Case study: Philips : Innovation and change management in global organizations: the case study of

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Introduction

In this case study we are interested in how the adaptive cycle model (ACM) works inside a real-life company. Especially, we would like to analyse how a large and global organization innovates and reaches the maximum efficiency of its own adaptive cycle.

We decided to focus our attention on the case of Royal Philips Electronics to help us answer these questions. Why Philips? Simply because we thought that if we asked one of the biggest companies in the Netherlands which has long history and international standing, we would be able to get accurate answers to our questions, especially in terms of change management over time.


working group: Petra Gardai, Chiyuan Li, Jan Joost Visser & Benjamin Gabriel.

Organization

During the 20th century, Philips has developed a very strong brand image and a broad physical presence around the world through the sales of its electrical appliances. The Philips brand has always been a reference in the industry, both for the quality of the products and for their innovative aspect. Also, the firm was one of the first to introduce the concept of “sustainability” into its corporate culture and strategy. Indeed, early on, Philips started to care for the social rights of its employees and against the pollution generated by its factories. Over time, it also started to diversify its activities. While in the beginning the firm was almost exclusively active in the lighting industry, it has developed core competencies in the healthcare industry (medical equipment) and in the customer lifestyle industry (day-to-day consumer products and electronic devices). The three business units enable the company to reach different markets and largely contribute to the firm’s economic rise around the world. But in business (and even more in technology), times change and companies have to stay open up to their internal and external environment if they want to keep up and stay competitive.

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Expectations towards the case study

The purpose of this case study is to try to understand what a company can do to renew itself over time and to overcome crisis situation. Particularly, analysis of the activity of a global company will inform us of the change mechanisms that must enter into action. Actually, in order to adapt itself to the external realities of the economy, Philips has had to lead several internal revolutions. The three revolutions that are going to be presented in this document have taken place at different times in Philips history and all have their influence on what the company is today and on what it will be in the future. When analysing these three revolutions (managerial, cultural and operational), it will be interesting to connect the output of our observations with the theory of the Adaptive Cycle. More specifically, it will be interesting to observe how the revolutions fit into the four quadrants of the model and how they influence the capacity of Philips to react to change. It will also be of high interest to understand how change can be introduced, integrated and how it can add value to the overall company structure.


Content of the Case Study

Interviews & research background

Regarding the methodology and our working background, we based our research exclusively on qualitative elements. On one hand, we interviewed three employees working at Philips, in departments related to our field of analyse. The main interview was realized on the 6th of December 2012 at Philips HQ (Amsterdam) in the presence of Ton van Veen (Sustainability Director Netherlands), Renee Walraven (Consumer Marketing Manager in the Avent Department) and Leonie Boelens (Integral Project Leader and M&CC Sustainability Officer in Eindhoven). A questionnaire had been designed and distributed before the interview so that the participants were aware of the content of the interview. In addition to the interview, we also attended to a speech given by a former Dutch Technology Head of Philips, Jan Post. This speech, given during an Alumni event late in November, was very inspiring for us as it was related to the Philips’ ability to produce and diffuse meaningful innovations. The combination of the interview and the speech created a consistent practical background for our research.

Besides this practical background, we tried to make theoretical assumptions and to establish connections with the research material that has been put at our disposal in the framework of the VODC course. In order to go into detail, we also relied on specialized literature on Philips and on corporate business reports issued by the firm itself.

All in all, we believe that these elements have formed a complete body of qualitative knowledge we explored through this case study.

The different (recent) revolutions inside Philips

The 1st revolution: “Creative destruction and business potential stimulation”

In the late eighties, Philips had to start struggling against fierce competition and the emerging of the Asian economies has reinforced this trend. In 1990, after the firm had lost a lot of market share to competitors in many different industries, the company, which employed around 300.000 people at that time, was at risk to go bankrupt. At corporate level, it seemed obvious that a strategic change in the leadership was unavoidable. A massive change programme was then introduced in 1990 by the former CEO Jan Timmer. The change programme, known under the name of the “Centurion”, was so aggressive that thousands of people (45.000) were fired, the business units were all reorganized and the corporate strategy was totally redesigned.

