By Kenji Hall When Sir Howard Stringer made his debut in March as the new head of Sony (SNE), he described a company in need of "redefinition." In the span of a few years, Sony had gone from pioneer to has-been. One look at its products showed why: Sony's gadgets, once coveted for their hip designs and innovative technology, had become nearly indistinguishable from rivals' and the brand was quickly losing cachet.
In an ever-crowded market, Sony was struggling to turn a profit. Welsh-born Stringer, a former U.S. TV industry exec, knew he would need to reverse the decline -- and fast.
On Sept. 22, Stringer unveiled the most sweeping reorganization for the consumer-electronics and media empire in 2 years. Under his plan, which aims to restore Sony to profitability by March, 2008, Stringer will eliminate 10,000 jobs -- or 6% of a 151,000-strong workforce -- shut 11 of 64 plants worldwide, and sell roughly $1.1 billion in securities, real estate, and other noncore assets. Stringer also prescribed a heavy dose of reforms for Sony's consumer-electronics division, which accounts for almost 70% of revenue but has been a money-loser for two straight fiscal years.
"NO. 1 PRIORITY." The changes are designed to simplify the chain of command. But more important, they're aimed at reviving the Sony brand. Products in the works will give anyone with a Sony Walkman, mobile phone, or portable PlayStation console the power to watch movies, listen to music, and play video games virtually anytime and anywhere. Overseeing the entire production process -- from product development to sales strategy -- will be Ryoji Chubachi, the electronics division's president and CEO.
"Without question, the revitalization of electronics is our No. 1 priority," Stringer told a roomful of reporters at a downtown Tokyo hotel.
The reforms are expected to inflict short-term pain. Sony says the overhaul would add $1.26 billion to restructuring costs this fiscal year, ending in March, 2006, and an additional $630 million the following year. That led Sony to slash its previous forecast for an operating profit of $270 million to a loss of $90 million for the current year -- its first annual operating loss since 1995.
MORE REALISTIC? The losses only compound Sony's longstanding problems of razor-thin margins and operating profits that have made it a laggard compared with others such as Korea's free-spending Samsung Electronics. If all goes to plan, Sony hopes to have a companywide operating profit margin of 5% by March, 2008, and raise its electronics division's operating profit margin to 4%.
That's less ambitious than the restructuring plan under the former regime, led by Chairman and CEO Nobuyuki Idei, which had set a 10% operating profit margin goal for the fiscal year through March, 2007. But Stringer's plan may be more realistic.
For Sony, the changes can't come soon enough. Its flat-screen TVs are playing catch-up to those of industry leaders Samsung, Sharp (SHCAY), and Matsushita Electric Industrial (MC). Sony's Vaio notebook computers are a niche contender compared with those of U.S. PC colossus Dell (DELL). And its digital portable-music players are barely making a dent in the market commanded by Apple's (AAPL) iPod.
Sony has relied on its movie division, which released such blockbusters as the Spider-Man series, and its successful PlayStation consoles in the computer video-game unit to lift profits in recent years.
PIPELINE GLIMPSE. It's likely that nobody understands Sony's dilemma better than Stringer. He wants to revive TV growth by the second half of next fiscal year, and he'll direct spending to "champion products" such as digital camcorders, mobile phones, Walkman music players, and the blockbuster PlayStation video-game machines.
Stringer also said a team of engineers is examining equipping Sony's next-generation portable gizmos with the superfast Cell chip, which it developed jointly with IBM (IBM) and Toshiba. And he said Sony is bolstering its TV lineup with new models to reverse the losses by the second half of the next fiscal year. "These products are a few of our weapons against commoditization," he says.
In recent weeks, Sony has offered a glimpse of some products in the pipeline. On Sept. 5, it unveiled an updated version of its Location-Free TV, which lets users surf the same channels they watch at home from anywhere on the planet. Three days later, Sony showed off its space-age makeover for the Walkman portable digital-music player, its latest effort to challenge the iPod's dominance (see BW Online, 9/9/05, "Can Sony's New Walkman Run?").
NEW STRUCTURE NEEDED. And on Sept. 14, Sony launched its Bravia brand of flat-screen, liquid-crystal display TVs, creating a new identity to distinguish them from the flagship Trinitron cathode-ray-tube sets. That comes months ahead of the much-ballyhooed spring 2006 launch of the next-generation console PlayStation3, which will run on the Cell chip and feature Sony's all-new high-definition DVD technology, Blu-ray.
It's too early to tell if Stringer is winning his fight to unify Sony's fractured organization. The warring fiefdoms had long brought out the best in Sony's engineers. But in recent years, infighting and bureaucracy had led to cumbersome decision-making and slow responses to shifting market trends. "We did not think our new plan could be launched within the existing organizational structure," Stringer said. Chubachi's new role atop a flatter structure should speed communication between engineers and marketing execs.
For all the fanfare surrounding the restructuring announcement, analysts weren't impressed. Some had expected Sony to sell its stakes in noncore businesses such as Sony Financial Holdings, Sky Perfect Communications, and Sony Network Communications, Sony's Internet service provider. Others felt Sony should get rid of its investment-intensive semiconductor chip business. But Stringer denied such things were in the works and said an IPO for Sony Financial would be postponed until the fiscal year ending March, 2008 (see BW Online, 9/16/05, "Is a Slimmer Sony Coming?").
NOT SAYING YET. Without selling off those units, it's not clear where Sony will come up with money to spend on new products. "I'm still not convinced that Sony can stir growth," says John Yang, an analyst at Standard & Poor's. "They have to come up with something nobody can imitate but consumers will buy. But they haven't given any details how they plan to do that."
During the presentation, Stringer showed he doesn't favor slash-and-burn tactics and that he's not afraid to hold his cards close. When reporters asked which of 15 business areas Sony planned to trim, Stringer sidestepped the question, though Chubachi later said the robot unit, which makes the Aibo robot dog, might lose some funding. It may be that Stringer has to give an even clearer picture on strategy, or make deeper cuts -- or both.
Hall is a correspondent in BusinessWeek's Tokyo bureau