philips vs a 157 and 172

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Ellen Moore Case

International and Cross-cultural management

12/30/2009

Deepika Raj (172/45)

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Contents

1. Case Background ………………………………………………………………... 32. Major and Minor Issues Identified ……………………………………...... 43. Analysis: Philips and Matsushita

a. Internationalization motives ………………………………………. 6b. Global strategy ………………………………………………………….... 7c. Analysis of Reorganization attempts…………………………….. 9d. Architecture, Routines & Culture (ARC) analysis …………. 11e. SWOT ………………………………………………………………………... 14

4. Solution & Recommendations ……………………………………………... 155. Current status of Philips and Matsushita ……………………………... 16

Bhavna Gaule (157/45) Deepika Raj (172/45)

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ELLEN MOORE (A)1. Case Background

The case deals with two companies well recognized in worldwide consumer electronics market- Philips based in Amsterdam, Netherlands and Matsushita, now called Panasonic based in Osaka, Japan. By 2001, both companies were getting ready to launch a set of strategic initiatives and organizational restructuring that was aimed at regaining their competitive edge. However, these two firms had arrived at this juncture by following vastly different paths. Philips built its success on a worldwide portfolio of highly autonomous national organizations while Matsushita based its global competitiveness on its centralized, highly efficient operations in Japan. Philips and Matsushita had followed very different strategies and emerged with different organizational capabilities.

Philips was founded in Eindhoven, Holland in 1892 as a family run business and by 1900 was the third largest bulb manufacturer in Europe. Philips differentiated itself from other firms in developing a tradition of caring for its workers through education, good pay, profit sharing and other benefits. In 1899 Philips ventured outside Holland and Europe to Brazil, Australia Japan, Canada and the U.S.

While all functions remained centralized in Eindhoven, Phillips created local ventures to gain entry into local markets. So in the late 1890’s and early 1900s Philips was a single product company that made light bulbs. By the 1920’s Philips departed from its highly centralized past and rapidly transformed itself into a multinational, decentralized company with a broad product line in the electrical and electronic industries. Philips had evolved from a highly centralized company whose sales were conducted through third parties to a decentralized sales organization with autonomous marketing companies in 14 European countries, China, Brazil and Australia.

Matsushita was founded in 1918 as an electrical socket manufacturer. It evolved rapidly into a multi-product electrical company. In the postwar boom, Matsushita thrived in the electronics industry and grew rapidly using a one-product-one –division structure that encouraged self-sufficiency.

In the 1950’s and 60’s Matsushita grew into a multinational company with plants all around the world. The VCR propelled Matsushita into leadership of the consumer electronics industry in the1980’. By then its overseas companies were either wholly owned single product plants or companies with abroad product line for local markets. At this time Matsushita had over 700 expatriate Japanese on foreign assignment for 4-8


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years. Tight central control was possible because these expatriates had strong network connections in Japan.

2. Major and Minor Issues Identified

Philips

Major Issues

1.) Power struggle between NOs and PDs

A major problematic area for Philips has been the struggle to balance the respective roles and power of the National Organizations (NOs) and the Product Divisions (PDs). While on paper the organizational structure was a geographic/product matrix one, the NOs enjoyed the real power, resulting in an ever existing conflict in terms of power and responsibilities. NO’s control of assets gave it more influence on the top management. The PDs as a result found it difficult to get their voices heard. The lack of clarity with respect to the two meant that Philips was unable to function efficiently, and thus has been unable to build either into a capability.

2.) Late to market

Due to highly decentralized organizational structure and autonomous national organizations, Philips failed to bring new products to market on time and in a cost efficient manner. Referring to the incident when the North American Philips decided to “outsource, brand and sell a VHS product” despite developing the technologically superior (to Sony’s Beta or Matsushita’s VHS) V2000 videocassette format. The V2000 failed to capture market for the following reasons:

a. Its late entrance to market (slowed by problems in the development of its DTF system, that made it the technologically superior product)

b. VHS and Beta already had established market share and ample pre-recorded video libraries

c. Beta camcorders arrived at market first d. VHS and Beta enjoyed worldwide distribution

Its late entry meant it was incompatible with machines and its unreliability seemingly left it destined to fail.

3.) Closure of inefficient plants – huge loss of manpower

In a span of 1975-2000, Philips had laid off 178,000 of its employees worldwide.


