Corporate Strategy Meeting

Corporate Strategy Meeting - February 18, 2015

Today I will be going into detail about the Mid-Term Corporate Strategy for the Sony Group for the period spanning fiscal year 2015 to fiscal year 2017.

This Corporate Strategy marks the second Mid-Range Plan since I assumed my post as President in fiscal year 2012. There are many elements of the first Mid-Range Plan that we succeeded in accomplishing, but there are some that we did not accomplish. The management team, the Board of Directors and I have analyzed those elements and have debated the answers to two questions: how should we go about transforming the Sony Group into a highly profitable enterprise, and what growth strategies should Sony aim to enact.

Our conclusions form the basis of the four topics that I will address today:

Today's agenda

  • *FY2014= Fiscal Year Ending March 31, 2015

1. Review of the first Mid-Range Plan (FY2012 - 2014)

As we stated at our financial earnings announcement on February 4th, although we expect to record a small operating profit, we are forecasting a net loss of 170 billion yen for fiscal year 2014, the third and final year of the first Mid-Range Plan. The fact that this forecast is significantly below the financial targets that we announced in April 2012 is a very serious issue. The impact of our difficult decision to eliminate dividends for this fiscal year is also something that I, as President, take very seriously. I would like to once again apologize to our shareholders for our inability to meet your expectations.

In our first Mid-Range Plan, we strengthened our core businesses and reevaluated our business portfolio, while addressing our most pressing issue: the revitalization of our electronics business.

There are multiple reasons for the gap between the targets we established and our actual results, but the key reasons were insufficient understanding of the competitive landscape and insufficient responses to the changes in that landscape. Looking back, I see our previous business plan as one that was overly reliant on solving our problems through increased scale in each of our business segments. I also acknowledge that the financial targets we established may not have been suitable, and that we likely did not implement sufficient cost reduction measures.

This fiscal year, we have recognized these missteps and have worked to address the issues that hinder Sony's fundamental transformation. We have resolved to deal with difficult problems as they arise, not putting them off until later, and we have committed to implement structural reform efforts. We made the difficult but crucial decision to withdraw from our PC business and we have split out our TV business. We also made significant strides toward achieving our cost reduction targets for both headquarters and our sales companies. For headquarters, we are projecting a 30% reduction in costs from fiscal year 2013 levels during next fiscal year and are currently on-track to achieve this goal. For our sales companies, we expect costs to be reduced by more than 20% from fiscal year 2013 levels, thereby exceeding our target. In addition to cost reductions, we are beginning to see concrete results from our efforts to streamline our headquarters' organizational structure by eliminating layers and reducing the number of different units. The result has been speedier decision-making and enhanced inter-departmental cooperation.

In terms of our Mobile business, as previously announced, we will undertake structural reform to be completed within the 2015 fiscal year. Though this timetable represents a one year delay compared to our original plan, our efforts will put us in a strong position to achieve greater profitability from fiscal year 2016 onwards.

In businesses other than the Mobile Communications segment where we have faced significant challenges, we are nearing completion of large-scale restructuring efforts. However, since we believe the competitive environment for these businesses will continue to be difficult, we plan to be vigilant with respect to their scale and with respect to any changes in the environment. We will constantly reevaluate the costs and profit structure of these businesses and continue to take action to reduce costs without hesitation.

With regard to changes in our business portfolio, we have either exited or sold businesses that, in total, accounted for approximately 10% of the Sony Group's consolidated revenue. This includes the exit from the PC business that I mentioned earlier. While making these divestitures, we have also proactively invested in promising areas that we expect will build a solid foundation for future growth. This includes capital investment in our image sensor business, the acquisition of the cloud-based gaming service "Gaikai," and the establishment of a joint venture with Olympus in our medical business.

