A new century, a new round

MBA 290GNovember 14, 2007

Team OneSohail Gondal, Vince Law, Que Anh Nguyen, Jason Stauth

VS.

Koninklijke Philips Electronics N.V., Netherlands

• Consumer Electronics, Lighting, Medical Systems, and Domestic Appliances and Personal Care

• In 2006 $39.6 billion in sales, 60 countries

• Bordered by the North Sea to the north and west, Belgium to the south, and Germany to the east.

Germany

Belgium

1970’sAdoption of

Matshusita’s VHS over V2000

videocassette

1892Light bulb

factory

1912Incorporation

1918-1930sVacuum tubes,

radios, x-ray tubes

1940Moved management & research to US and

England

1963Audio cassette

tape

1982Compact Disc

with Sony

1971-presentReorganization of company

- 7 CEOs -

Matsushita Electric Industrial Co., Japan

• Brands and divisions:

– Panasonic, National, Nais, Quasar, Technics, Ramsa, Rasonic

• In 2006, $79 billion in sales

• Ranked the 59th company in the world in 2007 by the Forbes Global 500

1918Duplex lamp

sockets

1927Bicycle lamp

“National” brand

1940’sLight fixtures, motors,

electric irons

1960’sTelevision sets

“Panasonic” brand

1974Purchased

Quasar from Motorola

1989Japanese stock

market crash

2004Panasonic as primary

global brand

1979Expanded

“Panasonic” brand to Europe

2006No more analog TVs.

Concentrate on digital.

Structure Matrix Hierarchical

Decision making Decentralized Centralized

Staffing Key staff local Key staff ex-pats

Philips Matsushita

Strategy Technical innovator Fast follower

Comparison of the starting positions of the two organizations

2006 Sales by product line and regionSales by Region

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Matsushita Philips

Sal

es (

$B)

Europe

North and South America

Japan, Asia

Philips Product Sales by Category

Medical Systems

DAP

CE

LightingOther

Matsushita Product Sales by Category

AVC Networks

Home Appliances

Components and Devices

MEW and PanaHome

JVCOther

AVC=audio, video & communications; MEW=Matsushita electric works CE=consumer electronics; DAP=domestic appliances and personal care

Matsushita overtook Philips in the mid 80’s and built a formidable lead

0

10

20

30

40

50

60

70

80

90

Philips 35.3 40 33 21.8 17 10 4.2

Matsushita 68.9 78.1 37.8 24.9 13.7 4.5 2.6

2000 1995 1990 1985 1980 1975 1970

Sal

e s,

$mn

Focus on growth in different industry sectors

Matsushita: Growth by Sector

0%10%

20%30%

40%50%

60%70%

80%90%

100%

2005 2006 2007

Other

JVC

MEW and PanaHome

Components andDevices

Home Appliances

AVC Networks

Philips: Growth by Sector

0%

20%

40%

60%

80%

100%

2004 2005 2006

Other

Lighting

CE

DAP

Medical Systems

Semiconductor Division:• 15% total sales• 17% EBIT

Ph

ilip

s S

emi

Div

• Good supply of Dutch engineers / sales talent

• Tap into EU / US talent

Philips Matsushita

• Good supply of Japanese engineering and commercial talent

• Value-added per hour 68% higher than EU

• Proximity to Germany caused operations to be moved abroad during WW II

• Proximity to low-wage Asian countries for manufacturing

Factor conditions

Skilledresources

Geographic Location

• Dutch market too small to absorb mass production of electronics

– Expansion to foreign markets (1899)

Philips Matsushita

• Japanese consumers represents a significant market

– Late focus on export market (1950’s)

• Global Ops provided access to local trends and needs in foreign markets

• Products focused on local markets

• Japanese customers are highly demanding of quality and innovation in electronics

Demand conditions

Market size

Marketmaturity

• Locally weak, but strong EU (Siemens) and US (GE) competitors

Philips Matsushita

• Strong presence of quality competitors

Related industries

• Locally weak, but strong EU / US value chain

• Strong presence of players across electronics value chain

• Approximately 120 electronics company in Japan

Support industries

Related & support industries

• Stay focused on core products while competitors were diversifying

• Emphasized innovations & technological prowess

Philips Matsushita

• Diversified product line• Focus on operational

excellence• Fast-to-market, “Manishita”

• Decentralized global operations, strong NOs

• Joint technical and commercial leadership

• Highly centralized• Small business environment

with divisional structure• “One-product-one-division”

• In house competition between technical and commercial functions

• No national rivals

• In house competition between divisions

• Fierce competition from Japanese electronics firms: JVC, Sony, Hitachi

Strategy

Structure

Rivalry

Firm strategy, structure & rivalry

Strong National Organizations

Fiefdoms often working against

each other

Employee centric values

Organization with “lifers”

Focus on R&D / technical innovation

Inability to commercialize

innovation

Core Competencies Core Incompetencies

How Philips’ strengths and core competencies became its weaknesses

Common Market

Ability to adapt to local market conditions

No economy of scale in

manufacturing

Centralized structure in Japan

Developing local footprint

Strong culture at centre

Over-reliance on centre for innovation

Fast follower strategyWeak entrepreneurial

/ innovation ability

Core competencies Core incompetencies

How Matsushitas’ strengths and core competencies became its weaknesses

Broad line of products (5000 vs.

