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Global strategies of Philips
European Management lournal Volume 7 No I 0 European Management Journal 2989 ISSN 0263-2373 $3.00
Global Strategies of Philips Gerrit reelof Vice-Chairman, Board of Management Philips N. V., The Netherlands
The Philips Corporation will reach its hundredth anniversary in 1991. In this edited paper, first presented at Management Centre Europe’s Top Management Forum in 1988, the author paints a picture of Philips’ corporate mission to take the company up to that date. He is very mindful of important developments in the external world that are affecting the electronics industry, like the development of global markets and advances in technology. In the whirlwind of change taking place, Philips has stated its mission to increase profitability so as to maintain leadership in the industry. The actions being taken to achieve this are - defining strategies, restructuring the organisation, better resources management and developing new corporate values.
All of us have been affected by the dramatic changes occurring in the electronics industry itself as well as the historically fundamental change in the world economy since the 1980s. But, of course, not everyone in the industry perceives those development in the same way or responds uniformly. This is how Philips has interpreted these external macroeconomic and internal industry changes. External World Economy and industrial Changes Affecting the Electronics Industry. The major changes - there are most certainly others, but these are the highlights - can be summarized as: l l l l
0
the development of global markets, technology developments and changed scope of business, new patterns of competition and cooperation, new impacts on business resulting from currency fluctuations, changing production processes.
The dmelopment of global markets has emerged for products demanding large-scale markets to absorb production and provide fast pay-back on enormous investment costs. The electronics industry, with its huge R&D costs, shorter product life-cycles and consequent shorter development periods identifies
closely with the concept of global markets. the United States and South East Asia/China markets essential to an electronics compatly.
Europe, are the
The necessity for global markets reaches to all sectors of electronics: consumer electronics. telecommunications and information technology and components. Technology developments have linked concepts of economies of scale, the learning curve and globalisation. These concepts are basic to survival. The interaction between these explained with a few examples.
concepts
can
be
In the professional sector, technology developments in public telecommunications rather dramatically illustrate the point. Up to the 1950s conventional telephones and their installations remained basically unchanged. Development costs for conventional, electro mechanical switching systems were about $10 million and they had an expected life cycle of about 25 years. By the beginning of 1970 when the analog system was introduced, development costs had jumped to $200 million, while the life cycle fell to 12 to 15 years. In the 1980s when the first digital systems were developed, costs had risen to $1 billion for a life expectancy of 8-12 years. Calculations
tell us that digital development
costs of
GLOBAL
$1 billion require roughly eight per cent of the world market share just to recover costs. The largest single market in Europe - West Germany - in total can deliver only six per cent of the world market share. This simple analysis clearly points to the basic problem of European markets segmented by countries. Larger scale markets now required for the electronics industry as a whole, are a major factor in the concept of globalism. Markets of global scale are necessary not only for professional products and systems, but also for components and consumer electronics. Development costs, shortened life cycles and cyclical pressures of surplus production characterize the components sector. Cooperation in predevelopment as a result, has become an accepted fact of life. There is a slightly different tilt to the consumer electronics sector introduced by our Japaneses friends: product targeting and price strategy. It, too, is based on achieving economies of scale, and the learning curve effect. The strategy of targeting categories of products for export involves moving through the learning curve as rapidly as possible to achieve a large production scale/low unit cost price ratio. The and largely protected homogelarge, innovative, neous Japanese home market has provided the ideal condition for this strategic success. The second external factor affecting the electronics industry is developments in technology that have changed the scope of business. The key words to describe development trends in electronics are:
Integration
and Complexity
As technology developments enable further miniaturisation and with the introduction of digitisation, separate products merge into systems that perform multiple functions. These systems are becoming interactive. As we witness the convergence of consumer electronics with professional systems and the convergence of the computer with telecommunications, we see the development of a huge, integrated information technology industry. If a company loses or fails to develop expertise in any of the key sectors, it cannot participate in the tightly knit information technology sector as a whole. This is the reason Philips considers it of utmost importance to maintain our strong position in consumer electronics. It is now clearly understood that the technology of consumer and professional products and systems are closely linked. The integration
of optical and electronics
technologies
STRATEGIES
OF PHILIPS
85
and its relevance to the fields of computers, training, document archiving and home entertainment, is a good example. Just over a decade ago, Philips announced the development of the video longplaying disc - now called LaserVision - which could store a 60 minute full-colour programme, or 45,000 colour slides, for replay on a domestic television receiver. Today, LaserVision forms the basis of a highly-sophisticated training concept which allows the trainee to interact with the programme and dictate the learning pace. Our experience with LaserVision technology also led to the development of a revolutionary digital optical storage system called Megadoc, the neologism of Mega: meaning millions, and dot, for document. In its maximum configuration, Megadoc can electronically store about B-million A4 pages of information replacing a row of filing cabinets nearly 3 metres high and some 300 meters long. It takes only one second to store the information and just a few seconds to retrieve and display it. The micro-mechanics and opto-electronics developed for Megadoc formed the basis of the first real breakthrough in home music reproduction since the stereo record. The Compact Disc - or CD - took the world by storm, for in the space of a few short years it became the standard for both the music industry and the home music lover. But CD technology is not restricted to recorded music for the CD-video is already on the market. And continuing development has opened up a realm of other possibilities. In computers, publishing, industry, business and home study. For example, the interactive CD-I, has a digital storage capacity in excess of 1000 floppy discs. It can reproduce on video 7,000 natural pictures, 32,000 colours for users manipulated graphics, 256 colours for full-programmed animation as well as 16 hours of audio possibilities and 16 available channels. In fact, the CD-I may well and truly be called the ultimate media standard. And of course, the CD-rom has been widely acclaimed as the world standard or the so called New Papyrus of the computer software industry. These rapid developments offer enormous opportunities to spin off a wide scale of products, systems and software for professional and home use. But a comprehensive pool of knowledge has to be tapped spanning technologies such as optics, magnetics, microelectronics, mechanics and glass technology. At Philips we talk about integration and convergence of the four C’s: Components, Computers, Communications and Consumer Electronics. It is a strong
