Philips is learning that cutting jobs reduces costs but does not impress the marketplace, increase output or reform the management system. Robert Heller assesses the company's flagging fortunes.
The grim 77% slump in third-quarter profits reveals hard truths about Philips. Time after time, the Dutch electronics empire has promised a brighter future, only to collapse into dimness. Now the decline also confirms a deepening suspicion about Europe's great downsizing wave: it may not work.
Only recently, the Philips contraction seemed to be paying off. Thanks primarily to strong demand for silicon chips, the workforce, slashed from 300,000 to 244,000 in only two years, recovered to 265,000 as 1996 began. But then PC sales and chip prices foundered - leaving Philips stuck with chronic low profitability (under 4% of sales).
The weakening of the company's markets, while real enough, doesn't truly explain the relapse. New chief executive Cor Boonstra offers a compelling diagnosis: 'We're not blaming the market, we're not blaming the competition ...
We the management are responsible.' His candour is refreshing - although newcomers (Boonstra arrived from America's Sara Lee only two years ago) seldom find it painful to savage the sins of their predecessors.
The breast-beating, however, is an encouraging start. Downsizing removes labour and other costs from the inputs. But it does not impress the marketplace, increase the output or reform the management system. The last of these reforms is crucial - yet is often strangely wanting. Thus, in Boonstra's promised revamp, managers will be expected 'to produce regular budgets against which the performance of their division' will be measured. Yet how could such elementary procedure be ignored in so sophisticated a company?
In fact, the sophistication applies far more to the technology than to the management, with unhappy consequences for both. Nearly 7% of revenue goes into R&D. But the technological genius of Philips has not spawned an array of world-leading products to match Sony's. This gap between promise and performance has its causes in a culture that rooted Philips in constipated ways.
Management remained deeply conservative, for all its progressive adventures into new goodies like multimedia, ranging from set-top boxes for interactive TV to personal computer-compatible compact music disks with advanced video features. The results were misfires like Compact Disk-Interactive, which Philips launched in the US in 1991 as 'The Imagination Machine'. In five years, it sold a scant 200,000 copies and lost an estimated $1 billion.
To quote the Wall Street Journal, 'Not only did Philips invest its hopes too heavily in a technology that became obsolete even as it rolled off the assembly lines, but its Dutch management pushed that technology into a market it didn't understand.' Mismanagement can easily wipe out all the benefits of technical advances. Lumbered with 'sacred cows' and 'taboos', Philips is less nimble, aggressive and consumer-oriented than its markets demand - that is Boonstra's own verdict.
Managers must have noticed threatening changes in markets, such as shortening product life-cycles, increased segmentation and heightened customer expectations.
The downsizing Operation Centurion, however, wasn't a reaction to the turbulent marketplace, but an attempt to improve feeble earnings by cutting costs - without tackling the layers of managerial bureaucracy which gummed up the works.
One consultant hired by Philips noted that work on reforming its processes concentrated on those areas where results were poor: for instance, some of the Latin American businesses, which accounted for only a trivial part of the whole. In contrast, the vast businesses like lamp bulbs - cash cows which were still churning out large profits - were left untouched.
The whole Philips problem is encapsulated in this attitude. The rich cash-flow which stems from historic brands and entrenched market positions finances managerial incompetence, encourages complacency, and feeds European vices. These include a tendency to employ too many indirect workers within over-large bureaucracies, to have too many management layers, to concentrate on productivity in the plants while ignoring it in executive and other office processes, and to slow down decision-taking through hierarchical discussions.
To its credit, Royal Dutch-Shell, for example, reacting to dissatisfaction among investors and top management itself, moved to explode this cosiness, shaking up the hierarchy from top to bottom, even though it was earning oil's largest profits: but its recent quarterly results, an earnings decline of 7%, perhaps indicates that action was taken only just in time. Another result of the European vice is that reform takes so long it may well confront a different situation at the end than the beginning - again, see Philips.
Philips' Operation Centurion achieved a 30% rise in sales per employee that took five years to achieve and ended with the company's strategy under threat and thousands more people losing jobs. Downsizers should heed this bad example. Incorporate harsh self-criticism into the system; react equally to external critics; link higher productivity with high-class growth management; and don't hang about - strike while the company is hot.