The Traditional Organization Structure of Philips NV - Case Study Example

The case study brief: Philips NV is one of the leading electronics companies. It has a Dutch origin. Philips NV set its foot in the dynamic market in1891. (investing.businessweek.com, 2010). The enterprise has established a business that is principally based on four areas of production, namely the “consumer electronics” like electric fittings and electric machines etc, all sorts of “lighting” including multi-powered bulbs and tube lights, “professional products” that are typically the products of professional significance that include but are not limited to computers, telecommunication products and a large variety of medical tools and equipment, and lastly, small “components” ranging from chips to batteries. If the Philips NV is considered with respect to its performance in these four potential domains, it can be stated that the enterprise has done good enough to be ranked among the big names such as the General Electric, Sony, Matsushita and Siemens which are well-known as the global competitors. This is partly evident from the fact that according to results of a survey conducted in the second half of the 1980s, which was about 100 years since the birth of Philips NV, the enterprise had spread so much that its subsidiaries were noticed to be functional in 60 countries worldwide which had offered job opportunities to nearly 300,000 employees from all over the world. (Hill, n.d. cited in Jones and Mathew, 2009, p. 523). However, in spite of the fact that the enterprise had multiplied its business and revenues manifolds since its start up to 1990, Philips NV found itself in big trouble in terms of financial losses that amounted to about $ 2.2 billion on a profit of $ 28 billion and declining revenues because of some hardships encountered in the 1980s. It might have happened so because of the dynamic and increasingly competitive nature of the global electronics industry that almost experienced a technological revolution in the period between 1970s and 1980s. The traditional organization structure of Philips NV: World War II spanning from 1939 to 1945 had created many challenges and issues for Philips NV in a number of ways. Philips’ head office was located in Eindhoven in Netherlands. Because of the war, the enterprise had to organize its foreign activities outside its head office in Eindhoven since Netherlands was occupied by Germany during the war. Under such circumstances, the national organizations owned by Philips had no choice but to function on their own. This paved way for these organizations to develop themselves as independent companies each of them having its own functional departments including the research and development (R & D), production and marketing section. The long sustained war led to the development of a consensus among the top management of the Philips NV that national organizations should be allowed to develop as independent units. This vision was supported by reasonable arguments. The top management visualized the issue of trade barriers that necessitated the establishment of independently working national organizations in individual market places. Secondly, establishment of independent national organizations was considered as a positive step towards serving the localized needs of the consumers of the services. Thirdly, during the course of the war, the national organizations had matured as independent units to a considerable extent and restructuring the whole setup seemed unwise. On the other hand, establishing some sort of centralized monitoring system specially over the product policy and R & D section was essential for exercising interaction and cooperation among the individually developed organizations. Thus by 1980s, a total of 14 product divisions had been established across the globs. Top management made the product divisions liable to ensure smooth running of the fundamental R & D as well as the policy making regarding the development of the product while running daily operations remained the responsibility of the national organizations. Responsibility of the development of the product strategy rested with both simultaneously with the latter to implement the strategies thus developed. One of the unique traits of the functioning style of Philips NV was that the responsibilities of the top management were distributed between two managers instead of one. One looked after the technical aspects of the business while the other ensured that the product was adequately marketed and sold. This management structure can be traced back to the enterprise’s founders, namely Anton and Gerard Philips. The dual manager structure was more offensive than supportive for either of the two managers. Anton once argued that the managers tried to outshine each other. The technical manager would try to produce too much for the marketing manager to get sold and the latter seemed to show the production inefficiency by projecting a lack of supply caused by exaggerated sales. Not only that, a total of 10 managers were responsible for the top decision and policy making that had separate fields of interest despite the common objectives. Dutch managers were in a majority in the board of management who had risen in the head office with the help of bureaucracy. Often, they would be made top manager of some national organization. Change in the company’s environment: The incident of trade barriers falling all over the world as a result of the General Agreement on Tariffs and Trade (GATT) and the rise of European Economic Community in the Europe both contributed to raise the complexities of competition for the Philips against its parallels after 1960s. The competition was further aggravated by the emergence of Japanese competitors after 1960 that produced low priced in-house products that did better business than the relatively expensive products of Philips. Dependence on modern technology including transistors and