1. Introduction
Founded in 1891 by Frederik Philips and his son Gerard Philips as Philips & Company, Koninklijke Philips Electronics is a major Dutch manufacturer of consumer electronics, electronic components, medical imaging equipment, household appliances, lighting equipment, and computer and telecommunications equipment (Deckmyn, 2009). With sales and service outlets in over 100 countries worldwide, Philips employs approximately 118,000 employees and with sales of thirty-three billion dollars it is a market leader in medical diagnostic imaging and patient monitoring systems, energy efficient lighting solutions, and lifestyle solutions (Koninklijke Philips, 2009).
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Company’s first products were light bulbs, as Gerard Philips had worked with the Anglo-American Brush Electric Light Corporation Ltd. before founding the Philips & Company and continually experimented to improve the longevity of light bulbs and optimising production procedures [Encyclopaedia Britannica, 2009]. The basis for company’s international expansion was triggered by Gerard’s younger brother Anton Philips joining the firm (Deckmyn, 2009). The company kept striving for high quality than low cost which often slowed it down to bring its innovative technologies to the market in later years. (Deckmyn, 2009).
It formed the Phoebus cartel in 1924 together with General Electric and Osram GmbH (now owned by Siemens AG), to divide the light-bulb market worldwide and to set the standard life of a light bulb at 1,000 hours (Deckmyn, 2009). Philips, in 1927, introduced a simple radio and by 1933 it was the world’s largest radio manufacturer (Deckmyn, 2009).
Philips expanded its product range after 1945 and launched its record label in 1951 acquiring Mercury Records in 1960. It continued to invest in record labels such as Deutsche Grammophon, Decca, and Motown through its PolyGram subsidiary which it sold in 1998 (Deckmyn, 2009). However, Philips was much less successful in entering the computer business (Deckmyn, 2009).
The company faced many ups and downs in its market with many innovations. The 1963 launch of battery-powered audio tape recorder which used a cassette and letting other manufacturers reproduce the technology royalty-free established cassette tapes as a standard in favour of loose spool tapes (Deckmyn, 2009). Despite demonstrating world’s first video cassette recorder in 1971, Japanese who launched Betamax in 1975 and VHS in 1976 superseded Philips in the market (Deckmyn, 2009). Philips introduced LaserDisc in 1978, which despite being a failure led to another major success: the compact disc (Deckmyn, 2009).
Philips established a position in America consumer electronics market with a series of acquisitions in the 1970s but fared poorly with Japanese consumer electronics (Deckmyn, 2009).
With manufacturing and marketing subsidiaries throughout the world, Philips was a leading producer of portable defibrillation units, ultrasound systems, and computed tomography (CT) scanners by the early 21st century (Deckmyn, 2009).
2. Situational analysis
The company was founded in Eindhoven (Netherlands) in 1891 to manufacture incadescent lamps and other electrical products. The company has focused in pioneering innovations in medical imaging, television, lighting, optical technology and many more to simplify and enhance people’s lives (Koninklijke Philips, 2007).
Increasing its product range, Philips is global number 1 in home healthcare, lamps, electric shavers, cardiac ultrasound, cardiovascular X-ray, patient monitoring systems, professional luminaries, lighting electronics, automotive lighting, electric male grooming and automated external defibrillators (Koninklijke Philips, 2009).
The company has fundamentally simplified its business portfolio over the past decade investing in Healthcare, Consumer Lifestyle and Lighting businesses and its brand value has almost doubled to $8.1 billion since 2004 Philips Corporation, 2008).
3. PEST analysis
PEST analysis is used to describe a framework for the analysis of political, economic, social and technological factors to analyse the external macro-environment in which the firm operates (www.quickmba.com, n.d.).
3.1 Political
The global political conflicts, including the Middle East and other regions, could continue to impact macroeconomic factors and the international capital and credit markets (Koninklijke Philips, 2009).
Due to unfavourable political factors, including unexpected legal or regulatory changes such as foreign exchange import or export controls, nationalisation of assets or restrictions on the repartition of returns from foreign investments, the company may encounter difficulty in planning and managing operations (Koninklijke Philips, 2009).
As the company has established subsidiaries in over 60 countries, these subsidiaries are exposed to governmental regulations and unfavourable political developments which may limit the realisation of business opportunities and an increased focus on medical and health care increase exposure to highly regulated markets, where obtaining clearances or approvals may be difficult (Koninklijke Philips, 2009).
