Sony’s cost-cutting strategies

Sony's cost-cutting strategies

Since the late 1990s, Sony, the world leader in consumer electronics, has encountered difficulties mainly in its core business. Consumer electronics – responsible for everything from TVs to walkmans to DVD players – used to be the jewel in the crown of the Sony empire, but in recent years it has become a disaster.

After the quiet days of the late 1990s, when the division was the company’s profit leader, Sony watched its electronics divisions plummet and turn red, losing $ 300 million in the twelve months to March 2004.

Sony’s other divisions, such as entertainment and video games, also had trouble with the weak Japanese economy and strong competition from companies such as Matsushita, Philips Electronics, Nintendo (a console video game company), and Samsung. In addition, Sony seemed to be losing out on two traditional and key components: technological innovation and product quality.

To protect the company in the circumstances, the chairman of Sony Nabujuki Ideas undertook a massive restructuring plan, the first phase of which began in 1999. To further cut costs and boost revenue growth, Sony announced its second phase of restructuring, called Transformation 60 in 2003. The restructuring plan is due to end in 2006 when Sony will celebrate its 60th anniversary. The plan is expected to generate an operating margin of 10% after 2007.

Sony’s rapid growth

Based in Tokyo, Sony was founded in 1946 as Tokyo Tsushin Kokyo (Totsuken) or the Tokyo Telecommunications and Energy Corporation of Masaru Ibuka with an invested capital of 190,000 yen ($ 500). In 1953, Totsuken made the world’s smallest pocket radio, the Sony TR 63. The following year, Totsuken changed its name to Sony. Sony’s stay in America in 1960 helped the company establish other overseas operations.

The company also continued to add innovative products to its portfolio and became widely known with the launch of the Trinitron color TV, which won the company an Emmy Award in 1973. Sony began selling its Walkman in 1979, which became one of the most successful electronic products for consumers in the 1980s. By 1995, Sony had sold 150 million Walkmans and also become the world’s largest TV supplier. In addition to consumer electronics, Sony entered other segments in the 1980s. Sony started the life insurance business in 1981 and entered the entertainment business with the acquisition of CBS Records in 1988.

He also bought Columbia Pictures Entertainment in November 1989 for $ 3.4 billion, which was the largest foreign acquisition by a Japanese company to date. Columbia Pictures Entertainment was founded in 1993. In 1994, Sonny’s Playstation was launched in Japan. It became a spectacular success, selling more than 1 million units in less than 6 months after its launch. After its success in Japan, the PlayStation moved to the US and European markets.

Sony sells 5 million units of this product worldwide. By 1998, Sonny had sales of 6.671 trillion yen with a net income of 222 billion yen (operating profit of 514 billion yen).

In 1999, however, net income fell to 179 billion yen (operating profit to 318 billion yen). In 2000, Sony lost money on its Sonny Pictures Entertainment project when the product and “I Dreamed of America” ​​failed to cover $ 80 million in production costs. In the mobile communications business, Sonny faces stiff competition from companies such as Matsushita, NEC, and Fujitsu. After the September 11 attacks, sales of movies, console video games, and other consumer electronics products fell, leading to a further decline in operating income to 134.6 billion yen in 2002. Sony has to reduce the price of its Playstation2 from $ 299 per $ 199 in the US market to be able to compete with Microsoft’s Xbox and Nintendo’s Game Cube.

In addition, Sony still suffers from quality problems in its products and has to withdraw from the market three batches of mobile phones manufactured for Japanese operators in early 2001 due to software problems. Sonny’s net income further declined to 15.3 billion yen in 2002 (Exhibit 1) due to disappointing product lines (Exhibit 2). Sony is battling a fairly strong competition in the consumer electronics market, from companies such as Apple Computers, Samsung, Dell, Gateway, and Motorola, especially in the US market, which at the time was the main one for Sonny. At the end of 2003,

Sony was forced to withdraw 10,700 plasma TVs from the market due to an open defect in a power component, and also withdrew its small cameras from the market. Sales fell to 7473.6 billion yen in 2003, mainly due to lower overall sales in the consumer electronics sector.

However, operating income increased significantly to 184.5 billion yen as a result of the restructuring undertaken by the company in 1999 to prevent the problem of landslides. Investors have long hoped that the company can carry out the tough restructuring it needs to recover profits and compete with competitors. But Sony is not so strong. After all, the company is finally showing results. In the second quarter of the year, which ended in June 2004, the electronics department announced a $ 65 million profit. Merrill Lynch predicts that the electronics business will report sales of $ 45.4 billion and a profit of $ 375 million this fiscal year. Not a bad recovery, although it fades to $ 2.3 billion, which the department earned in 2000 and remains well below the combined $ 1 billion Meryl Lynch expects from Sony’s much smaller gaming, music and film divisions. spend this year.

