by Gillian Tett
By the end of the 1950s Ibuka and Morita’s entrepreneurial venture had changed beyond all recognition. Its revenues had grown to more than $2.5 million and it employed 1,200. Then it swelled further as it moved into numerous products. Initially, it focused on radios and recorders. Then, in the 1960s it developed the pathbreaking Trinitron color technology for televisions. It moved into video recorders and cameras. However, its most memorable hit was the Walkman.
“The [Walkman] idea took shape when Ibuka came into my office one day with one of our portable stereo tape recorders and a pair of our standard-size headphones,” Morita recounted.12 “[Ibuka] looked unhappy and complained about the weight of the system . . . [so] I ordered our engineers to take one of our reliable small cassette tape recorders we called Pressman, strip out the recording circuit and the speaker, and replace them with a stereo amplifier. I outlined the other details that I wanted, which included very lightweight headphones, which turned out to be one of the most difficult parts of the Walkman project.” Initially, Morita’s own staff thought that he was mad; nobody could believe that a tape player would sell without a recording device. Some of the staff also hated the Walkman name, since it was ungrammatical. “I thought we had produced a terrific item and I was full of enthusiasm for it, but our marketing people were unenthusiastic,” Morita admitted.
The group of engineers duly debated the idea, with voices from across the company pitching in; ever since the company had first sprung to life in a bomb-damaged basement of a Tokyo department store, Morita and Ibuka had taken pride in the idea that their company was a place for creative, boundary-free brainstorming. However, Morita and Ibuka were not willing to let debate drag on. They went with their gut. When the gadget went on sale, in 1979,13 it stormed the market, selling more than twenty million units within a few years. “I do not believe that any amount of market research could have told us the Sony Walkman would be successful, not to say a sensational hit that would spawn many imitators,” Morita said. “And yet this small item has literally changed the music-listening habits of millions of people all around the world.”14
IN THE LATE 1990S, four long decades after Morita and Ibuka had created their entrepreneurial experiment in the bombed-out basement of a Tokyo department store, and twenty years after Sony had stormed the market with its innovative Walkman, the company appointed a new man as president and co–chief executive officer: Nobuyuki Idei. His appointment symbolized a bigger shift. Until the early 1990s, the company was effectively run by Ibuka and Morita. However, in 1992 and 1993 the two men suffered strokes within months of each other and ended up in the same nursing home. There they spent long hours sitting next to each other in their invalid chairs, holding hands, in silence, unable to speak.
Back in the Sony headquarters, the company announced that Norio Ohga, Morita’s protégé, would take the helm. Ohga had been appointed chief executive officer in 1989, but, as so often in Japan, the formal title did not correspond to the real power. Though Morita was supposedly retired, he had exerted enormous influence over Sony until the point where he could no longer talk. But with Morita incapacitated, power had passed on, and to the outside world Ohga seemed an impressive and charismatic figure. Not only was he skilled in engineering, but he was also trained as a concert pianist.15 But he was not popular. And he arrived at a time when Sony was starting to face headwinds. In the early 1980s, the West had been hit by recession, sparking a fall in consumer purchases of electronic goods. The company responded by cutting prices and investing in more research. But this strategy caused a decline in its profit margins and a rise in debt.
Ohga knew that he needed to make the company more dynamic. But he faced a problem that besets almost every successful company: size. In the 1950s and 1960s, Sony had been a tightly run, relatively small, and flexible operation. By the late 1990s, it employed 160,000 people and was involved in activities ranging from radios to television to computers to home insurance to movies, as well as those famous Walkmans. A close-knit boutique had become a sprawling, complex behemoth. Ohga’s solution was to use his own person to knit the company together, and enact policies. He was often autocratic and was not afraid to take bold decisions. In the early 1990s, for example, some of the Sony engineers started tossing around the idea of creating a games console. They suggested calling it PlayStation. Initially, there was great internal skepticism about the concept, just as there had been over the Walkman. But Ohga overrode that. “Ohga pushed Sony to pursue the games business on its own, ignoring all objections,” observed Sea-Jin Chang, a Korean business analyst, in a seminal study on Sony. “He often said that “Ibuka contributed to Sony with the Trinitron TV, Morita with the Walkman, and me with the PlayStation.”16
This autocratic approach drove the company forward. But it stoked considerable resentment inside Sony. And the man who succeeded Ohga as president a couple of years later, Nobuyuki Idei, was from a different mold. Unlike the founding fathers, Idei was not an engineer by training. He had spent his career in Sony’s corporate management. Unlike Ohga, Idei was not an autocrat, preferring to lead in a more consensual style. And as he looked at Sony’s challenges, he became convinced that the best way to handle the swelling size and complexity of the company was to divide the company into specialist, self-standing units—or what management consultants like to call silos.17
Idei’s inspiration for this decision partly came—oddly enough—from Swiss giant Nestlé. Idei sat on the board of the confectionary and food giant, and had noticed that Nestlé had a distinctive way of running its operations. During the decades immediately after World War II, most large multinational companies were run as giant bureaucracies, all operating on a single grid. But by the 1990s, a new thinking, or fashion, was taking hold among Western business schools. Management consultants and experts had become convinced that it was better to run big companies not as a single grid, but as a collection of distinct, self-enclosed, accountable units. The idea was that having separate units, or silos, would create more transparency, accountability, and efficiency. Nestlé had embraced this idea in a particularly striking way. During the 1990s, the Swiss food giant implemented a restructuring program that forced each department—say, chewing gum or chocolate—to operate like distinct businesses, with separate “profit and loss” (P&L) accounts. Management was held responsible for meeting specific targets on profits, margins, sales, and managing their own investments, and their success or failure could be easily tracked since each department had its own balance sheet. It was an approach that had often been used in the financial world, where big banks in the City of London or Wall Street tended to use an “eat what you kill” mentality for traders and brokers. But Nestlé was one of the first to incorporate it so starkly into the world of consumer goods. To Idei (and the rest of the Nestlé board) it seemed to work well.
