Philips Electronics Case

Philips Electronics: Case Study

During the 1970's and early 1980's, the industry of audio equipment manufacture had become very competitive and was nearing maturity. The audio market was ready for innovation, but with a customer base (home electronics industry) that held a conservative attitude with regards to new recording technology, success in this new product would have to be a careful combination of a ready market, alliance of key industry leaders, and a superior product to have any chance of supplanting the firmly entrenched vinyl segment. The Compact Disc was an exciting new product into a market that was experiencing stagnation; turntable sales had been decreasing since 1975 primarily due to minimal improvements in sound technology. A handful of Japanese companies were dominating the market due to a reputation of superior quality, design, and value. In addition, during the late 1970's a worldwide economic recession was contributing to a decline in sales of audio equipment. An accepted prototype of the CD was developed by Philips in 1978 but Philips realized it would have a difficult time turning this concept into a standard on its own.

Philips knew they would have their work cut out for them. Past history had proved it was very hard to introduce new technology. Just having a good or even superior product did not guarantee success. One had only to look to the video laser disc (a failed Philips product launch) and the Betamax system (a failed Sony product). The Betamax was far superior to the ultimately accepted VCR systems but due to maintaining propriety and not utilizing licensing, Betamax failed to be accepted and went by the wayside. Due to these failures, Philips knew they would need to build a strategic alliance to help absorb some of the market risk and help facilitate the establishment of industry standards. Additionally, Philips knew that marketing support and production capability had proven to be just as important as R&D in creating a more integrated organizational response to innovation. Past failures also helped these two realize that they had been out of step with the market and in the development of new technology, and that there needed to be a focus on those markets in which consumers are willing (and ready) to adopt new products. Due to past experiences, and present strengths, Philips and Sony had strong motivations to work with one another on this project.

Philips chose Sony and the first commercial CD was presented in 1982. Sony was chosen due to three primary reasons; 1. Sony was considered a world leader in progressive audio equipment manufacture, 2. Sony (being a Japanese company) would gain easier access to the Japanese market, which was long considered to be a ready adopter of new technology, 3. Cor van der Klugt (director at Philips) and Akio Morita (Sony's CEO) had a personal relationship. The alliance of Philips and Sony created a strong combination of technology with marketing.

Philips and Sony developed microchips necessary for the modulation, control, and correction of the digital signal while also developing three IC's that eliminated 500 microchips, making the CD player much more compact and affordable. Philips and Sony worked towards getting their new chips adopted by the Electronic Industries Association (EIA) of Japan. Once this was done, Philips/Sony responded rapidly to ensure the technology was made available to other manufactures of the CD players. Also leery of the past was the record industry itself which was reluctant to buy into the new technology but was also hesitant to pay the three-cent royalty commanded by Philips and Sony for each CD sold.

To help alleviate this reluctance, Philips and Sony set their resources towards the presentation of the CD to the world press to build consumer awareness and interest. Ultimately, this was a success, consumer and trade interest were stimulated and the industry committed to the Philips/Sony CD standard. Now that the standard was accepted, a steady supply of players and recorders needed to be established to meet market needs or failure would be the end result. CD's could only gain in popularity (over vinyl or cassettes) if the consumer had a similarly available selection of recordings from which to choose. Philips and Sony had both developed relationships with the music companies and therefore were able to influence the development of catalogs of CD recordings.

Philips and Sony had to convince both the consumer and the retailers of the value of the CD. The belief was that the consumer would want it because it provided the need for a high quality sound recording that would not deteriorate over time (as do vinyl and tape), provided a low noise, accurate, and portable reproduction