Philips vs. Matsushita Assignment

1. Philips vs. Matsushita Assignment 2008 MBA/ENG 290G International Competition in Technology

2. Team 1

3. Value Chain: Philips vs. Matsushita Team 1 Franck Formis, Robert Kong, Vincent Ng, Jameson Slattery, Chuohao Yeo

4. Porter’s diamond Philips Matsushita • Factor Conditions • Initial tradition of bolstering education • Creation of the Common Market in 1968 altered factor s of production (land, labor, and capital) • Not a multi-domestic market anymore • Demand Conditions • A single market • New Transistor and circuit-based technologies • Unmet demand • Domestic throughout 20th century • Since 1998, investing in R&D partnerships and technical exchanges abroad • Need to broader sources of innovation • Growth through post-war boom • Shift to export markets • Earlier picture of emerging foreign demand

5. Porter’s diamond (cont’d) Philips Matsushita • Related and supporting industries • Principal agreement with GE in 1919 > World split into 3 spheres of influence • By 1998, JV with Lucent to target “digital revolution” • Improved performance • Strategy, Structure, and Rivalry • Early local production facilities • Autonomous NOs • Uncoordinated decisions • A technology exchange and licensing agreement with Philips • Licensing of the VHS format to other local manufacturers • VCR segment ~ 45% of profits • Highly centralized operations • High dependence of subsidiaries • Low competitiveness

6. Philips value chain • Philips Research has labs around the globe • Acquired from suppliers. E.g. critical lamp components for LCD panels • Outsourced to low cost nations • Maintain some manufacturing sites. E.g. lighting has sites in 25 countries • Sales in more than 60 countries • Do their own marketing • Uses wholesales, retail stores to distribute products • Also support limited direct shipments and plannings Red – heavy presence by Philips Blue – no or light presence by Philips

7. Matsushita value chain • Mainly in-house and centralized, PDCC as an initiative to “outsourced” R&D • Depend on third-party to acquire raw materials and components, e.g. steel, plastic, semiconductors etc. • Maintain huge amount of manufacturing plants in Japan, Asia and China • Mainly carry out by subsidiaries located in various countries • Cooperation with domestic and overseas mass-scale retailers. Red – heavy presence by Matsushita Blue – no or light presence by Matsushita

8. Value chain comparison • Centralized versus Decentralized • Philips: Decentralized • Depend on National organizations to respond to local market. • Moving towards more centralized decision to cut cost and enjoy economies of scale • Matsushita: Centralized • Most decision made by headquarters and product division in Japan; local subsidiaries are mostly sales and marketing • Moving towards localization to response better to customer demand and preference, PDCC is one of this initiative. • Outsourcing versus in-house • Philips: Outsourced • Most manufacturing are outsourced or offshored to low-cost regions. Mostly retain R&D and sales and marketing only. • Matsushita: In-house • Directly control most manufacturing operations located in Japan, Asia and China

9. Challenges faced Philips – Too decentralized Matsushita – Too centralized • Powerful and autonomous national organizations (NOs) • Lack of company-wide strategic cooperation among NOs • Lack of accountability in NO/PD matrix • Management by technical & commercial consensus • Slow to respond • Inefficient production due to local production centers • Product divisional structure • Highly centralized services • Centralized product development • Subsidiaries too dependent on parent company • Communications between overseas subsidiaries and parent company

10. Key restructuring steps Philips Matsushita • Rein in NOs • Centralize production • Focus on core businesses • Empower global product development • Combine product divisions • Remove historical organizational structure • Empower regional operations • Local customization of production • Combine single product divisions • Tap overseas/external innovation • Remove historical organizational structure • Name change to Panasonic

11. Outcome and difficulties faced Philips Matsushita • Outcome • Continuing low profit margins • Competitiveness impacted • Difficulties • Conflicted local loyalties • Restructuring for tomorrow using today’s parameters • Cost-cutting in key aspects, e.g. R&D • Outcome • Low profit margins • Competitiveness impacted • Difficulties • Culture of lifetime employment • Organizational resistance • Difficult Japanese economic conditions in 1990s