86
GERRIT JEELOF
belief at Philips that expertise must be maintained in all of these core technologies in order to compete and survive. Closely related to the new scope of activity as a result of integration and complexity is the next point, new patterns of competition and cooperation. I have already spoken about the targeting strategies of Japan in consumer electronics which have succeeded in swallowing the entire American consumer electronics industry. Philips is described frequently by the media as the last surviving competitor standing between Japan and world domination of consumer electronics. Because Philips feels so strongly about defending our position in consumer electronics, precisely for the reason I have just explained maintaining expertise in core technologies - you can perhaps understand why Philips has a special interest in and relationship with the Japanese electronics industry. We are attempting to balance out roles as both competitor and cooperative partner. One demands the other. If we are to remain significantly competitive by staying on the cutting we have to solicit the edge of development, cooperation of the Japanese electronics industry in the development of world standards. We have succeeded in this, starting with the compact caswith a sette, the compact disc and continuing number of other consumer electronics development. We are currently engaged, along with other in critical discussions about European companies, setting a world standard for High Definition Televisision. Because of integration in Consumer Electronics, Components, Computer and Communications, other changes in patterns of competition and cooperation are also affecting the industry. The crossover between these formerly separate areas is introducing new competitors to one another. Telecommunication organisations and Telecommunications and Information Technology companies are invading each others’ markets. Producers of components, hardware, software and information services meet each other as both suppliers of services and equipment and competitors in the market-place. Joint ventures and other cooperative alliances produce a kind of “musical chairs”. In one situation we sit together at one side of the table and in the other competitive situation we face each other across the table. Closely allied to the previous points is the changes in production processes. New production techniques are changing old rules about manufacturing. Large scale, labour, intensive assembly lines are giving
way to highly automated, nent operations.
capital intensive
compo-
Computer Aided Design (CAD), Computer Aided Manufacturing (CAM) and Computer Integrated Manufacturing (CIM) are technologies that increase quality, flexibility and efficiency. They have the possibility to achieve these positive gains in production concepts and require new organizational structures to accommodate the changes they bring about. For example, sharp increases in productivity resulting from CAD/CAM can mean a 15% increase per annum. The market does not grow that fast. So we have an over-production problem. Reduced labour costs as a result of automation mean for Philips, for instance, that Brugges-Belgium can now be a cheaper manufacturing location for consumer electronics than Singapore. Capital intensive investments mean that your capital must work day seven days a week. This requires and night, realigning work patterns - not always easy to do. And the highly technical nature of production means that there will be a need for a much more skilled and highly educated production work-force. All industrial nations, but especially the United States and Europe, will have to stimulate a change in attitudes about career directions. Both Europe and the United States face undersupply of engineers. Manufacturing must be made as attractive to students as MBAs are! My final point about the external factors exerting an influence on Philips and others is the wildly j7uctuating monetary levels in the world markets. The instability of exchange rates has completely distorted profit levels and made a shambles of long-term planning. The influence on production locations is quite clear. There is the joke about buying a huge ship, equipping it with CAD/CAM automated production capability and dropping anchor on the shore of whatever country at the moment offers the best currency exchange opportunity. It isn’t particularly funny, however, when you consider the costs involved in moving production facilities, which unfortunately cannot yet float. A Philips example: since 1985 Philips moved production of 14 inch TVs from the United States to Taiwan and now again to Juarez, Mexico. Many companies could tell their own stories about second-guessing the world money market. But when hard-earned profit margin increases are wiped out by currency fluctuations, companies are forced to use resources that could be so much valuably allocated elsewhere. This is a problem of global dimensions affecting all industries. That is the Philips
version
of the major challenges
GLOBAL
we face in the electronics industry. Philips doing about these challenges?
Now what
STRATEGIES
OF PHILIPS
87
is
present. The national orientation must be changed from an end in itself to that of a link in the global chain.
The most obvious first step in adapting to new or changed situations is to step back and become clearheaded about what it is your company is doing and what it should be doing. As a 97-year-old company one of the oldest in the world in the electronics business, we have a lot of history to deal with.
The structure of OUY product development and production must be organized for global market distribution.
A favourite media description of Philips in the beginning of the 1980s was “Philips is a large, diversified electronics multi-national with operating strength based in Europe”. The appropriate description for Philips for the 1990s will be: “Philips is a leading, global electronics company with strong positions in Europe, the United States and Southeast Asia and China in lighting and the electronics activities of component, consumer electronics and telecommunication and information technology”.
A global strategy has to be directed product policy and planning process.
To ensure that description when Philips celebrates its hundredth anniversary in 1992, our corporate mission can be stated as follows: “Philips must increase its profitability in order to maintain leadership in the key sectors of the electronics industry.” In a combination of evolution since the and an accelerated pace of change since 198Os, which could be called a revolution, well along in implementing its strategy to mission. These are the actions we have continue to implement: 1. 2. 3. 4.
mid 1970s the early Philips is achieve its taken and
Defined our strategies Restructured our organization Improved the management of all our resources Developed new corporate values.
1.
Defining the Philips
Strategy
Philips must be a global company The the the key
conditions operating in the world economy and electronics industry demand an orientation to concept of globalism. The global markets are the world markets such as: - USA - Europe - The Pacific Basin/China.
