Sony Corporation and It's Corporate Strategy - Term Paper Example

Sony Corporation Financial review for the Year 2004-2005(As until Nov'05) Introduction: Sony Corporation is a tremendous Japanese success story that was founded on May 7, 1946 by Akio Morita and Masura Ibuka. Sony Corporation continues to be one of the world's leading consumer electronics firm with additional interests in the entertainment industry through subsidiaries dealing with recorded music, motion pictures, TV programming, DVDs and videos. The company, headquartered in Tokyo, Japan, has operations based out of North America, South America, Europe, Asia, Africa and Australia and employs about 151,400 people.(As on March 31st 2005-Sony Corp. Info) Sony Corporation (Sony) is engaged in business through its six major operating segments: Electronics, Games, Music, Pictures, Financial Services and Other. In the Electronics segment, Sony develops, designs, manufactures electronic equipment. Its subsidiary, Sony Computer Entertainment Inc., the Company develops, produces, manufactures and markets games like PlayStation, PS one, PlayStation 2, among others. In the Music segment, Sony produces recorded music and music videos, and also distributes compact discs (CDs), digital versatile discs (DVDs) and universal media discs (UMDs). Sony's Pictures segment includes production, acquisition and distribution of motion pictures, television broadcasting and online distribution. Sony's financial services include savings and loans. The Other segment consists of an advertising agency business and an Internet-related service business. Focusing on the recent financial year, Sony entered a new stage of development, one that seeks to target opportunities in the upcoming era of broadband networks. A new top-management team made up of CEO Sir Howard Stringer, Director Dr. Ryoji Chubachi, and CFO Mr. Katsumi Ihara was formed to take the lead in this important effort. This is a pivotal year for Sony Corporation, and this new structure will enable the company to streamline its operation, and provide a more cohesive focus for operating its businesses around the world in a proactive and strategic manner. This Report is an attempt to analyze and review, in depth the financial status, position and a comprehensive reporting of the same to the Investors of Sony Corporation. Financial & Market Standpoint(As of Nov'2005): The global economy was generally strong during the first half of the fiscal year. However, the U.S. economy began to slow in the second half of the year due to a rapid slowdown in growth of consumer spending and other economic factors. As the fiscal year drew to a close, economies in Japan, Asia, Europe, and elsewhere showed increasing signs of weakness. Even amid these worsening market conditions, Sony was able to achieve a 9% increase in consolidated net sales for the year (Hem Scott, Inc. ). On a local currency basis, sales rose 12%(Hem Scott, Inc. ). A large increase in sales of electronics products was the primary reason. Regarding earnings, the Electronics business performed very well, primarily due to the performance of digital products and semiconductors. The Game business posted a loss, which was chiefly a reflection of start-up expenses for the PlayStation 2 format. As a result, consolidated operating income increased only 1% compared with the previous year. However, excluding the impact of the stronger yen, on a local currency basis consolidated operating income increased 47%. Share of sales and operating revenue by business segment * Year ended March 31, 2005 All eyes are on Sony or, more likely, on its high profit PlayStation home video game systems. PlayStation 2 dominates the "game console market" with about 70% of global sales (Nintendo's GameCube and Microsoft's Xbox control about 15% each). Sony, one of the world's top consumer electronics firms, also makes a host of other products, including PCs, digital cameras, Walkman stereos, and semiconductors; these products account for more than 60% of the company's sales. Sony's entertainment assets include recorded music and video (Epic and Columbia), motion pictures (Sony Pictures Entertainment, Sony Pictures Classics), DVDs (Sony Pictures Home Entertainment), and TV programming(Columbia Tri-Star) constituting the rest of the revenue sources as reflected in the graph above.(Hoover's Market Data) To have a look at the Overall performance of the Company in terms of Operational Revenue, net Income and net profit as compared to the previous financial years is described below: Year Revenue($mil.) Net Income($mil.) Net profit margin(%) Employees Mar 05 66,912.00 1,531.00 2.3% ---- Mar 04 72,081.00 851.00 1.2% 162,000 Mar 03 63,264.00 978.00 1.5% 161,100 The Annual Financials on a more in depth analysis and comparison with Figures published for Financial year 2004 is shown below (Hem Scott, Inc. ): All amounts in millions Bottom of Form Income Statement Mar05 Mar04 Revenue 35,610.6 39,471.6 Cost of Goods Sold 21,646.2 23,095.0 Gross Profit 13,964.4 16,376.5 Gross Profit Margin 39.2% 41.5% SG&A Expense 10,035.2 12,130.4 Depreciation & Amortization 3,223.5 3,538.6 Operating Income 705.7 707.5 Operating Margin 2.0% 1.8% Non operating Income 342.7 206.4 Non operating Expenses 122.4 146.8 Income Before Taxes 926.0 767.2 Income Taxes 79.8 277.6 Net Income After Taxes 846.2 489.6 Continuing Operations 838.2 477.0 Discontinued Operations 0.0 0.0 Total Operations 838.2 477.0 Total Net Income 814.8 466.0 Net Profit Margin 2.3% 1.2% There is reason enough to smile on the overall performance this financial year when compared to what the company has been experiencing the last couple of years in terms of Net Income and Overall profit margin, already exceeding last years figures with another quarter to go. It needs to be mentioned that On September 2005,Sony had announced organizational restructuring and had adjusted it's forecast to reflect additional restructuring costs. Subsequent to the same Sony realized a higher than anticipated gain from the transfer to the Japanese Govt., of the substitution portion of Sony's employee Pension Fund. Strengths & Areas of Concerns: Though the PlayStation still dominates the game machine scene, sales of other electronics (DVD recorders, TVs, and computers) and music have seen a drop. Weak consumer demand, price wars, and increased competition from Apple Computer's iPod, has clobbered Sony's CD and mini disk Walkman products and Samsung's consumer electronics lines, which have cut into Sony's TV sales (its biggest market). These challenges, along with an increasingly stodgy image that's overshadowing its former reputation