Emelie Gustafsson Jacek Nagrski Katherine Nunes Johan Sandstrm Michael Steiner

Internationalization Strategy and Organizational Structure

Corporate Strategy Philips case 1

Questions!
What were Philips Interna8onaliza8on strategies over the decades (especially pre- and post-1960s)?
Examine it's development over ,me Examine the Interna,onaliza,on strategy and organiza,onal structure Look for the reasoning and side-eects

What organiza,onal structure do you think would t best Philips' strategy and product por?olio today? Propose one.
Corporate Strategy Philips case

Todays Agenda
1. BACKGROUND 2. INTERNATIONALIZATION STRATEGY 3. ORGANIZATIONAL STRUCTURE 4. REASONS AND SIDE EFFECTS 5. NEW ORGANIZATIONAL STRUCTURE

Corporate Strategy Philips case

1. BACKGROUND
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Philips history in short

Founded 1891 in Eindhoven, Netherlands It all started with light bulbs Today ac8ve within 3 areas; Healthcare, Ligh8ng and Consumer lifestyle Moving from decentralized to centralized

Corporate Strategy Philips case

 More decentralizing, par8ally due to impending war Build on strength of NOs because of bombings in Holland NO/PD-matrix structure

Closed inecient plants, around 38 layos, high compensa8on by law Focused more on core business PDs more decision power Reduced mgmt. board R&D concentra8on

1892-1930

1930-1960

1960-1982

1982-1990

1990-2001

Founded; Eindhoven Started to export Broaden product line Decentralizing

Low-wage electronics manufacturing Lots of innova8on but low market shares Yellow Booklet; disadvantage of PD/NO- matrix Concentra8ng products

100 factories closed, 68 layos Target to increase ROA from 17 to 24 % Elimina8ng the PD/NO-matrix 40 % increase in adver8sing Performance goes up!
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Corporate Strategy Philips case

2. INTERNALIZATION STRATEGY
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Evolved from a national to a worldwide business strategy

High

Focus on low costs

Global

Transna8onal

Interna8onal
Low

Mul8na8onal

Low

Corporate Strategy Philips case Focus on local adap8on

High

Philips moved from Multinational to a Global/Transnational company

Management Prac8ce Adapted management to local needs Manufacturing and Marke8ng
Dieren8a8on to t local foreign condi8ons Generic, undieren8ated products world-wide Dieren8a8on of foreign markets, but integra8on of ac8vi8es where possible

Worldwide unied management prac8ce Global and Local Prac8ces in Parallel

Research and Product Development

Local product development to t local market needs Centralized product development for global needs Local developed products, but globally coordinated transfer of knowledge
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Corporate Strategy Philips case

Market Imperative have been the main driver of Philips internationalization

Access to new markets extends product life cycle Limited home market Increasing compe88on at home market Access to low-cost factors Strategic moves on foreign and domes8c compe8tors Changes in poli8cal, legal, and social environment

Market Impera8ve;

Foreign ins8tu8ons give access to unique and valuable knowledge Access to key development people, enables research, development and innova8on Access to key patents abroad

Knowledge Impera8ve;

Managers take personal interest in foreign ac8vity Interna8onal rms amract talents Career opportuni8es abroad mo8vate the organiza8on

Management impera8ve;

Corporate Strategy Philips case

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Of course there are some counterforces of Internalization Cultural

Varying consump8on pamerns

Ins8tu8onal
Performance standards Na8onal priori8es, economic and social policies

Localiza8on
Localized customer needs Customer preferences Local knowledge and exper8se
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PHILIPS VS. MATSUSHITA

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Globalization vs. Multi domestic

Globaliza8on (Matsushita) Mul8 domes8c (Philips)
Product is the same in all countries. Centralized control - limle decision-making authority on the local level Eec8ve when dierences between countries are small Advantages: cost, coordinated ac8vi8es, faster product development Product customized for each market Decentralized control - local decision making Eec8ve when large dierences exist between countries Advantages: product dieren8a8on, local responsiveness, minimized poli8cal risk, minimized exchange rate risk
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Corporate Strategy Philips case

3. ORGANIZATIONAL STRUCTURE
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WW2 and decreased sales during the 60s, increased power of NOs
Loca8ons NO 1 PD 1 Products PD 2 PD 3 PD 4 REAL POWER . . . NO 2 NO 3 NO 4

Corporate Strategy Philips case

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Organizational structure at 1960, with decreasing sales

Na8onal Organiza8on (NO); Financial, Legal & administra8ve responsibility Product Divisions (PD); Development, produc8on & Global distribu8on Formal corporate level; Geographic/Product matrix In reality; NO had the real power In 1954 Interna8onal Concern Council is created, consists of the heads of NO
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Reduce # of products production plants for increased sales during 70s

Loca8ons NO 1 PD 1 Products PD 2 PD 3 . . . NO 2 NO 3 NO 4

REAL POWER

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During 1970s the responsibility tilting towards PD Dene rela8onship between NO & PD, and pin point responsibility Increase PD control Decrease # of products and introduce scale produc8on Close least ecient local plants Start Interna8onal Produc8on Centers (IPC)
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Continued decrease in profit during the 80s force Philips to close even more plants, go offshore and reduce products even more
Loca8ons NO 1 PD 1 Products PD 2 PD 3 . . . NO 2 NO 3 NO 4

REAL POWER

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At 1982 the responsibility is given even more to PD Close 40 of 200 inecient plants in Europe Focus on some main businesses and acquire knowledge were needed Start oshore manufacturing PD was the nal decision makers S8ll declined sale and stagnated prot

