ase 4: Philips versus Matsushita: A New Century, a New Round Steve Kotarski MGT380 Dr.

. Tang Case Synopsis Two major competitors in the global consumer electronics industry, Philips of the Netherlands and Matsushita of Japan, both have extensive histories that can be traced back more than a century. They have each followed different strategies and have had significant capabilities and downfalls along the way. In general, Philips built its tenured success on a portfolio of responsive national organizations. On the other hand, Matsushita based its global strategy on a centralized and efficient operation through Japan. As they developed and reorganized their international strategies, each company was forced to undertake its strategic posture and restructuring as its competition position fell. During the 1990s, each company experienced specific difficulties to their market share. Both companies struggled to reestablish themselves in the global consumer electronics world. As the year 2000 came around, new CEOs at both companies came up with even more complicated initiatives and reorganizations. Outsiders wondered how each companys internal changes would affect their endless competitive battle in the industry. The case illustrates how global competitiveness depends on the organizational capability, the difficulty of overcoming deeply rooted administrative heritage, and the limitations of both classic multinational and global models. Study Questions 1. How did Philips become the most successful company in its business during an era when scores of electrical engineering companies were being formed? What impediments and disabilities did Philips' strategic and organizational capabilities bring with them? Philips made a strong push to developing new technologies starting in the 1950s and 1960s. Upon doing so, the company also wanted to translate these technologies into products while adapting, producing, and selling these products within individual national markets. During this time period, most of the companies in the electrical products market were bring formed and racing to diversify. However, Philips decided to stick with what they knew best. They made only light-bulbs. In doing so, their strong focus enabled the company to create significant innovations. Continuing on, Philips also became a leader in industrial research by creating physics and chemistry labs to address both production and scientific problems. The labs developed a tungsten metal filament bulb that brought great commercial success. Philips simple structure and significant innovations gave them the financial support they needed to compete in a time period where competitors were seeking major growth. Along with these positives, Philips had several problems that caused them to regress in the industry. Their main issue was its inability to bring products to market, also known as their local responsiveness. Philips was largely dependent on centralized operations and decisions, thus they lacked the flexibility to successfully operate in a multinational environment. In the late 1960s, the creation of the Common Market broke down trade barriers within Europe and diluted the rationale for maintaining independent, country-level subsidiaries. Also, new technologies demanded larger production runs than most national plants could justify, and many of Philips competitors were moving production of electronics to new facilities in low-wage areas in East Asia and Central and South America. Despite its many technological innovations, Philips ability to bring products to market began to falter. In the 1960s, the company invented the audiocassette and the microwave oven but let its

Japanese competitors capture the mass market for both products. A decade later, its R&D group developed the V2000 videocassette format, but was forced to abandon it when North American Philips decided to outsource, brand, and sell a VHS product which it manufactured under license from Matsushita. 2. How was Matsushita able to overtake Philips in over 25 years? What are the limitations or strategic incompetence that Matsushita suffers from? During the 1970s and 1980s, Matsushita focused its competitiveness in high quality, low cost, and standardized products. Their rapid product and process innovation was also one of their strong points. Also, their company really wanted to focus on exporting sales to world markets. Matsushita capitalized greatly on their broad line of 5,000 products by opening 25,000 domestic retail outlets. They represented 40% of appliance stores in Japan. These stores brought a serious increase in sales volume, as well as direct access to market trends and consumer reaction. Being the first Japanese company to adopt a divisional structure really helped Matsushita, which gave each division of the company a clearly defined profit responsibility. This structure created a small business environment to maintain growth and flexibility. It also generated competition amongst divisions and encouraged them to drive growth. Matsushitas global organizational model centralized the product and process innovation and then the development and manufacturing of the products were the product divisions responsibility. However, the company continued to struggle. Japans domestic market for consumer electronics collapsed, from $42 billion in 1989 to $21 billion in 1999. Excess capacity drove down prices and profits evaporated. And although offshore markets were growing, the rise of new competition from countries such as Korea and China created a global fight for consumer electronics. This caused prices to collapse and the consumer electronics companies to suffer. 3. For Philips and Matsushita attempts to reorganization, outline each CEOs efforts. Explain why both company had such difficulty building the capability they so clearly recognized as missing. Reorganization for Philips began around the 1970s when CEO van Reimsdijk proposed rebalancing managerial relationships between product divisions (PDs) and national organizations (NOs). This allowed Philips to decrease the number of products marketed yet increase the flow of goods among NOs. Also, he wanted to close the least efficient local plants, while converting them into International Production Centers (IPCs). However, implementation was slow. This was caused by the political and organizational difficulties of closing local plants. In the late 1970s, Dr. Rodenburg toke over as CEO and continued these ideas, establishing IPCs. Into the 1980s, power struggles continued. Unsatisfied with the companys performance overall, new CEP Wisse Dekker outlined a new plan in 1982. He closed 40 plants in Europe, focusing on core operations by selling certain businesses. Dekker replaced dual leadership with single general managers in order to deal with what he referred to as slow-moving bureaucracy. However, overall sales still declined and profits were at a standstill. The next CEO was Van der Klugt in 1987, who first designated various businesses as core and noncore, depending on their technological and strategic importance. He tried to strengthen product divisions around four core global divisions and dispatched his experienced managers to the most competitive of markets. Finally, van der Klugt closed 75 plants worldwide in order to jumpstart a financial recovery by 1990. In May of 1990, van der Klugt was replaced due to losses of over $4.5 billion. When Jan Timmer took over in 1990, he immediately reduced employees by 68,000 over the next 18 months. Workers were required to receive 15 months pay, further hurting Philips. To focus resources further, Timmer sold various businesses to major competitors. Timmer cut costs drastically over his time, and presented a new growth strategy before stepping down in October of 1996. Cor Boonstra was next, and within a year, cut 3,100 jobs and closed 100 of the companys 356 factories. Boonstra based his moves on a digital revolution, and focused on technologies such as cell

