2005. The reorganization focused on revitalizing the electronics businessofthecompanyandonimprovingprofitsbyreducingbusinesscategoriesandproductmodels. Italsoaimedatremovingredundanciesandoverlapsinbusinessprocessbyfocusingresourcesonlyon thecompanyshighgrowthbusinesslikeHDproducts,mobileproducts,semiconductor/keycomponent devices, and networkenabled products and appliances. The plan addressed the silo culture in the organization by introducing the slogan Sony United, and outlining several measures that could be implemented to unite the company and enhance crosscompany collaboration. The plan started showing,encouragingresultsandfortheyearendingMarch2007,Sonyssalesandoperatingrevenue increased by 10.5% to 8.29 trillion as compared to March 2006. The trend continued over the next yearandforthefiscalyear2008,salesandoperatingrevenuegrewby6.9%overthepreviousyearto 8.9trillion.Thecompanyrecordedanoperatingincomeof374.5billioninfiscal2008ascomparedto 71.8billioninfiscal2007. However,bylate2008,SonyhadreduceditsearningsforecastandinDecember2008,itannouncedthat itcouldendthefinancialyearinaloss.AnotherreorganizationplanwasannouncedinFebruary2009, whichinvolvedaneworganizationstructure,theclosureofeightofitstotal57manufacturingsites,ana reduction of the workforce by 16,000. The reorganization also witnessed Stringer assuming more powersasthePresidentofSonyandhispredecessor,RoyjiChubachi(Chubachi),whowasalsoheading

the electronics division, being made ViceChairman. Through the new reorganization plan, Sony expectedtoreducecostsbyUS$2.5billion.Onthereorganization,Stringersaid,Thisreorganizationis designed to transform Sony into a more innovative, integrated, and agile global company. (These changesandreorganization)willnowmakeitpossibleforallofSonyspartstoworktogether. Analysts were satisfied with the changes proposed in the new reorganization plan. Hitoshi Kuriyama, analystatMerrillLynch&Company,commented,Thesemovesarebolderthanwehadanticipatedand arepositive.WebelievethenewmanagementandorganizationwillbeeffectiveinbringingoutSonys potentialinthisnewnetworkedage. However,someanalystsremainedskepticalabouttheproposedbenefitsoftheplan.AccordingtoKoya TabatafromCreditSuissee,Weremainunsureaboutwhetherconsolidatingcontrolintothehandsof Chairman Howard Stringer will change the business model significantly and fundamentally strengthen Sonysoperations. BACKGROUNDNOTE Sonywasfoundedin1946asTokyoTsuchinKyogo byMasaruIbukaandAkioMorita (Morita)inwar ravaged Japan. Initially, the company had 20 employees and a capital of 190,000. Right from its inception,Sonyfocusedonproductinnovationandonofferinghighqualityproducts. Sony started off manufacturing telecommunications and measuring equipment and went on to manufacturetransistorradiosandtaperecorders.ThecompanydecidedtocallitselfSony,asMoritafelt thatthenamewasinaccordancewithitsglobalexpansionplans.SonysetupasubsidiaryintheUSin 1960andwaslistedontheNewYorkstockexchangein1970.In1972,itsetupmanufacturingfacilities intheUS,therebybecomingthefirstJapanesecompanytodoso. Sonysproductswerealwaysinnovative.Thecompanyfirmlybelievedthattherewasahugedemandfor suchproductsanddidnotattachmuchimportancetomarketresearch.However,itsufferedamajor setback in 1975 on account of its Betamax video cassette which was to be used in its home video cassetterecorder.BeforetheBetamaxtechnologycouldestablishitselfinthemarket,itlostouttoVHS, which was backed by top studios in Hollywood. This incident served as an eyeopener for Sony. It realized that technology used in such products was largely determined by the owners of content and thisledtoitsenteringthecontentdevelopmentbusiness.In1988,thecompanyacquiredCBSRecords andrenameditasSonyMusicEntertainment. In1989,itacquiredColumbia Pictures (whichincluded Tristar)andrenameditasSonyPictures(RefertoTableIfordetailsofSonysBusinesses). In1968,SonyintroducedtheTrinitronColorTV,whichwashighlysuccessful.Anotherhighlysuccessful productwastheWalkmanlaunchedin1979.Otherpathbreakingproductsthatitintroducedincluded the worlds first Compact Disc Player (1980), the Camcorder (1982), the Discman portable CD player (1984),PlayStation(1994),andtheDigitalHandycam(1995.Sonyintroducedseveralotherproductslike homeelectronicequipmentand3.5inchfloppydiscs. Till1983,Sonyoperatedasafunctionspecificorganizationwithdifferentdepartmentsfordevelopment, manufacturing, sales etc. However, with the number of products and people increasing, Sony introducedthebusinessgroupsystemin1983anddefinedtherolesofheadquartersandeachbusiness group.

