Sonys Business Prepared by Bonnie Thomas EPGP - PT.

EB-11
Son commonly referred to as Sony, is a Japanese multinational conglomerate corporation headquartered in Knan Minato, Tokyo, Japan. Its diversified business is primarily focused on the electronics, game, entertainment and financial services sectors. The company is one of the leading manufacturers of electronic products for the consumer and professional markets. Sony is ranked 87th on the 2012 list of Fortune Global 500. When you think who will lead us in the coming years, it always comes back to Google, to Apple, to Microsoft. Why not Sony? Ten years ago it would have been inconceivable to think of the world of technology and not consider Sony a key driver. Today many consider it to be what one calls "just another electronics company." What happened? Before putting in my strategic decisions for the restructuring of Sony corp let us take a look at the present scenario of the company and what factors led to it.

1. Financial Analysis.
Sinking Market Cap.

High Debt. Total liabilities are the total amount of all financial obligations (short term and long term) of a company. This includes all creditor claims on company assets. Total Liabilities as of June 2012: (Sonys Total Liabilities : $135.61 Billion)!!! Electronic Arts Total Liabilities: $ 2.27 Billion (for comparative purpose) Googles Total Liabilities : $ 21.33 Billion Apples Total Liabilities : $ 51.15 Billion Microsofts Total Liabilities : $ 54.91 Billion Sony has more total liabilities than Microsoft, Apple, Google, and Electronic Arts combined. Total Assets as of June 2012: Total assets include cash in the bank, property, accounts receivable (money owed to the company), equipment, and inventory. (Sonys Total Assets : $166.22 Billion)!!! Googles Total Assets : $ 86.05 Billion (for comparative purpose) Apples Total Assets : $162.90 Billion Microsofts Total Assets : $121.27 Billion Since total assets include everything that Sony owns (cash, buildings, divisions, intellectual property, etc.)Sony would have to sell over 80 percent of their total assets (Total Assets = Every single thing Sony owns including cash) just to pay off their total liabilities.

The biggest problem here is that Sonys total liabilities show no sign of declining. They keep increasing and eventually, this bubble is going to pop. Its important to understand that not all liabilities are inherently toxic. Companies are expected to have significant liabilities at all times. Its when we compare Sonys liabilities to assets ratio with that of other major corporations that it suddenly becomes clear that something has gone wrong. Back in black. Sony had eked out an annual profit for the first time in five years, thanks to belttightening and the weakening yen. A weak yen helps Japanese exporters by making their goods less expensive overseas and by inflating profit when foreign currency is brought home and converted to more yen. The dollar, for example, buys 20% more yen than it did months ago. It had booked a net profit of 43 billion yen, or $435 million, in the financial year that ended March 31. That compares with a loss of 456.7 yen billion ($4.6 billion) a year earlier. Sales grew 4.7 percent to 6.8 trillion yen ($68.4 billion). (But is this actual profits earned out of healthy operations???) Asset / Stake Sales. Sony sold its U.S. headquarters building on New York's Madison Avenue in January 2013, to investors for $1.1 billion, according to Bloomberg. The sale is expected to generate net cash of around $770 million for Sony, the firm will also record a windfall profit in its accounts, as the building is being sold at a gain of 685m, compared with the price that Sony originally paid for it in 2002, with which Sony is working to cut losses across the board. The company will continue occupying the 37-story building at 550 Madison Avenue for up to three years, leasing from new owners the Chetrit Group. Sony hopes to complete the sale in March perhaps not coincidentally the end of its fiscal year, by which it has predicted a return to profit. The company is said to be currently re-evaluating its predictions based on the sale, however, so we may well see more positive results for the year than previously expected. Following Nokia's similar sale of its Espoo headquarters, it seems cash-strapped companies have hit on a new way to raise funds. (Is it the right thing to do? Showing Profits in P&L by disposing its assets.) Sony sold its entire stake in social-game website operator DeNA Co., the electronics makers fourth major asset sale in the financial year 2012 13, as it tries to avoid a fifth straight annual loss. The worlds third-largest TV maker expects to book a 40.9 billion-yen ($438 million) gain this quarter from the sale of 17.7 million DeNA shares to Nomura Holdings Inc. Sony also plans to sell-off of its chemicals division, and cutting 10,000 jobs. On June 27th, 2012, Sony held an annual meeting with over 9,303 shareholders in Tokyo, Japan. After years of multiple disappointing quarters, some of Sonys shareholders began to release their anger on Howard Stringer the then CEO. On April 15th, 2012, investingdecoded.com wrote, When subtracting deposits in its financial services arm, Sony still has 87 cents in liabilities for every dollar in assets. This rising debt balance has lead to increases in the firms interest expense. Sony is on the cusp of being deemed non-investment grade by Standard and Poors, which rates the firms credit as BBB+. Sony burned through 12.8% of its cash in the 1st 3 quarters of FY11.

