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A new century, a new round

A new century, a new round. MBA 290G November 14, 2007 Team One Sohail Gondal, Vince Law, Que Anh Nguyen, Jason Stauth. VS. Germany. Belgium. 1918-1930s Vacuum tubes, radios, x-ray tubes. 1892 Light bulb factory. 1963 Audio cassette tape. 1982 Compact Disc with Sony. 1970’s

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A new century, a new round

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  1. A new century, a new round MBA 290G November 14, 2007 Team One Sohail Gondal, Vince Law, Que Anh Nguyen, Jason Stauth VS.

  2. Germany Belgium 1918-1930s Vacuum tubes, radios, x-ray tubes 1892 Light bulb factory 1963 Audio cassette tape 1982 Compact Disc with Sony 1970’s Adoption of Matshusita’s VHS over V2000 videocassette 1940 Moved management & research to US and England 1912 Incorporation 1971-present Reorganization of company - 7 CEOs - Koninklijke Philips Electronics N.V., Netherlands • Consumer Electronics, Lighting, Medical Systems, and Domestic Appliances and Personal Care • In 2006 $39.6 billion in sales, 60 countries • Bordered by the North Sea to the north and west, Belgium to the south, and Germany to the east.

  3. 1974 Purchased Quasar from Motorola 1940’s Light fixtures, motors, electric irons 2006 No more analog TVs. Concentrate on digital. 1918 Duplex lamp sockets 1989 Japanese stock market crash 1979 Expanded “Panasonic” brand to Europe 2004 Panasonic as primary global brand 1960’s Television sets “Panasonic” brand 1927 Bicycle lamp “National” brand Matsushita Electric Industrial Co., Japan • Brands and divisions: • Panasonic, National, Nais, Quasar, Technics, Ramsa, Rasonic • In 2006, $79 billion in sales • Ranked the 59th company in the world in 2007 by the Forbes Global 500

  4. Comparison of the starting positions of the two organizations Philips Matsushita Structure Matrix Hierarchical Decision making Decentralized Centralized Staffing Key staff local Key staff ex-pats Strategy Technical innovator Fast follower

  5. 2006 Sales by product line and region AVC=audio, video & communications; MEW=Matsushita electric works CE=consumer electronics; DAP=domestic appliances and personal care

  6. Matsushita overtook Philips in the mid 80’s and built a formidable lead Sales, $mn

  7. Focus on growth in different industry sectors • Semiconductor Division: • 15% total sales • 17% EBIT Philips Semi Div

  8. Factor conditions Philips Matsushita • Good supply of Dutch engineers / sales talent • Tap into EU / US talent • Good supply of Japanese engineering and commercial talent • Value-added per hour 68% higher than EU Skilled resources • Proximity to Germany caused operations to be moved abroad during WW II • Proximity to low-wage Asian countries for manufacturing Geographic Location

  9. Demand conditions Philips Matsushita • Dutch market too small to absorb mass production of electronics • Expansion to foreign markets (1899) • Japanese consumers represents a significant market • Late focus on export market (1950’s) Market size • Global Ops provided access to local trends and needs in foreign markets • Products focused on local markets • Japanese customers are highly demanding of quality and innovation in electronics Market maturity

  10. Related & support industries Philips Matsushita • Locally weak, but strong EU (Siemens) and US (GE) competitors Related industries • Strong presence of quality competitors Support industries • Locally weak, but strong EU / US value chain • Strong presence of players across electronics value chain • Approximately 120 electronics company in Japan

  11. Firm strategy, structure & rivalry Philips Matsushita • Stay focused on core products while competitors were diversifying • Emphasized innovations & technological prowess • Diversified product line • Focus on operational excellence • Fast-to-market, “Manishita” Strategy • Decentralized global operations, strong NOs • Joint technical and commercial leadership • Highly centralized • Small business environment with divisional structure • “One-product-one-division” Structure • In house competition between technical and commercial functions • No national rivals • In house competition between divisions • Fierce competition from Japanese electronics firms: JVC, Sony, Hitachi Rivalry

  12. How Philips’ strengths and core competencies became its weaknesses Core Competencies Core Incompetencies Ability to adapt to local market conditions No economy of scale in manufacturing Strong National Organizations Fiefdoms often working against each other Common Market Employee centric values Organization with “lifers” Focus on R&D / technical innovation Inability to commercialize innovation