TableI SonysBusinesses(2008) Audio, Video, televisions, information and communications equipment, semiconductorcomponentsandotherproducts. Games console and software businesses conducted by Sony Computer Entertainmentinc. MusicSegment BusinessesofSonyMusicEntertainment(Japan)Inc. PicturesSegment Motion Pictures, and television programming distributed by Sony Pictures EntertainmentInc. FinancialServices Sony Financial Holdings Inc, and its subsidiaries Sony Life Insurance Company Limited.,SonyAssuranceinc.,SonyBankInc,andSonyFinanceInternationalInc. Others The music recording business of Sony Music Entertainment, and Sony Music Entertainment (Japan) Inc., and network services related business of Sonet EntertainmentCorporation. Source:www.sony.net. THERESTRUCTURINGEFFORTS Intheearly1990s,inspiteofamoderateincreaseinSonysoperatingrevenues,itsoperatingandnet incomewitnessedadecline.Aftertheelectronicsbusinesswasrestrictedin1994underthethenCEO Norio Ohga, the companys performance deteriorated further and Sony reported a loss of 293.36 billionin1995.Thisledtoanotherroundofrestrictingin1996,whereinSonywasorganizedintoaten company structure. However, this restricting did not lead to any sustainable improvement in the companysfinancialperformance.Forthefinancialyear199899,thenetincomedroppedby19.4%. Another round of restructuring was proposed in 1999 in order to enable Sony to exploit the opportunitiesofferedbytheInternet.ThoughsomeofitsproductslikethePlayStationwereprofitable, a majority of its other businesses like electronics, movies, mobile telecommunications, and personal computers were not performing well. For the fiscal 19992000, Sonys net income fell to 121.83 billion,adeclineofover58billionascomparedtothepreviousyear. With none of its restructuring efforts proving fruitful, Sony went in for a revamp of the top management. In the fiscal year 200001, despite the increase in revenue due to higher sales of the PlayStation, net income dropped to 16.75 billion as compared to 121.83billion the previous year. Thedropinnetincomewasattributedtoadeclineindemandforcomputerrelatedproductsduetoa slowdownintheITindustry.Atthisjuncture,NobuyukiIdei(Idei),CEOofSonyatthattime,proposed another round of organizational restructuring. This plan aimed to transform Sony into a Broadband NetworkSolutionscompanybylaunchingawiderangeofbroadbandproductsandservices.Explaining the objective of restructuring, Idei said, By capitalizing on this business structure and by having businessescooperatewitheachother,weaimtobecometheleadingmediaandtechnologycompanyin thebroadbandera. However,thisrestricting exercisedid notyieldsatisfactoryresultseitherandSonysoperatingincome declined by 40.3% in the fiscal year 200102, while revenues increased by 3.6%. In April 2003, Sony announced its quarterly results, reporting a quarterly operating loss of 116.5 billion. This loss was termedtheSonyShockbythemedia.ForthequarterendingJune2003,Sonyreportedanetincomeof Electronics Segment GameSegment

1.1 billion which was 98% lower as compared to the profit of 57.2 billion reported in the correspondingquarterinfiscal2002.AnalystswereoftheopinionthattheerosioninSonysprofitswas duetotheexpensesthecompanyhadincurredonimplementingitsmanyrestructuringplans.Atthis junctureinOctober2003IdeiproposedyetanotherrestructuringplancalledTransformation60. This was a threeyear restructuring plan, which aimed at optimizing manufacturing infrastructure and reducingfixedcostsbycombiningtheoperatingdivisionsandshiftingcomponentsourcingtolowcost marketslikeChina.Sonyplannedtoreducecostsbydownsizingtheconsolidatingthemanufacturing, distribution, and customer service facilities and also by streamlining procurement. As a part of Transformation60,about7000employeeswerelaidoffinJapanand13,000atotherlocationsacross the world. Several corporate and administrative functions which were overlapping were integrated. This US$ 3.1 billion plan aimed at achieving operating profit margins of 10% and reducing the annual fixedcostsby330billionbythefiscalyear200607. These restructuring plans were not successful mainly because of the significant drop in sales of conventionaltelevisionsandportableaudioproducts.ThedeclineinsalesofSonyselectronicsproducts was prominent in Japan, where the demand for Vaio personal computers and cathode ray tube televisionsfellsignificantly.Theelectronicsdivisionrecordedanetlossof6.8billionduring2004.The games division also did not fare well with the sales of PlayStation 2 consoles falling rapidly. In fiscal 2004,thegamesdivisionrecordedanoperatingincomeof67.6billionasagainst112.7billionin2003. BythetimeSonyannounceditsOctoberDecember2004results,itwasevidentthatthecompanywas farfromreachingthegoalsenvisagedinitsTransformation60plan.Duringthequarter,thecompanys salesfellby7.5%to2148.2billionandoperatingincomewentdownby13%to138.2billion. At this point in March 2005 Stringer became the CEO, Stringer identified five main challenges for Sony. These were: getting rid of its silo culture, attaining profitability across businesses, making products in line with industry standard technologies, improving the competencies in software and services,anddivestingthecompanyofitsnonstrategicassets. Stringer announced another round of restricting in March 2005. While announcing the plans, Stringer said, We are battling on many fronts against many competitors, a number of whom have at times provedmoreagileandmorenimble.Wecanandwillcompetevigorously.Wearegoingtoachieveour goalsbybreakingdowntheexistingsilowallsandeliminatingthehighlydecentralizedstructureweve maintainedinthepast. Sony adopted the new organizational structure on October 01, 2005. The company was reorganized into five business groups the electronics business, the games business group, the entertainment businessgroup,thepersonalsolutionsbusinessgroup,andtheSonyfinancialholdingsgroup.Through the new structure, Sony expected to achieve coordination across different areas including planning, technology, procurement, manufacturing, sales, and marketing. The new structure helped eliminate product and design redundancies (Refer to Exhibit II for more about Sonys restructuring in 2005 and ExhibitIIIforSonysorganizationalchartasofOctober2005).Alongwiththenewstrategy,Sonyalso announced an internal slogan called Sony United. This focused on promoting teamwork and cooperationandbringingtogetherkeyresources.

