Strategic Management of Philips NV - Case Study Example

Philips NV Table of Contents Introduction 1 The Issues 2 The Analysis 4 The Recommendations 8 Conclusion 11 References 12 Bibliography 14 Introduction Beset with remarkable volatility in terms of almost all aspects of the external business environment, the 21st century has necessitated the corporate world to recognize the importance of change management. Against the backdrop of a highly volatile business scenario, change is perhaps the only thing that is constant and organisations have to efficiently cope with these numerous variations in order to survive amidst acute competition. It may be very well understood that the process of organisational change as well as its management are quite complex and hence managements have to devote commendable amounts of time and other valuable resources (including money) in order to identify the necessity to change and to take necessary steps towards the achievement of change. The current topic will aim at shedding light upon this domain from the perspective of Phillips – the Amsterdam based electronics behemoth. After the central issues are identified, they will be analysed meticulously, and finally a set of plausible recommendations will be provided. The research initiatives will be augmented by referring to a number of scholarly literatures. The Issues Several eminent thinkers have pointed out that “change is the only constant” (Yang & Nylan, 1993, p.59). Though most organisations are aware of it, many have failed to realise its importance which have resulted in a reversal of fortunes. Philips NV is one such organisation that failed to incorporate the required changes in the organisation and soon lost its competitiveness in the global market. The case of Philips NV stands as a burning example of what an organisation’s apathy in implementing change in accordance with the environment can do to erode its very existence. This case can be used to study the implication of various factors that are responsible for the decline of an enterprise. Such factors include ambiguous organisational policies, wrong leadership style, poor change management process and inefficient strategy development & implementation. Philips too had been a victim to such oppressive forces that actually resulted in the decline of the company. Among them, a poor and arbitrary organisational structure is the one that was responsible for the poor state of the company. The company tried to retain the concept of dual power in the decision making process as well as in the management of the company, as introduced by the founder of the company. The decision making people never realised that such dual power strategy is resulting in various problem in the organisation. The company never maintained a risk management structure that identifies the latent problems in the organisation. With time these small problems turned out to be major issues that drastically affected the organisation. The company always preferred a decentralised structure and the degree of coordination among different level organisations went on reducing. Therefore, when the management tried to introduce the required changes in the organisational structure including the policies of developing centralised decision making structures, these individual departments resisted. As a result the organisation failed to achieve its objective. Different CEOs of the company attempted to introduce various changes to enhance the competitiveness of the organisation with no avail. This was because of poor planning of the organisation and reluctance to change. The leadership style followed by these CEOs failed to motivate the followers creating resistance and mistrust in the employees. Philips even failed to respond to the strategies followed by its competitors. It failed to understand that too much diversification never assist in gaining higher market share. It is only achieved by developing core competency in one specific field. Apart from these factors there are many organisational issues that were responsible for the dismal performance of the company. These issues will be discussed in a comprehensive manner in the later part of this project. The Analysis Things were sailing very soothly till the imposition of trade barriers following the end of World War-II. At this point of time, the management was forced to provide more liberty to the national organisations in terms of decision making. The then management’s decision was correct as per the demand of the market because retaining a centralised organisation was not possible. As per organisational theory, an organisation is- “complex social system with well-defined, established procedures, process and patterns of interpersonal relationship” (Meingast, 2009, p.4). In Philips, all the national organisations were given the liberty to make their own decisions because the company believed that they will be more effective in understanding the needs of the local customers. The national organisations were given the power to conduct individual research and development and to produce products that best suits the conditions of the local market. The management soon realised the fact that if the local organisations remains isolated, the company will never be able to develop an international brand in global market. This awareness led to the centralization of the R&D and product development activities, but the decisional making power remained with the local management. This resulted in a faulty organisational structure because when the ultimate decision making power is given to the national