Question

Explore how multinational giant Philips NV has evolved over time. The Dutch company, which was internationally oriented almost from the start, moved to a national organization approach during World War II. This approach, which allowed the company to tailor its product line and marketing to each national market, remained in place for several decades, however, by the 1970s, the duplication of effort the approach required began to cause problems and Philips shifted toward a product division structure that established international production centers. In the mid-1990s, a new CEO implemented significant changes replacing Philips’ 21 product divisions with just 7 global business divisions. This new structure was further refined in 2008 to establish three global divisions responsible for product strategy, global marketing, and production decisions. QUESTION 1: Why did Philips’ decentralized structure make sense in the 1950s and 1970s? Why did this structure start to create problems for the company in the 1980s? QUESTION 2: What was Philips trying to achieve by tilting the balance of power in its structures away from national organizations and toward the product divisions? Why was this hard to achieve? QUESTION 3: What was the point of the organizational changes made by Cor Boonstra? What was he trying to achieve? QUESTION 4: In 2008 Philips reorganized yet again. Why do you think it did this? What is it trying to achieve?

Answer 1

1. Decentralized organization structure means that the top management has delegated responsibility among the middle managers about taking decisions about their respective units. Until 1970s, Philips was trying to penetrate and expand in the national market. Decentralized structure facilitates expansion and decision-making. So, the structure was thriving well till the 1970s.

The decentralized organization structure started to pose problem to business in the 1980s as this structure led to creation of silos in business, which in turn led to less coordination and duplication of efforts. Resources were not getting efficiently utilized. Also there was a lack of standardization in the business approach.

2. Philips was initially only in the international segment. With World War II, it had diverted its inclination towards the national market. Once the markets and economies started gaining its foothold after World War II, Philips again wanted to dive back in the international segment. By expanding in the international market, the company was aiming to achieve economies of scale. This objective would be facilitated by development of production centers at various locations in international market. These production centers will lower the cost and thus facilitate economies of scale. Therefore, Philips was trying to incline towards the product division structure.

The international market was reviving from the perils of World War II. Also, most of the managers and employees had become comfortable in the national market. So, there was hesitance and resistance to expand globally. This proved as a hurdle in the embracement of products division structure.

3. Cor Boonstra became the CEO of the company in the mid 1990s. The company then had around 21 product divisions worldwide. Boonstra tried to streamline the business of the company. So he developed the strategy of replacing the 21 product divisions with 7 global business divisions. This would have streamlined the business and added accountability and responsibility among managers.

4. In 2000s, Philips got a new CEO in Gerard Kleisterlee. The new CEO found that the company was not performing its best in the global markets. The company needed more streamlining so that the focus of the streamlined business could be stronger and more intact. Thus the company was again reorganized in 2008. The 7 global business divisions were replaced by 3 global divisions of healthcare, lighting and consumer lifestyle.