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The closure of the least efficient plants has also been undertaken by a number of CEO’s, meaning the loss of a large number of jobs on many occasions. In this sense it is clear that failed to build manpower into a capability.

Minor issues

During the 1960s, creation of common market eroded trade barriers, and diluted the rationale for maintaining independent country level subsidiaries

Matrix organization of Philips had its own disadvantages as it was difficult to hold NOs or PDs responsible due to lack of an agreement of responsibilities. In such organizations complex operations lowered the speed of reaction to the market demands.

Matsushita

Major Issues

1) Highly centralized and inflexible organization structure: Slow to manage change

Historically, the high level of centralisation and the tall structure have hindered Matsushita’s innovation attempts. The presidents in recent years have tried to make innovation a capability of Matsushita. The hierarchy has been flattened, and restructuring has finally taken place. After the collapse of the Japanese economy left Matsushita with excess capacity and evaporating profits, restructuring was certainly necessary, but took many years until anything was done to correct the situation. This shows that Matsushita was also slow to manage the changes in the external environment.

2) Dependence on competitors for technological innovation

As Matsushita has never been an innovative company, its main capabilities have always been the ability to mass produce and at low price, due to its production techniques and the fact that it produces in a low cost area of the world. It has also been quick to market, so that when a competitor brings out a new and potentially successful product, Matsushita is usually fast in producing a similar product. This strategy is somewhat risky, as it is dangerous to rely on other companies’ innovation and Research and Development to produce new products.

Minor Issues

Matsushita faces issue of high turnover by disgruntled overseas staff due to excessive control from Japan’s highly centralized R&D operations. There was lack of initiative at foreign plants as they were too dependent on the centre and acted only as an implementation arm.


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Despite excess capacity and strong yen, management couldn’t radically restructure its increasingly inefficient portfolio of production facilities or even layoff staff due to strongly held commitments to lifetime employments

There was lack of technology development in own overseas companies and the organization formed joint R&D agreements with other organizations.

Failure of ‘Destruction and Creation’ program by Nakamura created chaos and confusion in the organization and led to sharp financial losses.

3. Analysis

a. International Business motives of Matsushita and Philips

Matsushita exploited the post-war surge in demand by introducing a flood of new products and extensively expanding its distribution network which not only assured sales volume but also gave the company direct access to domestic market trends and consumer reaction. However, due to slowing down of post-war growth, Matsushita expanded to new markets as the domestic market was already mature and saturated whereas international market provided huge opportunities. It needed new markets and opportunities to boost sales and exploit its economies of scale.

One of the main reasons attributable to Philips success initially, was its one product focus strategy. While other electronics companies were keen to diversify into other products, Philips concentrated producing light bulbs and inventing new technologies for this product. It was, thus, able to build a competitive advantage based on technology, and subsequently, became a market leader in this field. To avoid market saturation, Philips soon expanded into global territories like Japan, Australia, China, etc.


MatsushitaMatsushitaPhilipsPhilips

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b. Global Strategies of Philips and Matsushita

Philips: Initially, when Philips did internationalization of its operations and marketing, the main strategy was to hedge risks against impending wars etc. It expanded to various countries and set up autonomous national organizations which controlled their own marketing, production and R&D decisions so as to suit the local demands.

However, it realized that globalization and increasing standardization of products by other companies call for efficient, scale-intensive, low-cost production facilities. And then, Philips started to look towards low-cost countries to set up production facilities and shifted its focus towards gaining efficiencies.

Matsushita: The organization looked outside its domestic market only when its own market was highly saturated and the demand growth had begun to slow down. It expanded to new markets so as to seek markets and the main strategy was to achieve efficiency through economies of scale and highly centralized operations.

Later, it began to realise that the foreign subsidiaries were too dependent on the centre for strategic decisions and technological development and they themselves acted as only implementation arms. So, it began to introduce decentralization of decisions in the organization structure. Also, Matsushita started to look outside for learning new


Matsushita

Philips

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technologies and formed various technological agreements and set up a venture fund for sourcing new inventions in Silicon Valley.

The source of competitive advantage for Matsushita was derived from economies of scale like lower costs and higher quality resulting from specialization by designating one plant to serve as the sole producer of a component for use in the final assembly of a product. It also made use of scope economies based on the saving and cost reductions that accrue when two or more products can share the same assts such as the productions plants, distribution channels, brand name, staff services etc.

Philips derived its competitive advantage from National differences and benefitted from the varied tastes and consumer choices in different countries.

