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JANUARY 28, 2000 VOL. 26 NO. 3
Sony's New e-Strategy
"We would like to amaze people," says Chief Executive Idei Nobuyuki. His Internet ideas, plus PlayStation 2 and partnerships with Seven-Eleven and General Motors come pretty close
By TIM HEALY and MURAKAMI MUTSUKO Beijing
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 Chairman Ohga saw Idei as the leader to take Sony into th future Ricky Wong--Moonshine Photo for Asiaweek |
Idei has proven to be a bold and visionary president - too bold and too visionary, some critics contend. In just a few short years, Idei has helped turn Sony's first-ever annual loss - the fiscal 1994 result was reported shortly after he was named president in April 1995 - into what promises to be the fifth consecutive year of profits in the 12 months ending March 31. In the same five-year period since he took over, Sony's stock has gone from barely 4,000 yen ($38 at an exchange rate of 105 yen to the dollar) per share to nearly 24,000 yen ($229). Market capitalization in 1999 increased four-fold. He has also made inroads into restructuring and shrinking the organization (though last year Sony still had about 170,000 employees).
But perhaps Idei's most important accomplishment is the one he hasn't achieved yet. With a range of hit products from the transistor radio of the 1950s to the Trinitron television, Walkman, Camcorder and now PlayStation, Sony has become the world's most respected, successful consumer electronics company. Idei's challenge is to chart a revolutionary new direction for the company and pursue it before this hit-parade becomes a list of golden oldies. Many executives have been famously unsuccessful trying to force change upon a solid, successful organization - until decline sets in. "We would like to amaze people," Idei told Asiaweek recently in an exclusive interview. "Sony has the [ability] to dream something brand new [See interview page 46]."
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If you sense that Sony's Internet strategy is unusually broad - from life insurance to consumer electronics to offices-on-wheels (and don't forget the robot dog), then you're beginning to see where the organization is headed. And it's headed there fast. To put it as succinctly as possible, Idei wants Sony to become a broadband entertainment company. What that means is he wants Sony to be whereever people gather - especially on the Internet. Consumers need money, Sony creates an online bank. They listen to music or watch movies, Sony creates the Web-content they want to enjoy and the hardware they need to make it happen. And in the future, when individuals film home movies and want to share them with relatives halfway around the world, Sony plans to be there, too. "The extinction of the dinosaur was caused by a huge meteor that crashed into the Yucatan Peninsula 65 million years ago," Idei recently told an audience of business school students at Peking University. "Today's meteor is digital network technology. It will change the rules of business and create new winners and losers."
Articulating a vision is one thing. Making it happen, as Idei is discovering, is quite another. Sony has long been one of Japan's most creative and innovative companies - at least in terms of the products it develops. But having emerged at the end of World War II as an organization of engineers and technicians, it has rarely been flexible. Idei realized this when he became president. At that point, he had already worked for the company 35 years. In an entertaining and insightful book on Sony's formation and success called Sony: The Private Life, author John Nathan recounts how Ohga considered and rejected each of the executives above Idei in Sony's corporate hierarchy before settling on an obscure executive with a marketing background. Ohga told Nathan, who was granted broad access to current and former Sony executives as he researched the book, that he knew the selection of Idei would be a surprise: "Logic would have demanded that he [Idei] be rejected. Certainly, his career didn't qualify him."
The son of a well-to-do university economics professor, Idei's childhood home on the outskirts of Tokyo was filled with books and ideas. As a boy he developed an affinity for the violin and classical music that endures. From the time he was first hired by Sony in 1960, Idei had a stated interest in Europe that caught the eye of Sony co-founder Morita Akio, who was planning to expand Sony's reach there. Idei spent six years in Europe before returning to Japan. His Sony career, at least until 1984, was unremarkable.
Then Idei was assigned to launch one of Sony's earliest computer efforts: bringing to market the company's first personal computer, the MSX. The product, however, was never able to achieve much penetration and Idei left the team in 1986. The MSX line was killed three years later, only to be revived by Idei in 1997, redesigned and reintroduced as the stylish VAIO series. The timing of the relaunch was good: In the current fiscal year, Japanese consumers are expected to buy a record 9 million personal computers. Sony plans to sell 1.4 million VAIO computers worldwide in the year ending March 31.
Ohga told Nathan that he likes what Idei has accomplished and appreciates the vision he has provied, but he thinks it is too soon to say what impact he will have on Sony's long-term performance. The chairman questions Idei's "nose for profit." He told Nathan: "[Idei] doesn't have as sharp a sense for making money as I do." That might be true, but Sony's stock price suggests that Idei does have a sense for giving shareholders what they want, which in Sony's case is a prescription for meeting the business challenges of the Internet.