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More specifically, as the firm was losing its fight against its Japanese competitors (Sony, Canon, etc.), Timmer’s idea was to integrate a set of Total Quality Management and Continuous Improvement programmes at all levels of the organization. The change process was enforced from the top and touched heavily all the level of hierarchy. In fact, Philips changed its behaviour from a comprehensive and open leadership to become more strict and dominant. Actually, the leadership behaviour was in phase with the idea to force a breakthrough in order to stop the bleeding and to ensure the survival of the company. The Centurion programme took about 5 five years before organizational equilibrium was reached again. After this period, Timmer estimated that continuous improvement would no longer be realized through brute force, but through upgrading managerial skills, detecting opportunities, empowering staff and enhancing communication. The new slogan “Let’s make things better” reflects the new spirit of Philips. This first revolution in Philips recent history can be characterized as “systemic” and rational.

Within the same idea, but from a different perspective, the firm launched the change programme “Accelerate!” in 2011, which has been proposed by the current CEO of Philips, Frans van Houten. This programme aims to unlock the potential of the firm at every levels in order to increase its overall competitiveness. It is said that “Accelerate!” aims to significantly boost profitable growth by reducing complexity (and working capital) and driving productivity. It is centred on three key behaviours: eager to win (competitiveness), take ownership (empowerment) and team up to excel (exploitation of the working capital). At first sight the programme can be seen as for very comprehensive, as it actually represents a fundamental step for Philips to overcome the crisis times the firm is confronted with since 2009.

In parallel to the abovementioned change programmes, Philips also strives to reach two other business objectives: to be a sustainable actor of the globalisation and to be a meaningful innovator to the customer. Both objectives summarise a strong willingness to remain an international innovator in the future. These objectives involve two other revolutions in the sense of Christensen and Perez.

The 2nd revolution: “To be a sustainable actor of the globalisation”

According to its involvement in massive change programmes over time, Philips seems to understand the “business as usual” dangers and focused its effort on helping the company to grow again. Then, from the end of the “Centurion” (1995) up to the “Accelerate!”, Philips has developed a strategy of geographic expansion. Actually, the firm did not want to miss the train of “globalisation”. More especially, the firm wants to make use of the globalisation in order to transform itself from a functional organization to a process-driven end-to-end collaborative network, able to deliver innovative and sustainable products at a lower cost. To this end, Philips keeps on outsourcing the majority of its manufacturing in order to reduce costs. Cost reduction is a must for Philips to remain competitive in terms of pricing. But an outsourcing strategy involves many concerns regarding the reliability of the suppliers, the quality of the products they deliver and the sustainability of their manufacturing processes. In order to ensure the viability of its supply chain, Philips has developed two main commitment/control tools. These tools are the following:

Charts: in the framework of the Eco-Vision programme, which for example aims to improve the energy efficiency of its plants by 50% and to increase the usage of recycled materials in its products by 2015, Philips’ suppliers are held to sign a set of charts. That commits them to respect the sustainability targets imposed by Philips.

Audits: signing a chart is not a guarantee of quality, nor performance in the long-term. In order to control their suppliers’ operations, Philips proceeds to on-site audits. Given the size and the complexity of its supply chain, the firm has to focus its efforts on suppliers which develop a risk profile. In 2011, Philips audited 212 of them in terms of continual performance. Besides them, suppliers from new acquisitions (Saeco, Apex, etc.) have also been audited and evaluated.

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These tools can be considered as a way to control if suppliers which seem to meet the requirements are performing well continuously. Beside the control aspect of the process, they also constitute an opportunity for both parties to be in contact with each other and to share ideas in order to improve their relationship.

