Philip's vs. Matsushita - Essay Example

Running Head: PHILIP’S vs. MATSUSHITA Philips vs. Matsushita Question No Why are both companies having such difficulties building the capabilities they both recognize as missing? Answer. Philips Philips was established by Gerard Philips and his father in 1892 as a small light- bulb factory in Eindhoven, Holland. Later Gerard Philips’s elder brother Anton who was an excellent salesman and manager also joined the Philips. Both brothers and their father worked hard and by 1900, Philips was the third largest light-bulb producer in Europe. Philips concentrated only on light-bulb technology development. Company policy was to scrap old plants and use new machines or factories whenever advances were made in new production technology. It also established hi-tech laboratories for R&D and it developed a tungsten metal filament bulb that was a great commercial success (Bartlett, 2006, p. 1). In 1899, Philips initiated its offshore business and within a decade it expanded its sales network across Japan, Australia, Canada, Brazil, United State and Russia. In 1919, Philips made an agreement with Genera Electric, giving each company the use of the others patents. In 1918, Philips introduced the electronic vacuum tubes; eight years it lunched its first radios to market, capturing a 20% world market share within a decade; and during the 1930s, Philips began producing X-ray tubes (Bartlett, 2006, p. 2). During World War II Allied and German bombing had targeted and damaged most of Philips’ manufacturing facilities in the Netherlands, the management board decided to build the postwar organization on the strengths of the national organizations (NOs). The independent NOs had a great advantage in being able to sense and respond to the local market demands and differences. These NOs were also free in financial, legal, and administrative matters, and also to built their own technical capabilities and product development. In the late 1960s, as Common Market concept emerged, it eroded trade barriers within nations, it also speckled its impact on Philips hence it ability to bring products to market began to falter. Over more than last three decade Philips financial performance remained poor and its global competitiveness are was still a question (Bartlett, 2006, p. 1). Philips case study highlights following important factors that contribute its poor performance over three decades. Unbalance and undefined power shearing between PDs and NOs. Lack of effective restructuring. Lack of well defined performance criterion. Fragmented organizational structure. Matsushita Matsushita is a key manufacturer over a verity of consumer appliances and products having world wide manufacturing facilities. Initially started as a modest home based manufacturing facility making double-ended electrical sockets, in 1918 by Konosuke Matsushita, a 23-year-old inspector at Osaka Electric Light Company, Matsushita has evolved as a versatile consumer appliances and products manufacturer with a wide retail and marketing network across the globe. It manufactures a broad line of 5,000 products including video and audio equipments, home appliance and house hold equipments, information, communication and industrial related equipments, power backup and electronics equipment (Exhibit 7, p. 20) (Bartlett, 2006, p. 20). Matsushita total sales has attained a figure of US $68.862 million with net income of US $ 941 million for fiscal 2000 (Exhibit 6, p.19) (Bartlett, 2006, p. 19). Since the announcement of Konosuke Matsushita 250-year corporate plan on May 5, 1932, Matsushita has been facing difficulties and struggling in capability building and re-establishing its competitiveness. Matsushita case study reveals following important reasons that contribute toward these difficulties (Bartlett, 2006, p.8-12). During 1933-50 period, Matsushita followed a centralized leveraged technology strategy. Also, central research laboratory (CRL), that was technology development research center, was intentionally under-funded by Matsushita, forcing it to compete for additional funding from the divisions. The centralized leveraged technology strategy greatly impaired division’s innovative proficiency for future market competition and place. Lack of an appropriate collaboration company with Matsushita during 1951, also influenced Matsushita intension to grip market place particularly in north America. Despite Konosuke Matsushita best efforts, the best he could do was a technology exchange and licensing agreement with Philips. During 1960-1980 period, Matsushita expanded and internationalized its business through its mass videocassette recorder (VCR) and television manufacturing and sales. During this period although Matsushita decided to outsource its manufacturing facilities to developing countries due to low labor and manufacturing cost and pressure from national governments in developing, yet Matsushita continued its centralized leveraged technology strategy. Almost all high- value components and subassemblies were still made in its scale intensive Japanese plants and overseas operations had to used plant and equipment designed by the parent company, followed manufacturing procedures dictated by the center, and used materials from Matsushitas domestic plants. The central product divisions maintained strong operating control over their offshore production units. To have strong operating control over their offshore production units, Matsushita also followed the centralized management policy. In the mid-1980s, Matsushita had over 700 expatriate Japanese managers and technicians on foreign assignment for four to eight years. Local managers were only made responsible to achieve the targets. Deployment of such huge number of management staff on foreign assignment to only implement headquarter management and innovative policy obviously not only caused an extra expenditure to Matsushita but also deprived it from the expertise of a large pool of professional involved with Matsushita. During 1980-86 period, although company President Toshihiko Yamashita initiated “Operation Localization” to boost offshore production from less than 10% of value-added to 25%, or half of overseas sales, yet overseas companies continued to act primarily as the implementation arms of central product divisions. In 