12. Philips becoming the leading consumer electronics company • Focused on one product rather than diversifying in early days • Became leader in industrial research • Competence • Independent National organizations. • adept at responding to country-specific market conditions • Built their own technical capabilities to address local market conditions • Enforce market specific research • Businesses being supported by the research are responsible for the R&D budget • Incompetence • Product division had no real power • NO ignores main company’s welfare and focuses on local profit (Ex. V2000 case) • Too many factories over the world • Higher cost than simply outsourcing or having one area serves the global market

13. Matsushita displacing Philips • Focused on VCR production • High volume allowed them to slash price quickly • License VHS format to other manufacturer • Highly centralized system • Competence • Huge number of retail outlets • 6x the outlets of rival Sony • Assured sales volume and direct access to market trends and consumer reaction • One-product-one-division system • Internal competition • “Small business” environment • Main company acts as a “bank”

14. Matsushita displacing Philips (cont) • Competence • Under fund the central research laboratory • Force it to compete for additional funding from divisions • Give overseas sales subsidiaries more choice over the products they sold • Incompetence • Over-management • Expatriate managers located throughout foreign subsidiaries • Strongly-held commitments to lifetime employment • Can not compete with companies who outsource to low-cost Asian countries • Product divisions were not giving sufficient attention to international development • Oversea subsidiary companies act little more than implementing agents

15. New US CE Companies:Apple, Chumby, Kindle, Microsoft, Roku & Tivo

16. Apple in the MP3 Market • Apple designs and controls the major consumer touch points in the MP3 market • Device HW and SW, PC SW, and distribution • Focus on ease of use and HW & SW elegance • Apple has permeated the retail channels with iPods • Advertising focus that drives demand & replacement • Design as a differentiator • DRM as a lock-in

17. Philips & Matsushita in the MP3 Market • Any competitor is unlikely to unseat Apple by doing the same as Apple or making iterative improvements • Philips and Matsushita should invest in the next generation of music consumption • Prepare for the demise of the music-only device • Shift to cloud-based subscription services available anytime to countless types of devices • Explore business models of giving away the music to undermine Apple’s current business model

18. Team 2

19. Philips Vs Matshuita Team 2: Jon Wiesner, Rachel Simon, David ExpositoCossio, Yanpei Chen, EmrehanKirimli

20. Porter’s Diamond: consumer electronics industry Japan: highly demanding and sophisticated internal buyers. Huge market. Netherlands: small internal market. Internationalization needed to survive. Japan: Centralized companies. Reluctance to delegate activities. Process innovation rooted in culture. Huge local rivalry Netherlands: Decentralized companies. Low local rivalry Structure, Strategy, Rivalry Factor Conditions Demand Conditions Japan: Highly skilled labor force. Large number of engineers. Highly efficient production process. Traditions deeply rooted Netherlands: Highly unionized industry. Expensive workforce. Entrepreneurial culture. Small Country located in centre of Europe. Both countries large expenditures in R+D Related and Supporting Industries Japan: Large number of supporting industries: transportation, copiers, cameras, audio, appliances, musical instruments… Netherlands: medium/high number of supporting companies: canon, HP, TomTom, …

21. Value Chain Comparison Supply Operations Distribution Marketing Services Philips Raw materials Lighting Parts DAP CE Medical Sys Retail Lighting DAP CE Hospital Medical Sys One Philips brand Manufacturing Lighting DAP CE Assembly Medical Sys Medical Sys Matsushita Raw materials Components Home App Parts AVC Home App MEW Retail AVC Home App MEW OEM & Self Use Components Merge brands into Panasonic Manufacturing Components AVC Home App MEW Comparison Philips actively consolidating supplies Both are mainly retail with some enterprise Both do brand consolidation Matsushita heavy focus on manufacturing Philips trying to move in this direction