The 3th revolution: “To be a meaningful innovator to consumer”

Philips seems to be very aware of the fact that nowadays’ economy is driven by customers’ desires and needs. Over time, Philips has changed its approach from a “push organization”, which aims to produce in mass, to a “customer-centric” organization. Even if Philips has always been considered as an innovative company, this change has many consequences, both at strategic and operational levels.

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As the customer becomes the centre of attention, the company has to listen to him, understand him and propose him something that can satisfy him. From there, Philips has developed different approaches aiming to reach excellence in customer satisfaction.

  a) Local empowerment

In a concern to get closer to its customers, Philips has developed a solid physical presence in each market it is active in over time. The first goal of these local cooperatives is to run the business accordingly to the corporate strategy even when far away from the head-quarters. In order to understand local specifications and to understand which products are the most desired by local customers, their mission is also to analyse the market and explore any opportunities Philips could make profit from. To Philips, local empowerment is best strategy to position itself in the heart of international innovation. In practice, the results of the market researches conducted by the local cooperatives are communicated to head-quarters in the Netherlands which owns the decision making power. A good example is the concept of soya milk makers in Asia (in especially in China). Local cooperatives have detected that Chinese appreciated the fact to make their own soy milk at home, rather than buying pre-made alternative. Consequently, Philips HQ gave its approval and support to the cooperative to develop a new concept of soya makers. After two years of developments and tests, the concept is now patented and sold locally in China.

Philips intends to empower local organizations so that the overall structure can faster react to market changes and to develop disruptive innovations (cfr. “Accelerate!”).

  b) Research Centres of Excellence

As customers’ needs do not stop evolving over time, massive investment in R&D must be made by a firm like Philips. In highly internationalized organizations, geographic expansion is often accompanied by a qualitative dimension. In fact, Philips considers that manufacturing abroad must be supported by technological development early on. By Philips, this qualitative dimension is materialized by its research centres. In the early ages, these centres were working quite autonomously without discovery of sufficient innovations in line with the corporate strategy. This lack of innovative effectiveness was due to the following issues:

  • Inadequate transfer in research results,
  • Duplication of activities,
  • Fragmentation of dispersed research laboratories,
  • Excessive orientation towards technology for technology’s sake,
  • Insufficient guidance.

In the nineties, Philips understood that one of the most important factors in innovation success was to coordinate learning and other change-related activities across international boundaries within the whole firm. In order to structure and rationalize the production of knowledge, the company decided to distribute research activities to specific centres, according to its competencies. For instance, the research centres of Aachen and Hamburg have been merged and the resulting centre is responsible for investigating in light generation and man-machine interface. Another example is the Chinese labs which are dedicated to research in the wireless communication technologies.

Based on this, the nine research centres of Philips spread over the globe have turned over time into “Centres of Excellence”, which are in possession of strong (technical, market and managerial) competencies and which are able to link research among each other and to coordinate it with Business Units’ strategic targets. Even though it seems to cut a little bit in the exploratory potential of the research centres (only 30% are dedicated to basic market research), this change seems particularly convenient because it concentrates skills and competencies in one location, which is a sound asset to really move forward in R&D.

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  c) Technology Incubators

In response to previous attempts of radical innovation, which failed to be integrated into the corporate innovation system, Philips decided to create a technology incubator in the heart of the Technology Campus of Eindhoven in 2006. Founded in the sixties, the Technology Campus has always been used as traditional research centre until the intervention of Ad Huijser, CTO of Philips between 2002 and 2006: he believed that sustainable firms’ growth was only achievable through radical innovation. By “radical innovation”, Huijser meant technology products that were totally new to the firm and to the customers. It is well known that driving radical innovation in large established firm is difficult: these firms naturally create antibodies fighting against time-consuming and costly projects which only open doors to niche markets. Huisjer observed that sometimes Business Units rejected even great innovative concepts because they did not want to take the risk to step out of their core competency. Thanks to the technology incubator, the idea is to develop these state-of-the-art technologies within a protected environment, where they have sufficient time and expertise to nurture.