These are global markets because they provide the economies of scale demanded by the electronics industry. And these are the centres of excellence and competence in which Philips must be significantly
International production centres (PCs) are designed as the manufacturing locations of products for world markets. by a centralized
Product planning, design, development and global marketing strategy must be integrated into a coherent centralized process. Production and national marketing, sales and service programs should complement the overall strategies and policies. The concept of profit centres has given way to concepts of linkage and directing all efforts to the same goal. The management structure has been strengthened and at the same time reduced in layers. Since product planning and policy making is now centralized along a Product Division Aiis, and interaction between these Product Divisions is our new imperative, management structure, from the top governing body to the Product Divisions and National Organizations must be consolidated and become more transparent. We are giving top priority to the development strengthening of OUT core actwities.
and
We describe our core activities as a tree whose trunk is component technology and production. The main branches, on one side, are consumer electronics, and on the other side, professional products and systems. The tree is nurtured through its roots, which are research activities, while the profusion of leaves constitutes our contacts and market outlets around the world. We must improve the utilization
of our resources.
Management of all our resources requires greater attention than we have devoted to it in the past.
2. Adapting and Restructuring Fit the Strategy
the Organization
With the key strategies to implement them?
what have we done
defined,
The “grand strategy” calls for a global orientation
to
for
88
GEFCRIT JEELOF
production and markets, and a change in organizational structure to conform to the global concept. These are the measures we have already taken in this direction: going global. We have Today Philips is a global company. recognized that the economic power has tilted to the United States and the Pacific Basin and we have stepped up our investments and activities in these areas. The growth of our presence in the United States represented by the increase in US share of total Philips turnover has risen in less than a decade from about 3% to nearly 30%. Philips has recently moved to integrate the North American Philips Organization into our worldwide structure. At the end of 1986, we abolished the US Philips Trust, which had been established to protect Philips’ interests during World War II. Recently Philips moved to complete the integration process by making a tender offer to buy outstanding shares of North American Philips stocks. The excellent group of activities under the North American Philips banner will be able to play a more prominent role in the Philips global strategy once they are more closely aligned with the central product planning and management process. We are increasing our investments in Japan. The Japanese-based MARANTZ company, which is a Philips joint venture, is one of our major investments there. Marantz provides us with a production facility to top-of-the-line Hi-Fi. We have also forged cooperative ventures with Kyocera and Nippon Steel and we have recently extended our successful cooperation with Matsushita (MEC) which dates back to 1952. In the People’s Republic of China we have already joint venture agreements for personal audio equipment, radio cassette recorders, car radios, compressors, laservision, optical fibre, TV-tubes and private communications (PABX) and other product lines are planned. These are just some highlights of our increased presence in key markets. Restructuring
for global production
activities.
We are well along in our program of production The consolidation of production restructuring. operations, which I mentioned earlier, resulted in closing to date of some 80 factories. In that period from 1972 to 1980 the major task was to close duplicative factories. the new role of factories as By 1980, however, International Production Centres required a different approach. The transition in factory organization
from local production operations to highly efficient factories for large volume production for world markets was a more complex process. Now, the managements of IPCs has to be controlled by the Product Divisions, since the strategy for product planning and development must be globally coordinated. Centralizing
the Product Planning
Process
Another very important change we have set into motion is the reorganization of our management structure to implement our global strategies. In the first place, the developments of electronics technology towards integration of products and systems, which is described earlier, defined the kind of integration we needed to follow in our organizational structure. We merged all audio and video activities into our Consumer Electronics Product Division. Our new Information Technology and Communication sector the conforms to inter-relatedness of telecommunications with computers and all kinds of automated office equipment. We also simplified the structure of the Product Divisions. The traditional, dual commercial/technical management was consolidated into a single senior director position. The newly defined charter for the Product Division called for central planning and coordination by the Product Divisions and National Organizations. This has changed the relationship between Product Divisions and National Organizations. It has become contractual in which the National Organization agrees with the Product Division to meet annual performance goals and clarifies responsibilities for implementation of product planning. However, National Organizations still fit their valuable role as local market experts. And they are integrated into the centralized decision making process. Senior National Product Managers of the key countries are part of the policy-making teams. Their input is of great importance to these decisions. We expect our well-developed National Organization networks to be an especially strong asset as information technology, strongly developed software, user education and service become increasingly important. Strengthening Another
OUY
element
Core Activities. in the restructuring
of our organ-
GLOBAL
ization is to give top priority to our core activities, which have been defined as Components, Consumer Electronics and Information Technology and Communications. The focus of our resources must be directed to the development of the technologies and businesses that are strategic for tomorrow’s Information Society. Strengthening the Governing Services more efficient.
Structure
and making Stafi
We formed a Group Management Committee with the intention of creating a top level management structure that is directly involved in the shaping of policv for the activities they manage. By appointing to this committee direct representation of the responsible directors for the largest product divisions a layer of management is stripped away. Representation on the Group Management Committee of the management of our core activities also contributes to cross-fertilisation of policies and planning between these inter-related Product Divisions. Expertise is shared and accountability strengthened for the management of these activities. We are also moving to slim down the Corporate Staff by merging or clustering departments which have proliferated over the past 40 years. Lighting, which has been and continues to be a strong part of Philips will be organized as a more autonomous business since lighting technology has little interface with the core businesses I described. By itself it can move more aggressively to maintain its top world positions. The organizational changes we have already made or are in the process of making can be summarized as follows:- lntegration of technologically linked Product Divisions; - Reduction in management layers in Product Divisions; - Establishment of central policy planning responsibilities with the Product Divisions; - Direct representation of our largest core activities in the Group Management Committee; - Streamlining of corporate services; - Autonomy of the lighting division and Major Domestic Appliances; - Strengthening our positions in the US and Far East, and restructuring of our European set up.
3.
Improving
STRATEGIES
the Management
OF PHILII’S
89
of our Resources.
