Q2. Causes of the management control problems and how they affect performance?
Growth and Decentralization of the companies led to:
At a guest lecture at Kingston University; Jan Oosterveld, the former CEO of Philips Asia Pacific, explained: The main problem of Philips, in the past, was the great diversification into both related and unrelated business areas. Many of the business units were running major deficits and the decentralisation made it difficult to create synergies across the organisation and capture the innovation as the business units was very autonomous. Philips decided to restructure its business by selling off unrelated businesses and businesses who not yielding any profits. In the past, the divisions did not contribute much to the organisation in sharing the innovation so they created a common R&D centre, an area of expertise, bundled together with the rest of the organisation.
By growing and diversifying significantly, Philips decentralised the decision making in the supporting functions of the value chain (i.e. finance, HR, procurement etc). Especially the decentralising the budgeting processes made it difficult for Philips to control the overall cost, as each country specific PD had its own budget. Centralising the supporting functions to country HQ, indicates that the PD will loose autonomy over its operations. The operational processes and culture within the respective PD’s differed widely making job sharing (transfer) and utilisation across business units increasingly difficult. Oosterved. J (2005)
The Matrix Structure - The sudden change of organization without bringing along the business at all levels is the main cause the problems. The matrix organization failed to align the business units with the organization’s goal, allowing them to pursue their own individual goals. I.e., when implementing changes, there should be a clear agenda of what to achieve, but also careful consideration should be taken into the existing parts of the organization that perform well. The pre-change situation should be evaluated and measured before the alterations and after implementation of the changes. The desired effects should be measured and followed by organizational adjustments.
Lack of Direction for the business units - Lack of effective cultural and personnel controls lead to general lack of direction for the business units. There was no commitment or motivation from top management and employees on the ground floor to match growth with capabilities.
Growth through M&A’s - Philips China had grown through M&As and JVs and particularly increased mode of entry via JVs. This growth strategy facilitated loss of control because lack of proper control measures incorporated by Philips. The result was the BU culture did not fit with the overall Philips culture due to differing goals and strategies. Philips growth through M&A’s, not imposing any performance measurements, made it difficult to capture the synergies and evaluate performance of these units.
Vision and Goals - Not having a common vision, hindered Philips to pursue one unified goal for growth. The respective business units have different SWOT’s, but there are some commonalities that could be utilised. As there are no common way on how to measure performance, it is difficult to control the respective business units on how well they perform and furthermore improve their performance. Aditionaly, it is impossible to create synergies between the units functions. People within the organisations have not seen the importance of implementing performance measurement systems. The lack of ownership and support from management, at all levels, made it hard to implement changes in the past. It is core that they manage this through educating and training. There is a lack of a clear governance structure creates problems in reporting.
Responsibility centres - There seems to be no clear responsibility centres and hence no sense of responsibility, accountability and costs allocation. The result was that opaque traceability of costs, which might have incurred elsewhere.
Performance Measurement Systems - It was vague in the case if Philips had any performance measurements at all. Performance measurements like KPIs to quantify financial and non-financial performance, and TQM to increase and/or sustain quality were absent in all of the Philips units. This made it difficult to benchmark performance and control activities.