Matsushita Electronic Industrial Pham ThachExecutive summary: Matsushita Electronic Industrial (MEI) is a very successful company in both Japan and the global in the 1970 s and 1980 s. MEI’s success in this period came from its diversification of productions, dominance domestic market, unique corporate culture, and divisional structure in both domestic and international market. However, in 1987, under new circumstances, such as the change Yen prices, and the pressure of integration of information technologies that need international transfers, sharing, and synergies, MEI’s faced declines in sales and profits because its structure was exposed some weakness. To overcome these problems, MEI should choose Worldwide Product Division Structure.
Matsushita Electronic Industrial (MEI) was established in 1918 by Konosuke Matsushita to produce a double-end socket in Japan. This company grew rapidly, in 1977 MEI was praised by Fortune as “the most dazzling corporate success in Japan”, and then ranked 20 on Fortune list of the world’s largest by 1985. In the 1980 s, MEI became the world’s largest producer of customer electronics product, and the forth largest electrical and electronics firm in the world with the compounded annual sales growth and annual growth in net profits was 11. 6 percent and 14.
6 percent, correspondingly. The success of MEI in the 1970 s and 1980 s is contributed by its global strategy in which, its diversification of productions, dominance domestic market, unique corporate culture, and divisional structure in both domestic and international market. Contributing to MEI’s rapid growth and consistent profitability in the highly competitive world consumer electronics industry in the 1970 s and 1980 s was its diversification of productions. Originally, MEI only produced double-end sockets, then its list of products was unceasingly expanded. MEI introduced various of products to markets: battery-powered bicycle lamp and an electronic iron (1923), radio (1931), Domestic fans and light bulbs, small motors for domestic appliances, then appliances (1935), black and white TV sets (1952), transistor radios (1957), stereos, tape recorders, air conditioners (1958), drivers, and disposal unit (1959), color TVs, dishwashers, electric oven (1960).
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In term of the numbers of its products, MEI outdistanced its competitors.
MEI grew rapidly and gained consistent profitability because it dominated its domestic market. To overcome the flaws of the Japanese distribution system which was highly fragmented and provided little service and no customer education, MEI established its own chain in domestic market. Owning about 40 percent of all electronic appliance stores in Japan by the late 1960 s, MEI could gather quickly information of domestic market’s demand, and introduced its products. This extensive business web played a primary role of MEI’s source of competitive. Another important source of MEI business success was its unique corporate culture – Konosuke Matsushita’s business philosophy and 250-year corporate plan. The philosophy and plan, which was presented in the MEI’s emphasized on the active role of MEI in society that MEI and all its employees would make all their efforts “to foster progress, to promote the general welfare of society, and to devote ourselves to furthering the development of world culture.” All MEI’s employees had experienced a cultural and spiritual training to understand the role of business in society, and know how the philosophy translates into their daily responsibilities in the company.
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This philosophy and corporate plan was the glue to tie up all MEI’s employees to work in the same direction. MEI’s divisional structure was another important source of its rapid growth and consistent profitability. First introducing in 1933 by Matsushita, this divisional structure was used to delegate more power to junior levels in order to create an organization that would develop managers able to lead the company into the first phase of its ambitious long-term mission. Each division could perform easily because profits responsibility was defined clearly. Therefore, Matsushita created a small-business environment in which all MEI’s divisions could maintain its growth and flexibility. The core of Matsushita’s divisional structure was “One product-One Division” system in which each product line was managed by a separate autonomous division that was expected to operate as if it were an independent corporation.
Corporate management provided division with initial fund, and the corporate treasury operated essentially like a commercial bank. Divisions deposit their excess funds and received normal market interest. Request for additional corporate funds to meet expansion plans were submitted as loan applications to the central finance department. This organizational system generate a high level of internal competition among divisions, and helped drive new product development that managers saw as their best way to maintain long-term growth and profitability. The need to fund new product development also drove managers to maximize performance of existing products. MEI managed the international business by categorizing its overseas branches and plants into three groups: The A group, the wholly owned single product global sourcing plants that reported primarily to the relevant product divisions of MEI and were tightly controlled by them; the B group was the multi-product sales and manufacturing subsidiaries that reported to corporate overseas management (COM); and the third groups of offshore companies was the sales and marketing subsidiaries that imported their products from Japan and from the global production centers.