For an innovative project, the access to the incubator is restricted to the following conditions:

  1. Intellectual property of the technology (protection),
  2. Potential market of €100 million (sales objective),
  3. Disruptiveness of the technology in the market (competitive advantage),
  4. Alignment with Philips’ long-term corporate strategy (change integration),
  5. Motivated and capable team (capability).

Once in the incubator, the ventures enjoy a nurturing environment and Philips’ funding to conduct their researches. The performance of the ventures is monitored on monthly basis by the Philips Research Committee and is subjected to informal reviews led by the incubator management. The research in itself consists in two parts: the exploration (invest in opportunities detection) and the exploitation (monetise the existing assets through patents and technology licensing).

Once a new technology is discovered, matured and tested by its venture, it is time to value it on the marketplace. If it is judged to have strategic value for Philips, the technology can be integrated into one of the operating divisions of the firm (“spin-in process”). At a lower scale, if the technology is judged as for promising, it is spun out through a partnership with the venture (“spin-off process”). This process allows Philips to maintain some participation in promising concepts while sharing the risk with other actors. In the worst case, non-promising ventures are discontinued and moved away from the incubator (“spin-out process”).

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Recognising the success of an initiative (out of eleven projects, two ventures have been spun in, four have spun out, one has been cancelled and the rest is still part of the portfolio), Philips has created two new incubators since 2006. These are even more market-oriented and are also looking for new business opportunities inside the firm.

Partnerships

In order to reach new markets and to create synergies, Philips promotes brand partnerships with other companies. The best example to give is the partnership with Senseo in the elaboration and promotion of the super popular coffee machines. Other examples are the ones of Nivea (shaving equipment) and InBev (Perfect Draft machine). By doing this, Philips can stay focus on its main competency (manufacturing the products) while relying on partners to add value to their products (increase of the customers’ experience). In addition, this kind of partnerships allows Philips to count on different expertise (marketing, design, etc.) coming from different sources, which can lead to a better exploration of the market opportunities.


Conclusions

As it has been highlighted in this document, Philips seems to be conscious of its weaknesses (internal rigidity and time to react to market opportunities). This is also the general conclusion coming out of the mouth of the Philips’ employee we interviewed. In order to fight against these weaknesses, Philips has developed and still develops a set of business processes aiming to make the firm more resilient to change.

  a) Step out of the crisis through a combination of values:

The first concept to be put into evidence is the one of “Centres of Excellence”. These centres are necessary to understand local specifications of the markets, improve existing products and conduct basic research in new fields. For the moment, and knowing that operatio nal costs are still too high, the “Centres of Excellence” must emphasis on the development of products which combine different values: “cost effectiveness”, “innovation” and “environmental friendliness”. This can be seen as changes (or improvements) in the business approaches that could help Philips to gain competitive advantage and thus to step out of the crisis quadrant in the sense of the Adaptive Cycle.

  b) Explore the opportunities and implement new concepts:

In order to support this philosophy and because Philips knows the importance of radical innovations, the firm developed the concept of “incubators”. The firm also tries to share expertise with other firms in order to create unique concepts. This can be identified as more openness to high-potential concepts in the exploratory phase of the Adaptive Cycle. This seems to be a critical step to move on towards a meaningful innovation culture.

The incubators and partnerships are also responsible for helping Philips to implement new ideas in its operating divisions. For example, the ventures coming from the incubator are supposed to be immediately valuable. The ideas and concepts coming from partnerships are also easier to integrate because Philips can stay focused on its own core competencies, while partners provide their help for the rest of the integration. Besides this, it also came out of the interviews that employees feel like entrepreneurs: they can bring their own ideas on the table, lead their own projects and make use of corporate resources. This is one of the good changes induced by the “Accelerate!” programme.

  c) Control your sources to support your strategy:

The last element is that Philips has already started put in practice its new culture of “more sustainability”. Actually, the firm has started to impose (Eco-Vision) controls to its suppliers in order to improve its equilibrium situation in the long run. This constitutes a method to make the suppliers part of the creation of sustainable and collaborative network. “Collaborative” also means that suppliers would be allowed to propose new products and new ways of doing business, which aims to reinforce the abovementioned concepts.


