A new century, a new round

MBA 290G November 14, 2007 Team One Sohail Gondal, Vince Law, Que Anh Nguyen, Jason Stauth

VS .

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.

Germany Belgium

1892 Light bulb factory

1918-1930s Vacuum tubes, radios, x-ray tubes

1963 Audio cassette tape

1982 Compact Disc with Sony

1912 Incorporation

1940 Moved management & research to US and England

1970s Adoption of Matshusitas VHS over V2000 videocassette

1971-present Reorganization of company - 7 CEOs -

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

1918 Duplex lamp sockets

1940s Light fixtures, motors, electric irons

1974 Purchased Quasar from Motorola

1989 Japanese stock market crash

2006 No more analog TVs. Concentrate on digital.

1927 Bicycle lamp National brand

1960s Television sets Panasonic brand

1979 Expanded Panasonic brand to Europe

2004 Panasonic as primary global brand

Comparison of the starting positions of the two organizations

Philips Matsushita

Structure Decision making Staffing Strategy

Matrix Decentralized Key staff local Technical innovator

Hierarchical Centralized Key staff ex-pats Fast follower

2006 Sales by product line and region

Sales by Region
90.0 80.0 70.0
Sales ($B) Europe North and South America Japan, Asia

60.0 50.0 40.0 30.0 20.0 10.0 0.0 Matsushita

Philips

Matsushita Product Sales by Category

Other JVC MEW and PanaHome Components and Devices Home Appliances AVC Networks

Philips Product Sales by Category

Other Lighting Medical Systems

DAP CE
CE=consumer electronics; DAP=domestic appliances and personal care

AVC=audio, video & communications; MEW=Matsushita electric works

Matsushita overtook Philips in the mid 80s and built a formidable lead
90 80 70 60
Sales, $mn

50 40 30 20 10 0 2000 35.3 68.9 1995 40 78.1 1990 33 37.8 1985 21.8 24.9 1980 17 13.7 1975 10 4.5 1970 4.2 2.6

Philips Matsushita

Focus on growth in different industry sectors

Philips: Growth by Sector
100% 80% Other 60% 40% 20% 0% 2004 2005 2006 Lighting CE DAP Medical Systems 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007

Matsushita: Growth by Sector

Other JVC MEW and PanaHome Components and Devices Home Appliances AVC Networks

Philips Semi Div

Semiconductor Division: 15% total sales 17% EBIT

Factor conditions
Philips Matsushita

Skilled resources

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

Geographic Location

Proximity to Germany caused operations to be moved abroad during WW II

Proximity to low-wage Asian countries for manufacturing

Demand conditions
Philips
Dutch market too small to absorb mass production of electronics
Expansion to foreign markets (1899)

Matsushita

Market size

Japanese consumers represents a significant market

Late focus on export market (1950s)

Market maturity

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

Related & support industries

Philips Matsushita

Related industries Support industries

Locally weak, but strong EU (Siemens) and US (GE) competitors

Strong presence of quality competitors

Locally weak, but strong EU / US value chain

Strong presence of players across electronics value chain Approximately 120 electronics company in Japan

Firm strategy, structure & rivalry

Philips
Stay focused on core products while competitors were diversifying Emphasized innovations & technological prowess

Matsushita Diversified product line Focus on operational excellence Fast-to-market, Manishita Highly centralized Small business environment with divisional structure One-product-one-division In house competition between divisions Fierce competition from Japanese electronics firms: JVC, Sony, Hitachi

Strategy

Structure

Decentralized global operations, strong NOs Joint technical and commercial leadership In house competition between technical and commercial functions No national rivals

Rivalry

How Philips strengths and core competencies became its weaknesses

Core Competencies
Ability to adapt to local market conditions Strong National Organizations

Core Incompetencies
No economy of scale in manufacturing Fiefdoms often working against each other Organization with lifers Inability to commercialize innovation

Common Market
Employee centric values Focus on R&D / technical innovation

How Matsushitas strengths and core competencies became its weaknesses

Core competencies
Broad line of products (5000 vs. Sonys 80) Centralized structure in Japan Strong culture at centre

Core incompetencies
Bloated operations & excess capacity Developing local footprint

