CASE 9 Samsung Overtaking Philips, Panasonic, and Sony as the Leader in the Consumer Electronics Industry During the past century, industry leadership in the global consumer electronics industry (e.g., radios, TVs, movie and music players) has changed, with Philips (Netherlands), Panasonic, Sony (Japan), and Samsung (Korea) emerging as leaders at di!erent times. Indeed, each company achieved leadership with a di!erent international strategy, a di!erent organization design, and a di!erent set of organizational capabilities. Philips built a worldwide federation of inde- pendent national organizations able to gain access to the company’s renowned technological prowess and then to apply and adapt it to meet local market needs. Philips was the world- wide leader in consumer electronics from the early 1900s until the late 1970s. During the 1980s, Panasonic used overseas expansion to leverage its centralized, highly e!icient operations in Japan, exploiting global-scale economies in R&D and production to o!er lower-cost products and overtake Philips as the world leader in consumer electronics. In similar fashion, Sony lever- aged its centralized operations in Japan to produce standardized products around the globe. Sony invested far more in R&D than Panasonic did, though, and it was typically the techno- logical and innovation leader in the industry, if not the sales leader, from 1980 to 2005. By 2009, Samsung had seemingly come out of nowhere to become the world leader in consumer electronics, however. Like Sony, Samsung made large investments in R&D so that it emerged as a technological leader in TVs, DVD players, and smartphones. But rather than just making standardized products that were sold around the globe, Samsung took a more decentralized approach than Panasonic and Sony, which allowed it to do some customizing of products for specific markets. By 2014, Samsung’s lead continued to grow. Observers wondered whether the pattern of leader replacement would continue or if Samsung was on top to stay. Philips Leadership Era: 1900–1980 Philips was founded in 1891 in Eindhoven, Netherlands, by Dutch engineer Gerard Philips and his brother, Anton. The two brothers initially focused on the light bulb business, with Gerard in charge of product development and Anton in charge of sales. Gerard and Anton began a friendly competition in which Gerard would try to produce more than Anton could sell and vice versa.1 The two agreed that strong basic R&D and product development e!orts where vital to the success of Philips, so the company made R&D and product development high priorities. The Philips emphasis on research and product development helped it to become a leader in its field, rivaling General Electric in the early 1900s in the electric lamp industry. In 1914, Philips established its first research laboratory dedicated to developing break- through technologies in lighting. This investment helped the company create some of the world’s leading innovations in lighting, such as the tungsten metal filament bulb—a superior advancement over the common carbon-filament lamps. Moreover, the Philips emphasis on research led the company to experiment and develop new technologies that allowed it to C-100 expand its product portfolio. For example, in 1918, Philips started to produce electronic vacuum case09Samsung.indd 100 11/8/19 5:45 PM Philips Leadership Era: 1900–1980 C-101 tubes, and soon a"er that, it was producing X-ray tubes, electric shavers, and small generators. Philips’ most successful new products were arguably its radios, which, by 1936, a mere ten years a"er the device’s introduction, had captured a nearly 20 percent world market share.2 Due to the small size of the Netherlands, Philips was forced to expand internationally in order to leverage its investment in R&D and develop economies of scale in production. By the early 1900s, Philips had begun selling in a wide range of countries, including the United States, France, Russia, Brazil, Canada, Australia, and Japan.3 With such a diverse group of international opera- tions, Philips decided to adopt English as the company language, requiring its use across all of its management ranks. In anticipation of what would become World War II, Philips shi"ed assets away from the Netherlands and further decentralized management control to the national orga- nizations (NOs) in each country. Anton Philips and much of the top management team fled to the United States, and its main research lab was moved to England. The decentralization of Philips during the war enabled the NOs in each country to become more independent, thus allowing them to respond to their local market conditions. Each of the larger country NO presidents con- trolled multiple functions for their countries, including R&D, product design, manufacturing, and sales and distribution (see Exhibit 1). In order to succeed in each local market, the NOs tailored the Philips products to meet consumer preferences in each di!erent country market. For example, some countries, such as the United States, preferred large furniture-encased television