Sony's Shake Up

President Idei has seized on shrinking profits as an opportunity to force much-needed change. Other top Japanese execs would do well to follow his lead

Sony President Nobuyuki Idei must think he's in Silicon Valley. How does he rev up his staff and goose flagging profits? By tossing the whole organization chart in the air, pulling vagrant subsidiaries back into the parent company, and committing to scrapping 20% of his factories by 2003 while escorting some 17,000 workers to the door.

Idei's mid-March restructuring proposal dashes most hopes in Japan that the country's jobs-for-life policy would survive the recession. Facing hefty losses this month at the close of Japan's fiscal year, companies have been falling over each other to announce restructurings. NEC Corp. plans to slash 15,000 jobs worldwide over three years. Parts maker Omron Corp.'s payroll will shrink by 2,000. And it's not just high tech: In a bid for public funds, Japan's top 15 banks have agreed to ax almost 20,000 jobs by 2004.

But Sony Corp. is in a different class. The planet's premier consumer brand--home to Japan's most innovative engineers--it has a near-mythic capacity to emblazon a message in other managers' minds. That message now: Strip down, plan for an unfathomable high-tech future, and then put your foot on the gas.

Idei's jolt comes at just the right time, since Japan Inc. needs to think much more boldly about restructuring. Yes, job cuts have led to a postwar unemployment peak of 4.4%. But Japan's plants are still operating way under capacity, and payrolls and wages may have to drop 7% more before companies return to health. For all the screaming headlines about layoffs, says Schroders Japan Ltd. Senior Economist Andrew Shipley: "It's not enough to offset the current rate of deflation in the economy."

"PEANUTS." In contrast with other manufacturing chiefs, the tightly wound Idei has seized on his company's deteriorating profits as an opportunity to force the changes he has long championed. Says Idei: "If we'd stuck to our present corporate model, Sony would probably go the way of other large Japanese electronics makers." For the year ending on Mar. 31, revenues will be comfortably above $50 billion, thanks to flat-screen TVs, digital video cameras, and other gadgets. But margins on such products are "peanuts," says Idei. Operating profits will likely drop by 35%, to $2.8 billion. Only the red-hot PlayStation video game business is keeping profits afloat. While it contributed just 15% of Sony's total sales, it made up 42% of Sony's operating profits in the most recent reported quarter. Any downturn in games will leave the whole corporation vulnerable.

The way out, as Idei sees it, is to provide the missing link between Sony's "content"--its music, films, and games--and the delivery side of the business--everything from TVs and audio gear to trendy movie theaters. That means amassing networking skills. Don't think multimillion-dollar network switches of the sort that Cisco Systems, Nortel, or Lucent Technologies provide. But Idei will certainly push ahead with software to link devices in the home and new E-business schemes to collect transaction fees from consumers tapping Sony's rich pools of content--whether it's watching a movie on a giant digital TV or buying a movie ticket on a Web site that you tap from a sleek Sony Vaio notebook.

In a world where offices, homes, and individuals connect constantly on the Net, Sony must provide "what consumers want, where they want it, and when they want it," says Van Baker, director for consumer market research at Dataquest Inc. in San Jose, Calif. Consumers must be able to enter Sony's digital world, whether it's from a TV, a PC, or a cell phone. "Sony has a better understanding of this than any other company," Baker says. It's the software half of the business that motivates Idei. He wants to widen the role of music, movies, and games that can be downloaded into homes or onto portable devices. At the same time, Sony wants to perfect--and charge money for--the software that links these venues and appliances together.

LEANER AND MEANER. The first step to achieving this vision is getting leaner and more centralized. Sony's 10 internal companies will be regrouped into four autonomous units focused on products and networks. Each will be allocated research funds and be required to justify its existence with profits. Idei will cut headquarters staff from about 2,500 at present to "several hundred" in the next few years.

The home office's main function will be to oversee, but not manage, the company's units, and to scout for investments. Sony's global workforce of 170,000 will be cut by 10%, and factories will go from 70 now to about 55 by 2003. Idei doesn't rule out further cutbacks. To get a tighter grip on its most prized operations, Sony will reel in three separately listed subsidiaries that contribute to the booming PlayStation business, including Sony Music Entertainment Inc.

Sony Computer Entertainment, the division that makes the PlayStation, will be folded into Sony's Japanese electronics business. This will cut overhead and communication time as Sony develops its next-generation PlayStation, a graphics-rich device that will play digital video disks (DVDs). This platform, set to debut in Japan within 12 months, may wind up costing Sony as much as $1 billion--and will require tight collaboration, Idei says. Sony might decide to make the new PlayStation double as a video player or as a high-capacity game feature on its notebook computers.

News of the plan sent Sony's Tokyo-traded shares soaring as much as 50% above its January lows. The rally buoyed shares of other electronics makers, too, including NEC and Toshiba. Suddenly, everyone's reform plan looked better, says Hitoshi Kuriyama, a Sony analyst at Merrill Lynch Japan Inc. "Sony always sets the standards in innovation, and its new business model could become another standard."

Sony is hardly out of the woods. Some factions have fought restructuring. Idei says senior management still opposes his plan to cut headquarters down to size. And now that Sony has announced the new PlayStation, shoppers may stop buying the old machine. Sony also faces competition from Sega Enterprises Ltd., which has sold about 1 million units of its snazzy, 128-bit Dreamcast console since November. Nintendo Co. also has a new machine in the works.

RIVALS. Worse, Sony's networking plans face competition abroad. In the U.S., Sun Microsystems Inc., Microsoft Corp., and a host of startups are determined to expand their presence in the home. Even Cisco Systems Inc., a maker of network plumbing, is designing consumer network products--and running flashy TV ads.

Sony's aces are its technological prowess and peerless brand. But as Idei points out, there is no proven profit model for what Sony is attempting. In the Internet world, Sony is neither an aggregator of content, such as Yahoo! Inc., nor a limited-product vendor with a brilliant distribution scheme, such as Dell Computer Corp.

Still, at the crossroads of the entertainment, electronics, and information industries, there is no other company positioned like Sony. Whether the race is lost or won, Sony is demonstrating to its Japanese partners and rivals how the game is supposed to be played.

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