The History Of The Socio Economic Impacts Analysis

Published Date: 02 Nov 2017

Philips Company

Business Methods, Industrial Economics and Strategy

JESSICA MIN TIAW

Table of Contents

ABSTRACT

The purpose of this paper is to propose a strategic and economic management for the Philips Company to achieve the mission of improving quality of lives for 3 billion a year by 2025. SWOT analysis, PWOT analysis and Porter’s Five Forces model are realized to be effective for business and strategic planning, product and business growth for the company. Moreover, supply and demand and socio-economic impact analysis are the common tools used in the process of economic analysis to understand the ways to maximise resources for optimal profits. An evaluation on the strategy implemented by Philips Company at corporate level through diversification has been discussed. Successful diversification will make sure competitive advantage to a company in attaining their mission. 

INTRODUCTION

Philips is the global leader in lightning with a strong and balanced portfolio. The foundation of Philips was established in 1891 in Eindhoven, the Netherlands by Gerard Philips and his father, Frederik Philips. The company began manufacturing carbon-filament lamps and started to create new products, such as vacuum tubes in the early 1920s. Then, Philips was instrumental in the revival of the Stirling engine and has introduced their electric razor in 1930 and 1939. The company started to sell television sets in 1949, which then introduced Philips Records. The world’s first home video cassette recorder was launched in England by Philips in 1972. Philips introduced the first global campaign under the tagline "Let’s make things better" in 1995, where this theme encapsulated the "One Philips" thinking and was rolled out globally in all markets and on all Philips products. In the early 21st century, Philips physics laboratory was scaled down as the company concluded trying to be inventive in end user semiconductor technology through fundamental study.

Nowadays, it had become one of the largest producers in Europe. The company’s headquarter is located at Amsterdam, Netherlands with sales and service operation in over 100 countries, about 118,000 employees worldwide (Philips Company, 2012). Philips is a diversified company which is structured into three core divisions, which are Philips Consumer Lifestyle, Philips Lightning and Philips Healthcare. Philips was the leading manufacturer lightning worldwide measured by applicable revenues in the year of 2012 (Sterling, 2012). In 2012, Philips attained total revenues of €24,788 million, which €9.983 billion were made by Philips Healthcare, €5.953 billion by Philips Consumer Lifestyle, €8.442 billion by Philips Lightning and €247 million from group activities (Philips Company, 2012). The companies operation is made up of four geographical groups:

The North American Group – The United States, Canada and Mexico

The South American Group – Brazil

The Middle and Far East Group – India, Israel, Pakistan, China, Hong Kong, Australia and New Zealand

The Greater Europe Group – France, Greece, Poland, Italy and United Kingdom

The company has posted 4% comparable sales growth in 2012, despite on-going economic challenges and market weaknesses, especially in The United States and Europe (Philips Company, 2012). As seen in Figure 1, the growth geographies made a strong and increasing contribution, which contributes up to 35% of sales in 2012 as compared to 33% in 2011 (Philips, 2012).

Figure 1: Sales by geography (in euro million) (Philips Company, 2012)

Philips is more than a company name. In fact, it is a brand that promises an experience to people. The Philips Company mission is to bring "Sense and Simplicity" to customers with advanced technology goods that are intended specially to meet their necessities (Ishtiaq & Kawtar-Mona, 2008). Nevertheless, Philips will be the best place to work for the people who share their passion and together provide higher value for Philips customers and stakeholders. In 2011, Philips implemented a new set of behaviors which are aimed to raise a new performance culture and distribute sustainable profitable growth. These behaviors are (Philips Company, 2012):

Eager to win

Take ownership

Team up to excel

STRATEGIC AND ECONOMIC ANALYSIS

STRATEGIC ANALYSIS

Strategic analysis is a method showing investigation on the business macro-environment in the operation of the organization as well as on the organization itself for the purpose of strategy formulation. (BNET Business Directory, 2007). According to Worrall, L. (1998), strategic analysis is a hypothetically well-versed understanding of the macro-environment in which an organization exists so that the competence of the organisational can be developed by accumulating the organization’s capacity to deploy and redeploy its resources wisely. In general, strategic analysis is nearly observing on what is going on outside the organization at the moment and sooner. Strategic analysis will aids the organization to get ahead of what might occur, estimate how likely it is to occur and then get ready for the happening, which brings the organization to stronger and further relevant aims, enhanced quality choices and a more confident prospect as the organization are well set for what will happen (National Council for Voluntary Organisations, 2010). Therefore, a number of tools are used in the method of strategic analysis such as PEST analysis, SWOT analysis and Porter’s Five Forces model.

