Nearly 70 years since Akio Morita and his partner Masaru Ibuka launched a tiny electric engineering firm inside a bombed-out department store in Tokyo, the producer of the Walkman portable music players and Trinitron televisions is trying to remember how to act like a young company again.
After years of failing to match its past successes in the digital age, Sony is attempting to branch out from the consumer electronics business that it once dominated. Under Kazuo Hirai, Sony’s chief executive since 2012, the company is moving into some surprising new businesses, including online mathematics competitions, property services, drones and endoscopes.
“It’s important to be bold enough to take risks and enter into new business fields where we feel that we can innovate and make a difference,” says Hirai.
Sony is not alone. Japan’s consumer electronics industry is adapting to a radically changed consumer landscape, where best-selling televisions, laptops and smartphones are more likely to be made outside Japan by Apple, Samsung or Lenovo.
These shifts are already well advanced at Hitachi and Toshiba, which have moved into sectors such as railways and nuclear plants. Panasonic is delving deeper into the housing and automotive sectors.
Hirai is not seeking such a dramatic overhaul. Sony is investing in divisions it has had for years, including its PlayStation game network and its movie and music businesses. But it is also shifting its focus in electronics, concentrating less on making devices and more on components and software.
“We consider ourselves as a start-up. I want to bring disruptive innovation through software,” says Masaaki Isozu, the 40-year-old chief executive of Sony Global Education, which carries out online math competitions.
The language Isozu and many other Sony employees are speaking — peppering their conversations with phrases such as “venture spirit” and “Sony DNA” — symbolise the company’s effort to rekindle the creative, freewheeling spirit that gave birth to successful products such as the PlayStation game console and Vaio computers.
But if those successes were based on inventing the must-have gadget, the new ventures suggest a future that is not necessarily built on Sony hardware. Its drone business, for example, is not about selling its own unmanned aerial vehicle, but helping companies to monitor agricultural crops and analyse data collected by the drones.
“Sony expanded with hardware but times have changed. It is no longer possible to survive only on hardware and technology,” says Kazunori Ito, a Barclays analyst.
The transition comes as the company gradually emerges from a gruelling decade-long restructuring that saw more than 35,000 employees let go. It now has 131,700 employees across the group.
Under Hirai, Sony jettisoned its PC business and is spinning off its TV and Walkman divisions into wholly owned subsidiaries after losses of more than $8 billion over the past seven years.
The reinvention is far from complete, however, and analysts have questioned whether its new ventures will ever generate the profits that its biggest products made in their heyday.
Sony is still trying to rebuild its lossmaking mobile phone business, which dragged the company into a net loss of Y126 billion ($1 billion) for the fiscal year that ended in March. The influx of cheaper handsets from Chinese rivals such as Xiaomi forced Sony to significantly scale back its business in China, the world’s largest smartphone market, while it has struggled to gain an edge against Apple and Samsung in the US and other markets.
Investors have cheered the Sony chief’s decision to axe underperforming electronics businesses — but the shift also comes at a huge cost. Smartphones, games, TVs, audio devices and cameras still account for more than half of the group’s revenue totalling $68 billion.
Yet the combined operating profits from these electronics divisions — excluding smartphones — do not reach the profit level of financial services, which is Sony’s single biggest profit driver.
“The restructuring measures are to address problems accumulated over the past. Now we need to change the mindset to find future opportunities,” said Kenichiro Yoshida, Sony’s chief financial officer and second-in-command.
One of the architects of the new strategy was 37-year-old Shinji Odashima, who studied how other mature conglomerates such as Procter & Gamble and General Electric managed to keep growing. Odashima suggested that Sony set up a division for new businesses that directly reports to Hirai, similar to organisations created by P&G and GE.
“It became clear that Sony was confronting a dilemma faced by big companies,” says Odashima, now deputy general manager of Sony’s new business creation department. “There was a possibility that some people were losing the spirit of producing new ideas.”
Sony last year launched a programme where employees pitch their ideas in auditions that are carried out once every three months. In the past four auditions, 450 proposals were submitted and about 10 ideas have passed the first approval phase.