From the perspective of delivering superior products, the essence of Sony, we have continued our efforts to further strengthen the competitiveness of our offerings by creating unique customer value not available anywhere else. We believe that doing so will enable us to break through and overcome the intensely competitive environment we face. Accordingly, we have begun to shift our focus to high value added models that delight customers:

PS4™ provides users with new ways to experience entertainment. Our CMOS image sensors transcend the limits of the human eye and make it possible to "see the unseen." Our mirrorless single-lens cameras are redefining the camera market. And our 4K and Hi-Resolution Audio products provide users with unparalleled audiovisual experiences. There is a clear sense that these and other products have begun to translate into improved profitability. And needless to say, these efforts toward further improving our product competitiveness will continue into fiscal year 2015 and beyond.

2. Second Mid-Range Plan (FY 2015 - 2017) Business Strategies and Financial Targets

From here on I will turn to an explanation of our Mid-Range Plan covering the next three fiscal years starting from fiscal year 2015. As the specifics of the mid-term business plan and strategies for each of our individual segments were explained in depth by the respective business heads during our IR Day last November, I will refrain from addressing those again today. Rather, I would like to take this opportunity to elaborate on our Group-wide strategy as I see it.

Based on the review of our first Mid-Range Plan that I just outlined, we established the following three points as the key strategies for the second Mid-Range Plan, in order to steadily move forward with our transformation into a highly profitable enterprise.

First, we must manage our businesses so as to emphasize profitability, without necessarily pursuing volume in each of them. Second, we must grant each business unit greater autonomy and place greater emphasis on shareholder value. And third, we must clarify the roles each business in our portfolio is to play over the next three years and, according to this, prioritize investment of company resources.

And we have thus decided to position Return on Equity, or ROE, as the key performance indicator that we will emphasize above all others for the entire Sony Group.

We will facilitate a dialogue with investors, as we work to achieve the targets announced today in the mid to long-term.

Additionally, as we work to increase our corporate value, we will continually examine the return that we generate in proportion to our cost of capital and enhance our ROE.

ROE is broken down into three components: net profit margin, asset turnover, and financial leverage. In order to increase our ROE, we will prioritize improvement in our net profit margin, which illustrates profitability, and asset turnover, which illustrates efficiency.

Additionally, in order to achieve this target ROE for the Sony Group overall, we will assign a target for Return on Invested Capital (ROIC) to each business unit, which will be coupled with the Group's target ROE. Sony oversees an extremely diverse range of businesses, from imaging, gaming, and mobile communications to TVs, entertainment, and financial services. Yet the competitive landscape, market growth potential, and Sony's own competitive edge are not the same for any two of these businesses.

Given this, in order to clarify precisely what we will prioritize when managing each of these businesses, we will classify each one as a "growth driver," "stable profit generator," or "area focusing on volatility management."

In other words, we will plot an appropriate path forward for each business in order to improve its net profit margin and asset turnover. We will also act with clear direction with regard to sales, profits, and invested capital, as illustrated on this slide.

I will now go into more detail about each of these three classifications.

Devices, Game & Network Services, Pictures, and Music are the segments that we see driving Sony's growth over the next three years. We intend to implement various measures and focus investment in these businesses to achieve an increase in sales and profit. The growth potential of the respective markets of these businesses is the central reason why we have labeled them growth drivers, but, more importantly, we see them as businesses where Sony can, through innovation, set itself apart from our competitors and highlight the uniqueness of our offerings.

In Devices, Sony aims to further bolster its competitive edge in the realm of CMOS image sensors by investing in increased production capacity and technology development. We also plan to build the business into a systems solution business. In other words, we will not only strive to improve the capabilities of the image sensors themselves, but will also work to develop new sensing technologies and expand our business with camera modules that incorporate new features and added value. Automotive electronics represents one promising outlet for our sensors, particularly in the realm of ADAS, or advanced driver assistance systems. We will pursue all possible avenues for leveraging the high sensitivity, high clarity, and high speed imaging technologies used in our image sensors as well as our image recognition and image processing technologies.

In Game & Network Services, our priority will be on further expanding the PlayStation® platform and PlayStation™ Network users. In Pictures, while we will work to improve profit margins in the Motion Pictures business, we will strive to create better TV content than ever before, including content made for Subscription Video on Demand platforms that are rapidly growing. We will also focus on increasing the audience for the Media Network business by increasing ratings through improved content offerings and expanding our array of broadcast channels operated across the globe. Finally, in Music, we will enhance our business model in the growing streaming music market and work to discover and cultivate new artists. In these ways, we will proactively invest in and implement a variety of measures in the growth areas, with the aim of increasing sales and expanding profits.