Personal remark:

All in all, Philips seems to do its best but is still limited by its own assets. The structure is so big and broad that it remains hard to control as well as hard to change. We have seen that radical changes like the “Centurion” are effective but cost a lot in terms of image and working capital. In our views, “Accelerate!” is smoother than the “Centurion” but will enable the firm to assimilate the importance of a sustainability culture. This culture could help Philips to take advantage of its enhancements in green products and to value this advantage on the market in a near future.

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We can also add that in such a big company, crisis times are almost unavoidable and sometimes even necessary. They force large structures to adopt new values and to continuously re-engineering their business processes. Even more philosophically, they force companies to “open-up” their minds to change themselves and to be able to create new market realities.


Appendix I: questionnaire

1. General question:

  1. Could you please give us a short introduction of what is your function here by Philips?
  2. How would you describe your core business?
  3. Is your organization currently going through any change processes/reorganizations at the moment?

2. Market positioning:

  1. How does Philips select the markets it is going to be active in? and why?
  2. How is the competition? Are you confronted with aggressive competition?
  3. Why Philips decided to leave the television market?

3. Sustainability:

  1. What triggered Philips to change towards sustainability?
  2. How can Philips control the sustainability of your processes around the world?
  3. Is sustainability just a marketing tool to attract new customers or is it a real desire to preserve resources?

4. Innovation:

  1. In practice, how do you select suitable innovative projects?
  2. How can you feel or measure if the projects can be potentially brought in the marketplace?
  3. How do you involve your employees and keep them informed of the innovation processes?
  4. How does Philips can be sure to explore all the market opportunities? How does it proceed to analyse its external environment?

5. Change situation:

  1. Imagine your organisation went through disruptive change, would the organisation stay functional as a unit or would it create new (smaller) spin-off, independent organisations to come over the disruption?
  2. How resilient do you think your company is to change? Can it usually react in due time? Can it then moving back to an equilibrium status?
  3. How did you reflect previous learning experiences? And how are you using them in the future? In other words, how can you “save” knowledge?
  4. Do you have to stick to a specific budget while running your innovation activities? If yes, how budget is allocated to your department? And by who is it allocated?
  5. Do you feel like an entrepreneur while working for Philips?
  6. Does your organisation encourage employees to be entrepreneur? In which way?
  7. Can you feel that Philips is changing its innovation strategy while facing the current crisis time?
  8. Can you feel that the top management is getting stricter and more aggressive for the moment? Can you feel there is a change of leadership behaviour from their part.

Appendix II: references

  • Karsten L et al. (2009). Leadership and entrepreneurial change: the Centurion operation at Philips Electronics. Journal of Organizational Change Management, vol. 22, pp. 73-91.
  • Christensen C.M. & Overdorf M. (2000). Meeting the Challenge of Disruptive Change. Harvard Business Review, March-April 2000, pp. 1-10.
  • Perez C. (2004). Technological revolutions, paradigm shifts and socio-institutional change. Cambridge University Press, pp. 1-23.
  • Mac Ivor R. et al (2006). Supplier involvement in product development in the electronics industry: A case study. Journal of Engineering and Technology Management, n°23, pp. 374-397.
  • Reger G. (2004). Coordinating globally dispersed research centres of excellence—the case of Philips Electronics. Journal of International Management, n°10, pp. 51-76.
  • Leonard-Barton, D.A. (1992). Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development. Strategic Management Journal, n°13, pp. 111-125.
  • Ford S. et al (2009). Evolving corporate entrepreneurship strategy: technology incubation at Philips. R&D Management, n°40, pp. 81-90.

Corporate reports:

  • Annual report. Philips, 2011.
  • Sustainable Innovation. Philips, 2011.