Sony Corporation Final Report - Research Paper Example

?Sony’s current ratio has dropped in 2009 from 25 to 0.95 but risen to 02 in while quick ratio similarly demonstrates a drop in 2009 from 0.67 to 0.53 and surged to 0.66 in 2010. Both the current ratio and quick ratio are slightly below the electronics industry average of 1.09 and 0.76 respectively for the year 2009 and 2010 (Reuters, 2011) due to unfavourable financial performance of the group. However, the free cash flow was positive and exceeded ?300 billion excluding the Financial Services segment (Annual Report, 2010) indicates no symptoms of cash tied up or liquidity issue. The business restructuring introduced in 2008 has further improved the working capital management efficiency and control of capital expenditures generating a hefty cash flow. The management believe that the strategy implementation would further reduce costs by more than ?300 billion. Nevertheless, Sony should pay particular attention in improving its long term solvency position given that its liquidity ratio is currently below the industry average and it poses a risk that it might not be able to meet its current obligations in an event of emergency even though inventories are not liquidated. (Annual Report, 2009-2010) The debt-to-worth ratio expresses the extent to which the business is relying on debt financing as opposed to shareholders funds (Albrecht, 2004). The increase in debt-to-worth ratio from 2.62 in 2008 to 3.05 and 3.34 in 2009 and 2010 respectively display that Sony is gradually increasing its reliance on debt financing mainly to fund the innovation required for the business growth. The Group’s financial risk position is increased as reflected by the total debt position of the Group. The total debt in 2008 as at balance sheet amounted to ?1,084 million, ?1,111 million in 2009 and ?1,209 million in 2010. (Annual Report, 2009-2010) The debt-to-worth ratios for 2008, 2009 and 2010 which are higher than the industry average further lay emphasis that Sony is currently at a highly leverage position as compared to its competitors. It would pose a threat to its financial safety and flexibility to borrow in the future if the trends continue. Moreover, there might be debt covenants which the Group is obliged to comply and it is critical that the Group monitors them tightly as non-compliance cause breaches in contract and immediate repayment is required. Gross Profit Margin shows a decrease from 2008 (23.1%) to 2009 (19.7%) mainly caused by the challenging economic environment hit by the global financial crisis and the negative impact driven by the appreciation of the yen against U.S dollar and Euro. There is an overall decline of sales in the Electronic, Game, Pictures and Financial Services businesses. Sales in the Electronic business declined 17% from ?6,613 billion to ?5,488 billion as there is a low demand for products such as the Handy cam video cameras, Cyber-shot compact digital cameras and VAIO PCs. Additionally, Sony has exited its business in LCD rear-projection televisions and CRT televisions during the year. The drop in sales in the Game business from ?1,284 billion to ?1,053 billion is mainly contributed by the decrease in revenue in its PS2 business while motion pictures revenue were down by 16.4% from ?858 billion to ?718 billion primarily driven by lower home entertainment demand and fewer films being sold to the home entertainment market. Financial Services revenue dropped 7.4% from ?581 billion to ?538 billion due to profit deterioration at Sony Life caused by the net valuation loss of convertible bonds and increase in impairment loss on equity securities. However, in 2010, the gross profit margin has improved considerably recording a margin of 22.9% subsequent to restructuring measures and cost reduction activities implemented. The restructuring consists of three horizontal platforms – the Global Sales and Marketing Platform, the Manufacturing, Logistics, Procurement and Customer Service Platform and the Research and Development and Common Software Platform aim to achieve cost efficiencies, strong value chain and accelerate decision making. The business in 2010 remained harsh due to the economic storm, stiff competition and continued appreciation of the yen but profit is improved through cost-cutting initiatives for example the annual procurement cost was reduced by 20% following the consolidation of electronics and game component purchases as number of suppliers are substantially reduced. (Annual Report, 2009-2010) As compared to the industry average, it was performing well above the industry average in 2008 and dropped below the industry average in 2009 caused by the financial crisis. However, the restructuring has payoff and Sony is again performing above the industry average in 2010. Sony reported a significant decrease in net profit margin in 2009 with a net loss of ?98,938 million. Despite the decline in sales discussed above, the decrease is mainly due to the losses incurred in sale, disposal or impairment of assets amounting to ?38,308 million as compared to ?37,841 million gain in 2008, signifying a 201% drop. This is attributable to the impairment loss on equity securities at Sony Life. Additionally, interest and dividend received during the year has dropped 35% from ?34,272 million to ?22,317 million due to losses made in investments as Japanese