Framework of Global strategy

National Differences Scale Economies Scope Economies

Achieving Efficiencies

Matsushita benefitted from differences in factor costs such as wages and cost of capital

Matsushita expanded and exploited potential scale economies in each activity

Matsushita shared investments and costs across products, markets and businesses

Managing Risks

Philips managed different kinds of risks arising from market or policy induced changes

Philips did portfolio diversification to create options for various kinds of consumers in different markets

Innovating, Learning &

Adapting

Philips learned from societal differences in organizational and managerial processes and systems as well as consumer choice

Matsushita benefitted from experience, cost reduction and innovation and exploited it in foreign markets


Philips

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c. Analysis of Reorganization attempts by both companies


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Philips

Matsushita:


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Overall, it appears that Matsushita has failed to manage change effectively during the 1980’s and 1990’s. Although delegating responsibility, successive presidents did not realise that if they wanted their overseas subsidiaries to be more innovative they needed to invest in the expertise. Had they done this, the subsidiaries may have developed their own products, which they could be responsible for selling and not have to be at the mercy of the Japan-based product divisions. It was only Morishita, in the late 1990’s who realised this. However, he did not restructure the Japan-based production facilities after the recession in the Japanese economy and, thus the company was unable to reach the levels of profitability it was used to prior to the recession.

d. ARC Analysis


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Philips:

Architecture

The organizational structure at Philips was decentralized, with major decisions divided between the PDs and the NOs

Routines• It was a company policy to renew plant machinery by regularly scrapping

pld plants and using new machines• Allowed NOs and PDs relationship to affect company’s success. The NOs

had more voice when it came to dealing with the top management• International Concern Council established to formalize board meetings

with NO heads• In the later stages, attempts to reduce autonomy of NOs and replacement

of dual management style with single management• Shutdown of a number of inefficient pland marked by a great deal of

turnover in short period of time

Culture


FORMAL NETWORK INFORMAL NETWORK

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Culture comprised of shared but competitive leadership between the technical and commercial functions. In some places, it was a triad management style concluded by the finance function, and this style trickled down to front line teams. Decentralization of decision making was a way to respond to country specific market conditions (difference in consumer preferences and economic conditions, etc) better. Shared values were disjointed from founder’s ideals. As company saw more problems, the employee centric company no longer took precedence.

Matsushita:

Architecture

The organization structure of Matsushita: highly centralized and strictly hierarchical.

Routines:


MEIMEI

METCMETC36 product divisions

Imports Industrial Goods Export

Regional Operations

Service Finance & accounting

Planning

MIS & administration

Personnel

China Europe Latin America

North America

Asia/ Oceania

Middle East/ Africa

Planning Manufacturing Sales

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• METC and the product divisions used to set detailed sales and profit targets for their overseas subsidiaries but local managers were given autonomy on how to achieve those targets.

• The company hired Japanese managers and technicians on foreign assignments to build relationships of subsidiaries with the central management.

• The Japanese technical managers were sent to transfer product and process technologies and provide local market information.

• Regular face-to-face meetings between managers of foreign subsidiaries and the headquarters was a routine in the organization.

• Once a new product was established, it was spun off into its own operation to create an independent product centre so as to maintain the ‘hungry spirit’.

• Various product divisions competed amongst themselves for market, funds, R&D etc and it created a healthy competitive spirit in the organization.

Culture:

The organization had become too centralized as all the major decisions were taken in the headquarters and the foreign subsidiaries played no major role in strategic decisions or product innovation. Many a times, excessive control created dissatisfaction in foreign subsidiaries and led to turnover of talent. It also led to over-dependence of subsidiaries on the centre and thus, lack of technological innovation.

Since Matsushita was basically a Japanese company, it fostered Japanese cultures and norms such as collectivism, lifetime employment etc. This not only decreased the flexibility of the company to reorganize but also restrained its capacity to lay off excess staff.

e. SWOT ( Strengths, Weaknesses, Opportunities, Threats) Analysis


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Philips:

Matsushita:

4. Solutions and Recommendations


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Philips

Philips’ pursuit to become a global leader has failed, but it still possesses capabilities that its competitors do not. Its ability to innovate and develop technology is what made it successful in the first place, and it must exploit these capacities further. Sustained investments in R&D and marketing may be the only way to beat the low cost Japanese competitors

The essential need is that Philips should not give up on its value proposition of being a ‘technology developer and global marketer’, which might happen by outsourcing majority of production of its basic products and services. If this happens, it will be close to impossible for Philips to make a comeback and compete with rivals offering the technology at more economical rates

Philips also needs to find the correct structure to suit its operations and its strategy. It needs to find a structure that is compatible with its strategy as opposed to changing one and trying to make the other fit to it.

