diversification, growth and risk: casestudy of philips and...

Salskov Bjørn

Master of Science in EU Business and Law in the EU

Academic Year 2006-2007

Diversification, growth and risk:

Casestudy of Philips and Siemens

Supervisor: Erik Strøjer Madsen

Aarhus Business School

1

Table of Contents

1. Introduction ____________________________________________________________4 1.1. Problem statement _________________________________________________________ 4

2. Diversification Theory____________________________________________________7 2.1 Competition and diversification in a theoretic framework _________________________ 8 2.2 Risk reduction and value increase ____________________________________________ 13 2.3 Schumpeter’s economic development, innovation and the entrepreneur ____________ 16 2.4. Using patent data _________________________________________________________ 18

3. Industry Analysis: The Lighting Industry___________________________________19 3.1. Internal rivalry ___________________________________________________________ 20 3.2. Suppliers ________________________________________________________________ 21 3.3. New entrants _____________________________________________________________ 22 3.4 Bargaining power of buyers _________________________________________________ 23 3.5. Substitutes_______________________________________________________________ 24 3.6. Summary ________________________________________________________________ 24

4. Empiric analysis – Philips________________________________________________26 4.1. Introduction _____________________________________________________________ 26 4.2. Product Diversification ____________________________________________________ 28

4.2.1. Indexes ______________________________________________________________________33 4.2.2. Summary _____________________________________________________________________34

4.3. International diversification ________________________________________________ 35 4.3.1. Turnover analysis by continent – worldwide level _____________________________________35 4.3.2. A closer look at the European Level ________________________________________________38 4.3.3. Indexes ______________________________________________________________________39 4.3.4. Manufacturing distribution in year 2000_____________________________________________40 4.3.5. Summary _____________________________________________________________________41

4.4. Technology Diversification _________________________________________________ 41 4.4.1 Patents _______________________________________________________________________41 4.4.2. Number of Patent Applications ____________________________________________________42 4.4.3. Patents per sector_______________________________________________________________43 4.4.4. Indexes ______________________________________________________________________44 4.4.5. Summary _____________________________________________________________________45

4.5. Zoom in on the lighting division _____________________________________________ 46 4.5.1. Introduction ___________________________________________________________________46 4.5.2 Product diversification ___________________________________________________________48 4.5.3. International diversification ______________________________________________________49 4.5.4. Technology diversification _______________________________________________________50 4.5.5. Summary _____________________________________________________________________50

4.6 Summary on Diversification in Philips ________________________________________ 51 5. Empiric analysis – Siemens AG ___________________________________________52

5.1. Introduction _____________________________________________________________ 52

5.2. Product Diversification ____________________________________________________ 53 5.2.1. The Indexes ___________________________________________________________________59 5.2.2. Summary _____________________________________________________________________59

5.3. International Diversification ________________________________________________ 60 5.3.1. Turnover analysis by continent – worldwide level _____________________________________60 5.3.2. A closer look at the European Level ________________________________________________62 5.3.3. The Indexes ___________________________________________________________________63 4.3.4. Summary _____________________________________________________________________64

5.4. Technology / Patents Diversification _________________________________________ 65 Figure 37: Technological diversification 1850-2000_________________________________ 65

5.4.1. Patent evolution over the years ____________________________________________________66 5.4.2. Diversification by Field of Technology _____________________________________________67 5.4.3. Patents by Applicant Country _____________________________________________________69 5.4.4. The Indexes ___________________________________________________________________69 5.4.5. Summary _____________________________________________________________________71

5.5. Zoom in on Lighting: OSRAM ______________________________________________ 71 5.5.1. Introduction ___________________________________________________________________71 5.5.2. Product Diversification of OSRAM ________________________________________________72 5.5.3 Technological Diversification _____________________________________________________73 5.5.4. International Diversification ______________________________________________________73 5.5.5. Summary _____________________________________________________________________74

5.6 Conclusion on Siemens _____________________________________________________ 74 6. Company comparison on diversification ____________________________________75

6.1. The Berry indexes compared________________________________________________ 75 6.2. Comparing the firms with stock prices. _______________________________________ 76

7. Conclusion ____________________________________________________________78

8. Bibliography __________________________________________________________80

1. Introduction

Diversification is an activity well known to nearly every company in the world. By diversifying

technologically, geographically or product wise, companies try to avoid that their share of a

given market is taken over by competitors. Another reason for diversifying is the fast that by

placing one’s eggs in several baskets, the risk of losing them all, is reduced.

Various works are written about diversification and growth in order to theoretically predict the

optimal level of diversification that creates the highest growth rate with a minimum of risk.

Furthermore, empiric investigations have been made in order to determine whether

diversification, growth and risk in praxis, follows the theory.

1.1. Problem statement

This thesis will answer the following question:

How does the theoretic connection between diversification, growth and risk fit to the

behaviour of Philips and Siemens?

This leads to three sub questions:

1. What does theory predict about diversification in a competitive setting and does

this theory apply to the lighting industry?

2. Which behaviour is expected of Philips and Siemens in terms of diversification?

3. Could the development in stock prices be linked to the diversification behaviour

of the two companies?

Throughout this paper it is assumed that companies diversify for two reasons: to reduce risk

and/or to increase value of the company. Furthermore it is assumed that the overall goal in

both companies is to provide the largest profits to the shareholders at a minimum risk. The

analysis should help conclude on which of the companies that have been diversified most in

the period and what this has brought the company in terms of value. In the analysis there will

be a comparison of growth stock in prices in order to be able to evaluate the performance of

the companies in the period, which is analysed.

This paper aims at analysing Philips and Siemens as far as diversification is concerned. Since

this paper grounds itself in the lighting industry, the paper will present an industry analysis in

order to assess if there are any competitive reasons to diversify. After this analysis, the different

types of diversification will be discussed: this will be done by analysing international

diversification, product diversification and technology diversification. More concretely this

paper zooms in on the years 1987, 1993, 1997 and 2000 – although other years will be used if

they are interesting within the framework of diversification.

International diversification will be analysed by evaluating both sales and production per

country. The analysis should give an idea on the amount of international diversification Philips

and Siemens have gone through in the course of the years.

Product diversification will be discussed on two dimensions. First the paper will look at the

range of products and the development within the range of products. Secondly, a turnover

analysis will be presented in order to bring insight in the composition and evolution of sales of

products in the different markets.

Thirdly, technology diversification will be evaluated through the available patent data as well as

information gathered from management and annual reports. It is possible to give a good

overview of the technology diversification, which have been going on in the firms and see if

the development is related to any of the other diversification analysis.

The different diversification analyses will also be analysed for linkages and possible

explanations for linkages. At the same time diversification will be linked to the competitive

ability of the firms because the firms might diversify because of competitive reasons in the

industry.

Finally, all of the diversification analyses will be matched with a linkage with stock price.

Although other variables can influence stock price, to a certain extent this analysis should

clarify if there is a link between diversification and profitability. It is though also important to

state if there has been changes in the companies’ risk profiles in the period because it could be

a specific strategic goal to reduce risk.

The analysis will, however, not deal only with the risk reducing effects of diversification but

will try to analyse on how the different actions taken by Siemens and Philips in the focus years

are related to diversification (thereby also risk) and how this has shown in the growth in stock

prices as a measure of their price earnings.

By answering the above questions on Philips and Siemens it should be possible to both to see

how the capital markets react to diversification and how the reaction is to changes in the

companies risk profile.

2. Diversification Theory There are several ways for a company to diversify, however, the analysis of this paper will focus

on the following three:

• International diversification,

• Product diversification

• Technology diversification.

It is clear that each of the diversification methods does not rule out the others, hence firms can

diversify in all three ways simultaneously. In the 60´s and 70´s the financial markets reacted

positively to diversification (Constantinos C. Markides, page 2), causing firms to diversify a lot

in these years. For many firms, it was an excessive process leading to a restructuring phase in

the 80´s and 90´s (Constantinos C. Markides Page 2), which was welcomed by the financial

markets1. The problem in recent years is that firms have restructured so much back to core

business that they might be unable to reap the benefits from moderate diversification. If the

connection between diversification and performance is curvilinear then firms might under

diversify because of the reaction from the financial markets

The following analysis deals with the three diversification methods described above. Below the

three diversification methods will be elaborated on in order to provide clarity about these

methods and the following analysis.

International diversification is a geographical diversification in two dimensions. First of all this

means that the firm starts to sell its products in new markets. Secondly internationalisation can

also mean relocation of production to other and/or more countries (Bodnar et al, 1997, page

3).

The definition used in this analysis is based upon investment in foreign markets meaning that

when a company has invested in a foreign market it is diversified. This definition does not

foresee any relatedness between the markets and therefore does not provide any insight on the

relatedness of the diversification. The problem of relatedness is very important to the company

but in the analysis it can only be dealt with through a far more extensive analysis that can

provide an insight into the cultures of the specific countries and how the product in question

fits into these cultures.

1 Focus on deconglomeration

The problem in this analysis is the question of how many countries a company should diversify

to: Diversifying means that you are able to reduce risk or increase value but at one point the

diversification can become too broad (an over diversified firm) which means that

diversification will provide a lower performance on a long term basis. This also means that risk

reduction is becoming too expensive.

Product diversification is a broadening in product range. This can be in related areas, which

means that the product has some similarities in the way they are produced or assembled or any

other way that has relatedness to existing products. As in international diversification the

analysis of relatedness will become very technical because the products are technically very

complicated and so makes the relatedness analysis very technical and such an analysis would be

better left to an engineer. There will always be grey areas in a relatedness analysis because some

products might have a little relation with each other and will that make the products related or

not? This will be one of the problems faced with in the relatedness analysis. In this paper focus

will be on the range/number of different product divisions and the link it has to both risk and

value in the firm. The relatedness analysis in this paper is only done on a Fraunhofer division

classification because this can provide an overview of the relatedness in a company’s

diversification.

Technological diversification is broadening the technologies of the firms. As with product

diversification this can be done into unrelated and related fields. To measure technology

diversification, patent data will be used which both gives the years of application, the issue

years and which field the patent can be placed in. This makes it possible to see if the firm has

developed its technology into related or unrelated areas. The analysis in technology

diversification will because of the data specifications deal with the relatedness issue. The

Fraunhofer classification is used and this will also be described thoroughly in a later chapter.