22. Philip’s Success How they became leader: developed national organizations (NOs) that were independent, and specialized in local market demand for specific and diverse technologies. Common Market Competencies/Incompetencies • / • / • / Fragmented product line (no economies of scale) Technologies lost in market flooded by competitors • / Loss of market shares to low wage outsourcing competitors • / • Strong R&D funding • Strong National Organizations Slow to market Poor global strategy • Adaptive to diverse markets • Commitment to employees • Reputation for quality

23. Matsushita’s Success How they became leader: global scale approach of rapidly bringing a emerging technologies to saturate the market 1989 crash Competencies/Incompetencies • / • / Resistance by employees to structural change • Strong distribution system, • high retail presence • / • / • / Dependant on center; loss of talent due to perceived overbearing top • Broad product line • Fast [follower] to market Weak on innovation Excess capacity • Strong culture, visionary leader High overhead • Centralized Japanese structure

24. Change and its Challenges Both Philips and Matsushita have faced enormous challenges and multiple reorganizations in trying to manage global operations. Both have tried multiple organizational structures, but have encountered some of the following barriers • Philips • Historical: legacy of WWII and decentralization of operations • Cultural: strong cultural ties to Eindhoven • Organization: matrix organizational structure constantly between PD and NO reorganized • Manufacturing: late to outsource manufacturing • Profitability: low margin business leaves little room for error • Technological: big bets on losing technologies and standards • Structural and Macroeconomic: high cost of layoffs of European workers • Matsushita • Cultural: lack of independent thinking by overseas subsidiaries • Organization: legacy of product division structure • Employees: tradition of lifetime employment • Managerial: highly centralized management style • Technological: over-reliance on declining products (TVs, VCRs, etc.) and lack of innovation • Structural and Macroeconomic: economic malaise in Japan starting in the 1990s

25. What has allowed Apple to succeed? relaxed, casual, collegial environment with high-work ethic emphasize on innovation and design (teams all over the world) User Experience Architect’s Office was established to make Apple products easier to use What should Philips and Matsushita do to compete? focus on innovative physical appearance and user interface add features like wireless sharing, games, etc. which iPod does not have design more than just a player, also offer software platform that allows music to be shared from PCs and other devices partnership with companies to gain more youth population (ex: Samsung & Adidas vs. iPod & Nike ) Mp3 Player Market vs. or Zune by Microsoft or Samsung and Adidas

26. Team 3

27. Philips vs. Matsushita Team 3: Gonzalo Baez Silvio Filho Brian Gawalt Ryan Stanley MBA290G, Oct 8, 2008

28. Comparison of Porter’s Diamond Factors Factor Conditions • Both countries have access to a highly skilled workforce due to local availability of specialized research and high extent to staff training in each country. • High cooperation yet highly regulated labor relations. Tradition of lifelong employment in Japan has reduced the risk of brain drain. • Limited natural resources (esp. Japan) induces constant attention to value-add services. • Institutions in the Netherlands are considered highly efficient, ethical, and transparent compared to other countries: corporate boards are effective, government policymaking is transparent, intellectual property protection strong, and firm behavior ethical. • The Netherlands has highly developed ports and is considered “the gateway to Europe.” Demand Conditions • Japan has a high national demand that includes sophisticated technical users, whereas Philips had to export early on due to low national demand in the Netherlands. Related and Supporting Industries • Both countries have national access to companies to suppliers in chemical and other equipment or machinery industries for production. • The Netherlands includes robust research institutions • Cluster development in Japan related to consumer electronics and semiconductors. Firm Strategy, Structure, and Rivalry • Cluster development in Japan indicates fierce domestic rivalry. 8 of the top 10 companies in the field are Japanese. • Government stability and context has been a major help to Philips as the Netherlands benefits from its central waterways, advanced neighboring economies, and political stability.

29. Value Chain Contrast R&D R&D MFG MFG Ware-house and direct sales Direct and online Sales Distribution centers, retailers Distribution centers, retailers Customer service Customer service End customer End customer In-house In-house Outsourced Outsourced • Philips had a decentralized approach for manufacturing and sales. • Matsushita had nearly everything centralized in Japan. Marketing • competitive advantage over manufacturing.

