Philips NV is a Dutch company founded in 1891 and is one of the worlds largest electronics enterprises.

There are four main divisions: lighting, consumer electronics, professional products, and components. Their main competitors are Matsushila, General Electric, Sony, and Siemens. In the 1980s the company had several hundred subsidiaries in 60 countries as well as operating manufacturing plants in more than 40 countries. They employed more than 300,000 people and manufactured thousands of different products. Despite their success however, in the 1990s they were in deep trouble. They lost $2.2 billion on revenues of $28 billion. The major reason for their downfall is their inability to adapt to the changing competitive conditions. This case study will go into further detail as to why they began to decline. Philipss environment changed in the 1960s and 1970s due to changes in trade and competitive aspects in the global market. The first change was removal of trade barriers and new agreement bodies, like GATT and EC, facilitated greater competitiveness among old and new players in the market. Meanwhile, companies from Japan emerged as world-class players in Philipss home turfs with companies like Matsushita, which manufactured at home but exported its products all over the globe, taking benefit of the economies of scale. Furthermore R&D costs increased dramatically while product lifecycles reduced thus reducing the time a company needed to recover its investment. To help make new products successful, mass production was needed to bring in economies of scale but shorter product life cycles limited this possibility as well. The implication of these changes was that previously Philips was more concentrated towards its local market through its national organizations, but new global competitors with global strategies changed the market dynamics. For Philips the environment was rather

simple and stable but upon entry of new players the environment became more complex and unstable.

There are numerous reasons for Philips low profits in 1970s. Even after massive level of changes in environment of global market with new changes being brought in by competitors, Philips still lacked the strategy and structure that suited its environment best. Philips, which had national organizations all over the world, still lacked behind in a global market that were more interested in maintaining their independence from Eindhoven. Philips had a matrix structure, which included national organizations and product divisions. This caused a clear separation of many vital aspects from the Eindhoven, which played important role in the new global markets. Such as day to day operation and strategy implementation were performed by national organization and R&D was product division responsibility while product strategy was made through consultation between product division and national organizations. There was also dual leadership present within its national organization. Furthermore this kind of separation caused severe problems for Philips when its own U.S national organization rejected its own product design V2000 for VCR format and started using VHS Matsushita format. Due to this kind of biased and dominance of national organization there was problem of duplication in its manufacturing facilities leading to lack in global strategy. This caused higher operating costs and lower technological standards against Matsushita and Sony standards. Furthermore marketing was carried by national organization while R&D was

carried by Eindhoven (product division). These entire problems within its structure and culture caused Philips to get lowering profits because neither its structure nor its culture support the environment Philips was operating in. The reason these problems persisted in 1980s because all changes brought on during were all superficial and didnt help remove the core problem within its dysfunction structure. Even though there were some improvement as in selling poor performing divisions, removal of dual leadership and creation of core division. But all these failed to correct the main problems of coordination and communication among its product division or its national organizations and to readjust its top-heavy bureaucracy in Eindhoven. The 1970s and 80s period was really tough for companies in the global electronic industry because the success can just belong to companies which have ability to adapt to the competitive condition and Philips was not one of those. Philips had serious internal organization problems. The first problem was two main managers of the company did not support each other well, both technology and sale department. It leaded to the situation that focusing too much on how many products they can sell without keeping up-to-date technology or improving it. The second problem was Philips had many too many manufactories in different geographic locations. That was the reason why they could not deal with all the different trade barriers which gave them more difficulties in competing with other companies. So the first thing Philips need to make a change to survive is solving the internal problem, every single departments in the company have to cooperate, helping, exchanging the information in order to earn more satisfaction from the customers. The second essential change should be cutting cost by decreasing the number

of manufactories and placing them in fewer locations, maximizing the efficiency by reducing workforce and improving technology. By that method, they will not have to spend too much attention on managing, take advantage of the low-cost differentiation strategy. The inertia within Philips stems from power struggle and conflict caused by the change, differences in functional orientation, organizational structure and culture. First of all, although the change is necessary due to the environmental change, it is extremely costly to change the organizational structure. In additional, the resistance to change is cause by the power conflict between national organizations and product divisions, in which the change will tilt power within Philips away from the national organizations toward the product divisions. Secondly, the difference in functional orientation can be seen in the informal competition between technical and sales managers in Philips when they tried to outperform each other. This inside competition may benefits the organization at first, but when there is a change needed in the organization; this can be a resistance because one side will see issues and problems primarily from their own viewpoint. Third, despite of many efforts from different CEO, the real power in Philips still lay with the Eindhoven bureaucracy and their allies in the national organizations. (page 500) Philips is a Dutch company and most of management board members come up from the Eindhoven bureaucracy. National organizations of Philips are also very powerful and have strong autonomy. These factors are really difficult to be changed. Philips can overcome its inertia by taking step by step changes in the company such as remove the duplication across national organizations, especially in manufacturing area, move away from dual leadership arrangement (technical and sale) to a single general

management arrangement. Philips also needs to cut its work force sharply to reduce cost and simplify its organizational structure. All of these actions need to be taken slowly, step by step, with high determination to help Philips overcome the inertia and be able to compete in the changing environment. Philips has faced many changes throughout such as environmental, organizational and strategic change. Despite these changes, Philips competitive position continued to decline. Many argued that while new management had changed the organizational chart, much of this change was superficial. Alarmed by a 1989 loss of 1.06 billion, the board forced de Klugt to resign from CEO in May 1990. He was replaced by Jan Timmer. Timmer quickly announced that he would cut Phillips worldwide work force by 10,000 to 283,000 and launch a $1.4 billion restructuring plan. He eventually sold off Phillips microcomputer division which was losing $1million per day. He also planned to reduce costs by $1.2 billion by cutting the workforce by 55,000. In addition, he entered into a strategic alliance with Matsushita, a Japanese electronic giant, to manufacture and market the Digital Compact Cassette. Phililps planned for the DCC to be the remaking of the company.