PEST ANALYSIS

PEST Analysis is a strategic tool that used to categorizes macro-environment impacts in which an organization exists as Political, Economic, Socio-Cultural and Technological factors so that Philips can understand the growth or decline of market, its business position, the operations path and potential as all industry entities are beneath the stress of diverse factors within the organization (Kotler, 2005). With the use of PEST, Philips can easily adapt to the actualities of new situation as this analysis aids to breakdown any insensible assumptions and it is realized to be effective for business and strategic planning, marketing planning, growth of product and business and research reports (Papers4You.com, 2009). Moreover, PEST analysis is frequently worthwhile to complete before finalizing a SWOT analysis as PEST factors can be categorized either as threats or opportunities in a SWOT analysis.

Political Factors

Economic Factors

The activity of Philips Company affected by:

Foreign trade regulation

Employment legislation

Monopolies regulation

Taxation policy

Environmental policy

Political balance in the country

Philips as vast manufacturers:

Agreement with an abundant sort of laws and policies, which varying all the time

European countries going on dynamic fluctuations in employment regulation (Federation of European Employees, 2007)

Developed countries are now more environmental concern

Pollution issue, such as water pollution, air pollution, noise pollution

Economy of the country developed at the fastest rate for two years in the third quarter of 2012

Reached 2.5% in September 2012 (Pettinger, 2012)

According to Office for National Statistics (ONS), inflation rates has increased to 2.8% in December 2012 (Pettinger, 2012)

Typical inflation in 2012 is apparent to be about 3.0%

Increase of economic growth inflation and interest rates

Bank of England retained the interest rate at 0.50% (Money Reporter, 2013)

Go through high economic growth due to the company business in developing business

Purchasing power of the consumers increases

Incremental rates of alternate marketing schemes

Growth of new markets

Socio-Cultural Factors

Technological Factors

Philips has massive and assorted socio-cultural field, which includes:

sales and service operation in over 100 countries

around 120 manufacturing facilities across 26 countries

Philips is a highly ethical company which caused consumers start to give more concern to its culture (Jain, 2010)

Philips operation made up of four geographical groups

Population demographics

People from developed countries are more wealthier and expecting higher standards of lifestyles

Afford to purchase the pricey new technologies products

Better income distribution

Levels of education increases

Philips is very reliant on technology

Technology is important as:

Main factor for globalisation

Vital for competitive benefit, prevents slack of company’s market share (Jain, 2010)

Innovative can expand operations of the company

Consumers and businesses are able to experience more innovative products and services

Leads to economy and improved standard of quality for products and services, for examples internet banking, online customer services, new improved and green environment LED bulbs

Philips has put more time and effort to design and develop new technologies although the cost for research and development is more expensive

SWOT ANALYSIS

SWOT Analysis is a marketing tool that used to evaluate the company’s resources to discover Strengths, Weaknesses, Opportunities and Threat. It has been a structure of choice between lots of superiors for an extensive period as a result of its simplicity and interpretation of the principle of strategy formulation, which matching the company’s threats and opportunities with its weaknesses and strengths (Paper4You.com, 2009). According to Kotler (2005), Philips would understand how to deliver their products and correct services to its customers effectively and where its shortcomings are with the help of SWOT. Thus, the company size up the competitive advantage and acquire certain awareness into the vagaries of the marketplace.