30. Changes in Market Leadership Post-war Philips rose to dominance through strong R&D, technical development, and ability of national organizations to independently structure market offering • Small national market instigated robust export function and global sales and marketing force • Vital research facilities and top management transferred overseas as WWII approached • WWII destroyed factories, so chose to rebuild on strengths of National Organizations • Independence of management to act • Ability to sense and respond to differences in national demands of countries of operations related to marketing • Take advantage of surrounding talent and cultures for independent technical capabilities as well • Developed strong competency in R&D and technical development • Lacked good centralized planning (no advantage from economies of scale) and slow to market. • Current strategy to move/outsource low-end manufacturing and focus on design/development makes sense given national and firm competencies. Difficulties lie in the strength of national organizations and Panasonic succeeded Philips in global dominance through central planning, strategic manufacturing choices, and a strong system of controls • Opened plants in low-cost Latin America and Southeast Asia; kept high-value components in Japan. Allowed outsourcing of minor components. Plants built by division for economies of scale. • Aggressive management goals encouraged innovation, but one product-one division led to subsequent spin-off and strict focus. • Overseas operations reported to parent through the product division or the Trading Company. • Developed competency in long-term planning, low-cost manufacturing, and being quick-to-market • Lacked strong independent R&D near global markets • Strategy for more regional control was hard because of ingrained culture and tight controls. However, implementing “Outsourced R&D” through incubators helps overcome Panasonic’s lagging innovation by supporting start-ups without difficult cultivation of in-house expertise.

31. Apple’s keys to success in MP3 market Corporate culture Organizational structure • Apple is vertically integrated, designing its own operating system. • Apple's stated philosophy is to increase investment in R&D. • In-house brands set the standard: iPod & iTunes • Rebel spirit: "It's better to be a pirate than join the navy" . • Intense work ethic and casual/informal structures. • Combines Design and Marketing in one department.

32. Team 4

33. 2008 Philips vs. Matsushita Christian Huth Lakshmi Jagannathan Christopher Quek Daisuke Tanaka John Michael Wyrwas

34. Philips challenged with independent national organization focusing on R&D Factor Conditions • Dutch legislation prevents hostile raids • Bureaucracy leads to slow-moving transformation of company • CEO succession hinders continuous development of strategy Supporting Industry Firm Strategy, Structure & Rivalry • Technology-sharing agreements and offshore manufacturing shall lead to reduced costs • Original competitive leadership by commercial and technical functions (PD/NO matrix) was succeeded simpler and structured marketing and manufacturing organization • Original worldwide portfolio of responsive national organizations increases manufacturing costs (start of outsourcing) • Strong industrial research Demand Conditions • Adoption to local markets by independent national organizations in marketing as well as in product development

35. Matsushita with centralized organization and strong manufacturing capabilities Factor Conditions • High value-add per hour in manufacturing • Low labor costs in developing countries where parts of manufacturing is outsourced • Early trade-liberalization enabled Matsushita to start export business Supporting Industry Firm Strategy, Structure & Rivalry • Low shipping rates reduces logistics costs • R&D partnerships and technical exchanges as well as outsourced R&D (VC, incubator and technology partnerships) • Dynamic new digital networking technologies and business models enabled by internet lead to pressure • Worldwide business based on centralized, highly efficient organizations in Japan • Shift to local sourcing over time, but still in control of output (quality, productivity etc.) • Expats spreading company culture and technologies • “Operation Localization” - Internationalization including manufacturing abroad and increasing independence from Japan (but still dependent) Demand Conditions • Japan as home market as early technology adopter • Worldwide information of local demand provided by expats

