Case Discussion Questions 1. Why did Philips' organizational structure make sense early on in its existence? Why did this structure start to create problems for the company later on? 2. What was Philips trying to achieve by tilting the balance of power in its structure away from national organizations and toward the product divisions? Why was this hard to achieve? 3. What was the point of the organizational changes made by Cor Boonstra? What was he trying to achieve? Do you agree with Frans van Houten's decision to keep the same three divisions when he became CEO? 4. Philips reorganized multiple times, from 21 divisions to 9 divisions and subsequently just 3 divisions. Why do you think it did this? What is it trying to achieve? Can a company reorganize its structure this often and maintain competitiveness? Philips' Global Restructuring Established in 1891 in Eindhoven, the Netherlands, Koninklijke Philips NV is one of the world's oldest multi- national corporations. Philips began making lighting products and, over time, diversified into a range of busi- nesses that included domestic appliances, consumer elec tronics, and health care products. From the beginning. structure. When trade barriers were high, this did not matter so much, but the significance of its effect became important when trade barriers were starting to fall and more fierce competitors came in to the marketplace These competitors included Sony and Matsushita from the small Dutch domestic market created pressures for Japan, General Electric from the United States, and Sam- Philips to look to foreign markets for growth. Some argue sung from South Korea. Each of these competitors gained that this is the case for most European companies and, market share by serving increasingly global markets from thus, the many companies from Europe that are globally centralized production facilities where they could achieve competitive by essentially being "born global." greater scale economies and hence lower costs. By the start of World War II. Philips already had a Philips' response was to try to tilt the balance of power global presence. During the war, the Netherlands was oc- in its structure away from national organizations and to cupied by Germany. By necessity, the company's organi- ward product divisions. International production centers were established under the direction of the product divi zations in countries such as Australia, Brazil, Canada, the United Kingdom, and the United States gained consider- sions. The national organizations, however, remained re sponsible for local marketing and sales, and they often able autonomy during this period. After the war, a struc maintained control over some local production facilities. ture based on strong national organizations remained in One problem Philips faced in trying to change its struc- place. Each national organization was, in essence, a self- ture was that most senior managers had come up through contained entity that was responsible for much of its own the national organizations. Consequently, they were loyal manufacturing, marketing, and sales. to them and tended to protect their autonomy Most R&D activities, however, were centralized at Despite several reorganization efforts, the national or Philips' headquarters in Eindhoven. Reflecting this de ganizations remained a strong influence at Philips until centralized national structure, several product divisions not too long ago. Former Philips CEO, Cor Boonstra, fa- were also created. Based in Eindhoven, the product divi mously described the company's organizational structure sions developed technologies and products, which were as a "plate of spaghetti" and asked how Philips could then made and sold by the different national organiza compete when the company had 350 subsidiaries around tions. During this period, the career track of most senior the world and significant duplication of manufacturing managers at Philips involved significant postings in vari and marketing efforts across nations. Boonstra instituted ous national organizations around the world (a career de a radical reorganization. He replaced the company's 21 velopment practice often seen still in multinational product divisions with just 7 global business divisions. corporations) making them responsible for global product development, For several decades, this organizational arrangement production, and marketing. The heads of the divisions re- worked well. It allowed Philips to customize its product ported directly to him, while the national organizations reported to the divisions. The national organizations re offerings, sales, and marketing efforts to the conditions mained responsible for local sales and local marketing ef that existed in different national markets. Later on, how- forts, but after this reorganization, they finally lost their ever, flaws were appearing in the approach. The decen- historic sway on the company. tralized, country-based structure involved significant Philips, however, continued to underperform its duplication of activities around the world, particularly in global rivals. By 2008, Gerard Kleisterlee, who succeeded manufacturing, which created an intrinsically high-cost Part 7 Cases 626 Boonstra as CEO in 2001, decided Philips was still not sufficiently focused on global markets. He reorganized yet again, this time around with just three global divi- sions: electronics, health care, and lighting. These are also the three divisions that are in place under the most recent CEO, Frans van Houten, who became the CEO of Philips in 2011. Under Houten's leadership, the goal is that Philips should strive to make the world healthier and more sustainable through innovation. The compa- ny's goal is to improve the lives of 3 billion people a year by 2025 (the world has about 7.4 billion people). To achieve the goal of improving the lives of 3 billion people, the slogan for the health care division is "creating the future of health care." Philips is a global leader in the health care domain and the company's lofty goal is admi- rable. It is guided by the understanding that there is a pa- tient in the center of everything it does in the field of health care, and its focus is on creating the ideal experi- ence for all patients around the world, young and old. Philips Lighting is about "enhancing lives with light" by delivering innovative and energy-efficient solutions. The Consumer Lifestyle division is dedicated to "helping peo- ple achieve a healthier and better life." The three divisions are responsible for product strat- egy, global marketing, and shifting of production to low- cost locations (or outsourcing production). The divisions also took over some sales responsibilities, particularly dealing with global retail chains such as Walmart, Tesco, and Carrefour. To accommodate national differences, however, some sales and marketing activities remained located at the national organizations