Internal to Organisation

External to Organisation

Strength

Brand name of Philips is very powerful and globally recognized, achieved world 41st Most Valuable Brand in 2012

Cost-efficiencies and responsiveness :

Low cost and highly efficient manufacturing and supply base

Integrated value chain and end-to-end processes for fastest time-to-market

Innovation leader :

Leader in LED Lightning

Strong global footprints emphasizing:

Serving customers in over 100+ countries

Growth geographies contributing nearly 40% of the total revenue

Weaknesses

Operates in field where competitiveness is very powerful

Limited product line

Limited stock availability in the company

Almost Dutch-only corporate level

Employs a huge number of people working in different countries :

Communication problems

Problems in controlling operations of different business

Opportunities

Strategic :

Macroeconomics changes

Growth emerging markets help to increase revenue and profits

New innovative products help to improve sales

Higher demand for sustainable and energy savings lightning

Cooperative ventures

Operational :

Transformation program

Innovation process

Supply chain

IT

New market, services and customers help to expand Philip’s market

Product liability

Reputation

Threat

International competition is strong

Cheaper technology

Foreign exchange fluctuations

Changes in interest rates

Economic slows down could affect the market growth

Fast moving nature of the industry

PORTER’S FIVE FORCES MODEL

Porter’s Five Forces model is a business strategy tool that used to evaluate the five forces that controls the company’s competitive environment and frequently used in strategic planning for all CEO, business managers and investors. This model is also used to study the attractiveness of a company structure and assess whether the company is operating underneath a profitable industry (Aboeleinein, 2010). Each force can be characterized as strong, medium or weak forces. Strong forces have high bargaining power, which in turns maximum the enterprise’s capability to raise price or decrease price. However, weak forces have low bargaining power which results in rising decreasing the price so that extra profit can be made (Presentation Helpdesk, 2013). In the meanwhile, strong forces are known as threats whereas weak forces are known as opportunities to the enterprise (Presentation Helpdesk, 2013). In general, strategy formulation could be done through this model so that Philips can detect opportunities and avoid threats.

Porter’s Five Forces model includes three components that measure competition, which is the intensity of existing rivalry, threat of new entrants and threat of substitutes (Wikiwealth, 2012). These external forces are out of the control of the subject Philips. However, the company’s decision is influenced by the internal forces such as the bargaining power of buyers and bargaining power of suppliers. Generally, the subject of Philips is altered by the grouping of these forces which then controls the level of competition (Wikiwealth, 2012)

Threat of New Entrants

High capital requirements and high entry price into market

Low product differentiation

Switching cost for customers is low

Geographic location limits competition

Advanced technologies is necessary

New competitors is difficult to compete in the market as they need to develop new products which is time consuming and required high production cost

Customers are loyal to existing brand

Brand name of Philips achieved world 41st Most Valuable Brand in 2012

Strong competition between competitors

Fast industry growth rate

Low storage cost

Low exit barriers

Large industry size

Allows multiple firms

Produces to prosper without having to steal market share from each other

Intensity of Existing Rivalry

Potential Entrants

Philips Competitors

Suppliers

Buyers

More suppliers’ pressure exert, more bargaining power they have on the company

Increase profitability

Low cost of switching suppliers

Influenced by:

Volume is critical to suppliers

Diverse distribution channels

Bargaining Power of Suppliers

Bargaining Power of Buyers

Rivalry among Existing Films

Threat of Substitutes

Limited number of substitutes

High cost of switching to substitutes

Lower quality of products

More buyers’ pressure exert, more bargaining power they have on the company

Product is important to buyers

Positive feedback from buyers, enhanced profit

Influenced by:

Limited buyer choice

Large number of customers

Limited bargaining leverage when there are large number of customers

Substitute or Service

Substitutes

Threat of Products

2.2 ECONOMIC ANALYSIS

Economic analysis is a systematic method to allocate the optimal use of scarce resources efficiently, study choice problems, which relate to two or more choices evaluation in completing a definite objective in the specified assumptions and limitations. This analysis also considers the prospect costs of revenues employed and tries to measure in monetary terms the quantifiable costs and benefits of a project to the municipal or economy via economic and statistical techniques. Through the understanding for economic analysis, the informal thought of the company is motivated and explained, simple and brief evidence is conveyed for the purpose of project funding choices as well as the unseen assumptions are found, discussed and their influences are considered (Sullivan, 1992). Three common economic analysis such as supply and demand and socio-economic impacts analysis are being out-lined in this section.