Up to this point I have defined our strategy and described the key measures we have taken to adapt our organizational structure to our strategy. Next I will talk about the actions we are taking improve the management of our resources. 1. We have decentralized establishment of
the organization
to
with the
- Business Units - Project Teams 2. We are implementing a stronger development program.
human resource
3. We are increasing our attention ment of external relationships.
to the manage-
4. We are improving ing systems.
the management
of our operat-
I will briefly elaborate on these points of action. First the issue of decentralization. It may seem contradictory to make claims for a structure that is both centralized and decentralized. But we believe in the necessity for global or transnational companies, to play a balancing act between global integration and national responsiveness. Or, in other words, centralization to achieve global integration and decentralization to achieve national responsiveness. We are continually working on developing the desirable balance. The steps we are taking to achieve that balance are the following: - Establishing the Business Unit Concept. The more closely linked management of Product Divisions and National Organizations result in the vertical integration of International Production Centres and product planning and marketing. Organizationally this vertical integration is defined by Business Units with profit responsibilities. For example, Car Audio, Video Recorders or Hi-Fi are Business Units within the Consumer Electronics Product Division. - Developing the Project Team Approach. This characterizes a shift from functionalism to an interdisciplinary approach to planning and carrying out projects in a coherent, integrated way. We conduct issue-oriented, process improvement programs to reinforce interdisciplinary concepts. - A top priority has been assigned to strengthening our Human Resource Development programme. Our strategy is directed to the recruitment of out-
90
GERRlT JEELOF
talent; internationalization of standing management personnel, close appraisal of potential with clear career plans that are transparent to candidates for promotion; interfunctional job training, with interdivisional experiences; a stepped up management training programme. - Management of external relationships with regard to Philips has arrived at the point in time when it is no longer efficient to provide all the resources required to support our scope of activities. We will therefore be increasingly concerned with two kinds of external relationships: - with co-makership partners - with joint venture or other strategic partners.
The advantages of flexibility and efficiency that suppliers of components and services can contribute to our production process is increasingly appealing. It is a system our Japanese competitors have used to great advantage. This means building close and durable relationships and integrating co-makers into development and production plans at an early stage. Our co-makers will also have to be close at hand to production facilities, which means that our co-maker partnerships will be on a global basis. Strategic partnerships have long been central to Philips’ policy for extending our resources and broadening our reach. We form strategic partnerships when they answer one of the following requirements: - Extension of our financial and human resource capital in Research and Development projects; - Contribution of Philips expertise;
expertise
that
- Assistance in entering a market otherwise be difficult to penetrate;
complements that
would
- Sharing risks, and of course also as partners achieving world or regional standards.
in
The improvement of the management of OUY operational systems is an effort that, of course, cuts across all sectors of our activities. I will limit myself to mentioning an example of efforts to utilize the tools of technology to assist in our tasks. At Philips we have made it a top priority to develop a state-of-the-art communications technology infrastructure. Its purpose is to bind together our world wide operations.
Investments in the latest technology for mail, telephony, messaging and computer data network are intended to remove the barriers of physical distances and time differences of our employees. For example, Philips operates one of the largest private communications networks in the world, enabling messages to be sent between virtually all Philips employees. Our Corporate Data Network (CODAN), one of the most advanced worldwide data networks, inter-links national Philips data networks and permits communications to flow between computer systems. It has accesses from thousands of authorized terminals. This kind of operational system assists us in managing decentralization by making problems of distance or separation into smaller units less relevant. Now I come to the fourth and final area of this discussion about the key measures we are taking to achieve our companies mission. In order for the changes I have described up to this point to make any difference at all, we must achieve nothing short of the following.
4. Changing Culture.
the Company’s
System
of Values
or
We do not expect overnight miracles. The Philips culture of the pre-1980s can be described as: internally focussed; informal in organization with horizontal communication channels, decision-making by consensus, and evenly spread, balanced power - a classic example of a matrix structure; rigid charters of product divisions, with not much interaction between divisions; a geographic focus rather than an integrated, global focus. This was at odds with shift in geographic centres of gravity to the United States and Pacific Basin; fragmentation in the deployment of our resources. The changed concepts in corporate culture which must finally result from our efforts can be described as: 1. New concepts about how we deploy our yesouyces: does the resource allocation agree with priorities for core businesses. 2. Coherent organizational concept. Our key strategy of globalism demands a unified and centralized approach, supported by national responsiveness. At the same time we must manage varieties of structures to provide flexibility, and efficiencies.
GLOBAL
Examples
of these varieties
in structures
are:
- Stand alone operations (lighting). - Interlinkages (components, consumer electrontechnology and communiics, information cd tions) . - Joint ventures. - Separate companies. - Partnerships. 3. Consensus management is charters for responsibility accountability. The informal more formalized resulting making process, based on ships.
replaced with clear and a system of organization is now in a faster decision contractual relation-
4. The performance appraisal system we are instituting fundamentally changes the way the company operates. Clear targets are set for each Product Division and their Business Units for a whole of activities from Human Resource range Development to market research activities of inventory controls. Every manager knows that is expected of him.
STRATEGIES
OF PHILIPS
91
An annual appraisal directly links achievment of targets with remuneration. This new kind of accountability changes the culture of the company in a very fundamental way. 5. Concepts of achieving market share as a measure of success are replaced by the mission to achieve corporate profitability. Non-core businesses, as a lower company priority, must see profitability as their reason to exist in the company orbit. The approach of our hundredth anniversary in 1991 gives Philips an ideal target date to achieve our mission and to read in newspapers and magazines that our company is fittingly described as “a leading global electronics company with strong positions in Europe, the United States and Southeast Asia and China in Consumer Electronics, Components and Communications and information technology”. Everyone can rest assured, earn that description.