1986, Yamashitas successor, Akio Tanii, merger of foreign soldieries into the parent company in an effort to fully integrate domestic and overseas operations could not help the overseas subsidiary companies to act as little more than the implementing agents of the Osaka-based product divisions. In 1990s despite the excess capacity and strong yen, management seemed Did not show any interest in restructure its increasingly inefficient portfolio of Production facilities. Despite Morishitas promises, resistance within the organization prevented his implementation of much of the promised radical change. Question No. 2: How effectively has Matsushita managed its change agenda of the 1980s and 1990s? Answer: Matsushita Change Agenda during 1980s and 1990s To have a strong operating control over their offshore production units, Matsushita had followed the centralized management policy before 1980s. In the mid-1980s, Matsushita had over 700 expatriate Japanese managers and technicians on foreign assignment for four to eight years. Local managers were only made responsible to achieve the targets. In 1982, as Toshihiko Yamashita took over the charge as President of company. He launched his “Operation Localization” ‘to boost offshore production from less than 10% of value-added to 25%, or half of overseas sales, by 1990. To support the target, he set out a program of four localizations-personnel, technology, material, and capital (Bartlett, 2006, pp. 11-12). Toshihiko Yamashita’s “Operation Localization” policy brought a reasonable change to Matsushita organization structure and it increased the number of local nationals in key positions. In the United States, for example, US. nationals became the presidents of three of the six local companies, while in Taiwan the majority of production divisions were replaced by Chinese managers. But unfortunately these local staff did not have direct contact with senior administratative body and they were not free in their decisions. They were directed and advised by senior Japanese advisors, who had direct link with Matsushita’s parent management team. Toshihiko Yamashita policies also gave the offshore production subsidiaries to some extent to buy minor parts from local vendors as long as quality could be assured. Toshihiko Yamashita’s “Operation Localization” policy also gave overseas sales subsidiaries more choice over the products they sold. Every year a two-week internal merchandising show was organized. The show provide an opportunity to exhibit Yamashita’s products, to have meetings for future planning and to decide the new line of action. Although Toshihiko Yamashita’s was expecting that operation localization would help Matsushita’s overseas companies develop the entrepreneurial initiatives and innovative capability that he had long admired in the national organizations of rival Philips yet overseas companies continued to act primarily as the implementation arms of central product divisions. After Toshihiko Yamashita, Akio Tanii took over the charge of Matsushita. After realizing that Matsushitas product divisions were not giving sufficient attention to international development-in part because they received only 3% royalties for foreign production against at least 10% returns on sales for exports from Japan, he introduced his total integration strategy. He brought all foreign subsidiaries under the control of Matsushita Electric Trading Company (METC). To fully integrate domestic and overseas operations, Tanii merged METC into the parent company and relocated the major regional headquarters functions from Japan to North America, Europe, and Southeast Asia. During 1980’s decade Matsushita’s sales increased about three fold and reached to US$ 37753 million with a net income of US$ 1214. Flush with cash and international success, in early 1991 the company acquired MCA, the US. entertainment giant, for $6.1 billion with the objective of obtaining a media software source for its hardware. Yet as Japans bubble economy had burst, Matsushita plunged recession and Tanii had to shift the companys focus from expansion to cost containment. Despite his best efforts to cut the costs, in1992, Matsushita’s profit declined to half their 1991 level, hence in February 1993, Tanii had to resign (Bartlett, 2006, pp. 9-12). After Akio Tanii indisposed resignation Mr. Yoichi Morishita became the companys executive vice president with a slogan “simple, small, speedy and strategic”. At that time Morishita was facing a number of challenges including consumer electronics market recession, excess capacity driven down prices with low profits return and strong competition from Korea and China. So Mr. Yoichi Morishita had to devise his strategy to tackle these challenges. He adopted the decentralizing policy and within next one and half year he moved about 6000 staff from headquarter to operating sites. He also sold 80% of MCI to Seagram, booking a $1.2 billion loss on the transaction. During the 1990s, although Matsushitas product divisions expanded its offshore Manufacturing facilities, particularly to low-cost Asian countries like China and Malaysia and by the end of the decade, yet the excess capacity and strong yen management did not show any interest to radically restructure its increasingly inefficient portfolio of production facilities. Hence despite Morishita s promises, resistance within the organization prevented his implementation of much of the promised radical change. During last couple of years, Morishita policy focused was much of his intension offshore innovation and technology development. Concerned that only 9% of the company’s 3,000 R&D scientists and engineers were located outside Japan, he began investing in R&D collaboration and technical exchanges, particularly in fast emerging fields like ICTs (Bartlett, 2006, pp. 10-12). Question No. 3: a) What advice would you have for the current CEO of Philips? b) What do you think of the company’s outsourcing plans? Answer. a) An Advice for the Current CEO of Philips In May 2001, Gerard Kleisterlee, a 54-year-old engineer, took the charge CEO Philips. Believing that Philips had finally turned around, the board challenged Kleisterlee to grow sales by 10% annually and earnings 15%, while increasing return on assets to 30%. Despite these set targets, Mr. Kleisterlee