1. How did Philips become the leading consumer electronics company in the world post war era? What distinctive competencies did they build? What incompetancies did they build? Prior to World War II, Philips had created a culture of embracing technical innovation. On the production side, Philips was a leader in industrial research, and scrapped old plants in favor of new machines or factories whenever advances were made. On the product side, strong research enabled the company to broaden its product line, starting with light bulbs but growing into vacuum tubes, radios and X-ray tubes by the 1930s.
Because Holland was such a small country, Philips was forced to start exporting in the early 1900s in order to have enough sales volume for its mass-production facilities. Philips evolved into a highly centralized company with decentralized sales and autonomous marketing in 17 countries. Political events in the world during the 1930s forced Philips to change into a truly multi-national company. First, the depression caused countries to erect trade barriers and enact high tariffs, forcing Philips to build local production facilities in the foreign markets they served. Second, in anticipation of World War II, Philips transferred its overseas assets into trusts in Great Britain and the U.S. They moved the bulk of their research staffs to England, and their top managers to the United States. With these assets, the national organizations (NOs) became selfsufficient during the war, skilled at responding to conditions in country-specific markets. In the post-war environment, the NOs had a great advantage in being able to sense and respond to differences in their local countries, and eventually product development became a function of local market conditions. Philips was able to exploit their competencies in research and localization until the late 1960s.
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At this time, their biggest incompetency was beginning to get in the way of growth. Philips was no longer able to act as a single unified company in order to bring new product technologies to market or to react to recent manufacturing trends; instead each of the NOs acted independently in their own self-interest. Top management was no longer able to manage the multi-national company Philips had become. For example, Philips was unable to standardize the company for a global push with its V2000 videocassette format when the U.S. chose to license VHS from Matsushita instead. On the manufacturing side, printed circuits were more efficiently produced in large plants, but the NOs were unwilling to consolidate their local manufacturing facilities. Philips’ attempts to set up Product Divisions (PDs) to balance the NOs were largely a failure, and Philips began a long slide, unable to launch new products or to take advantage of the global manufacturing opportunities in low-cost countries because they were unable to coordinate the NOs.
2. How did Matsushita succeed in replacing Philips as #1? What were its competencies and incompetancies? About the same time pre-war Philips was decentralizing its international structure, Matsushita was a Japanese company that was expanding rapidly into consumer items such as battery powered lamps, electric irons and radios. Post-war, Matsushita integrated horizontally, selling 5,000 products, and vertically, opening 25,000 domestic retail outlets (which gave then direct access to market trends and consumer reaction).
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Matsushita had a small central research lab, but product development occurred in product divisions. While rarely an innovator, they were very fast to market.
When local markets were saturated, Matsushita followed a global strategy of international growth. They shifted basic manufacturing to low-wage countries, but high-value components were still manufactured in Japan. Assembly plants were eventually established in Europe and the Americas to satisfy protectionist sentiment, but the central product divisions kept strong control over the overseas plants. Contrary to Philips, Matsushita stayed in control of the company’s subsidiaries: they developed an effective network of expatriates to build relationships and teach their management process to their foreign subsidiaries, foreign GMs traveled often to the Osaka headquarters, and they stayed in constant contact with daily faxes and nightly phone calls. With a unified global strategy, increased volumes enabled Matsushita to drive costs (and prices) lower, and eventually they overtook Philips based on the strength of their manufacturing operations.
11/7/2005
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Philips vs. Matsushita Case
Greg Tensa
This control, however, stifled creativity at the foreign subsidiaries, and innovation began to lag. It seems that the foreign operations were little more than arms of the home organizations, only implementing what they were told by the central organization. While it seems that Matsushita may have desired for their local operations to be more independent in words, in practice American engineers resigned due to excessive control that the their central operations exercised. Unable to develop innovative overseas companies, Matsushita tried to buy innovative companies (i.e. MCA), but the collapse of the Japanese bubble economy and high Yen caused the Japanese economy to enter a protracted recession, and Matsushita was forced to abandon this strategy.
3. What do you think about the changes each company has made to date? The objectives? The implementation? The impact? Why is change so hard for both of them? It seems that Matsushita and Philips had adopted two cultural extremes in their organizations; Matsushita with a highly centralized operation that dictated global operations, Philips a conglomerate of similar businesses with little central coordination. It seems that both realized that they needed to adopt the best practices from the other company. In a mass-market like consumer electronics, this would mean a strong central organization that could develop standards for emerging technologies in order to develop economies of scale for production, yet has the flexibility to adapt the standards to fit the desires of local markets.
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On the Philips side, seven CEOs over 30 years tried to reshape the company. In the 70’s, they tried consolidate the most efficient local plants into International Production Centers (IPCs), each supplying multiple NOs. It turned out that the NOs were too powerful, and the PDs were still unable to set direction for the company, so the local operations prevailed. In the 80’s, Philips began closing inefficient plants (40 in Europe then 75 internationally), and identifying businesses as either core (where they were technical leaders or strategically important) or non-core (candidates for divestiture).
They also repurchased the North American Philips Corp., in order to regain control. It seems that they might have begun to turn the corner on control, but then Philips also halved its spending on basic research, and made R&D the direct responsibility of the businesses supported by the research. The CEO implied that R&D spending was being wasted on impractical ideas, but it seems just as likely to me that money was being wasted because the various NOs were unwilling to rally around the new technologies being developed. Indeed, by 1994 it seemed that the cuts had left the company with few who understood the technology for new businesses.
The 90’s were marked by cost cutting; a 22% headcount reduction followed by divestiture on 1/3 of its 120 major businesses, and then shifts of thousands of jobs from North America to APAC. After all of this, in mid-2001 Philips was again losing money, and looking to outsource even more manufacturing. Changing a company culture is incredibly difficult, and changing that of an international company is even harder. It seems that Philips is finally turning the tide and just beginning to get the cooperation necessary to get the scale from their investments in research and manufacturing. Unfortunately, because of all the cost-cutting they needed to do while they tried to get there, they seem to have lost much of their competence in R&D. Success in consumer electronics requires constant innovation and efficient manufacturing, and while manufacturing is beginning to improve, their innovation is now lacking.
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Matsushita, on the other hand, was trying to give more power to its overseas subsidiaries, such as 1982’s“Operation Localization,” what gave local managers more choice over the products they sold and authorization to use more local parts. (Importantly, however, product divisions could overrule a local subsidiary if a particular product was of strategic importance).
In 1986, Matsushita relocated several major regional headquarters to North America, Europe and SE Asia from Japan. In the early 90’s, the Japanese market for consumer electronics collapsed, leaving Matsushita with a glut of capacity as prices collapsed. While they shifted some production off-shore, Matsushita was unwilling to restructure its increasingly inefficient domestic production facilities in Japan. By 2000, only 250 of the company’s 3,000 R&D scientists were located outside of Japan, and their latest CEO finally decided to consolidate manufacturing facilities. They were slightly profitable (0.4% in consumer electronics), but losing money on one-time cash cows TVs & VCRs.
