Philips versus Matsushita: A New Century, a New Round

Introduction Royal Philips NV and Matsushita (owner of the Panasonic brand among others) are two of the worlds biggest electronics multinationals. After successfully building their global empires in the early twentieth century, they have both suffered financially in recent decades. It is therefore interesting to look at why this has happened and what their future prospects are.

1. The Rise of Philips. Philips was established in 1892 by Gerard Philips and his father in Eindhoven, Holland (Hill, 2005). They were later joined by Gerards brother Anton, who brought with him sales and management expertise (Hill). It soon went from being small-scale lightbulb manufacturers to leaders in its field (Hill). How did Philips, therefore, become more successful than its rivals during its formative years?

One of the main reasons for Philips early success is arguably because of its focus on manufacturing lightbulbs. Other electronics organisations were keen to diversify (Hill), whereas Philips concentrated solely on producing lightbulbs and developing new technology for this product. It was, thus, able to build a competitive advantage based on technology, and subsequently, became a market leader in this field.

In addition to its technological development, Philips overseas expansion was also a formidable reason for its growth and success. According to Hill, the small size of Holland

forced Philips to look beyond its borders. It appeared to successfully pursue an international strategy as there was little pressure for local responsiveness with a simple product such as a lightbulb and it was able to benefit from greater economies of scale.

The other aspect of its success could be attributed to Philips care for its workers. According to Hill, the company built houses, bolstered education, and paid its employees so well that other employers complained (p.518). This could be argued as building a resource-based advantage. Barney et al (2001) believe that sustained competitive advantage derives from the resources and capabilities a firm controls that are valuable, rare, imperfectly imitable and not substitutable (p.625). This unique care for its workforce arguably fostered a culture that helped create such a competitive advantage. Porter (1980) would argue otherwise as he feels the only way to create a sustainable competitive advantage is through overall cost leadership, diversification or focus. It could be seen that Philips did the latter, as they were diversifying by developing new lightbulb technology. However, its workforce was involved in this development and consequently should be considered as a reason for Philips success.

2. How Matsushita was able to overtake Philips. Matsushitas success in the consumer electronics market is just one of many from a hugely successful Japanese electronics industry. Japanese enterprises share many similar elements in their success, particularly their revolutionary working practices such as the use of Just-in-time or Kanban. Consequently, Matsushitas success in overtaking Philips can be attributed to the success of the Japanese consumer electronics industry as a whole. There are a whole set of interrelated industries and clusters (Porter, 1990), both domestic and

international, that aided this companys transformation from a lamp socket factory in rural Osaka, Japan to an international electronics giant.

One of the main reasons for the success of Japanese enterprises has been their exporting efficiency. Porter (1990) discovered several distinct factors about Japanese exports. Firstly, the high export rate of Japanese companies, and secondly, he found that many of Japans successful industries, from transportation equipment and related machinery to entertainment and leisure (notably consumer electronics), are often integrated. Thus, from Porters (1990) analysis, it would appear that Japans comprehensive machinery industry offers the domestic companies the resources (from manufacturing to distribution and opportunities) to compete in the world market.

Porter (1990) further highlights how various studies looking at the success of the Japanese economy mentioned the importance of government intervention, especially when it came to helping organisations find capital investment. It became traditional for many corporations to have their own government agencies. Matsushita managed to build its leadership through the VCR in the 1980s, after the bitter videotape format war (Videotape Format War, www.wikipedia.com, 27/04/2006). However, before the war started in early 1980s, Matsushita adopted the VHS standard under the pressure of Japanese International Ministry of Trade and Industry (MITI) and gave up its own standard in late 1970s. In 1974, Sony released Betamax, and as expected the other Japanese manufactures followed this format. However, JVC refused to adopt it and in 1976 released the VHS format. Sony appealed to MITI in the hope that it would force JVC to use Sonys

Betamax format, however their appeal was rejected. Therefore, although Sony may have viewed MITI as a hindrance, MITIs interventions helped to create an environment that fostered fierce competition and cooperation between organisations. This arguably stimulated the development of the video recording industry as a whole. Matsushita was, thus, able to benefit from the competitive nature of the industry.