SUPPLY AND DEMAND

Market price is determined by supply and demand. Supply and demand curve (Figure 3) stated the position from which there is no tendency to change. Equilibrium exists when the supply and demand intersect at the same point. At this stage, people are pleased with the economic situations as the suppliers are selling entire the products that they have produced while consumers are purchasing all the products that they are demanding at a certain price (Investopedia, 2013). As price rises there is typically a drop in amount of products demanded. Nowadays, there is more demand of sustainable and energy savings lightning from the consumers. Philips Company has to invent more innovative and advanced technology products so that the company can compete with the competitors in the global market and to maintain the constituent supply of the products.

Figure 3: Supple and Demand Curve (Investopedia, 2013)

SOCIO-ECONOMIC IMPACTS ANALYSIS

Socio-economic impacts analysis is used to evaluate just how to reach the goals of energy policy in the best proper manner, which is be subject to the assumptions used for the analysis (Schwarzenegger, et al., 2008). Unlike cost-benefits analysis which observes variations in resource costs and benefits to major recipients, socio-economic impacts analysis is further wider in range as it classifies the direct and indirect as well as the positive and negative possessions of an action or project. This analysis also emphasize on the variations in local population and commercial activity along with fiscal effects upon native governments such as political, social and ethical considerations and also the changes in public amenities and revenues (Schwarzenegger, et al., 2008). Due to the globalization and fast-paced industry, the activity of Philips Company is influenced by the foreign trade, employment law, tax policy, environmental regulations and the political balance in the country. Furthermore, the different geographic locations of the operations of Philips Company have definitely made some profits for the company as in those developed countries, the people are wealthier and afford to purchase higher value technology products to improve their lives.

STRATEGIC AND ECONOMIC CHOICE

STRATEGIC CHOICE

Strategic choice is the vital part which involves consideration of the nature of stakeholders’ prospects, classifying the option of the best strategic choices in terms of the cooperation directions where strategy would change and the approaches by which strategy would be pursued, assessing and choosing the ideal choice between all, which will helps to achieve the organization’s goals. The options for resources, capabilities, competencies along with markets and products should be measured while undergo strategic choice so that the strategic valuation able to categorize the strengths and weaknesses in present resources and capabilities in contrast with the rivals. In the meanwhile, strategic choice also enables the options of potential market and product expected to have need of supportive alterations in resources and capabilities and to identify the developments needed both shore up weakness or to form on current strengths. The options for strategic choice are market penetration, market development, market development and diversification.

CORPORATE LEVEL STRATEGY

Corporate level strategy is the selection and growth of the markets in which a company competes so that the goals of the company can be reached and the sort of businesses that the company is to pursue can be well-defined (Furrer, 2011). It is the strategy that refers to the general proposal for a diversified company, which decides the sorts of industry it must go into, classifies in what manner each unit form synergy or enhance overall competitive advantage of the company (The Daily Business, 2013). Defining corporate strategy consist of two major scopes which is vertical integration and diversification. Vertical integration refers to where the company involves in activities that were previously completed by their consumers or suppliers whereas diversification refers to additional markets that are introduced to the company. Philips is a diversified company which assists professional and consumers market over three intersecting divisions, which is Philips Healthcare, Philips Lightning and Philips Consumer Lifestyles (Furrer, 2011). At the corporate level, Philips needs to increase the company’s value to improve overall performance through its diverse business units by handling its business portfolio efficiently, confirming long lasting success for every business unit and make sure compatibility and coordination between all units. Through corporate strategy, Philips will be able to identify its competitive interaction and selects which unit is to be localised. Further, corporate strategy is also used to develop synergies by sharing and managing resources through entire business units in Philips when every single activity as well as business interrelationships is well controllable (The Daily Business, 2013).

DIVERSIFICATION

Diversification is a method of corporate strategy (Ansoff, 1957). A diversification strategy shows a significant character for large company and lets the company to use its primary capabilities to pursue opportunities in the external environment (Hitt & Ireland, 2008). According to Ansoff (1989), diversification is harshly a strategy that moves out of its existing products and markets then brings the company into new markets with new products when a company diversifies. Generally, a diversification strategy allows the growth of company’s sales volume by introducing new products and finding new market segments (Hitt & Ireland, 2008).

