Established in 1891 in Eindhoven, the Netherlands, KoninklijkePhilips NV is one of the world’s oldest multinational companies.The company began making lighting products and over timediversified into a range of businesses that included domesticappliances, consumer electronics, and health care products. Fromthe beginning, the small Dutch domestic market created pressuresfor Philips to look to foreign markets for growth.
By the start of World War II, Philips already had a globalpresence. During the war, the Netherlands was occupied by Germany.By necessity, the company’s national organizations in countriessuch as Australia, Brazil, Canada, United Kingdom, and the UnitedStates gained considerable autonomy during this period. After thewar, a structure based on strong national organizations remained inplace. Each was in essence a self-contained entity responsible formuch of its own manufacturing, marketing, and sales.
Most R&D activities, however, were centralized at Philips’Eindhoven headquarters. Reflecting this, several product divisionswere created. Based in Eindhoven, the product divisions developedtechnologies and products, which were then made and sold by thedifferent national organizations. During this period, the careertrack of most senior managers at Philips involved significantpostings in various national organizations around the world (acareer development practice often seen still in multinationalcorporations).
For several decades this organizational arrangement worked well.It allowed Philips to customize its product offerings, sales, andmarketing efforts to the conditions that existed in differentnational markets. By the 1970s, however, flaws were appearing inthe approach. The structure involved significant duplication ofactivities around the world, particularly in manufacturing. Whentrade barriers were high, this did not matter so much, but thesignificance of its effect became important when trade barriersstarted to fall and competitors came into the marketplace. Thesecompetitors included Sony and Matsushita from Japan, GeneralElectric from the United States, and Samsung from South Korea. Theygained market share by serving increasingly global markets fromcentralized production facilities, where they could achieve lowercosts.
Philips’ response was to try to tilt the balance of power in itsstructure away from national organizations and toward productdivisions. International production centers were established underthe direction of the product divisions. The national organizations,however, remained responsible for local marketing and sales, andthey often maintained control over some local productionfacilities. One problem Philips faced in trying to change itsstructure at this time was that most senior managers had come upthrough the national organizations. Consequently, they were loyalto them and tended to protect their autonomy.
Despite several reorganization efforts, the nationalorganizations remained a strong influence
at Philips until not too long ago. Former CEO Cor Boonstrafamously described the company’s organizational structure as a“plate of spaghetti” and asked how Philips could compete when thecompany had 350 subsidiaries around the world and significantduplication of manufacturing and marketing efforts acrossnations.
Boonstra instituted a radical reorganization. He replaced thecompany’s 21 product divisions with just 7 global businessdivisions, making them responsible for global product development,production, and marketing. The heads of the divisions reporteddirectly to him, while the national organizations reported to thedivisions. The national organizations remained responsible forlocal sales and local marketing efforts, but after thisreorganization they finally lost their historic sway on thecompany.
Philips, however, continued to underperform its global rivals.By 2008, Gerard Kleisterlee, who succeeded Boonstra as CEO in 2001,decided Philips was still not sufficiently focused on globalmarkets. He reorganized yet again, this time around just threeglobal divisions: health care, lighting, and consumer lifestyle(which included the company’s electronics businesses). These arealso the three divisions that are in place under the most recentCEO, Frans van Houten, who became the CEO of Philips in 2011.
The three divisions are responsible for product strategy, globalmarketing, and shifting of production to low-cost locations (oroutsourcing production). The divisions also took over some salesresponsibilities, particularly dealing with global retail chainssuch as Walmart, Tesco, and Carrefour. To accommodate nationaldifferences, however, some sales and marketing activities remainedlocated at the national organizations.
QUESTION: Describe how, without setting up any newsubsidiaries or changing where any of the subsidiaries wereheadquartered or how they operated, the company might havetransferred profits from subsidiaries in high tax jurisdictions tothose in low tax jurisdictions in order to reduce the total amountof tax it had to pay to all of the various host countries where its350 subsidiaries were located
