Sony - Choose one - Answer in length a. Should Sony adopt a new, simple organizational structure? Justify your answer. b. Should Sony adopt a new, functional organizational structure? Justify your answer. c. Should Sony adopt a new, multidivisional organizational structure? Justify your answer. d. Should Sony adopt a new, matrix organizational structure? Justify your answer.

SONY IN CRISIS, AGAIN In May 2009, Japan-based 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 ending March 2009. Sony announced annual loss of 98.9 billion3 , with annual sales going down by 12.9% to 7.73 trillion. Sony also warned that with consumers worldwide cutting back on spending in light of the recession, the losses could be to the extent of 120 billion for the year ending March 2010 (Refer to Exhibit IA for Sonys five year financial summary and Exhibit IB for operating loss by business segment). Sonys announcement came after the company had announced a major reorganization plan in February 2009. Sony had gone through a series of reorganization programs starting from the year 1994, the aim being 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 divisions in Sony from communicating and cooperating with each other, for the companys problems. Howard Stringer4 (Stringer) became the first non-Japanese CEO of Sony in March 2005 and he announced a major reorganization in September 2005. The reorganization focused on revitalizing the electronics business of the company and on improving profits by reducing business categories and product models. It also aimed at removing redundancies and overlaps in business processes by focusing resources only on the companys high growth business like HD products, mobile products, semiconductor/key component devices, and network-enabled 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 cross-company collaboration. The plan started showing encouraging results and for the year ending March 2007, Sonys sales and operating revenue increased by 10.5% to 8.29 trillion as compared to March 2006. The trend continued over the next year and for the fiscal year 2008, sales and operating revenue grew by 6.9% over the previous year to 8.9 trillion. The company recorded an operating income of 374.5 billion in fiscal 2008 as compared to 71.8 billion in fiscal 2007. However, by late 2008, Sony had reduced its earnings forecast and in December 2008, it announced that it could end the financial year in a loss. Another reorganization plan was announced in February 2009, which involved a new organization structure, the closure of eight of its total 57 manufacturing sites, and a reduction of the workforce by 16,000. The reorganization also witnessed Stringer assuming more powers as the President of Sony and his predecessor, Royji Chubachi (Chubachi), who was also heading the electronics division, being made Vice-Chairman. Through the new reorganization plan, Sony expected to reduce costs by US$ 2.5 billion. On the reorganization, Stringer said, This reorganization is designed to transform Sony into a more innovative, integrated, and agile global company. (These changes and reorganization) will now make it possible for all of Sonys parts to work together. 5 Analysts were satisfied with the changes proposed in the new reorganization plan. Hitoshi Kuriyama, analyst at Merrill Lynch & Company,6 commented, These moves are bolder than we had anticipated and are positive. We believe the new management and organization will be effective in bringing out Sonys potential in this new networked age. 7 However, some analysts remained skeptical about the proposed benefits of the plan. According to Koya Tabata from Credit Suisse8 , We remain unsure about whether consolidating control into the hands of Chairman Howard Stringer will change the business model significantly and fundamentally strengthen Sonys operations. 9 BACKGROUND NOTE Sony was founded in 1946 as Tokyo Tsuchin Kyogo by Masaru Ibuka and Akio Morita (Morita)10 in war-ravaged Japan. Initially, the company had 20 employees and a capital of 190,000. Right from its inception, Sony focused on product innovation and on offering high quality products. Sony started off manufacturing telecommunications and measuring equipment and went on to manufacture transistor radios and tape recorders. The company decided to call itself Sony, as Morita felt that the name was in accordance with its global expansion plans. Sony set up a subsidiary in the US in 1960 and was listed on the New York stock exchange in 1970. In 1972, it set up manufacturing facilities in the US, thereby becoming the first Japanese company to do so. Sonys products were always innovative. The company firmly believed that there was a huge demand for such products and did not attach much importance to market research. However, it suffered a major setback in 1975 on account of its Betamax video cassette which was to be used in its home video cassette recorder. Before the Betamax technology could establish itself in the market, it lost out to VHS, which was backed by top studios in Hollywood. This incident served as an eye-opener for Sony. It realized that technology used in such products was largely determined by the owners of content and this led to its entering the content development business. In 1988, the company acquired CBS Records and renamed itas Sony Music Entertainment. In 1989, it acquired Columbia Pictures (which included Tristar) and renamed it as Sony Pictures (Refer to Table I for details of Sonys Businesses). In 1968, Sony introduced the Trinitron Color TV, which was highly successful. Another highly successful product was the Walkman launched in 1979. Other path-breaking products that it introduced included the worlds first Compact Disc player (1982), the Camcorder (1982), the Discman portable CD player (1984), PlayStation (1994), and the Digital Handycam (1995). Sony introduced several other products like home electronic equipment and 3.5 inch floppy discs. Till 1983, Sony operated as a function-specific organization with different departments for development, manufacturing, sales etc. However, with the number of products and people increasing, Sony introduced the business group system in 1983 and defined the roles of headquarters and each business group. THE RESTRUCTURING EFFORTS In the early 1990s, in spite of a moderate increase