Diversification can be characterized into two kinds, which are the related and unrelated areas. Related diversification can be described as backward integration, forward integration and horizontal integration. Unrelated diversification is not being subject to on any form of similarity as they are alienated into strategic reasons, which are often mentioned by directors in the popular business media and personal motives that CEOs might have for pursuing diversification (Harrison & John, 2009). According to Harrison and John (2009), Philips is a kind of unrelated diversification company as it diversified its business units into different ranges of industries, such as semiconductors, lightning, medical systems, domestic appliances and personal care division. When the strategy permits a company’s business units to upturn profits or cut budgets, value-creating diversification is done by related diversification and yet implementing their business-level strategy. One of the value-creating diversification through unrelated diversification is the financial economies, which causes the allocation of internal capital becomes more efficiently and reorganization of business.

However, it is suggested that Philips should undergo related diversification as well so that the market power for blocking competitors through multipoint competition and vertical integration can be done (Hitt & Ireland, 2008). For the scopes of economies, sharing activities and transferring core competencies will increase the Philips’s value through its overall performance. Nevertheless, related diversification is said to be more profitable although unrelated diversified businesses are likely to grow faster. Related diversification that Philips can undergo is the forward integration. Forward integration refers to company spreads its activities to its outputs, for example distribution channels in similar business. By undergo forward integration, Philips can joins or creates businesses whose character in the distribution of similar products. For example, if Philips buying semi-finished products from an external basis then the work culture will be diverse and there are probabilities of argument about regulations of supply. Hence, Philips should acquire another company which is also leader in the production of similar products so that one division of the same company will transfer goods to other divisions, which further enhance the decrease of transportation costs.

ECONOMIC CHOICE

Economic choice is the choice that decides under diverse uses of scarce resources, which reveals the relationship between supply and demand. There are few options for economic choice to be made, such as production efficiency, product distribution as well as opportunity cost. Production efficiency is a condition when it is not likely to manufacture any extra components of a product deprived of giving away the opportunity to manufacture another product unless a change happens in obtainable productive resources (eNotes.com, 2001). Product distribution is normally determined by prosperity in capitalize monetary system (eNotes.com, 2001). Scarcity occurred because there is not enough of supply to meet the consumers wants. Therefore, economic decision must be made due to the endless wants of consumers and the limited resources to satisfy them. There are costs exist once there is scarcity and choice. Consumers make judgements based on expecting more benefits from one substitute than another, which results in an opportunity cost occurred in the choice. Opportunity cost is the benefit that is gone in deciding between two rival uses of scarce resource. It is the best substitute for consumers if they can’t get what they want for. Opportunity cost also influenced by the surrounding circumstances. Sometimes, the results may not be optimal as the consumers are forced into a decision due to the circumstances. As in industry, Philips has to trade off any money-losing operations so that the company can focus its management resources. For example, Philips traded its television manufacture and sales operations to a shared venture with a Taiwanese firm in April 2012 so that Philips can emphasis on the medical systems marketplace, which result in a remarkably rapid turnaround of the company’s future (Nojima, 2013).

STRATEGIC AND ECONOMIC IMPLEMENTATION

Implementation is the method that changes strategies and ideas into actions, such as development of programs, procedures, budgets and policies so as to achieve strategic aims and intentions. Strategic and economic implementation is the most difficult stage of business management that consist of the use of managerial and organizational tools to direct resources to accomplish satisfactory outcomes. Nevertheless, strategic and economic analysis and choice are two important components of that purpose. It may require few months to years for completion and the process of implementing take in executives at all levels.

ORGANISATIONAL STRUCTURE

Organizational structure provides distinct value developing activities and responsibilities to the employees and mentions the way of these activities and responsibilities can be related so as exploit productivity, value and consumer satisfaction. The purposes of organizational structure are to balance economic advantages of specialization activities with the problems and costs of organization and motivation, such as bureaucratic costs which arise from organization activities, motivation issues, supervisory monitoring and information bias. There are three types of generic organizational structures, such as unitary or functional structures (U-form), multidivisional structures (M-form) and holding or conglomerate structures (H-form). For implementing corporate level strategy, the multidivisional organizational structures should be used as this structure is designed to accomplish diversification while monitoring bureaucratic costs and the control problem. Multidivisional structures reorganize operating executive to the business unit where all required economical and operational choices are made. The headquarters level has the responsibility for the strategic decision-making and also to monitor the division’s performance by suing both objective and subjective market performance measures. With a new organizational structure, Philips is able to boost the developing of economic of scopes through division and therefore accelerates diversifications and growth.