Cost management

To overcome its financial problems Ideas began restructuring costs at Sony in 1999. Much of the turnover was affected by the painful way in which Sony rethought its style of work. In 2001, Sony established Global Treasury Services in London to control the global liquidity of Sony’s various activities and the optimal use of the company’s funds by grouping working capital and centralizing monetary and risk management. Following the completion of the first phase of restructuring in 2003, which focused solely on cost reduction, the company managed to reduce its production costs from 70 to 55. This in turn led to a 37% reduction in the company’s research activity after 2000. as well as the labor force by 19%.

Although profitability in cases of operating surpluses increased by 70 basis points in 2003, the company still has too many product lines, only a few of which, such as those for the production of cameras and digital cameras, make a profit through sales growth. To find a solution to the problems, in 2003 Ideas initiated an ambitious Transformation 60 program worth 335 billion yen, which is expected to bring fixed-cost savings worth 200 billion yen a year by March. 2006 (Exhibit 3). The plan will raise Sony’s profits, renew lines and help restore the company’s innovative image. Kunitake Ando, ​​President of Sony Corporation, is responsible for implementing Transformation 60.

‘These reforms are designed to create an efficient, value-based operating framework that suits a leading global company. Promptly, we intend to strengthen our operating structure by reducing fixed costs and production materials, as well as other variable costs. ” Ando wants to transform Sony into a profit-oriented company, not one that seeks only to increase global and market share. With the help of Transformation 60, Sony intends to close its losing operations, consolidate its production capabilities, as well as the distribution and services it offers. By 2006, the company expects to free up $ 2.8 billion in annual costs from its divisions and electronics manufacturing, mainly through layoffs and early retirement, which will reduce the payroll by 13%, equivalent to 20,000 jobs. After closing 17 of the 70 factories from 1999 to 2003, Sony has closed four more in the last 18 months. For example, Sony has reduced the number of companies in Japan that produce cathode-ray tubes for TVs from 17 to 5. The decision to close these plants in Japan is due to reduced demand for conventional TVs and the rapid growth in demand for flat-screen TVs. liquid crystals. Sony also intends to relocate its production facilities and other non-critical operations to China to reduce its fixed and variable costs.

Through the creation of IPPU (Engineering, Production, and Consumer Services), the management team was able to integrate 10 former divisions in Japan, which generally specialize in the production of electronic products. This is a new business model that aims to link the coordination of interacting product design, acquisition, production, delivery, and customer service. Production units gain competitiveness by adopting a more flexible and efficient supply system with the help of controlled management. Sony plans to cut back on its manufacturing, logistics, and service delivery worldwide. deals with the company. Sony intends to sell its life insurance business to this end will begin negotiations with potential buyers.

The company is reducing its jobs through voluntary retirement programs, non-renewal of the employment contract after its expiration, and a general policy of reduced hiring of new labor. The minimum age for the voluntary retirement scheme is reduced to 35. For full-time workers with more than 10 years of experience who wish to benefit from the voluntary retirement scheme, they are paid a salary of 6 years plus any additional benefits from the fact that they are retiring. At the same time, the company intends to cut its innovation activity by bringing innovations to 15 for 137 product categories.

Sony is reducing the number of production models it uses. For example, for TVs, clean circuits, and platforms. A year ago, Sony had 30 schemes. Now there are 15 in 2005, and the goal is for them to become 6 by 2006. “When we use an integrated model, production is much easier, which reduces our production costs by 30% or more,” says Manoto Kagure. manager of the TV production department. Sony hopes to reduce the list of components it produces from 840,000 years ago to 100,000 by March 2006. Of these, the 20,000 most popular for the company will be presented as the best manufactured by Sony, while the other 80,000 will be called ordinary parts. Reducing the number of components will allow the company’s engineers to focus more on product development and development, as Sony representatives say: “To differentiate our products and increase their competitiveness, we even need the parts we produce for them. to be different ”. Reducing the number of components will also reduce the number of suppliers from 4,700 to 1,000. Sony intends to buy most of the items from its largest suppliers, and also reduce component prices as a result of the acquisition price.

Read more: “Reorganization of business processes in the organization”,

Sony insists that the recovery of positions and is not due to cost reductions. The company is trying to achieve greater vertical integration by buying a large number of key parts for its most profitable products, from divisions of the company instead of from outside. This technique has been tested by many companies, but Sony sees it as a great strategic advantage. For example, the TV division will start taking liquid crystal displays next year from the joint venture between Sony and Samsung. And while Sony now buys most of the necessary items from external suppliers, once it reaches the production of half a dozen standard schemes, most will be produced by its divisions.

