Philips Versus Matsushita: a New Century, a New Round

Block Assignment:
Philips versus Matsushita: A New Century, a New Round

Global Business
Block Assignment (individual presentation)
Case: Philips versus Matsushita: A New Century, a New Round

Background information
Both Philips and Matsushita became successful global companies. Each by its own way. Matsushita became successful based on its centralized, high efficient operations in Japan. In contrast, Philips did it by leveraging a worldwide portfolio of responsive national organizations.

Philips started off as an innovating business in light-bulbs. Even though competitors were trying to diversify its business as soon as possible, Philips maintained light-bulbs as its core business for a long time. Later on it became a leader in industrial research. The company expanded by building new labs that were specialized in physics and chemistry. In 1912 they started building sales organizations in U.S., Canada and France. All other functions remained in Eindhoven. The decentralization continued when Philips started to create local joint ventures. In the end there was nothing left of the highly centralized company. The result was a decentralized sales organization with a very broad production line.

The different departments/subsidiaries of Philips turned out to be very independent in decision making. This was mainly due to the fact that each one of these organizations had to continue its operations during the war without any instructions and/or directions from the headquarters. Their greatly increased self-sufficiency during the war had allowed most to become adapted to responding to specific market conditions. This made them highly independent units. On the one hand this independence and adaptability to local markets was the main advantage for these national organizations (NOs). On the other hand, it was hard for the management at Philips Eindhoven to keep control over the NOs. It became clear that although there was a “formal corporate level structure” implemented, the NOs kept the real power. The elite group of managers identified strongly with each other and with the NOs as a group and had no difficulties in representing their strong, country-oriented views to corporate management.

Due to this massive decentralization it was hard for Philips to stay innovative. As technological changes started to exponentially evolve, Philips had to keep up with their competitors. Many of these competitors were moving their production to low-cost countries to create economies of scale and scope. The new technologies demanded larger production runs than most NOs could fulfill. At this point Philips started to discover that having very independent and adapted NOs can be a disadvantage if fast restructuring or adjustment is needed. In the next thirty years the company tries everything it can do to adjust its business to the new rapidly changing market. As the case states in the end “…they believed it was time to recognize that its 30 year quest to build efficiency into its global operations had failed”.

Matsushita followed a whole different strategy. The company focused on export markets to sell its broad line of 5000 products. To do this 25000 retail stores were opened. In this strategy Matsushita created a centralized global business which was operated and coordinated from the main company in Japan. Similar to Philips, Matsushita created a structure consisting of divisions which were given responsibility for its profits. Each product division also got the opportunity not only to maintain the existing products but also create new products by leveraging its technology. By doing this the company created internal competition between the product divisions. Additionally, to stimulate product development and engineering even more they set up a licensing agreement with Philips to exchange technology (knowledge). Apart from these aspects, further actions were taken to globalize the business.

One of these actions was to shift the more basic production to low wage countries. This was done to save costs as manufacturing costs in Japan rose. Though the manufacturing of high value parts was kept in Japan in order to maintain quality for its products. Another action was to build global leadership by focusing on VHS. They adopted an established VHS format and aggressively licensed this standard format to other manufacturers. After a few years the VHSs sales increased to 30% of Matsushita’s total sales.

Apart from this Matsushita also tried to the way the divisions were controlled, in order to globalize and grow internationally. In the beginning the operating control over the product divisions was strictly maintained by the central production division in Japan. Although each division had the responsibility over its own profit figures, the company found it necessary to increase subsidiary responsibility even more in order to globalize its production. Therefore, controlling the inputs for a product division was left aside and they started monitoring measures of output. Moreover, to stimulate global planning within Matsushita corporate managements required all the product divisions to prepare global product strategies. By implementing the management gets more input from the divisions, which is especially beneficial as the division have more local expertise and knowledge. The goal was to create a dialogue between the headquarters and the subsidiaries. The subsidiaries are there to translate Matsushita’s philosophy in foreign countries. On the other hand, the headquarters should also receive the necessary information from the subsidiaries including local marketing information. To maintain this dialogue Matsushita made sure these subsidiary managers would visit the headquarter in Japan at least two times a year. This proved to be successful as a high communication between the headquarter and all managers was established.

Further concerns about the centralization of the Matsushita’s operations made that another few actions were taken to stimulate localization. A number of local nationals were installed at key positions within the subsidiary. Subsidiaries were given permission to buy minor parts from local suppliers. More freedom was given to customize the products to local needs and preferences. Additionally, some major regional headquarters were moved from Japan to North America and Europe. The need to develop technologies and innovations was also emphasized in order to decentralize Matsushita’s business. To fulfill this need more foreign investments in R&D partnerships and technical exchanges were made. Another action taken was to make sure customer needs reached the corporate managers. Therefore the hierarchy of the company had to be flattened in order to empower employees so they can respond to these customer needs. The final action taken to decentralize the business was to get rid of the product division structure. As the case states “… plants, previously controlled by individual product divisions, would now be integrated into multi-product production centers”.

