Sony was essentially established as a venture business

 

The Sony Corporation      

            Sony was essentially established as a venture business created in cooperation with a number of technology experts, spearheaded by Akio Morita and Masaru Ibuka. The year 1979 brought great changes to Sony. At age 57, Ibuka shifted over to the largely ceremonial position of chairman emeritus and left Morita to run things his way, which he did with such a personal style that the company began to resemble a founder enterprise. Most recent figures indicate that the Morita family is a major shareholder in Sony with their company, called Reikei K.K., holding 4.1 percent interest and total family holdings representing about 10 percent of Sony’s stock.

                        As for the makeup of Sony’s top-management team, the real power still lay with Morita, who held the post of director/chairman. Morita’s hand-picked choice as president was the former baritone singer Norio Ohga, and Morita’s younger brother, Masaaki, is vice president. There are other family connections as well. Sony’s president prior to Ohga was Kazuo Iwama, who was Morita’s brother- in-law, and the president of Reikei K.K. is Kazuaki Morita, another of Morita’s younger brothers. With this sort of lineup—and also taking into account the influence of Morita’s extremely well-connected wife, Yoshiko—I had intended to write that Sony, as a founder enterprise, was headed for potential future problems. But in November 1993 nature intervened, bringing huge changes at Sony. Akio Morita suffered a serious stroke, forcing him to resign as chairman a year later. In Morita’s place Ohga became chairman, and other new appointments included Tsunao Hashimoto as vice chairman and Nobuyuki Idei (a regular director up this time) as president and CEO. Many had pegged Masaaki Morita to replace Ohga as president, but instead Masaaki took this opportunity to

retire. Currently, the only Morita connection on the Sony board is Kazuaki Morita, who holds the position of auditor. This flourish of boardroom changes, and the reasoning behind the changes, caused a rash of speculation—but unfortunately the true answers remain unknown. From the outside, however, the changes look like healthy ones. Sony avoided having a long-term disabled (or dictatorial) chairman running things his own way, and the appointment of a new president was not put off interminably as it was with Y.K.K., as we’ve seen. Sony’s reputation remained solid and unscathed by what, from today’s perspective, seems to have been only a temporary setback.

                        Sony started with twenty people in 1946, and has grown to 8,000 people in twenty years. In keeping up with such a rapid growth, we could not depend on the usual yearly hiring of freshmen. Sony gathered a wide variety of personnel by such methods as personal acquaintance, public announcement, etc. As a result, school history and seniority are never considered by Sony’s management. Only the ability and qualifications of a person are considered basic factors for personnel assignments. However, as the company started to grow, Sony’s management began to face pressure from the traditional Japanese social influences. To maintain its freedom to act, management thereupon decided to delete a man’s school history from his personnel record. It was a bold step to take in Japan. But it resulted in greatly boosting morale, among SONY employees. This decision created a sensation and was highly appreciated by the people who are trying to introduce modern management in Japan.

                        On the other hand, Sony management became aware that it was a mistake to disappoint the men and their families by completely abolishing the seniority promotion system. For the seniority concept is a firmly established business and social practice in Japan. Still, to keep active and adjustable to keen international competition, and to the fast-developing electronics technology, Sony must have flexibility in personnel management. A compromise has therefore been developed. Sony gives such titles as assistant manager, manager, and general manager to people on the traditional seniority basis. But the functions and the range of responsibility of a section or department are set according to the capacity of the person who assumes the management of that section or department. To carry this idea out, Sony, being flexible, changes its organization as frequently as necessary.

                        Japanese manufacturing corporations have to be globally oriented because they either have to export their products or establish foreign factories, although the domestic market is relatively large. Sony’s policy is that all new products have to be sold worldwide and this policy is followed from the inception of these products. Overseas sales account for more than 70 per cent of Sony’s total consolidated sales. Overall, Sony is more global in outlook than most, but the average firm in the sample was still globally oriented – the export ratio and overseas production ratio of the sample of manufacturing companies were 20 per cent and 16 per cent respectively in 1993.

