Expert answer:Koninklijke Philips NV case study Discussion


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Philips NV Established in 1891 in Eindhoven, the Netherlands, Koninklijke
Philips NV is one of the world’s oldest multinational companies. The company
began making lighting products and over time diversified into a range of
businesses that included domestic appliances, consumer electronics, and health
care products. From the beginning, the small Dutch domestic market created
pressures for Philips to look to foreign markets for growth. Some argue that
this is the case for most European companies and, thus, the many companies from
Europe that are globally competitive. By the start of World War II, Philips
already had a global presence. During the war, the Netherlands was occupied by
Germany. By necessity, the company’s national organizations in countries such
as Australia, Brazil, Canada, United Kingdom, and the United States gained
considerable autonomy during this period. After the war, a structure based on
strong national organizations remained in place. Each national organization was
in essence a self-contained entity that was responsible for much of its own
manufacturing, marketing, and sales. Most R&D activities, however, were
centralized at Philips’ headquarters in Eindhoven. Reflecting this, several
product divisions were created. Based in Eindhoven, the product divisions
developed technologies and products, which were then made and sold by the
different national organizations. During this period, the career track of most
senior managers at Philips involved significant postings in various national
organizations around the world (a career development practice often seen still
in multinational corporations). For several decades this organizational
arrangement worked well. It allowed Philips to customize its product offerings,
sales, and marketing efforts to the conditions that existed in different
national markets. By the 1970s, however, flaws were appearing in the approach.
The structure involved significant duplication of activities around the world,
particularly in manufacturing, which created an intrinsically high-cost
structure. When trade barriers were high, this did not matter so much, but the
significance of its effect became important when trade barriers were starting
to fall and competitors came in to the marketplace. These competitors included
Sony and Matsushita from Japan, General Electric from the United States, and
Samsung from South Korea. Each of these competitors gained market share by
serving increasingly global markets from centralized production facilities
where they could achieve greater scale economies and hence lower costs.
Philips’ response was to try to tilt the balance of power in its structure away
from national organizations and toward product divisions. International
production centers were established under the direction of the product divisions.
The national organizations, however, remained responsible for local marketing
and sales, and they often maintained control over some local production
facilities. One problem Philips faced in trying to change its structure at this
time was that most senior managers had come up through the national
organizations. Consequently, they were loyal to them and tended to protect
their autonomy. The headquarters of Philips NV in Eindhoven,
Netherlands.Source: © Sander KONING/AFP/Getty Images Despite several reorganization
efforts, the national organizations remained a strong influence at Philips
until the 1990s. In the mid-1990s Cor Boonstra became CEO. Page 428He famously
described the company’s organizational structure as a “plate of spaghetti” and
asked how Philips could compete when the company had 350 subsidiaries around
the world and significant duplication of manufacturing and marketing efforts
across nations. Boonstra instituted a radical reorganization. He replaced the
company’s 21 product divisions with just 7 global business divisions, making
them responsible for global product development, production, and marketing. The
heads of the divisions reported directly to him, while the national
organizations reported to the divisions. The national organizations remained
responsible for local sales and local marketing efforts, but after this
reorganization they finally lost their historic sway on the company. Philips,
however, continued to underperform its global rivals. By 2008, Gerard
Kleisterlee, who succeeded Boonstra as CEO in 2001, decided Philips was still
not sufficiently focused on global markets. He reorganized yet again, this time
around just three global divisions, health care, lighting, and consumer
lifestyle (which included the company’s electronics businesses). These are also
the three divisions that are in place under the most recent CEO, Frans van
Houten, who became the CEO of Philips in 2011. The slogan for the health care
division is “creating the future of healthcare.” Philips is a global
leader in the health care domain. It is guided by the understanding that there
is a patient in the center of everything it does in the field of health care,
and its focus is on creating the ideal experience for all patients around the
world, young and old. Philips Lighting is about “enhancing lives with
light” by delivering innovative and energy-efficient solutions. The
Consumer Lifestyle division is dedicated to “helping people achieve a
healthier and better life.” The three divisions are responsible for
product strategy, global marketing, and shifting of production to low-cost
locations (or outsourcing production). The divisions also took over some sales
responsibilities, particularly dealing with global retail chains such as
Walmart, Tesco, and Carrefour. To accommodate national differences, however,
some sales and marketing activities remained located at the national
organizations. Sources: C. A. Bartlett, “Philips versus Matsushita: The
Competitive Battle Continues,” Harvard Business School Case, December 11, 2009;
“Philips Communicates Vision 2010 Strategic Plan,” Philips press release,
September 10, 2007. Case Discussion
Questions Why did Philips’ organizational structure make
sense early on in its existence? Why did this structure start to create
problems for the company later on? What was
Philips trying to achieve by tilting the balance of power in its structure away
from national organizations and toward the product divisions? Why was this hard to achieve? What was the
point of the organizational changes made by Cor Boonstra? What was he trying to achieve? Do you agree with Frans van Houten’s decision
to keep the same three divisions when he became CEO in 2011? In 2008 Philips
reorganized yet again, now down from 21 divisions to 9 divisions and
subsequently just 3 divisions. Why do you
think it did this? What is it
trying to achieve?

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