as the bleeding edge of consumer electronics manufacturers, as well as charges incurred while streamlining operations in recent years, have significantly hurt Sony's market value. To boost sagging sales, Sony needs to emphasize high definition products for consumers and broadcasters, integrated mobile video, music, and gaming products, and aim at improving product innovation. Sony went through a major management shake up in 2005, bringing Sir Howard Stringer on board as chairman and CEO in June. Stringer, who is the first nonJapanese CEO to head the company. After being on the job just a few weeks, Stringer announced plans to implement a plan known as Project Nippon that aims to shake up the electronics business and foster better communication between the company and it's divisions. Stringer also announced that he plans to implement a concrete research and development scheme with a greater emphasis on consumer demands and reestablish the brand value. Stringer's reorganization plans build off Sony's last restructuring effort (termed "Transformation 60"), which began in 2004 and was to reduce the company's headcount by 20,000, combine operating divisions, and shift component sourcing to low-cost markets such as China. The Stringer's plans call for cutting 10,000 jobs, shuttering 11 manufacturing plants, and reducing the company's electronics product lines by 20%. Additionally, Stringer has abolished Sony's 'Network Companies' structure in favor of five product focused business groups (TV, video, digital imaging, audio, and VAIO) in order to streamline operations from R&D to distribution to marketing. In words of Koichi Hariya, senior analyst at Mizuho Securities "One of Sony's strengths is that it has an operation like the game business where, at the peak, it can sell 20 million units per year," Critical accounting policies: The preparation of the consolidated financial statements is in conformity with U.S.GAAP requirements for management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, Sony evaluates its estimates on historical experience. Sony considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates on the part of management in its application. Sony believes that the following represent the recent critical accounting policies which will impact the company's reporting standards. a) Employers' Disclosures about Pensions and Other Postretirement Benefits: In December 2003, the FASB revised Statement of Financial Accounting Standards ("FAS") No.132. The new FASNo.132 revised employers' disclosures about pension plans and other postretirement benefit plans. While retaining the disclosure requirements, the new FASNo.132 requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. In accordance with the transition provisions of the new FASNo.132, the disclosure provisions have been adopted in the consolidated financial statements by Sony. b)Consolidation of Variable Interest Entities: In January 2003, the FASB issued FIN No.46, "Consolidation of Variable Interest Entities- an Interpretation of ARB No.51". Under FIN No.46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting changes. As a result of adopting FIN No.46, Sony recognized a one-time charge with no tax effect of 2.1billion yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony's assets and liabilities increased by 95.3billion yen and 98.0billion yen, respectively. These increases were treated as non-cash transactions in the consolidated statements of cash flows. In addition, cash and cash equivalents increased by 1.5billion yen. c)Principal Capital Investments: Sony invested 175billion yen in the semiconductor business during the fiscal year ended March31, 2004. 190billion yen was invested in the semiconductor business in the fiscal year ending March31, 2005 (Hoover's Inc.). These were to be disclosed as per the new accounting standard adopted. Market Data & Stock price(As per London Stock Exchange): The Stock price evaluation of Sony Corporation would reflect an era of change and expectations. The Restructuring programme and New management team on board has shown a renewed interest in the investor group and hence a better future overall for the company. As on Nov 29th'05,Sony Corporation stood at a All time high of 4450 after a whole year of up's and down's. Conclusion: The Financial target for the Sony is to achieve consolidated sales of over 8 trillion yen and an operating profit margin of 5% (electronics 4%) by the end of fiscal year 2007. (Sony Group Mid-Term Corporate Strategy FY2005-FY2007---Sep 22nd 2005) though far from realization is but a target to achieve well within timelines. As a result of reducing the global headcount by 10,000(almost achieved) by the end of fiscal year 2007 (headquarters/administrative staff 5000, non-administrative staff 5000; 4000 in Japan, 6000 overseas) It will help streamline the operations and enable further efficient operations. The abolishing of existing company system (known as "Network Companies") and introduction of reorganized operational units called Business Groups, for specific product categories has almost revitalized Sony Corporation. This significant structural change is designed to eliminate the corporate issues that have been preventing from focusing the vast resources on most competitive products and to foster coordinated, efficient and rapid decision making. Resources will further more need to be focused on HD products, mobile products and the semiconductors/key component devices that can continue to differentiate those products from the competition. Over the next financial year, these changes should echo back on a structural financial backing, better operational profit margin and rocketing share prices. The Market as always, is watching. Works Cited UNITED STATES SECURITIES AND EXCHANGE COMMISSION Annual Report Pursuant to SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934 http://www.sec.gov/Archives/edgar/data/313838/000114554904000801/k00683e20vf.htm#130---Critical Sony Corporation (ADR): Company Report http://moneycentral.msn.com/investor/research/profile.aspSymbol=SNE Sony Group Web link FY 2005 Quarter 1,2,3 Earnings http://www.sony.net/SonyInfo/IR/financial/fr/index.html Sony Corporation announces Corporate Strategy 2005 Tokyo, Japan -- (MARKET WIRE) -- 09/22/2005 http://www.marketwire.com/mw/release_html_b1release_id=95960 Atrill P, Eddie McLaney (2004) "Accounting and Finance for Non-specialists", 4th.edition Analyst Recommendations data from Zacks Investment Research. Financial Statement data provided from Hemscott, Inc. . & Hoovers.Inc., Stock Scouter data provided by Gradient Analytics, Inc. Read More