This article is brought by the Finance Lab Investment Panel
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Sony Corporation is a company that has gone through a difficult period the last years with declining financial performance. The management has recognized this fact and they have launched a new comprehensive strategic plan. Is this a potential successful turn-around or is it a company in continuous decline?
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Sony?s financial performance has been declining the last several years. The revenue has fallen with almost 23% the last five years and from 2009-2012 Sony reported a loss. This was first and foremost because of the decline in the revenue but also because of a significant downturn in their margins. In their newly reported results for 2013 they have reported a profit of $458 million. The increase is mainly caused by the depreciation of the Japanese Yen as well as the consolidation of Sony Ericsson AB. So the result is positively affected by nonrecurring gains and it is therefore not representative for the ongoing development.
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After a comprehensive renewal of the management team followed by a reorganization of the organizational structure Sony Corporation launched a new ambitious strategic plan. Sony Corporation is with their new plan trying to increase the focus on their core strategic business units and reorganizing their broad portfolio of business units. The three new focus areas, where almost 70% of their R&D budget will be allocated, are ?Digital Imaging?, ?Game? and ?Mobile?. In all of these three areas Sony is going to increase the focus on innovation, strengthen their network across product platforms and improve the integration.
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In addition to this new focus Sony has also initiated a turn-around of their television business. This included a 60% reduction in fixed business costs as well as a 30% reduction in operating costs. This reduction is supposed to be achieved through a thorough overhaul including reducing the model count with 40%. In addition to the reduction in costs they are also targeting innovation and development of new technology such as OLED.
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As a last part of the strategy plan Sony is going to strengthen their already strong position on emerging markets.
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Broadly speaking we believe that their new strategy includes some good initiatives and they have realized that they have to focus on their core competences. However, we do believe they could have been more ambitious in the restructuring and possibly sold some of their business units such as the ?Entertainment? division. We also do not believe that their competitive positioning is especially attractive and they have to strengthen their competitive advantage if they want to survive in the market. The execution of the strategy plan also involves significant risks and we would like to see more decisive results before we are convinced.
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Japan is going through tremendous macroeconomic change and there is a lot of risk involved in this process. The expansionary monetary policy has already caused the Japanese Yen to depreciate and it has also led to gains on the stock market. If it will have a permanent effect or not is difficult to predict and it will be very decisive for Sony during the next years as 32% of their revenue comes from their home market.
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The share price has already soared by almost 80% during this year measured in Japanese Yen and we would argue that the stock is currently too expensive. In addition we believe there is significant risk associated with their new strategy plan, their competitive positioning as well as the Japanese economy. This adds up to the fact that we do not see the company at the current moment as an attractive investment.
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Source: http://www.financelab.dk/2013/05/17/analysis-of-sony-corporation/
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