in Sonys operating revenues, its operating and net income witnessed a decline. After the electronics business was restructured in 1994 under the then CEO Norio Ohga, the companys performance deteriorated further and Sony reported a loss of 293.36 billion in 1995. This led to another round of restructuring in 1996, wherein Sony was organized into a ten company structure. However, this restructuring did not lead to any sustainable improvement in the companys financial performance. For the financial year 1998-99, the net income dropped by 19.4%.11. Another round of restructuring was proposed in 1999 in order to enable Sony to exploit the opportunities offered by the Internet. Though some of its products like the PlayStation were profitable, a majority of its other businesses like electronics, movies, mobile telecommunications, and personal computers were not performing well. For the fiscal 1999-2000, Sonys net income fell to 121.83 billion, a decline of over 58 billion as compared to the previous year. With none of its restructuring efforts proving fruitful, Sony went in for a revamp of the top management. In the fiscal year 2000-01, despite the increase in revenue due to higher sales of the PlayStation, net income dropped to 16.75 billion as compared to 121.83 billion the previous year. The drop in net income was attributed to a decline in demand for computer-related products due to a slowdown in the IT industry. At this juncture, Nobuyuki Idei (Idei), CEO of Sony at that time, proposed another round of organizational restructuring. This plan aimed to transform Sony into a Broadband Network Solutions company by launching a wide range of broadband products and services. Explaining the objective of restructuring, Idei said, By capitalizing on this business structure and by having businesses cooperate with each other, we aim to become the leading media and technology company in the broadband era. 12 However, this restructuring exercise did not yield satisfactory results either and Sonys operating income declined by 40.3% in the fiscal year 2001-02, 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 termed the Sony Shock by the media. For the quarter ending June 2003, Sony reported a net income of 1.1 billion which was 98% lower as compared to the profit of 57.2 billion reported in the corresponding quarter in fiscal 2002. Analysts were of the opinion that the erosion in Sonys profits was due to the expenses the company had incurred on implementing its many restructuring plans. At this juncture in October 2003 Idei proposed yet another restructuring plan called Transformation 60. 13 This was a three-year restructuring plan, which aimed at optimizing manufacturing infrastructure and reducing fixed costs by combining the operating divisions and shifting component sourcing to low cost markets like China. Sony planned to reduce costs by downsizing and consolidating the manufacturing, distribution, and customer service facilities and also by streamlining procurement. As a part of Transformation 60, about 7000 employees were laid off in Japan and 13,000 at other locations across 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 fixed costs by 330 billion by the fiscal year 2006-07. These restructuring plans were not successful mainly because of the significant drop in sales of conventional televisions and portable audio products. The decline in sales of Sonys electronics products was prominent in Japan, where the demand for Vaio personal computers and cathode ray tube televisions fell significantly. The electronics division recorded a net loss of 6.8 billion during 2004. The games division also did not fare well with the sales of PlayStation 2 consoles falling rapidly. In fiscal 2004, the games division recorded an operating income of 67.6 billion as against 112.7 billion in 2003. By the time Sony announced its October-December 2004 results, it was evident that the company was far from reaching the goals envisaged in its Transformation 60 plan. During the quarter, the companys sales fell by 7.5% to 2148.2 billion and operating income went down by 13% to 138.2 billion. 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, and divesting the company of its non-strategic assets. Stringer announced another round of restructuring 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 proved more agile and more nimble. We can and will compete vigorously. We are going to achieve our goals by breaking down the existing silo walls and eliminating the highly decentralized structure weve maintained in the past. 14 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 business group, the personal solutions business group, and the Sony financial holdings group. 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 Exhibit III for Sonys organizational chart as of October 2005). Along with the new strategy, Sony also announced an internal slogan called Sony United. This focused on promoting teamwork and cooperation and bringing together key resources. THE OUTCOME After the reorganization announced in 2005, Stringer went on to revamp Sony. Sonys Aibo, a robotic pet, was discontinued after the Robotics unit was shut down due to its low revenue generation. Sonys Qualia line of luxury electronics that included high-end cameras and televisions was also discontinued. Other businesses that were discontinued included cosmetics maker, mail order shopping company, and a chain of restaurants. One-third of Sonys 1,000 subsidiaries and affiliates were involved in businesses that were different from the core electronics and entertainment business of Sony. One of Stringers first tasks was to revive Sonys television business, which had suffered as the company had been late in coming out with the flat panel televisions. The television business was brought under the charge of Katsumi Ihara, who discontinued production of CRT televisions and launched the Bravia brand of LCD TVs in 2005. However, in fiscal 2006, the TV division still showed losses as the company had spent heavily on advertising and had lowered prices in its race against competitors like Samsung and LG. Industry experts felt that after lowering prices, Sony had been unable to maintain its premium pricing. Earlier, Sony had had a tradition of retaining retired senior personnel as advisors. This practice was done away with.