Industry Trend
In the 1990s the large screen television segment of the consumer electronics industry was about eight years old and growing steadily. The $2 billion U.S. consumer electronics division of one of the largest global CE conglomerates, Philips Electronics, had literally founded the mass market for large screen television but the division had not turned a profit in 7 years, although annual sales exceeded $120 million.
The Company
At the time, Philips was a $30 billion plus global concern manufacturing consumer electronics, semi-conductors, light bulbs, medical equipment and other products. The U.S. consumer electronics division was based in Knoxville, TN and had about $2 billion in revenue from sales mostly in the U.S. The company operated its own manufacturing plants and had upwards of 1,400 employees.
The brands being manufactured and marketed by Philips included Magnavox, Philips and several OEM brands.
The Situation
Even though Industry CAGR was averaging about 7%, the division's revenue CAGR for the past 3 years was -12%. The division had experienced a quality crisis and retailers had started migrating to competing brands. At that time there were about 20 companies offering large screen TVs and Philips' share had eroded from more than 60% to less than 25%. The company began shifting resources to other opportunities and the CFO strongly recommended that the large screen TV division be shut down. The CEO assigned the task to a young executive with previous experience in exit strategies.
Using modeling techniques picked up in previous experiences he discovered in about 4 weeks that the root cause of most of the marketing problems was extensive product line complexity which had, in turn, been caused by ceding control of product development to the sales team.
Because of the corporate culture at the time, sales was extremely strong and had undue influence on product development. Under their control, the product line had quickly proliferated into a complex smorgasbord that attempted to address every retailers' desire for something unique. Parts commonalities diminished, factory throughput slowed to a crawl and the product and engineering team became unable to keep up with a growing and ever changing stream of requests from sales. Quality plummeted, sales shrank, margins shrank as marketing struggled to keep share, and the division's morale hit bottom.
Strategy
After analyzing the market's growth trends and profitability, the newly appointed executive asked to create the company's first business team and pulled together the division leaders from every functional area. He explained the imminent shut-down of the division, presented a bold turnaround plan focusing on pruning the product line, an all new styling approach, creating consumer incentives and strong new partnerships with retailers. Bluntly asking for their support, he promised the demoralized product management, engineering and manufacturing teams (about 200 employees), if they agreed to this new product line and marketing plan, he would freeze the new product line for one year and not allow sales to make any changes of any nature.
Next Steps
- The new business team became joined at the hip. The leaders from each functional division met weekly. In each meeting the team reviewed the financials first. The remainder of the meeting was devoted to the new product line development and understanding the financial implications of each decision impacting the new line.
- The new product line was created quickly, focusing on parts commonalities and differentiation that could be easily appreciated by consumers and retail buyers but did not require unusual changeover times in the factory.
- A new marketing plan was created focusing on national TV advertising, retailer merchandising and sales promotions.
- The young executive leading the turnaround hit the road with the top sales people and helped convince key retailers to give the new product line a try.
Results
The turnaround took a year to execute and another year to demonstrate sales results. At the end of that second year sales were up, market share was up and the division had turned in a $7 million operating profit, following an operating loss of -$5 million the year before. Of all the divisions in the $2 billion company, this division was one of two that turned a profit that year. The team were treated like company heroes and the large screen television division went on to become a significant strategic component of the parent company's overall consumer electronics strategy.