Established in 1891 in Eindhoven, the Netherlands, Koninklijke Philips NV is one of the worlds oldest multinational corporations. Philips began making lighting products and, over time, diversified into a range of businesses that included domestic appliances, consumer electronics, and health care products. From the beginning, the small Dutch domestic market created pressures for Philips to look to foreign markets for growth. Some argue that this is the case for most European companies and, thus, the many companies from Europe that are globally competitive by essentially being born global. By the start of World War II, Philips already had a global presence. During the war, the Netherlands was occupied by Germany. By necessity, the companys organizations in countries such as Australia, Brazil, Canada, the United Kingdom, and the United States gained considerable autonomy during this period. After the war, a structure based on strong national organizations remained in place. Each national organization was, in essence, a self-contained entity that was responsible for much of its own manufacturing, marketing, and sales. Most R&D activities, however, were centralized at Philips headquarters in Eindhoven. Reflecting this decentralized national structure, several product divisions were also created. Based in Eindhoven, the product divisions developed technologies and products, which were then made and sold by the different national organizations. During this period, the career track of most senior managers at Philips involved significant postings in various national organizations around the world (a career development practice often seen still in multinational corporations). For several decades, this organizational arrangement worked well. It allowed Philips to customize its product offerings, sales, and marketing efforts to the conditions that existed in different national markets. Later on, however, flaws were appearing in the approach. The decentralized, country-based structure involved significant duplication of activities around the world, particularly in manufacturing, which created an intrinsically high-cost 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 Japan, General Electric from the United States, and Samsung from South Korea. Each of these competitors gained market share by serving increasingly global markets from centralized production facilities where they could achieve greater scale economies and hence lower costs. Philips response was to try to tilt the balance of power in its structure away from national organizations and toward product divisions. International production centers were established under the direction of the product divisions. The national organizations, however, remained responsible for local marketing and sales, and they often maintained control over some local production facilities. One problem Philips faced in trying to change its structure was that most senior managers had come up through the national organizations. Consequently, they were loyal to them and tended to protect their autonomy. Despite several reorganization efforts, the national organizations remained a strong influence at Philips until not too long ago. Former Philips CEO, Cor Boonstra, famously described the companys organizational structure as a plate of spaghetti and asked how Philips could compete when the company had 350 subsidiaries around the world and significant duplication of manufacturing and marketing efforts across nations. Boonstra instituted a radical reorganization. He replaced the companys 21 product divisions with just 7 global business divisions, making them responsible for global product development, production, and marketing. The heads of the divisions reported directly to him, while the national organizations reported to the divisions. The national organizations remained responsible for local sales and local marketing efforts, but after this reorganization, they finally lost their historic sway on the company. Philips, however, continued to underperform its global rivals. By 2008, Gerard Kleisterlee, who succeeded Boonstra as CEO in 2001, decided Philips was stillPage 626 not sufficiently focused on global markets. He reorganized yet again, this time around with just three global divisions: 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 Houtens leadership, the goal is that Philips should strive to make the world healthier and more sustainable through innovation. The companys 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 companys lofty goal is admirable. It is guided by the understanding that there is a patient in the center of everything it does in the field of health care, and its focus is on creating the ideal experience 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 people achieve a healthier and better life. The three divisions are responsible for product strategy, 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.

Question 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?

Question 2 Why would Philips competitors have had a cost advantage as a result of their relatively more centralized production strategies?

Question 3 What strategies might Philips have used to encourage cooperation among managers in the different national organizations?

Question 4 Describe one method the company might have used to reduce the total amount of tax it had to pay to all of the various host countries where its 350 subsidiaries were located? Question 5 Why do you think it might make sense for some sales and marketing activities to remain located at the national organizations?