Strategic Management: Sony Restructuring Attempts - Case Study Example

Introduction Sony Corporation, known as the Japanese multinational Communications and Electronics giant has been under enormous restructuring in its operations recently, most perceptibly in the period from 1994 to 2008 (Press Release 1996). During this period, the company experienced five radical restructuring in the organization done to compliment Sony’s Strategy Internationally and to counter the fast technological changes, which occur during the specified period (Sandra 1997). This paper discusses and tries to make an analysis of the changes done to Sony structurally in the years between 1994 and 2008 basing on ‘The Unified Dispersed Management Model (Tomoko 2010).’ The paper also looks into the subsequent implications of the restructuring on Sony as an electronic company. The paper is overly a discussion on the organizational restructuring that the Japanese communication and electronics giant Sony Corporation (Sony) tried between years 1994 and 2008. It looks at Sony's business operations in this period as having been restructured at least five times within the years. The paper provides a description of each of the five restructuring exercises detailed and examines their ideal implications to the company. In general, it also looks into the impact of the respective structural changes on the performance of Sony financially. The objective of the entire change for Sony was enhancing shareholder value via what the company called "Value Creation Management (Press Release 1996)." The “unified dispersed” management model later adopted was geared towards resources within the Group complementing each other (Tomoko 2010). The new Group architecture for Sony had autonomous, self-contained business units and created a headquarters having a strong coordination role (Tom 2009). Commenting on an announcement, Sony President Nobuyuki Idei asserted that, "With the newly developing digital network technology evolution, the three pillars of the Group including entertainment, electronics, and insurance as well as finance had to face rapid changes (Sandra 1997).” He asserted that, over the next years, Sony would invest insistently in R&D, facilities and capital equipment so the company’s electronics business that and has been the core business to evolve to best meet the demands of a network-centric world (Tomoko 2010). He also added that Sony was committed to creating new and advanced lifestyles and in the provision of new forms of enjoyment to individuals in the network-centric society developed in the 21st century (Press Release 1996). Urgency for a the restructuring in 1994 - 2008 The structural change looked into here was announced by Sony early in 1994 and has been persistent over the years until 2008 when it was at its climax (Tom 2009). The reason for the structural change was principally to take the maximum advantage of advancement in the modern Technology that has been rising over the years (Tomoko 2010). The company’s restructuring at first in year 1995 put a significant focus on the Electronics Segment that gave Sony an edge over its rivals and competitors in the field of Electronic products (Sandra 1997). Despite of the established edge, the investors in the company developed concerns on the performance of Sony as an electronic company in a golden age where the Internet started to feature as a new development. In case of any firm’s corporate plans, the success is dependent inherently on the eminence of projections made by own corporate goals (Tom 2009). In case of Sony as an electronic company, the company made marginal profits that were decreasing progressively towards the mid 1990s (Tomoko 2010). Additionally, Sony was banking hugely on one enormous area of business being its PlayStation released in the market for its profits, in spite of the company’s presence in numerous other consumer electronic products for instance audio, visual equipments (Tom 2009). Therefore, it was apparent over the years that there was a need to streamline Sony’s business operations, so that the unhealthy dependence hugely on one particular, area of business for, profits would be reduced and reduce the risk of loosing profits within the market (Tomoko 2010). At the time, one of the major ways of doing this was to go in for a decentralized, diversified corporate-level strategy meaning that the company had to narrow its business areas to fewer particular, areas, which were not equally exclusive (Sandra 1997). On the other hand, this also meant combining the existing areas of business using a technology in that they were no longer equally exclusive (Tom 2009). Justifiably, it was impossible combining all areas of business with the use of this technique, but Sony had to adopt the technique as all of its released products had their main base in either electronics or relatively in the content of electronic products (Press Release 1996). There was also the area of Insurance and Finance which was also amongst the operations by Sony, but the plans for restructuring the same were less because the main concentration was on the electronics as well as content related business areas. Sony had made a choice at the time to reorganize and introduce the Internet as the link between its content-related