36. Philips Value Chain • Inbound Logistics • Philips has many suppliers (255+) around the world, but they have a close connection with all of them • Supply Management plays a key role in value creation, and 74% of Philips spend on suppliers is now centralized or center-led. • The‘Partners for Growth’ strategic supplier relationship management program brings Philips together with its top 30 suppliers • Global Supplier Rating System (GSRS) is now operational in all businesses, resulting in a more professional structural supplier performance measurement and subsequent improvement actions (84% of Philips’ spending went for this last year) • Operations • Low Cost Country Sourcing in China: main supply base and manufacturing center • Other smaller manufacturing facilities in 25 countries (including Netherlands, France, Belgium, Hungary, Mexico, Argentina and Brazil) • The Supply Market Intelligence and Services group (SMIS) work closely together with businesses to identify supply market opportunities around the world

37. Philips Value Chain • Research and Development • $2.2 Billion spent on R&D (2007) • Some Areas of Research: Drug Delivery Potential of Microbubbles, Contrast Agents for Medical Applications, and OLEDs as the future of indoor lighting • Marketing and Sales • Philips sells its products using dedicated sales representatives, telephone (to big customers), ODMs, OEMs, retail, website, and indirect channels • Philips markets to its big customers (for ex: in healthcare industry) through its sales force and its small customers (for ex: individual consumers) via web, TV, and print/advertising • Sales organizations in more than 60 countries • Service • Customer Support is very specialized since Philips’ products cover many areas • 24 Hour Support for Consumer Electronics (such TV, portable electronics, etc) • 24 Hour Professional Support for its health care products, lighting, and specialized businesses such as Dictation and Speech Recognition Systems • Specific product-based FAQs and online support along with phone support

38. Matsushita Value Chain • Inbound Logistics • Matsushita is dependent on the ability of third parties to deliver parts, components and services in adequate quality and quantity in a timely manner, and at a reasonable price • It is not dependent on a single supplier, and has no significant difficulty in obtaining raw materials from suppliers. • In addition to devices/products, Matsushita makes its own components and devices used in various products ranging from AV equipment and information and communication devices to home appliances and industrial equipment. • Works closely with its third party suppliers for timely and quality in the deliver of its components • Operations • Main Manufacturing center and operations in Japan • Overseas, Matsushita plans to expand its manufacturing bases, particularly in South China and Vietnam, in response to rising demand for components and devices. • Matsushita’s international business operations is risky because of political instability as well as cultural and religious difference.

39. Matsushita Value Chain • Research and Development • $5.6 billion spent in R&D Costs (in 2007) • Develops unique technologies via a high level of cooperation, not only through in-house production, but also through a sophisticated network of cooperation among materials, components and devices, and finished product divisions • Some Areas of Research: Full HD plasma TVs, Blu-ray disc (BD) recorders, and Energy Efficient/ Eco Friendly Products • Marketing and Sales • Sells to small customers, individual customers, and big industries • Promotes ‘environmentally friendly’ products • Sells its products using local retailers, phone/online system, retail stores, and indirect channels (OEMs and ODMs) • Sells its parts and services to the same set of customers • Service • Customer Support is very specialized since Matsushita’s products cover many areas • 24 Hour Support for Consumer Electronics (such TV, portable electronics, etc) • 24 Hour Professional Support and Business Support for its small customers • 24 Hour Support Specific to OEMs and its industrial customers/products • Specific product-based FAQs, manuals, and online support along with phone support

40. Philips in the post-war era Competances Incompetances Weak control of national organizations by Netherlands-based product-divisions created conflicts in company strategy Local production plants could not take advantage of economies of scale Inability to capitalize on R&D • Protected company resources through war by transferring abroad • Strong, self-sufficient national organizations • Product development and industrial design responds to regional customer preferences • Decentralized marketing and sales • Innovative R&D

41. Matsushita – Competitive Analysis • Matsushita was able to displace Phillips as the leader in Consumer Electronics by: • Successfully capturing the advantages of localization and avoiding the management difficulties that other global companies encountered. • Leveraging its corporate structure to bring new technologies to market more efficiently than its competitors. • Implementing manufacturing best practices to keep manufacturing costs low despite differences in regional inputs. • Outsourced core R&D needs to better recognize new marketable technologies and business models that were congruent with Panasonic’s Global Strategy.