organisations, the R&D and product developing department function less effectively. In an organisation, the organisational level of power plays a very crucial role in the quick decision making and smooth functioning of the organisation. Figure 1: Levels of Organisational Controls (Source: Hill & Jones, 2009, p.390) The national organisations of Philips top position was shared by the head of sales and the technical department. The company’s founders were the first one to incorporate such a unique organisational structure. Such organisational structure was implemented to motivate the production department to produce more as well as the sales department to sell as much as possible. This resulted in increased revenue generation. However this strategy failed to assist the company to increase its revenue in the global market. According to the economists, the supply of products and services are dependent on the demand prevailing in the market. Mere production of commodity will never generate the required demand to needed to make the desired profit (Rotheim, 1998, p.318). As the local companies had the power to take their own decisions, they went on producing different types of products to cater to the requirement of the local customers. The company became highly diversified in terms of products. When the trade barriers were minimised and Japan emerged as the international competitor of Philips, the company failed to retain its competitiveness. Japanese companies conducted productions process in their home country where the cost of operations was quit low. These companies also enjoyed economies of scales because of bulk production strategy. On the other hand, Philips had its production units situated in different locations. Due to small production capabilities, the fix cost associated with such national organisations proved to be very high. Most of activities were redundant and it became impossible for the company to acquire cost leadership. The CEO of the company attempted to integrate the production units by introducing the concept of centralised production. However as the coordination was quite less among different national organisations, this process proved very cumbersome. To cope up with the changing technological environment, Philips made high investments to introduce new machineries. However, the management failed to realise that mere incorporation of new technology will never help the company to gain competitive edge over the competitors. The management failed to develop its workforce and hence the new technology was not much effective in boosting the sales of the company. In past, the company was more interested in increasing the revenue through production and sales activities but neglected the quality issue. When the concept of standardisation of products was introduced in the international market, Philips failed to prove the quality standards followed by the company. This failure of Philips model of standardisation can be related to the low level of employees’ motivation in quality maintenance. As per ‘equity theory’, the employees always try to measure the monitory gain with the input in form of labour. If the employees feel that they receive more money as compared to the input (labour) done by them, then they feel motivated. On the other hand, if they find that the monitory output is less than the input given by them, they get de-motivated and feel dissatisfied (Latham, 2007, p.43). The CEO of the company ignored the fact that without developed and motivated workforce, no organisation can be successful in achieving their goals. This was a major issue that reduced the efficiency of the change introduced by the management for acquiring competitiveness. Both the CEOs of Philips made attempts to restructure the organisational structure of the company. They believed that if the company has a centralised organisational structure, it will be easy to control different production units situated in different nations. The organisational change proposed by them was aimed to develop a more bureaucratic structure in Philips. Figure 2: The Bureaucratic Form of Organisation (Source: DuBrin, 2008, p.257) Initially, all the national organisations had their own board where the board members were responsible for taking decision solely for their own organisation, but after the introduction of centralised control panel many of the board members were asked to leave the organisation. The company decided that all the vital decisions will be taken by the headquarters of Philips. This bureaucracy resulted in a highly complex organisational structure. As majority of the members in the control panel were from headquarters, it became increasingly impossible to understand the local problems and issues related to different production units. As the technical environment was changing at a fast rate, the national organisations were required to take quick decisions, but after the introduction of centralised decision making system, the process of decision making became a time consuming process. Thus these companies failed to respond to the changes taking place in the external environment. The company decided to concentrate more on profit maximisation and was resolute to disinvest the loss making concerns. However, the company didn’t know how to handle the resistance offered by the employees who lost their jobs. The management introduced various changes in the organisation without the prior permission of the other stakeholders in the decision making process. This resulted in mistrust and eventual loss of faith in the functioning of the organisation. The Recommendations