THEOUTCOME Afterthereorganizationannouncedin2005,StringerwentontorevampSony.SonysAibo,arobotic pet,wasdiscontinuedaftertheRoboticsunitwasshutdownduetoitslowrevenuegeneration.Sonys Qualialineofluxuryelectronicsthatincludedhighendcamerasandtelevisionswasalsodiscontinued. Otherbusinessesthatwerediscontinuedincludedcosmeticsmaker,mailordershoppingcompany,and achainofrestaurants.OnethirdofSonys1,000subsidiariesandaffiliateswereinvolvedinbusinesses thatweredifferentfromthecoreelectronicsandentertainmentbusinessofSony. OneofStringersfirsttaskswastoreviveSonystelevisionbusiness,whichhadsufferedasthecompany hadbeenlateincomingoutwiththeflatpaneltelevisions.Thetelevisionbusinesswasbroughtunder the charge of Katsumi Ihara, who discontinued production of CRT television and launched the Bravia brandofLCDTVsin2005.However,infiscal2006,theTVdivisionstillshowedlossesasthecompany had spend heavily on advertising and had lowered prices in its race against competitors like Samsung andLG.Industryexpertsfeltthatafterloweringprices,Sonyhadbeenunabletomaintainitspremium pricing. Earlier, Sony had had a tradition of retaining retired senior personnel as advisors. This practice was doneawaywith.Bythefirsthalfof2006,ninefactorieswerecloseddownandover5,700jobswere eliminated.Tofocusonthegrowthmarkets,Sonydiscontinuedthemanufactureofaround600ofthe total3,000productsitmanufactured. BytheendofMarch2006,Sonysearningshadimprovedconsiderably;itreportedanetprofitof123 billion.ThecompanyattributedthistothenewBraviaLCDtelevisions.Thoughtheelectronicsbusiness remained a problem, the sales of flat panel televisions improved and so did the sales of PCs and camcorders. In 2006, analysts were of the view that Stringers efforts had succeeded in putting the companybackontherighttrack. OnMarch29,2007,Sonyannouncedthattostrengthenitsproductdevelopmentcapabilityandimprove profitability in the electronics segment, some more changes had to be made in its organizational structure. The company established the B2B Solutions Business Group, with the aim of enhancing its B2Bbusinessgrowth.OnthenewstructureSonyannounced,TheB2BSolutionsBusinessGroupwill uniteandstreamlineSonysexistingBroadcasting/Professionalequipmentbusinesses,BtoBsolution services, and FeliCa business. At the same time, by utilizing Sonys broadbased research and developmentachievementsinitsB2BSolutionBusiness,Sonyhopestodevelopnewbusinessthatcan drivesalesandprofitgrowthintheBtoBbusinessfield.(RefertoExhibitIVforSonysOrganizational ChartasofApril2007). As a part of the reorganization, Chubachi was made President of the B2B Solutions Business Group. FormingapartoftheB2BSolutionsBusinessGroupweretheB&PBusinessGroup,theFeliCaBusiness Division,andapartofthePersonalSolutionsBusinessGroup.Twonegroups,theTVBusinessGroup andtheVideoBusinessGroup,werealsoestablished. InMay2007,afterthecompanyannouncedthattheprofitswouldincreasesixfoldfortheyearending March2008,Sonyssharesrosetoafiveyearhigh.

When Sony announced its results for the first quarter ending June 2007, it had exceeded analysts expectations. Sony reported that sales had increased by 13% as compared to the first quarter of the previousyearto1,976.5billion.Theoperatingincomegrewbyover250%to99.3billionduringthe sameperiodandtheoperatingincomeoftheelectronicsdivisionincreasedby77%.Analystsattributed the success of Sonys electronics division of the Bravia range of televisions, whose sales were higher thanthatofcompetitorslikeSamsungandLG.SonysjointventurewithSamsungformakingpanelswas alsosaidtobeoneofthereasonsforSonydoingwellinthetelevisionmarket.Analystspointedoutthat this joint venture also marked a change in Sony, where such an arrangement would have been unthinkableearlier. In late 2007, Sonly also launched its first ultrathin TV screen made of OLEDs, which were only five millimetersthick.ChubachitermedthisasaSymbolofSonyscomeback.ByNovember2007,thesales of PlayStation 3 in Japan overtook the sales of Nintendo Wii. In December 2007, Stringer announced thatafterthreeyearsofreorganization,Sonyhadrecoveredfromitspastproblems.Inthefiscalyear ending March 2008, Sony appeared to be on the path to revival. For the fiscal year 2008, sales and operatingrevenuegrewby6.9%to8.9trillion.Sonyrecordedoperatingincomeof475.2billionin fiscal 2008 as compared to 150.4 billion in fiscal 2007. Sony had a slew of products in the pipeline includinghighenddigitalcamerasandnewOLEDtelevisions.Anotherproductinthepipelinewasthe new version of a portable PlayStation. But the sudden strengthening of the Yen coupled with the recessionintheUSsloweddownconsumerspendingconsiderably.Besides,consumerspostponedthe purchaseofelectronicsproducts.TheresultwasthatSonyendedupperformingbadly. PROBLEMSRESURFACEAGAIN Inmid2008,Sonysmanagementremainedconfidentthatitstelevisionunitwouldturnprofitable.The salesofLCDTVsofSonyrosefromonemillionunitsin2005to15.2millionunitsin2008.Butwiththe globalrecessionaffectingspendingonluxuryproducts,Sonysfortunestookaturnfortheworse.Inthe televisionsegment,Bravia,whichwasoneoftheSonystopsellingproducts,facedcompetitionandits salesplummetedasrecessionhitconsumerspostponedtheirpurchases.TheOLEDtelevisionfailedto makeitspresentfeltintheUSmarket,asitwaspricedatUS$2,042foran11inchmode.Analystssaid thattheproductwasaheadofitstimeandSonywastakingtheriskofcomingintothemarkettooearly. Sonyfacedproblemsonseveralfronts.PlayStation3didnotfareaswellasexpectedanditssaleswere farbehindthatoftheNintendoWiiandMicrosoftsXbox360.ThemanufacturingcostsonPlayStation3 werealsohigh.Forexample,SonyincurredUS$840asmanufacturingcostsonaPlayStation3wassold forUS$599,whenitwaslaunchedinNovember2006.ByDecember2008,thepriceofPlayStation3had come down to US$ 399, while its manufacturing cost was US$448. Sony expected that by mid2009, PlayStation3wouldbreakeven.Thecompanysoldaround10millionPlayStation3consolesin2008. In the second quarter of 200809, Sony posted a 72% decline in net profit from 73.5 billion in the secondquarterofthepreviousyearto20.7billion.Atthattime,itannouncedthattheannualprofit coulddeclineby59%ifthevalueoftheYencontinuedtorise.Thecompanysprofitswerehitbythe strengtheningoftheYen,withtheexchangeratebeingaround100YenperUS$andaround151Yenper Euro.AnalystsreportedthatincaseoftheJapanesecurrencystrengtheningbyevenoneYenagainstthe dollar,theimpactonSonywouldbetothetuneof4billioninoperatingprofit.(RefertoExhibitVfor Sonys sales and operating revenues by Business Segment and to Exhibit VI for Sonys Sales and OperatingRevenuebyGeographicSegment).