42. Matsushita – Core Strengths • Core Strengths: • Manufacturing: • Globally standard manufacturing processes created economies of scale (lower costs) and knowledge transfer between different manufacturing facilities. • Matsushita shifted certain manufacturing processes to low cost countries, but kept highly technical manufacturing process located in Japan. This ensured the highest quality at the lowest cost. • R&D: • Centralized R&D process where core designs were established and local offices made feature requests to tailor products to regional markets. • Underfunded the Central Research Lab to encourage the development of marketable technologies. • Localized (Regional) Autonomy: • Local offices were given the authority to create and execute local strategies with oversight from the main office. • Regional offices were able to alter products and product portfolios to meet local demand.

43. Matsushita – Core Weaknesses • Core Weaknesses: • Power of the Central Organization: • The power exerted by the central organization limits regional innovations. • R&D • The R&D structure is good at making marketable products but not good at creating new technologies. • It is a culture of fast follower R&D.

44. Organizational Changes: Philips • 1950s • Different standards and consumer preferences across countries led Philips to give power to the NOs • Successful until Common Market eroded trade barriers • 1970s • PD>NO • Decrease SKUs, build scale, and increase flow of goods • Create International Production Centers • Slow implementation and NOs continued to have power • 1982 • Shut inefficient operations • Off-shore manufacturing alliances • PD>NO • Focused on core operations • Sales declined and profits stagnated

45. Organizational Changes: Philips • 1987 • Goal: increase profits and beat the Japanese • Strategically linked core businesses • Restructured around 4 core global divisions • Linked PDs with their markets • Halved spending on basic research to 10% of R&D • Huge cuts in plants and employees • Loss of $2.5 billion and a shareholder’s lawsuit • 1990 • Cut 22% of workforce • Sold various businesses • Expand software, services, and multimedia • Focused on developing 15 core technologies • Low morale and lack of focus on new market demands for segmented products and higher consumer service

46. Organizational Changes: Philips • 1996 • “No taboos; no sacred cows” • Slashed 3,000 jobs in N American • Added 3,000 jobs in Asia • Huge cuts • Relocated headquarters to Amsterdam • Bet on “digital revolution” • Focus on marketing • Achieved objective of a 24% return on net assets • 2001 • Outsourced mobile phone production • Seeks to sell off manufacturing of mass-produced items • Focused on developing 15 core technologies • Loss of 2.6 billion euros. Become a technology developer and global marketer?

47. Organizational Changes: Matsushita • Yamashita (Operation Localization) • 4 localizations: personnel, technology, material, and capital • Increased number of local nationals in key positions • Overseas sales subsidiaries given more choice over products they sold • Expressed displeasure with lack of initiative of TV plant in Cardiff • Tanii • Objective: obtaining software source for its hardware • Acquired MCA for $6.1 billion • Japan went into recession, and Tanii forced to resign • Morishita • “simple, small, speedy, and strategic” • Cut staff and decentralize responsibility • Sold MCA to Seagram at a $1.2 billion loss • Challenges: Korean and Chinese competition; strong yen=weak exports • Increase offshore R&D: Panasonic Digital Concepts Center in California

48. Organizational Changes: Matsushita • Nakamura • From “super manufacturer of products” to “meeting customer needs through systems and services” • Empower employees to respond to customer needs • “Destruction and creation” – disbanded product division structure • Streamlines plants: now integrated into multi-product production centers • Streamlines marketing divisions: Panasonic and National • First losses in 30 years accelerated: Matsushita seen as a takeover target

49. The Apple Slide • Vertical integration • First to offer excellent hardware, software, and content – iPod and iTunes • Successfully convinced content providers to allow sale of mp3 • R&D • Idea was not internally developed, but execution was • Strong collaboration with Portal Players who did bulk of the software and hardware development • Manufacturing • Outsourced all manufacturing • Steve Jobs • Genius CEO with a vision • Involved in unusually detailed aspects of daily business

50. Team 5