Out of Service
By Tim Clark and Carl Kay

That a foreigner is taking the helm of a proud Japanese firm like Sony is of great symbolic importance: it sends a message to domestic stakeholders that something has changed--or needs to change.

It should come as no surprise that Sony would choose as its leader a non-Japanese "outsider.” As CEO Idei Nobuyuki himself said earlier this week, two-thirds of Sony's 150,000 employees are non-Japanese. Most customers think of Sony only as a global corporation, and many consumers outside Japan neither know nor care about the company’s country of origin.

In Japan, though, where distinctions between uchi (inside) and soto (outside) are extreme--even in interactions among fellow Japanese--obsessive attention to distinctions such as nationality can obscure what's important.

Sony faces challenges that would try any CEO, regardless of nationality. The company--like Japan itself--faces a wrenching change: the transition from a hardware mentality to a services orientation.

This may seem counterintuitive. Isn't Japan the land that has mastered service, a nation of white-gloved taxi drivers and consummately polite department store clerks, where every customer is king? Well, yes--for low value, concierge-like services like gift shopping. But in mission-critical service industries such as health care, finance and real estate, Japan's domestic firms fall surprisingly--even dangerously--short. Japan's multi-trillion dollar domestic services market remains uncompetitive and largely undiscovered by outsiders.

How long will Japanese companies and Japan watchers abroad focus on hardware wars? Slammed by Chinese competitors and relentless electronics industry commoditization, Japan's giants struggle to stay ahead through cost cutting and technological innovation. But nothing can bring back the double digit annual growth these companies once enjoyed. In Japan, whose wealthy but rapidly-aging population is poised to start declining next year, the big opportunities are no longer in manufacturing and hardware but in services.

Japan’s consumers already enjoy an astonishing array of merchandise choices. What they desperately lack is good housing, sound financial advice and innovative investment products, a patient-centric health care system and benefits of the information technology revolution that go beyond hip mobile telephones and flawlessly stocked convenience store shelves. In Japan's future, it won't be the Walkman, but rather the walker--and the home caregiver delivering it--that will drive profitability.

To its credit, Sony already does services better than most of its Japanese colleagues. Its domestic financial units, with names little-known outside Japan--Sony Bank, Sony Life, Sony Assurance, and Sony Finance--account for half of the company’s worldwide earnings. But that's because at home Sony faces primarily world-lagging domestic competitors.

Competing internationally in content-driven service arenas, though, is an entirely different matter, and one that demands high-powered leaders with specialized expertise. Mr. Stringer is just such a content business expert, and a foreigner to boot. As such he may ride in the positive draft created by the spectacular success of Nissan CEO Carlos Ghosn.

Nevertheless, Sony's choice of Mr. Stringer, a longtime Sony employee, may be less bold than it looks. While some observers suggest he can harmonize Tokyo's hardware-focused engineering culture with New York and Los Angeles media sensibilities, he is still a Sony insider. A U.S. company in similar straits might look outside for fresh vision that could drive true transformation. Aside from the novelty that Mr. Stringer is not Japanese, the appointment hardly seems radical. Only time will tell whether he can push through the massive culture change Sony needs.

Carly Fiorina was apparently available when the Sony chose its new leader (now that would have been a radical choice). Then again, she failed to take the bold step of splitting HP into smaller, more focused components, precisely what Sony may have to do. After a breathtaking decades-long run, and despite its many strengths, can a company as large as Sony really jumpstart growth by fusing Tokyo engineering and Hollywood glitter?

Meanwhile, the next Sony is being hatched somewhere in Japan's archipelago, maybe even by a foreigner. It might begin life as a mobile phone-based disease management service run by a Canadian, a sales support software firm run by a Chinese engineering whiz, or as a dozen other services launched by outsider entrepreneurs. Some of their businesses are even financed by American-run local banks--featuring world class information systems built in India. Outsiders seem to understand better that service sector success demands speed, flexibility, specialization and true customer focus.

Twenty years from now the big news may come when one of Japan's dynamic new outsider-run services firms decides to name a Japanese national as its new CEO.

Tim Clark and Carl Kay are the authors of Saying Yes to Japan: How Outsiders Are Reviving a Trillion Dollar Services Market