1989 Market Crash

Over-reliance on centre for innovation Weak entrepreneurial / innovation ability

Fast follower strategy

A comparison of the two organizations attempts to shift their strategies

Degree of centralization

Matsushita
1982 - Operational Localization 1986 - Matsushita Bank 1999 - Simple, small, speedy and strategic

Philips
1970s - Shift to IPCs / Tilting matrix to PDs 1987 - 4 core LOBs / 14 PDs to 4 global divisions 1990 - Bet on 15 core multimedia technologies 2001 - Eliminate management discount in stock price

High Low

While Philips is amongst the biggest R&D spenders in the industry

The worlds top ten R&D investors in electronic and electrical equipment
3793

2884 2268 1983 1595 1223 726 659 560

2003 R&D spend (m)

437

Source: UK Department of Trade & Industry R&D Scoreboard

 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)

79,6 74,2 75,6 63,1 66,9 64,9 64,2 57,3 56,8 46,7 43,5 37,1 38,5 26,5 28,6 17,1 21,0 30,4 36, 3

Sales in electrical capital goods

(in billions of euros)

GE (USA)

IBM (USA)

Siemens (D)

Hewlett- Hitachi Matsushita (JPN) Packard (JPN) (USA)

Toshiba Sony Samsung (JPN) Electronics (JPN) (KOR)

NEC (JPN)

Despite the attractiveness of foreign markets for electronics products

The top ten world markets for electronic and electrical equipment
779

32.3

% share of world market

341

14.1

166

149

6.9

6.2

94

88

3.9

64

63

3.6

55

2.7

37

2.6

2.3

1.5

volumes in billions

Source: Siemens AG, Nov 2003

 Matsushita still generates the predominant amount of its sales from Asia.
Sales by geographic segment Philips
Domestic 4%

Matsushita
Asia & Others 21% US 28%

Other 44%

Europe 13% Domestic 51% China 6% Europe 18% North & Soth America 15%

Source: 2006 Financial Statements

Source: 2007 Financial Statements

While lagging in sales, Philips has managed higher net income

100 80

Sales, $bn

60 40 20 0 2002 2003 66.2 34.8 2004 66.9 36.1 2005 77.9 37.4 2006 79.5 39.2 2007 81.4

Possible reasons for Net Income differential

Philips has disposed of many businesses that has resulted in net income being supplemented by income from discontinued operations e.g., in 2006
Income from continued operations 0.9Bn Income from discontinued operations4.5Bn Net Income 5.4Bn

0 Matsushita 38.9 Philips 10 8 6 4 2 0 -2 -4 -6

Net Income, $bn

2002 0 -4.6 2003 -0.2 1 2004 0.4 4.1 2005 0.5 4.2 2006 1.4 7.8 2007 1.9

Exchange rate effects due to weak Yen Tax incentives to Philips?

Matsushita Philips

Philips stock price growth has outperformed Matsushita

Philips has even outperformed GE and Sony

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

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 2 3 4 5 6 7 8

Establish a sense of urgency Form a powerful guiding coalition Create a vision Communicate the vision Empower employees to act on the vision Create short term wins Build on momentum to drive more change Institutionalize new approaches

? ?

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Corporate venturing units have generated decidedly uneven financial returns

Success rates for different types of venture unit
30% 25% 20% 15% 10% 5% 0%
in g in g in g in g ve nt ur le g M ix ed je ct iv es ob ur in g ur ur ur ui ty Eq ve nt N ew

Successful Unsuccessful

ve nt

Ec os ys t

ov at io

Source: The future of corporate venturing, MIT Sloan Review, Fall 2003

Pr

iv at e

In n

ar ve st ve nt

em

ve nt

Apples Core Competencies

Many-to-one supplier relationship Close supplier relationships Complete off-shore production Retain bargaining position and drive down costs

1
Managing the supply chain

+
Core strengths in design & branding

Flat/small structure, young/innovative culture User-centric design and marketing Focused product line Strong brand loyalty Own the customer relationship = higher margins

Maintain Control over suppliers and costs

High margins & Dominant market share (ipods)

Comparison: Philips, Matsushita, Apple

Consumer Electronics Value Chain:
Component & Material Suppliers Assembly Design Development Marketing Retail Customer

Organizational Structure

Firm Culture

How to compete with Apple in CE

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

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