So Idei persuaded the senior Sony managers to reorganize the company on similar lines. During the 1980s, Sony had been run as a single corporate unit, subdivided into nineteen product divisions. In 1994, Sony reorganized itself into a so-called company system, which grouped those departments into eight stand-alone entities. (Consumer audio and visual; components; recording media and energy; broadcast; business and industrial systems; InfoCom; Mobile Electronics; and Semiconductors.) At the same time, the gaming, music, movie, and insurance businesses were given even more independence, run as separate satellites. This new system was not a pure “eat what you kill” structure of the sort seen at Wall Street banks, since the salaries for Japanese staff were largely set on a company-wide basis, not dependent on the profits each department made. However, each of these “companies” had its own top management, who would be judged on the basis of each department’s P&L performance.
Initially, the reforms worked. When the top managers in Sony’s new “internal companies” realized that they were accountable for their own P&L, they reined in their costs, cut borrowing, and boosted margins. This cut Sony’s debt by 25 percent between 1993 and 1997, and its profits i
ncreased sixteen times, from 15.3 billion yen to 202 billion. The share price doubled from 2,500 yen in 1994 to more than 5,000. Indeed, the reforms seemed so successful that when Idei was promoted from the position of president to co-CEO Sony (with Ohga), and then eventually sole CEO, he took them even further. In 1998 the eight companies were reorganized into ten groups. Then in 1999 the ten companies were reintegrated into three overarching companies that had twenty-five different “sub-companies,” and in 2001 and 2003 those independent entities were reorganized, twice more. Through trial and error, Idei was determined to find the perfect silo. “[We want to] simplify the structure in order to clarify responsibilities and transfer authority so that responses to external changes would be quick,” Idei explained. “[We need to] reduce the levels of hierarchy . . . [and] encourage entrepreneurial spirit in order to foster a dynamic management base for the 21st century.”18
But though these specialist silos made the company appear more efficient, at least in the short term, they also had a drawback. As soon as the managers of the new silos realized that they were responsible for their own balance sheets, they started trying to “protect” their units, not just from rival companies but other departments as well. They became less willing to share experimental ideas with other departments, or even rotate the best staff between departments. Collaboration halted. So did experimental brainstorming or long-term investment that did not offer immediate returns. Nobody wanted to take risks.
Idei was aware of these problems. In his speeches to staff he exhorted them to adopt a “networked” mentality, to pull together the different parts of the product line. Indeed, when journalists asked him why Sony kept reorganizing the company silos, he explained that he was trying to find the best system to encourage the different silos to interact with each other. To reinforce this point, the top leadership announced that their slogan would be “Sony United.”19 But rhetoric was one thing; practice quite another. As time passed, the different departments became less and less willing to interact. This, in turn, made the boundaries of the silos more rigid. Outside the walls of the electronics giant, the world of entertainment, media and electronics was changing fast: technological upheaval was blurring the different categories of software, hardware, content, and devices. This made many of the classification systems of the past outdated, if not redundant. But inside the company, the departmental walls were hardening. As a result, there was a growing contradiction between the language that Sony employees used to talk about the company, and how they actually behaved. In public, Sony liked to project an image of edgy innovation, boundary-hopping, and change. Idei and others constantly invoked the concept of “Sony United” and the freewheeling spirit of the company founders. In their mind, they were running a company that was still based on the values that Ibuka had described in the 1940s in his first prospectus: “Purpose of incorporation: Creating an ideal workplace, free, dynamic, joyous.”
But, as Pierre Bourdieu or any other anthropologist would have quickly pointed out, there was a big gap between rhetoric and reality. Inside the company, employees clung to the boundaries they knew. And, as time passed, those boundaries became so ingrained, in terms of how the company was physically laid out and employees organized themselves, that it seemed natural and inevitable to the staff that Sony ran itself that way. Just as it was hard for fire inspectors in New York’s City Hall to imagine using data on mortgage defaults to predict fire risk, the managers working in different departments of Sony found it difficult to imagine swapping data between departments in a proactive way, even when they were all working on the same projects or problems.