Once Philip was one of the leading companies in the electronic equipment industry, but with time it lost its competitiveness. Various reasons are attributed to it; however the primary factor to be blamed was the failure of the management to develop suitable strategies as per the changing demand of the external environmental. The company should have taken into account the vital environmental factors. These are political, economic, social and technological (Henry, 2008, p.51). The policies followed by the government and the legal system of the nation influences the major decisions taken by the company. Economy of the nation influences the purchasing power and demand of the product in a specific region. Economic condition is also taken into consideration while developing the price strategy of different products and services offered by the company. Social environment comprises the ethical issues and the value system followed by the region. The social environment influences customer’s behaviour and their purchasing pattern. Technical environment is important for companies working in the technology sector. After conducting the PEST analysis of Philips, it can be concluded that the while developing the strategy the company, special emphasis should have been paid to the international technical environment. Other environmental factors should also have been taken into consideration, while developing the strategy to be implemented. In the case of Philips the corporate strategy should include, developing core competency by attaining a leadership position in electronic products. Later on this goal needs to be broken down into SMART objectives. The term ‘SMART’ stand for “specific, measurable, achievable, relevant and time-bound” (Frey & Osterloh, 2002, p.234). This will help the company to develop business strategy for each business unit. While developing the business level strategy, the management should make attempts to understand the customers and their unique needs. While developing business level strategy, the local management should take into account the nature of the customers, their needs and the manner in which the company can fulfil their requirements (Hitt, et al., 2009, p.99). Figure 3: Hierarchy of Strategy in an Organisation (Source: Orcullo, 2007, p.99) Finally, the functional level strategy should be set for each and every department. To achieve the leadership position in the field of technology, the company will have to motivate its R&D department. The profit making business should be disinvested and the capital should be used to restructure the core businesses. The company also needs to invest in the development of human resource through different training sessions. An organisation can only be successful if all the departments work hand in hand to attain the organisational goal. The prevailing bureaucratic organisational system should therefore be modified. People from different departments and from different production units should be motivated to participate in decision making process. The employees should be motivated to assist the management in finding the root cause that is troubling the company. The employees should also be allowed to help the management in finding different alternatives to the problems. If the top management of Philips implements the above mentioned strategies, there is high possibility that the company will attain leadership position in the global market. Conclusion During the course of this research it has been observed that organisations need to understand the criticality of changes that take place on a continuous basis in their external environments. Due to the advancements that are taking place in the areas of science and technology, environmental changes have been taking place at a stupendous pace of late, and hence organisations are necessitated to augment their core competencies along with other capabilities to sustain the volatility. It has been found that Phillips preferred to follow a rather outdated bureaucratic hierarchy; furthermore the electronics giant exhibited significant opacity in terms of the need to disinvest and restructure the core businesses. This report has outlined how an organisation, that is otherwise an industry leader, slowly loses its ground in the face of environmental change(s) if it fails to be proactive in implementing organisational changes as a response to them. References Frey & Osterloh. 2002. Successful Management by Motivation: Balancing Intrinsic and Extrinsic Incentives. Springer. Henry, A. 2008. Understanding Strategic Management. Oxford University Press. Hill, C & Jones, G. 2009. Strategic Management Theory: An Integrated Approach. Cengage Learning. Hitt, A. M., Ireland, R. D. & Hoskisson, R. E. 2009. Strategic Management: Competitiveness And Globalization: Concepts & Cases. Cengage Learning. Latham, G. P. 2007. Work Motivation: History, Theory, Research, and Practice. SAGE. Meingast, S. 2009. Intelligence Reform and Counterterrorism Effectiveness: A Structural Approach. GRIN Verlag. Rotheim, R. J. New Keynesian Economics/Post Keynesian Alternatives. Routledge. Yang, Y & Nylan, M. 1993. The Canon of Supreme Mystery. SUNY Press. Bibliography Baier, C. 2008. The Alignment Performance Link in Purchasing and Supply Management. Gabler Verlag. Borghoff, T, 2005. Evolutionary Theory of the Globalisation of Firms. Gabler Verlag. Carroll, A. B. & Buchholtz, A. K. 2008. Business and Society: Ethics and Stakeholder Management. Cengage Learning. Hill, C. W. L. & Jones, G. R. 2008. Strategic Management: An Integrated Approach, 2009 Ed. Dreamtech Press. Read More