Philips vs Panasonic: Facing the 2008 Economic Crisis Essay

1. Introduction Panasonic and Philips are two of the main consumer electronics companies in the world with different origins but similar international path. Several hurdles were faced by both companies in their evolution. This paper will analysis how the administrative heritage of Philips and Panasonic caused problem in the changing of their strategy, causing problem in the implementation of the respective strategic decisions. Moreover it tries to explain how time contingences and the external environment had influenced the strategy of the two MNEs and shape the organizational structure; sometimes leading to success, sometimes losing ground in the market field. Nowadays the main tasks of the two companies are conflictual : for Panasonic defending its leadership position, for Philips challenging the global leader. How to reach these goals? The last paragraph will address these objectives providing to the CEOs of the respective companies further steps to consider in order to remain com petitive in the market field, from 2008 looking forward. 2. How the environment and culture shape companies’ strategy and organization 2.1 Philips evolution: from responsive to integrated Philips’s strategy, right after WWII, led the company to its success. The economic situation during the 30s, forced the company to transfer part of its assets and laboratories abroad. This led to a dispersion of responsibilities. Countries protectionism, high tariffs and trade barriers required local production facilities. These problems led to the adoption of a decentralized federation with independent and self sufficient units and autonomous marketing. The contingent environment spurred the management to rebuild their structures upon National Operations (NOs). Philips built its success on a worldwide portfolio of responsive national organizations. Economic conditions, tastes and preferences, at that time, differed across countries; corporate management treated subsidiaries as independent national businesses with the aim to satisfy local needs. National Organizations were so vigil that they manage to preempt products required by customers, launching products such as the first color TV, the first stereo TV and the first TV with teletext. Innovation and R&D were the core strength of the company. They were flexible, responsive and fast in the approach to market. Entrepreneurial initiatives derived, not from top down imposition, but from every single division. The company succeeded in managing its innovation and to bring it to the next level, making innovation and customer’s needs the purpose of their business. The focus on national responsiveness was appropriate since the 50-60s, when it started to become the firm’s limitation. The great focus given to tailor solution to costumers’ tastes increased the cost of production and led to a dispersion of subsidiaries across too many countries. Problems of efficiencies and coordination arose. The company took several years to get rid of its matrix structure. Attempts to shift the companies to a slimmer organization in order to become more efficient in its production were slow and cumbersome. The National Operations continued to detain major responsibilities. The company was captive of its past. Contrarily to management prevision, the matrix structure created more problems that it solved. It was more complex than either the â€Å"worldwide area structure† or â€Å"the worldwide product structure†, and it created conflicts of responsibilities. Market signals warned the company to implement changes in the way business was conducted. However, in the 1990s, the company was, still, going through major losses. The structure was too costly and value added higher, compared to Japanese production facilities. Even if a good objective were settled in the strategic planning, however, as history showed, the further step of re-organization failed due to difficulties encountered in rebuilding the organization. It was not a zero-base reconfiguration. For more than 35 years, from 1971 onwards, different CEOs tried to take action in order to reduce the power of NO and create an agile and simple divisional organization that could create efficiencies, however trying not to neglects their sources of innovation: respond to country specific markets. 2.2 Matsushita evolution: from integration to responsiveness Matsushita point of departure instead was complete different from the one undertaken by Philips. Matsushita employed a divisional structure with a strong centralized decision making. The adoption of the divisional organization was well-thought due to the large and highly differentiated product range manufactured by the companies, aimed to different target clients. This allowed the company to reduce the organizational complexity and reducing transaction costs within the company. Matsushita exploited the favorable characteristic of the post war era, such as a convergence of tastes across borders and the â€Å"uncontrollable† globalization. In the 60s, the firm managed to expand its product range. It created self-funded research laboratories to develop new product solution. At the time, Matsushita detained a strong distribution channel directly owned by the company with more than 25.000 domestic retail store. However, when the demand in the domestic marketed slowed down, what was a competitive advantage domestically was not replicable abroad. The company made a lot of effort in expanding its international presence, without being demoralized. However as times passed by, the highly centralized control structure, create problems in their offshore operations. By the 1980s, the company, mainly concentrated on global integration instead of localization, decided to re-tailored its strategy . Decentralization of responsibilities was more than a necessity. Matsushita’s strategy was too focused on global efficiencies neglecting innovation, and learning and flexibility. R&D was vital in this industry. Actions of several CEO tried to address these issues, changing the company’s strategy from copycat to promoter of invention. However, as Philips encountered problem in its â€Å"transformation†, so did Mastushita. The firm had difficulties in promoting self initiatives among different divisions. The former centralized hub organizational structure was still present in the employees’ mentality. The initiatives, such as the introduction of local managers with stronger responsibilities in key positions and locations, did not give the expected outcome in the short run. It took several years and a lot of effort to see some res ults. Again the company was captive of its past. Today, Mitsushita’s configuration is mainly built around 3 main divisions: Digital networks, Home appliance and Components; reduced from the 36 product divisions used in the 1980s. The simplification was clear and so its advantages. The reaction of such a structure led the company to be more