As the Walkman Retires, Sony Rewires

When the news hit late last month that Sony (SNE) was discontinuing production of its original Walkman, the pioneering portable cassette-tape player, many in the media marked it as the passing of an era. Yet here's what most everyone is missing: Thanks in part to a student of Peter Drucker's, Sony may well be on the verge of creating a new slate of devices that have a shot at becoming as hot as the Walkman once was.

For Sony, that would certainly be a welcome development. For years now, competitors from South Korea, the U.S., and elsewhere have been clobbering the Japanese electronics company. The mojo that Sony had three decades ago, when the Walkman first hit the market, has long since faded away.

But now, Sony is being pushed in new directions. George Bailey, who was hired in 2009 from IBM (IBM) and carries the title "chief transformation officer," has been steadily tackling Sony's cost, efficiency, and productivity problems. The company's year-over-year operating margin has improved for four consecutive quarters.

But perhaps even more important than these financial reforms is the philosophy that Bailey is helping to instill at Sony: The business must start on the outside with the customer, not on the inside at the engineer's workbench.

Customer Satisfaction

The message is pure Drucker, from whom Bailey took half a dozen classes at Claremont Graduate University in the early 1980s, when the Walkman was still the greatest gadget around. "The customer defines the business," Drucker wrote in his 1973 classic Management: Tasks, Responsibilities, Practices. "A business is not defined by a company's name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when he or she buys a product or a service."

As basic as that insight may seem, it's one that Sony has neglected. The company, Bailey says, has always been able to make superior products from an engineering standpoint. "A whole lot of what Sony did was make things smaller, faster, of higher quality," he explains. And for quite some time, that was good enough. The formula fueled Sony's incredible growth into the early 1990s.

But in more recent years, both technology and the marketplace have changed dramatically. For instance, the picture quality on televisions is generally so good these days that many new advances are "not even perceptible to the human eye," Bailey says. Rivals such as Vizio, which uses contract manufacturers in China for its relatively low-priced sets, are closing the gap with Sony in terms of what Bailey calls "specmanship."

Sony's edge in design—Bailey likens some of the company's offerings to works of art—has also slipped. "It's not that Sony got any worse at that," he says. "Others got a lot better," including Samsung (005930:KS) and LG (066570:KS).

Drucker's Concept of Quality

At the same time, customers' desires have evolved. Having fantastic hardware isn't sufficient anymore. "All of a sudden, people have started to think differently about electronics," Bailey says. "They want software that's intuitive and makes things easy to use. They want applications, content, and services.

"What excites a Japanese engineer in Shinagawa," he adds, "may not be what makes a consumer happy in Helsinki or New York or Mumbai."

In this sense, the technician's traditional concept of "quality" isn't really relevant anymore, just as Drucker counseled. "Quality in a product or service is not what the supplier puts in," Drucker asserted in his 1985 book Innovation and Entrepreneurship. "It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality."

And so Bailey and other Sony leaders are forcing the engineering team to ask the kinds of questions it hasn't been asking: "It's great that you made this thing faster, lighter, smaller. But what's it going to do for the customers who buy it? Will it change their experience?"

Culture Shift

Bailey believes that the company's culture is starting to shift, pointing to Sony's new NEX-5 camera as one example. It is not only well-built but has managed, with its interchangeable lenses and a slew of other features, to provide "a vital difference" in "photography experience," in the words of one product review. Sales are soaring.

Changing the mindset of Sony's engineers is only one part of the equation for success, of course. In addition, Bailey has introduced a program called FAST, for "focus, accountability, speed, and teamwork." All of these are principles that also echo back to Drucker, whose "thoughts," says Bailey, "are as valuable today as when he wrote them."

But in the end, it is likely to be Sony's renewed attention to the customer that proves most crucial. Bailey acknowledges that in some ways he, as well as Chief Executive Officer Howard Stringer and others, are attempting to nudge the company "back to the future." The Walkman, after all, sold more than 200 million units not merely because it was small and lightweight but because it revolutionized the way people consumed music.

For Sony, the battle cry is clear: The Walkman is dead. Long live the Walkman.