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These reported to MET, the trading company. Applying a “Hand off” management, Japan’s headquarters gave a sales and a profit target and the subsidiary must achieve them. Headquarters provided advice and support. Local managers had complete autonomy in managing employees, salary, other expenses, purchasing less critical but quality standard assured parts from local vendors. Sales subsidiaries had some choice with regard to the products they sold. The linkages between MEI headquarters and its subsidiaries were strengthened by regular visits of managers of all foreign subsidiaries to the headquarters, and vice versa.
MEI also managed its international business through its web of expatriates. The expatriates hold senior positions as subsidiary general managers, accounting mangers, technical managers in MEI subsidiaries. They transmits a complex and bustle philosophy, act as the communication links translating information about the overseas environment to headquarters and transferring the company’s strategies and technologies to the local companies. However, the way that expatriate groups often worked in informal meeting between themselves may lower the role of local managers in local decision al making. In fact, all of MEI’s tremendous growth was concentrated on its focused factories and its network of established suppliers in Japan. Therefore, it was able to reap scale and experience benefits that allowed prices to drops 50 percent within 5 years of product launch.
Product quality and reliability as measured by carefully monitored consumer return rates continued to rise. MEI also took advantage of international environment at that time to expand its overseas sales. Successful rounds of GATT reduced trade barriers, and the introduction of containerization and supercargo reduced transportation cost. MEI established its overseas manufacturing facility developing countries of East Asia, and Central and South America.
By transferring more production to efficient plants in low-wage countries, MEI could reduce its costs of productions. In 1987, MEI began facing some serious problems. Its sales of 1986 declined 10 percent, and profits dropped 30 percent compared to those of 1985. The sales declined of 30 percent in color TVs and 19 percent in VCRs which had been the products that had fueled the company’s dramatic growth in sales and profits in earlier years. MEI international sales which accounted for 50 percent of its total sales was threatened. The source of MEI’s problem came from the dramatic rise in the value of the Yen from 239 to the dollar in the fourth quarter of 1985 to 159 a year later.
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This rise made serious decline in Matsushita’s 1986 international sales compared with 1985. Moreover, MEI faced central challenge in the area of technology. Life cycles of products have become shorter and technological innovations more rapid. MEI was strong in linear semiconductor technology, but not in digital technology which was essential in the new business.
It lagged behind many competitors in technologies for computers and copiers. Moreover, MEI over depended on its consumer electronics products. The most important source of MEI’s problem was “the divisional ized organization had developed “structural weaknesses.” The company’s highly centralized R&D structure in Japan made many past effort to develop technological capability abroad failed. MEI’s subsidiaries were too dependent on the headquarters. Profitability-oriented responsibility accounting system causes division managers to emphasize short-term results and to avoid risky developing investment. Competition among divisions impeded transfers of information, resources, and people across different parts of the organization.
Internal competition made it difficult to transfer specialists from one division to another. Under pressures of integration of information technologies, new products need taking the form of multi-functional “system” rather than stand-alone equipment, and joint action on the part of multiple division was becoming more and more essential. In new circumstances, the invigorating force of divisional autonomy and inter divisional competition had become less important than the need for internal transfers, sharing, and synergies. To prevent the decline in MEI, the president of MEI Toshi kiko Yamashita initiated Operation Location and Action 86 programs to shift more activities to its vast oversea operation, and shift its business emphasis.
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However, some subsidiary managers worried that this program could weaken their relationship with headquarters managers and reduce their access to central resources and expertise. Some managers were afraid that by de emphasizing traditional products, the company might lose its competitiveness in its existing market, and its capabilities in responding quickly and flexibly to market changes, change Matsushita’s culture and philosophy, undermined its source of strength. However, under new circumstance, the traditional structure were exposed these flaws mentioned above, and its impact was the decline of MEI sales and profits. To be a firm that was reasonably diversified and, accordingly, originally had domestic structures based on product divisions, MEI could apply Worldwide Product Division Structure. By that, MEI could easier to pursue the consolidation of value creation activities at key locations necessary for realizing location and experience curve economies, and to transfer of core competencies within a division’s worldwide operation.