Global view and International Business
An International Business Strategy case study on Philips and Matsushita (Panasonic)
Introduction
“Change before you have to” said Jack Welch, the legendary former CEO (1981-2001) of General Electronics who steered the huge boat of GE to pass many dangerous “submerged reef” in the progress of internationalization. For sure, volatile and constantly changing global markets throw a big obstacle to all the companies that want to go abroad, and proactive actions are always helpful in this situation. However, success can hardly be replicated, especially in electronics industry, with increasingly intensive competitions between GE, Siemens, Philips and Panasonics, as well as the emerging challenges from Artificial Intelligence (AI) and Internet of Things (IoT). This essay will discuss the case of Philips and Matsushita from the perspective of synthesis between organizational structure, and Internationalization strategies attached to it.
1. Organizational Structure
(1) Evolutionary Routes - International Division to Global Matrix
Philips – Area Division
Operating decisions are decentralized to functionally self-contained and autonomous country subsidiaries. Headquarter usually holds financial control over subsidiaries. It is reflected on the booming of National Organizations (NOs) during postwar period to satisfy different customers’ demands in different countries, and in the following years, NOs grew even more powerful than headquarter, gradually fragmenting and cutting the coordination between headquarter and between other NOs. Nonetheless, it enhanced the internal connections within NOs, specializing innovation and R&D of products to fulfil local responsiveness, the first color TV in Canada, teletext TV in UK and dominant VCR later are achievements of this structure.
However, fragmentation of structure caused cost of control from International Concern Council (ICCs) bumped up during decades, leading a huge loss on reconciling conflict - vague boundaries of responsibilities between NOs and PDs. Besides, the transfer of core competences between subsidiaries was difficult, especially when cost reduction became an obstacle. This problem was emerged when Philips moved to global matrix or even network structure under sever competition from Japanese companies.
Matsushita - Worldwide Product Division
Heavily relied on PDs, it requires “absolute” control and coordination from headquarter, which was reflected on 700 Japanese expatriates managers in each subsidiary and on separating 36 products divisions with METC, which is a combination of all other supportive functions.
This structure intrinsically reduce the possibility of local responsiveness since each PD is too separated to adapt to local specific needs, and it ignores the communication of knowledge between Japanese managers and local employees, causing a cultural gap that local managers felt they were “ignored”. Nevertheless, it did transfer the core competences of Matsushita, cost competences, across all its value creation activities in subsidiaries, given its benefit of experience curve economies with a prosperous profit around 1000 billion Yens compared to loss of its competitor, Philips, during the end of 20th century.
Both companies - Towards global matrix and Network structure
From 1960s when Philips started its reorganization to the economic bubble burst of Japan around 1992, both companies realized the necessity to move from their original structure to global matrix, and even “tilting the matrix” further to Network structure. This indicates that global matrix is only a transition and temporary stage in two companies’ long-term plan. Given that global matrix’s dual decision-making responsibility is usually “stuck in the middle” clumsy and bureaucratic in the reality, causing conflict and inefficiency from dual managers. Network structure, including knowledge networks and share of culture and vision, is the right choice for both companies. The transnational strategy that built on global matrix can be neither easily maintained in the volatile global market. Therefore, both companies in the case have been reinventing themselves.
(2) “Fluctuant” Pathway - Towards Network Structure
Along the global value chain, “portfolio” type business models are becoming increasingly popular, such as the “life style provider” concept from Panasonic or the “happiness maker” from Disney. Even more, Google and Alibaba such Internet companies can be hardly defined as some specific type of industry. Therefore, what the case provide is not only strict on the history, but also shed light on the future of international business, transnationality or even post transnationality for non-boundary companies across a wide range of industries. Physical boarders will not even become a factor to be considered by international business players. In this case, Philips and Matsushita struggled to “tile the matrix” to transform towards the future Network structure and transnationalities.