In our Imaging Products & Solutions segment and Video & Sound business, we will strive to generate stable profits and positive cash flow through a continued focus on innovative products and marketing strategies. While we do not anticipate market growth in these businesses, we do expect certain segments of each market to remain insulated from commoditization. In these businesses, we have already been offering new, high value-added products such as our advanced mirrorless single-lens reflex cameras and Hi-Resolution Audio products, which are performing well. We will continue to do this, and we will aim to maximize profits and Return on Investment by capitalizing on our existing technological expertise in these areas, rather than engaging in large-scale investment. Furthermore, we will work to optimize fixed costs and enhance inventory control.

We believe the stable profit and positive cash flows generated by these businesses to be every bit as important a contribution to Sony as the growth driving businesses I just explained.

Next, we have our Mobile Communications Segment and TV business, whose markets are defined by high volatility and challenging competitive landscapes. Considering this, we will manage these businesses with discipline and prudence, placing the highest priority on securing profits while curtailing risk. Both businesses are experiencing intense cost competition, and we foresee even further commoditization. Having said that, these markets are incredibly large in scale and are ones in which Sony should be able to differentiate ourselves by leveraging the technologies and components for which we possess distinct advantages and expertise. We will also carefully select the markets in which we will compete and the products with which we will do so, enabling us to limit the capital we invest in these areas. Our priority will be the generation of stable profits, even if this means that sales come down. We will also continue to consider potential alliances with other companies among other options in these areas.

As a listed company, our financial services business is already operating with a focus on shareholder value. The life insurance, non-life insurance, banking and nursing care businesses will target further stable business expansion and profit growth by continuing to provide high quality services that our customers have come to expect.

Strengthen "recurring-revenue businesses" in order to generate sustained, high profit levels

Furthermore, in order to deliver sustained, high profit levels beyond the scope of this three-year Mid-Range Plan, from fiscal year 2018 onwards, Sony plans to manage its business portfolio so as to reinforce recurring revenue business models. What we mean by a recurring revenue business is one that enjoys stable and predictable revenue thanks to the continued patronage of a given customer base. Our financial services businesses, starting with Sony Life Insurance, are examples of the successful implementation of this model - these businesses are generating sustained, stable profits through the relationships they have built with their customers during their long investment phase.

Sony has nurtured recurring revenue businesses before, and we aim to nurture new ones, extending well past the scope of this Mid-Range Plan, by building long-lasting relationships with customers.

In the PlayStation business, we continue to expand the installed base for our consoles, thereby enabling us to continuously generate profits from software sales. PlayStation™ Network has over 64 million monthly active users enjoying services such as our subscription service PlayStation® Plus and PlayStation™ Vue, a new cloud-based TV service that began beta testing in the United States. PlayStation is a prime example of a recurring revenue business in which we are able to maintain an ongoing relationship with our customers and continue stable profit growth.

The Media Networks business operated by the Pictures segment, also boasts many customers who regularly view its channels, particularly in the United States and India. We will continue to grow and broaden the scope of this business, partially through M&A. Although the investment recoupment periods for these investments are relatively long, we anticipate generating stable profits in this area. Another recurring revenue business is music publishing, which generates licensing revenues based on our extensive catalog of music content.

In Digital Imaging, customers using our digital single lens cameras tend to purchase multiple high-performance interchangeable lenses from Sony, which broadens the scope of the images they can capture. As we increase the total number of camera bodies shipped as well as the variety of lenses that we offer, the relative sales ratio of lenses will increase.

Our B2B businesses, in which we provide solutions to clients and thus foster close relationships with them, are also examples of the recurring revenue business model that we will work to expand.

Looking to longer-term initiatives, beyond the scope of the Mid-Range Plan, I would like to touch on our medical business. We have launched a joint venture with Olympus Corporation and are working to develop surgical endoscopes and other products that will lessen the burden placed on patients and doctors alike. These products leverage our 3D and 4K expertise cultivated in the AV market, and we are preparing to launch our first product, as scheduled, by the end of fiscal 2015.