2.1 Competition and diversification in a theoretic framework

The following section deals with competition and the effects competition has or might have on

diversification. To analyse the link between competition and diversification there is a need to

introduce the basic competition theory. Competition ranges between perfect competition and

monopoly and the figure below links prices and quantities with marginal costs.

Figure 1: Competitive modes

Source: The author

MC=AC=C

Monopoly=Chamberlin (collusion)

Cournot

Stackelberg

Pm

Pc

Ps

Ppc

D MR

Qm QpcQc Qs Quantity

Price

The above figure shows the different modes of competition. The monopolist sells the lowest

quantity at the highest price and in perfect competition the largest quantity is sold at the lowest

price. Theoretically the profits will always be highest in the monopoly situation and in perfect

competition there will not be any profits at all. The question is whether any of the different

competitive modes would foster diversification? To be able to answer that question there is a

need to describe the competitive behaviour within the different theories.

The monopoly situation gives rise to the highest possible profits. There is only one market

player, the monopolist, and therefore there is no competition in the market (Lipczynski 2001

page 4). There are the two main, contradicting, arguments concerning monopoly and

innovation, which is applied to diversification because diversification and innovation are closely

linked. The Austrian economist J.A. Schumpeter, which will be discusses in a later chapter,

postulated that since a monopolist has excess profits, this excess profits will be invested in

innovation, meaning that monopolists would be more innovative (Schumpeter 1978, page 22).

This way of thinking can be applied to the context of diversification because diversification will

demand some investment and a monopolist will, ceteris paribus, have more profit to invest in

diversification. The opposite argumentation relates to lack of competition in the market – since

a monopolist will never experience any competition the monopolist grows “fat and lazy”.

There will be no innovation in the company and applying this argumentation to diversification,

it means that the monopolist would not apply this strategy. The theoretic discussion above is

inconclusive on the matter of competition in a monopoly situation and the relationship to

diversification as there are contradicting, but valid argumentations on diversification in a

monopoly situation.

Cournot is the competitive scenario with two players in the market competing on quantity

(Lipczynski 2001 page 20). The profits in this situation will be lower than in the monopoly

situation but profits would still be relatively high. The following analysis builds upon the

assumption that the Cournot model is in equilibrium2 and that it is a stable equilibrium. This

theoretic situation describes how the two players in the market react towards the each other

and how the supply curve looks. The Cournot situation does provide competition in the

market but the important aspect is that all moves by the players influence the other player. So

when relating the Cournot competitive situation to diversification the influence between the

players in the market is important. In the Cournot model the so-called “fat and lazy” principle

cannot be applied because this argumentation builds upon the lack of competition and in the

Cournot model there is competition between the players.

The Schumpeter view where the excess profits lead to innovation and also leads to

diversification can be applied in the Cournot model since both players are able to create profits

and they are both able to invest this in new innovations, which will lead to diversification. The

firms will, according to Schumpeter, innovate and this will most likely lead to technology

diversification and product diversification. The reason is that because a market divided between

only two players is most likely a mature or high entrance cost market, which implies less

product development and therefore less innovation in the product. There does not seem to be

a direct link between international diversification and Cournot competitive situation. There

might though be some profitability in size, meaning that if the product has low variable costs 2 Demand equals supply and both players are satisfied with the given supply

and high fixed costs the firms are able gain from scale economies. The link between the

Cournot situation and international diversification could be secondary, meaning that by

diversifying geographically a firm might be able to profit in other markets and thereby gain a

competitive advantage in the Cournot market. The conclusion on the Cournot market must be

that according to theory the competitive mode will provide firms with a reason for

diversification. The diversification mode, which is chosen, will be firm specific in this scenario

but the competitive mode should foster some kind of diversification.

In the Stackelberg competitive mode (Lipczynski 2001 page 28), there are various players, but

contrary to perfect competition, one firm has a first mover advantage and is thereby able to

earn above perfect competition profits. Since there is competition in the market the “Fat and

Lazy” argumentation is not feasible here. In the Stackelberg mode there is more competition

than in the Cournot mode and this higher competitive mode also leads to less profit. To follow

the Schumpeter theory of profits and innovation the Stackelberg mode should also provide

profits, which could be invested in innovation leading to diversification. It is, however, possible

for the first mover in the Stackelberg model only to innovate existing products, which, ceteris

paribus, would not lead to diversification. The first mover advantage could very well lead to

international diversification since the company already knows how to move first in one market.

The risk associated to being a first mover in a new market is diminished hence the possibility of

high profits with lower risk. The conclusion on the Stackelberg competitive mode must be that

the higher profits according to theory would create an incentive to innovate hence creating

technology diversification. Furthermore, it might also vary with the product and lead to

product diversification. Lastly, the Stackelberg mode also theoretically brings about an

incentive to international diversification because of the first mover experience.

The profit in the Stackelberg mode is close to what would be expected in the monopolistic

competition model. The product is homogeneous, leading to above perfect competition profits.

When products are not homogeneous, the incentive for product diversification increases

because there is already knowledge about the positive profits. The conclusion is the theory of

Stackelberg provides several reasons for all three modes of diversification.

The perfect competitive situation provides no profits for the players. This means that long-

term average costs are equal to the price of the product sold in the market. This scenario does

not seem to be able to provide any profits to let the players in the market diversify at any level.

Following this argumentation there will be no diversification from companies who are players

in a perfect competitive market.

The above theoretic analysis has provided an insight into how competition and diversification

could be related when only looking at it from the competitive perspective. The figure below

shows how the relation between diversification and competition is according to theory

presented here.

Figure 2: Connection between competition and diversification

Diversification

Competition Low

High

High

Low

inconclusive

Source: The author

From the above figure the theoretic link between competition and diversification is clear. The

first part where the competition is low (monopoly), the graph is inconclusive due to the fact

that monopolists could decide to use or to not use the excess profit to innovate and diversify.

The remaining part of the figure shows that theoretically there should be an optimal amount of

diversification at any given competitive level. Furthermore it is seen that the highest amount of

diversification is closer to the perfect competitive scenario than it is to the monopoly situation.

Ignoring the outer left and right part of the figure, the main part of the curve indicates that

companies are to be forced into diversification through tough competition – the more

competition, the more diversification despite less excess profit.

The first hypotheses is bound by the fact that the companies in the industry will have to gain

advantages from becoming diversified, this being advantages from scale and scope economy:

H1: The competitive level fosters firms to become internationally diversified, product

diversified and technologically diversified.

2.2 Risk reduction and value increase

The following section gives an insight into how diversification can provide a reduction of risk

and, on the other side, can provide an increase in the value of the firm.

There has been an academic discussion going on throughout the 70´s, 80´s and 90´s on positive

and negative effects from diversification. It has been stated above that diversification is a good

measure to reduce risk and might also be used to enhance value. The problem is however if

diversified firms create higher values than non-diversified firms? It has already been shown that

firms operating in unrelated businesses have lower values than a portfolio of firms operating in

the same businesses (Lamont 2000 page 24). This means that the company with the highest

degree of diversification in unrelated business would be the company that has experienced the

lowest growth in stock prices in the focus years.

The first diversification mode that will be analysed is international diversification. International

diversification is used as a measure that minimizes risk in an investment portfolio (Nilsson

2002 page 1). If a company involves itself in international diversification it is possible to lower

the risk in the firm. International diversification can lower risk in a firm if the economics in the

markets move differently, meaning that an economic downturn in one market does not show in

the companies’ value because there is an upturn in another market. With increasing trade

between markets in the world and the merger of markets, EU, NAFTA, etc, there will be less

variance in the movements of the markets so the reason for international diversification is

minimised. The possibility of asymmetric shocks still provides some reason for international

diversification if thinking of risk reduction, but if markets trade more and more, this will occur

less frequently. The other reason to internationally diversify is to create more value in the firm

hence higher price earnings. Here economies of scope could be a good reason for international

diversification (Scott 1993 page 13). If a company is able to use knowledge from an existing

market in a new market at a lower cost compared to competitors, then the price earnings ratio

raises relatively more. Also scale economies can be a reason for international diversification. If

the fixed costs are relatively high compared to the variable costs of the product, then a

company could increase its price earnings by producing a larger quantity and thereby reducing

total average costs per product.

There are also problems associated to international diversification. By having a larger

corporation the complexity of the organisation rises and thereby the costs of monitoring the

organisation rise. The agency costs in a big and complex organisation will also rise and the

managers will be able to create personnel benefits through agency costs, which exceed their

private costs. Managers will also diversify because this creates less risk for themselves and their

un-diversifiable human capital (Laeven, 2001 page 3). The academic research in the area of

international diversification is very ambiguous. Laeven found that international diversification

at low levels increases company value but high values of international diversification reduces

company value. These results are taken from a sample of 1.914 companies the companies are

widely spread across all countries in the world. Bodnar (Bodnar et. al. 1997) found that

international diversification leads to a 2.2% higher value than a comparable domestic firm and

this research was based upon 4.722 U.S firms. These diverging research results provide the

analysis in this paper with an ambiguous attitude towards the value created by international

diversification in the two companies, which are analysed here.

International diversification has been viewed as value increasing because it gives firms the

possibility to shift production to markets where prices are most favourable since prices on

inputs often vary between markets. It is especially the cost of labour that varies and has a large

impact on the total costs. This flexibility in production lowers the average cost of production

and thereby increases the value of the firm relatively to a firm without diversification. It is of

course also easier to exploit economies of scale when a company is exposed to more markets

and is able to generate higher sales. As already mentioned, Bodnar (Bodnar et. Al. 1997)

showed that international diversification leads to higher value in firms, ceteris paribus. Vaelen

(2001) found that there must be a relationship between international diversification and

company value, which is closer to curve linearity than a steady increase. The analysis in this

paper is done on two European companies and it seems more valid to use the findings of

Vaelen for these companies than the findings based only on U.S. companies.