International HR practices
Ethnocentric / Polycentric to Geocentric. The future network structure needs fresh “foreign” talents to feed its growth. For the local-power technical plus commercial managers in Philips and for the ethnocentric Japanese expatriates of Matsushita, they both tried hard to reduce employees in the “system” and increase innovative talents out of the “system”. Philips relocated its HQ from 100-year-old Eindhoven to more thriving labour markets in 2000s, Matsushita also abandoned its “army of expatriates” strategy and first time to lay off its lifetime employees to open to global talents in 2000s. Both companies increased international turnover of talents and built a network of both local and foreign labors.
Knowledge network of people, especially for managers, employees and customers are the foundation of network structure within an organization. Building the knowledge network means accelerate the floating of knowledge within organization. Philips reduced the number of product divisions to make each unit more comprehensive for innovation to flow, and reconciled the conflicted responsibilities between NOs and PDs managers through control mechanism. Matsushita engaged local entrepreneurs to stimulate innovations in the community and to create cross-unit competitions for better knowledge interchanging, and expending its centric expatriate network by absorbing more external talents.
International customers
Network also means to include the downstream customers. During the 2000s in Kleisterlee’s management, marketing strategy ranked before product strategy. Philips approached to customers by rebranding the business as “lifestyle company”. Moreover, relocating the headquarter in Eindhoven brought more flexible and more strong connection between upstream suppliers and downstream customers. Matsushita, given its existing inflexible and hierarchy structure, involved local entrepreneurs and engaged local communities into innovative competitions to lay down its layers and get closer to people network.
However, both companies need to understand the risk in network structure, which is extremely vulnerable to global risks such as natural disasters, global financial crisis, and even terrorism. Cost of control is another problem that network structure has to face to when the flexible structure need a strong control mechanism to combine together. They indicate urgent needs in an united culture and vision.
Culture and People
Organizational culture and people are the booster and center of network structure. Different from previous culture, which only care about people within the companies – employees, managers and shareholders, the network culture must include wider range of people including customers, and other stakeholders. Matsushita initiated the written “Creed and Philosophy” which needs to be updated and enhanced regularly. For Philips, it needs to draft down the culture it has like Matsushita did and find a unique position for itself in diverse culture streams.
Synthesize transnational strategy and network structure
Restructuring follows strategies, but strategies are embedded in the structure. Both companies reinvent almost entire companies upside down, the key is to redefine the core international competences. In terms of the two companies’ history, coordination between strategy and structure itself can be a strong advantage in the dynamic business environment. The period between each stage of internationalization became shorter and shorter as business developed. ID, WD, AD or GM structures had existed a longer time than NS, however, none of them are “once for all”. For network structure, even though it may take only months to build, yet it needs to be revolutionized regularly.
Philips and Matsushita dynamically match them by providing customers with “lifestyle” services rather than only products and reorganize the business unites into portfolios such as health, wellbeing and technology. When generalizing the business scope, both companies wider their competencies instead of narrowing them down as they did decades age, to open to more opportunities in modern and future business world.
Even though the process of synthesis cased huge financial difficulties such as decreasing profit or loss, or strong resistance and oppositions from employees and managers, yet both companies struggled to overcome a “bottleneck period” and are on their way to “unfreezing” the organization, when holding the right direction and showing determination in the restructuring
2. Internationalization Strategy
Revolution of Internationalization strategies is another important concept. As Jack Welch said, internationalization strategies are always changing, most of which are derived from either the internal technology improvement on product, or the external trend on the market.
Matsushita – Global standardization strategy
Japanese headquarter has absolute control on all products’ core components and subassemblies, leading to interdependent subsidiaries with standardized but inflexible product lines. However, the pros are that market entry time of new products is faster than other competitors, with acquisition and WOS as entry modes, and the industry standard can be decided if one company has dominant position in the market. Between 1960s and 1970s, the dominations of VCR market under the “VHS” format of Matsushita is the great example of global standardization strategy. Besides, the standardization can also be reflected on the “product division domination” over global operations. The separation of Matsushita Electric Trading Co. (METC) and the 36 Product divisions during the 1980s can be seen as the separation of products and other “supportive” functions, causing the products hardly adapt to local needs / responsiveness without supportive functions in the globe.