By the early 1990s, it had become clear to everyone inside Sony that the glory days of the Walkman were over. For a period, the company tried to keep the product alive by offering updated Walkman gadgets with compact discs, or miniDiscs, instead of the original cassette tapes. But consumers were moving faster than Sony could update its iconic product, and toward the Internet. So Sony engineers started experimenting with different methods to distribute music using the Internet. Instead of working as a single team, however, each department started experimenting with its own ideas. The consumer electronics division developed the Memory Stick Walkman. The Vaio computing group created its own offering. Neither group collaborated. Nor did they coordinate with the salesmen working in the Sony Music Entertainment group, a division of Sony that had been created when the Japanese group acquired CBS Records, an American group, a decade before. SME was one of the biggest music companies in the world and had a rich library of content. But its officials were so terrified that the rise of digital music might undercut their revenues from the sales of records and compact discs that they refused to cooperate with other departments at all. The music department hated the idea of helping consumers download songs from the Internet, for a digital Walkman or anything else. “Everyone said that it was great that Sony had a music label, since it could help with the next generation of music devices,” recalled Stringer. “But it didn’t work out that way at all.”
At Apple, however, the culture was radically different. Around the same time that teams at Sony starting exploring ideas about a digital Walkman, Steve Jobs, the CEO of Apple, sat down with a team of engineers to try to create his own digital music experiment. However, Jobs did not let the Apple engineers do that in separate departments. Jobs ran Apple with an autocratic style, and opposed to the idea of creating silos in the company, since he feared that these just created incentives for managers to protect existing product ideas and past successes, rather than trying to jump into the future. He believed that Apple should only ever produce a tiny collection of items, meaning that products which were becoming outdated should be killed off to make space for new ideas. “Jobs did not organize Apple into semiautonomous divisions; he closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom line,” Walter Isaacson wrote in his biography of Jobs. Or as Tim Cook, Jobs’s successor, later said: “We don’t have ‘divisions’ with their own P&L. We run one P&L for the company.”20 So when the Apple engineers pondered the future of digital music, they brainstormed a series of ideas across different product categories.
Swapping ideas across different boundaries at Apple turned out to be fruitful. Initially, the Apple engineers tried to create a gadget that was broadly similar to a Walkman but with Internet connectivity, namely a “one-step” digital music player, which would enable users to download songs from the Internet, and then play these wherever they chose. But they quickly realized this one-step approach had a big drawback: the technology of the time demanded so much computing power to store and edit music that any portable one-step device could only hold a limited selection of songs. Worse still, if they used a proprietary technology to store music in a compressed form, this would not be compatible with most music libraries.
So the Apple engineers debated the issue and eventually decided to use an innovative two-step solution. The first step required consumers to download music from the Internet on a computer such as an Apple Mac. They could then edit their selection of songs into a playlist. Then, in the second step, consumers could transfer the music to a small portable listening device, that enabled consumers to enjoy the music lists they had assembled. The beauty of this two-step process was that a device that just enabled consumers to listen to music did not need much computing power, unlike a device that edits or downloads songs. So Apple could keep the gadget very small. As a side benefit, this two-step process also encouraged consumers to use another Apple product, the Apple Mac computer. “The phrases [Jobs] used were “deep collaboration” and “concurrent engineering,” Isaacson observed. “Instead of a development process in which a product would be passed sequentially from engineering to design to manufacturing to marketing and distribution, these various departments collaborated simultaneously.”21
Then the Apple engineers blurred the product lines further to deliver more innovation. The Apple engineers knew that th
e music companies had no incentive to help consumers download music over the Internet, because they feared that people would listen to music for free. So Jobs and his colleagues hunted for a way to combat this piracy and bring the music groups on board. Eventually they hit on the idea of creating an “iTunes store,” a website where music companies could sell songs to consumers for a nominal fee of 99 cents. This produced far less revenue than CD or record sales. But it did at least provide music groups with some royalties, and gave them more incentive to cooperate. And to boost sales, the Apple engineers designed the platform so it could be accessed by anybody, using any technology, not just Apple products. At Sony, by contrast, digital music systems relied on proprietary technologies.
So in 2001, Apple launched its own portable digital music device, the iPod. This gadget was so tiny and elegant it could fit into a shirt pocket, and it could store such a vast array of songs that it was marketed under the tagline “1000 songs in your pocket.” It became a huge hit. Within a few months the word “iPod” had not only become a powerful brand in its own right, but defined an entire product category, in much the same way the original Sony Walkman had done. Eventually Sony conceded defeat and withdrew its inferior, competing offerings from the market. Apple had seized the crown.
IN THE SUMMER OF 2005, as humid air enveloped Tokyo, hundreds of staff at Sony crowded into a large room in the company headquarters to watch a once unimaginable spectacle. Howard Stringer, the British man who had been in charge of Sony’s operations in North America in the previous years, had just been appointed CEO, and was now addressing the company.