On August 6th, 2012, Moodys Investors Services placed Sony Corp. under review for a possible second downgrade for this year. At the current moment, Sonys credit rating is three levels away from being declared junk. Moodys is unsure whether Sonys restructuring will even help. Moodys commented on Sonys restructuring process by saying, Sony has not been able to deal with these issues effectively. Moodys added, concern that weak consumer sentiment, especially in Europe and China, and a strong yen versus the euro may hinder the timely recovery of Sonys earnings and leverage. On June 2009, Sony only had 40.6% debt and 59.4% equity. By June 2012 (3 years Later) Sonys debt is now 50.1% of their capital structure, and their equity shrank to 49.9%. In three years, Sony went from a company that used to be mostly equity, to a company that is now 50/50 on debt and equity.

Diminishing ROA & ROE ROE: Its a basic test of how effectively a companys management uses investors money ROE shows whether management is growing the companys value at an acceptable rate. ROA: Return on Assets reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture. The chart below uses data from the year 2002 all the way through June 30th, 2012.Youll notice that the red line (ROE) is rapidly sinking, the orange line (ROA) is slowly declining since 2009, and the blue line (total liabilities) is skyrocketing out of control. When you look at all three of these things on the chart, it makes Sonys financial situation look worrisome.

2. Sonys Revenue Structure.

FISCAL YEAR ENDED MARCH 31
YEN IN MILLIONS

Companies
Imaging Products & Solutions Game Mobile Products & Communications Home Entertainment & Sound Devices Pictures Music Financial Services All Other

2011 52,439 48,494 5,321 -73,205** 34,893 34,893 38,927 118,818 -13,838

2012 18,592 29,302 7,246 -203,211** -22,126 -22,126 36,887 131,421 -54,082

2013 1,436 1,735 -97,170 -84,315** 43,895 43,895 37,218 145,807 91,003

0000 in red indicates loss. **The Operating losses on Home Entertainment & Sound devices does not include restructuring charges.

3. Strategic Direction 1. Financial Restructuring:

Sony needs to immediately restructure their finance. With huge debt the company will not sustain longer. Interest costs are dragging bottom lines still further. Although not a preferred option, Sony needs to cut back on their work force urgently. Sony has currently decided to cut almost 10,000 jobs from their various factories. Existing loans should be converted into low cost interest loans. Sony can even convert some of their debt into equity as well. Cost cutting is something which Sony has not looked into for several years. This has been mentioned by many expert financial analysts and fund managers. Sony has the highest cost of manufacturing when compared with their peers like Samsung or LG. Sony should shift their key manufacturing bases to low cost manufacturing sites like India or China to cut costs. Japan is and will always be expensive for manufacturing. This has been done by all reputed brands extensively, but Sony has been slow in this strategy. To cut costs, Sony should analyze which products arent adding much value, they should then decide either to drop those products, or figure out ways to reduce costs through collaboration. They should also transform their business portfolio to cut costs and make profits.