OnOctober23,2008,SonyslashedthenetprofitoutlookfortheyearendingMarch2009by38%to 150billion.Sonysinitialprofitestimatehadbeen520billion.Thiswasreducedto470billionand thento240billion.SomeanalyststermedtheannouncementasthesecondSonyShock.Withthe Yen appreciating and hitting a 13year high against the US dollar at 94.62 per US Dollar in October 2008, Japanese exports became uncompetitive. Sony expected this to have an adverse impact on its earnings. The company also said that the global economic downturn could impact the sale of LCD televisionsanddigitalcameras.Itcautionedthatthepositioncouldbecomeconsiderablyworseandthe revised forecast could also be affected. After the announcement, analysts predicted that Sony would witness an earnings collapse and was likely to post losses in the televisions, video gaming, mobile phones,andcomputerssegments. InDecember2008,Sonyannouncedthatitwaslikelytopostitsfirstfullyearoperatinglosssince1995, andonlyitssecondsince1958,duringtheyearendingMarch2009.Analystswereoftheviewthatthe Japaneseeconomywhich wasexperiencingitsworstevereconomicdownturnsinceWorldWarIIhad alsohadanimpactonthecompanysearnings. InDecember2008,Sonyannouncedthatareductionintheworkforcewasinevitablealongwithare examination of businesses which were not profitable, t o contain the losses that it expected to incur duringtheyear.Itannouncedthat8,000jobswouldbeslashedandthatcapitalinvestmentwouldbe reducedby30%.Itannouncedseveralmeasurestoachievecostsavingstotheextentof100billion layoffs,outsourcingproduction,closingplants,andreducingproduction. At the same time, Sony announced initiatives to improve profitability and enhance operational efficiencies in the electronics business. The initiatives taken by the company included shortterm measures like reducing operational expenses and lowering inventory costs. Other measures that it planned to take included adjusting product pricing to square off the increase due to the appreciating Yen against global currencies, withdrawing from or downsizing unprofitable businesses, delaying the investment in semiconductors and in a few television plants, and realigning domestic and overseas manufacturing sites. (Refer to Exhibit VII for details of the initiatives taken by Sony to revitalize its ElectronicsBusiness) InJanuary2009,Sonyannouncedthatitsannualoperatinglosswouldbeabout260billion.Analysts said that the company, which had posted a profit during the first half of the year, had failed to take advantage of the holiday season in the US. The discounts it had given were not adequate while the competitors had resorted to more aggressive price cuts, they said. The fact that Sony had failed to deliver could also be a pointer to management related problems in the company, they cautioned. At that time, several analysts pointed out that by giving more power to the CEO, Sony could be brought backontherecoverypath.Intheiropinion,aradicalchangewaslongoverdueatSony.Accordingto KoyaTabata,analystsfromCreditSuissee,Themostimportantthingisthat,toimproveorganizational strength in the areas of development, purchasing, and marketing, it will be necessary to further concentrate power in the hands of [Sir Howard] and unless this is achieved we believe [Sony] will be unabletoclosethegapwithcompetitorssuchasAppleandMintendo. Severalreports,however,claimedthatinspiteofthelossesbeingreported,theJapanesemanagement wasagainstanysweepingchangesbeingmadeinthebusinesspracticesthatSonyhadbeenfollowing forsuchalongtime.

