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Apples market capitalization in 2001 was $7 billion, while Sonys was $55 billion. Apple introduced the iPod, a portable digital music player, in October 2001 and the iTunes music store 18 months later. Through these two strategic moves Apple redefined the music industry, reinventing itself as not only a mobile-device but also a content-delivery company. Signaling its renaissance, Apple changed its name from Apple Computer, Inc., to simply Apple, Inc. But what happened to Sony the company that created the portable music industry by introducing the Walkman in 1979?

Sonys strategy was to differentiate itself through the vertical integration of content and hardware, driven by its 1988 acquisition of CBS Records (later part of Sony Entertainment). This vertical integration strategy contrasted with Sony Music divisions desire to protect its lucrative revenue-generating, copyrighted compact discs (CDs). Sony Musics engineers were aggressively combating rampant music piracy by inhibiting the Microsoft Windows Media Players ability to rip CDs and by serializing discs (assigning unique ID numbers to discs). Meanwhile, Apples engineers were developing a Digital Rights Management (DRM) system to control and restrict the transfer of copyrighted digital music. Apples DRM succeeded, protecting the music studios interests while creating value that enabled consumers to enjoy portable digital music.

Sony had a long history of creating electronics devices of superior quality and design. It had all the right competencies to launch a successful counterattack to compete with Apple: electronics, software, music, and computer divisions. Sony even supplied the batteries for Apples iPod. Cooperation among strategic business units had served Sony well in the past, leading to breakthrough innovations such as the Walkman, PlayStation, the CD, and the VAIO computer line. In this case, however, the hardware and content divisions each seemed to have their own idea of what needed to be done. Cooperation among the Sony divisions was also hindered by the fact that their centers of operations were spread across the globe: Music operations were located in New York City and electronics design was in Japan, inhibiting face-to-face communications and making real-time interactions more difficult.

Sonys then-CEO Nobuyuki Idei learned the hard way that the Music division managers were focused on the immediate needs of their recordings competing against consumer-driven market forces. In 2002, Mr. Idei shared his frustrations about the cultural differences between the hardware and content divisions: The opposite of soft alliances is hard alliances, which include mergers and acquisitions. Since purchasing the Music and Pictures businesses, more than 10 years have passed, and we have experienced many cultural differences between hardware manufacturing and content businesses . This experience has taught us that in certain areas where hard alliances would have taken 10 years to succeed, soft alliances can be created more easily. Another advantage of soft alliances is the ability to form partnerships with many different companies. We aim to provide an open and easy-to-access environment where anybody can participate and we are willing to cooperate with companies that share our vision. Soft alliances offer many possibilities.[2]

In contrast, Apple organized a small, empowered, cross-functional team to produce the iPod in just a few months. Apple successfully outsourced and integrated many of its components and collaborated across business units. The phenomenal speed and success of the iPod, as well as iTunes development and seamless integration, became a structural approach that Apple applied to its successful development and launches of other category-defining products such as the iPhone and iPad. By August 2012, Apples stock market valuation had increased by a factor of 89 times, from $7 billion in 2001 to $623 billion, making it the most valuable public company of all time.[3] In contrast, Sonys market value had declined by almost 80 percent, from $55 billion to $12 billion.

To improve Sonys performance, the company is undergoing a major corporate restructuring. In 2012, Sonys revenues were $72.4 billion, with Sonys Mobile Products and Communications division ($13.0 billion), Entertainment ($12.4 billion), Financial Services ($10.7 billion), and Home Entertainment & Sound ($10.6 billion) being the largest divisions. In terms of profitability, however, Sonys core businesses are underperforming. Sonys most profitable divisions are non-core businesses such as Financial Services ($1.55 billion) and Other business activities ($970 million). The Entertainment unit made only $910 million in net income on over $12 billion in revenues, which represents a meager 0.007 percent return on investment.

As the Japanese economy is undergoing a major transformation under Prime Minister Shinzo Abe, corporate governance at leading Japanese enterprises from Toyota to Sony is also being shaken up. Companies must now rely more on equity financing rather than being able to continually finance operations through debt based on their cozy relationships with banks. This is the result of more than a decade-long competitive disadvantage by once world-leading Japanese companies, especially in the electronics industry (including Sony and Sharp).

Activist investors such as hedge funds are becoming more powerful players in Sonys corporate governance. And with more power, they are becoming more vocal. In particular, they argue that Sony Corp. is spread too thin over too many businesses and that its corporate strategy needs a major refocus. These activist investors are advising Sony to combine its music and movie businesses into one entertainment unit, and then spin it off as a standalone company. Among its assets, Sony Entertainment has music artists such as Justin Timberlake and Pink under contract, and the movie Skyfall, Sonys latest installment in the James Bond saga, which topped the rankings and grossed over one billion dollars since its release in 2012. This corporate restructuring should allow Sony to focus on its core business in electronics, while unlocking hidden value-creating potential in its entertainment unit.

Questions

1. What could Sony have done differently to avoid failure? What lessons could be learned?
2. Explain how restructuring (as activist investors are recommending) would produce benefits for Sony. What would be the benefits of splitting up Sony as proposed? What would be its drawbacks?
3. Explain how Sonys organizational design (structure, culture, and control) inhibited Sonys ability to respond to the competitive challenge of Apple in the digital portable music industry.

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