We have established targets for ROE and operating profit in our new Mid-Range Plan in line with the strategic approaches and initiatives that I have discussed to this point. Since we will be prioritizing profitability, some of our businesses will not be pursuing volume and, as such, we have decided not to set a consolidated sales target. For fiscal year 2017, the third and final fiscal year covered in this Mid-Range Plan, we aim to achieve an ROE of more than 10% and operating profit of more than 500 billion yen.

Finally, in regards to shareholder returns, our fundamental stance is to do this through increased corporate value and dividends. We are aiming to resume the payment of dividends in fiscal year 2015.

3. New Organizational and Management Structure

So far, I have announced our financial targets and discussed how we envision Sony Group's ideal business portfolio, how we classify each of our business segments, what we expect from each of them, and how we will go about allocating our corporate resources. Needless to say, it is critical that we draw up concrete plans based on these key strategies, execute them, and produce results.

I will now introduce the realigned organizational structure and the management team to lead it that we will adopt going forward in order to enact these reforms.

First, we will move to sequentially split out the electronics business units currently housed within Sony Corporation. With respect to the Game & Network Services and Mobile Communications segments, they have already been operating as self-sustained companies within the Sony Group. And last July, we established Sony Visual Products Incorporated and transferred control of our TV business there. Our strategy is to split out the other electronics businesses in a similar fashion in order to enable more autonomous management of each individual business unit.

Our goals for splitting out our business units are threefold.

The first goal is to promote clearly attributable accountability and responsibility. Specifically, we will create a separate balance sheet for every business, thereby encouraging the management of each business to keep shareholders and investors in mind when setting their financial targets.

Our second goal is to foster management policies and direction that place an emphasis on sustainable profit generation and the continuity of each business unit. By splitting them out, we will enable each company to engage in R&D investment and human resource development with an eye to long-term success. It will also encourage the management of each business to act independently and more flexibly when responding to changes in the business landscape, such as when making decisions about partnering with other companies, altering the subsidiary's capital structure, and making sales and acquisitions.

Our third goal is to continue to eliminate organizational layers, thereby further accelerating decision-making processes, and to reinforce the competitiveness of each business unit by increasing the transparency of its sales and non-operational expenses. We will therefore strive to adopt an ecosystem in which each business can build an optimal operational and cost structure suited to its distinct needs.

These goals also apply to our businesses already operating autonomously as subsidiaries. It is important to keep in mind, however, that splitting out our businesses is not an end unto itself or a solution that will solve every problem. Rather, it is a means to an end. We are keenly aware that splitting out a business may often have adverse side effects, so we will give careful consideration to designing the architecture of this new organizational structure. This includes clearly defining the roles of group companies in relation to a leaner headquarters, which will focus on group strategy creation and oversight. We will also create a system for cooperation between group companies in order to preserve the integrity of One Sony. We will thus do everything we can to avoid producing any undesirable side effects.

In terms of the timetable for splitting out our business units, we are targeting October 1, 2015 as the starting point for this reorganization process, at which time we will split out the Video & Sound segment and launch it as a self-sustained group company. We will also move forward with preparations for splitting out other business units thereafter.

In terms of personnel changes, we have decided on the following executive appointments to form a new management team that will lead Sony's transformation.

We already made some changes along the same lines for certain critical management positions last year, and this "second management team," which includes those changes, reflects an emphasis on two factors.

The first factor is that we wanted to build a team that brought together individuals well-versed in the hardware business and technology - individuals who have spent their careers in those areas - with others who have diverse career backgrounds and experience in other business categories. The second factor is to initiate a changing of the guard, while also promoting individuals capable of autonomous management, particularly in view of our strategy of splitting out our business units.

The personnel shown on the slide here will comprise the management team that will lead Sony through the second Mid-Range Plan that I have announced today.

Tomoyuki Suzuki, Andrew House, Hiroki Totoki, Michael Lynton, and Katsumi Ihara will continue to be responsible for Devices, Game & Network Services, Mobile Communications, Pictures and Music, and Financial Services, respectively.