  13. How Matsushitas’ strengths and core competencies became its weaknesses Core competencies Core incompetencies Broad line of products (5000 vs. Sony’s 80) Bloated operations & excess capacity Centralized structure in Japan Developing local footprint 1989 Market Crash Strong culture at centre Over-reliance on centre for innovation Fast follower strategy Weak entrepreneurial / innovation ability

  14. A comparison of the two organizations attempts to shift their strategies Matsushita Philips Degree of centralization • 1970’s - Shift to IPC’s / Tilting matrix to PD’s • 1987 - 4 core LOBs / 14 PD’s to 4 global divisions • 1990 - Bet on 15 core multimedia technologies • 2001 - Eliminate “management discount” in stock price • 1982 - Operational Localization • 1986 - “Matsushita Bank” • 1999 - “Simple, small, speedy and strategic” High Low

  15. While Philips is amongst the biggest R&D spenders in the industry… The worlds top ten R&D investors in electronic and electrical equipment 2003 R&Dspend (£m) Source: UK Department of Trade & Industry – R&D Scoreboard

  16. … it still seems unable to translate innovation into commercial success. The top ten companies in electronics and electrical engineering 120,5 Total sales (in billions of euros) Sales in electrical capital goods (in billions of euros) 79,6 74,2 75,6 66,9 64,2 57,3 64,9 56,8 63,1 46,7 43,5 37,1 38,5 30,4 36,3 28,6 21,0 26,5 17,1 Samsung Electronics (KOR) Toshiba (JPN) Hitachi (JPN) Matsushita (JPN) NEC (JPN) GE (USA) IBM (USA) Siemens (D) Sony (JPN) Hewlett- Packard (USA)

  17. Despite the attractiveness of foreign markets for electronics products… The top ten world markets for electronic and electrical equipment 32.3 % share of world market 14.1 6.9 6.2 3.9 3.6 2.7 2.6 2.3 1.5 volumes in € billions Source: Siemens AG, Nov 2003

  18. … Matsushita still generates the predominant amount of its sales from Asia. Sales by geographic segment Philips Matsushita Source: 2006 Financial Statements Source: 2007 Financial Statements

  19. While lagging in sales, Philips has managed higher net income Possible reasons for Net Income differential Sales, $bn • Philips has disposed of many businesses that has resulted in net income being supplemented by income from discontinued operations e.g., in 2006 • Exchange rate effects due to weak Yen • Tax incentives to Philips? Net Income, $bn

  20. Philips stock price growth has outperformed Matsushita

  21. Philips has even outperformed GE and Sony

  22. Philips is on par with DJI and better than S&P500 & Nasdaq

  23. Why do the transformation efforts at Philips and Matsushita not seemed to have worked? Eight steps to transformation Leading Change: Why Transformation Efforts Fail, Kotter, HBR Philips Matsushita 1 Establish a sense of urgency   2 Form a powerful guiding coalition   3 Create a vision   4 Communicate the vision   5 Empower employees to act on the vision   6 Create short term wins ? ? 7 Build on momentum to drive more change ? ? 8 Institutionalize new approaches  

  24. Corporate venturing units have “generated decidedly uneven financial returns” Success rates for different types of venture unit Source: The future of corporate venturing, MIT Sloan Review, Fall 2003

  25. Apple’s Core Competencies • Many-to-one supplier relationship • Close supplier relationships • Complete off-shore production • Retain bargaining position and drive down costs 1 • Flat/small structure, young/innovative culture • User-centric design and marketing • Focused product line • Strong brand loyalty • Own the customer relationship = higher margins Managing the supply chain + 2 Core strengths in design & branding = Maintain Control over suppliers and costs High margins & Dominant market share (ipods)

  26. Comparison: Philips, Matsushita, Apple Consumer Electronics Value Chain: Component & Material Suppliers Assembly Design Development Marketing Retail Customer Organizational Structure Firm Culture

  27. How to compete with Apple in CE Develop internal entrepreneurial spark Diversify design and development beyond Japan Top management buy-in E.g. allow autonomous product development and design arm to thrive within the company Build smaller brands or reinvent existing brands (Panasonic/ National) for premium image higher prices/margins • Focus on core competency: local design and engineering innovations • Improve/centralize commercialization, marketing, and branding of innovation • Centralize/outsource production, develop operational excellence • Minimize cost of production

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