Corporate Strategy Philips case

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1987 the business gets even more focused

Find four core businesses to focus at Keep strengthen PD power compared to NO Start 4 global divisions instead of 14 PD Replace Interna8onal Concern Council with policy making Group Management, consis8ng of PD heads. Each PD moves to their most compe88ve market R&D budget increases Building ecient specialized mul8 market produc8on facili8es. Close 75 out of 420 remaining plants Lay o 38 000 employees
Corporate Strategy Philips case 21

Close to bankruptcy in 1992 forced Philips to focus the business even more, and increase their innovativeness
Loca8ons NO 1 PD 1 Products PD 2 PD 3 . . . NO 2 NO 3 NO 4

REAL POWER

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1990
Philips was almost bankrupt Addi8onal 68 000 employees were laid o. Every NO want to protect their unit Focusing resources, by selling parts of the businesses Low eciency compared to Japanese rms Be more innova8ve Cost-curng and standardiza8on lead to ignoring demands (product myopia)
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In 1996 businesses were sold off, they increased their presence in Asia and changed their structure which resulted in positive ROA
Loca8ons NO 1 NO 2 Philips NO 3 NO 4

1 Division 1 PD Division 2 Division 3 Division 4 Division 5 Division 6 Division 7 Products REAL POWER
Corporate Strategy Philips case 24

PD 2 PD 3

1996
Sold 40 of 120 major businesses (focusing) Need of more simple and structured marke8ng and manufacturing organiza8on to compete with asia. Produc8on to low wage countries, more concentrated in asia. 100 Bus & 7 divisions instead of 21 PDs and NOs Focusing on marke8ng & brand Posi8ve return
Corporate Strategy Philips case 25

2001 -> Outsourcing produc8on with high costs First loss since 1996

Corporate Strategy Philips case

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4. REASONS & SIDE EFFECTS

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SWOT - pros and cons of this development

Lower structural costs Increased protability Concentrated produc8on Investments where it mamers to fuel future growth

Portolio of businesses that corresponds to key global trends

S O

Helpful

Internal

Layos are causing huge expenditures Problems with controlling opera8ons of dierent businesses in dierent countries Reluctance of NO managers

External

Opera8ng in elds where compe88veness is very concentrated Irreversible loss of some product divisions (sold o)

Corporate Strategy Philips case

W T

Harmful

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Reasoning

NO had too much power Need of scale Globaliza8on Weak global compe8veness Losing market shares Poor performance Crea8on of the Common Market and eroded trade barriers
Corporate Strategy Philips case 29

 Reorganiza8on layos caused huge expenditures Unan8cipated loss $2.5 billion Replacement of the president and half of the management board

Side-eects

Irreversible loss of some product divisions Opera8ng in a fast changing environment, where new products are introduced within small space of 8me Reluctance of NO managers

Corporate Strategy Philips case

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5. NEW ORGANIZATIONAL STRUCTURE

Corporate Strategy Philips case 31

Our thought: Todays organizational structure

Board of management Group Management & Services
R&D

Healthcare

Consumer lifestyle
Sales
Manu- facturing R&D

Ligh8ng

Sales

Manu- facturing

R&D

Sales

Manu- facturing

Sales

Manu- facturing

R&D

LO 1

LO 1

LO 1

LO 1

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

STAFF

LO 2

LO 2

LO 2

LO 2

LO n

LO n

LO n

LO n

STAFF

Our thought: Todays organizational structure

Healthcare
Manu- facturing

Independent Product Divisions

More power for separate product lines Higher responsiveness for each product line

Sales

R&D

LO 1

STAFF

STAFF

LO 2

STAFF

Func8on Loca8on matrix approach

Matrix approach as residual S8ll high internal complexity

LO n

Growth geographies are all geographies excluding USA, Canada, Western Europe, Australia, New Zealand, South Korea and Japan
Corporate Strategy Philips case 34

New organizational structure

Todays organiza8onal structure represents a transi8on phase towards a.

Oh no, not again a new system!

New organizational structure M-Form organized along product

CEO Sta

Ligh8ng Innova8on & Emerging Businesses

Healthcare Consumer Lifestyle

New organizational structure U-Form for each division

Product
Healthcare Ligh8ng Consumer Lifestyle Innova8on & Emerging Businesses

Product R&D

Marke8ng

Manufacturing

HR

Sales

New organizational structure M-Form

Advantages: Corporate can focus on strategic control Facilitates diversica8on and growth Disadvantages: Divisions may compete and not cooperate
Corporate Strategy Philips case 38

Questions?

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BACK UP SLIDES
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Philips 1990
Ghoshal Bartlem: The Mul8na8onal Corpora8on as an Interorganiza8onal Network (AMJ, 1990)

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New organizational structure

M-structure divided in Mo8va8on why? geographical units, each of them consists of an u-form (including product lines).

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Back-up; organizational structure/evolution

Vision 2010 aims to fuel growth through sharpened strategies for Healthcare and Ligh<ng and an integrated approach to Consumer Lifestyle Philips aims to simplify organiza<onal structure by forming three sectors - Healthcare, Ligh<ng, and Consumer Lifestyle - as next step in evolu<on into a market-driven, people-centric global leader in its elds Philips expects to more than double EBITA per share by 2010 Philips is a vast organiza8on, employing people around the world. Changing the direc8on of such a massive en8ty was not something that could happen overnight. It would require a clear vision of the direc8on to be taken, and a clear plan of ac8on to bring it about.
Corporate Strategy Philips case 43