and electronic-related business (Tomoko 2010). This was due to the fact that the Internet was at a high spirit and booming stage, and all the company’s competitors already had begun to cash on this. Also, numerous of the senior executives in the company’s management felt that Internet was the way to revolutionize the globe, and would be of enormous use to sell all of its electronic products online (Sandra 1997). Therefore, the organizational restructuring as started in the year 1994 and running across 2008 was envisioned (Tom 2009).The Unified Dispersed Management Model as used by Sony being an electronic company in the achievement of its prime corporate goal that was increasing the shareholder value was excellent for Sony and worked out over the years (Press Release 1996). Restructuring Sony’s Electronics Business (1994) Under Ohga's leadership, the company witnessed negligible growth particularly in sales during the period 1990 to 1994 (Tomoko 2010). In this period, operating revenues and Sales improved by only 2% a fact that was of enormous concern during that period. However, the operating income and the net income registered a rapid fall of 67% and 87% respectively (Sandra 1997). Business analysts felt that fall back in the electronics industry together with factors for instance the Japanese economy recession and the yen’s appreciation against the dollar was leading to the deterioration in Sony’s performance (Tom 2009). It was clear that, in the transactions within the electronics business, the revenues acquired from the audio and video equipment businesses were to come down or were remaining stagnant, while the 'Others' group including the television were showing possibilities of improvement (Press Release 1996). The 'Others' group that included the technology-intensive products for instance video games, computer products, telecom equipments and semiconductors, was performing extraordinarily well with the growth rate of nearly 40% (Tomoko 2010). However, it was clear that improvements were needed, and quick restructuring too was necessary at that time (Press Release 1999). The Unified-Dispersed Management Model In late April 1999, Sony made the announcement about the changes it would implement in its organization structure (Press Release 1996). Even with the new framework, Sony aimed at streamlining its operations to better take advantage of and exploit the opportunities that were in the offer by the Internet just like many other companies were doing (Sandra 1997). It was a period where everything was on the Internet and any competing company had to make appropriate changes and go online (Press Release 1999). Sony's main business divisions including Components division, Consumer Electronics division, the Games division and Music division were therefore, re-organized and network to fit the online businesses (Tomoko 2010). This engaged the reduction of at least ten divisional companies for the structure to work into three network companies, the Broadcasting systems, Professional Systems (B&PS) and the Sony Computer Entertainment (SCE). SCE Company took the responsibility of the PlayStation business with B&PS Company supplying audio and video equipments for broadcast, education, business, industrial, production and medical, related markets (Tom 2009). The restructuring had the aim of achieving three main objectives for Sony that included strengthening the business, strengthening the management capabilities and privatizing at least three Sony subsidiaries (Press Release 1999). Strengthening the Business In the restructuring, to strengthen Sony the company implemented many changes in ensuring the reinforcement of its electronics operations (Press Release 1996). Realigning the Operations of the company was the first step (Tomoko 2010). Effective April 1, 1999, the Sony Corporation divisional group, grouped into three main business units, with computer entertainment positioned as the fourth pillar of the business (Traian 2008). These included Home Network Company, Sony Computer Entertainment, Inc, Personal IT Network Company and Core Network and Technology Company (Sandra 1997). In enabling each network company to autonomously operate well, indispensable support functions and R&D laboratories were transferred from the company’s corporate headquarters to all units (Tomoko 2010). Authority was also delegated to a Board as well as a Management Committee within the networks of the company, allowing it to operate independently, while it enjoyed the benefits of the company system established then (Traian 2008). In providing a flexible system, to pursue new business opportunities in the global network- centric environment, Sony as network companies started creating venture companies that would utilize technologies as well as the expertise available within the company’s respective units. This was perfect as it increased the electronic sales and generated a boom in the market (Sandra 1997). Sony on the other hand, established Digital Network Solutions under Group Headquarters (Press Release 1996). Digital Network Solutions also strived to create a network business model through charting strategies as well as developing necessary technologies in materializing future opportunities (Press Release 1999). Sony also aimed at creating a network