Philips is hard at work to
Global Strategies of Philips Gerrit reelof Vice-Chairman, Board of Management Philips N. V., The Netherlands
The Philips Corporation will reach its hundredth anniversary in 1991. In this edited paper, first presented at Management Centre Europe’s Top Management Forum in 1988, the author paints a picture of Philips’ corporate mission to take the company up to that date. He is very mindful of important developments in the external world that are affecting the electronics industry, like the development of global markets and advances in technology. In the whirlwind of change taking place, Philips has stated its mission to increase profitability so as to maintain leadership in the industry. The actions being taken to achieve this are - defining strategies, restructuring the organisation, better resources management and developing new corporate values.
All of us have been affected by the dramatic changes occurring in the electronics industry itself as well as the historically fundamental change in the world economy since the 1980s. But, of course, not everyone in the industry perceives those development in the same way or responds uniformly. This is how Philips has interpreted these external macroeconomic and internal industry changes. External World Economy and industrial Changes Affecting the Electronics Industry. The major changes - there are most certainly others, but these are the highlights - can be summarized as: l l l l
0
the development of global markets, technology developments and changed scope of business, new patterns of competition and cooperation, new impacts on business resulting from currency fluctuations, changing production processes.
The dmelopment of global markets has emerged for products demanding large-scale markets to absorb production and provide fast pay-back on enormous investment costs. The electronics industry, with its huge R&D costs, shorter product life-cycles and consequent shorter development periods identifies
closely with the concept of global markets. the United States and South East Asia/China markets essential to an electronics compatly.
Europe, are the
The necessity for global markets reaches to all sectors of electronics: consumer electronics. telecommunications and information technology and components. Technology developments have linked concepts of economies of scale, the learning curve and globalisation. These concepts are basic to survival. The interaction between these explained with a few examples.
concepts
can
be
In the professional sector, technology developments in public telecommunications rather dramatically illustrate the point. Up to the 1950s conventional telephones and their installations remained basically unchanged. Development costs for conventional, electro mechanical switching systems were about $10 million and they had an expected life cycle of about 25 years. By the beginning of 1970 when the analog system was introduced, development costs had jumped to $200 million, while the life cycle fell to 12 to 15 years. In the 1980s when the first digital systems were developed, costs had risen to $1 billion for a life expectancy of 8-12 years. Calculations
tell us that digital development
costs of
GLOBAL
$1 billion require roughly eight per cent of the world market share just to recover costs. The largest single market in Europe - West Germany - in total can deliver only six per cent of the world market share. This simple analysis clearly points to the basic problem of European markets segmented by countries. Larger scale markets now required for the electronics industry as a whole, are a major factor in the concept of globalism. Markets of global scale are necessary not only for professional products and systems, but also for components and consumer electronics. Development costs, shortened life cycles and cyclical pressures of surplus production characterize the components sector. Cooperation in predevelopment as a result, has become an accepted fact of life. There is a slightly different tilt to the consumer electronics sector introduced by our Japaneses friends: product targeting and price strategy. It, too, is based on achieving economies of scale, and the learning curve effect. The strategy of targeting categories of products for export involves moving through the learning curve as rapidly as possible to achieve a large production scale/low unit cost price ratio. The and largely protected homogelarge, innovative, neous Japanese home market has provided the ideal condition for this strategic success. The second external factor affecting the electronics industry is developments in technology that have changed the scope of business. The key words to describe development trends in electronics are:
Integration
and Complexity
As technology developments enable further miniaturisation and with the introduction of digitisation, separate products merge into systems that perform multiple functions. These systems are becoming interactive. As we witness the convergence of consumer electronics with professional systems and the convergence of the computer with telecommunications, we see the development of a huge, integrated information technology industry. If a company loses or fails to develop expertise in any of the key sectors, it cannot participate in the tightly knit information technology sector as a whole. This is the reason Philips considers it of utmost importance to maintain our strong position in consumer electronics. It is now clearly understood that the technology of consumer and professional products and systems are closely linked. The integration
of optical and electronics
technologies
STRATEGIES
OF PHILIPS
85
and its relevance to the fields of computers, training, document archiving and home entertainment, is a good example. Just over a decade ago, Philips announced the development of the video longplaying disc - now called LaserVision - which could store a 60 minute full-colour programme, or 45,000 colour slides, for replay on a domestic television receiver. Today, LaserVision forms the basis of a highly-sophisticated training concept which allows the trainee to interact with the programme and dictate the learning pace. Our experience with LaserVision technology also led to the development of a revolutionary digital optical storage system called Megadoc, the neologism of Mega: meaning millions, and dot, for document. In its maximum configuration, Megadoc can electronically store about B-million A4 pages of information replacing a row of filing cabinets nearly 3 metres high and some 300 meters long. It takes only one second to store the information and just a few seconds to retrieve and display it. The micro-mechanics and opto-electronics developed for Megadoc formed the basis of the first real breakthrough in home music reproduction since the stereo record. The Compact Disc - or CD - took the world by storm, for in the space of a few short years it became the standard for both the music industry and the home music lover. But CD technology is not restricted to recorded music for the CD-video is already on the market. And continuing development has opened up a realm of other possibilities. In computers, publishing, industry, business and home study. For example, the interactive CD-I, has a digital storage capacity in excess of 1000 floppy discs. It can reproduce on video 7,000 natural pictures, 32,000 colours for users manipulated graphics, 256 colours for full-programmed animation as well as 16 hours of audio possibilities and 16 available channels. In fact, the CD-I may well and truly be called the ultimate media standard. And of course, the CD-rom has been widely acclaimed as the world standard or the so called New Papyrus of the computer software industry. These rapid developments offer enormous opportunities to spin off a wide scale of products, systems and software for professional and home use. But a comprehensive pool of knowledge has to be tapped spanning technologies such as optics, magnetics, microelectronics, mechanics and glass technology. At Philips we talk about integration and convergence of the four C’s: Components, Computers, Communications and Consumer Electronics. It is a strong
