Philips Versus Matsushita: A New Century, A New Round

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plan aims to develop a broad comparison and then focus on the detailed changes in one of the companies in one time period, rather than covering the long sequence of changes in both superficially.

As an introduction, the instructor might remind students that almost from the creation of the industry, Philips emerged as one of the global leaders and eventually became the largest and most successful consumer electronics company in the world, beating out such capable players as GE, RCA, EMI, Grundig, Thomson, Sony, and Matsushita. Referring to the old saw, “If you don’t know where you’re going, any road will get you there,” the instructor might add the corollary, “If you don’t know where you’re coming from, you have no idea where you are on the map.”

Too many companies begin thinking about new strategic objectives and future organizational models as if these could be developed as zero-based options. But companies, like countries, are to a considerable extent, captives of their past: the historically determined distribution of assets and resources, the organizationally embedded competencies and relationships, and the culturally shaped management assumptions and beliefs. These are the embodiment of any company’s strategic position and organizational capability that represent both assets to be leveraged and impediments to be overcome. This introduction leads to the opening question:

1. How did Philips become the most successful company in its business during an era when scores of electrical engineering companies were being formed (GE, RCA, EMI, Thomson, Grundig, Matsushita, Hitachi, and Toshiba, to name just a few)? What did it do better than these others?

The objective with this opening question is to identify the distinctive competencies that Philips built, and the way in which these fit the strategic imperatives of the time. Essentially, Philips built two strong strategic competencies that were ideally suited to the environment in which they were developed. The first was a commitment to technological innovation that allowed the organization to retain its leading edge of product and production process innovation in this emerging industry. Equally important, the company developed a strong market-focused commercial bias (the legacy of Anton Philips), thereby ensuring that the innovations found access to the large and fast growing international marketplace. This strategy of national responsiveness was particularly appropriate in an era when barriers between national markets were high (cultural and logistics barriers in the 1920s, the addition of protectionism in the 1930s, and the occurrence of the World War in the 1940s). In such an environment, companies that built strategies and organizations focused on understanding and responding to these market differences were well rewarded. This analysis leads to the logical follow-up question:

• How was Philips able to embed and institutionalize these strategic advantages in its organization?

While other companies may have recognized the need for technological innovation and market responsiveness, in Philips, these early strategic priorities were embedded and institutionalized in an organization model that became a source of sustainable competitive advantage for the company. From its earliest days, Philips devoted a huge amount of its resources to creating an incredibly capable technology engine located in the strong, independent R&D laboratories. Gerard’s enduring influence ensured that rising worldwide earnings were committed to a research program that ensured R&D could generate a continuing flow of leading-edge products and technologies.

R&D’s technological capability provided the raw material to be sold or adapted by the national organizations (NOs)—Philips’ other organizationally-embedded source of competitive advantage. The decentralized federation of fully integrated, self-sufficient NOs was ideally structured to be sensitive and responsive to local market needs. The NOs’ growing independence created an entrepreneurial environment that was reinforced by the Philips management philosophy that made these NOs its primary profit centers and gave them a good deal of strategic freedom. In short, management ensured that these independent national companies had both the resources and the incentive to create entrepreneurial initiatives in response to local market needs.

Maintaining the balance between the R&D-driven technical capability and the NO-dominated commercial expertise was a philosophy of “two-headed management” that, on one hand, created a tension that drove creativity and, on the other, built a partnership that ensured cooperation. This technical/commercial integration seemed to work particularly effectively within the NOs. (This can be recorded on the first part of a center board—Exhibit TN-1.)

The next follow-up question could be:

• If these were the strategic and organizational capabilities, what impediments and disabilities did they bring with them?

While this organization structure and the strategic assumptions it supported were in tune with the industry environment in the immediate pre- and post-war years, by the 1970s it was clear that Philips’ strategic and organizational model was under strain. Most obviously, Philips’ lack of cost competitiveness was closely tied to the organization’s inability to integrate its widely-distributed development and manufacturing capabilities across national organizations. This organizational disability was in turn due to the lack of power in the product divisions (PDs), the weak third leg of the organizational stool dominated by the NOs and the CRL. Equally problematic was Philips’ chronic inability to get its advanced technologies to market. Brilliant innovations by R&D were poorly linked to the product development activities which, in turn, designed new products with little consideration of market needs or manufacturability.

In summary, therefore, the company’s resources were spread out across three poorly linked units: a research capability that was controlled by an isolated technological R&D elite; a development resource theoretically in the hands of the PDs, but also more often under the control of R&D and/or the NOs; a manufacturing asset built by the NOs, but supposedly the responsibility of the PDs; and a marketing capability firmly held by NOs, but over which the PDs wanted some coordinative capability. Not only did this dispersion of assets and resources cause difficulty in getting new products to market, it also undermined any opportunity to achieve scale economies either in product development or manufacturing. This was particularly true in manufacturing