Phillips attempted to capture its share of the market when it launched its format, Video 2000, in 1979 (Hill). This was seen as being the most technically advanced with its Dynamic Track Following (DTF) system (Video 2000, www.wikipedia.com, 27/04/2006). However, its late entry meant it was incompatible with machines and its unreliability seemingly left it destined to fail. Philips withdrew Video 2000 in 1988, deciding to adopt the VHS format of its rivals instead (Hill). This left Philips considerably far behind Matsushita in the VCR market.

Although Matsushita was forced to give up its format and accept VHS, along with Philips, Matsushita had increased capacity 33-fold between 1977 and1985 (Hill). VCRs accounted for 30 percent of Matsushitas total sales, over 40 percent of overseas revenues, and provided 40 percent of its profits (Hill). This was seen to be because Matsushita shifted its role from a developer to a manufacturer or a service provider. Consequently, Matsushita was having considerably more success in the VCR market than Philips. Matsushitas success in this market can, therefore, be seen as one of the main reasons it was able to overtake Philips.

A further reason for Matsushita overtaking Philips is arguably because of its structure. Its division structure whereby each product division manufactured one product only could be seen as one of its core competences, as it helped focus the attention and resources of each department. Furthermore, the individual, self-funded research laboratories within each product division potentially made Matsushita more aware of their profits and the value of instant marketing. Thus, it meant they were able to go from manufacturing something that was not only technologically advanced, but was something the people would actually buy (Hill). Moreover, whilst Matsushita was dominating the VHS market in the 1980s, Philips was still suffering from the long-running power dispute between its National Organisations and its Product Divisions. Therefore, its highly competitive-internal environment and flexible organisational structure along with government support and the competitive nature of the Japanese consumer electronics industry as a whole, meant that it was perhaps inevitable that Matsushita eventually overtook Philips in the consumer electronics market.

3. The difficulties both companies are having in building the capabilities they both recognize as missing. Philips Philips decline of success over the last thirty years has been mainly down to the lack of consistency and the lack of ability to deal with a changing competitive international environment. In terms of structure, the company has had to change many times and in very different ways by successive CEOs. Similarly, it has not had a clear strategy or focus since they started to run into difficulties in the 1960s. Whether strategy follows structure of vice versa is a matter of great debate which we will look at in depth later.

A problematic area for Philips has been the struggle to balance the respective roles and power of the National Organisations (NOs) and the Product Divisions (PDs). This matrix, which was finally eliminated in the 1990s, did not seem to be hugely successful as there always existed conflict in terms of power and responsibilities. The power that the NOs enjoyed seemed detrimental to the PDs, as they often found it difficult to get their voices heard. The PDs have been restructured on various occasions into separate divisions, and were finally replaced at the same time as the NOs were. The lack of clarity with respect to the two meant that Philips was unable to function efficently, and thus has been unable to build either into a capability.

In terms of structure, Philips used to have a dual management system, which historically worked for the Philips brothers. This desire to recreate the past as opposed to changing and looking to the future shows a weakness in Philips culture. This was however eventually replaced by a more orthodox single management set-up at both corporate and NO level. Nowadays, the PDNO matrix no longer exists, as the PDs have been replaced by 7 divisions, and day to day responsibility has been passed onto 100 business units (Hill). This change was a very successful one for Boonstra, who managed to change the fortunes of Philips in just a few years. This outdated management system, however, held Philips back at a time when they needed to be looking to the future.

A strategy which has been employed by many of Philips CEOs has been to reduce the number of products in order to concentrate on making the more basic ones perform to their

full potential. Defining certain products as core for instance, which was basically those with strategic importance, was one way of focusing on certain areas and attaining specialisation. This seems to be a very negative strategy as instead of trying to make this work, they have historically cut their losses and given up on various products. The closure of the least efficient plants has also been undertaken by a number of CEOs, meaning the loss of a large number of jobs on many occasions. In this sense it is clear that it did not treat its staff in the generous way that Matsushita did, and thus falied to build manpower into a capability.

Since the consumer electronics industry is ever-changing, firms need to be able to envisage the future demands of consumers, be able to produce high-quality, high-tech products and be able to do it at a low price. Philips has failed to manage these three elements effectively, and thus is suffering the consequences. It has also failed to adapt to the changing demands and the strengths of the competition, partly due to its confused strategies and its ever-changing structure.