                        Today, Sony uses EVA as a measure of performance and it has found that EVA is related to share price. It estimates EVA for three years – thus it tries to avoid too much emphasis on measures of short-term profit. Matsushita Electric has started to use ROE as one of its corporate goals. However respect for people is a continuing value and employees remain a prime priority. For example Matsushita tried to raise the retirement age to 65 years (strictly speaking, one should refer to this as the ‘extended retirement age’ because employees should retire when they reach 60. Usually they enter into a new employment contract with less generous provisions because the long service obligation no longer applies). These new trends do not signal a convergence with the US system but rather the emergence of a hybrid model, sometimes referred to in Japan as the ‘new gemeinschaft ’ model.

                        In the past the Japanese organizational structure tended to be highly centralized but recently a degree of decentralization has occurred. One can see this in the tendency of many companies to establish ‘internal companies’. Hitachi has established ten such companies, each headed by a president. Sony has set up four companies of this type. Hitachi previously had a strong head office that housed marketing and other key functions. The many factory profit canters reported to the head office, but because they were shortsighted and afraid of failure, risky strategic decisions tended to be postponed and this hampered innovation. Sony had a hybrid organizational structure with many product divisions, but these lacked marketing and research functions because many of the key functions were centralized in the head office. Sony then established ten internal ‘companies’, but marketing and research were still conducted at head office. More recently Sony established four internal companies with full-responsibility for these functions. The head office still retains staff teams to study strategic issues.

                        The reasons for this change to the organizational structure are as follows. First, rapid strategic decisions have become necessary in the age of mega-competition: competitive advantage depends on seizing new opportunities as they appear. For instance Sony was quick to enter the entertainment and Internet businesses. Second, the construction of core competencies requires the concentration of resources into growth areas. Small product divisions with responsibility for short-term profits are not equipped to take decisive strategic action.

                        Sony had 38 directors in 1997 but this number has now been reduced to 10, of whom three are non-executive. At the time of the changes Sony sent letters to the removed directors’ families to reassure them that the change did not constitute a demotion. In the transition the title of 31 directors was changed to ‘corporate executive officer’, which corresponds to ‘vice president’ in American corporations. Corporate executive officers have been further categorized as senior, superior or junior.

                        Sony, now provide stock options to higher level managers to encourage them to improve shareholder value. Since the Corporation Act was changed to allow companies to hold treasury stock, managers have been able buy treasury stock or new issues of stock at the option price. The stock option and the bonus paid to managers accounts for more than half of their remuneration, thus to a large extent their salaries reflect the company’s profits. It does not appear that these changes were intended to transform corporate philosophy, however. Top managers are not being required to ‘cut the neck of employees to enrich [their own] pockets’ (Groenewegen, 1997), and companies still seem to be trying to maintain their employment levels as much as possible.

                        For presidents who exemplify the innovative and analytical type, innovation is the most important value. Typically, they encourage the collection of large amounts of information about future opportunities, keep a close watch on the business environment, are sensitive to new opportunities and generate alternative ideas based on information, ideas and data collected from both outside and inside the organisation. Decision-making depends on forecasts of the risks involved. The leadership style is typically participative – by listening to the opinions of subordinates the president strives to create a free atmosphere and is generous about failure – the emphasis is on innovation, not success.

                        Many companies have very specific corporate creeds, updating them when they become obsolescent. Sony emphasizes creativity in innovation. The creed is a condensation of what it means to share common goals (in quality, in creativity, in youthful appeal and so on). The creed also makes clear the meaning of jobs in the enterprise: as oriented overwhelmingly towards quality, creativity or innovation, or towards the youth market. The creed, as the implicit backdrop to all strategic thinking, also encourages consistency in strategic decision-making.