Product diversification can also be a measure to reduce risk. The so-called idiosyncratic risk is

the risk associated to a price change in a security translated in to company risk. This would be

the risk associated to the changes in profits from a product. The idiosyncratic risk measure

used by investors can be used as a guide for product diversification by firms. Idiosyncratic risk

is a measure, which investors can reduce totally through diversification (Nilsson 2002 page 1)

and is this risk reduction that a company might benefit from. A company can reduce the risk of

profit changes from one product incrementally by having a wide range of products. The

problems associated to the risk reduction in a company will though differ very much from the

problems an investor has. The company has to create a higher price earnings ratio and still keep

risk at a minimum. By having a very broad product diversification the influence from profit

changes in one product will be reduced considerably and result in less risk in the company but

at one point the price earnings of the company will also start to diminish (Bodnar et al 1997

page 8). This raises the question of how broad should product diversification be? This is an

intriguing question and could be a good foundation for another analysis. There is also the

chance of product diversification being value increasing – as it might be possible to increase

efficiency in a company by producing more then one product. This would then be a value

increasing measure instead of a risk reducing measure. The academic research in the area of

product diversification is not as ambiguous as international diversification. The overall result of

the academic research shows that there is a value decrease associated to product diversification

when product diversification spans over different SPES codes (Laeven, 2001, page 5). The

expectations in this analysis would then be that the company with the highest degree of

product diversification, ceteris paribus, is the company of least value or the company with the

lowest growth in the period of rising product diversification.

Technology diversification can be viewed as a means to reduce risk but also as a measure to

create higher value. Technology diversification as a risk reducing measure is associated to

product diversification. Either the new technology is used in the company to produce a new

product or is integrated into an existing product or the technology is sold/rented to a third

party, which turns the technology into a product. This means that technology diversification

can either be a part of product improvement or the development of a new product hence the

argumentation used in product diversification would comprehend technology diversification as

well.

It is clear from the above analysis that diversification can often be used as a measure for

reducing risk.

H2: A high degree of diversification leads to risk reduction and to lower growth rates –

and vice versa.

2.3 Schumpeter’s economic development, innovation and the entrepreneur

Schumpeter is known as one of the great economists of this 20th century - his ideas are still

used in modern economy. In this paper it is his ideas of innovation and entrepreneurship that

are used. Innovation and entrepreneurship, which Schumpeter often discusses, is a new angle at

the technological diversification in this paper. Several factors should be discussed to

comprehend the importance of Schumpeter’s theories when describing diversification. First

Schumpeter’s view at the economy and development in the economy has to be introduced,

secondly the analysis of the entrepreneur and the role of the entrepreneur in the economy will

be analysed and connected to the role of the innovation. The two subjects are closely linked

together, however there are also important differences. Both has their distinct role in

diversification and therefore they are presented and discussed in this chapter.

The problem of looking at economy statically is still present in many of the used analyses today.

The problem already arises in this paper when doing the five forces analysis, because it is static

and therefore cannot describe the development in the industry. Schumpeter has a clear view on

economy and the development and believes that the overall view on a market should be that

there is a constant revolution (Schumpeter, 1991 page 407). If industrial and commercial

patterns are under a constant change, then the demands for existing companies increases

tremendously (Schumpeter 1934, page 67). In a constantly changing environment where

companies are competing or expect competition, the demand for companies to be

technologically in front increases. This fundamental view at economy has spawned the other

subject, which will be discussed below. In a revolutionary environment the only survivor will be

the company that is able to innovate as Schumpeter argues that new products and new

methods will outcompete old products. This means that companies will have to invent new

methods or products, which will destroy the market of the old products or methods – a term

that is known as destructive innovation (Schumpeter 1934, page 67). According to Schumpeter,

in the non-revolutionary market, there is no room for any economic gains. But in the

revolutionary market the possibility of innovation creates the possibility for the company to

gain monopoly prices as a first mover (innovator). However, in the revolutionary market these

gains will only be temporary because others will follow or even create products or methods,

which outcompete this first monopoly. Whenever a monopoly has risen due to first mover

ability, the profit should be invested in new innovation.

To be able to innovate there is a need for an innovative person – an entrepreneur. First we

need to establish what an entrepreneur is and make sure that the role is distinct. It is easy to

view the manager or the CEO of a company as the entrepreneur and this might not be wrong

but according to Schumpeter it is not possible to label the individual entrepreneur and instead

we will define the behavioural patterns of an entrepreneur. It is however not hard to define the

entrepreneurial behaviour, since it is the ability to create new products or produce an existing

product in a new way (Schumpeter 1991, page 413). Because of this rather open definition of

an entrepreneur it is difficult to standardise an entrepreneur educationally. It raises, though, one

problem because many products and methods are already developed but a very great deal will

never become reality or profitable. These products or methods and the persons who invented

or thought of them, are they entrepreneurs? This problem is not a problem in the

diversification analysis, but if the analysis is aimed at measuring the most innovative company

this would create an immense problem. The need for an entrepreneur is not present if the

strategic goal in the company is only to diversify as diversification can be done without creating

anything new and so the need for the entrepreneur is not present.

Diversification can be viewed as being a result of the revolutionary behaviour in the market as

companies are simply diversifying to cope with the present revolutionary state. Diversification

cannot accord the principles of the revolutionary market place when diversification is only a

risk reducing measure. In the revolutionary market place, diversification has to create profits in

order to help the company innovate. Therefore the companies have to behave as entrepreneur

when diversifying, as there has to be something new in the way the company diversifies. The

problem arises if a company diversifies without being innovative, as then there will be no room

for extra profits.

The above provides the following hypothesis:

H3: A competitive environment in which firms are able to create excess profits – or the

expectations of it – fosters innovation.

2.4. Using patent data 3

When patent data are used it has both its flaws and its strengths. These will be analysed in

order to take them into account when presenting the analysis of the patent data

There are some clear weaknesses when patent data are used. A problem when using patent data

is that it is not the only variable that allows you to assess innovation in a firm. Patents are

necessarily made public. However, it is possible to innovate and not tell anyone in order to

prevent competitors from profiting from it (e.g. revision that falls out of the scope of the

patent). That is why companies can choose to innovate secretly and thereby still be able to

harvest the market successfully. A well-known example is Coca Cola and their secret formula,

which is not patented.

It is though clear that a large part of innovations lead to patenting. The biggest problem

however is that often only the major innovation leads to patenting. This means that there might

be a lot of increase or decrease in R&D spendings (innovation)4, which cannot be seen in

patent data. So when patent data is used to describe technological diversification, it is possible

that a biased result is presented since most product development will not be patented.

Another problem is the national differences in patenting as the tendency to patent varies from

country to country and the possible reap for the firm might also vary from country to country.

In our situation this might not be a problem since both companies are present in the internal

market (EU) and patent data are used for the EU patent office.

There are more biases, which can be taken into account, but these are of less importance for

the analysis in this paper.

As far as the advantages are concerned, patent data cover almost all technologies and for the

analysis in this paper it is not a significant problem if only a couple of technologies are left out.

The importance of the coverage of a large variety of technologies is significant for this paper

because the data can be used for measuring the technological diversification in the firms. This

3 Based on data from OECD (1994), Using patent as science and technology indicators page 15 and 16 4 Through the paper, when R&D is mentioned, it is assumed that a large part of R&D is innovation.

information would not be available in R&D expenditures (innovation), which means that

patent data is maybe the only way to measure technological diversification.

3. Industry Analysis: The Lighting Industry5

It is chosen to use Porter’s Five Forces in order to analyse the internal rivalry in the lighting

industry. Furthermore the analysis evaluates the interactions between the industry and

suppliers, buyers, substitutes and new entrants.

Figure 3: Porter’s Five Forces

Industry Level

Suppliers

Buyers New entrants

Internal Rivalry

Bargaining power

Threat of Substitutes

Bargaining power

Threat of new entrants

Substitutes

Source: Hollensen (2001) page 76

The industry analysis will focus on reasons in the competitive environment for diversification.

It’s possible that a firm might try to diversify away from a highly competitive industry into a

less competitive industry. The problem with the industry analysis is that it remains a snapshot

analysis. The company analyses that look at diversification are not static as the analyses are

5 See European Commission (1996), Analysis of the EU electrical engineering industry for more information on competition.

done over time, while the industry analysis is focusing on one particular moment in time. This

should be born in mind when reading this chapter.

The lighting industry can be divided into two subgroups:

1. Light sources, such as electrical households and industrial lamps including light bulbs,

halogen lamps and fluorescent lamps.

2. Lighting fittings or luminaries, which comprise interior lighting fixtures for private

households, industrial and infrastructure uses.

The following analysis will look only at subgroup number 1 – light sources. This subgroup is

most important to the analysis of this paper because Siemens is active only in this subgroup.

3.1. Internal rivalry Concentration in the industry:

Three companies – Philips, General Electrics and Osram, which is a wholly owned subsidiary

of Siemens, dominate the industry. Philips and Siemens are large companies known to operate

in many different markets. Both Philips and Siemens are major players in the lighting industry,

having together 75 % of the European market and are the only international players in the

market. With only three large players in the industry taking 75% of the entire market, this

industry can be regarded as quite concentrated.

Market growth:

The growth in the market has been on average at 3.6% p.a. and the growth has been higher in

Europe and Japan than in the US. An average growth rate in the industry of 3.6% p.a. cannot

be seen as a high growth rate and this will probably contribute to more intense rivalry in the

industry.

Structure of cost:

If there are high fixed costs, a firm will try to expand output to cut down the average costs. The

industry only has three large players because this industry require huge expenditures in R&D to

be competitive and large need for scales of economy, which means that there will be relatively

high fixed costs.

Degree of differentiation:

The industry is quite a standardised industry with little differentiation between standard lamp

products. The products are also rather easy to copy by small low quality firms in the industry.

This will also create more intense rivalry in the industry.

Switching barriers:

The switching costs for buyers are not high in this industry; it is normally a standardised

product for the whole industry. Since the industry uses the same standard then the switching

cost are reduced greatly. This will make rivalry in the industry fiercer.

Exit barriers:

Since the fixed costs are high, exit barriers will generally also be higher if there is no possibility

to change the production facilities to another product with little cost. So exit barriers are

relatively high for the lightning equipment industry. This however also means that there are

higher entry barriers, which will reduce rivalry. So exit barriers will not necessarily create higher

rivalry in the industry.