3.2 Economic
The global recession and economic downturn particularly in consumer markets has reduced its sales predominantly felt within Consumer Lifestyle category which reported 8% decline in comparable sales, led by a 12% sales decrease at Television, as well as lower sales in Audio & Video Multimedia and Peripherals & Accessories (Koninklijke Philips, 2009).
There was 6% comparable increase in sales growth at Healthcare because of its merging markets and across all businesses, notably costumer services, clinical care systems, and healthcare informatics and patient monitoring.
Because of the strong growth in energy-efficient lighting solutions, lighting saw a 3% comparable sales increase.
3.3 Social
Philips is highly influenced by Social and demographic trends such as growing demand for better healthcare at lower cost, consumer empowerment, the rise of emerging markets and the need for energy efficiency (Koninklijke Philips, 2007).
In 2006, Philips lost EUR 61 million as a result of agreements made with L.G. Philips Displays for voluntary payments (social contributions and environmental clean-up), mainly in France, Germany, the Netherlands and the UK (Koninklijke Philips, 2007).
Philips and its subsidiaries have also faced various accusations related to labour rights such as labour rights violations at Jabil Circuit de Chihuahua and Sanmina SCI systems de Mexico, and recruitment practices at Philips plant in Ciudad Juarez, Mexico (Weyzig and Schipper, 2008).
3.4 Technological
The ability of Philips Research and Development team to create innovative technological advances and solutions for costumers is a major factor of Philips’ competitiveness in its markets.
Philips constantly invests on technological advancement to reduce energy consumption, weight and hazardous substances. It invested approximately EUR 282 million in Green Innovations– the Research & Development spend related to the development of new generations of Green Products and breakthrough Green technologies (Koninklijke Philips, 2009).
Philips still faces competitive challenges such as speed of innovation, fast-moving market trends and rapid technological change, shortening product life cycles which requires price management, cost reduction and/or efficiency increase and must develop superior technology anticipating consumer needs and continue to rapidly develop attractive products (Koninklijke Philips, 2009).
4. SWOT analysis
SWOT analysis is the overall evaluation of a company’s strengths, weaknesses, opportunities and threats (Kotler, 2000).
4.1 Strenghts
Philips is a globally recognised brand with a brand value of $8.1 billion (Royal Philips Electronics, 2009).
It is a people centric company which organises around costumers and markets (Royal Philips Electronics, 2009).
Philips invests in a strong brand and focuses on brand promise of ‘sense and simplicity’ in its actions, products and services (Royal Philips Electronics, 2009).
A significant amount of sales is attributable to the brand alone. For example 29% in Healthcare, 24% in consumer lifestyle and 21% in lighting. Its brand value grew more than twice as fast as that of its closest competitors in 2008 (Royal Philips Electronics, 2009).
Philips has joined forces in IP telephony together with NEC Corporation which is ranked as one of the world’s top patent-producing companies and world’s leading providers of Internet, broadband network and enterprise business solutions (Khan et. al., n.d.).
Philips invests in high-growth and profitable businesses and emerging geographies to achieve market leadership positions (Koninklijke Philips, 2007).
Philips are now leaders in energy-efficient lighting with TL5 lamps and LED light sources, electronic gear, high-efficiency optics and energy-saving lighting controls. Philips is also aiming for Green products to generate 30% of total revenues by 2012 which is a part of EcoVision programme. Philips commitment to energy efficient innovations puts it as one of the favourites with the global climate change, rising energy costs and pressure to meet targets on CO2 reductions (Koninklijke Philips, 2007).
4.2 Weaknesses
It has continued poor market conditions in PC- related businesses (Khan et. al., n.d.).
Philips made a strategy to build a simpler, market focused company by the end of 2010 in their Vision 2010 strategy. However, the financial targets are not expected to be met by the end of 2010 as originally planned due to the global recession and economic slowdown (Koninklijke Philips, 2009).
The Philips Group haven’t still tested costumer list effectively (Khan et. al., n.d.).
To increase its sales, it needs more sales people (Khan et. al., n.d.)
It has limited budget to spend in new inventions and marketing techniques (Khan et. al., n.d.).
Given the size and market of the company it doesn’t have a detailed plan yet (Khan et. al., n.d.).
4.3 Opportunities
As 70% of the material from IC to screens in Nokia mobile phones are from the Philips, it has a great opportunity to start a mobile business (Khan et. al., 2009).