integrated circuits boosted the costs of production while the life of the products was considerably reduced which called for frequent production in excess to the refunding upon previous investment. Also, the globalization of products set standards for every competitor to meet or exceed. It can be noticed specially into the business of videocassette recording, in which there was a competition among three different standards, namely the Betamax standard, the VHS standard and the V2000 standard owned by Sony, Matsushita and Philips respectively. Among the three, VHS outshined the rest causing them to decline. Philips’ V2000 was further discouraged by its North American organization upon the directions of the top management from Eindhoven. This stood as a big fall in the history of Philips. Changes made in favor of Philips: Top management felt an urgent need to rebuild the structure of their business in the first half of 1980s. In the production sector, there occurred a lot of duplication in the national organizations which came in the way of the enterprise’s progress. Wisse Dekker, upon his appointment as the CEO of the enterprise in 1982, developed some international production plants to supply individual national organizations with the products in an attempt to eradicate duplication errors in the production. Dekker made Philips enter into joint venture contracts with leading electronics companies to lessen the organizational risks and exaggerated costs thus incurred. The two top managers were replaced with one general manager. He developed a corporate council to serve as a forum for negotiations between the product managers and the national organizations managers. He associated greater R & D responsibility with the product divisions. Cor van de Klugt took the charge in 1986 and made the product divisions fundamentally responsible for making the business proceedings profitable. He also aborted the US Philips trust to give the leadership of the North American subsidiary in the hands of Eindhoven. In May 1987, Klugt rebuilt the basic structure of Philips when he categorized the product divisions into four core classes, namely the “lighting, consumer electronics, components, and telecommunications and data systems” with the rest to diminish. (Hill and Jones, 2009, p.90). Management board was cut short. He organized a group management committee chiefly led by the product division managers to make it more stable and powerful. In spite of these efforts, Philips continuously lost and critiques held the large sized bureaucratic Eindhoven responsible for the losses. As a result of the continuous loss, the management board replaced Klugt with Jan Timmer who attacked the right areas by downsizing the enterprise. He overtly expressed an intention to reduce Philips’ workforce spread all over the world by 10,000 to 283,000 and also dedicate a sum of $1.4 billion solely for rebuilding Philips’ structure. This partly went against the enterprise for the time being for the stakeholders had a very unwelcoming attitude towards this step of Timmer but the critiques were only considering the downsizing aspect and not pondering over the additional benefits the practice might bring in near future. The price of Philips’ share dropped down by about 7% as a result of Timmer’s attempt to rationalize the volume of Philips’ workforce. The technique worked and Timmer came up with some really favorable results. By the middle of 1991, Philips’ minicomputer division was sold that had been incurring the company a sum of $1 million every single day. So getting rid of that saved the same amount every day. Soon after he happened to take the charge of Philips, Timmer expressed that he would shortly reduce the workforce by no less than 55000 for it would cut down the company’s expenses by up to $1.2 billion. (Jones, 2009, p. 525). Besides reducing the company’s workforce, Timmer shook hands with Japanese Matsushita being a representative of Philips for he was well aware of the importance of networking and the benefits derived by joint venture projects. “In 1987, the company announced plans for a merger with Matsushita Electric Trading Co. and concluded the merger in April 1988.” (www.4engr.com, 2009). Matsushita is no doubt a big name in the electronics industry and one of the biggest makers of the Digital Compact Cassette (DCC). The DCC was created by Philips and Philips intended to launch the product in the second half of 1992. The specialty of the DCC was that it had the capability of generating the compact disc’s sound effects on a tape. DCC allows the customers room to play the conventional cassettes onto it. This is indeed a very appealing feature of the DCC. Sony has launched a Mini-Disk which can be thought of as a major competitor in front of Philips’ DCC since Sony’s Mini-Disk is portable as the name implies. The competition foreseen between the DCC and the Mini-Disk can be thought of as similar to the competition that took place between Betamax and VHS in the past. It needs to be noted that in the pasty, Philips had lost to Matsushita on V2000. Therefore, success of DCC means a lot to Philips and is essentially a step towards the rebuilding of Philips. “Philips today is a simpler company that is both agile and more resilient to market fluctuations.” (www.newscenter.philips.com, 2010). References: Hill, C and Jones, G 2009. Essentials of Strategic Management. ‘Second edition’. USA: South-Western, Cengage Learning. Print. investing.businessweek.com, 2010. “Philips Electronics-NY SHR”. Bloomberg Businessweek. viewed 20 August, 2010, . Jones, GR and Mathew, M 2009. Organizational Theory, Design and Change. ‘Fifth edition’. India: Dorling Kindersley (India) Pvt. Ltd. Print. www.4engr.com, 2009. “Matsushita Electric Industrial Co., Ltd.”. viewed 20 August, 2010, < http://www.4engr.com/company/catalog/1809/index.html>. www.newscenter.philips.com, 2010. “Fourth Quarter and Annual Results 2009”. viewed 20 August, 2010, . Read More