Matching of price reduction:

There is low incentive to match price reduction as prices are easily observable and adjustment

can be done quickly. This scenario is especially true for the standardized products. But as to the

specialized products, it’s more difficult to match price changes.

3.2. Suppliers

Concentration of suppliers:

The concentration of suppliers is not intensive: the industry is generally categorized with many

suppliers (CSR Europe, 2005, Philips Asks Suppliers to Join). So there will not be any power

given to the suppliers. It is more likely that the producers in a highly concentrated industry will

have power over the suppliers since they will take large shares of the total sales volume from

the suppliers.

Uniqueness or differentiation:

In the lighting equipment and lamps industry the suppliers are not very differentiated but some

of the products are very unique. In this case the lightning industry normally ties close

relationships with their suppliers (Information Builders, 2005, Philips CE Turns on

WebFOCUS). Since the suppliers are very dependent on the large manufacturers, this will not

give more power to the suppliers.

Suppliers have to make relationship-specific investment:

The lighting equipment and lamps industry is important to the suppliers of rare materials

(Information Builders, 2005, Philips CE Turns on WebFOCUS), which means these suppliers

have to make relationship-specific investment. This will reduce the power of the suppliers who

supply rare materials. Other suppliers to the industry do not have the same dependency on the

industry, which gives them a bit more bargaining power.

Backward and forward integration:

Since the lighting equipment and lamp industry is highly concentrated, these companies will,

theoretically, be able to perform a backward integration. This will give more bargaining power

to the manufacturers. The tendency in the industry has though been to outsource, which means

that the threat of backward integration does not seriously affect the bargaining power in the

industry. Generally suppliers will not gain bargaining power by threats of forward integration

since there are relatively high entrance barriers.

Availability of substitute inputs:

Since the large players in the lightning equipment and lamps industry have up to 50.000

suppliers (CSR Europe, 2005, Philips Asks Suppliers to Join), this also means that there is a

fierce competition between suppliers. If a big manufacturer, thus, wants to work together with

a supplier, it will be unwise to try to put this manufacturer under pressure. Of course, this does

not account for the suppliers of rare material.

3.3. New entrants

Large capital investment:

In this industry it is important to have economies of scale, which will make it harder for new

entrants to enter into the market since it would demand a lot of capital. Also a lot of money is

required to invest in R&D if one wants to compete with more hi-tech products.

Customer loyalty:

For some of the customers, especially the ones using specialised products, there might very

well be considerable loyalty to a certain producer taking into account possible scarcity of

suppliers and service levels. For the standardized products in the industry the customer loyalty

is very low as customers will most likely follow producers with the best price/quality ratio. So

this will not be a considerable disadvantage to a new entrant.

Switching cost, the cost of switching from one supplier to another:

For a specialised user, the cost of switching can be considerable. This will very likely affect new

entrants since this very likely is the part of the market with highest margins. In the standardized

market there are no switching costs.

Access to distribution channels:

The access to distribution channels does not necessarily affect new entrants, although in some

cases it may: large supermarkets only take a couple of brands on their shelves and it can be

hard to compete with the incumbent players to get shelf space. For the sale of standardized

products, the main goal is to get as much shelf space as possible, as the end users are not very

connected to one brand.

Product standards:

In the lighting industry a big part of the market is standardised and this makes it harder for new

entrants to enter the market since they cannot completely differentiate from other products.

The other part of the lighting industry is the part of specialised products for industry use. Here

there are no standards so in this segment it is possible to differentiate from other products.

3.4 Bargaining power of buyers

Buyers are concentrated and/or buy in big batches:

Buyers are big consumers, especially in more specialised product. This will make both the

supplier and buyer depending on each other so the power of these customers depends on

switching cost and on how much bargaining power each of the players have. As the suppliers

are relatively large, the buyers are to be of a considerable size or be a very well known brand in

order to have bargaining power. The standardized products will be bought in large batches but

since the lighting industry is so concentrated the buyers will be less concentrated, therefore the

bargaining power of the buyers will not be significant. In the area of the standardized products,

bargaining power is higher, as buyers do not have switching costs.

Backward integration:

The industry is dependent on scale economies and hence very costly to enter into, which means

that backward integration is not an option for buyers. Very big companies dominate the

lighting industry and clearly this makes it very hard for buyers to perform backward integration.

Price sensitivity of customers:

In the lighting industry both price and quality is very important so this will not affect

bargaining power for the buyers.

3.5. Substitutes

The buyer’s willingness to substitute:

There are no real substitutes for this industry since they basically produce light sources and for

the main part of the buyers the use of candlelight is not an option.

The relative performance of substitutes:

No substitutes can really perform as a light bulb.

The costs of switching to substitutes:

The cost for a company to switch to candlelights or another light source will be enormous and

unrealistically high.

3.6. Summary

Force

Contents

Conclusion

Internal rivalry

High concentration in the industry (-)

Small market growth. (+)

High fixed cost. (+)

Low degree of differentiation. (+)

Switching barriers are low (+)

Strong exit barriers. (+)

Matching of price reduction. (+/-)

Intensive rivalry

Supplier power

Small supplier concentration (-)

Big purchase volume over sales volume of

suppliers (-)

Backward integration (-)

Availability of substitute inputs (-)

Weak supplier power

Buyer power

Buyers are concentrated and/or buy in big

batches (+/-)

Backward integration (-)

Price sensitivity of customers. (+/-)

Moderate buyer

power

Threat of

entrants

Huge economies of scale require large capital

investment (-)

Customer loyalty (+/-)

Switching cost, the cost of switching from one

supplier to another. (+/-)

Access to distribution channels (-)

Weak threat of

entrants

Substitutes and Weak availability of substitutes (-) Weak substitutes

complements Huge cost of switching to substitutes (-)

From the above analysis it is concluded that the competitive level in the lighting industry is

moderate. It is also clear from this analysis that there are gains associated to both scale and

scope economies in the industry. There are large capital investments and the average cost per

product can be reduced significantly by increasing production. There are also very good

opportunities in scope economy by using the knowledge in the lighting industry to produce

other products where the technologies can be used such as television tubes, lighting for cars

etc.

A moderate competitive level means, according to the theoretic chapter on competition and

diversification, that there is excess profit in the market, which could be invested in

diversification and innovation. The expectations will therefore be that the two companies,

Siemens and Philips, will be diversified and since there is competition at a moderate level, the

diversification is expected to be extensive.

4. Empiric analysis – Philips

In the analysis of Philips, it is important to bear in mind, the hypotheses, that are to be

answered.

H1: The competitive level fosters firms to become internationally diversified, product

diversified and technologically diversified.

H2: A high degree of diversification leads to risk reduction and to lower growth rates – and

vice versa.

H3: A competitive environment in which firms are able to create excess profits – or the

expectations of it – fosters innovation.

4.1. Introduction

Philips is an industry giant that is active in a wide range of business areas. Originally the

company is founded as a light bulb company in 1891, but Philips has grown exponentially and

is today active in an entire array of business areas. The company’s main activities take place in

Lighting, Consumer Electronics and Domestic Appliances and Personal Care, which form the

Consumer Products. Philips is also highly active in the Semi Conductors and components

business, as well as in Professional Services Systems (Philips annual report 2004).

In its entire existence, the company has met quite some turbulence. Figure 3 shows an

overview of the turnover evolution of the last 20 years and figure 4 shows the evolution of the

company profitability. Clearly after more than a decade with lack of growth, Philips has been

able to substantially grow its turnover in the last couple of years. The reason of this steady

growth is thanks to an increasing consumer demand, the willingness to find new markets and

the introduction of new technologies. However, profits have not grown along, but on the

contrary the years 2001 and 2002 were quite dramatic with record-breaking losses of

respectively 2,475,000,000 and 3,206,000,000 euros. In order to change this trend, massive lay-

offs have taken place.

Figure 4: Annual turnover 1985-2003

Annual Turnover 1985-2003

05000

10000150002000025000300003500040000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Year

Mill

ions

of E

uro

Turnover (millions of Euro)

Source: Philips annual report 2004

Figure 5: Annual profit in millions of euros

-4000

-2000

0

2000

4000

6000

8000

10000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Annual Profit in millions of euros

Annual Profit


In order to assess how Philips has diversified over the last two decades, first of all an analysis

of product diversification will be presented, based on the annual reports and management

information available. The next part will take a closer look at the technological and

international diversification.

4.2. Product Diversification

Philips is a company that has been active in many product areas. Through years, the company

has diversified from a single business light bulb producer in 1891 to a conglomerate that is

active in many different industries. In this section, a closer look will be taken at product

diversification in the years 1993, 1997, 2000 and the year 20036 in order to provide insight in

the ways and degree of product diversification within Philips.

To increase comparability, turnover has been split up into 5 different parts:

1. Consumer products

2. Semiconductors and components business

3. Lighting business

4. Professional products and systems

5. Miscellaneous

6 Because of the fact that we only had unconsolidated data for Belgian, operations available the year 1987 will be ignored.

When reading this analysis one needs to bear in mind that within these categories a lot of shifts

have taken place.

1993 Figure 6: 1993 - % of turnover

In the year 1993,

more than half of the

turnover came from

the consumer

products division.

About two third of

this came from new

and improved

consumer electronic

1993 - % of turnover

31%

13%20%

34%

2% Consumer Products

Lighting

Semiconductors andComponentsProfessional Products andSystemsMiscellaneous


products, which were welcomed in the market. Also Grundig, the troublesome Philips’

daughter, provided extra turnover but remained unprofitable. The other 33% of this

department came from a variety of products ranging from Polygram Music Records to an

entire array of home appliance and personal care products (DAP). The past few years this

department has grown exponentially percentage wise. In 1989 only 10% of total turnover came

from this division but in 1993 it is already at 20%. As far as the components and

semiconductors’ section is concerned, importance remained more or less constant, basically

because prices for semiconductors increased as well as demand for components. The most

troublesome division is the one of professional products and systems, which in the period

between 1989 and 1993 had a steep decrease from 25% of total turnover to 15% mainly due to

decreasing demand of optic fibre activities (Philips annual report 1993) and a general recession

in Europe. Other divisions remained more or less constant.