Idei has adopted a decidely Western style of leadership in which the man at the top delivers broad goals and assumes his lieutenants will handle the details of how to achieve them. He professes great respect for a number of Western business leaders including Jack Welch of General Electric and Michael Eisner of Disney. He especially goes out of his way to cultivate friendship with successful entrepreneurs like Microsoft's Bill Gates - he plays golf with Gates whenever the world's richest man is in town - Steve Case of AOL and even newcomers like Charles Zhang, founder of the Chinese portal Sohu.com.
Like these luminaries, Idei has to successfully navigate the fast-changing environment in his industry. Kubota Masashi of ING Baring Securities in Japan thinks Sony is becoming much more concerned than it has been up to now with distribution channels. "Sony is still very much based on electronics," says Kubota. "But now that home electronics are increasingly digitized, margins are dropping. Sony can take great advantage of its content (music and movies), but it has not been equipped with the proper channels for net marketing."
Idei seems to understand the difficulty of dramatically shifting Sony's direction - and making it comprehensible to its customers. Many people will not be prepared to hear that Japan's sixth-largest company in terms of market capitalization is no longer solely an audio-visual appliances producer, he says. "You cannot take them from grammar school immediately to university." This is not to say that Idei is holding back on change. In less than five years as president (he added the title of CEO in June 1999), he has already accomplished two separate organizational makeovers. The first, in 1996, created 10 semiautonomous companies within Sony Electronics and was aimed at increasing the speed at which decisions were made. The second major overhaul came last year, when the 10 companies were consolidated into an even more nimble four.
Sony's embrace of a multitude of partnerships and alliances is not so much un-Japanese as it is un-Sony. Over the years, the company developed a reputation for going it alone that, in the eyes of some, verged on arrogance. (For a case study, examine Sony's stubborness in sticking with its Betamax videotape recording standard even after it was a clear loser.) But in today's changing world, where today's Internet success can easily become tomorrow's black hole, it pays to have partners and spread the risk. For instance, Sony buys a key component for its Memory Stick devices from Toshiba even though Toshiba is a partner in the product's only direct competitor (see box). Sony is working with both Microsoft and that company's current archrival, Sun Microsystems, which is promoting its Java operating system as an alternative to Windows. The lesson is, don't let rivalry or size or anything get in the way of useful partnerships. "Ideas count more today than the amount of funds [a company has]," says Miura Kazuharu of the Daiwa Institute of Research in Tokyo. "There are many small companies with great human resources but little funds. They make great partners for companies such as Sony expanding into the Internet business."
Idei is breaking other conventions too. At a time when Internet companies contemplate what digital device - computers, mobile phones, game players or even peripherals - will become the most popular for accessing the Internet, Idei wants the managers of these businesses to face off. It's almost like the western management philosophy of creative tension, which believes that individuals will perform best when they are placed under some stress. "He is letting [the managers] compete, [and then] he will jump on the bandwagon of the winner," says analyst Kuriyama Hitoshi, who follows Sony for Merrill Lynch in Tokyo. Of course, there may not be just a single victor. Idei may, he reckons, merge some operations by combining PlayStation, Internet-compatible appliances and computers.
The PlayStation line of video games is currently the unrivalled hit product for Sony, and therefore a popular partner for any struggling unit. Since it debuted in late 1994, Sony has sold more than 70 million units, giving it 70% of the market for video game players. In the last fiscal year, PlayStation accounted for 38% of operating profits. By contrast, electronics products, Sony's bread, butter and historical brand, suffered from slumps in Russia and Japan and contributed just 36% of operating profits.
In fact, that seems quite likely. PlayStation 2, is due to roll out March 4 in Japan, a few months later in Asia and before the end of the year in the U.S. and Europe. The buzz surrounding Sony's new product is so terrific among game players that it is damping the Japan sales of Sega's new Dreamcast. But Idei has bigger plans for PlayStation than dominating the industry that, including both machines and games, grew to $14 billion last year from $10 billion in 1998. The PlayStation 2 will be a computer with a central processing unit that the company claims will far exceed CPUs typically found in today's personal computers. Players will be able to enjoy video games with movie-quality graphics. Eventually, movies that include remote-controlled characters influencing the direction of plot and action should be possible.
For all his talk about the need for Sony to change and move away from being just a consumer electronics company, Idei knows that the company will live and die with PlayStation 2 for the medium term. Five years ago, he introduced the theme he wanted to drive the company: "Digital Dream Kids." Since then, he has added "on the Network" to the slogan. Now doesn't that sound like the future?
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