Sony revealed a new business strategy that is ambitiously targeting an operating profit of at least $4.3 billion in the company’s 2017 fiscal year (ending March 31st 2018).
This is a huge leap from the ¥20bn operating profit predicted for the current year, ending March 31st. Indeed, the company still expects to register its sixth net loss in seven years during the present period, albeit by a smaller amount than it previously anticipated. Sony said it will use a goal of 10% return on equity (ROE) as the main indicator by which it will measure its profit target.
The Japanese electronics firm believes the key to swelling its profit and ROE base is to focus on a narrower band of products. Primarily, Sony has said it will no longer look to pursue growth in business areas where intense competition puts it at a disadvantage. Smartphones are one such example, and the company has struggled to compete with Samsung and Apple, as well as budget smartphone manufacturers such as Huawei and Xiaomi.
Although Sony will still make smartphones and TVs, it will not “rule out considering an exit strategy” in these areas. A possible spinoff or partnership for these divisions seems likely. The strategy will therefore see Sony shift to more profitable business areas, such as camera sensors, videogames and entertainment products.
Sony’s CEO, Kazuo Hirai, has divided up the company into three sectors. The potentially profitable business areas have been categorised as the company’s “Growth Drivers”. This covers Devices, Game & Network Services, Pictures, and Music. Sony will employ aggressive capital investment in these areas, with the aim of achieving sales growth and profit expansion. There will be increased investment in image sensors, as well as enhanced R&D in the area, expanding their applications in everything from smartphones to medical treatment.
Meanwhile, Sony will work to expand the installed user base of the PlayStation platform. In Pictures, Sony will focus on increasing its audience, and for Music it will centre growth on burgeoning areas such as the streaming music market.
Next comes the “Stable Profit Generators” sector. Here, Sony will prioritise the generation of steady profit and positive cash flow for Imaging Products & Solutions, and Video & Sound. By capitalising on its existing technological expertise in these areas (rather than engaging in large-scale investment), and by optimising fixed costs and enhancing inventory control, Sony will target a profit maximisation and return on investment.
Lastly, the laggards are those areas focusing on “Volatility Management”; namely TV and Mobile Communications. These businesses operate in markets characterised by high volatility and challenging competitive landscapes. By carefully selecting the territories and product areas it targets, Sony will seek to limit its capital investment and establish a business structure capable of securing stable profits. To achieve stability, the company is aiming to spin off its Video and Sound business unit in October 2015, establishing it as a wholly-owned subsidiary. Sony says it will also explore potential alliances with other companies.
An achievable goal?
Sony’s optimistic profit target belies the tumult that the company has suffered in recent years. Indeed, even now it is still restructuring, selling off its PC division and spinning off its TV business, as well as cutting thousands of jobs. However, many in the technology industry have praised Sony’s trajectory over the past year, which has seen its share value increase by over 80%. This growth has been partly attributed both to the recent appointment of Kazuo Hirai to company CEO, and to the appointment of Kenichiro Yoshida as his Chief Strategy Officer in late 2013.
As this announcement suggests, the pair are likely to continue to aggressively pursue restructuring over the short to medium term. During Mr Hirai’s recent strategy presentation, he placed particular emphasis on profitability over volume, securing business unit autonomy with a focus on shareholder value and providing a clearer definition of each business unit’s position within Sony’s overall business.