Consumer Electronics Value Chain by vpq48527

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									                           VS.

A new century, a new round

                    MBA 290G
                 November 14, 2007


                       Team One
Sohail Gondal, Vince Law, Que Anh Nguyen, Jason Stauth
                 Koninklijke Philips Electronics N.V.,
                             Netherlands
•     Consumer Electronics, Lighting, Medical Systems,
      and Domestic Appliances and Personal Care
•     In 2006 $39.6 billion in sales, 60 countries
•     Bordered by the North Sea to the north and west,                                   Germany
      Belgium to the south, and Germany to the east.                           Belgium




      1892                  1918-1930s             1963            1982
    Light bulb             Vacuum tubes,       Audio cassette   Compact Disc
     factory             radios, x-ray tubes        tape         with Sony




             1912                   1940                  1970’s
         Incorporation      Moved management           Adoption of             1971-present
                            & research to US and     Matshusita’s VHS    Reorganization of company
                                  England              over V2000               - 7 CEOs -
                                                      videocassette
                 Matsushita Electric Industrial Co.,
                              Japan
   •     Brands and divisions:
          – Panasonic, National, Nais, Quasar, Technics, Ramsa, Rasonic
   •     In 2006, $79 billion in sales
   •     Ranked the 59th company in the world in 2007 by the Forbes Global 500



                                                 1974
   1918                   1940’s              Purchased          1989                       2006
Duplex lamp      Light fixtures, motors,      Quasar from    Japanese stock          No more analog TVs.
  sockets            electric irons            Motorola       market crash           Concentrate on digital.




             1927               1960’s                   1979                        2004
         Bicycle lamp       Television sets            Expanded               Panasonic as primary
       “National” brand   “Panasonic” brand           “Panasonic”                 global brand
                                                    brand to Europe
 Comparison of the starting positions of the
 two organizations
                        Philips           Matsushita




   Structure            Matrix            Hierarchical


Decision making     Decentralized         Centralized


   Staffing         Key staff local     Key staff ex-pats


   Strategy       Technical innovator    Fast follower
   2006 Sales by product line and region
                                                              Sales by Region
                                         90.0
                                         80.0                               Europe
                                         70.0                               North and South America
                            Sales ($B)
                                         60.0                               Japan, Asia
                                         50.0
                                         40.0
                                         30.0
                                         20.0
                                         10.0
                                          0.0
                                                      Matsushita                          Philips



     Matsushita Product Sales by Category                                             Philips Product Sales by Category
                  Other                                                                                                          Medical
                                                                                                       Other
           JVC                                               AVC Networks                                                        Systems
                                                                                     Lighting

MEW and
PanaHome
                                                                                                                                       DAP
        Components                                Home
        and Devices                             Appliances                                              CE

   AVC=audio, video & communications; MEW=Matsushita electric works             CE=consumer electronics; DAP=domestic appliances and personal care
Matsushita overtook Philips in the mid 80’s
and built a formidable lead
          90
          80
          70
          60
          50
          40
          30
          20
          10
           0
                2000   1995   1990   1985   1980   1975   1970
   Philips      35.3    40     33    21.8    17    10     4.2
   Matsushita   68.9   78.1   37.8   24.9   13.7   4.5    2.6
  Focus on growth in different industry sectors

              Philips: Growth by Sector                                               Matsushita: Growth by Sector

100%                                                                    100%                                     Other
                                                                         90%
80%                                                                      80%                                     JVC
                                                      Other              70%
60%                                                                      60%                                     MEW and PanaHome
                                                      Lighting
                                                                         50%
                                                      CE
40%                                                                      40%                                     Components and
                                                      DAP                                                        Devices
                                                                         30%
                                                      Medical Systems    20%                                     Home Appliances
20%
                                                                         10%
                                                                          0%                                     AVC Networks
 0%
                                                                               2005         2006       2007
       2004         2005        2006
                                   Philips Semi Div




                                                                                                   Semiconductor
                                                                                                   Division:
                                                                                                   • 15% total sales
                                                                                                   • 17% EBIT
Factor conditions


                       Philips                       Matsushita


             •   Good supply of Dutch       •   Good supply of Japanese
Skilled          engineers / sales talent       engineering and
resources    •   Tap into EU / US talent
                                                commercial talent
                                            •   Value-added per hour
                                                68% higher than EU


             •   Proximity to Germany       •   Proximity to low-wage
Geographic       caused operations to be        Asian countries for
Location         moved abroad during            manufacturing
                 WW II
Demand conditions