Hirai the current CEO of Sony announced a plan to cut 10,000 jobs at Sony, reduce the number of TV models, and exit out of PC-use optical drives. Sony announced cutting 15 percent of the mobile phone workforce. Some of Sonys asset managers think Sonys strategy of cutting costs isnt enough to make the company profitable. Sony should sell some of its fixed assets to raise money. Sony is currently selling two of its offices, one in Tokyo and other in New York for huge profits. This money should be used partly for clearing debts and also to restructure their product portfolio and innovating manufacturing process to reduce costs. Sonys cash cows Sony Life Insurance, Sony Assurance, Sony Bank, Sony Bank Securities and Sony Life Insurance (Philippines) which is the only segment that is showing increasing revenue year after year for the past three years. Sonys major profit comes from its Life Insurance Business. But recently there were expert opinion on Sonys management not giving adequate attention to their financial arm and instead trying to put in all their efforts in their ailing electronics division to turn it around. Although Sony is known for their electronic products, their financial arm is the bread & butter at the moment. They should give their undivided attention to this sector as well. Competition from Dai Ichi life & Nippon life insurance is also hotting up. Sony Life currently having operations only in Japan should look at spreading their business to other continents as well to increase volumes and profitability. They should come out with tailor made policies catering to specific customers needs. They should also (if funds permit) look at launching their products in new markets outside Japan (something which should have been done long back when they were financially sound). Sony should also think of isolating their financial arm from their other business. It should be made into a separate entity altogether with a capable management. Since Sony lacks the financial discipline (looking into the history of financial management at Sony) required to run the financial business it would be safe to handle it separately. It will also alleviate the fears if any, of investors in its financial business due to the poor performance of its electronics division. It will also reduce the cross subsidizing of funds among companies in the long run.

2. Reducing product Line & Restructuring product portfolio.

Sony has an extensive range of product line. For Example: 76 models of headphones. The value on sales of these products is very low. With increasing manufacturing costs and logistics, they should look into their sales data and cut back or discontinue on their unprofitable or low sales volume products.

Car & Marine Audio consists of 62 models. All car manufacturers today provide Original equipment audio systems along with the car. Customers do not intend to replace the car audio which are provided by the auto companies. Moreover auto companies void warranty if the standard audio players are replaced with aftermarket ones. In this case replacement market for car audio players is very minimal. Sony should think of associating with car manufacturers to provide their audio systems as OE equipments. This will create volumes for the company. But at the same time cutting costs will have to be looked into, as auto companies look for the cheapest pricing. Home audio components have 54 models. They comprise of mostly component and home theatre systems. Sales revenue from this segment has been falling steadily. By looking at the product line, Sony mainly caters to the low end audio buffs. But component systems are not known for their sound quality. Sony should introduce a mid to high end product in a different product line or brand with superior audio and technology. Companies like BOSE, DENON, MARANTZ etc cater these markets. They get a premium for these products and have a quality branding to them. Sony audio products are known for their cheaper pricing hence people who value quality, stretch their budget and go for the reputed brands. Also they have competition from their Korean counterparts in the pricing front. Hence they are losing out in the lower priced as well as higher priced products. Sony's TV division has been making a loss for the past nine years, hurt by the likes of Samsung which has been steadily increasing its global market share. This has been a major impact on Sonys bottom line. The following excerpt has been taken from a famous tech review magazine Sony's products are good but they just keep redesigning and developing rather too many products too quickly. Not everyone can afford to change their tech every year which you would have to do to keep up. 3D is really not worth the outlay so they must have gotten their fingers burned over that one. For the general public cheaper TVs are just as good as more expensive ones and there is a lot of competition out there. You have to be very fussy to prefer one TV over another. My preference is for connectivity - lots of HDMI connections and a simple interface on the remote. They just keep redesigning and developing rather too many products too quickly. The main problem in Sony. They are always in a race to create the first innovative product that no one else has created. They develop, launch and create a fuss about it and leave it to die. They put in little effort to upgrade or market it successfully. Best example is Apple they have very limited product line, Ipod, Ipad, Iphone, Macbook air, Macbook Pro, Mac Desktop. But the products are so innovative and user friendly it has taken the market by storm. They also constantly upgrade their products from time to time. Compare that to Sonys product line comprising of 100s of models.