Philips – Localization strategy
Differently, Philips adapted localization strategy first, spreading its hundreds of product lines abroad to strengthen its local production facilities. During Postwar period the National Organizations (NOs) as local “mini business units” combined technical & commercial managers within them to make sure that local responsiveness is maximized, as well as utilized joint venture entry mode and strategic alliance with GE. However, subsidiaries are gaining more and more local control on products and R&D than headquarter, further enhanced the degree of decentralization.
Both company – Towards the edge of “Transnationality”
In the late 1990s and 2000s, when price advantage collapsed (Japanese economic bubble burst) and with booming specific demands of customers, Matsushita approached to drove to the transnational strategy through internal competitions between different product division in order to stimulate local innovations and flexible manufacturing according to the local needs. At the same time, losing control of local NOs and weak financial connections between NOs and headquarter made consecutive losses under the circumstances of rising cost and sever competitions. This make Philips to move forward to cost reduction by reducing the number of NOs and by redundancy.
Physical boundaries between nations, industries and technologies becomes more and more vague with volatile market and sever competitions. For simultaneously combine experience curve economies and local responsiveness, both companies at the beginning of the 21st century attempted to flat their hierarchy structure and flexible their manufacturing, chasing for “transnationality”. They reduced the number of business units from hundreds to the final 3 portfolios, revolutionizing the concept of business towards customers. Motivations for internationalization for both companies are similar, cost driven and market driven: Expending global customers market post war, chasing for labors in low-wage countries, accessing to global financial market and utilizing the global convenient supply chain distribution channels.
Moreover, transnationality needs companies to transfer their core competences, closely monitor trend of the market, and enhance the dual responsibilities - from headquarter to subsidiaries and from subsidiaries to headquarter. The benefit of transnationality can be experience curve economies, global learning and global competitiveness.
3. Updated Panasonic’s Core Competences
Clearly, Panasonic, as the new version of Matsushita, has approaching to transnational strategy in a brand new way. First, by changing name to Panasonic, the company rebuild its brand image to adapt to global market and to share its value and vision to the public. Second, by shifting its core competences from household electronics to the new energy batteries and automotive industry, again decentralizing its existing structure and producing capabilities in order to chase after the trend in global market instead of doing what it is good at. Third, building strategic alliances (in this case it is more likely to be an exclusive supply contract – “strategic partnership”) with Tesla for getting on the boat to explore the “New World” together and to hedge risk. Panasonic sees Tesla as “a window” which open to wide international clients. Last, utilizing joint venture and acquisition entry modes to open itself to wider global clients.
From the perspective of network structure, it can be seen that Panasonic is expending its network to reach customers, market and strategic allies in an informal but integrated mechanism, especially knowledge network can be expended when learning from Tesla’s automotive expertise.
Moreover, from the point of strategy, transnationality of Panasonic has never been stronger since then to push Panasonic to the global stage by strategic partnership and acquisitions. This action paves long term development path of Panasonic even though there may appear short term loss as explained in the case - the operating margin decrease to 5%. Giving up some of the existing core competences and heading for the new automotive sector push Panasonic to move forward to the far end of transnationality. And control mechanism attached to it is more likely to be the culture control.
For decades, Panasonics has been trying to restructuring based on the naive assumption that its core competencies will never change, however in the real world, it is never the case. For the first time that Panasonic made its mind clear to really restructured its business. Therefore, according to the case, the restructuring seems to start and is expected to be continued in the near future. Moreover, be willing to “hug” management know-how on new trends in technology such as AI and IoT has also leveraged Panasonic’ new competitive edge.