In 1997, it is clear Philips has

made an important shift

product wise: The consumer

products division has lost its

leading position and decreases

with more than 20% of total

turnover. This sharp decrease

is not due to lower sales but

mainly due to the divesting


44%

13%

28%

10%5% Consumer Products

Lighting

Semiconductors andComponentsProfessional Productsand SystemsMiscellaneous


from Grundig and lower pricing due to increased competition. In order to re-establish turnover

from this division, a set of new digital products was introduced and more efforts taken in order

to grow in the cellular phone market. The second decrease can be found in the Miscellaneous

category which is caused by divesting seemingly unrelated several activities – along with

divestments in other divisions indicates some product portfolio concentration.

The main growth sector was the one of professional products and systems. The division existed

of medical systems, business electronics and software & services and industrial electronics. In

the latter several companies were divested in order to refocus within that unit. In the medical

systems several joint ventures were set up including with Siemens. Philips stopped certain

activities with the Origin company, where Philips is the majority shareholder (Philips annual

report 1997).

Although Philips divested in the semiconductor industry selling off some participations, the

division was able to grow turnover percentage with 5% of total turnover. Both components

and semiconductors can take credit for that which was different from the year before were

there was a turnover stagnation in the semiconductor unit. Nevertheless Philips believed that

the component unit was the growth unit and further joint ventures in Asia were set up (Philips

annual report 1997).

In 1997, Philips sold its participation in several companies in different business sections.

Especially Grundig and the participation in Bang and Olufsen seems to indicate that back then,

the company wanted to invest more in non-classic consumer products such as cell phones,

LCD monitors etc. This assumption is reinforced by the fact that several joint ventures with

these kinds of companies were set up.

The final department is the lighting division, which remained stable because of restructuring

within the division, a modified product range and a spectacular increase in the Middle-East and

Latin-America (Philips annual report 1997).


The year 2000 was a non-

typical year: the company

enjoyed record-breaking

turnover, which needs to be

taken into account to perform

an analysis: although

percentages may have

dropped, a significant increase

in absolute figures is still

possible. That being said, it is


44%

13%

28%

10%5%

Consumer Products

Lighting



obvious that some interesting observations can be made: the clearest change without any doubt

is the spectacular increase of the consumer products department, which jumped from 31% to

44% of turnover. There are several reasons that can explain this large increase: First of all an

organizational shift was made where the Business Electronics Unit coming from the

professional systems is now in the Consumer Products division. Also the growth is attributable

to a major joint venture with LG Electronics, which is a large player in the active matrix LCDs.

Another positive influence came from the booming of new technologies like GSM, CD-ROM

and DVD, which further boosted the consumer electronics turnover (Philips annual report

2000).

As far as the professional products and systems business area is concerned a sharp drop is

observable: in 3 years the turnover percentage dropped from 34% to 10%. The fact that a part

of this turnover is shifted to the consumer electronics area can at least partially explain this

decrease as well as the large increase of other demand while in this business division demand

did not grow spectacularly. Also note that the divestment of Origin results in a hard bite from

turnover of the division (Philips annual report 2000).

The semiconductor and component business division on the other hand has grown

spectacularly with 8% of total turnover from 20 to 28%. Clearly, this department is linked with

the consumer electronics department and an increase in this department will positively

influence the other. Also the increasing demand by other companies has positively influenced

the result. This growth mainly came from the take over of the Mircus and VSLI company in

the US and especially because of superior results of the Taiwan Semiconductor Manufacturing

Company. Finally, the lighting business was able to grow on a normal rate to keep its total

turnover percentage intact (Philips annual report 2000).

2003 The period between 2000 and 2003 is a period where company focus within Philips has

changed. The most obvious trend that can be seen is the spectacular increase of Professional

Products and Systems soaring to 19% of total turnover. Important note is that this business

Figure 9: 2003 - % of turnover

division now only exists of

medical systems, all other

activities have been divested or

have been transferred to

another division. This increase

is mainly the result of the

growth of cardiologic medical

systems and medical software

sales, which are stimulated


43%

15%

16%

19%

7% Consumer Products

Lighting



by a growing market (due to more aging people) and by a foreseeing Philips, who made

important investments in the last three years to grow this business area. In these years it took

over several companies such as Medquist and Agilent Technologies and started several joint

ventures with companies working in the medical system sector (Philips annual report 2003 page

11).

The other quite important observation is the fact that the business area of components and

semiconductors has decreased by almost 50% to a 16% of total turnover. The industry has

been hit hard by the 2001 attacks and the burst of the dot-com bubble resulted in lower

demand. As importantly, the component division worked on analogue technologies, which

were out of date. From an organisational point of view it seemed useless to keep this division

separate. As a result Philips took drastic measures and changed its organisational structure

within this unit: it dissolved the Components unit and repositioned its respective businesses

into the other existing business divisions (Philips annual report 2003 page 11).

It is clear that by the year 2003, Philips is trying to tap into other higher margin markets and

does not consider the component and semiconductor business area to be the most important

one. In the other business segments, in 2003 the consumer electronics department remains the

biggest turnover centre and remained stable due to introduction of new products and increased

branding (Philips annual report 2003 page 11).

As far as other divisions remained stable, the lighting business division turnover decreased

compared to the year 2000 but in percent terms it increased its importance in Philips (Philips

annual report 2003 page 22).

4.2.1. Indexes

After this historical overview a quantitative approach using the Berry index will be provided to

analyse product diversification.

The Berry index corresponds to 1- Herfindhal index and is meassured as:

Di = 1 - ∑j(xij)2/ (xi)2

where xij = Philips’ production in country j; and xi = total production of Philips in EU.

Berry Index for Product Diversification measures to what extent a company in question is

active in different industries. The smaller the Berry Index, the more company concentrates its

activities in few business areas. The larger the Berry Index, the firm has diversified its product

portfolio more. In the table below the results are presented.

Figure 10: Berry Index for product diversification at Phillips in the years 1993-2003

1993 1997 2000 2003

Berry Index 0,6682 0,731 0,6986 0,6875

Number Equivalent 3,01 3,72 3,32 3,2

Source: SPES data

It’s clear that Philips is fairly diversified product wise and does not rely heavily on one division

to generate turnover. After 1997, though, the Berry index decreases which implies that the

product diversification seems to be declining. The decrease is, however, not drastic and

therefore one can say that over the 10 years the level of product diversification has remained

the same, although shifts within product importance occurred. This trend is confirmed by the

Number Equivalent, which is defined as:

NDi = (1 – Di)-1

NDi provides the number of businesses in which a company would be active if it had an equal

share in all industries. Di = Berry index.

4.2.2. Summary

From the above analysis it is clear that Philips from 1993 to 2003 has been changing priorities

in product diversification and product strategy. Traditionally built as a company focusing on

consumer products such as electronics and domestic appliances where in the mid-nineties, at

the beginning of the technology revolution, it chose to focus more on professional systems

rather than on consumer products.

In the late nineties however, a shift in strategy seems to have taken place: The company, in the

middle of the new technology boom, refocused its activities more on semiconductors and hi-

tech consumer electronics. In doing so, the company chose to add less priority to the

professional systems division. Due to increasing competition, markets that have slowed down

and several product failures, Philips seems to have shifted to its original approach in the

beginning of the nineties with the professional systems increasing in importance.

The only true constant business in all of this seems to be the lighting business that has grown at

the same pace as the company.

4.3. International diversification

Philips has steadily grown, not only product wise but also on an international level. In order to

grow its turnover, the company has expanded into new markets over the world. Due to

unavailable data it is not possible to analyse global expansion for the last two decades.

Nevertheless, an analysis will be presented starting in 1997, based on data gathered from the

Philips’ annual reports.

In a second part, using SPES data of the last two decades, a closer look will be taken at

production spread within Europe

4.3.1. Turnover analysis by continent – worldwide level

In order to increase comparability, 5 different classifications have been used:

1. Netherlands

2. Rest of Europe together with Africa

3. North America

4. Latin America

5. Asian Pacifics

The merging of Europe and Africa is a bit odd and no conclusive reasons were found to

explain this. The assumption is therefore made that Africa’s turnover share can be neglected.

1997

Figure 11: 1997 – turnover by region

Historically, Philips has always been

a company with a strong home base

in sales. However, by the end of

1997, it is clear that the Netherlands

– although still significant - are no

longer crucial turnover wise. One

could say that by 1997, the

company has become a global

1997 - Turnover by region

5%

43%

23%

7%

22%NetherlandsEurope & AfricaNorth AmericaLatin AmericaAsia Pacific


company with a very strong European pillar (providing almost half of total turnover). Also

from the graph, it’s clear that Philips is actively selling in North America. Latin America stays

behind to some extent largely due to the fact that the majority of countries are not as

developed yet as countries in North America together with the fact that South American

economy was in crisis.

An interesting observation is the fact that Philips already awarded a lot of attention to Asia and

the Pacific area. The economic growth in this region, requiring more professional systems as

well as an increasing spending level with the consumers are very likely the main determinants

for the important share of sales for Philips (Philips annual report 1998 page 58).

2000

Figure 12: 2000 – turnover by region

Geographically, the sales growth in

2000 was strong in all regions, in

particular in Asia Pacific. Sales in Asia

accelerated strongly and ended 29%

above the year before, with all sectors


4%

42%6%

23%

25%

NetherlandsEurope & AfricaNorth AmericaLatin AmericaAsia Pacific

contributing to the success. When turnover is compared, it is noticed that only little shifts have

taken place. Source: Philips annual report 2000

Generally, the overall importance of regional turnover has remained more or less the same. In

Europe (including Africa) the relative importance fell from 48% to 46% total turnover while

North America grew 2% of importance. This American increase can mainly be attributed to a

strong US dollar and several acquisitions Philips made. 1% increase of turnover importance

comes from the Asia Pacific region, largely attributable to strong increases in sales coming

from the Semiconductor business. Although in Latin America sales recovered, especially due to

improving economic climate in Brazil, relative importance dropped with 1%. It needs to be

said, changes are very small (Philips annual report 2000 page 60).

