Philips and Matsushita

In this paper we are going to examine two large multinational electronics companies: N.V. Philips (Netherlands) and Matsushita Electric Industrial (Japan). Both of these companies have had different internationalization strategies and management styles, as well as very different national backgrounds. By analyzing their past strategies and organizational changes, we shall attempt to suggest successful future strategies.

International Strategies and Processes

 

Philips

For Philips their process of internationalization began in 1899 when they hired eight to ten export managers who devoted their time to exploring the world for new markets appropriate for Philips’ goods.  Then through the early decades of the next century, in hopes of gaining acceptance into local markets, joint ventures in the United States, Canada, France, and other countries, were established.  It was at this time that relations with General Electric (GE) were grounded in what was called the “Principle Agreement”.  This allowed for an exchange of technology between the two companies and divided the world market into three parts: North America (controlled by GE), Holland (controlled by Philips) and the rest of the world (where both competed).

In order to gain local advantage, National Organizations (NOs) were allowed to be very self-sufficient while Product Division (PD) was a function of the local market.  However, Eindhoven still had 14 Product Divisions to develop, produce and globally distribute Philips’ products.  So while allowing for products to be in the final stages tailored to the local markets yet using economies of scale associated with only eight research centers around the globe, Philips was able to achieve the feel of local suppliers while simultaneously being most cost effective.

In recent times there have been four leaders in Philips, all with short terms of control, and with different ideas of the best method for Philips to becoming a global leader.  First, was Hendrik van Reimsdijk who saw a vision with few International Production Centers (IPCs) each supplying several NOs.  His motivation was to take power from the NOs by giving more to the PD managers.  He believed that “joint responsibility...can also lead to operational inefficiencies” (Lightfoot, 1992).  After him was Dr. Rodenburg, who for the most part followed what van Reimsdijk had started, but with even more emphasis on simplifying control by combining the management at the NO and corporate levels.

In 1982 Wisse Dekker created even more IPOs with the purpose of becoming even more efficient by closing more smaller plants.  Also, he saw the benefit of alliances to share more technology knowledge.  He therefore strengthened relationships via joint venture, cooperation agreements or alliances with Control Data Corporation, RCA, Intel, AT&T, Toppan, Kyocera, and BRF.  He returned control to the NOs and PDs and intensified joint strategies by creating the Corporate Council made up of the heads of the NOs and PDs.  This Council annually met to evaluate four-year strategic product plans developed locally by each NO. 

After five years, Cor van de Klugt came into control with the intent to strengthen strategic planning even more.  His focus was to become more efficient.  He divided Philips into four core businesses: Elcoma, Consumer Electronics, Telecommunications and Data Systems, and Lighting; and two non-core businesses: domestic appliances and medical systems.  The first three core businesses were linked strategically, while lighting was seen as very profitable and developed independently of the others.  The two non-core businesses were aligned with Whirlpool (domestic appliances) and GE Company UK (medical systems). 

Van de Klugt also created the Group Management Committee to develop company policy and greatly restructured the global production divisions to focus on the four core competencies. He believed that the best managers should be located in the most competitive markets in order to inspire new technologies and innovative developments.  This action resulted in a firmer control being set on the NOs because decisions were once again being made from the center of the organization. 

Finally, in 1990 one last president, Jan Timmer, began his period.  Having worked in several divisions of the organization, Timmer knew the markets and products well.  He decided the best possibility for future success would depend on less in-house Research and Development and instead focus on the current market niches.  He stopped the production on a key chip that Philips had invested heavily in for nearly a decade. 

Matsushita

Matsushita entered the global arena later than Philips starting in 1951 when CEO and founder Konosuke Matsushita, otherwise known as KM, visited the United States for the first time.  With the black and white television as their core export product, Matsushita spread to the United States and other parts of Asia quickly.  In 1953 their first overseas branch office in New York named the Matsushita Electric Corporation of America (MECA) was opened.  Mass merchandisers and discounters were used in the US and their products sold under these merchandiser’s brand names.  Also at this time a licensing agreement with Philips was established in order to increase technological knowledge.

In the 1980’s the Video Cassette Recorder (VCR) supported Matsushita on the global market and they quickly became the leader.  Between 1977 and 1985, in order to meet demand, production capacity was increased to 6.8 million units and were distributed through established product channels.  By the middle of the decade, VCRs counted for 43 percent of overseas volume.

During the mid-eighties Matsushita saw the need to restructuring among their global organizations in order to speed up decision making processes, decrease corporate costs and to further integrate international sales and marketing.  The Corporate Overseas Management was merged with METC, creating one central reporting mechanism.  Each division was now required to prepare their own global strategies.  The strategy of Operation Localization was enacted to increase off-shore production by one half of overseas sales by 1990.  This required the localization of personnel in order to increase local nationals in key positions throughout the world.  Also technology and material was developed locally with the intention of increasing subsidiaries expertise.  Thirdly, capital was distributed by adding production facilities in the US, the United Kingdom, France, Spain, and parts of Asia.  The focus for Operation Localization was to increase the flexibility, creativity and entrepreneurial undertakings by the overseas branches.

