Why Sony needed to swap out its CEO

Sony, having suffered through years of gaffes under CEO Howard Stringer, badly needed some change.

That change came today when Sony announced that Kazuo Hirai will become the company's new president and chief executive, effective April 1. Stringer put a good face on the change, saying that his company has been working on "succession plans" over the last few years and that Hirai is the ideal choice to take over Sony.

"Kaz is a globally focused executive for whom technology and the cloud are familiar territory, content is highly valued, and digital transformation is second nature," Stringer said in a statement today. "I believe his tough-mindedness and leadership skills will be of great benefit to the company and its customers in the months and years ahead."

But Hirai's promotion has as much to do with Stringer's mistakes as Hirai's own very real qualifications. Under Stringer's watch, Sony has watched its financials slump, its major businesses, including the PlayStation and HDTVs, lose market share, and major competitors take the lead in the mobile market.

Given that, Hirai's assent to the top spot at Sony is by no means a surprise. For months, rumors have suggested Stringer would be replaced, and earlier this month, he told CNBC in an interview that Hirai would likely become Sony president soon.

However, what's interesting about that interview is that Stringer believed at the time that he would stay on as chairman and CEO. In a statement announcing the executive shakeup today, Sony announced that Stringer will lose the CEO title in April, and remain on solely as the board chairman, effective in June.

So, what has precipitated this dramatic change? How did Stringer go from being a prominent, respected CEO to one who has been replaced rather unceremoniously?

Here are just a few of the reasons:

The PlayStation Network Breach
Last year's PlayStation Network breach might be one of Stringer's biggest gaffes.

Sony announced last year that hackers had forced their way into the company's servers, stolen customer information from the PlayStation Network, Sony's Qriocity service, and even Sony Online Entertainment. Initially, the company believed that just basic information was stolen, but soon after, it was revealed that credit card data was also taken.

Although Stringer was leading Sony, it was Hirai who stepped into the spotlight to initiate damage control. Just weeks after the breach, Hirai divulged details on the methods the hackers employed, and, in many ways, bore the brunt of the outcry, as Sony's gaming services remained offline for weeks.

Eventually, Stringer spoke out and apologized to Sony's customers. But by then, there was some discontent among investors who wondered why their leader took so long to acknowledge the problem, and left his heir apparent to handle the initial cleanup.

What happened to the PlayStation brand?
When the first PlayStation launched over 15 years ago, it immediately became a hit. It was then followed by the PlayStation 2, which dominated all other competitors throughout its lifecycle, and still remains on store shelves around the world.

But the good times quickly came to a halt when the PlayStation 3 got off to an inauspicious start in 2006--just a year after Stringer became Sony chairman and CEO--and Nintendo's Wii became the top-selling console of its generation.

The PlayStation 3's troubles in the beginning were numerous. The device was bulky, wildly expensive, and lacked the unique gameplay found in the Wii. It was also facing off in a head-to-head battle with the Xbox 360 that it couldn't win. All the while, Stringer and his executives reassured investors that things would turn around.

Although Stringer was right--Sony's PlayStation 3 is selling relatively well around the world and closing in on total Xbox 360 sales--it took much longer than expected for the company to see such strong sales. What's worse, Sony was losing money on every console it was selling well into 2010, making investors wonder what happened to their once hugely profitable division.

HDTVs, Anyone?
If there was a single issue that should have worried Stringer more than any other last year, it was his company's declining HDTV business.

Sony's television business posted its eighth-straight loss in 2011 as consumers once again turned to cheaper alternatives from Vizio and highly advanced options from Samsung and LG. At the end of 2010, Sony owned just 10 percent of the U.S. LCD market, compared to 27.6 percent and 20.2 percent for Vizio and Samsung, respectively, according to research firm IHS iSuppli. When 2011 figures are released later this year, Sony is expected to be in an even worse position.

Sony's HDTV troubles haven't gone unnoticed by investors. Many prominent shareholders and even analysts have called on Sony to sell off its HDTV business, but Stringer has consistently said that option is off the table. Instead, he decided last year to split the TV business into three distinct divisions--LCD TVs, outsourcing operations, and next-generation TVs--to "make clearer the mission and responsibilities" of the units. It was a move widely panned by investors, and something that Sony will need to justify during its fiscal third quarter earnings call tomorrow.

That said, investors hoping to see a change in Sony's HDTV direction under Hirai might be disappointed, since he has been of the more outspoken supporters of keeping the HDTV business in-house.

"We all know it's a challenging business, but that doesn't equate to 'We should be out of the TV business,' " Hirai told The Wall Street Journal in August. "The question that needs to be asked, which I am trying to engage in very aggressively, is, 'What does it take to turn the business around?' as opposed to, 'Let's leave the business or other options.'"

Going Mobile
After Apple unveiled the iPhone in 2007, an arms race immediately erupted between handset vendors around the world. Just about every company was getting into touchscreens, developing software, and trying to adapt to the changing times.

However, over the last few years, Sony Ericsson seemed flat-footed as competitors delivered new products. All the while, its importance in the mobile space became marginalized.

In this case, Stringer can't take full blame. Sony Ericsson was a joint venture between Sony and Ericsson, and Stringer, while influential, couldn't autonomously determine the company's direction. However, back in October, Sony announced that it planned to buy out Ericsson's stake in the joint venture for $1.47 billion to complete its "four-screen strategy," which includes smartphones.

Although Stringer's decision to get Ericsson out of the way was widely viewed as a good one, some wondered why the company waited so long to pull the trigger. Smartphones have become a key component in several companies' business, and are increasingly the go-to platforms for casual gamers. It would have only made sense for Sony to make a mobile push sooner rather than later. And yet, Stringer waited.

The Great Financial Decline
Inevitably, CEOs are judged not by how friendly they are or how well-liked they are among their employees, but by their financial performance. And on that front, Stringer has been a disappointment.

Over the last four fiscal years ended March 31, Stringer has watched his company's revenue dwindle from 8.8 trillion yen ($115.6 billion) in 2007 to 7.1 trillion yen last year. During its 2008 fiscal year, the company posted a profit of 369 billion yen. Sony then lost 99 billion yen and 41 billion yen in 2009 and 2010, respectively, and a whopping 260 billion yen during its 2011 fiscal year.

It appears Sony's current fiscal year will be similarly disappointing. In the first two quarters it has posted so far, the company has lost nearly 43 billion yen.

Stringer's financial record has also been brought down by a declining stock price. Over the last year, Sony's shares have lost nearly 48 percent of their value and fallen to $18.22. Over the last five years, Sony's shares has lost nearly 62 percent of their value.

The single most important CEO duty is to maximize shareholder value. Since becoming CEO, Stringer failed to achieve that goal.