REORGANIZATIONIN2009 InFebruary2009,Sonyannouncedamajorreorganization,whichwastobemadeeffectivefromApril 2009. The reorganization concentrated on the electronics and game businesses of Sony, aiming to improvetheirprofitabilityandstrengthencompetitiveness.Commentingonthereorganization,Stringer said, This reorganization is designed to transform Sony into a more innovative, integrated, and agile global company with its next generation of leadership firmly in place. The changes were announcing todaywillacceleratethetransformationofthecompanythatbeganfouryearsago.Theywillnowmake it possible for all of Sonys parts to work together to assume a position of worldwide leadership and, together,achievegreatthings.(RefertoExhibitVIIIfororganizationChartofSonyasofApril2009) ThecompanyproposedtoformtwobusinessgroupsTheNetworkedProducts&ServicesGroupand TheNewConsumerProductsGroupthroughtheorganization. Under Networked Products & Services Group would be Sony Computer Entertainment, personal computers,mobileproductsincludingWalkman,andSonyMediaSoftwareandServices.Themainaim of the group was to bring in few products using Sonys technologies and also to increase the pace of innovationatSonythatwouldleadto higher profitability.Formingapartof theseprocesseswasthe expansionofthePlayStationnetworkplatform.ThegroupwastobeheadedbyKazuoHirai. FormingapartoftheNewConsumerProductsGroupwouldbetelevision,digitalimaging,homeaudio, and the video business of the company. The focus of this group was on achieving profitability and growththroughproductinnovation,andimprovingefficiencyandspeedofoperations.Anotherareof interestforthisgroupwasdevelopmentandgrowthintheemergingmarkets.Thisgroupwasheadedby HiroshiYoshioka. Asapartofthereorganizationefforts,twocrosscompanyunitswerecreated.OnewastheCommon Software and Technology Team which was to develop and implement integrated technology and softwaresolutions.Thegroupwasalsorequiredtoprovidecoordinatedsoftwaredevelopmentservices. TheotherunitwastheManufacturing/Logistics/Procurementteamresponsibleforensuringefficient supplychainsolutionsforthebusinessgroups. The reorganization was expected to speed up the production of networked products and services. Analysts were of the view that it would help different divisions in Sony like the PC, mobiles and entertainmentdivisions,andalsootherdivisionsliketelevision,digitalimaging,homeaudio,andvideo toworkintandem.Thiswouldaddresstheissueoftheprevailingsilocultureintheorganization. Thereorganizationalsowitnessedareshuffleofsomeofthetopexecutivesinthecompany.Stringer assumed responsibility as the President of Sony, in addition to his existing positions of CEO and Chairman.ChubachiresignedfromhispostasCEOoftheelectronicscomponentsunitandbecamethe ViceChairmanoftheCompany(RefertoExhibitIXforthedetailsoftopexecutivesafterreorganization). Afterthereshuffle,theelectronicsdivisioncameunderStringerspurview.

As a part of its reorganization efforts, in May 2009, Sony came up with extensive measures in its electronics operations. These included consolidation of some of the operations in Japan (Refer to ExhibitXformoreinformationaboutconsolidationofelectronicsoperations). THEAFTERMATH In February 2009, Stringer became Head of Sonys electronics business and remained the companys President. This brought in a new control structure at Sony, which was expected to be operationally convenientandtounitethedifferentsilosthatexistedintheorganization.WhilerestructuringSony,a lotofyoungbloodhadbeeninfusedintothetopmanagementofthecompany.Thiswasalsoviewedas a move to break the Japanese tradition of seniority in favour of performance. On the new reorganization,Stringersaid,ThisreorganizationisdesignedtotransformSonyintoamoreinnovative integratedandagileglobalcompanywithitsnextgenerationofleadershipfirmlyinplace. Through its new restructuring efforts, Sony planned to gain a substantial position in the networked electronicsmarket,andanewgroupNetworkedProductsandServicesGroupwascreatedespecially for that purpose, concentrating on products like the PlayStation and the Vaio personal computers. Analystswereoftheviewthatthenetworkedproductsandservicesgrouphadatoughtaskaheadit hadtocreatedigitalservicesthatwouldtieallSonysproductstogether.Someindustryexpertswereof theviewthatthereorganizationwouldresultinsustainedprofitabilityandacohesivecorporateculture. Itwasalsoexpectedtoresultinnimblenessintheorganizationandinmakingitreadytofacethenew agerivals.Thecreationofcrosscompanyunitsintheareasoflogisticsandsoftwarewasalsoseenby analysts as an effort to bring down the silos in the company. Stringer, however, tried to bring in coordination and was largely successful in bundling the Bluray version of Spiderman III with Sonys PlayStation3. GeorgeBailey,anexecutivefromIBM,wasropedinasthefirstChiefTransformationOfficerofSonyin May 2009. He assumed the post of Senior Vice President, Corporate Executive, and Chief Transformation Officer, effective from June 01, 2009. His main responsibility was to accelerate the transformationofSonyintoaleadingproviderofnetworkedproducts,contentandservices.Baileywas expected to work closely with different crossfunctional teams, business groups and the top managementofSony. Sony also planned to reduce the number of suppliers from 2,500 to around 1,200 after taking into consideration those who provided the best deals. The reorganization efforts received a positive response from analysts and industry experts. Nobuo Kurahashi (Kurahashi) of Mizuho Investors SecuritiesinTokyo,said.,ItsapositivesignofhowSonyisfranticallymovingforwardtowardchange, includingstructuralchangesespeciallyinitsTVandotherelectronicsbusinesses. However, some analysts wondered why Sony had promoted Kaz Hirai, CEO of Sony Computer Entertainment, whose division was responsible for considerable losses. Some analysts did not see anythingpositiveinStringerassumingadditionalresponsibilityandwonderedhowitwouldbenefitthe company. Kurahashi said, Its uncertain if Stringer can now do what he hasnt been able to do as a CEO. StringerinseveralinstancesmentionedthatthesiloculturewasSonysmainweakness.Manyanalysts saw the reorganization as Stringers efforts to break down these silos. Stringer said, Have I broken