sets, but other countries, such as India, demanded inexpensive, small TVs—o"en placed inside closable shutters to keep the dust away. Additionally, di!erent countries had di!erent ways to penetrate the market, such as through establishing a TV rental business or selling through department stores or discount retailers.4 The NOs had the flexibility to address the local market as they saw fit while drawing upon Philips’s technology and financial resources. For example, Philips of Australia made the first stereo TV, and Philips of the United Kingdom created the first TV with teletext.5 Other countries could then access those technologies and adapt them to their local markets. As time went on, Philips matured into its postwar organization. Fourteen product divisions (PDs) with responsibility for each product’s development, production, and global distribu- tion were established in Eindhoven. The product divisions were created to better coordinate across country markets. But the real power remained with the NOs.6 The NOs were highly CEO and Management Board International Concern Council National Organizations Administration (U.S., U.K., Germany, Product Divisions -Finance, Legal HR Japan, etc.) Product Development R&D Manufacturing Marketing Development Production Distribution EXHIBIT 1 Philips Organization Structure in the 1950s case09Samsung.indd 101 11/8/19 5:45 PM C-102 Samsung autonomous and reported directly to the management board (o"en sending proxies to repre- sent their interests). But a"er the European Common Market broke down trade barriers during the 1960s and 1970s, Philips’ competitors—especially Panasonic (then named Matsushita) and Sony—started to gain the upper hand. Products started to become more standardized across markets. Whereas Panasonic and Sony were producing large volumes of standardized prod- ucts in low-wage countries in Asia, Philips was producing smaller volumes of more tailored products in many di!erent countries. Over time, Philips’ products could not compete with the products of its Japanese competitors on price or reliability. As a result, Philips’s market share in various consumer electronics products started to fall. The company made numerous attempts to centralize the company in order to compete against its large-scale competition. Such attempts included consolidating production to a smaller number of high-volume plants called international production centers, closing ine!icient operations, shi"ing production to low-wage countries, and reorganizing the company into core and noncore businesses. But Philips’s market share and profitability continued to decline. Other problems outside of production also arose for Philips as a result of its decentral- ized organization structure. In the 1970s, Philips lost the battle as the provider of the preferred videocassette technology when its V2000 format had to be abandoned due to its North American NO deciding to license and sell Panasonic’s VHS format (originally developed by JVC, a subsidiary of Panasonic).7 Despite being a technologically superior format, V2000 was unable to capitalize on world market demand because it sold only in Europe on the PAL standard, whereas its Japanese competitors sold globally. VHS would eventually become the market’s preferred format, surpassing both Philips’s V2000 and Sony’s Beta formats, and it would lead Panasonic to the top of the consumer electronics industry in the 1980s.8 By 1987, Philips was one of only two non-Japanese consumer electronics companies in the world’s top ten (the other was General Electric). Its profit margins of 1 to 2 percent lagged behind its Japanese competitors’ 4 to 6 percent (see Exhibit 2). Between 1990 and 2005, Philips continued to reorganize to centralize operations in an attempt to gain greater e!iciencies. In the early 1990s, CEO Jan Timmer reduced headcount by EXHIBIT 2 Philips Group Summary Financial Data, 1970–2016 In millions of dollars: 1970 1980 1990 2000 2005 2010 2013 2014 2015 2016 Net Sales $4,163 $16,993 $32,996 $35,253 $25,628 $19,228 $31,209 $33,423 $29,335 $29,664 SG&A N/A N/A N/A N/A N/A $556 $1,270 $9,173 $8,499 $8,147 Cost of Sales N/A N/A N/A N/A $4,006 $3,968 $6,789 $20,602 $17,409 $16,824 As % of net sales N/A N/A N/A N/A 16% 21% 22% 61.6% 59.3% 56.7% R&D Expenses N/A N/A N/A N/A $2,152 $1,192 $2,318 $2,555 $1,463 $1,022 As % of net sales 8.4% 6.2% $0 7.6% 5.0% 3.4% Advertising Expenses N/A N/A N/A N/A N/A $1,235 $1,355 $1,427 $1,210 Income Before Taxes N/A N/A −1414 2814 1500.0% 1562.0% $2,664 $759 $754 $1,681 Net Income 123 247 −2631 N/A 1097.0% 1085.0% $1,568 $642 $797 $1,804 As % of net sales 3% 2% −8% N/A 4.3% 5.6% 5% 1.9% 2.7% 6.1% Total Assets $5,273 $18,440 $30,530 $35,885 $28,551 $24,409 $35,530 $44,300 $37,481 $39,087 Employees (in thousands) 359 373 273 219 159 119 116 1,12,959 1,13,678 Labor Costs 1,627 7,134 10,404 7,895 5,760 N/A N/A As % of total employees 39% 42% 32% 22% 23% 24% N/A Net Income per Employee $13,761 Exchange Rate (fiscal period 3.62 2.15 1.69 1.074 1.186 1.322 1.25 1.25 1.1 1.1 end; guilder or euro/dollar) Source: Annual reports.