86
GERRIT JEELOF
belief at Philips that expertise must be maintained in all of these core technologies in order to compete and survive. Closely related to the new scope of activity as a result of integration and complexity is the next point, new patterns of competition and cooperation. I have already spoken about the targeting strategies of Japan in consumer electronics which have succeeded in swallowing the entire American consumer electronics industry. Philips is described frequently by the media as the last surviving competitor standing between Japan and world domination of consumer electronics. Because Philips feels so strongly about defending our position in consumer electronics, precisely for the reason I have just explained maintaining expertise in core technologies - you can perhaps understand why Philips has a special interest in and relationship with the Japanese electronics industry. We are attempting to balance out roles as both competitor and cooperative partner. One demands the other. If we are to remain significantly competitive by staying on the cutting we have to solicit the edge of development, cooperation of the Japanese electronics industry in the development of world standards. We have succeeded in this, starting with the compact caswith a sette, the compact disc and continuing number of other consumer electronics development. We are currently engaged, along with other in critical discussions about European companies, setting a world standard for High Definition Televisision. Because of integration in Consumer Electronics, Components, Computer and Communications, other changes in patterns of competition and cooperation are also affecting the industry. The crossover between these formerly separate areas is introducing new competitors to one another. Telecommunication organisations and Telecommunications and Information Technology companies are invading each others’ markets. Producers of components, hardware, software and information services meet each other as both suppliers of services and equipment and competitors in the market-place. Joint ventures and other cooperative alliances produce a kind of “musical chairs”. In one situation we sit together at one side of the table and in the other competitive situation we face each other across the table. Closely allied to the previous points is the changes in production processes. New production techniques are changing old rules about manufacturing. Large scale, labour, intensive assembly lines are giving
way to highly automated, nent operations.
capital intensive
compo-
Computer Aided Design (CAD), Computer Aided Manufacturing (CAM) and Computer Integrated Manufacturing (CIM) are technologies that increase quality, flexibility and efficiency. They have the possibility to achieve these positive gains in production concepts and require new organizational structures to accommodate the changes they bring about. For example, sharp increases in productivity resulting from CAD/CAM can mean a 15% increase per annum. The market does not grow that fast. So we have an over-production problem. Reduced labour costs as a result of automation mean for Philips, for instance, that Brugges-Belgium can now be a cheaper manufacturing location for consumer electronics than Singapore. Capital intensive investments mean that your capital must work day seven days a week. This requires and night, realigning work patterns - not always easy to do. And the highly technical nature of production means that there will be a need for a much more skilled and highly educated production work-force. All industrial nations, but especially the United States and Europe, will have to stimulate a change in attitudes about career directions. Both Europe and the United States face undersupply of engineers. Manufacturing must be made as attractive to students as MBAs are! My final point about the external factors exerting an influence on Philips and others is the wildly j7uctuating monetary levels in the world markets. The instability of exchange rates has completely distorted profit levels and made a shambles of long-term planning. The influence on production locations is quite clear. There is the joke about buying a huge ship, equipping it with CAD/CAM automated production capability and dropping anchor on the shore of whatever country at the moment offers the best currency exchange opportunity. It isn’t particularly funny, however, when you consider the costs involved in moving production facilities, which unfortunately cannot yet float. A Philips example: since 1985 Philips moved production of 14 inch TVs from the United States to Taiwan and now again to Juarez, Mexico. Many companies could tell their own stories about second-guessing the world money market. But when hard-earned profit margin increases are wiped out by currency fluctuations, companies are forced to use resources that could be so much valuably allocated elsewhere. This is a problem of global dimensions affecting all industries. That is the Philips
version
of the major challenges
GLOBAL
we face in the electronics industry. Philips doing about these challenges?
Now what
STRATEGIES
OF PHILIPS
87
is
present. The national orientation must be changed from an end in itself to that of a link in the global chain.
The most obvious first step in adapting to new or changed situations is to step back and become clearheaded about what it is your company is doing and what it should be doing. As a 97-year-old company one of the oldest in the world in the electronics business, we have a lot of history to deal with.
The structure of OUY product development and production must be organized for global market distribution.
A favourite media description of Philips in the beginning of the 1980s was “Philips is a large, diversified electronics multi-national with operating strength based in Europe”. The appropriate description for Philips for the 1990s will be: “Philips is a leading, global electronics company with strong positions in Europe, the United States and Southeast Asia and China in lighting and the electronics activities of component, consumer electronics and telecommunication and information technology”.
A global strategy has to be directed product policy and planning process.
To ensure that description when Philips celebrates its hundredth anniversary in 1992, our corporate mission can be stated as follows: “Philips must increase its profitability in order to maintain leadership in the key sectors of the electronics industry.” In a combination of evolution since the and an accelerated pace of change since 198Os, which could be called a revolution, well along in implementing its strategy to mission. These are the actions we have continue to implement: 1. 2. 3. 4.
mid 1970s the early Philips is achieve its taken and
Defined our strategies Restructured our organization Improved the management of all our resources Developed new corporate values.
1.
Defining the Philips
Strategy
Philips must be a global company The the the key
conditions operating in the world economy and electronics industry demand an orientation to concept of globalism. The global markets are the world markets such as: - USA - Europe - The Pacific Basin/China.