downallthesilowalls?No.Aretheyverystrongandverythick?Yes.Butwevebrokendownalotof them.Ourgoalistocontinuetodothat. InMay2009,Sonyannounceditsfirstannuallossin14years.Itreportedalossof98.9billion.Annual salesfellby12.9%ascomparedtothepreviousyear.Itannouncedthatfortheyear200910,theloss couldbehigherat120billion.Thecompanyattributedthefalltothesluggishdemandfortelevisions andcamerasinthewakeoftherecession. LOOKINGAHEAD AsofJune2009,theproposedreorganizationwasprogressingwellandStringerreaffirmedhisintention ofmakingthecompanyspresencefeltinthenetworkelectronicsmarket.Accordingtohim,Inthe20th century,thiscompanycreatedgreatchampionproducts.Inthe21stcentury,othercompaniestookour hardwareliketheWalkmanandaddednetworkcapabilityandturneditintotheiPod.Wearenotgoing tobebeatenagaininthenetworkage.Sonyplannedtomake90%ofitselectronicproductsnetwork enabledby2011 Though American consumers were increasingly opting for widescreen, flat panel televisions, industry expertsfeltthattheSonymightfinditdifficulttosellitstelevisionstothemassimilarKoreanproducts werecheaper.ThefluctuatingYencouldalsoaddtoitsdifficultiesasitwasmakingJapaneseproducts moreexpensive,theypointedout. TheprofitmarginsforSonysdigitalcamerasandcamcorderswerealsogoingdown.Sonyannounced that the sales of its digital cameras could fall to 20 million units during the year ending March 2010, from22millionin2009.ThedemandfortheSonyHandycamwasalsoexpectedtofallfurther. Sony had several pathbreaking products in the pipeline, with the company spending around US$ 5 billion on R&D every year. Some of the products were panoramicimage cameras, organic LCD televisions, the new line of ecoBravia televisions, webbie cameras, and highend digital projection systems.Strignerbelievedthatthenewproductsshouldbewithinthereachofconsumers.Hesaid,I needafewmorebreakthroughsincost.SonymakestheworldsthinnestTVandtheonewiththebest picture, but if its $1,000 more than people are going to spend in a recession, I have no advantage. Peopleaccuseusofnothavingtheinnovation.Thatsnonsensebutunlessyougetthecostdown,these thingsnevermakeit. Sony aimed at connecting all its devices to one another and to the proposed Sony network, through which digital content like movies, games, and TV shows could be downloaded. The content could be downloadedusingPlayStation3,whichwouldactasaservertothehomecomputers.Thenewrangeof Bravia televisions allowed the users to connect to the Internet and stream movies. Sonys movie Hancock was released on Internetready televisions, before it was released on the DVDs. Thus, Sony plannedtohaveacontinuousstreamofrevenuebynetworkingallthedevices.AccordingtoStringer, Thebattleformeisthenetworkingofthesedevices.Ihavetosucceedatthat. Industry experts opined that the next revolution in the realm of electronics would be entered around television.Severalcompanieswereintheprocessofbringingoutwebbasedcontentontotelevisions. Sony already had a considerable presence in the television market and could take advantage of this emerging trend by bringing out products that helped in downloading content from the internet on to thetelevision,theysaid.Sonyplannedtolaunchanewservicethatwouldhelpusersputimagesfrom

camera on television, display and edit video sharing, storage, etc. Stringer also indicated that the companyplannedtomoredeeplyintegrateitstelevisionandcomputerentertainmentproducts.First, we will accelerate the transition of our televisions from being passive displays offering linear entertainment chosen by conventional gatekeepers to becoming network entertainment centers providing rich content alternatives organized by consumers [based] and called directly from the broadestandmostopennetworkintheworld,theInternet. AnalystsbelievedthatSonyneededtoinvestincuttingedgetechnologiesinvideogamesandtelevision, asthesebusinessesaccountedforaquarterofitsrevenues.However,theeconomicdownturnandstiff price competition made success even harder to attain. According to Yasuo Nakane of Deutsche Securities,Butitshardtoimaginethattranslatingintoimprovedearningssoon.Thekeyquestionis whethermanufacturing,design,anddevelopment,procurementandmarketing.Canallbeimproved withinashorttimeframe. Industry analysts opined that while Sony had announced several restructuring exercises in the recent past, none of them had been able to deliver sustainable positive results. They felt that while the reorganization plan of 2009 sounded promising, it was effective execution that would be the key. AccordingtoMikeMcGuire,analystatGartner,Theexecutionisgoingtohavetobeprettypowerful. Sony is still a fairly powerful brand, but its not like everybody can forget the past. Theyve got to overcome that by performing in the market, Apples advantage is that it created a seamless user experience.ThatsalsowithinSonysgrasp.Sonyhastheassetstodothat.Thesoftwareistheopen question.

Exhibit1A SonyFiveYearSummaryofSelectedFinancialData (inMillion) FortheYearEndedMarch31 SalesandOperatingRevenue Equityinnetincome(loss)of affiliatedcompanies OperatingIncome(loss) Income(loss)beforeincometaxes Incometaxes NetIncome(loss) Source:SonyAnnualReport,2008. Exhibit1B SonyOperatingIncome/LossbyBusinessSegment (inMillion) FortheYearEndedMarch31 Electronics Games Pictures FinancialServices Allother Total CorporateandElimination ConsolidationTotal Source:SonyAnnualReport,2008. 2007 251,256 (232,325) 26,705 84,142 32,808 162,586 (12,182) 150,404 2008 441,787 (124,526) 58,524 22,633 60,800 459,218 16,081 475,299 2009 (168,084) (54,476) 29,916 (31,157) 30,367 (197,434) (30,349) (227,783) 2005 2006 2007 2008 2009

7,191,325 7,510,597 29,039 174,667 186,246 16,044 163,838 13,176 239,592 299,506 176,515 123,616