Matsushita Matsushita on the other hand has faced quite different problems. As Matsushita has never been an innovative company, its main capabilities have always been the ability to mass produce and at low price, due to its production techniques and the fact that it produces in a low cost area of the world. It has also been quick to market, so that when a competitor brings out a new and potentially successful product, Matsushita is usually fast in producing a similar product. This strategy is somewhat risky, as it is dangerous to rely on other

companies innovation and Research and Development to produce new products. Historically, the high level of centralisation and the tall structure have hindered Matsushitas innovation attempts. The presidents in recent years have tried to make innovation a capability of Matsushita. The hierarchy has been flattened, and restructuring has finally taken place. After the collapse of the Japanese economy left Matsushita with excess capacity and evaporating profits, restructuring was certainly necessary, but took many years until anything was done to correct the situation. This shows that Matsushita was also slow to manage the changes in the external environment, which we will now discuss further.

4. The effectiveness of Matsushitas change agenda during the 1980s and 1990s.

In 1982, Matsushitas President, Toshihiko Yamashita, implemented a change programme known as Operation Localization (Hill, p.527). This was as an attempt to give its overseas subsidiaries more autonomy in the hope of improving their innovative capacity, and also to help to develop firm specific advantages (Birkinshaw et al., 1998). By the end of this period Matsushita was struggling after the Japanese economic recession of the early 1990s. Therefore, was Matsushita able to manage change effectively throughout the 1980s and 1990s?

Under Operation Localization, however, attempts to give its overseas subsidiaries more autonomy were to prove challenging, as one of the main problems during this period for Matsushita was the apparent inability of its overseas operations to become less dependent

on the Japan-based product divisions. This could be because implementing any change is not always simple, as there are often various barriers obstructing the process. Johnson (1992) highlights two main reasons for this: resistance to change and strategic drift (p.33). In terms of culture there is often a resistance to change, for instance at Matsushita during Yamashitas Operation Localization the problem of change initially seemed to rest not with the overseas subsidiaries, but the product divisions as Hill cites: despite his (Yamashitas) four localizations, overseas companies continued to act primarily as the implementation arms of central product divisions (p.528). This potentially indicates that the product divisions found it difficult to limit their interfering in the affairs of overseas subsidiaries. Whether the product divisions were actually opposed to change remains to be seen, it could however be argued that the product divisions had been used to one system for so long it was proving a challenge for them to change. Thus, it appears Matsushita failed to realise the potential obstacles when attempting to change.

Furthermore, Yamashitas successor, Akio Tanii, failed to respond adequately to his predecessors inability to make the overseas subsidiaries more innovative. As Hill states: he relocated major regional headquarters functions from Japan to North America, Europe, and Southeast Asia (p.528). Nevertheless, the overseas subsidiaries continued to follow orders from the product divisions (Hill, p.528). This could be owed to the fact that only 250 of the companys 3000 R&D (Research and Development) scientists and engineers were located outside Japan (Hill, p.529). If Matsushita wanted its overseas subsidiaries to be more innovative they perhaps should have located more key R&D staff overseas in addition to the responsibility delegated. Matsushita may have delegated responsibility to its overseas subsidiaries to develop more products, but if the subsidiary does not actually

have the expertise to do so then it is likely to be unsuccessful. Thus, the strategy pursued by Matsushita appeared to be inconsistent with its overall objective of achieving greater innovative capacity in its overseas subsidiaries.

With the majority of the organization based in Japan, Matsushita undoubtedly suffered when the Japanese economy went into recession in 1992 (Hill). Tanii failed to cut costs sufficiently and was forced to resign (Hill). His successor, Yoichi Morishita, had the task of restructuring. He began by decentralising more responsibility, but according to Hill the management seemed unwilling to radically restructure its increasingly inefficient portfolio of production facilities (p.528) in Japan. This could be seen as an example of resistance to change, as the management were unwilling to drastically decrease production in Japan. Moreover, it is also an example of strategic drift as the strategy pursued is not coherent with its environment (Johnson). This inability to change has prohibited Matsushita sufficiently recuperating from the economic crash in Japan.