Critical analysis
Global companies face strategic and administrative complexity to manage their international organization. Two variables that represent this complexity, according to Chapter 4 (Bartlett et al. 2008), are the foreign product diversity (number of products sold internationally) and the foreign sales as percentage of total sales. This shows the importance of international sales to the company. These global corporations typically adopt different organization structures at different stages of international expansion (international division, worldwide product division, area division or global matrix structures). Both the chapter introduction and the first article (Kim and Mauborgne, 1993) emphasize the failure of these matrixes. The chapter introduction states “…separated by barriers of distance, time, language, and culture, managers found it virtually impossible to clarify the confusion and resolve the conflicts.” Furthermore, the administrative heritage should be taken into account, these are the aspects (organizational history and management culture) that shape the company to what it is in its present state.

Identifying the problem or failure is one thing, finding the solution is sometimes even harder. All three parts of Chapter 4 (introduction and the two articles) bring up their own solution. The chapter introduction emphasizes the creation of a transnational organization in continues transition. To remain competitive and make the global structure succeed this organization should have multidimensional perspectives, distributed interdependent capabilities and a flexible integrative process. In the article ‘Making global strategies work’ the emphasize is on what they name the ‘due process’ in order to make a global structure effective. This process should consist of five aspects. These are familiarity with local conditions, consistent decision making practices, ability to refute decisions, and an explanation for final decisions. To create a sustainable and effective global structure, the second article (J. Birkinshaw & C. Gibson, 2004) suggests to build ambidexterity into the organization. This concerns the ability for a company to adapt towards new opportunities while at the same time align the business to streamline short term activities.

The theoretical suggestions in the chapter introductions and the two articles seem to go hand in hand or even overlap on some parts. Though, nowhere it is stated that the company should just abandon its present global structure and follow the suggestions given. The chapter does however state that the traditional implementation mechanisms became on the whole less effective to make a global business work. Therefore the suggestions stated above, for example to create a due process, should be a way of supporting the traditional implementation mechanisms in order to make them more effective global strategies.

Each of the suggestions made in the chapter seem to have good intention. However, the problem is probably how to implement it in a well established global corporation with many subsidiaries. Here lays the challenge, as these companies have to deal with their administrative heritage. It would have been better if these companies had thought of their strategy before going global. Though, this seems unreasonable. Companies like Matsushita and Philips expended their business abroad in a time period where these strategic insights and knowledge were not available to use on the fly. Moreover they did not have any idea of what would become of their tryouts abroad to increase sales.

Although this is true for Matsushita and Philips, it should be less of a problem for more recent international companies. Some scientific articles inform companies to create an appropriate strategy before going global in order to prevent problems (organizational history and management culture) once the company is growing in a rapid pace. The article ‘Factors That Influence Multinational Corporations’ Control of Their Operations in Foreign Markets: An Empirical Investigation’ by Don’t et al. (2008) is one of these articles. It states that “It is worth examining the factors that were directly predictive of a firm’s desired level of control when entering a foreign market”. The article emphasizes the need for a company to consider whether they should go abroad in the first place, and if yes, how would it design its strategy to expand internationally.

As a concluding comment, I would like to state that in the end a company should look at its future when expanding its business. A future that is in most situations unsure. So expanding a business abroad includes many risks but also many opportunity, and it is up to the company to decide whether it should move abroad or not. Creating a strategy should be of big importance before making this next step. As the article ‘Global plan: Looking at the future’ by C. Hill (2010) the definition of globalization is ““an increase in interconnections, or interdependence, a rise in international flows . . . such that the world is, in some respects, becoming a single place”. Creating a structure as a company to fulfill the given definition is more than a challenge. It is something unpredictable and therefore (upcoming) global companies have to make sure that it can make readjustments in a traditional framework like a global matrix while continuing their international operations. Logically it would be best to create the perfect global strategy, culture and structure beforehand, it is not always or even in most cases feasible.

References Bartlett, C., S. Ghoshal and P. Beamish (2008). Transnational Management, Text, Cases, and Readings in Cross-Border Management, Fifth Edition, McGraw-Hill International Edition: ISBN 978-007-125915-6.
Dong, B., Zou S. and C.R. Taylor (2008). Factors That Influence Multinational Corporations ' Control of Their Operations in Foreign Markets: An Empirical Investigation. Journal of International Marketing. Volume 16, issue 1 (page 98 – 119).
Darryl C. Hill (2010). Global plan: looking to the future. Professional safety. Published on September 1, 2010.

References: Bartlett, C., S. Ghoshal and P. Beamish (2008). Transnational Management, Text, Cases, and Readings in Cross-Border Management, Fifth Edition, McGraw-Hill International Edition: ISBN 978-007-125915-6. Dong, B., Zou S. and C.R. Taylor (2008). Factors That Influence Multinational Corporations ' Control of Their Operations in Foreign Markets: An Empirical Investigation. Journal of International Marketing. Volume 16, issue 1 (page 98 – 119). Darryl C. Hill (2010). Global plan: looking to the future. Professional safety. Published on September 1, 2010.