Wac – Philips Nv: Dealing with a Global Financial Crisis
Essay by Dave Cabatay • December 12, 2016 • Case Study • 1,203 Words (5 Pages) • 1,450 Views
David D. Cabatay
EMBA 2018
WAC – Philips NV: Dealing with a Global Financial Crisis
Overview
Philips NV, a diversified technology conglomerate based in the Netherlands that is active in the markets of healthcare, lighting and consumer lifestyle is now facing a strategic crisis. The United States, the most important market for Philips, has caused a global financial meltdown that first started as a large-scale default of home mortgages. These home mortgages, which has been transformed to financial products known as MBS (Mortgaged Backed Securities), has been bought by European banks thereby spreading the financial crisis across Europe and freezing most the financial markets across the world. Now, the United States, United Kingdom, Germany and France, the four most important markets for Philips and represents half of the company’s revenue, is a facing an economic decline. Given that Philips has already declared its goal called Vision 2010 wherein they will double the company’s earnings before interest, tax and amortization (EBITA), they would now be hard-pressed to accomplish the said goal. Furthermore, the case asks how should Philips deal with the credit crunch in the short term and how should Philips come out of it as a robust company in the long term?
Internal Factors
Founded in 1891 by Anton Philips and Gerard Philips in the Netherlands, the company has become a major player at the turn of the century in manufacturing and marketing consumer electronics, household appliances, lighting equipment, medical equipment, imaging equipment, etc. resulting in a strong brand equity known across the world.
Philips also has a history of innovation by introducing new technologies such as the compact disc (CD) and digital video disc (DVD) which has become highly successful. This can be attributed to their strong research and development program focus. Also for Philips, innovation can also mean a new business model or a unique selling proposition. Having said that, Philips has made it a priority in acquiring businesses that strategically fits with its goals and focusing in business lines which the company believes will have more impact and create more value among its shareholders. This includes focusing in the lighting, healthcare and consumer lifestyle markets and shifting to producing products that are more applicable in day-to-day living thereby widening the company’s customer base and avoiding the pitfall of seasonality of earnings.
Given the breakthroughs mentioned above, Philips is not a company without challenges. From year 2000 to 2007, the company’s revenue had fallen at around €11 billion. Furthermore, the company is heavily reliant on earnings from countries which are affected heavily by the global financial crisis such the US, UK, Germany and France. Also, disappointingly, they have not expanded aggressively to countries in Asia and other emerging markets.
External Factors
The emerging markets such as Asia and BRIC serves as new frontiers for Philips as these locations are where the reach of Philips is weak and offers new opportunities for expansion due to the emergence of the middle class in the mentioned regions. As for the developed countries where traditionally Philips is strong, age demographics is evolving wherein it is projected that people who are more than 60 years old will comprise 32% of the total population by 2050. That said, the growth of the medical devices industry will be positively affected with a compounded annual growth rate (CAGR) of 9.3% from 2008 to 2013, together with it the growth of consciousness of pursuing health and wellness.
The entrance of new technological innovations has brought with it positive changes such as awareness among world governments the need to promote the use of green technology and lessening the carbon footprint of their respective countries. The other side of it though is that technological innovations has increased the interconnectedness among countries and regions, thereby increasing the economic risk exposure of Philips. With that reality, Philips must find a way to adapt quickly to unfavorable industry or market circumstances.
In summary, the internal and external factors can be summarized in a SWOT table as shown below:
Strengths | Weaknesses |
1. Strong Brand Equity and Market Leadership across different Business Lines | 1. Pattern of decline in Total Annual Revenues |
2. Focus of the company in acquiring businesses are the world that strategicially fits its priorities and spinning off ones that are not doing well to joint ventures and brand licensing agreements | 2. 48.3% of company revenues are derived from United States, Germany, the United Kingdom, France and Netherlands, countries which are heavily affected by the financial crisis |
3. Strong company focus on Research and Development | 3. Lack of presence and focus in Emerging Markets |
4. Shift of company focus from producing cyclical products to those with day-to-day applications |
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5. Large global reach with production in 29 countries and sales service outlets in 150 |
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Opportunities | Threats |
1. Emergence of the Middle Class in the Emerging Markets due to their robust GDP growth | 1. Highly competitive business environment across all Busines Lines |
2. Growth of the Global Medical Devices Industry | 2. Interconnectedness of the global economy results to the spillover of financial crisis from one region to another (ex. Global Economic Crisis of 2007) |
3. Evolving age demographics among developed nations | 3. Financial crisis is part of the normal economic business cycle (Expansion-Boom-Recession-Depression) |
4. Upward trend of using 'greener' products encouraged especially by governments through legislation |
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5. The pursuit of health and wellness is now a universal trend |
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