Matsushita

Matsushita attempted to implement a change programme they perhaps should have considered other factors before deciding on how to embark on a change programme. If they had used a more bottom up approach, employees may have been able to warn the management of potential problems that may be in store.

Matsushita’s President Nakamura has now integrated the product division structure into multiproduct production centres. This may reduce costs, but it is difficult to see how this will stop them interfering overly with their overseas subsidiaries. If these production centres do allow their overseas subsidiaries more freedom then this may help to create an environment of innovation. This, along with Matsushita’s new marketing initiative may help the company to be more locally responsive and although this may come at a significant cost to Matsushita, its management should be prepared to sacrifice short-term profits for long-term success.

The management of Matsushita should engage in consultation with its workforce when undergoing its large-scale restructuring programme and carefully analyse the dynamic relationship between strategy and structure when doing so.


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5. Current Status of Philips and Matsushita

Philips

Philips launched a ‘Vision 2010’ which aimed to simplify its organizational structure by forming three sectors- Healthcare, Lighting and Consumer Lifestyle- as next step in evolution into a market-driven firm. Philips integrated its Consumer Electronics (CE) and Domestic Appliances and Personal Care (DAP) businesses into one Consumer Lifestyle sector capitalizing on the success of integration initiatives such as the International Retail Board created in 2004. However, given the current economic environment, the financial targets set as part of Vision 2010 are not expected to be met by the end of 2010 as originally planned due to the continuing economic slowdown and resulting declining demand in key markets.

Philips employs 134,000 people, holds more than 60,000 registered patents and has sales of EUR 27.0 billion or approx 39 billion US Dollars. Headquartered in the Netherlands, it has a presence in over 60 countries and is one of the largest multinationals in China.

Whilst the logo of the company has been consistent since the1930s the way in which Philips has advertised and communicated to the outside world has varied. In September 2004, Philips launched its “sense and simplicity” brand promise, which marked a new way forward for the company. “Sense and simplicity” reflects Philips’ commitment to be a market-driven company that provides products and services that fulfil the promise of being “designed around you, easy to experience and advanced”. In 2008, the total estimated value of Philips brand increased by 8% to USD 8.3 billion and was ranked the 43rd most valuable brand in Inter-brands 2008 ranking of best global brands.

The executive management of Philips is entrusted to its Board of Management under the chairmanship of the President/CEO. The members of the Board of Management have collective powers and responsibilities. The Supervisory Board supervises the policies of the executive management and the general course of affairs of Philips and advises the executive management thereon. The Group Management Committee is the highest consultative body within Philips; it ensures that business issues and practices are shared across Philips implements common policies.

The business mission of Philips is – “Improve the quality of people’s lives through timely introduction of meaningful innovations”. It clearly shows the organization’s focus on innovation.


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Matsushita

On October 1, 2008, Matsushita Corporation was renamed as Panasonic Corporation and all its brands were consolidated under the Panasonic brand.

Panasonic Corporation is one of the largest electronic product manufacturers in the world, comprised of over 540 companies. It manufactures and markets a wide range of products under the Panasonic brand to enhance and enrich lifestyles all around the globe.

There are currently more than 556 consolidated companies and 66 companies which are reflected by the equity method worldwide. Panasonic is comprised of 14 business domain companies. Each company has its own distinct R&D, production and sales divisions that respond to its own business segment, such as digital AV, home appliances, industrial solutions, and other electronic and consumer products.

Corporate Governance Structure

Panasonic manages Companywide risk based on the management philosophies of founder Konosuke Matsushita: "worry earlier and enjoy later," "causes of failures lie within one," and "be alert for signs of change and act accordingly." In specific terms, in accordance with shared global evaluation standards, risk information is collected widely and analyzed centrally. At the same time, Panasonic maintains a management cycle that links risk management activities with business plans for responding to important risks and with other business management initiatives.

Panasonic management philosophy is “Recognizing our responsibilities as industrialists, we will devote ourselves to the progress and development of society and the well-being of people through our business activities, thereby enhancing the quality of life throughout the world.”


http://panasonic.net/corporate/governance/popup.html

philips vs a 157 and 172

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