                        Changes in the mode of selection of non-executive directors are hastening ethical disclosure and compliance. Sony has reduced the size of its board from 38 members to 10, three of whom are non-executive directors. This measure is spreading to many other companies; thus the disclosure of company activities will be advanced. Further-more the new code in the Company Act stipulates that at least one member of the statutory auditors must come from outside the company, and this auditor could act as a monitor of corporate ethics. At Shiseido an independent centre for corporate ethics has been established.

                        When a Sony project team developed the Walkman, five million of which are sold each year throughout the world, the marketing department opposed the decision to proceed. However the president of Sony overruled them he was clearly closer in tune with customers than were those who were supposed to be.

Market analysis                     

                        The Walkman was made possible by good market analysis, in addition to technological developments. There was a trend for stereo players to become smaller as a result of technological innovations in miniaturization, the sale of these sets was increasing and the tape as a medium of music was becoming more popular than records. The technology of miniaturization combined with the concept of portability led to the Walkman, which took three years to develop after the idea was first put forward. During the course of development the response from sales channels was very cold. It was thought that an expensive small player without a recording capacity would be unable to compete with the small tape recorders that were flooding the market, so the development team was not confident of success. But when the president of Sony inspected the prototype Walkman he declared that the sound was splendid and encouraged the development team to go ahead, thus giving a great stimulus to the team and the project as a whole. So not only was information on market trends important for success but also support from the top played a great part in encouraging continued development.

                        Successful companies were able to launch growth products even during the economic downturn in the 1990s. Sony had been producing the hardware for Nintendo’s game machine but Nintendo decided to change its alliance partner from Sony to Philips, where upon Sony resolved to enter into the game machine business in its own right. This was not a sudden leap into the dark because its alliance with Nintendo had enabled it to expand its technical knowledge. It had made a number of innovations to the game machine, including changing the recording medium from tape to CD (Sony had already been successful in the music recording business and so it was familiar with CD technology). It had also changed the contract system so that the risk formerly assumed by the software suppliers had been taken over by Sony. Furthermore it had acquired skills that enabled it to enter the personal computer market, such as miniaturization skills, which resulted in its notebook computers setting the industry standard for thinness. Sony introduced its PlayStation in 1994, and in 1999 its global sales of about billion contributed about billion to Sony’s profits. The successful new product was based on Sony’s core competence in miniaturization.

                        Sony has learnt the hard way about the importance of new products following a standard if they are to be successful. Its more sophisticated Beta video technology lost out to the VHS format because the latter was freely available as a standard for other manufacturers to copy while Sony sought to control its proprietary knowledge through exclusive license. The license strategy deterred content providers and restricted the range of contents available as rival ‘me-too’ manufacturers used the freely available VHS standard. Today, Sony considers the global market whenever it introduces new products and it struggles to establish the de facto standard. For instance it has been striving to unify the standard format for DVD (Digital Video Disc) technology with Toshiba in order to increase the market share for them both. If they have different DVD formats the market share for DVD technology will not expand as much as it would have done with a shared standard.

                        In addition alliances can be inflexible compared with markets. Technology changes rapidly, and being bound by an alliance can be an obstacle to strategy change. As well as using retailers, Sony now advertises and sells goods directly to consumers through the Internet, which allows it to sell a much wider range of goods at a lower price, as well as reduce its inventory. There are only 2000 Sony shops and these are not totally captive they are large shops that also sell the products of other companies.

                        Complementary capabilities and economies of scale can lead to worldwide competitive power. For example Sony provides the hardware for its PlayStation while its software suppliers provide outstanding software. In this way the PlayStation quickly became a highly successful product.

                        The shift from multi-domestic production to global production is somewhat similar to Vernon’s (1966) life cycle model. The current trend is towards more specialized subsidiary production, made possible by lower import taxes and the establishment of free enterprise zones. Changes can be seen at Sony in San Diego, where production has shifted from color televisions for the US market to cathode ray tubes for the world market. The Sony plant in Barcelona has become a production centre for color televisions for the EU, and Nissan in Mexico now specializes in the production of small cars for the NAFTA countries. Sony in San Diego (3700 employees) now has more than a hundred development engineers while Sony in Barcelona (1600 employees) has about 40 development engineers to design TVs that fit the different broadcasting systems in Europe. Research and development activities are increasing in subsidiaries.