The programme is aimed at making it faster and easier for employees to turn ideas into products or businesses without getting bogged down in layers of bureaucracy. Employees can also raise money through a crowdfunding programme.
Sony introduced a traditional-looking wristwatch called a Wena Wrist, which features an electronic wallet. The product has so far raised nearly $380,000 through crowdfunding and attracted 899 supporters.
Some critics say the nostalgia for its roots as a start-up could be a distraction at a time when Sony should be focusing on making hard-headed decisions about where it can make money, such as image sensors used in Apple’s iPhones.
“Sony is 70 years old. It should be a mature company and wowing the world should be left to the younger firms,” says Kazuhiko Toyama, a contributing author to ‘Examining Japan’s Lost Decades’ where he did a case study on Sony.
Sony’s inroads into property and education also broaden its already wide business line-up, which includes movies, music, banking and insurance services.
“I don’t doubt that their turnaround is real but I don’t like their business portfolio. It’s a hodgepodge of businesses that have no synergies with each other,” says a fund manager at one large US asset management firm.
For many Sony executives and employees, though, the new businesses are far from an alien concept. The Japanese group entered the life insurance business in 1979 and established an online banking subsidiary in 2001.
When Sony entered the video game market in 1993, Hirai, who led the PlayStation division in North America in the late 1990s, says people asked: “Why is Sony getting into that? Is that going to be a core business ever?”
More than two decades later, the gaming business is one of the key profit drivers for Sony, generating 16 per cent of its annual revenue amid stellar sales of its latest PlayStation 4 console. The company is also expanding a subscription-based model using its game network and a new streaming video service called PlayStation Vue, which analysts say could create a more profitable and stable business structure.
“When you speak to a lot of employees involved in new businesses and in older traditional businesses, people talk about the spirit of innovation and the roots of Sony and the DNA of Sony. It’s not about nostalgia but it’s about who we are,” Hirai insists.
Kazuo Nishiyama, the 40-year-old chief executive of Sony Real Estate, says he wants to replicate the success of his former boss Hiroki Totoki, who helped launch Sony’s online banking services. Totoki now heads Sony’s mobile division and is an adviser on the new businesses.
Sony’s property brokerage service is similar to the US model, where agents act only on behalf of either the buyer or the seller of property. In Japan, agents often serve on both sides, creating a conflict of interest.
Nishiyama says he is aiming to make the business profitable and list the company’s shares before the 2020 Tokyo Olympics, although he declined to provide a sales target.
In a report on Japan’s property market, Deutsche Bank analysts said Sony’s entry is one factor that could help the industry “to revamp its outmoded business structure”, which would lead to lower fees for consumers.
Hirokazu Hasegawa, a professor at the Graduate School of Management at Waseda University, says the success factors for new businesses are different each time and trying to replicate the past can be a trap. “Sony is a company that has a very strong entrepreneurial culture where you need to keep challenging to innovate. But if you cling to success stories in the past, it could actually hamper innovation,” he says.
Company executives admit Sony’s turnaround is not complete. Its smartphone business remains an Achilles heel and growth prospects for its other consumer electronics businesses, excluding games, are slim.
“Costs are continuing to increase at this very moment that you are breathing air,” Totoki was quoted as telling employees.
Many analysts welcome Sony’s focus on new areas of growth but are sceptical they will develop into significant drivers for the company. At Sony Global Education, for example, the company is aiming to generate 10 billion yen in revenue by 2020 with an ambitious profit margin target of 20 to 30 per cent.
Others suggest Sony should think bigger by targeting a market ripe for digital disruption: cars. Google is already working on a self-driving vehicle and Apple has launched an automotive project in anticipation of the arrival of autonomous, connected cars.
Sony is aiming to tap into the automotive market, but in a smaller way, by expanding sales of its image sensors from smartphones to cars. Hirai says he will not rule out building a Sony vehicle, but has no specific plans in place. “Where we can make a difference, we will be in that space,” he says.
“I would hope Sony is already working on a vehicle. Now that’s exercising start-up spirit in the real sense,” says Barclay’s Ito.
— Financial Times