8,295,695 8,871,414 7,729,993 78,654 150,404 180,691 53,888 126,328 100,817 (25,109)

475,229 (227,783) 567,134 (174,955) 203,478 369,435 (72,741) (98,938)

ExhibitII SonyOrganizationalRestructuring(2005) RestructuringElectronics TheelectronicsbusinesswasbroughtunderthepurviewofElectronicsCEO,RyojiChubachi.Underthe electronicsbusinesswerethesemiconductorbusinessunit,thecorecomponentbusinessunit,theB&P businessgroup,thedigitalimagingbusinessgroup,theVAIObusinessdivision,thevideobusinessgroup, theTVbusinessgroup,andtheconnectcompany. The electronics division had a product strategy committee to look at things from the customers viewpoint.Theothercommitteeswerethesales&strategycommittee. The new structure was expected to coordinate various activities marketing strategy committee, production strategy committee, procurement strategy committee, and technology in the electronics divisionandbreakdownthesilosstructure.Theotherbenefitsofthenewstructurelayinprioritizing R&D,maximumutilizationofresources,andeliminationofredundancies. ImprovingProfitStructure Sonyplannedtoachievecostreductionsbyreducingbusinesscategoriesandproductmodels.Another step to reduce costs was creating affective administrative structures by removing redundancies and overlap in business processes. The number of product models was to be reduced by 20% and the numberofmanufacturingsitesfrom65to54. FocusingResourcesonHighGrowthBusinesses Sony started focusing on high growth businesses such as HD Products, and mobile products and semiconductor/keycomponentdevices,whichwerebuildaroundcustomerdriventechnologies.The company was a pioneer in HD products with a wide range of products in consumer hardware and broadcastingbusinesses. Another growth are that Sony was exploring was networkenabled products and applications. In key components,innovativetechnologiesforsystemLSIs,nextgenerationdisplays,andBluraydiscrelated products were being developed. In order to maintain user interface, the software development businesswasbeingstrengthenedbyestablishingaTechnologyDevelopmentGroup.Bytheendoffiscal 200506,SonyaimedatestablishingsoftwaredevelopmentfacilitiesinChinaandtheUS. GroupStrategy Sonyaimedatregainingitsleadershippositioninthemobileaudiodevicesmarketandalsotoestablish itself in the portable video market. For the mobile entertainment group, Sonys goal was to enable consumerstoenjoyentertainmentcontent. Inthegamesbusiness,SonyplannedtointroducePlayStation3andpositionitastheultimateportable entertainment player. Through this produce, Sony aimed to increase market share in the computer entertainmentmarket.Sonyhadbeguntoincreasinglyoptforinternallysourcedgamessoftware.The company also aimed at achieving increased collaboration among different sectors like games, entertainment,andsoftware.

SonyEricssonMobileCommunications SemiconductorBusinessUnit CoreComponentBusinessUnit B&PBusinessGroup AudioBusinessGroup DigitalimagingBusinessGroup VAIOBusinessGroup VideoBusinessGroup TVBusinessGroup ConnectCompany

Source:www.sony.net ProductStrategyCommittee TechnologyStrategyCommittee ProductionStrategyCommittee ProcurementStrategyCommittee SalesStrategyCommittee

ExhibitIII SonysOrganizationalChart(AsofOctober2005) ElectronicsBusiness

Headquarters/CorporateR&D

GameBusinessGroup EntertainmentBusinessGroup PersonalSolutionsBusinessGroup SonyFinancialHoldingsGroup

ExhibitIV SonysOrganizationalChart(AsofApril2007)

ElectronicsBusiness
Semiconductor&ComponentGroup Semiconductor&ComponentGroup ConsumerProductsGroup Headquarters/CorporateR&D Source:www.sony.net ExhibitV SonyOperatingRevenuebyGeographicRegion (inMillion) Applications&DevicesMarketingGroup PhotonicDevice&ModuleBusinessGroup ChemicalDeviceBusinessGroup DigitalimagingBusinessGroup MobileDisplayBusinessGroup B2BSolutionsBusiness GeographicSegment Japan USA Europe Other Total Source:SonyAnnualReport,2009 YearendedMarch31 2007 2,127,841 2,232,453 2,037,658 1,897,743 8,295,695 2008 2,056,374 2,221,862 2,328,233 2,264,945 8,871,414 2009 1,873,219 1,827,812 1,987,692 2,041,270 7,729,993 SonyEricssonMobileCommunications AudioBusinessGroup EnergyBusinessGroup VideoBusinessGroup VAIOBusinessGroup TV Business Group GameBusinessGroup EntertainmentBusinessGroup SonyFinancialHoldingsGroup

SemiconductorBusinessUnit

ExhibitVI SonySalesandOperatingRevenuebyBusinessSegment (inMillion) FortheyearendedMarch31 Electronics Customers Intersegment Total Games Customers Intersegment Total Pictures Customers Intersegment Total FinancialServices Customers Intersegment Total Allother Customers Intersegment Total Elimination Total Source:SonyAnnualReport,2009 287,599 67,525 355,124 (764,197) 8,295,695 624,282 25,059 649,341 966,260 0 966,260 974,218 42,571 1,016,789 2007 5,443,336 629,042 6,072,378 2008 5,931,708 98,2102 6,913,810 1,219,004 65,239 1,284,243 855,482 2452 857,934 553,216 27,905 581,121 312,004 70,194 382,198 (847,892) 8,871,414 471,398 68,205 539,603 (606,430) 7,729,993 523,307 14,899 538,206 717,513 0 717,513 984,855 68,291 1,053,146 2009 503,220 455,035 958,255