It also seemed that Morishita had lost faith in the overseas subsidiaries to innovate and develop new technology as he entered into partnership with the Chinese Academy of Sciences and established the Panasonic Digital Concepts Centre in Silicon Valley (Hill). Having appeared to be unwilling to invest in research and development at Matsushitas own overseas subsidiaries, he at least seemed to have acknowledged the need to invest in new technology. Therefore, although Morishita looked unable to change the situation in Japan, he was attempting to move the organisation forward.

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Overall, it appears that Matsushita has failed to manage change effectively during the 1980s and 1990s. Although delegating responsibility, successive presidents did not realise that if they wanted their overseas subsidiaries to be more innovative they needed to invest in the expertise. Had they done this, the subsidiaries may have developed their own products, which they could be responsible for selling and not have to be at the mercy of the Japan-based product divisions. It was only Morishita, in the late 1990s that realised this. However, he did not restructure the Japan-based production facilities after the recession in the Japanese economy and, thus the company was unable to reach the levels of profitability it was used to prior to the recession.

5. Recommendations for Philips. It is clear to see that Philips quest to build efficiency into its global operations has failed (Hill). The most recent CEOs, Boonstra and Kleisterlee, have therefore been outsourcing various products and have turned their attentions to looking for other ways in which Philips can return to compete with the industry leaders. It possesses capabilities that some of its competitors does not, and should therefore try to exploit these further. Its ability to innovate and develop technology is what brought Philips to the forefront of their field many years ago, and it seems that further investment in R&D and marketing may be the only way in which its can match the low-cost Japanese advantage of efficiency. However, if Philips is unsuccessful in becoming a technology developer and global marketer (Hill, p.524), the fact that it is no longer producing many of its basic products may leave it with nothing but a bleak looking future. Therefore it should either retain some of its production to fall back on in case of failure, or invest heavily in its new strategy and encourage

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participation of everyone in order to ensure that it is not another failed strategic change. Philips also needs to find the correct structure to suit its operations and its strategy. As Mintzberg (1990) says, structure follows strategy as the left foot follows the right (p.183). Bearing this in mind, Philips need to find a structure and strategy which are compatible, as oppose to changing one and trying to make the other one fit. The relationship between structure and strategy will be further discussed in part 6.B below.

6. Recommendations for Matsushita. A. Change Management As has been shown, Matsushita has struggled to restructure its organisation. This can be seen when analysing Matsushitas attempts to make its overseas subsidiaries more innovative. The problem with their method seems could be that its programme for change was too prescriptive, such as the approach favoured by Lewin (in Burnes [1996]). He views change as a three-step process whereby current attitudes are first unfrozen then moved to the new level that is desired and finally the new attitudes are refrozen (Burnes, p.11). This top down, planned approach is seems similar to how Matsushita implemented its change programme. It appears that the management thought that by giving its overseas subsidiaries more autonomy it would instantly make them more innovative. However, this did not happen because as has been highlighted change is not always such a straightforward process.

Dawson and Wilson (in Burnes) argue that such a prescriptive approach ignores the dynamic nature of environmental and change processes, and does not address crucial issues such as the continuous need for employee flexibility and structural adaptation (p.13). Thus,

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although managers at Matsushita attempted to implement a change programme they perhaps should have considered other factors before deciding on how to embark on a change programme. If they had used a more bottom up approach, employees may have been able to warn the management of potential problems that may be in store. For instance, they may have told their managers that such change programmes could only happen if the product divisions stopped interfering or that they were given more resources to invest in research and development.

The emergent approach does have its drawbacks. For instance, it views change as a long-term process, but if an organisation does not have time on its side then it may find it difficult to assess all areas of this process. Furthermore, a bottom up approach may be impractical in an organisation as vast as Matsushita as it would struggle to involve all its employees. Nevertheless, a compromise could be reached, as Matsushita bosses would not necessarily have to involve all their employees, but could take a sample and still receive important feedback.

Burnes even suggests a contingency approach to change management, as in certain situations a planned and prescriptive approach may be the best option, whereas others may require an emergent approach. However, he does highlight the difficulty involved in knowing which approach to change is best for the situation. Nevertheless, it appears a useful way of looking at change management because at Matsushita there may be occasions where the changes proposed are relatively simple and do not require consultation. However, for their current major restructuring process it would be beneficial if Matsushita

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consulted some of its workforce. Had it done this originally it may have had more success when trying to make its overseas subsidiaries more innovative.