                       Philips                         Matsushita


           •   Dutch market too small         •   Japanese consumers
Market         to absorb mass                     represents a significant
               production of                      market
size           electronics                         – Late focus on export
                – Expansion to foreign               market (1950’s)
                  markets (1899)

           •   Global Ops provided access     •   Japanese customers are
Market         to local trends and needs in       highly demanding of
maturity       foreign markets                    quality and innovation in
           •   Products focused on local          electronics
               markets
Related & support industries


                         Philips                     Matsushita


             •   Locally weak, but strong   •   Strong presence of
Related          EU (Siemens) and US            quality competitors
industries       (GE) competitors


             •   Locally weak, but strong   •   Strong presence of
Support
                 EU / US value chain            players across
industries                                      electronics value chain
                                            •   Approximately 120
                                                electronics company in
                                                Japan
Firm strategy, structure & rivalry

                         Philips                         Matsushita

            •   Stay focused on core           •   Diversified product line
                products while competitors     •   Focus on operational
Strategy        were diversifying                  excellence
            •   Emphasized innovations &       •   Fast-to-market, “Manishita”
                technological prowess

            •   Decentralized global           •   Highly centralized
                operations, strong NOs         •   Small business environment
Structure   •   Joint technical and                with divisional structure
                commercial leadership          •   “One-product-one-division”

            •   In house competition between   •   In house competition
                technical and commercial           between divisions
Rivalry         functions                      •   Fierce competition from
            •   No national rivals                 Japanese electronics firms:
                                                   JVC, Sony, Hitachi
How Philips’ strengths and core
competencies became its weaknesses


   Ability to adapt to                    No economy of
     local market                            scale in
       conditions                         manufacturing

                                         Fiefdoms often
    Strong National
                                         working against
     Organizations
                                           each other
                         Common Market
   Employee centric                      Organization with
       values                                “lifers”

                                            Inability to
    Focus on R&D /
                                          commercialize
  technical innovation
                                            innovation
How Matsushitas’ strengths and core
competencies became its weaknesses

Core competencies                        Core incompetencies
      Broad line of
                                            Bloated operations &
   products (5000 vs.
                                              excess capacity
       Sony’s 80)

  Centralized structure                       Developing local
        in Japan                                 footprint
                             1989
                          Market Crash
    Strong culture at                         Over-reliance on
         centre                             centre for innovation

                                                   Weak
 Fast follower strategy                       entrepreneurial /
                                              innovation ability
A comparison of the two organizations attempts
to shift their strategies




                               centralization
                               Degree of
    Matsushita                                      Philips
•   1982 - Operational                          •    1970’s - Shift to IPC’s / Tilting
    Localization                                     matrix to PD’s


•   1986 - “Matsushita Bank”                    •    1987 - 4 core LOBs / 14 PD’s




                                   High
                                                     to 4 global divisions
•   1999 - “Simple, small,
    speedy and strategic”                       •    1990 - Bet on 15 core
                                                     multimedia technologies

                                                •    2001 - Eliminate “management
                                                     discount” in stock price
                                   Low
While Philips is amongst the biggest R&D
spenders in the industry…
  The worlds top ten R&D investors in electronic and electrical equipment


    3793      2884                                                       2003 R&D spend (£m)



                       2268
                                1983
                                        1595
                                                 1223
                                                          726      659         560        437




           Source: UK Department of Trade & Industry – R&D Scoreboard
… it still seems unable to translate innovation
into commercial success.
    The top ten companies in electronics and electrical engineering
     120,5



                                                                  Total sales (in billions of euros)

               79,6                                               Sales in electrical capital goods
                        74,2                                      (in billions of euros)
               75,6               66,9       64,2

                         63,1      64,9                  57,3     56,8

                                                                                46,7         43,5

                                                                                                     37,1
                                              38,5                                            30,4
                                                          28,6                                         36,3

      26,5                                                                       21,0
                                                                    17,1




    GE       IBM      Siemens   Hewlett-   Hitachi   Matsushita   Sony      Samsung        Toshiba   NEC
    (USA)    (USA)    (D)       Packard    (JPN)     (JPN)        (JPN)     Electronics    (JPN)     (JPN)
                                (USA)                                       (KOR)
Despite the attractiveness of foreign markets
for electronics products…
    The top ten world markets for electronic and electrical equipment
     779