The TV business, the worlds third-largest, was unprofitable for a ninth straight year with a loss of 69.6 billion yen, excluding charges, amid sluggish demand and competition from Samsung and LG Electronics Inc, Sonys share of revenue in the market for flat-panel TVs fell to 7.8 percent compared with 27.7 percent for Samsung, according to Santa Clara, California-based Display Search. The main reason being the high cost structure and lower price offerings from its competitors. They should bring in lower priced TVs which can be catered to the mass market. Sony said it is beefing up its TV lineup, including models with 4K liquid crystal displays, which deliver even better image quality than current LCD TVs. This is again a wrong move by the company. The 4K TVs are very expensive there will be very few takers. People used to pay additional to get a Sony Trinitron, But the industry has trained the consumer that any time there is a new technology, if they wait six months the price will come down. The same thing will happen to the 4K. And Sony will be forced to reduce the price of their TV sets after a few months. 3. Sonys Management Issues. The War inside Sony: Engineers Vs Executives: Engineers have always been stars at Sonymore so, perhaps, than their creations. Gizmodo. Sony always gave full creative freedom to its engineers as a strategy to push quality and innovation. This is the vision that Sonys founders always had when they created the company. Engineers are treated like rock stars for creating many of the different products and proprietary formats coming out of Sony. Is it possible that Sonys loyalty to the creative visions of their engineers might be partially responsible for Sonys financial problems? Its easy to say that Sony should cut their costs and stop putting out super expensive products. But the truth is, Sonys culture was built on giving engineers (not accountants) the ability to make the final decisions on Sonys products. By giving engineers so much control, Sony forgot that making a profit is most important to the overall health of the company. Sony should change this attitude of their engineering team; it is good to give a certain level of freedom to engineers for bringing in creativity. But in this case Sonys engineers hardly created products that were profitable. Ego and competition among employees will create management problems inside the organization. The finance department has no control over the R&D expenditure. Engineers should be promoted or retained only if they are efficient and work together in a team for the common benefit of the company. Inefficient engineers irrespective of their post should be terminated or given voluntary retirement schemes. The finance department should give strict budget to the R&D departments on their limits of spending each year. Innovative engineers should be awarded and encouraged.

Failure is Acceptable Policy: To promote thinking outside the box and innovation above all else, Sony became a culture of where failure is acceptable and has little consequence or threat to most engineers jobs. This is partly because the founders, Masaru Ibuka and Akio Morita, failed multiple times before having their first major success. The founders adapted this logic to Sonys culture. This explains why engineers who have worked at Sony in Japan for a very long time have amazing job security even after numerous products have failed. This creates a sense of false security among the employees. They tend to under perform as the management is lenient with them. This leads to unwanted expenditure and unethical competition among employees at companies expense. Sony should curtail this by imposing strict sanctions. A company cannot sustain multiple failed products. (See below a range of failed product line from
Sony).

Inward Looking research, Customer feedback not taken. Sony hardly takes any customer feedback. This results in no product improvements based on feedback. Sony is not producing what the customers want; instead it manufactures what its engineers think its the best. Every retailer who is selling Sony products should follow up on customer feedback, although online registration of products and feedback forms are provided along with the product, customers hardly give feedbacks. Retailer should encourage the customers to revisit them from time to time by providing free service camps or software updates for their products, this will be a good opportunity to get feedbacks. Sony should have a market research team to compare the existing products in the market and to find out what is lacking in their products. Sony believes too much in their capabilities which might not be right always. Their slogan Make. Believe tells it all. Sony believes but customers always may not. Marketing "I don't think the brand carries as much weight as it used to," William Stofega, a program director at market researcher IDC, says of the company as a whole. "They don't really market it as well as they should." Sony spends a lot of money in marketing, but at the same time they do not look into the efficiency of the same. The marketing efforts do not reach the customers very effectively. Most of the customers do not know the entire product line of Sony unless they walk into a Sony exclusive customer store. This is yet another problem when you have too much products to offer. Logistics, warehousing and finally reaching the customer become a problem.