These are global markets because they provide the economies of scale demanded by the electronics industry. And these are the centres of excellence and competence in which Philips must be significantly
International production centres (PCs) are designed as the manufacturing locations of products for world markets. by a centralized
Product planning, design, development and global marketing strategy must be integrated into a coherent centralized process. Production and national marketing, sales and service programs should complement the overall strategies and policies. The concept of profit centres has given way to concepts of linkage and directing all efforts to the same goal. The management structure has been strengthened and at the same time reduced in layers. Since product planning and policy making is now centralized along a Product Division Aiis, and interaction between these Product Divisions is our new imperative, management structure, from the top governing body to the Product Divisions and National Organizations must be consolidated and become more transparent. We are giving top priority to the development strengthening of OUT core actwities.
and
We describe our core activities as a tree whose trunk is component technology and production. The main branches, on one side, are consumer electronics, and on the other side, professional products and systems. The tree is nurtured through its roots, which are research activities, while the profusion of leaves constitutes our contacts and market outlets around the world. We must improve the utilization
of our resources.
Management of all our resources requires greater attention than we have devoted to it in the past.
2. Adapting and Restructuring Fit the Strategy
the Organization
With the key strategies to implement them?
what have we done
defined,
The “grand strategy” calls for a global orientation
to
for
88
GEFCRIT JEELOF
production and markets, and a change in organizational structure to conform to the global concept. These are the measures we have already taken in this direction: going global. We have Today Philips is a global company. recognized that the economic power has tilted to the United States and the Pacific Basin and we have stepped up our investments and activities in these areas. The growth of our presence in the United States represented by the increase in US share of total Philips turnover has risen in less than a decade from about 3% to nearly 30%. Philips has recently moved to integrate the North American Philips Organization into our worldwide structure. At the end of 1986, we abolished the US Philips Trust, which had been established to protect Philips’ interests during World War II. Recently Philips moved to complete the integration process by making a tender offer to buy outstanding shares of North American Philips stocks. The excellent group of activities under the North American Philips banner will be able to play a more prominent role in the Philips global strategy once they are more closely aligned with the central product planning and management process. We are increasing our investments in Japan. The Japanese-based MARANTZ company, which is a Philips joint venture, is one of our major investments there. Marantz provides us with a production facility to top-of-the-line Hi-Fi. We have also forged cooperative ventures with Kyocera and Nippon Steel and we have recently extended our successful cooperation with Matsushita (MEC) which dates back to 1952. In the People’s Republic of China we have already joint venture agreements for personal audio equipment, radio cassette recorders, car radios, compressors, laservision, optical fibre, TV-tubes and private communications (PABX) and other product lines are planned. These are just some highlights of our increased presence in key markets. Restructuring
for global production
activities.
We are well along in our program of production The consolidation of production restructuring. operations, which I mentioned earlier, resulted in closing to date of some 80 factories. In that period from 1972 to 1980 the major task was to close duplicative factories. the new role of factories as By 1980, however, International Production Centres required a different approach. The transition in factory organization
from local production operations to highly efficient factories for large volume production for world markets was a more complex process. Now, the managements of IPCs has to be controlled by the Product Divisions, since the strategy for product planning and development must be globally coordinated. Centralizing
the Product Planning
Process
Another very important change we have set into motion is the reorganization of our management structure to implement our global strategies. In the first place, the developments of electronics technology towards integration of products and systems, which is described earlier, defined the kind of integration we needed to follow in our organizational structure. We merged all audio and video activities into our Consumer Electronics Product Division. Our new Information Technology and Communication sector the conforms to inter-relatedness of telecommunications with computers and all kinds of automated office equipment. We also simplified the structure of the Product Divisions. The traditional, dual commercial/technical management was consolidated into a single senior director position. The newly defined charter for the Product Division called for central planning and coordination by the Product Divisions and National Organizations. This has changed the relationship between Product Divisions and National Organizations. It has become contractual in which the National Organization agrees with the Product Division to meet annual performance goals and clarifies responsibilities for implementation of product planning. However, National Organizations still fit their valuable role as local market experts. And they are integrated into the centralized decision making process. Senior National Product Managers of the key countries are part of the policy-making teams. Their input is of great importance to these decisions. We expect our well-developed National Organization networks to be an especially strong asset as information technology, strongly developed software, user education and service become increasingly important. Strengthening Another
OUY
element
Core Activities. in the restructuring
of our organ-
GLOBAL
ization is to give top priority to our core activities, which have been defined as Components, Consumer Electronics and Information Technology and Communications. The focus of our resources must be directed to the development of the technologies and businesses that are strategic for tomorrow’s Information Society. Strengthening the Governing Services more efficient.
Structure
and making Stafi
We formed a Group Management Committee with the intention of creating a top level management structure that is directly involved in the shaping of policv for the activities they manage. By appointing to this committee direct representation of the responsible directors for the largest product divisions a layer of management is stripped away. Representation on the Group Management Committee of the management of our core activities also contributes to cross-fertilisation of policies and planning between these inter-related Product Divisions. Expertise is shared and accountability strengthened for the management of these activities. We are also moving to slim down the Corporate Staff by merging or clustering departments which have proliferated over the past 40 years. Lighting, which has been and continues to be a strong part of Philips will be organized as a more autonomous business since lighting technology has little interface with the core businesses I described. By itself it can move more aggressively to maintain its top world positions. The organizational changes we have already made or are in the process of making can be summarized as follows:- lntegration of technologically linked Product Divisions; - Reduction in management layers in Product Divisions; - Establishment of central policy planning responsibilities with the Product Divisions; - Direct representation of our largest core activities in the Group Management Committee; - Streamlining of corporate services; - Autonomy of the lighting division and Major Domestic Appliances; - Strengthening our positions in the US and Far East, and restructuring of our European set up.
3.
Improving
STRATEGIES
the Management
OF PHILII’S
89
of our Resources.