has to tackle a number of other challenges too. These are Philips complex governance structure, Dutch legislation, fragmented organization structure and an immense financial pressure (Bartlett, 2006, p. 7). Following are few important points to tackle these issues. The long lasting power shearing struggle between PDs and NOs can be if not solved yet at lease can be reduced by setting a well balanced and clearly defined power shearing criterion between PDs and NOs. If the power shearing issue is resolved, Philips complex governance structure, can be amended by implementing an effective restructuring policy. To attain the set targets, analysis the core and non- core businesses and devise strategies to address the causes. b) Philips’s Outsourcing Plans Outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the product or service will be sold or consumed. It can be contrasted with off shoring, in which the functions are performed in a foreign country by a foreign subsidiary. Opponents point out that the practice of sending work overseas by countries with higher wages reduces their own domestic employment and domestic investment. Although Philips’s started its business beyond Dutch border in 1899, yet as Gerard Kleisterlee took over the charge of Philips CEO, he initiated the Philips future outsourcing plan. In August, Kleisterlee announced an agreement with Japans Funai Electric to take over production of its VCRs, resulting in the immediate closure of the European production center in Austria. The CEO also gave an indication that Philips is seeking partners to take over the manufacturing of some of its other mass-produced items such as television sets. There is also a general consensus among shareholders Philips best hope of survival is to outsource even more of its basic manufacturing and become a technology developer and global marketer (Bartlett, 2006, pp. 2-7). Question. 4: a)What advice would you have for the current CEO of Matsushita? b) Is the restructuring program at Matsushita attainable? Answer. a) An Advice for the Current CEO of Matsushita Matsushita case study reveals it had followed the following course of action (Bartlett, 2006, pp. 8-12). Matsushita based its global competitiveness on its centralized, highly efficient operations in Japan. It always had followed a strong centralized leverage technology strategy. Headquarter product divisions always had a strong control over their offshore Matsushita production and procurement units. Matsushita had implemented a strong influential management policy to its offshore manufacturing units. Matsushita had deployed an uneven number of R&D and management staff to its offshore manufacturing units. Lack of interest in restructuring. Matsushita management believe its global competitiveness on its centralized, highly efficient operations, yet as world business scenario is continuously changing and free trade and open market options are obvious, it requires that Matsushita too revisit its business strategy and modify it according present business scenario. Matsushita management has always remained reluctant to transfer technology to its offshore manufacturing units. Also it product divisions always has a strong control over their offshore Matsushita production and procurement units. The control over technology, operation and procurements turned Matsushita offshore manufacturing units into assembly units, that is why the overseas subsidiary companies could not developed its R&D strategy and they managed to act as little more than the implementing agents of the Osaka-based product divisions. Hence this trend should also changed and current CEO should address this issue. Matsushita had implemented its strong influential management policy by deploying a large number of Japanese managers and technicians on foreign assignments. Local managers were only made responsible to achieve the targets. Deployment of such huge number of management staff on foreign assignment to only implement headquarter management and innovative policy obviously not only caused an extra expenditure to Matsushita but also deprived it from the expertise of a large pool of professional involved with Matsushita. On the other hand it only deployed a small proportion of scientists and engineers on offshore manufacturing units for R&D. It suggests that a restructuring of staff is very essential for Matsushita and current CEO should consider this issue too. b) Matsushita Restructuring Program Matsushita major restructuring was carried out twice. The first restructuring was done by Toshihiko Yamashita under the slogan “Operation Localization” to boost offshore production from less than 10% of value-added to 25%, or half of overseas sales, by 1990. To support the target, he set out a program of four localizations- personnel, technology, material, and capital. He increased the number of local nationals in key positions and under his “Operation Localization” program in the United States, US. nationals became the presidents of three of the six local companies, while in Taiwan the majority of production divisions were replaced by Chinese managers (Bartlett, 2006, p. 19). The second major restructuring program was launched by Yoichi Morishita under the slogan “simple, small, speedy and strategic,” In his restructuring program, he reduced the headquarters staff by decentralizing and deploying to the operating units. Within one and half years, he moved 6,000 staff to operating jobs (Bartlett, 2006, p. 19). Nevertheless both “Operation Localization” and “simple, small, speedy and strategic” programs did not bring any significant change to Matsushita future performance. During Toshihiko Yamashita restructuring program, although few local nationals moved to key positions yet they were not given free hand to their decisions. Local national managers were still supported by senior Japanese advisors, who maintained a direct link with the parent company. The restructuring under also failed to have any significant impact because of resistance within the organization. The above discussion implies that any restructuring within in Matsushita will not be effective till local nationals are not given their right to make decisions. References Bartlett, C. A. (2006). Philips versus Matsushita: A New Century, a New Round. Harvard Business School. Read More