2003 Figure 13: 2003 – turnover by region

Although changes are small, important

trends can be observed. By the end of

2003, European turnover has further

decreased. Together with Africa, it

now takes into account 44% of total

turnover. The reason for this decline is

partly because of divestments and

weaker currencies.


4%

40%

27%

5%

24%NetherlandsEurope & AfricaNorth AmericaLatin AmericaAsia Pacific


Also within Europe important shifts took place. Sales shifted from the Western-European

countries to those in Eastern Europe.

Sales in North America decreased by 19% but nevertheless the North American market

increased its relative importance, because of the fact that the majority of other regions

performed worse. Latin America – although slightly – further decreases its share in turnover,

mainly because of currency issues after the collapse of the economies of Argentina and

Venezuela which were traditionally among the richer Latin American countries.

In Asia, sales increased, especially in China. Growth of importance is small, only one percent

but this growth is hampered by the weak position of the US Dollar (Philips annual report

2003).

4.3.2. A closer look at the European Level

Even with the more global focus of Philips, it is obvious that Europe remains the most

important continent for the company to generate turnover. The question remains whether this

is also the case for production. Therefore this section we will dig deeper in the European

situation by analysing SPES data of the years 1987, 1993, 1997 and 2000.

1987 and 1993

Figure 14: Production divided by countries – 1987 and 1993

Source: SPES data

It is clear from the graph that production wise, Philips originally focused on the Netherlands,

its home country, taking care of almost 50% of the total production. However with the further

integration of the European Union after 1992, Philips has broadened its focus. Production in

the Netherlands fell substantially from 49% to 35%. Especially in the bigger countries such as

France, Germany and the UK the increase is significant.

1987 & 1993 Philips

0

10

20

30

40

50

60

BEL/LUX

DEN FRGER GR IT IR

E NLPORT SP UK

Countries

Perc

enta

ge

19871993

1997 and 2000

Figure 15: Production divided by countries – 1997 and 2000

1997 & 2000 - Philips

05

101520253035

AUS

BEL/LUX

DEN FIN FRGER GR IT IR

E NLPORT SP

SW UK

Countries

Perc

enta

ge

19972000

Source: SPES data

The main trend, which was observed in figure 14, clearly continues in the years 1997 and 2000

The production within the Netherlands is further decreasing to 23% in the year 2000.

Production within Europe has clearly shifted to France where production percentage is

significantly higher than in the Netherlands. Furthermore, the Be-lux has experienced a

significant increase. Apart from this clear evolution, also the almost total retreat from the UK is

at least remarkable.

It needs to be mentioned that production has clearly shifted away from the European

continent: production facilities in the EU 15 countries is only 33% of total production. The

newly ascended EU countries only take care of 7% of total production. The main production

country has become China with almost 31% of total production. Clearly, cheap wages and

inputs have stimulated this trend.

4.3.3. Indexes

Once again, using the Berry index, the degree of diversification is mathematically approached:

The larger berry index, the more internationalised the company is. Therefore from the data in

the table below, the findings show that Philips’ berry index has increased continuously in four

periods, which shows that Philips has kept expanding its markets, and that international

diversification is seemingly what Philips aims for. Once again, the Number Equivalent clearly

confirms the trend of the berry index.

Figure 16: Berry Index for international diversification at Phillips in the years 1993-2003

1987 1993 1997 2000

Berry index 0.70512 0.772764 0.812495 0.9762456

Number Equivalent 3.391209 4.40071 5.333181 42.09748

Source: SPES data

4.3.4. Manufacturing distribution in year 2000

Figure 17: Manufacturing distribution at Phillips in 2000

Philips Manufacturing Distribution

36%

7%0%14%

33%

10%EUACROENAAsi aROW

Source: SPES data

To realize the international diversification, it’s essential to become internationalised in

manufacturing. The motives behind this action are achieving cost advantages and economies of

scale, and also to enter into local markets easily. From the pie chart above, it’s clear that Philips

now pays special attention to Asian territory (the 2nd largest area in manufacturing), where the

labour costs are probably the lowest and the consumer markets is of great potentiality in

growth. Philips has also spread its manufacturing in North America and the rest of the world.

In Europe, manufacturing is mainly focused on the members of the EU, however, the 10 new

members of EU (AC) are not at Philips’ attention at this point in time.

4.3.5. Summary

The analysis above has proven that Philips has continuously expanded its foreign operations in

the last couple of decades. Philips remains of course one of the crown jewels of European

industry but it is clear that Philips is not a purely European company anymore. As far as sales

are concerned, Asia pacific and North America are important pillars and contrary to Europe

seem to increase in importance over the years.

Also as far as production is concerned, it is clear that the company is not a Dutch manufacturer

anymore, it clearly aims for cheaper production facilities in Asia and more specifically in China.

The international diversification in Philips and the investments in production facilities in a

diversified range of countries make Philips able to choose the place of production where inputs

have the lowest price. This is one of the main points in theory on international diversification

that firms can benefit from diversified production because of price differences on inputs.

Clearly Philips is expecting a gain from low prices on labor in China, to where most of the

production has been moved. From the competitive view the diversification in Philips is what

was expected because of the competitive level in the lighting industry, which is still one of the

main business areas in Philips.

4.4. Technology Diversification

4.4.1 Patents

Patents are a good standard to monitor the ambition and focus of a company. Patents are at

the same time often essential when trying to stimulate demand for innovation since there are

often considerable amounts of money invested in R&D and without patents, no company

would dare to take such risks. Philips currently holds about 75.000 patent rights along with

22.000 trademarks and 6.000 designs (Philips corporate website).

In this section an assessment will be made of the actions Philips has taken in the field of

applying for patents. Also, in a second part, the proportion of patents per business sector will

be presented.

4.4.2. Number of Patent Applications

Patent applications are a good indicator of R&D output and thereby the level of innovation in

the company as it shows the amount of unique technologies Philips believes can get a patent.

Also it is a valuable source of income for the company trough licenses. In the figure below it is

possible to observe the amount of patent applications Philips has made from 1977 until 2001.

Figure 18: Number of patent applications from 1977 to 2001 at Philips

It’s clear that there has been a steep increase in

the early 1980’s, with a first peak around 1989.

From there on, over a decade yearly patent

applications were less than the amount in 1989.

The break-trough of new technologies such as

laser disc technology used in CD players along

with peripheral technology can at its very least

partially explain this steep increase. Although

Patent aplications in Philips

0

500

1000

1500

2000

2500

1978 1981 1984 1987 1990 1993 1996 1999

Source: SPES data

this is a valid reason one also needs to mention that the increase will at least partly be due to

the fact that the patent applications on the European level became more popular in the

eighties.

In the 1990s a drop to about a 1000 patent applications per year is clearly visible. This drop is

caused by the fact that these applications are often expensive and not always usable in business

(Philips Annual report 1998, page. 30) In the past, Philips often pioneered new technologies,

only to discover that the market preferred a less sophisticated product. Rather than investing in

R&D and patents, Philips chose to try to forge alliances and partnerships in order to share the

costs and risks involved. Nevertheless by the end of the 1990s the company was able to reach

the number of the then all time high of the year 1989.

The year 2000 was clearly an extra-ordinary year patent wise: Philips filed almost 2100 new

patent applications, or more than 6 per day, which signifies a 35% increase compared to the

year 1999. Interesting to know is that for every million euros spent on R&D, one patent

application is filed (Philips annual report 2000, page. 52). After the year 2000 a clear drop in

patent applications is observable. This drop can be explained because the fact that data for that

year were incomplete, it has thus no importance for Philips patent activities.

4.4.3. Patents per sector

Patents are also a good indicator of the focus of a company. Clearly a company that is

interested in a certain business division will devote R&D budgets to that division, which will

lead to a certain number of patents. In order to assess where the company’s focus is, an

overview will be presented of relative importance of a business area by measuring the amount

of patents that have been applied for in that business area.

In this section a patent analysis will be made based on the Fraunhofer classification. The

Fraunhofer classification divides technologies into five main technologies and each of these in

to a different number of subdivisions. The suibdivisions will not be looked upon in this paper

because these are not of a great importance to diversification in this paper. The five categories

are listed below:

1. Electrical enginering

2. Instruments

3. Chemicals and phamaceuticals

4. Process enginering

5. Mechanical enginering

Per class, it is possible to see the percentage it takes of total patents. As seen in figure 18 below,

Philips has been active patent wise in all five areas. Clearly visible, the first Fraunhofer category

is by far the most important one. Through the years this part has only grown and today takes

more than 80% of all patent applications for its account. This is not really hard to explain since

the major activities of Philips can all be found in this first class. Businesses such as

semiconductors, medical equipment and lighting are important providers of patents for this

category. No need to say that also the consumer electronics division remains an important

source of new technologies and patents, as this category accounts for products as CD-ROM,

CD-R/RW and various DVD formats.

Sector number 2, the instruments class seems to be the largest victim of this steady increase,

largely due to increasing competition from other companies and a decline of interest of Philips

in the sector of instruments. The other sectors have remained almost constant and are far from

important compared to the first two categories. It thus seems that Philips is concentrating its

patent activities on the first Fraunhofer category.

Figure 19: Patents by technology in 1970,1980,1990,2000

Patents in the 70´s divided by technology

59%24%

0%

5%

12%

12345

Patents in the 80`s divided by technology

68%

19%

1%

7% 5%

12345

Patents in the 90`s divided by technology

78%

14%

1%

3%4%

1

2

3

4

5

Patents in the firts years of 2000 divided by technology

82%

14%

1%

1%

2%

1

2

3

4

5

Source: SPES data

4.4.4. Indexes

As stated in the previous part, the lower the Berry index, the less diversified a company is. It is

clear that on the level of technology, the Berry index shows a clear downward pattern (see

figure 20 below). This signifies that on in the field of patents, Philips is more and more

focussing at one particular business area, being the first Fraunhofer category. The Number

equivalent indicates the same trend.