stock market plunged. In 2010, Sony highlighted an improvement in its financial performance although it is still making a net loss of ?40,802 million. This is largely contributed by the Group wide cost reduction and aggressive cost monitoring measures introduced such as reduction in inventory levels, manufacturing sites and streamlining workforces. According to the Edge magazine, Sony has announced 8,000 jobs cut which account for 5% of the total workforce, reduces its manufacturing sites by 10% and investment in electronic businesses by 30% by March 2010 in response to the rapid business environment changes. (Annual Report, 2009-2010) The industry average comparison indicates that Sony is not up to performance as compared to its competitors. Sales to assets ratios have decreased continuously from 0.70 to 0.64 and 0.56 in 2009 and 2010 indicating an inefficient utilization or obsolescence of fixed assets (Annual Report, 2009-2010). This might be due to the excess capacity in production and manufacturing sites faced by Sony due to low market demand in its products. Sony is certainly aware of the adverse condition and has taken initiative to reduce its size and capacity in certain productions and focus on its core competencies. For instance, Barcelona Technology Centre owned by Sony in Spain which manufactures LCD TV for the Europe region was sold to Ficosa International and COSMA EMTE in order to enhance its manufacturing efficiency in 2010 and focus is placed on strengthening its position as the leading company in CMOS and CCD image sensors by doubling its production capacity through the acquisition of fabrication facilities from Toshiba Corporation and expansion of the production lines. The investment is supported by the subsidy of the Ministry of Economy, Trade and Industry in Japan (Sony, 2011). Sales to asset as is below industry average highlights that Sony is below performance and has not optimize the use of its resources and capabilities. Return on assets has decreased substantially from 3.03 to negative 0.81 in 2009 and negative 0.33 in 2010. This demonstrates that the capital investments are currently generating zero return to the Group. Besides reducing its capital expenditure as shown in the balance sheet 2009 from ?335.7 billion to ?332.1 billion and subsequently to ?192.7 billion in 2010 (Annual Report, 2009-2010) consistent with the restructuring program announced by the Group, the management should consider evaluating its current capital expenditure model and investment portfolios and take necessary steps when required. The turbulent macro environment which is uncontrollable by the Group no doubt has also impacted the performance of the business and investments. On the other hand, Sony is significantly below the industry average of 1.09 signifying that management effectiveness and strategy of the Company should be reassessed. Key Issue 1: Quality Control The first key issue faced by Sony is its inefficiency in manufacturing structures and poor quality control leading to adverse product quality. For example, a class action lawsuit was filed against Sony over defective Sony VAIO Notebook computers containing defective trackpads which would result in an opposite outcome of user’s input, randomly opening and closing programs and locking up the computer. Hundreds of complaints were lodged but Sony has refused to be held accountable or offer remedies (Doyle, 2010). This has nevertheless impacted its reputation and product competitiveness significantly and its product reliability has become questionable. Management should look into the case seriously and take strategic decision in overcoming the issue in order not to repeat the same default. Quality control should be in place and improvement on its supply chain management is essential to ensure efficiency and high quality supply of raw materials and components. Key Issue 2: Creativity and Innovation On the other hand, Sony is always under the pressure to launch innovative products and creative industrial design in respond to the fast changing hi-technology environment in the industry. Innovation and creativity is critical for Sony to remain competitive and stimulate sales due to rapid changes in technological advances and fast changing customer demand. Additionally, Sony faced stiff rivalry in the industry from competitors such as Apple, Panasonic and Sanyo Electric in all aspects including pricing, design, innovation and sales and service support. Thus, continuous investment in research and development is crucial to accelerate innovation and ensure that there is continuous launch of fun and innovative products in their electronic, game, motion picture, music, mobile phone and network services businesses. For instance, Sony is countering Apple’s iPad by developing its own handset products inclusive of a tablet-like device such as netbook, e-book reader and gaming functions and a smart phone which can download PlayStation games. Besides that, an online service which includes movies, music, games, television shows and downloadable PlayStation games would be launched to compete with Apple’s iTune store. (Shah, 2010) Key Issue 3: Risk Diversification In addition, Sony is facing issue in diversifying its risk. As evidenced by the ratio analysis presented, it is noted that Sony is heavily impacted by the global economic crisis leading to sharp decline in