Case 2

Philips China
May 30, 2007

(1) What are the management control problems at Philips China?

(2) What do you think are the causes of these problems? How do these management control problems affect performance?

(3) What can be done about these problems? Distinguish between short-term and long-run solutions, and indicate where these problems are located.

(4) Propose an action plan that Pratt Hsu can take with him to the Corporate Strategy Group meeting

Executive Summary


Philips China Group has witnessed increased growth through Merges & Acquisitions (M&A) and Joint Ventures (JV) since it was founded as a lamp factory in 1891. The company is organized into a matrix structure around its five product divisions, with one corporate division supporting the functions. This growth has effected the organization; profit margins have derailed in 2001 and 2002, there is lack of synergies among the units and a general loss of control and high administration costs.

Double line reporting, ineffective governance (or control) structure, lack of responsibility accounting, goal incongruence, lack of communication, personnel and cultural controls problems are some of the control problems that exist in Philips China Group. The main causes of these control problems, we believe, are cultural misfit resulting out of the increasing growth of Philips China, lack of any reporting structure, disparate systems and processes and enforcement of policies and/or strategies making the business units pursue their own opportunistic goals. 


Mr. Pratt Hsu, the HR VP has been mandated to implement the corporate actions to deal with the challenges and handle the issues at hand: the TOP program to capture synergies and align business processes, HR challenges to improve cost efficiencies of HR services, motivate employees and make the HR competitive, and lastly corporate culture problems. The need for different organizational set up of the Chinese subsidiaries is therefore imminent for Philips Groups of Companies to capture real value. The following proposed solutions in line with the tasks given to Prat Hsu:

*      TOP Program: Define a vision of a shared service in line with business goals, create a relevant governance model for the business units, incorporate TQM, Balance scorecard and other performance measurements like Key Performance Indicators (KPIs). This leads to mapping all processes, procedures, policies and consolidating them.

*      Redefine HR: map all transactional/administrative and technical HR, restructure them into shared service centre and design appropriate management control system for each.

Corporate Culture: increase training by transferring labour across regions, increase ownership to work processes and control in areas with high specific assets, and increase management control in value add activities for Philips China

Restructuring the purchasing department will have limited effect on the company performance. To be able to maintain its premium status as a manufacturing company the whole firm needs to restructured. A hierarchical structure is proposed to create transparency and accountability. Measurable work processes will make it possible to implement reward/incentive systems, this will increase motivation and secondly efficiency.

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