platform to provide customers with digital content for instance music, movies, and financial services a fact that led to considerable improvement in sales of the respective products (Tomoko 2010). At least the company was able to reach its goal in the annual sales of the year. Improving Profitability was also part of Sony’s motive when it started the restructuring process (Press Release 1996). In the improvement, of profitability of the business, Sony continued reducing the number of Sony manufacturing facilities across many regions from the 70 to 55 facilities by then up until the end of March 2003, and this was working out well as per the model established for change (Tom 2009). Sony proactively changed the composition of the Group workforce through a reduction of the headcount by an estimated 10% by the end of March 2003, reallocating and re-training employees from analog directly to digital businesses and to software operations, as well as promoting competent and valuable employees, which also worked out well for the operations of the business (Sandra 1997). Privatizing Sony Group Subsidiaries Sony intended to make Sony Music Entertainment (Japan) Inc., Sony Precision Technology, Inc., and Sony Chemical Corporation unconditionally owned subsidiary companies of Sony Corporation by January 1, 2000 (Press Release 1999). This was part of Sony's effort of creating a Group structure that respected the company’s autonomy, while at the same time promoting coordination within the businesses and their operations (Tom 2009). The company carried out the integration of the companies utilizing the exchange offer proposal that was part of the Commercial Code amendments and other laws that were expected to be deliberated at the session of the Japanese Diet (Parliament) in the year. This was excellent as it expanded profitability with Sony Music Entertainment (Japan), Inc (Tomoko 2010) creating new business opportunities that had the principal focus being on the long-term viability instead of short-term gains (Sandra 1997). Sony Corporation strengthened its ties between its electronics and music units, while respecting the autonomy and independence of Sony Music Entertainment (Japan), Inc (Press Release 1999). Sony Chemical Corporation on the other hand, increased its printed circuit board operations enabling the pursuing of new opportunities as it cooperated with the Sony Group circuit board and mounted the many engineering operations (Tom 2009). Sony Precision Technology, Inc was also improved as the company expanded its line of semiconductor and disc inspection precision measuring devices and equipments by combining its overall precision technologies with the ones of Sony Precision Technology, Inc. because of this, Sony Precision Technology, Inc. was able to grow its production systems and developed the business further (Sandra 1997). The Ten-Company Structure (1996) In January 1996, Sony established a new ten-company structure announcing it to replace the prior working eight company structure (Tomoko 2010). Under the new ten-company structure, the previous Consumer Video and Audio (A&V) company was split relatively into three newly developed companies including the Display Company, the Personal AV Company and the Home AV Company (Sandra 1997). There was a creation of a new company names the Information Technology Company focusing mainly on Sony's business interests ideally in the IT and PC industry (Press Release 1996). The Mobile Electronics Company and the Info Com Products Company were relatively merged in the process creating the Mobile and Personal Communications Company (Tom 2009). The other companies created were the Computer Peripherals and Components Company (formerly the Components Company), the Energy Company and the Recording Media, the Broadcast Products Company, the Sound and Image Communications Company (formerly the Industrial and Business Systems Company) and the Semiconductor Company (Tomoko 2010). This was a classical restructuring using the same model as established by the company and worked out well for the specified period (Tom 2009). The Implications Restructuring Sony could not go without implications on the company whether good or bad. From 1995 to 1999, he company’s electronics business (that the restructuring efforts had focused) grew hugely and fast at a compounded growth rate annually (CAGR) of 8.55% (Press Release 1999). The music business for the company had a CAGR estimated at 10.5% while Sony’s pictures business had a CAGR estimated at 17%. Significant gains were, nevertheless, recorded by the insurance and games business (Press Release 1996). The games business for the company registered a CAGR estimated at 215%, while the insurance business for Sony registered a CAGR estimated at 31% (Tom 2009). In the late 1990s, the company’s financial performance started deteriorating. For the financial years 1998 and 1999, its net income had experienced a drop estimated at 19.4%. During the entire period, Sony was banking solely on its PlayStation game machines (Richard 2004). There were estimates that the PlayStation (Games business) had accounted for an estimated 42% of Sony's operating profits with it being 15% of total sales for the fiscal quarter-ended December 1998 (Tomoko 2010). In the late 1990s, numerous companies