Sony is making similar progress with digital cameras. Years ago, Sony’s camera division bought only 30% of standard camera parts from other divisions of the company. But with its very light, 5.1 megapixel T1 – the second most sold device in the US in 2004. According to marketers from the NRD Group, Sony is increasing its share to 60%. A key element there are the sensitive lenses for the devices, developed in collaboration with the German company Karl Zeiss. More importantly, Sony developed a processor that built into T1 and its successor, T3. Hideto Jumbo, who heads product planning for digital cameras, says it’s cheaper than buying chips from third-party vendors, and also allows Sony to customize its parts. “An outside manufacturer who buys these parts can never achieve as tiny a case as we did. Jimbo says, turning 1.8 cm. The thick device in his hands.

This is not to say that all of Sony’s problems are behind them. For decades, Sony has been a leader in portable music listening technology with its Walkman for cassettes and discs. But Sony lags behind MP3 players when Apple Computers launches the iPod. Last summer, Sony finally introduced its Network Walkman, an iPod-like player. However, in many respects, it is inferior to the product produced by Apple.

Today, Sony’s audio earnings continue to fall, from 6.7% at the end of the reporting year in March 2004 to just 3% this year, as Meryl Lynch expects.
On TV, Sony is also not in the strong position it once had. For a long time, the company profited from TVs through technologies such as the so-called Wega engine, which further developed the TV signal to enhance picture quality. But now, Sony is facing a strong challenge from similar devices from Samsung, Panasonic, Sharpe, and others. In 2004, Sony went red in liquid crystal TVs and plasma TVs, and there was a decline in the production of DVD players and standard TVs, according to Deutsche Bank Securities. “Sony’s problem is that it loses money in its star products, and thus positions in older products are rapidly declining.” Says analyst Yasuo Nakane of Deutsche Bank.

To create income growth, Sony initiated the development of new digital products. Ken Katurati, the inventor of PlayStation, is implementing this initiative. Managers claim that this year the company will increase research and development costs in electronics by 33% to $ 1.9 billion. This money will be spent on developing new games, improving sound quality, and creating high-quality bright-color TVs, clear images, and spacious screens. An example of this is the Qualia 006, a 70-inch model that will cost about $ 10,000 when launched in the US. Another product is the camera, which will sell for about $ 3,700. So is Blu-ray, a new DVD format that can do two hours of high-quality disc burning. Sony is working with IBM and Toshiba to develop a high-power “Cell” chip that will help develop new digital products. The development of Cell will make it easier to transfer content, including advertising, sports, and video, to a wide range of Internet-connected devices. The chip will be used in the new version of the PlayStation3, which will be launched in 2005. Sony also plans to combine chip manufacturing and development operations into one business and place it under the auspices of the SEC (Sony Computer Entertainment). The goal is to allow Sony to find the lead chip solution it needs with less money than if corporation members continue to produce it themselves. Depreciation costs in this way will allow more efficient investment in more advanced technologies. This in turn will lead to the production of a new generation of products and reduce Sony’s dependence on traditional products.

Future potential

Through Transformation 60 Ideas, he believes that Sony will regain its leading position in the global electronics market. Sony Electronics President Dick Komiyama says, “Despite our exhausting competition from known and unknown companies entering the market, American consumers prefer Sony to other brands.” Sony is also encouraged by the growing sales and growth potential of Sony Ericsson camera phones, which recorded revenue of € 1.34 billion in the first quarter of 2004, compared to € 806 million in the same period last year. At the end of the year in March 2004, Sony recorded sales of 7,496 yen, but also a reduced operating income of 98.9 billion yen and a net income of 88.5 billion yen. The main reason for the reduced profits is the increased restructuring costs during the year, related to the sale of loss-making enterprises and salaries for workers who retired in advance. Total restructuring costs increased to 168.1 billion yen in 2004. Restructuring costs in the electronics divisions increased to 143.3 billion yen in 2004, which is the main factor after the reduced operating income in this department. In the music department, there is an increase in operating income due to reduced sales.

Sony has high hopes for the new version of the Playstation 2. The company expects high demand for these products after their introduction in the US and Europe. Sony also intends to capitalize on the potential of the Chinese market and expects to increase its sales in China to JPY 4 trillion.


Will the new products be enough to accelerate Sony’s profits? This will soon become clear in stores around the world. “If their products are a hit, investors and consumers will believe in Sony again,” said Meryl Lynch analyst Hitoshi Kuriyama. no, the company will not grow and the time of fat profits of the 90s will not return. ”In 2004, my goal is to show consumers the quality we strive for,” says Kunitake Ando. Next year, we will chase quantity. will remain a major player in new technologies and our competitors are rightly worried about us. ”

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