Figure 20: Berry Index for technological diversification at Phillips in the years 1987-2000 1987 1993 1997 2000

Berry index 0.497887 0.386191 0.374386 0.284019

Number

Equivalent 1.991585 1.62917 1.598429 1.396686

Source: SPES data

Figure 21: Berry index of patent applications and regression line

Phi l i ps' Ber r y I ndex of Pat ent Appl i cat i on and Regr essi on Li ne

0

0, 1

0, 2

0, 3

0, 4

0, 5

0, 6

0, 7

1978 1981 1984 1987 1990 1993 1996 1999

Berry

Inde

x

Source: SPES data

The above table and the trend line graph show that in the past 24 years Philips generally has

reduced its diversification scope on technology and has refocused on its core businesses. Yet

during the whole period, there were still some fluctuations due to the changes of the world

economic environment and people’s expectations in the market.

4.4.5. Summary

As far as technological diversification is concerned, it is not very difficult to see that, over the

years, Philips has reduced its technological diversification. The number of patent applications

jumped quite high by the end of the 1980s and remained fairly constant.

If a closer look is taken at the different business areas where patents are taken, it’s clear that

Philips’ patent strategy has consistently been focusing on the first Fraunhofer class with a

steady increase of applications of electric engineering patents. The technology diversification

does not follow the same pattern as international diversification. Philips is actually less

diversified technologically in 2003 than it was in the 1970´s. This is not what was expected

because of the competitive level in the lighting industry. The reason for this back to core

activity technologically has to be found in the history of the 1970´s business culture. It has

already been stated that the financial markets reacted positively to diversification with the result

that companies had a tendency to over diversify meaning that the diversification would be into

unrelated areas where companies would be less efficient than companies already present in that

business area. Philips has most likely also been over diversified and is now trying to get back to

core business with a more appropriate technological diversification level.

4.5. Zoom in on the lighting division The lighting industry is used as reasoning for the diversification in Philips through the years.

The lighting division was the start of Philips, as mentioned earlier, and so it does seem natural

to use this division as a reason behind diversification in Philips. To give a clearer picture of this

lighting division and the importance in Philips the following analysis of the lighting division is

provided.

4.5.1. Introduction

Over the course of the years, the lighting division of Philips has become less vital although the

company remains global market leader in lighting. Back in the 19th century, Philips’ only activity

was to produce light bulbs. The company has diversified its product portfolio and has looked

for new industries to achieve growth. The lighting business unit remains an important pillar of

Philips: it has contributed importantly to the companies result between 13 to 15% of total

turnover with steady operating margins around 13% ( see the figures below).

Figure 22: The share of lighting sales in per cent of total sales in Philips 1993-2003

Lighting sales share in total sales

0

5

10

15

20

1993 1997 2000 2003

Year

Perc

enta

ge


Figure 23: Total sales in lighting division at Philips 1989-2003

Sales in Lighting division

0100020003000400050006000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Sale

s in

Mill

ions

of

Euro

s


Figure 24: Operating margins in lighting division in Philips 1989-2003

Operating Margins in Lighting division

0

5

10

15

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Perc

enta

ge


4.5.2 Product diversification

Through the years, the lighting division of Philips has increasingly diversified to become what it

is today. Currently Philips operates in four lines of business:

1 Lamps

2 Luminaries

3 Lighting Electronics

4 Automotive, Special Lighting and Ultra High Performance Lamps (UHP)

Interesting to mention is that the diversification scope recently narrowed since in the year 2000,

Philips still had a batteries unit under the lighting division. In 2001 though, this activity has

been sold off to a Joint Venture with Matsushita (Philips News centre, article 2108).

It’s clear, though, that within units mentioned, a large variety of products exist. The

Automotive, Special lighting and UHP lamps are all quite different kinds of lighting products,

although they have a lot of similarities. That’s why these formerly separate units got merged in

the year 2000 (Philips annual report 2000, page 12)

Philips does not provide any information on the turnover shares within the lighting division.

Nevertheless, based on comments in the annual reports, some remarks regarding the product

diversification will be presented.

When we go back in time, in 1987 the lighting business was still under a separate consumer

products division along with consumer electronics and DAP products. (Philips annual report

1987, page 33). There were no subdivisions and Philips mainly focused on lamps (current

business unit ‘Lamps’). It introduced new types of lamps such as the Soft tone lamp and also

broadened its product portfolio by selling fluorescent lamps with different tones of light.

Although Philips introduced a variety of products such as a set of new luminaries for interior

lighting it seems that in the early nineties, Philips focused on international expansion and

break-through technology rather than a true broadening of product portfolio. Notice that

Lighting has now become a separate division of the company and consumer electronics has

been taken out of that division.

The year 2000 was clearly the year with an emphasis on consumer technology and also the

lighting division was influenced by this choice. It broadened its product portfolio by acquiring a

share of Metrolight and also introduced new lighting applications within the consumer

electronics department, e.g. LCD projectors.

Today, it seems that the lighting division of Philips is not looking to expand its product

portfolio any further rather does it want to focus on internationalisation and more on existing

promising technologies (which of course can lead to a new broadening of the product

portfolio).

4.5.3. International diversification

Figure 25: Lighting division sales - 1997

of the years the

ource: Philips annual report 1997

oes not mean that turnover was static within Europe over the course of the years. Starting in

uring the years, other continents have become more important with North America and

Asia-Pacific equally important. It needs to be mentioned though that Philips does focus more

In the courseLighting Division Sales

0% 10% 20% 30% 40% 50%

Europe & Africa

North America

Latin America

Asia Pacif ic

% of total lighting sales

lighting division of Philips has

internationalised along with the

company. Clearly Europe (and

Africa) is the continent where

sales are strongest. As seen on

the graph below, the Old

continent takes almost half of

total turnover of the lighting

division for its account. This

S

d

the late nineties a significant shift in turnover growth has taken place moving from Western to

Middle and Eastern Europe (Philips Annual report 1997, page 37 and Philips Annual report

2000, page 52).

D

on Asia Pacific, because they consider this to be a growth market compared to North Amer

This is further reinforced by the fact that the world’s number 3 player, General Electric, has a

strong home position in the United States. Already in the early nineties Philips turned to China

and started a Joint Venture with Yaming Lighting. The company also opened a new branch in

China of a US company they had taken over the year before.

As far as production is concerned, the general trend eastward o

ica.

f the entire company has been

llowed. Production of lighting products was shifted to low wage countries such as China

hat as far as sales is concerned further international

iversification is a core aspect of Philips’ strategy. Especially China seems to be the focus of

working hard to innovate within the different lines of

usinesses of the Lighting department.

s seems to value highly is the LED technology which

the core technology that is introduced in a joint venture with Agilent Technologies. Also in

it seems that within lighting division, the

ajority of subdivisions are equally important, although the luminaries unit is the least

.5.5. Summary

Undoubtedly the lighting division remains one of the core activities of Philips. Over the years,

e lighting division has diversified on all three dimensions. It seems however that currently the

fo

(Philips annual report 1997, page 37)

Based on the annual reports it seems t

d

the company (Philips Annual report 2004, page 55).

4.5.4. Technology diversification

Historically, Philips has always been

b

The most recent innovation, which Philip

is

other units Philips brings regular innovations.

Based on the annual reports of 2003 and 2004,

m

promising as far as innovation is concerned.

4

th

international diversification and technology diversification are more important than product

diversification. As far as international diversification is concerned, China seems to be Philips’

key expansion market. With regards to technology, it is mainly the car lighting and lighting

electronics that receive the most attention.

4.6 Summary on Diversification in Philips

er hypothesis number 1 and 3.

he above description of diversification in Philips and the lighting division is summarized in

al

igure 26: Berry indexes of Philips

he technology diversification has decreased and this, ceteris paribus, means that the risk

been passed.

rom the above analysis, it is possible to answF

T

figure 26 and has some interesting observations. According to theory, Philips’ ability to create

profits in the lighting area would result in diversification due to the moderate competitive level

in the lighting industry. From the diversification analysis of Philips it is clear that product

diversification has been rather stable through the analyzed period. The international

diversification in Philips has increased in the whole period and the level of internation

diversification in Philips in 2003 is best described as extensive.

F

Ber r y I ndexes of Phi l i ps

00, 10, 20, 30, 40, 50, 60, 70, 80, 9

1

1987 1993 1997 2000

Berr

y in

dex

Pr oduct i on

I nt er nat i onalTechnol ogy

Source: SPES data

T

reduction from the technology diversification has been too expensive. The theory did provide

the possibility of less technology diversification if the company had over diversified but it will

be hard to say at which point a company is over diversified since it is a break even between risk

reduction and value creation/reduction. How much will a company pay for the last risk

percentage of risk reduction and apparently this level has been reached in Philips and it has also

Risk could be viewed as stable because increasing international diversification and lower

chnology diversification can level out each other. Over all the level of risk is still viewed to be

h R&D expenditures, it can be concluded that the

ompany innovates. However it is difficult to determine, whether the competitive level in the

. Empiric analysis – Siemens AG

In the analysis of Siemens, it is important to bear in mind, the hypotheses, that are to be

petitive level fosters firms to become internationally diversified, product

iversified and technologically diversified.

o risk reduction and to lower growth rates – and

ice versa.

petitive environment in which firms are able to create excess profits – or the

xpectations of it – fosters innovation.

Werner von Siemens originally founded Siemens AG, a Prussian army recruit and a

gineer in 1847. Their company,

in the electronic and electrical technical branch in the world.

provides innovative technologies and products and is specialized in manufacture of

te

low because the geographic size of Philips.

Due to the fact that Philips has relatively hig

c

industry fosters this innovation.

5

answered.

H1: The com

d

H2: A high degree of diversification leads t

v

H3: A com

e

5.1. Introduction

mathematician, and Johann Georg Halske, a mechanical en

Telegraphen-Bauanstalt von Siemens & Halske, was awarded its first patent for a design of the

pointer telegraph the same week.

Today, Siemens is the largest firm

It

electronic valves, tubes and other components (NACE Rev. 1.1 Primary Code: 3210) for

telecommunications, semiconductor, transport, lighting, medical and other industries. In fiscal

2004, Siemens reported sale of EUR 75.2 billion and net income of EUR 3.405 billion. It

operates in 190 countries and employs about 430,000 employees.

The following sections of the paper will present the analysis of the company as a whole. This is

ecause, being very sizable, Philips and Siemens have been shaped by the diversification forces.