phones, digital television, and web TV. For Matsushita, President Yamashita hoped to capture the entrepreneurial initiatives of rival Philips. Despite his localizations, Yamashita publicly expressed his unhappiness. He felt that his plants remained too dependent on the center. Yamashita was replaced by Akio Tanii, who in 1986, shifted operational control to local markets by relocating major regional headquarters from Japan to North America, Europe, and Asia. When a Japanese recession came quickly, Tanii had to cut costs just as fast. Despite his efforts, Tanii was not successful and was forced to resign in 1993. As the new millennium approached, new CEO Morishita emphasized the development of technology and innovation offshore. He began investing in R&D partnerships in fast emerging fields. This idea brings us to their most current CEO. 4. What are the new developments in Philips and Matsushita? Evaluate the new business strategies implemented by each companys current CEO. In May of 2001, PhilipsCEO Gerard Kleisterlee was challenged to grow sales by 10% annually and earnings 15%, while increasing ROA to 30%. His first sign of restructuring came within weeks, when mobile phone production was outsourced to China. Kleisterlee admitted he was seeking partners to take over the manufacturing of some of their bigger products. Philips had their first quarterly loss since 1996 in 2001. These growing pressures led Philips to believe that outsourcing more was their only option. For Matsushita, Kunio Nakamura became the new president in April of 2000. The new CEOs key plan was to move the company to better meet customer needs. To do so, all key headquarters functions relating to international operations were transferred to overseas regional offices. The biggest surprise came in November, when Nakamura spoke of a destruction and creation plan, which would break up the entire PD structure. In Japan alone, 30 of the 133 factories were to be consolidated or closed. This only led to Matsushitas first losses in 30 years, and Nakamura announced emergency cost-cutting into the near future. Conclusion and Research It took time for both Philips and Matsushita to build up their international operations; therefore it is not easy to bring together their traditional organizational models with objectives that are in contrast of their extensive heritage. Philips innovation and entrepreneurship is no match for Matsushita. Philips is very good at adapting central products and strategies to meet local needs. Also, they have been able to use their resources available in the host country to create new products and new businesses. On the other hand, Matsushita and the Japanese have taught the world the value of pursuing a global strategy with only standard products. They have had tremendous cost advantages in being able to supply the world market from factories at home in Japan. It seems the tendency has been to compete on a country by country basis with all the additional costs associated with breaking up operations. In my view, both companies need to overcome limitations from their heritage and history. In order to do so, they need to differentiate business functions while at the same time integrate their distinct operating units. Next, they need to make all resources and responsibilities throughout the company to be independent. Lastly, each company needs to base their operations under one corporate philosophy. This can be started by adding to or changing their mission statements. It is clear that competing solely on the basic of national market responsiveness no longer is going to work. Modern transnational firms succeed by developing all their capabilities at the same time. The famous slogan, think global, act local shows the need to accomplish global effi ciency with

local responsiveness. The company knowledge needs to be transferred across organizational and national borders.