The philosophy of KM was seen as core to the Matsushita organization.  For this reason over 700 expatriates were located throughout the world in order to maintain communication between Japanese headquarters and all overseas offices.  At the same time, further empowerment was given to the off-shore production sites and sales subsidiaries with the purpose of inspiring the entrepreneurial spirit. 

In 1986, there was an immense appreciation of the Japanese Yen which was mostly felt in the company’s export practices.  Therefore an ACTION plan was reevaluated and refocused Matsushita’s core business areas into office automation, new audiovisual, industrial equipment, and electronic components.  In the 1990 again a long term strategy was promoted, an Action Plan for International Cooperation. Its’ purpose was “to promote globalization and correct trade imbalances” (Lightfoot, 1992).  This developed into a goal of increasing Matsushita’s foreign sales and imports.

 

Evolution of Organizational Structures

Philips

In this section we will make a comparison of the organizational structure of Philips before and after the radical reorganization in 1987. There were, of course, some changes in the organization also before but they were minimal, so the main focus will be on 1987. Cor van der Klugt as the CEO from 1987 to 1990 introduced those changes in organizational structure.

Some basic shanges in the intercommunication between managers. For a manager of a National Organization to reach the top management, he now had to first contact one level higher manager of the appropriate Product Division. When before the central power was reachable by both NOs and PDs. Although PDs remained in direct contact with the Board of Management, in this way PDs were given more control over NOs.

Numerous small local plants were closed and instead large International Production Centers (IPC) were introduced serving several NOs. Consequently more control was placed over production. Work of plants and NOs became more coordinated and growing interdependence between the units was inevitable, which leads to higher quality of production and greater innovation (Holt, 1998).

As a result of this reorganization dual leadership was replaced by single management. NOs control over assets and resources with PDs distance from markets, often caused problems regarding dividing responsibility between them. By assigning a single top manager over PDs and NOs and an IPC, dual leadership was eliminated and PDs gained control over operations. After the revolutional reorganization in 1987 the company structure can be drawn as so (Xiudian, 1996):

 

Matsushita

Basically since the beginning of internationalization, subsidiaries and offshore companies of Matsushita were given high autonomy in reaching the targets set by headquarters in terms of marketing, but they had to buy major components from internal sources. By around 1980 subsidiaries gained more flexibility in choosing where to buy key components as long as the quality was at the required level. The organizational benefit was gained by giving more autonomy to subsidiaries because they were able to respond faster and adequately to the local market changes and preferences, implementing their own, often better, locally controlled market strategy.

In 1982 Matsushita started the “Operation Localization” – personnel, technology, material and capital localization. If before managers of overseas divisions were Japanese, now they were replaced by local managers to gain more flexibility and local presence in management. By technology and material localization, the design of products, sources of materials were adapted to local needs in order to meet local requirements and incorporate local components. It is interesting that Matsushita management started adapting to local requirements and respond to local needs only after 40 years of operating internationally.

Operations were highly localized by 1988.  Matsushita had grown from a Japanese company exporting its production in the beginning into a multinational company with different production plants in different countries – US, UK, France etc. Also the major headquarters functions were shifted from Japan to closer markets in North America, Europe and Southeast Asia.

Organizational and Managerial Capabilities.

As mentioned previously, after 1987 Philips Product Divisions were given more control over National Organizations. Before that, the two sections often had “meeting points” where the responsibility for actions was divided and often it was hard to determine which of them was responsible for a specific action. After the reorganization, the power struggle between NOs and PDs disappeared (Xiudian, 1996). The little, inefficient local plants were merged into International Production Centers serving several NOs and controlled by PDs.

Products, components or parts of appliances produced in one unit were often needed in some other unit. Research done in one subsidiary or in the Central Research Lab was sent to all other units in order to keep everyone informed of the new inventions, data etc. Philips moved towards integration of different National Organizations and Product Divisions. Consequently integration of these units was inevitable.

Matsushita instead forced competition between its Product Divisions and national subsidiaries in order to gain the best results from each unit. This led to disintegration of divisions, which can be regarded as not a wise management action in long-term. Theory and cases of multinational companies show that those companies, which support integration of different business units, are more efficient in conducting business. The improvement of integration and interdepartmental communication results in higher quality, greater innovation and leads to organization that is more responsive to competitive and environmental changes.