     32.3   % share of world market




            341


            14.1
                   166     149
                                      94    88
                    6.9     6.2                     64    63     55
                                      3.9                                37
                                            3.6
                                                    2.7   2.6    2.3     1.5


                            volumes in € billions         Source: Siemens AG, Nov 2003
… Matsushita still generates the predominant
amount of its sales from Asia.
                             Sales by geographic segment

                Philips                                    Matsushita

                           Domestic                Asia &
                             4%                    Others
                                                    21%

                                       US
                                      28%
 Other
 44%
                                             Europe
                                              13%

                                                                                   Domestic
                                                                                     51%
                            Europe          North & Soth
             China           18%              America
              6%                                15%




  Source: 2006 Financial Statements                   Source: 2007 Financial Statements
While lagging in sales, Philips has managed
higher net income
      100

        80

        60                                                  Possible reasons for Net
        40                                                  Income differential
        20
                                                        •   Philips has disposed of many
         0
              2002   2003   2004   2005   2006   2007       businesses that has resulted in net
 Matsushita    0     66.2   66.9   77.9   79.5   81.4       income being supplemented by
 Philips      38.9   34.8   36.1   37.4   39.2              income from discontinued
                                                            operations e.g., in 2006
        10
         8                                                     Income from continued operations   €0.9Bn
         6
                                                               Income from discontinued
         4                                                                                        €4.5Bn
                                                               operations
         2
         0                                                     Net Income                         €5.4Bn
        -2
        -4
                                                        •   Exchange rate effects due to weak
        -6                                                  Yen
              2002   2003   2004   2005   2006   2007
 Matsushita    0     -0.2   0.4    0.5    1.4    1.9
 Philips      -4.6    1     4.1    4.2    7.8           •   Tax incentives to Philips?
Philips stock price growth has outperformed
Matsushita
Philips has even outperformed GE and Sony
Philips is on par with DJI and better than
S&P500 & Nasdaq
Why do the transformation efforts at Philips
and Matsushita not seemed to have worked?
        Eight steps to transformation                           Philips   Matsushita
 Leading Change: Why Transformation Efforts Fail, Kotter, HBR

  1        Establish a sense of urgency
                                                                            
  2        Form a powerful guiding coalition
                                                                            
  3        Create a vision
                                                                            
  4        Communicate the vision
                                                                            
  5        Empower employees to act on the vision
                                                                            
  6        Create short term wins                                  ?          ?
  7        Build on momentum to drive more change                  ?          ?
  8        Institutionalize new approaches
                                                                            
Corporate venturing units have “generated
decidedly uneven financial returns”
                   Success rates for different types of venture unit
           30%
                         Successful
           25%           Unsuccessful
           20%
           15%
           10%
              5%
              0%
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                               Source: The future of corporate venturing, MIT Sloan Review, Fall 2003
            Apple’s Core Competencies

                          1
• Many-to-one supplier                          • Flat/small structure,
relationship                  Managing the
                                                young/innovative culture
• Close supplier              supply chain
                                                • User-centric design
relationships                                   and marketing
• Complete off-shore                            • Focused product line
production                         +            • Strong brand loyalty
  Retain bargaining       2                       Own the customer
  position and drive          Core strengths
                                                 relationship = higher
     down costs                in design &
                                                        margins
                                 branding




  Maintain Control over
                                   =              High margins &
   suppliers and costs                         Dominant market share
                                                      (ipods)
 Comparison: Philips, Matsushita, Apple
Consumer Electronics Value Chain:
                                   Component                    Design
                                   & Material     Assembly      Development    Retail   Customer
                                   Suppliers                    Marketing




                                            Organizational Structure
                                         Centralized                     Localized
                     Innovative




                                                Quick, flexible,
      Firm Culture




                                                   close to the
                                                   market and       Innovator, but fail to
                                                 the customer      commercialize product
                     Formal




                                  Quick to market (follower),
                                   operational excellence
   How to compete with Apple in CE

• Focus on core competency:          • Develop internal entrepreneurial
  local design and engineering         spark
  innovations                           – Diversify design and
                                          development beyond Japan
• Improve/centralize                    – Top management buy-in
  commercialization, marketing,         – E.g. allow autonomous product
                                          development and design arm to
  and branding of innovation
                                          thrive within the company

• Centralize/outsource production,   • Build smaller brands or reinvent
  develop operational excellence       existing brands (Panasonic/
   – Minimize cost of production       National) for premium image
                                        – higher prices/margins

								
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