B. Structure and Strategy There has been much debate around whether a firms strategy is formulated before its structure (Chandler, 1962 from Miller, 1986) or vice-versa (Hall and Saias, 1980). Miller (1986), however, argues for a configuration between strategy and structure, whereby certain structures are appropriate for certain strategies. This is what Matsushita should focus on, as the important issue for them is not what to formulate first but, that there is a match between their strategy and their structure.

Miller would suggest that for a conglomerate such as Matsushita it should pursue a conglomeration and diversification strategy, and should have a divisionalised structure. Miller believes that the complexity involved in running a diversification strategy would require a divisionalised structure whereby individual subsidiary managers run their own operations. This is seemingly what Matsushita has been trying to achieve, as they have long employed a divisionalised structure and it has been attempting to give its subsidiary managers more autonomy to run their own operations. However, the subsidiary managers were unable to achieve this autonomy, as the product divisions kept interfering.

Matsushitas President Nakamura has now integrated the product division structure into multiproduct production centres. This may reduce costs, but it is difficult to see how this will stop them interfering overly with their overseas subsidiaries. If these production

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centres do allow their overseas subsidiaries more freedom then this may help to create an environment of innovation. This, along with Matsushitas new marketing initiative may help the company to be more locally responsive and although this may come at a significant cost to Matsushita, its management should be prepared to sacrifice short-term profits for long-term success.

Finally, Matsushita must recognise that restructuring is more dynamic than the relationship between strategy and structure. As has been shown, change is not a simple process and has many potential barriers. If Matsushita fails to realise this then it will struggle with its restructuring programme.

7. Conclusion Overall, it is relatively apparent that both organisations have seen better days. We believe that both companies should focus on their own capabilities instead of trying to match each others. Also, they should use different approaches to change, as their previous attempts have proved unsuccessful. Philips needs to see this latest change as a genuine one, and needs to avoid considering it as just another new strategic direction. If it does this, and everyone is involved and committed, then we feel that they can return to the success they enjoyed last century. The prognosis is similar for Matsushita, as if its management engage in consultation with its workforce when undergoing its large-scale restructuring programme and carefully analyse the dynamic relationship between strategy and structure when doing so, its restructuring programme has every chance of succeeding. Thus, Matsushita may once again be able to return to the levels of success it was once used to.

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WORDS 3,832 Reference List Barney, J., Wright, M., Ketchen Jr, D.J. (2001). The Resource-Based View of the Firm: Ten Years after 1991. Journal of Management, vol. 27, pp.625-641. Bartlett, C.A., (2006). Philips versus Matsushita: A New Century, A New Round. Harvard Business School Press. HBS No. 399-102. Birkinshaw, J., Hood, N., Jonsson, S. (1998). "Building Firm-Specific Advantages in Mulitnational Companies", Strategic Management Journal, vol. 19, no. 3, pp 221-241. Burnes, B. (1996). No such thing as a one best way to manage organizational change. Management Decision. Vol. 34. No. 10. pp.11-18. Hall, D. & Saias, M.A. (1980). Strategy Follows Structure! Strategic Management Journal, vol. 1, no. 2, pp.149-163. Hill, C. (2005). International Business: Competing in the Global Marketplace, (5th ed). New York: McGraw-Hill. Johnson, G. (1992). Managing strategic change: strategy, culture and action. Long Range Planning, vol. 25, no. 1, pp.26-36. Miller, D. (1986). Configurations of Strategy and Structure: Towards a Synthesis. Strategic Management Journal, vol. 7, no. 3, pp.233-249. Mintzberg, H. (1990). The Design School: Reconsidering the Basic Premises of Strategic Management. Strategic Management Journal, vol.11, no.3 pp.171-195. Porter, M.E. (1980). Competitive Strategy. New York, N.Y.: Free Press.

Porter, M.E. (1990). The Competitive Advantage of Nations, London. Macmillan Business. Panasonics UK Homepage http://www.panasonic.co.uk/ (Viewed 25/04/2006). Philips UK Homepage http://www.philips.co.uk/ (Viewed 25/04/2006). Videotape Format War, Wikipedia. http://en.wikipedia.org/wiki/Videotape_format_war (Viewed 27/04/2006).

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Video 2000, Wikipedia. http://en.wikipedia.org/wiki/Video_2000 (Viewd 27/04/2006).

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