Sony should have a good marketing consultant to take care of their marketing activities. Some of their niche product lines like medical imaging equipment should be separated from the existing electronics line. It should have a different marketing team altogether. Similarly their top of line products like DSLR cameras and top of the line HD Televisions also requires a separate space for marketing. The moment you walk into an exclusive Sony store the entire line of HD televisions and cheaper variants are kept together. Same with the Cameras. First Mover Advantage Squandered Sony's failure to gain traction with the Smart Watch is the latest in a long line of first-mover advantages the electronics giant has squandered. The Walkman and Discman dominated the global portable music player market for decades before the advent of the iPod in 2001 In Sony there were many innovative products and first mover inventions. But the company failed to capitalize on the same. They started off with the walkman, Discman which was a first mover advantage. Although they improvised these products, they never thought about technological breakthroughs creeping behind them. Sony should have been the first to invent a product similar to the ipod. They had the expertise and money to do it. Even though Mp3 technology was invented in the year 1995, Sony never believed in this technology. Sony had their version of digital music players but they played only files encoded with its own proprietary Atrac music file format. Its devices generally handle MP3 and other formats by transcoding files into Atrac-an awkward process that can be time-consuming, particularly on devices such as flash players with relatively little storage. Apple introduced the ipod with Mp3 playback support in the year 2001. It took Sony 3 Years to realize that Mp3 is the technology forward and stuck on with their proprietary Atrac format and thus losing market share to Apple. This was a grave mistake by Sony. If they had come out with similar products like the Ipad they would have simply conquered the music player market till date just like their WalkMan.

4. Summing it up
Sony is a company that has come out of multiple failures. The management team at Sony is as good as any other companies. Japanese work culture speaks about loyalty, hard work and Quality. Sony is capable of coming out of this mess, but it requires major restructuring, pay cuts, job cuts, assets sales and hiving off some products or services. Most importantly the work culture at Sony needs to change. Sony is still in its old school thinking where they feel that they are the best innovators in the world, to a certain sense they are, but they are not comparing existing competition. Their engineers believe that whatever they innovate are the way forward and customers accept them since it is produced by Sony.

Sony also has to get into the services front. They have a lot of products that enable them to do that. Since Sony is into Music production (Sony Music), Movie production (Sony Pictures) they can incorporate the content into their electronic devices. This enables consumers to access the content on a priority basis on Sony devices. This could boost sales. Also by looking into the gaming business of Sony, although its a huge market going ahead, Sony is steadily losing out in that segment also. Sony play station is one of the best gadgets available, but they are not making a profit out of its sales, because it is too expensive to manufacture. The company should look at developing state of the art game softwares that are multiplayer enabled and accessible from their handheld devices like phones, tablets etc. They should also look at developing their products for knowledge access purposes. Sony should develop softwares using third party developers for content up gradation. They should develop their products not only for entertainment and communications but at the same time a device that can be used for learning and knowledge gathering. They should introduce products that are low priced but smart enough for students to use. Going ahead e-classrooms and e-learning is the way of the future. Sony should capitalize on this. Sony should stop and think !! I believe Sony should spend all their resource in thought process. What is the Next big product that can take the world by storm. Its not how many products That Sony produces, but how many successful products that Sony can produce. The golden answer to the question whether Sony will survive this crisis will depend on this killer product that Sony can showcase in the near future. Believe. Make . . . SONY SLOGAN: Believe that curiosity is the key to creativity, Believe that anything you can imagine, you can make real. 1. Failed products from Sony (Data taken from online journal which did a survey on
Top 50 failed products. 8 of those products were from Sony)

Sony Clie PDA

Sony Qualia-017 MiniDisc Player

Sony Network Walkman

Universal Media Disc

Sony VN-CX1A Mouse / VoIP Phone

PlayStation EyeToy

Sony PRS-700 Touchscreen Ebook Reader:

Memory Stick: