Case study Philips and Matsushita 1998 G PDF

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Business Report Case study: Philips and Matsushita 1998: Growth of Two Global Companies INDIVIDUAL CASE STUDY REPORT

Konstantinos Belimpassakis

Contents:

1. Introduction Introduction…………………………………………………………….

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Philips………………………………………………..…………………. 2. Philips

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development development………………..……… 3. Establishment & organisational development

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1970s…………………………… 4. Reorganisation attempts in 1960s & 1970s

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1980s…………………………………….. 5. Reorganisation attempts in 1980s

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6. Reorganisation attempts in 1990s 1990s……………………………………..

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Matsushita……………………………………………………………… 7. Matsushita

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Structure Structure……………………………….. 8. Establishment & Divisional Structure

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Leadership…………………………... 9. Internationalisation & Global Leadership

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Operations………………………………… 10. Managing International Operations

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11. Recommendations on future Strategies Strategies……………………………..

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Conclusion……………………………………………………………... 12. Conclusion

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13. Appendices Appendices……………………………………………………………..

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Bibliography……………………………………………………………….. Bibliography

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Introduction: I) Introduction 2

This business report examines the case study of two global companies, of Philips and of Matsushita. Aim of this piece of work is to identify and analyse the main issues of the case study. Moreover, attention is drawn, first on the analysis of the competitive environment that the two companies operated within, and second on the identification of their capabilities and competences. Furthermore, this piece of work evaluates the strategic options that the two companies made, from the beginning of their establishment and until the first half of the late 1990s (1997). Finally, some recommendations are made, as concerns the strategies that the two companies could have followed in the next years after 1997, based on, the characteristics of the competitive environment, their competences and capabilities, during that time. This report consists of three main parts. The first two parts look at the competitive environment, the capabilities and competences, as much as the strategies followed by the companies, while for the convenience of the writer and the reader, the two companies are examined separately. Additionally, the evaluation of the strategies adopted from Philips and Matsushita, as much as the analysis of the main issues of the case study is made in these two first parts, on a chronological-based approach for the more effective and undistracted examination of the issues mentioned above. Finally, in the last part of this report recommendations are made for both companies, as concerns the appropriate strategy each one of them could have adopted after 1997. This strategy will be based on the information provided in the case study and its formation will be made with the help of the ‘strategic tools’ available.

II) Philips Philips:: The case of Philips is examined in four periods. More specifically, the first period looks at the capabilities and competences Philips acquired from its establishment and during its organisational development until the late 1950s. Moreover, attention is drawn on the competitive environment that the company operated within, during that period, while the examination of this period is concluded with an assessment of the strategies followed. The same issues mentioned above are also examined in the next three periods consisting of the period concerned with the 1960s and 1970s, the period related with the restructuring in the

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1980s and lastly with the period referring to the strategies followed in the 1990s.

Periods: First Period: Philips establishment and organisational development (1892-late 1950s) The first period examined begins with the establishment of Philips in 1892 and continues with its organisational development until the late 1950s. This period is characterised by the rapid evolvement of the company worldwide. From the beginning of its establishment, Philips developed specific capabilities and competences that led to its quick expansion. The tradition Philips developed of ‘caring for workers’ was among its capabilities. However, the acknowledgement of the significance of investing on the human capital of an organization through rewards’ giving can be characterised as a core competence of Philips. This policy that added value to Philips products could be easily imitated from its rivals, the rationale though behind this policy was inherent in the organisational culture of the company and thus differentiated it from its competitors. Philips decision to concentrate its efforts solely on the production and development of light bulbs and not to follow the trend of diversification was a strategy that proved beneficial for the company. This strategy would not have been successful though without investing in new production technologies. This capability of Philips combined with its core competence of recognizing the vitality of research for the company resulted in the development of new and innovative products that gave a competitive advantage to the company towards its rivals. Relatively to the decision to expand outside Holland, it was influenced from the successful performance of the company within its country, as much as from external environmental factors, as the need for mass production that the new technology Philips had acquired, imposed. Moreover, the saturation of the local market affected Philips’s decision to expand internationally through establishing sales organizations and joint ventures in diverse locations in Europe and America. Moreover, the ‘Principal Agreement’ that Philips signed with GE in the late 1910s gave both companies a competitive advantage towards their rivals. The two companies could share each other’s patents without competing against each other, at least in their regional markets, 4

after the division of the world into areas of control. This agreement gave the capability to Philips to compete more effectively worldwide and through a broader product line, because of the patents’ exchange with GE. The organisational structure of the top management of Philips can also considered as one of its core competences. The harmonic co-existence of the technical and commercial leadership in the decision-making of the company fostered a high degree of internal competition that was a main idiosyncrasy of Philips and among the main reasons for at least its early success. Among the decisions, Philips’s top management took before the beginning of the WWII was the transfer of some of its vital research and production assets to Great Britain and in the USA. Undoubtedly, the approaching war as much as the barriers posed from local governments ‘forced’ Philips to establish producing facilities overseas. However, this strategy proved beneficial after the end of war, since it facilitated the creation of the National Organisations (NOs), on which the new structure of Philips in the post-war period was based. The independent function of the NOs and the high degree of self-efficiency that they developed due to the war circumstances, strengthen their position in the post-war period and turned out to be “a valuable asset” for Philips (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.165). Through the NOs’ Philips managed to respond to the local needs and preferences of the customers, as much as to adapt to the different regional adoption of transmission standards. The new organisational structure of Philips was “represented as a type of geographic/product matrix” (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.165), where fourteen Product Divisions (PDs), located in the headquarters in Holland, were in charge of all of the product-related functions of the company. Relatively to the research, eight centers were established across Europe and the USA, while they operated independently. Moreover, Philips had established through the International Concern Council (1954) a formal communication line between the top management of the corporation and the senior executives of the NOs. However, in reality the increasing power of NOs overshadowed the role of PDs.

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Technical innovations that were built in NOs around the world, and were later adopted in the rest markets Philips was operating, like the color TV for instance that was created and first launched by the Canadian Philips, increased the significance NOs played within the corporation. The increasing autonomy NOs gained in all the areas related to the products, from its production and development and up to its distribution was developed with the ‘blessings’ of the corporate management. During that time, the operational structure of Philips was seen within the company and from its rivals as its core competence. A large number of innovations that set new standards in the global industry were an outcome of the NOs rather than an initiative launched from the PDs that were the ‘officially’ responsible for the development and distribution of new products. Despite the envy of the rivals and the good performance of the company due to the NOs’ capabilities, in the next years, though, Philips would have to be confronted with the increased autonomy NOs gained mainly in the 1950s. Second Period: Reorganisation attempts attempts in in the 1960s and 1970s The second period examined in this report refers to the restructuring efforts made from Philips in the 1960s and 1970s. In the 1960s, Philips came across with several problems. The removal of the trade barriers among the members of the European Common Market undermine the raison d’être that established the NOs almost three decades earlier. Moreover, advances in the technological area demanded a mass production that NOs’ could not manage. The rest competitors of Philips realised the structural changes in the industry and through transferring their production facilities in low-wage countries around the world tried to capture the economies of scale and gain a cost advantage in a cost-based industry that was becoming more competitive. Furthermore, in the 1960s Philips showed signs of incapability to market its new innovative products and to establish them as standard products in the global market as it have done in the past. The case of the audiocassette that the case study is referred to is a very good example of Philips’s inadequacy. In the early1970s, Philips based on the proposals suggested by an internally made report (‘Yellow Booklet’) took the first steps for re-addressing the balance between the NOs and the PDs that was identified as the major factor for its problems. However, while the philosophy

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behind the initiatives launched were on the right direction, their effectiveness though was limited. The rationalization of the production facilities through the establishment of the ‘International Production Centers’ (IPCs) met the resistance of local governments as much as the negative reaction from many NOs that were still very powerful. Despite the efforts in the late 1970s for the further simplification of the organizational structure through the abolishment of the traditional dual leadership with a single-one, the performance levels of the company remained low. The strategy of re-balancing the locus of power in a system that had proved not to be the appropriate one during that time for the company, due to the demands imposed from the competitive environment, was from the first place leading to failure. Third Period: Reorganisation Reorganisation attempts in the the 1980s In the 1980s, two organisational reforms took place, the first in 1982, while the second occurred five years later. In the first of the two reforms, the strategy followed was similar to that of the 1970s. Apart from closing down inefficient production facilities, the company aimed to become benefited by acquiring further capabilities through technology-sharing agreements and the formation of alliances. Moreover, for once again efforts were made for reducing the independency of NOs through the more strict control of them from the PDs. Despite these changes, company continued to face significant problems in economic terms. For this period, it can be argued that executives’ persistence to address the same problems with almost the same practices could not have brought any better results. It would have been more valuable for the top management to examine closer the reasons for the cost advantage of their Japanese counterparts and get some insights on how they could benefit from this knowledge. Furthermore, the closer examination of the Japanese case could have been used as a basis for the formulation and development of an appropriate corporate strategy. The second reform in 1987 had to be confronted with the continuing sliding performance of Philips worldwide. Among the main characteristics of this reform was the division of the business units into core and non-core businesses. Moreover, Philips “was restructured around the four core global divisions” (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.169) set in an effort PDs to gain further control over the NOs. The downsizing of the headquarters staff and