Philips has reached the milestone of 100,000 patents confirming its excellence (Khan et. al., 2009).
It has a vast opportunity to develop new products (Khan et. al., n.d.).
The products of its local competitors are very poor in quality (Khan et. al., n.d.).
The healthcare challenges present major opportunities (Koninklijke Philips, 2009).
It has a maximum opportunity to enter the computing industry.
4.4 Threats
The arrival of local electronic industries as in Pakistan poses a serious threat to its market (Khan et. al., n.d.).
Environmental effects and Global recession could favour larger competitors.
Shareholder value may be seriously affected by failure to deliver the Philips strategy (Koninklijke Philips, 2009).
Philips may not be able to adapt swiftly to changes in industry or market circumstances, which could have a material adverse impact on its financial conditions and results.
Philips could be exposed to integration risks through the recently made acquisitions and the one it is planning to make and challenge management in continuing to reduce the complexity of the company (Koninklijke Philips, 2009).
It faces market risks like being exposed to economic and political developments around the world which could adversely impact its revenues and income, being exposed to markets with high complexity and continued competition, and being exposed to governmental investigations and legal proceedings with regard to increased scrutiny of possible anti-competitive market practices (Koninklijke Philips, 2009).
The PEST and SWOT analyses gives the position of the company related to social, political, economic and technological factors as well as its strengths, weaknesses, opportunities and threats which are invaluable in its future marketing and business strategies.
What will be the cornerstone of your new strategy- divestment? Acquisitions? Strategic alliances? Increased product development? Address this from the context of international business.
The Philips’ Strategy
Companies must plan and replan marketing strategies for each product several times during a product’s life cycle. This is to overcome the changing conditions, assaults launched by competitors, changing interests and new requirement of buyers. A marketing strategy helps a company to extend the product’s life and profitability (Kotler, 2000).
Philips aim to make itself the leading brand in health and well-being through its strategy. Focusing in its three main sectors Healthcare, Consumer Lifestyle and Lighting, it positions Philips as a market-driven, people-centric company with a structure that reflects the needs of its customer base, while also increasing shareholder value (Koninklijke Philips, 2009).
Philips has a vision to invest in high-growth, high-margin businesses that are leaders in their respective fields. This can be achieved by acquiring strategic companies while divesting non-core, or unprofitable, business interests. Philips acquired several companies during the year 2008 which included nine notable companies within healthcare like VISICU, Respironics and TOMCAT and also other companies like Genlyte within lighting sector (Koninklijke Philips, 2009).
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Similarly, divestment of several non-core businesses in recent years has benefited Philips with several million EUR. In 2008 only Philips’ divestments included the sale of Set-Top Boxes and Connectivity solutions activities; the brand license agreement with respect to the North America television, audio and video businesses; the sale of Philips Speech Recognition Services (PSRS); divestment of High Tech Plastic- Optics and the sale of Philips’ approximate 70% ownership stake in MedQuist (Koninklijke Philips, 2009). Further acquisition of profitable companies in new fields like Computing and mobile phones and divestment of unprofitable ones will further open new markets for Philips.
With more than 30 global companies as partners, strategic alliances are important part of Philips which introduce never-seen-before products to the market (Koninklijke Philips, 2009). Some of the products made with alliances are Philips moisturising shaving system with integrated Nivea for Men lotion, Senseo coffee pod system developed with Sara Lee, and ActiveCrystals sound accessories and USB devices developed in alliance with Swarovski crystals (Koninklijke Philips, 2009). Philips has a vast opportunity in its marketing through alliances with different companies worldwide.
To increase its product development faster and more effectively Philips has to adopt open innovative strategy make stronger relations with institutes, academia, and industrial partners. The core activities of any product-development process is to create technological and customer knowledge, and translate it into products and services. A new approach for product development uses the collective knowledge of people within the marketplace (Spoor et. al., 2005).
Collaboration with online consumer groups to activate the consumer group and collecting the information regarding their views along with mobilising their creativity provides opportunities to enhance the speed and efficiency of product development which is known as co-creation (Spoor et. al., 2005).
In the past there was no active involvement of consumers in innovation and it only included importing knowledge about needs and wants, which in turn prompted new product development. The internet has changed this to enable a two-way relationship boosting mechanisms for direct co-operation and knowledge creation (Spoor et. al., 2005).