ExhibitVII InitiativetoImproveElectronicsBusiness ReviewInvestmentPlan:Sonyplannedtoreduceorpostponeplannedinvestmentinsemiconductors. It planned to outsource the manufacture of the CMOs sensors used in mobile phones. The company alsodecidedtopostponeitsplanstoexpandproductioninNitra,Slovakia,whereSonysLCDtelevisions fortheEuropeanmarketwereassembled.Theinvestmentsintheelectronicsbusinesswereestimated tobereducedby30%byMarch2010. Realignment of Manufacturing Sites: By the end of 2008, Sony had stopped production at two non Japanesemanufacturingsites.Italsoplannedtoshiftsomeofthemanufacturingoperatingtolowcost countries and utilize the services of its OEM and ODM partners. The manufacturing sites would be reducedby10%byMarch2010. Work force Reallocation / Headcount Reduction: Sony planned to reallocated and optimize its workforce by programs like work reassignments and outplacements. Out of the total workforce of 160,000,asofSeptember2008,theheadcountwastobereducedby8,000.Someoftheseasonaland temporaryemployeeswerealsotoberemoved. Source:www.japancorp.net

ExhibitVIII SonyOrganizationalChart(asofApril01,2009)

ConsumerProducts&DevicesGroup Devices Consumer Products

NetworkedProducts&Services Group

FinancialServices

MobilePhone

Entertainment

DigitalImaging

HomeAudio&Video

TV

Disc

NetworkServices

Vaio

Game

ElectronicDevices

B2BSolutions

Chemical &Energy

NewBusinessIncubation

PersonalDevices

Source:www.sony.net

Semiconductor

Manufacturing/Logistics/Procurement/CS CorporateR&D/CommonSoftwarePlatform Headquarters

ExhibitIX SonyTopExecutivesafterReorganization Name HowardStringer BeforeReorganization Member of the Board, Representative CorporateExecutiveOfficer, Chairman&CEO Member of the Board, Representative CorporateExecutiveOfficer, PresidentandElectronicsCEO Member of the Board, Representative CorporateExecutiveOfficer, Executive Deputy President, Officer in chargeofConsumerProductsGroup Corporate Executive, EVP, President of TVBusinessGroup AfterReorganization MemberoftheBoard,Representative CorporateExecutiveOfficer, Chairman,PresidentandCEO MemberoftheBoard,Representative CorporateExecutiveOfficer, ViceChairman CorporateExecutive,Executive DeputyPresident

RyojiChubachi

KatsumiIhara

HiroshiYoshioka

YutakaNakagawa

KazuoHirai

KunimasaSuzuki

YoshihisaIshida KeiichiroShimada

Corporate Executive Officer, Executive Deputy President, Officer in charge of Semiconductor and Component Groups, Production Strategy, ProcurementandSupplyChain President and Group CEO, Sony President and Group CEO, Sony ComputerEntertainmentInc. ComputerEntertainmentInc.,Corporate Executive Officer, EVP, Officer in charge ofNetworkedProducts&ServiceGroup EVP,SonyElectronicsInc.(USA) Corporate Executive, SVP, Deputy President of Networked Products & Service Group, President of VAIO BusinessGroup CorporateExecutive,SVP,Presidentof Corporate Executive, SVP, President of VAIOBusinessGroup TVBusinessGroup Corporate Executive, SVP, President of Corporate Executive, SVP, In charge of Technology Development Group, Head R&D,TechnologyandCommonSoftware ofConsumerProductsGroupUICenter Platform

Corporate Executive Officer, Executive Deputy President, Officer in charge of Consumer Products Group, SemiconductorandComponentGroups Corporate Executive Officer, Executive Deputy President, Officer in charge of Manufacturing, Logistics and Procurement

Adaptedfromwww.sony.net

ExhibitX SonyConsolidationofElectronicsOperations Digitalimagingproducts(digitalstillcameras,videocameras,andcameramodules)whichwere carried out at Sony EMCS Corp, Kohda TEC, Omigawa TEC and Minokamo TEC would be consolidatedunderSonyEMCSCorp,TokaiTECtobeestablishedinJuly2009 Development of manufacturing technologies and support functions for optical pickups, for factories outside Japan were conducted at Sony EMCS Corp Hamamatsu TEC. Manufacturing technologiesandsupportfunctionsrelatingtoopticalpickuplensesforfactoriesoutsideJapan werecarriedoutatSonyEMCSOmigawaTEC.Thesetwofunctionsweretobetransferredto Sony EMCS Corp. Kisarazu TEC, where optical disc related products were manufactured. By carrying out functions related to optical disc technology at one location, Sony planned to achievehigherefficiency,eliminateduplication,andachievesynergies. The support functions for small and midsized LCD panel operations for operations outside Japan were conducted by Sony EMCS Corp Hamamatsu TEC. These were to be transferred to SonyMobileDisplayCorpssiteatHigashiura,resultinginconsolidationofallSonysLCDpanel operations(smallandmidsze)

Mobile phone customer service operations of Sony Ericcson Mobile Communications, at Sony EMCS Corp,SenmayaTEC,andSonyEMCSCorp.Mizunami,weretobetransferredtoSonyEMCSCorp.,Tokai TEC. By doing this, Sony planned to achieve integrated operational structure for mobile phones from manufacturing to customer service. The electronics devices production at Senmaya TEC was to be transferredtootherlocationsincludingKisarazuTEC.ProductionatSonyEMCSCorporationOmigawa, HamamatsuandSenmayaTECsweretostopbyDecember2009 Adaptedfromwww.japancorp.net

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