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the assigning of many product managers to markets of strategic importance, where specific product lines were allocated, aimed at linking the PDs directly with the markets. Furthermore, actions towards regaining the power from the hands of NOs were taken, like in the case of the purchasing of the majority stake in the shares of the North American Philips. The corporate management wanted to prevent cases as the selection of rivalries’ standardized formats to be adopted from NOs, as NAPC did with the adoption of the VHS video format Matsushita launched. Finally, apart from cutting jobs and closing down factories, the percentage of the resources available to the R&D centers decided to be spent on basic research, in order new products to become more market-oriented. However, one of the most important decisions taken during this period was that each research center was going to concentrate its research on specific product areas. It can be argued that the actions taken during this reform were on the right direction and if the man behind these changes (van der Klugt) would not have been replaced then the outcome could have been more positive. Nevertheless, a basis for further changes had been set for the next leadership. 1990s Fourth Period: Reorganisation attempts in the 1990s The first reorganisation, of the two that took place in this decade, in 1990, began with a large number of job cuts worldwide and a huge amount of money paid from Philips on compensations for the redundancies. Despite the fact that Philips met the resistance of NOs to the job cuts, the process though continued as planned. Moreover, a new system of evaluating managers’ performance was established through the signing of contracts that engaged executives in achieving specific financial objectives. As concerns, the reducing of company’s product segments several businesses were sold, while the new strategy formatted aimed at focusing on specific core technologies that would lead company into the future. However, the earlier cuts in the R&D personnel as much as the selling of company’s technological assets and thus in some degree the weakening of its technological capabilities could not support the aims of the new strategy set. Finally, Philips’s ignorance of Japanese plans’ cost and value advantage prevented from successfully confronting with one of the main reasons of Philips poor performance.

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In 1996, Philips ‘inability’ to promote and establish the new products it had launched brought the company in a difficult position. Some argued that “the company’s drive for costcutting and standardization had let it to ignore new worldwide demands for more segmented products and higher consumer service” (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.171). The appointment in the position of Philips’s CEO of Boonstra, who was specialized in marketing, intended to solve all these problems. Among his first actions was the further reducing of cost-inefficient businesses, while he drawn his attention on the restructuring of company’s production facilities. In parallel with the rationalization of Philips’s production facilities, the locus of production was transferred to low-cost locations and more specifically to the Asian region. Relatively to the organisational structure, the PD/NO matrix was substituted for “the restructuring of the company around one-hundred business units, each one responsible for its profits” (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.172). Furthermore, the new strategy announced Philips’s continuing engagement in the sector of consumer electronics, while it was also stressed that attention would be given on the ‘exploitation’ of already established technologies associated with the digital segment of the market. Finally, resources were allocated to the strengthening of company’s brand image, since in the last years it had lost its perceived-value from customers. These changes brought some increase in the profit volumes of the company, however as it was stressed from cycles outside the company this rise was easy to be achieved due to the low profit base of Philips brought forward from the previous years. Undoubtedly, these actions were in the right direction, however, it cannot be argued that the new strategy addressed all the issues set from the competitive environment Philips operated and thus further changes were essential to be launched in the next years.

III) Matsushita Matsushita:: The case of Matsushita is examined in three parts. More specifically, the first part looks at the organisational structure of the company from its establishment and until the 1940s. The second part examines the internationalization of the company in relation to the issues mentioned in the introduction, while the last part studies the management of Matsushita’s international operations until 1997. Finally, it has to been mentioned that in all the parts the 9

issues of competences and capabilities as much as the characteristics of the competitive environment and the assessment of the strategies followed, are examined. First Period: Establishment and Divisional Structure Matsushita was established in 1918 as a small company producing double-ended sockets. Fourteen years later under a broader range of products its owner announced company’s corporate plan that intended to lead the company and the future generations of executives in the next twenty-five years. From the beginning of its establishment, Matsushita developed a corporate culture that was transferred and adopted on each location of company’s facilities. This fact was among Matsushita’s capabilities, since there was a common creed and philosophy of one-firm that connected different people in diverse locations. Moreover, Matsushitas’s much broader line of products that outnumbered that of its rivals was fully exploited through the establishment of twenty-five thousand distribution outlets in the local market. Through this well-organised distribution system, the company gained a competitive advantage over its opponents, since it had “direct access to the market trends and to the consumer product reaction” (Case study: Bartlett &Ghoshal, 2000,3rd ed, pp.172). Thus, it can be argued that apart from increasing the volume of its sales, Matsushita during that period had acquired a competence that its rivals could not imitate due to their limited product range and lack of any equivalent distribution system. Among the major strengths of the company in the 1930s was also its organisational structure. Being the first Japanese having adopted the divisional structure, Matsushita consisted of thirty-six divisions of which one of them was responsible for one product. With the headquarters having the role of the bank that could lend money to the divisions, each division was pa...