Koninklijke Philips NV case study Discussion
KoninklijkePhilips NV Established in 1891 in Eindhoven, the Netherlands, KoninklijkePhilips NV is one of the world’s oldest multinational companies. The companybegan making lighting products and over time diversified into a range ofbusinesses that included domestic appliances, consumer electronics, and healthcare products. From the beginning, the small Dutch domestic market createdpressures for Philips to look to foreign markets for growth. Some argue thatthis is the case for most European companies and, thus, the many companies fromEurope that are globally competitive. By the start of World War II, Philipsalready had a global presence. During the war, the Netherlands was occupied byGermany. By necessity, the company’s national organizations in countries suchas Australia, Brazil, Canada, United Kingdom, and the United States gainedconsiderable autonomy during this period. After the war, a structure based onstrong national organizations remained in place. Each national organization wasin essence a self-contained entity that was responsible for much of its ownmanufacturing, marketing, and sales. Most R&D activities, however, werecentralized at Philips’ headquarters in Eindhoven. Reflecting this, severalproduct divisions were created. Based in Eindhoven, the product divisionsdeveloped technologies and products, which were then made and sold by thedifferent national organizations. During this period, the career track of mostsenior managers at Philips involved significant postings in various nationalorganizations around the world (a career development practice often seen stillin multinational corporations). For several decades this organizationalarrangement worked well. It allowed Philips to customize its product offerings,sales, and marketing efforts to the conditions that existed in differentnational markets. By the 1970s, however, flaws were appearing in the approach.The structure involved significant duplication of activities around the world,particularly in manufacturing, which created an intrinsically high-coststructure. When trade barriers were high, this did not matter so much, but thesignificance of its effect became important when trade barriers were startingto fall and competitors came in to the marketplace. These competitors includedSony and Matsushita from Japan, General Electric from the United States, andSamsung from South Korea. Each of these competitors gained market share byserving increasingly global markets from centralized production facilitieswhere they could achieve greater scale economies and hence lower costs.Philips’ response was to try to tilt the balance of power in its structure awayfrom national organizations and toward product divisions. Internationalproduction centers were established under the direction of the product divisions.The national organizations, however, remained responsible for local marketingand sales, and they often maintained control over some local productionfacilities. One problem Philips faced in trying to change its structure at thistime was that most senior managers had come up through the nationalorganizations. Consequently, they were loyal to them and tended to protecttheir autonomy. The headquarters of Philips NV in Eindhoven,Netherlands.Source: © Sander KONING/AFP/Getty Images Despite several reorganizationefforts, the national organizations remained a strong influence at Philipsuntil the 1990s. In the mid-1990s Cor Boonstra became CEO. Page 428He famouslydescribed the company’s organizational structure as a “plate of spaghetti” andasked how Philips could compete when the company had 350 subsidiaries aroundthe world and significant duplication of manufacturing and marketing effortsacross nations. Boonstra instituted a radical reorganization. He replaced thecompany’s 21 product divisions with just 7 global business divisions, makingthem responsible for global product development, production, and marketing. Theheads of the divisions reported directly to him, while the nationalorganizations reported to the divisions. The national organizations remainedresponsible for local sales and local marketing efforts, but after thisreorganization they finally lost their historic sway on the company. Philips,however, continued to underperform its global rivals. By 2008, GerardKleisterlee, who succeeded Boonstra as CEO in 2001, decided Philips was stillnot sufficiently focused on global markets. He reorganized yet again, this timearound just three global divisions, health care, lighting, and consumerlifestyle (which included the company’s electronics businesses). These are alsothe three divisions that are in place under the most recent CEO, Frans vanHouten, who became the CEO of Philips in 2011. The slogan for the health caredivision is “creating the future of healthcare.” Philips is a globalleader in the health care domain. It is guided by the understanding that thereis a patient in