In terms of new appointments, Shigeki Ishizuka will be taking charge of the Imaging Products & Solutions Business, which centers on cameras for both consumer and professional use, while Ichiro Takagi will be taking charge of Home Entertainment & Sound, for which TVs, audio and video products are central to the product lineup. Considering the significant proportion of total revenues at our sales companies these products represent, Mr. Takagi will also assume responsibility for our overall consumer AV sales platform, and in the case of Home Entertainment & Sound, oversee the entire segment from end to end.

Toru Katsumoto, currently the President and Representative Director of Sony Olympus Medical Solutions Inc., will assume responsibility for our Medical Business Unit.

Masashi Imamura, who has been leading our efforts to return the TV business towards profitability, will now be placed in charge of the Manufacturing, Logistics, Procurement, Quality and Environmental Platform.

Finally, as Executive Deputy Presidents, Kenichiro Yoshida and Tomoyuki Suzuki will oversee a wide range of areas with Mr. Yoshida responsible for financial strategy and corporate planning, and with Mr. Suzuki responsible for technology. They will both be supporting me in an even greater capacity than ever before.

Together with this management team, I will proceed with making our second Mid-Range Plan a reality.

4. Vision for Sony

I believe that we have a responsibility to perpetuate the Sony spirit of "doing what has never been done before," a spirit that has been part of Sony's DNA ever since the company's founding. It imbues all facets of Sony's business without exception, from development and design to manufacturing and sales, from headquarters to the entertainment and financial service businesses. The Sony Spirit has prevailed since the company's inception, and it is strong enough to have emerged intact from the tough restructuring efforts of the last few years.

In order to continue as a pioneering company and global leading producer of innovative products and services, we must enact reforms where necessary without delay.

In the past, whenever Sony has entered a new market such as the music or insurance industry, it has brought innovation to that market, offering customers unique value that only Sony could provide.

In order for Sony to continue to grow in a uniquely Sony way, I believe that nurturing the characteristically inquisitive minds of Sony's employees by giving them opportunities to take on new challenges is paramount to the company's success. For this reason, since becoming President, I have personally taken the lead in the area of new business creation. One such initiative is "Life Space UX," a new concept line of products that is unconstrained by existing product categories already existing in Sony. Another is an initiative called the Sony Seed Acceleration Program, which facilitates the speedy creation of new businesses from within Sony. The program is meant to foster greater networking and to bring together individuals from both inside and outside the company who have concrete ideas and the requisite skills to bring those ideas to fruition. I am incredibly proud of our employees for instantly responding to our call for proposals with hundreds of detailed ideas and submissions. And I am proud of Sony itself for being the kind of organization and environment which welcomes this kind of response.. It is through initiatives like these that we are reclaiming our sense of speed that is sometimes lost when a company grows large in scale.

As I have always said, Sony's mission is "to deliver kando to customers - to move them emotionally - through truly superior products, content, and services that inspire and fulfill their curiosity." In order to accomplish this mission, we must secure a measure of sustainability in our businesses and restore our financial health so that we can make sufficient investments in areas of growth.

Of central importance here is that profits are not just dependent on the expansion of sales. Rather, profits are brought about by innovation and the resulting creation of customer value. We therefore aim to elevate Sony's corporate value by delivering unique products, services, and business models that are clearly distinct from those of our competitors. This is our vision for Sony.

The business environment for Sony continues to be a challenging one, but we will build on the successes we have achieved through our reform efforts these last three years to transform Sony into a highly profitable enterprise capable of consistently delivering kando to customers around the globe for a long time to come.

If the theme of our first Mid-Range Plan, ending in fiscal year 2014, was "transforming Sony," then the theme of our second Mid-Range Plan, which will go into effect from the next fiscal year, is "profit generation and investment for growth."

We will continue to push forward with our restructuring initiatives and firmly implement our business plans in order to bring about a full-fledged "Sony recovery."

February 18, 2015
Representative Corporate Executive Officer, President and CEO
Kazuo Hirai

Kazuo Hirai

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