financial performance. Restructuring and reorganisation highlighting on cost reduction is announced by the Group aim to achieve cost efficiency. The measure has no doubt improved its financial position but the substantial cuts in job brought negative publicity to the Company and demotivated employees due to lack of job security. Hence, the long term strategy should be focused on risk diversification by assessing its current investment portfolios and globalisation strategy. Besides that, Sony should enlarge its customer base by expanding its distribution channel and geographical reach such as selling its products through direct sales force, third-party resellers and online stores. Retail stores should be placed in high-traffic shopping malls and online services should be provided with direct contact with its customers. Key Issue 4: Marketing Strategy Sony is also lack of robust marketing strategy as compared to its top competitor such as Apple. As reported by The Straits Times, hundreds of Apple fans queued to place their reservation when the new iPhone 4 is launched in June 2010 signifying an active engagement by the public on the brand. Thus, Sony’s marketing strategy should not only target at increasing its brand awareness and brand identity but to establish a loyal relationship between the consumers and the brand. Sony should first segment its customer base, target its market explicitly and position itself seeks to retain its current customers and acquire new customers by meeting their specific needs and wants. Decisions should be made in regards to the product features, pricing and promotions to be held. Incremental Strategy 1: Providing training One of the strategies that Sony could implement is providing necessary training to increase the technical skills of its employees in order to increase productivity and efficiency. Cost can be reduced with lower report of wastage and breakdown time when staffs are equipped with the required expertise. Incremental Strategy 2: Learning Organization Learning organization culture is essential to support its product differentiation strategy facilitating continuous learning and allows employees to expand their knowledge and capabilities. Internal training should be provided when needs arise to increase staffs efficiency and productivity. On the other hand, a flat organization structure in a learning organization provides an opportunity for lower level staffs to voice their views and ideas. This is important as lower level staffs such as sales personnel are usually the person who has direct contact with consumers and thus better understanding in consumer’s expectations. Incremental Strategy 3: Disinvestment Sony could consider reducing its sales dependence on the developed countries as they are suffering from aged population with high debt burden. Focus should place on the existing emerging markets as they are often associated with strong economic growth leading to marked rise GDP and disposable income. The market has high purchasing power and allows Sony to tap with the new and large customer base. Incremental Strategy 4: Product Differentiation Sony has to strengthen its business through product differentiation by continuously improving its innovative skills and technological competence through investment in Research and Development and superior technology. This is crucial in order for Sony to be in an edge over its competitors. Sustainable competitive advantages would be achieved by ensuring that the product launched is of value to consumers, rare in the market and difficult to be imitated by competitors. References 1. Albrecht, S. et.al. (2004) Accounting: Concepts and Applications. 9th edition, Thomson south – western. 2. Doyle, W. (2010) Lawsuit Alleges Trackpad Defect Makes Sony Notebooks Unusable. Retrieved from http://www.technologynewswire.com/class-action-lawsuit-seeks-relief-consumers-defective-sony-vaio-notebook-computers/7825. 3. Reuters. (2011) Sony Corp. Retrieved from http://www.reuters.com/finance/stocks/financialHighlights?rpc=66&symbol=6758.T 4. Shah, A. (2010) Sony Developing Devices to Compete with Apple. Retrieved from http://www.pcworld.com/article/190829/sony_developing_devices_to_compete_with_apple.html 5. Sony Annual Report. (2009-2010) Retrieved from http://www.sony.net/SonyInfo/IR/financial/ar/2010/index.html 6. Sony. (2011) News Releases. Retrieved from http://www.sony.net/SonyInfo/News/Press/201012/10-165E/index.html 7. The Edge. (2008) Sony to cut 8,000 jobs. Retrieved from http://www.next-gen.biz/news/sony-cut-8000-jobs APPENDIX   RATIO 2008 2009 2010 Note trends & comments 1) CURRENT: Sony Corp. 1.25 0.95 1.02 Current Assets ? Current Liabilities Industry Benchmark 1.09 2) QUICK RATIO:  Sony Corp. 0.67 0.53 0.66 (Cash + Accts. Receivable) ? Current Liabilities Or ( current asset – inventories ) ? Current Liabilities Industry Benchmark 0.76 3) DEBT-TO-WORTH: Sony Corp. 2.62 3.05 3.34    Total Liabilities ? Net Worth Industry Benchmark 1.20 4) GROSS MARGIN: Sony Corp. 23.1 19.7 22.9    gross profit ? sales Industry Benchmark 21.69 5) NET MARGIN:  Sony Corp. 4.16 -1.28 -0.57    Net Profit Before Tax ? Sales Industry Benchmark 0.73 6) SALES-TO-ASSETS: Sony Corp. 0.70 0.64 0.56 Sales ? Total Assets Industry Benchmark 1.70 7) RETURN ON ASSETS:  Sony Corp. 3.03 -0.81 -0.33 Net Profit Before Tax ? Total Assets Industry Benchmark 1.09 Read More