                        Companies with large head offices have sufficient resources to draw on to take innovative action. Sony tripled its sales over a ten-year period by putting resources into electronics components, computer-related products (such as displays) and the expansion of AV products. The concentration of resources into these growth products would not have been possible under a decentralized product division structure. Strong corporate head offices also have the resources to create and sustain project teams in the incubator department of the head office for planning and implementing risky new ventures. A large head office also has more resources for the aggressive expansion of worldwide operations by establishing production centers around the world.

                        Effective head office organisation depends on the collection and management of corporate knowledge, data, information and know-how. Crucial questions for central knowledge management include future opportunities and threats to the domain. Such questions are typically not the responsibility of the product divisions; they often focus on more than two divisions, or can propose corporate restructuring in ways that the existing divisions would find difficult to address. Information on how to improve present products, improve quality and increase productivity is collected and used at lower levels. Diffusing it to other departments is a central role of the head offices.

                        If a company has decentralized product groups and a weak head office, the company can turn into a collection of separate small units that cannot easily develop an infrastructure of strong core competencies.

                        Large manufacturing companies such as Sony and others have established intracompany units. A problem with this system is the overlapping of functions among units. Thus Sony reduced the number of units from ten to four and combined their marketing and research functions. Sony also bought back the shares of its successful subsidiaries, including Sony Music Entertainment and its insurance companies, in order fully to control them. In this way it could move resources to growth areas in accordance with top management strategy. There is a tendency for subsidiaries that are losing money to rely on the parent company, whereas subsidiaries that make a profit try to distance themselves from the parent company and refuse to move their resources to other departments.

                        In many companies there are two promotion ladders: the hierarchy of job grades and the hierarchy of status grades. As a result there are many opportunities for promotion, but wages are usually determined by status grade rather than job grade. Employees are promoted up the status ladder in accordance with length of service and merit. This system is quite different from that in the US, where if an employee’s job does not change then his or her grade (and wage) does not change. We can see the system in use by looking at the case of Sony, where there are three ladders. At the lower levels there is only the status ladder, with eight grades; for positions higher than section manager there are three ladders with eight grades. This system applies to all departments. Salary is decided only by status. For promotion to occur there has to be at least one recommendation by a supervisor, a test or an interview. All employees are eligible for promotion up to the ninth grade (assistant to section manager). Until the age of 29 there is no differentiation in speed of promotion but after 30 years of age there is competition for promotion. Employees have to serve a minimum number of years in a grade before they can be considered for promotion. In this way overly rapid promotion is prevented. From the lowest grade up to that of group leader the minimum stay is about two years; after that, three years is the minimum tenure. Above the level of department manager there is no minimum stay period.

                        As at Sony, a minimum period has to be spent in each grade before promotion can be considered, for example two years in grade 2, four years in grade 3 and four years in grade 4. Thus length of service is to some extent used to prevent unduly rapid promotion. At the same time slow movers are offered the possibility of catching up. Recently, more than 30 career paths were introduced. These career paths have four status grade groups and as usual salary is determined by status grade.

New Post                   

                        New posts are advertised throughout the company and applications are sent directly to the personnel department, without the need for permission from the section head. Examples of new posts are jobs in foreign countries, other places in Japan or in new businesses (for example Sony set up a new life insurance business). About 2500 of Sony’s employees have moved since the introduction of this system in 1966. At Matsushita about 100 people a year move as a result of the system. The system differs from applications for promotion to a higher grade in the status ladder or a higher post. It is initiated on the demand side and mostly involves horizontal moves. Other companies are adopting a similar system, the advantage of which is that employees can choose their own opportunities; thus, potentially, greater motivation and respect for individuality can be achieved. If a superior does not take good care of his subordinates, it is sometimes the case that they will rapidly transfer out of that section.

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