Matsushita and Philips: globalization strategies and organizational restructuring

Business Policy Case Study Analysis

Key events Matsu*****a

The first key event for Matsu*****a was its breakthrough in the Japanese market in the early 1960s with a broad product line and 25,000 shopping points.

One other key event around the same period was the trade liberalization that translated into the company's first internationalization attempts. This process was particularly hard for Matsu*****a because the company didn't succeed in collaborating with local retailers to sell its products, which is why it had to open its own selling point. However, its brands were not known in the American and European markets.

The company's decision to shift part of its production to low wage countries in the mid 1960s was a major step that helped the company avoid the high labor costs in Japan.

In the mid 1980s, overseas subsidiaries that reported to the parent company in Japan started to gain more and more independence, while the headquarters was losing control over those. It was then that Matsu*****a took measures to intensify contact with local managers, by sending Japanese expatriates to overseas subsidiaries for prolonged period of time and by arranging 3 or 4 trips per year to Japan for all foreign managers. These local business units continued to increase their independence over the years.

In the mid 1990s, the company is committing to a general decentralization of local and overseas operations.

In the late 1990s, the company becomes concerned with its overseas R&D activity and starts strategic research partnerships with Chinese Academy of Sciences and located one of its research centers in Silicon Valley.

In early 2000 the company announces the reorganization of its production facilities from individual product control to multi-product production centers.

Key events Phillips

The first major key event for Phillips was the creation of Common Market in 1960. The event led to the erosion of trade barriers. The internal organization as a geographic/product matrix wasn't fit for the new market conditions. At the same time, many of Phillips' competitors relocated production in low wage regions, such as East Asia, which gave those a strong competitive edge.

The following major event was in the late 1980s, when the company decided to focus on core business and leave behind the low return business. The company started to focus more on product divisions, rather than geographic markets. Moreover, Klugt the CEO at that time relocated its most capable managers to the most competitive markets to link products to markets better. Later on, he transferred a large part of the research responsibility to core businesses.

In the early 1990s, Phillips turned its local production facilities in multi-market ones to help the company deal more efficiently with the globalization process.

In 1994, Phillips bets on its innovative capability to boost the company's activity. The corporate strategy pretends to have 40% of its revenue from software, services and multimedia.

The next major key event was switch of interest for East Asia in late 1990s. The company did massive firing in Europe and massive hiring in East Asia. The financial key figures registered positive results for 5 years in a row after several year of "profitless progress."

Finally, Phillips' financial results slow down in 2001 due to economic recession.

Comparison key events

Both companies were affected by the trade liberalization, but in different ways.

While Matsu*****a had a lot to gain from it because the liberalization made Japanese products relatively more attractive compared to the European and American ones, Phillips was faced with a big challenge, due to a loss of efficiency.

Off-shoring production to low wage countries took place faster for Matsu*****a than for Phillips because of its market proximity to countries like Taiwan and because the Japanese government created incentives towards this.

Value Chain Matsu*****a

Inbound logistics and operations. The basic product operations were performed in East Asia where the labor costs were lower than Japan. The final assembly took place in Japan where the complex operations were performed as well, because these operations needed high skills and technology that was missing in the low wage countries. After a while, the company built individual product centers in Europe to serve the region.

Outbound logistics. The distribution abroad was handled by Matsu*****a as it found it hard to cooperate with retailers from overseas markets.

Marketing and sales. The company resorted to aggressive marketing campaign to create brand awareness. Even though the products were manufactured in a few locations to serve many locations, the packaging was adapted to the local content. Matsu*****a managed often to price its product below its European and American competitors, because the labor cost advantages.

Support activities. Basically, accounting planning and general administration were functions centralized in the headquarters. The company struggled a long time to decentralize, however, most of these activities maintained centralized. The human resource-related activities were handled locally, except for top management. Here the headquarters always had a word to say. The technology development was localized in Asia until 2000, when the company started to feel the necessity of local R&D centers.

Porter 5 forces analysis for Phillips

Entry barriers. Before the Common Market creation, Phillips took advantage of the well established borders to organize its activity regionally and the trade restrictions prevented its Asian competitors from having profitable business in the European and American markets. After those events, Phillips had to face the pressure of Asian competition. Its competitive advantages were: its well-known brand name, good distribution network, proprietary product differences, economies of scale and access to necessary inputs. The pressure came from: high capital requirements to innovate constantly and maintain its products competitive, the incapacity of reducing costs (the activities were run from Europe, which was more expensive than Asia) and the incapacity to reach maturity on the learning curve due to Asian copycat-ing.

Buyer. The number of buyers in Europe and U.S. was large and increasing until 1980s. Those did not have much power on the manufacturer, however, the consumer were rather sophisticated, so maintaining the high quality standards was crucial.

Substitutes. After the trade liberalization, Phillips had an enormous pressure from Asian companies that managed to copycat its products and the price performance of the substitute products was net superior.

Supplier power. The suppliers did not have high bargaining power. The high tech industry in Europe and U.S. was quite developed and the number of suppliers was big.

Rivalry determinants. Those determinants refer to product differentiation, where Phillips was standing out in the industry and manufacturing costs, where Phillips was overrun by Asian counterparts. The fact that Phillips' products were easy to imitate, made its innovation advantage weaker than the Asians' cost advantage.

PEST Matsu*****a

Political factors. The political context from home helped a lot the company's evolution. The Japanese government was in favor of intensifying business activity with low wage Asian countries, such as Taiwan and offered incentives to national companies to relocate part of their activities to such countries.