Consumer involvement in product-innovation focuses on three main areas: consumer as resource, consumers as co-creators, and consumers as users. Tracking online user communities, in which users exchange product experience and alternatively companies initiating discussions concerning product-specific themes helps keep a company abreast of trends and issues that concern users. Via activities like virtual representations and rapid prototyping, consumers can develop a new concept based on their current product experience and product knowledge where consumers are act as ‘co-creator’ and become a part of company’s activities. Furthermore, web-based tools allow users to add their creativity and design capabilities to product blueprints with trial and error giving opportunity to learn and improve on a given concept. Lastly, consumers as ‘users’ can provide feedback or support. Discussions and views regarding product limitations and general consumer attitudes towards a product which is useful in the early phases of a product’s launch, and can serve as input for product improvements can be made through screening communities (Spoor et. al., 2005).
Example of consumer community and Philips working together for improvement of a product is provided by the Philips Pronto programmable remote control having good relationship with the independent Remote Central community (www.remotecentral.com) which has established itself as the ultimate source of online information on remote controls (Spoor et. al., 2005). This community with over 31,000 members, provide a base for users to support each other in the programming of their remote controls provide relevant information and also ‘co-creation’ takes place as users create files that fit their needs. Based on the files users have developed, the Pronto Team is able to identify key features for the success for future releases (Spoor et.al., 2005).
What measures will you recommend across organisational boundaries (geographical, functional) to achieve greater efficiency, leverage and better market focus?
Philips is already a market-driven and consumer focused company. Together with focusing on other factors, Philips could further benefit from working with consumer groups in development of new product which can enable consumer knowledge to be employed effectively.
Philips monitors its performance on a geographical axis and focuses on following market clusters: Key emerging markets, including China, India and Latin America; other emerging markets which includes emerging markets in Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone; and Mature markets which includes Western Europe, North America, Japan, Korea, Israel, Australia, and New Zealand (Koninklijke Philips, 2009).
In 2008 Philips saw a decline of 3% sales despite the comparable growth in key emerging markets and other emerging markets which was largely due to economic downturn affecting the mature markets especially Western Europe and North America (Koninklijke Philips, 2009).
The emerging markets are habitat to a fast-growing middle class group and Philips has great marketing opportunities in these geographical locations. However, majority of the world population who live on less than $2 a day also live in these areas (Koninklijke Philips, 2009). So, Philips should be able to make affordable yet durable and efficient products to meet the needs of the costumers specific to a particular geographical location. Marketing of the rice cooker range for Asian market, water purifier for India and Mate kettle in countries such as Brazil and Argentina gives example of such practice used by Philips (Koninklijke Philips, 2009).
Leverage can increase company’s shareholder’s return on their investments and there are often tax advantages associated with borrowing. Philips leverages its supply management through consolidated commodity buying at corporate level and aims for operational excellence through best-in-class processes which allows Philips to create a solid supply base.
In recent years Philips has leveraged different companies or products to boost its market and supply chain. In 2005 Arrow and Philips leveraged RosettaNet to accelerate Design Cycles (Emsnow, 2005). Recently an environmentally friendly residence has leveraged the reliability and flexibility of Philips Dynalite’s lighting control and automation technology (Dynalite, 2009). Future leverages in chosen sectors could boost Philips’ marketing efficiency.
The worldwide interest in health and well-being and the growing significance of emerging economics has been identified as one of the market focuses by the company from which it could benefit (Koninklijke Philips, 2006).
Philips’ earnings improvement is highly exposed to increased competitive challenges, which requires margin management through price management, cost reduction and/or energy efficiency. Philips, with its extensive experience, both supports innovation and efficiency. Philips is currently driving revenues from Green products, increasing its investment in Green Innovations and raising the energy efficiency of its operations. By 2012, it has set up a goal to increase its energy efficiency by 25% compared to 2007 (Koninklijke Philips, 2009).
Philips has been described as a company without market-focus, and with a reputation and tradition for home grown management. However, this trend has changed in recent years. With its market focused new approach and incorporation of outside ideas has boosted its brand equity and its costumer focus. For example, in January 2003, Andrea Ragnetti from Telecom Italia, with a reputation for fast and successful turnaround of companies, was named as head of global marketing and brands. These trends of market-focus and outside ideas are still in its beginning phase in Philips, and promoting these trends could see Philips as number one company in every sector it is focused in.
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