Up to this point I have defined our strategy and described the key measures we have taken to adapt our organizational structure to our strategy. Next I will talk about the actions we are taking improve the management of our resources. 1. We have decentralized establishment of
the organization
to
with the
- Business Units - Project Teams 2. We are implementing a stronger development program.
human resource
3. We are increasing our attention ment of external relationships.
to the manage-
4. We are improving ing systems.
the management
of our operat-
I will briefly elaborate on these points of action. First the issue of decentralization. It may seem contradictory to make claims for a structure that is both centralized and decentralized. But we believe in the necessity for global or transnational companies, to play a balancing act between global integration and national responsiveness. Or, in other words, centralization to achieve global integration and decentralization to achieve national responsiveness. We are continually working on developing the desirable balance. The steps we are taking to achieve that balance are the following: - Establishing the Business Unit Concept. The more closely linked management of Product Divisions and National Organizations result in the vertical integration of International Production Centres and product planning and marketing. Organizationally this vertical integration is defined by Business Units with profit responsibilities. For example, Car Audio, Video Recorders or Hi-Fi are Business Units within the Consumer Electronics Product Division. - Developing the Project Team Approach. This characterizes a shift from functionalism to an interdisciplinary approach to planning and carrying out projects in a coherent, integrated way. We conduct issue-oriented, process improvement programs to reinforce interdisciplinary concepts. - A top priority has been assigned to strengthening our Human Resource Development programme. Our strategy is directed to the recruitment of out-
90
GERRlT JEELOF
talent; internationalization of standing management personnel, close appraisal of potential with clear career plans that are transparent to candidates for promotion; interfunctional job training, with interdivisional experiences; a stepped up management training programme. - Management of external relationships with regard to Philips has arrived at the point in time when it is no longer efficient to provide all the resources required to support our scope of activities. We will therefore be increasingly concerned with two kinds of external relationships: - with co-makership partners - with joint venture or other strategic partners.
The advantages of flexibility and efficiency that suppliers of components and services can contribute to our production process is increasingly appealing. It is a system our Japanese competitors have used to great advantage. This means building close and durable relationships and integrating co-makers into development and production plans at an early stage. Our co-makers will also have to be close at hand to production facilities, which means that our co-maker partnerships will be on a global basis. Strategic partnerships have long been central to Philips’ policy for extending our resources and broadening our reach. We form strategic partnerships when they answer one of the following requirements: - Extension of our financial and human resource capital in Research and Development projects; - Contribution of Philips expertise;
expertise
that
- Assistance in entering a market otherwise be difficult to penetrate;
complements that
would
- Sharing risks, and of course also as partners achieving world or regional standards.
in
The improvement of the management of OUY operational systems is an effort that, of course, cuts across all sectors of our activities. I will limit myself to mentioning an example of efforts to utilize the tools of technology to assist in our tasks. At Philips we have made it a top priority to develop a state-of-the-art communications technology infrastructure. Its purpose is to bind together our world wide operations.
Investments in the latest technology for mail, telephony, messaging and computer data network are intended to remove the barriers of physical distances and time differences of our employees. For example, Philips operates one of the largest private communications networks in the world, enabling messages to be sent between virtually all Philips employees. Our Corporate Data Network (CODAN), one of the most advanced worldwide data networks, inter-links national Philips data networks and permits communications to flow between computer systems. It has accesses from thousands of authorized terminals. This kind of operational system assists us in managing decentralization by making problems of distance or separation into smaller units less relevant. Now I come to the fourth and final area of this discussion about the key measures we are taking to achieve our companies mission. In order for the changes I have described up to this point to make any difference at all, we must achieve nothing short of the following.
4. Changing Culture.
the Company’s
System
of Values
or
We do not expect overnight miracles. The Philips culture of the pre-1980s can be described as: internally focussed; informal in organization with horizontal communication channels, decision-making by consensus, and evenly spread, balanced power - a classic example of a matrix structure; rigid charters of product divisions, with not much interaction between divisions; a geographic focus rather than an integrated, global focus. This was at odds with shift in geographic centres of gravity to the United States and Pacific Basin; fragmentation in the deployment of our resources. The changed concepts in corporate culture which must finally result from our efforts can be described as: 1. New concepts about how we deploy our yesouyces: does the resource allocation agree with priorities for core businesses. 2. Coherent organizational concept. Our key strategy of globalism demands a unified and centralized approach, supported by national responsiveness. At the same time we must manage varieties of structures to provide flexibility, and efficiencies.
GLOBAL
Examples
of these varieties
in structures
are:
- Stand alone operations (lighting). - Interlinkages (components, consumer electrontechnology and communiics, information cd tions) . - Joint ventures. - Separate companies. - Partnerships. 3. Consensus management is charters for responsibility accountability. The informal more formalized resulting making process, based on ships.
replaced with clear and a system of organization is now in a faster decision contractual relation-
4. The performance appraisal system we are instituting fundamentally changes the way the company operates. Clear targets are set for each Product Division and their Business Units for a whole of activities from Human Resource range Development to market research activities of inventory controls. Every manager knows that is expected of him.
STRATEGIES
OF PHILIPS
91
An annual appraisal directly links achievment of targets with remuneration. This new kind of accountability changes the culture of the company in a very fundamental way. 5. Concepts of achieving market share as a measure of success are replaced by the mission to achieve corporate profitability. Non-core businesses, as a lower company priority, must see profitability as their reason to exist in the company orbit. The approach of our hundredth anniversary in 1991 gives Philips an ideal target date to achieve our mission and to read in newspapers and magazines that our company is fittingly described as “a leading global electronics company with strong positions in Europe, the United States and Southeast Asia and China in Consumer Electronics, Components and Communications and information technology”. Everyone can rest assured, earn that description.
Philips is hard at work to