An important part of management activities is employee training which received great attention from management side in Matsushita. Cultural and spiritual training was obligatory in Matsushita while Philips did not force employee training that much. Still, we cannot compare the two companies and decide which of them is better on basis of employee training. Because the one is Dutch and the second one is Japanese. According to Hiltrop (1999), the nationality   of the parent company plays a significant role in inhuman resource management and management in general – in this case employee training. It is more common in Japan and more resources are spent on that in Japan than in European countries. As regarding nationality, human resource management is the most complicated issue because not only large dependence on the parents company nationality but also the target country’s management traditions must be observed.  Therefore it is hard to compare Philips and Matsushita in this field, although we can say that the training employees received at Matsushita was a high benefit, comparing to Philips.

Main Problems and Strategic Options

Philips has seen many Presidents come and go with impressive levels of rapidity.  This is a detriment to the company because with every new leader comes new strategies, and a revamping of the organization follows.  Understandably some of the strategies, such as eliminating thousands of jobs, may not have been the best.  However, these strategies were meant to be reached in the long term and with the length of the leader, were only realized in short term periods.  Thus not allowing for the full potential of these plans to be seen.  It would be beneficial for Philips to collaborate on a long term strategy and some specific goals they would like to reach in the next decade and with each new leader, keep these same strategies in place, with only minor adjustments.  This will provide stability and higher chances for success of plans.

Also, with the reorganization of the firm in terms of cutting back on Research and Development as a method of cutting costs in the same instance they are cutting back their knowledge.  It has been proven that companies who enter the market first with a new product in the long run retain at least 30 percent of the market share (Wynstra, 2000).  This is not a single event with a result, but rather a chain reaction in cyclical form.  Concentrating on product development and exploring the capabilities of your core competencies, will lead to innovation, which leads to new products creating profit which funds new product development.  Seeing Jan Timmer cut stop development of a key chip may be a strategic choice dependent on current market determinants, however, for the future, which product will be most promote remains unknown.  As usual, an action in moderation is not harmful, but anything in excessive amounts often proves to be more dangerous than beneficial.

It is not common any longer for company’s to have the ability of providing lifetime employment benefits for their employees, and Philips has seen this and reacted by making sweeping cut backs.  However, it was their basis for many years to not let the loyal and devoted employees go.  This can be seen as a weakness for their future stability.  In order for a company to achieve continued success, their needs to be creative improvements within all levels of the organization.  By retaining old employees instead of hiring new personnel in way of cutting cost, this will effect the organization in the long term.  It often is the new recruits who can see faults in the system that old eyes are blind to.  Currently, Philips sees the need for cutting employment, a good strategy for their future will be to hire new people and not be afraid to promote them through the levels of the organization implementing new ideas in their path/as they go.

Matsushita also has similar human resource problems.  They are in the practice of relieving sales managers who allow their operating costs to fall more than four percent below sales for two years in a row, thus replacing individuals whose stay with Matsushita may be quite short in total.  The demands from the headquarters in this regard are too strong.  There could be many reasons a manager does not function up to standards set, including environmental pressures and uncontrollable economical forces.  A suggestion is instead of removing competence and knowledge, to reorganize it.

Several times the importance of KM’s philosophies are mentioned, which are based on the entrepreneurial style of business.  In the later years of the company it was seen that the oversea operations lacked this spirit.  To combat this over 700 expatriates were placed on location all over the world in order to be the communications link between headquarters and the local managers.  This is a good strategy for company culture security, but not for empowerment of employees.  Perhaps larger amounts of ideas and innovations were be the result of a looser tie to the central headquarters.  This could be accomplished by periodic trips to Japan for the international managers or occasional trips from Japan to the various locations.  In combination with training seminars to reiterate Matsushita’s mission and philosophy.  Empowerment through all layers of the organization would result and in turn innovative thinking and development.

 

Conclusions

Internationalization and globalization are inevitable today. The two companies examined, Philips and Matsushita both have expanded internationally. Their ways of management and organizational structures have been different before as well as after the radical reorganization during the 1980s.  But they both have achieved the goal of having a strong global presence. In order to maintain this position, both companies need to continue to develop strategies focused on solving the problems we have mentioned as well as improving technological achievements.

Reference list

Hiltrop, J.M. 1999. The use of HRM Practices in International and Doestic Organisations, New Zealand Journal of Industrial Relations, 24, 1, 47-61.

Holt, David H., 1998, International Management. Text and Cases, The Dryden Press.

Lightfoot, R. 1992, Case “Philips and Matsushita: A Portrait of Two Evolving Companies”, Harvard Business School.

Xiudian, D.1996, Corporate Strategy, Public Policy and new Technologies. Philips And The European Consumer Electronics Industry, Elsevier Science, Ltd.

Other sources

Wynstra, F., “Strategic Management and Technology”. Lecture for Jönköping International Business School on April 17, 2000.

www.philips.com, April15, 2000.

www.panasonic.co.jp, April 15, 2000.