globally were attempting to cash specifically on the Internet boom and therefore, leaving Sony without a choice (Press Release 1999). This was a main reason why restructuring was necessary regardless of the situation if the company was to survive. Going online was the ultimate restructuring that saw Sony advance hugely as become amongst the top rated electronic businesses (Press Release 1996). It augmented the profits of the company to over 40% over the years and has been on the frontline of bringing in more innovation for Sony and building its reputation within the electronic industry. Restructuring Cost Sony’s Profit It is worth noting that, despite an increase in revenue for the company, Sony's profit was down precisely in the third quarter. The restructuring costs for the company were prospected as having eaten into its bottom line (Tomoko 2010). The Tokyo-based media and electronics company reported that the revenue for the fiscal quarter 2003 came in at approximately $21.7 billion, a figure up 0.7 percent from a year ago. However, the company’s restructuring costs from operational changes to job cuts hurt its profit that was down roughly 26 percent year over year amounting to $866 million, or estimated 94 cents per share. Restructuring charges were up in the entire period from roughly $130 million to about $501 million (Press Release 1996). The electronics division that has been the largest contributor to Sony’s revenue accounted for the highest of the restructuring charges, and recorded about $433 million. Restructuring affected Shares Sony's attempts to increase profitability through restructuring had several other implications. The falling shares of the company were believed to be resulting from the restructuring announcement, as it did not at first impress investors were skeptical of Sony’s capability of turning around its operations precisely in the period when it was experiencing weak electronics sales (Richard 2004). With Sony announcing that it would cut 16,000 jobs in estimates in its efforts of lowering investment, and pulling out of several businesses, in an attempt of saving the company at least $1.1 billion a year tension grew and it resulted to lack of trust from the investors therefore, affecting the shares a fantastic deal and lowering their value (Press Release 1996). The announcement was like a confirmation to many investors that the company expected the global economics crisis, which was not healthy for the shareholding (Press Release 1996). Despite sustained efforts of demonstrating its capability of staying ahead of the financial problems, Sony shares went down by 3 percent, as analysts voiced monumental concerns that the steps presented by Sony wouldn’t be enough to thwart the effects of the effects of the low economy (Richard 2004). Conclusion Sony Corporation, known as the Japanese multinational Communications and Electronics giant has been under massive restructuring in its operations recently, most perceptibly in the period from 1994 to 2008. During this period, the company experienced five sweeping restructuring in the organization done to compliment Sony’s Strategy Internationally and to counter the fast technological changes, which occur during the specified period. It is worth noting that the restructuring had exceptionally, positive effects for the company including improvement of sales for the electronic products, diversifying the customer reach and winning over the competitive advantage over its customers. However, it is also worth noting that the same had negative effects to the company including affecting the profits of the company though increasing revenue and affecting the shares of the company within that period. Nevertheless, the restructuring is a worth long term strategy for the company and keeps Sony amongst the top rated electronic companies to date. References Press Release 1999, Sony Announces New Group Architecture for Network-Centric Era (March 9, 1999), retrieved on 25 August 2010, from, http://www.sony.net/SonyInfo/News/Press_Archive/199903/99-030/index.html Press Release 1996, Sony Announces a New Corporate Structure: designed to reinforce headquarters, R&D and company functions (January 16, 1996), retrieved on 25 August 2010, from, http://www.sony.net/SonyInfo/News/Press_Archive/199601/96O-004E/index.html Richard, S 2004, restructuring costs hurt Sony profit (January 28, 2004), retrieved on 25 August 2010, from, http://news.cnet.com/Restructuring-costs-hurt-Sony-profit/2100-1047_3-5149500.html Sandra, S 1997, Sony's Leading Man; Nobuyuki Idei's Shrewd Restructuring Has Lifted the Giant Back on Top, the Washington Post (May 29, 1997), retrieved on 25 August 2010, from, http://www.highbeam.com/doc/1P2-727919.html Tomoko, H 2010, Sony benefiting from restructuring, better sales (July 28, 2010), retrieved on 25 August 2010, from, http://finance.yahoo.com/news/Sony-benefiting-from-apf-4026361573.html?x=0&.v=1 Tom, M 2009, Sony announces restructuring, $2.9 billion loss (Jan 2009), retrieved on 25 August 2010, from, http://www.gamespot.com/news/6203468.html Traian, T 2008, Sony Shares Hit by Restructuring Plan Announcement, (Dec 10, 2008) retrieved on 25 August 2010, from, http://news.softpedia.com/news/Sony-Shares-Hit-by-Restructuring-Plan-Announcement-99753.shtml Read More