Sony’s 80)

Bloated operations & excess capacity

1989 Market Crash

Matsushita Philips

Deg

ree of

centralizatio

nL

ow

Hig

h

• 1970’s - Shift to IPC’s / Tilting matrix to PD’s

• 1987 - 4 core LOBs / 14 PD’s to 4 global divisions

• 1990 - Bet on 15 core multimedia technologies

• 2001 - Eliminate “management discount” in stock price

• 1982 - Operational Localization

• 1986 - “Matsushita Bank”

• 1999 - “Simple, small, speedy and strategic”

A comparison of the two organizations attempts to shift their strategies

3793

1983

15951223

726 659 560 437

2268

2884 2003 R&D spend (£m)

Source: UK Department of Trade & Industry – R&D Scoreboard

While Philips is amongst the biggest R&D spenders in the industry…

The worlds top ten R&D investors in electronic and electrical equipment

Total sales (in billions of euros)

Sales in electrical capital goods (in billions of euros)

Sony(JPN)

56,8

17,1

GE (USA)

IBM (USA)

Siemens(D)

120,5

79,6

75,6

74,2

63,1

Hitachi(JPN)

64,2

Matsushita(JPN)

57,3

Hewlett-Packard(USA)

66,9

64,9

Toshiba(JPN)

43,5

NEC(JPN)

37,1

SamsungElectronics(KOR)

46,7

38,5

26,5

28,6 30,4 36,3

21,0

… it still seems unable to translate innovation into commercial success.

The top ten companies in electronics and electrical engineering

779

341

166 14994 88

64 63 55 37

volumes in € billions

32.3

14.1

6.9 6.23.9 3.6

2.7 2.6 2.3 1.5

% share of world market

Source: Siemens AG, Nov 2003

Despite the attractiveness of foreign markets for electronics products…

The top ten world markets for electronic and electrical equipment

Source: 2007 Financial Statements

… Matsushita still generates the predominant amount of its sales from Asia.

Sales by geographic segment

Europe18%China

6%

Other44%

Domestic4%

US28%

Europe13%

Asia & Others

21%

Domestic51%

North & Soth America

15%

Philips Matsushita

Source: 2006 Financial Statements

Possible reasons for Net Income differential

• Philips has disposed of many businesses that has resulted in net income being supplemented by income from discontinued operations e.g., in 2006

• Exchange rate effects due to weak Yen

• Tax incentives to Philips?

While lagging in sales, Philips has managed higher net income

0

20

40

60

80

100

Matsushita 0 66.2 66.9 77.9 79.5 81.4

Philips 38.9 34.8 36.1 37.4 39.2

2002 2003 2004 2005 2006 2007

-6-4-2

0246

810

Matsushita 0 -0.2 0.4 0.5 1.4 1.9

Philips -4.6 1 4.1 4.2 7.8

2002 2003 2004 2005 2006 2007Net

In

c om

e , $

bn

Sal

e s,

$bn

Income from continued operations €0.9Bn

Income from discontinued operations

€4.5Bn

Net Income €5.4Bn

Philips stock price growth has outperformed Matsushita

Philips has even outperformed GE and Sony

Philips is on par with DJI and better than S&P500 & Nasdaq

Why do the transformation efforts at Philips and Matsushita not seemed to have worked?

1

2

3

4

5

6

7

8

Establish a sense of urgency

Form a powerful guiding coalition

Create a vision

Communicate the vision

Empower employees to act on the vision

Create short term wins

Build on momentum to drive more change

Institutionalize new approaches

?

?

?

?

Philips MatsushitaEight steps to transformationLeading Change: Why Transformation Efforts Fail, Kotter, HBR

Corporate venturing units have “generated decidedly uneven financial returns”

0%

5%

10%

15%

20%

25%

30%

Ecosy

stem

ven

turin

g

Innova

tion v

entu

ring

Harve

st v

entu

ring

Privat

e Equity

ven

turin

g

New le

g ven

turin

g

Mix

ed o

bject

ives

Successful

Unsuccessful

Success rates for different types of venture unit

Source: The future of corporate venturing, MIT Sloan Review, Fall 2003

Apple’s Core Competencies

Managing the supply chain

1• Flat/small structure, young/innovative culture• User-centric design and marketing• Focused product line• Strong brand loyalty

Own the customer relationship = higher

margins

Core strengths in design & branding

2

• Many-to-one supplier relationship• Close supplier relationships• Complete off-shore production

Retain bargaining position and drive

down costs

Maintain Control over suppliers and costs

High margins & Dominant market share

(ipods)

+

=

Comparison: Philips, Matsushita, Apple

CustomerRetailDesignDevelopmentMarketing

AssemblyComponent & MaterialSuppliers

Consumer Electronics Value Chain:

Organizational Structure

Firm

Cu

lture

How to compete with Apple in CE

• Focus on core competency: local design and engineering innovations

• Improve/centralize commercialization, marketing, and branding of innovation

• Centralize/outsource production, develop operational excellence– Minimize cost of production

• Develop internal entrepreneurial spark– Diversify design and

development beyond Japan

– Top management buy-in

– E.g. allow autonomous product development and design arm to thrive within the company

• Build smaller brands or reinvent existing brands (Panasonic/ National) for premium image– higher prices/margins