Case Study: added imageQuestion: Why did Phillips’ organization structure make sense in the 1950s and 1970s but create problems for the company in the 1980s? Established in 1891 in Holland, Phillips is one of the world's oldest multinationals. The company began makinglighting products and over time diversified into a range of businesses that included domestic appliances, consumerelectronics, and healthcare products. From the beginning, Holland's small domestic market created pressures for Philips tolook to foreign markets for growth. By the start of World War Philips already had a global presence. During the war,Holland was occupied by Germany. By necessity, the company's national organizations in countries such as Britain,Australia, Brazil, Canada, 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 organizationwas a self-contained entity responsible for much of its own manufacturing, marketing, and sales. Most R&D activities,however, were centralized at Philips' headquarters in Eindhoven, Holland. Reflecting this, several product divisions werecreated. Based in Eindhoven, the product divisions developed technologies and products that were made and sold bydifferent national organizations. During this period, the career track of most senior managers at Philips involvedsignificant postings in various national organizations around the world.For several decades, this organizational arrangement worked well. It allowed Philips to customize its productofferings, sales, and marketing efforts to the conditions in different national markets. By the 1970s, however, flaws wereappearing in the approach. The structure involved significant duplication of activities around the world, particularly inmanufacturing, which created an intrinsically high-cost structure. When trade barriers were high, this did not matter somuch, but by the 1970s, trade barriers were starting to fall, and competitors, including Sony and Matsushita from Japan,General Electric from the United States, and Samsung from Korea, were gaining market share by serving increasinglyglobal markets from centralized production facilities where they could achieve greater scale economies and hence lowercosts.Philips' response was to tilt the power balance in its structure away from national organizations and towardproduct divisions. International production centers were established under the direction of the product divisions. Thenational organizations, however, remained responsible for local marketing and sales, and they often maintained controlover some local production facilities. One problem Philips faced in trying to change its structure was that most seniormanagers had come up through national organizations and were loyal to them and tended to protect their autonomy.Despite several reorganization efforts, the national organizations remained a strong influence at Philips until the1990s. In the mid-1990s, Cor Boonstra became CEO. He famously described the company's organization structure as a"plate of spaghetti" and asked how Philips could compete with 350 companies around the world and significantduplication of manufacturing and marketing efforts across nations. Boonstra instituted a radical reorganization. Hereplaced the company's 21 product divisions with just seven global business divisions, making them responsible for globalproduct development, production, and marketing. The heads of the divisions reported directly to him, while the nationalorganizations reported to the divisions. The national organizations remained responsible for local sales and marketingefforts, but after this reorganization, they finally lost their historic sway on the company.Philips, however, continued to underperform its global rivals. By 2008, Kleisterless, who succeeded Boonstra asCEO in 2001, decided Philips was still not sufficiently focused on global markets. He reorganized yet again, this timearound just three global divisions: health care, lighting, and consumer lifestyle (including the company's electronicsbusinesses). The divisions were responsible for product strategy, global marketing, and shifting production to low-costlocations (or outsourcing production). The divisions also took over some sales responsibilities, particularly dealing withglobal retail chains such as Walmart, Tesco, and Carrefour. However, some sales and marketing activities remained at thenational organizations to accommodate national differences.In the second decade of the twenty-first century, Philips continued to evolve. It sold many of its electronicsbusinesses, and in 2016, it divested its original lighting business. The remaining activities of the company were now muchmore focused on the global healthcare area, which has proved to be a fast-growing and profitable business for Philips. Itcontinues to operate with global product divisions, with national and regional subsidiaries reporting to the productdivisions, and is primarily responsible for local sales, marketing, regulatory approval of medical equipment, and in somecases, product development.

Phillips is among the world's earliest multinational companies. Since its founding in 1891, the…

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Question: Why did Phillips’ organization structure make sense in the 1950s and 1970s but create problems for the company in the 1980s?

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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