Economic factors. Japan's economy was growing after the 2nd World War. The employment levels were growing, inflation and interest rates registered positive evolutions and the Yen was becoming stronger relative to other currencies in the world.

Social factors. After the war, the average Japanese's state of mind was focused on reconstruction the country. The population was mobilized for this purpose. Also, in this period, Japan witnessed an intensification of the rural migration to cities, which was synonym with an increase in the number of sophisticated consumers.

Technological factors. Japan is known as one of the most technology-intensive countries world wide. Both government and private R&D were high after the war and maintained these levels until today. The average Japanese is an individual with a high appetite for high tech products, which makes the Japanese market very competitive in this area.

PEST Phillips

Political factors. The Common Market and trade liberalization has a strong impact on European companies that had to face competition from the East, namely Asia, where labor costs were considerably lower. Besides having to cope with the price war, the European companies had to face the copycat phenomenon coming from the same competitors. Their products were copied soon after release and manufactured at lower prices under a different brand. The patent laws were inefficient in these situations.

Economic factors. Until 2000, the European economic outlook was a positive one. Of course, business cycles alternated, but that did not have a significant impact on Phillips' activity. The inflation and interest rated had positive evolutions. In the early 1990s, the Euro currency is introduced in a number of countries and later the same currency is expanded to more countries. In the late 1990s, the employment levels started to be affected by the globalization process. In the Western part of Europe more and more jobs are lost for Eastern Europe and Asia. In 2000, Europe enters a recession period, from which it will recover only a few years later. This recession is to affect the activity of a lot of companies.

Social factors. Europe, also known as "the old continent" is currently facing decreasing total population and increasing ratio of old people to young ones. The situation was different before the 1980s. Before, the population growth rate was positive and the average age was considerably lower. In the late 1980s, early 1990s, Europe witnessed the fall of the communism. Several countries opened their markets and consumption grew. Also, a lot of people migrated from the rural areas to cities for a better life.

Technological factors. Before the Common Market, Europe was a promoter in this field. However, the competition was considerably lower and it was easier for companies promote their innovations. After the Common Market, European companies were faced with a tough competition. Innovation became a necessity to survive, rather than a strategy to increase margin.

SWOT Matsu*****a

Strong Points

Weakness points proximity to low wage Asian countries;

massive off-shoring to low wage Asian countries - low liability of foreignness in these countries;

ability to create similar products to the competition's due to cash availability; strong centralization of overseas operations which implied high bureaucracy and reduced flexibility. Managers didn't have much freedom over their areas, but they had much responsibility.

Reduced innovative power compared to the competition.

Opportunities

Threats

Create more R&D centers to be able to create new high tech products for the electronic era;

Expand the activity to new industries, such as automotive and aerospatial;

Expand the activity to new markets, such as Asia and South America.

Economic recession - companies of this size are sensitive to business cycles;

High tech industry is growing fast and any small company may develop a patent to revolutionize the market;

Existing competition developing complex new products for sophisticated customers that would be difficult to copycat.

One major problem for Matsu*****a refers to the excessive centralization of overseas activities. Managers from the European and American markets report directly to Japan and do not have much independence in their decision making process, but they are responsible for the results. The control has to be loosen to be proportional to the extent to which those are responsible for meeting corporate objectives.

The low level of innovative power should be overcome by new R&D centers, such as the one in the Silicon Valley and strategic partnerships, such as the one with the Chinese Academy of Sciences.

SWOT Phillips

Strong Points

Weakness points

Long-term research experience - high quality products;

Customer brand awareness;

Brand associated with high quality;

Good distribution network;

Considerable economies of scale.

High production costs;

Incapacity to reach maturity on the learning curve - Asian competition is forcing Phillips to bet on new products permanently and leave behind the old ones;

Opportunities

Threats

Create more production centers in the low wage areas to be able to survive the price war;

Expand the activity to new industries, such as automotive and aerospatial;

Expand the activity to new markets, such as Asia and South America.

Economic recession - companies of this size are sensitive to business cycles;

High tech industry is growing fast and any small company may develop a patent to revolutionize the market;

Existing competition developing cheap high tech products, that Phillips wouldn't have the capacity to compete with.

One solution for increased production costs is off-shoring to low wage countries.

Strategic plan for Matsu*****a and Phillips

Matsu*****a is looking at a long decentralization process. Even though it is important to maintain the contact with top management from overseas operations, the presence of Japanese "spies" abroad to report to headquarters can create pressure and stress among those. The withdrawal of these spies would reflect increased trust and confidence in the overseas managers' ability to handle operations.

Each region should have clear and attainable objectives. Retribution and penalization should be proportional to the extent to which these objectives are met or not. It is important for the people to feel accountable for their actions, but the accountability has to be proportional to the extent to which they can make decisions on their own. Thus, right and responsibilities have to be agreed upon jointly.

Phillips has 3 options to relocate production facilities: buy and existing facility in Asia, engage in a joint venture with an existing manufacturer that would produce under Phillips brand or enter with a Greenfield. Considering that the company doesn't have much internationalizing experience in the Asian markets, it would have to face high liability of foreignness. Therefore, Greenfield is a risky choice. Buying an existing company implies buying its supply network and its local market knowledge and would be the most suitable solution in the beginning. After a few years, Phillips will be more familiarized with the Asian way of doing business and would have more knowledge to have success with Greenfield production facilities.

MATSU*****a - PHILLIPS CASE STUDY