flexible to local need, reduce costs of duplication and achieve economies of scope. The products developed within each division were highly linked. However the company was not safe from competition. With the crisis’ approaching, the economical situation of the company does not remain untouched. What else is left to do? 2 Core issues today in the consumer electronic industry The current economic situation differs drastically from the one encountered in 10 or 20 years ago. Phenomena like globalization have given companies such as Philips and Panasonic the chance to provide their product to an extensive market, raising however new challenges. The global economic recession has created new needs. Consumers are more price sensitive and less willing to pay high prices for low quality products. Companies need to be aware of their cost structure and be ready to take respond to rapid technological changes and changing consumer preferences with timely and cost-effective introductions of new products in markets that are highly competitive in terms of both price and technology. The access to low factor cost, such as low labor force in emerging country as become crucial. Moreover, developing markets, such as India and China, are not only location where firms can manufacture products at lower costs, but also new opportunities where companies can market their own produ cts. In the consumer electronic industry, competition has become extremely high and innovation, now more than ever has become crucial as new source of revenues. 3. Recommendation for Philips: Exploit contingencies of the time you are in The 2008 situation of Philips is not flourishing. In 2008, the company scored a net loss of â‚ ¬260 million. This was probably due to the financial crisis that affected the company drastically. However, company’s loss can not only be attributed to external factors. The company has made some mistakes, in the recent years, and should take action and correct its own strategy, remembering it origins. Coherence with past is crucial to tailor an effective strategy that could lead to innovative solutions for the future. That’s why Philips should continue to develop consumer-centric solutions. Research laboratories should remain independent but linked across one another. Philips should tackle the recession without sacrificing its long term strategic ambition: â€Å"Improving people live through meaningful innovation†1. That why now, more than ever, the company should be able to forecast marke t trends. Philips should continue more efficiently to re-allocate resources to growth opportunities and emerging markets. To do so it should transfer part of its qualified personnel to target markets, such as from India and China, building a strong teams of both local and expatriates managers and engineers. The combination of foreign and local figures could help the firm to continue the strategy of local responsiveness. To do so, it is necessary to include in the company agenda selective mergers and acquisitions. M&A, however, should not be out of focus. Philips has reduced its current division to 3 main domains: healthcare, lighting and customers lifestyle. My recommendation would be to stay true to these three core segments, acquiring key strategic companies in foreign markets. How to finance these new objectives? Disinvestments in peripheral activities and less profitable plans are still needed in order to obtain liquidity to reinvest in developing countries. This tactic would not repay within short term but long term profits would offset the high level of investments. Moreover leveraging of local subsidiaries in emerging markets can a springboard, to target back developed markets selling low cost products. 4. Recommendation for Mastushita: defending worldwide dominance The economic situation of Panasonic is different from the once faced by Philips. Panasonic is the world’s leading plasma maker in the industry and has to defend its worldwide dominance. Matsushita has based its competitive advantage ion low cost production. However, particular during financial crisis period, several other initiatives are to be implemented. First the company has to reduce its cost structure in order to face the deep decrease in demand in order to continue to make profits. Panasonic its already leader in this activities, however, there are always margins of improvements. To achieve cost reduction, it has to downsize its workforce. The firm should prioritized certain businesses over less profitable ones. Moreover adopt a lean management in order to reduce at the minimum the wastes in the value chain. Secondly it should restructure its organization to make it as clear and simple as possible in order to avoid cost duplication, slow process and cost of bureaucracy. In addition, The shift of demand and the focus on emerging market, in particular Asian markets, should be the highest priority. The market signaled opportunities in untapped market. The firm should be upfront in order to gain advantages over competition. These is a necessity to shut down plants in Japan and oversea and transfer workforce and capital to new sites. This initiative can also overcome exchange currency risk. Also distribution channels in these countries should be enhanced. However, the company should not forget its heritage: leverage on efficiency. The company should achieve a â€Å"transnational strategy†; incrementing its local responsiveness and innovation and learning, at the same time. Even during times of recession in essential to continue to invest in R&D, with the objective to grow faster than competitors when the market recovers. The main revenues for the companies come from distinct technologies. Local responsiveness could be achieved through the delegation of, even more, profit responsibilities to the three main divisions. This could enhance the company performance and to keep it on the podium. 6. Conclusions The structural variety is function of the environmental characteristics, Organization has to adapt to the external environment. Both companies has gone through several changes in their evolution. Environmental factors pushed companies to rethink their strategy and consequently their organizational structures. In some cases the difficulties encountered in the transition, for instance from an highly integrated company to more responsive, was slow and cumbersome. Both companies has been proved to be reluctant to change. . It is true that the set of strategies a firm is limited by the decisions the company has made in the past, however, these limitation should not be considered as insurmountable. Change can occur and rapidly. Philips and Panasonic lacked the ambition to design solution at 360 °. Firms should learn from their past and continue to leverage on their own competitive advantages, building on existing infrastructure. Do not be captive of your own past, but use your past experience to create a strong advantage, compensating your deficiencies. 5