BALANCED SCORECARD (BSC)

Balanced Scorecard (BSC) is a measurement tools for turning strategy into particular goals, actions and objectives as well as monitoring the way of implementation of strategy is done for the future. Implementation of balanced scorecard is suggested for massive companies with a multipart organization structure. It is more well-organized to progress scorecards at the strategic business unit level if these units have their particular goods, consumers, production services, strategy, marketing and distribution channels, where these can be secured to the corporate scorecard when a company is diversified. With the diversifying product lines and divisions, the management is able to streamline the complicated process of running Philips, which is a complex international company. Philips should use the balanced scorecard to support the company’s vision, motivate employees on the way they fit into the bigger picture of the company and teach them on what determine the business. Balanced scorecard acts as a path to get key monetary indicators and construct an assessable expression of the business strategy. Therefore, Philips should design the balanced scorecard to provide a shared understanding of the company’s strategic policies and vision of the future because Philips believe that the scorecard will helps the company to have better understanding about what drives present performance is the basis to determine the way of achieving future results. The scorecard can help Philips focus on factors critical for their business success and align hundreds of indicators that measure their markets, operations and laboratories. The business variables crucial for creating value, which are known as the four critical success factors (CSFs) on Philips balanced scorecard, are customers, financial, internal business processes and learning and growth. In order to measure performance, the objective is to change presumed relations for example product sales and consumers satisfaction into critical success factors. Philips should identify which financial and customer offers a competitive advantage and defines the process that have the maximum influence on the financial and customers giving the company that advantage.

ECONOMIC RESOURCES

Economic resources also known as factors of production, which is characterized into four basic groups, which is land, labour, capital and entrepreneurship (eNotes.com, 2001). In terms of economic, land is classified as the resources that come from the land. The common kind of human effort used is labour, which includes physical labour and mental labour. As in industry, mental labour is necessary for the company to plan the best ways for strategy management and making decisions for implementing the strategy chosen. Besides that, capital is idea that is regularly observed in two behaviours, much as is labour, which also noticed as human capital such as knowledge, abilities and attitudes that human hold that permit them to produce and another kind of capital is physical capital, which comprises buildings, equipment and tools for the production of goods and services. Furthermore, entrepreneurship is another important factor for any business to success. Entrepreneurial capabilities are required to develop what the company have and to construct new and better products and services with all the resources desired and assuming the risk of success and failure. Thus, the company’s market price will increased by achieving equilibrium in the relationship between supply and demand as scarcity will reduced if there is enough supply to meet consumer’s demand.

CONCLUSION

Strategy management consists of three main components, which is the understanding of strategic analysis, deciding strategic choices for future as well as dealing and handling strategy in action. The strategy of a company denotes to its wide-ranging proposal or program so that the vision and mission of the company can be accomplished in the extensive period. Philips wants to alter their strategies as the environment changes so that they will be able to adapt the environment not only to succeed but also to survive. The strategic analysis discussed is the PEST Analysis, SWOT Analysis and Porter’s Five Forces model whereas economic analysis consists of supply and demand as well as socio-economic impacts analysis. Both the strategic and economic analysis is likely to be inter-related. Every single choice is evaluate, then optimal choice is selected and implemented based on the numerous strategic choices. The chosen strategy for Philips is the corporate level strategy through diversification. Philips is a diversified company as it is can involve in several businesses and markets. Consequently, Philips’s level of diversification is one of the core models creating its corporate level strategy. Moreover, strategic analysis and choices are two vital constituents of the implementation stage of the strategic management plan, which is the central role in the strategic management implementation method. For a proposed strategy to turn out to be a realized strategy Philips must have good organisational structure, good systems and processes as well as good supply of economic resources.