1. Should Sony adopt a new, matrix organizational structure? Justify your answer.

Sony Corporation Restructuring Continues, Problems Remain

Seven out of eight years, Sony has failed to meet its own initial operating profit forecast. This is probably the worst track record amongst most major exporters. That means that either management is not able to anticipate challenges ... or they fail on execution almost every time. Either way, it does not reflect well on Sonys management.1

2 - Atul Goyal, Analyst, CLSA , in January 2009.

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

3 year ending March 2009. Sony announced annual loss of 98.9 billion , 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.

4 Howard Stringer (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.

1 Tina Wang, Earnings Collapse Looming for Sony, www.forbes.com, January 13, 2009.

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3 1 US$ 93.25 as of August 31, 2009.

4 Stringer was Head of Sonys North American business and was known for drastic cost cutting measures.

Headquartered in Hong Kong, CLSA is a leading equity broker in the Asia-Pacific markets. The services provided by CLSA include broking, investment banking, and asset management.

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Sony Corporation Restructuring Continues, Problems Remain

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

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Sony was founded in 1946 as Tokyo Tsuchin Kyogo by Masaru Ibuka and Akio Morita (Morita) 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

5 Howard Stringer Gets President Title, Aims to Save $3.1 Billion over the Coming Fiscal Year, www.sony.net, February 27, 2009.

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7 Hiroshi Suzuki, Masaki Kondo, Sonys CEO Stringer Ousts Chubachi in Overhaul of Management, www.bloomberg.com, February 27, 2009.

Merrill Lynch & Company is a financial services firm known as Bank of America Merrill Lynch after its acquisition by Bank of America in 2008. Merrill Lynch is involved in businesses like wealth and investment management.

8 loss of CHF 8.22 billion for the year 2008.

Credit Suisse is a Switzerland-based financial company. It recorded net revenue of CHF 9.268 billion and 9 Sony Shares up after Stringer Takes Control, www.execdigital.co.uk, March 02, 2009.

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Akio Morita was a graduate in physics, while Masaru Ibuka had a degree in electronic engineering. When Morita joined the Japanese navy as a Lieutenant, he met Ibuka at the navys Wartime Research Committee. They became friends and planned to float a company.

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Sony Corporation Restructuring Continues, Problems Remain

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.

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