.2. Product Diversification

as been active in many different business segments. We will

iscuss the product diversification of Siemens AG in 1993, 1997, 2000 and 2004. In order to

f the company:

2 Automation and Control

These are the names given by the company to the activities present in 2004. However, one has

remember, that between 1987 and 2004, there have been many changes in the business

b

This work will thus look at product, international and technological diversification in order to

track the changes that occurred over the years. After the diversification analysis of the entire

company, a short separate section will be devoted to OSRAM, the lighting company of

Siemens.

5

Through the years, Siemens h

d

explain the trends, the company’s annual reports and other sources is used.

For the purpose of comparison, we have identified 6 main areas of activity o

1 Information and Communication

3 Transportation

4 Power

5 Medical

6 Lighting

to

structure of Siemens, and those internal changes may have been more important than the

names used to describe them.

1993

igure 27: Sales by business segments - 1993 In 1993, the business

structure of Siemens

of

t year

yzed as a single business, this unit was rather fragmented and consisted

f such units as Public and Private Communication Systems, SNI (Siemens Nixdorf

d to roughly a fifth

f the total sales in1993. At a time this sector did not exist as one, and was known as a

re in

993. In this year, Western European countries and particularly Germany were in recession.

F

Sales by Business Segment in 1993 Siemens

40%

18%6%

17%

9%

10%

AG was clearly

dominated by the

Information and

Communications

segment, which

accounted for 40%

the total sales tha

(See the graph below).

Information andCommunicationAutomation andControlTransportation

Power

Medical

Lighting: Osram& DSP

Source: annual report 1993

Yet, despite being anal

o

Informationssysteme) or Defense Electronics (in total 6 areas of business).

The second in size was Automation and Control business, which contribute

o

combination of Industrial and Building Systems, Automotive Systems, or Components unit of

the company (5 divisions are classified as belonging to this unit). Also one fifth of the sales

were achieved thanks to the power business (17% in 1993). This unit included separate

Generation and Transmission & Distribution divisions. Transportation unit included only two

sub-companies called Transportation Systems and Siemens Automotive (this number did not

change over the years). It claimed only 6% of the total sales and it was the smallest segment at

the time. A little more contribution came from the Medical sector, 9% of the total sales.

There are several factors, which could have had an impact on the Siemens’ business structu

1

The company noted a decline in investments in Europe in all key sectors, which translated into

weak demand in Germany for the Industrial products (Siemens Annual Report 1993, page 6).

This also resulted in weakening of DEM against other European currencies. That is why the

Automation and Control unit only contributed one fifth of the total company sales, despite

providing services for which demand was traditionally high. Recession also impacted on

Communications unit, as the Semiconductors and SNI units were in red (Siemens Annual

Report 1993, page 8). However, the communications sector remained large, as the losses in

Europe were offset by the expansion of telecommunications business in China and India

(Siemens Annual Report 1993, page 7).

1997 Figure 28: Sales divided by business segments 1997

In 1997, the company

d not diversify so

:

lth

ort 1997, page 47).

e biggest business domain, with a

ight increase to 42% of annual sales. Yet, within this area, there has been a significant

for about


42%

18%

7%

14%

6%

13%

di

much compared to

1993. Officially the

company recognized

8 business segments

energy, industry,

communications,

information,

transportation, hea

care, components and


Power

Medical

Lighting: Osram &DSP

Source: annual report 1997, page 47

lighting (Siemens Annual Rep

The Information and Communication remained th

sl

reorganization, as SNI and unit called Public Communications Networks accounted

three quarters of the sales within the unit (Siemens Annual Report 1997, page 47). Also in

terms of numbers, Automation and Control and Power units still brought about 20% to the

total sales of Siemens. The contribution from other segments was also very similar to the one

in 1993.

However, what was happening inside the company had been much more important. There was

000

e 29: Sales divided by business segments 2000

he year 2000,

atively

firm.

portant fragments, i.e. Information and Communication and Automation and Control. The

he fact that Automation and Control closed their distance to Information unit within Siemens

an overall strengthening of core businesses through acquisitions: in the areas of power,

automation systems (purchase of ElectroCom) and building systems. Especially the

Automation and Control unit was deeply restructured, and more related units were brought

together under one business “roof”. Together with the acquisition came the divestments, and

non-core assets, such as dental and lighting fixtures and chain of wholesale installation centers,

were sold off (Siemens Annual Report 1997, page 47). Moreover, Siemens entered a completely

new area through the establishment of Siemens Financial services.

2 Figur

TSales by Business Segment in 2000 Siemens

32%

23%9%

14%

7%

6%9%

compared to rel

mild differences

between 1993 and

1997, brought some

clearly visible changes

to the business

structure of the

The most apparent is

the change in size of

the two most


Power

Medical

Lighting: Osram

Infineon

Source: annual report 2000, page 24

im

former has clearly shrunk from 42% of total sales in 1997 to 32% in 2000. The latter has

increased its share of the total sales to 23% from 18%.

T

can be explained by some decisive restructuring within the segment. For the first time the name

Automation and Control was used, and now it included: Automation and Drives, Industrial

Solutions and Services, Siemens Production and Logistics Systems and Siemens Building

Technologies (Siemens Annual Report 2000, page 24). The acquisition of Mannesmann

Dematic AG, a specialist in logistics IT and control systems, has given the company a better

inroad into the IT solutions areas as well (Siemens Annual Report 2000, page 25). While the

Information and Communication business reduced its share of total sales, the structure of this

segment was reinvented to provide what was called Siemens Business Services. This was done

by merging the information product unit with IT divisions, and was strengthened with an

acquisition of Entex Information Services of the US (Siemens Annual Report 2000, Business

segments).

Here it is worthwhile to mention that there have been some changes in overall outlook of the

ll of those successful restructuring changes, backed by well-chosen acquisitions, allowed the

company. In 2000 Siemens recorded that 9% of the total sales came from Infineon

Technologies AG, a semiconductor spin-off of Siemens. Compared to the Semiconductors unit

of Siemens, which had had a hard time to break-even in the last two years of analysis, Infineon

had done a marvelous job. Within the first year of operation (that is 2000), it ranked number

three in Germany, after Siemens and Bosch, in terms of number of registered patents, thus

being able to capture the growing demand in the areas of wireless and wireline

communications, automotive, industrial, computer, security and chip card markets (Infineon

Annual Report 2000, page 30). The creation of this company, in which Siemens retains 50% of

shares, can also explain why, in terms of percentage of total sales, the Information and

Communication segment was smaller than before.

A

Siemens to prosper well in 2000, and they made their slogan “We are moving into a new

world” (with high-tech solutions, e-business and m-business) seem reasonable.

2004

igure 30: Sales divided by business segments 2004

sion,

as

tal

he

evertheless, the company claims that this segment remains “one of the three pillars of our

re power engineering and medical solutions), (Siemens Annual

eport 2004, Letters to shareholders). Also the Automation and Control has reaffirmed its

4%.

has made Siemens

undle its power transmission and distribution services together. In this area of activity, the

oubled

om 9% in 2000 to 17% in 2004. New developments, such as the development of the “trans-

FIn 2004 the main

business divi

Information and

Communication, h

reduced its

contribution to to

sales further to 27%,

continuing t

downward trend

from 2000.


27%

25%17%

14%

9%5% 3% Information and

CommunicationAutomation andControlTransportation

Pow er

Medical

Lighting: Osram

Financing and RealEstate

Source: annual report 2004

N

business” (the other two a

R

position as the core area of activities, with 25% share of total sales in 2004.

The second pillar of the company has been the Power business. It accounted for a steady 1

Nevertheless, it underwent some changes too, as the deregulation process

b

company intends to expand by “entering into long-term service contracts, forging strategic

alliances and making acquisitions” (Siemens Annual Report 2004, Business segments).

The Transport unit has experienced the most spectacular growth in terms of share of the total

sales of Siemens in this year. In the last 5 years, as the Transport unit’s sales nearly d

fr

rapid” magnetic levitation trains together with ThyssenKrupp, another German technology

firm, and acquisition of Mannesmann VDO and DaimerChrystler’s electronic plant in

Huntsville, Alabama could have contributed to the recent figures (Siemens Annual Report

2004, Letters to shareholders). Also 2004 data acknowledge 3% contribution to total sales by

Financing and Real Estate business. Nevertheless, the company continues to struggle in the

environment of weakening USD against EUR, and higher costs of primary materials.

5.2.1. The Indexes

The berry indexes have been calculated on the basis of Siemens’ total European Union

production data for the four selected years. The table presents the results of our calculations.

Figure 31: Berry Index for product diversification at Siemens in the years 1987-2000

1987 1993 1997 2000

Berry Index 0.780143 0.790496 0.885714 0.976202

Number

quivalent 01 68 36 4.5484 4.7731 8.749976 42.020

E

S

It can be seen that alread the c as been quite diversified. This trend persists,

with Siemens diversifying even more in 1997 and in 2000. Thus, Siemens does not follow the

ath of many companies, which have begun refocusing on its core activities in the 1990s after a

his data suggests that while the current 6 areas of activity

escribed before, i.e. Information and Communication, Automation and Control,

he Information and Communications segment has seen a notable decline in size in terms of

ource: SPES data

y in 1987 ompany h

p

period of over-diversification in the 1970s (as expected by e.g. Markides 1995).

To see even more clearly the fact that Siemens has diversified in 1997 and in 2000 we

calculated the Number Equivalent.

While in 1987 Siemens has had an equal share in 4 industries, in 1997 this number doubles to 8,

while in 2000 it skyrockets to 42. T

d

Transportation, Power, Medical, and Lighting, are all core for Siemens, in fact the firm is much

more diversified. Clearly recent investments in Financial Services and Real Estate business

seem to confirm this trend.

5.2.2. Summary

T

total sales in the company. Power and Medical units retained the same position of 15% and 4%

f the total sales respectively, clearly fulfilling their purpose as the backbones of the whole

ion

5.3.1. Turnover analysis by continent – worldwide level

rom a strictly German company, Siemens has grown to become known worldwide, and in

ilable, the change in importance of

eographic regions to the total sales of Siemens AG in the last ten years can be seen from

o

company. The Automotive and Control as well as the Transport unit have restructured and

gained in size, now to account about a fourth of the total sales contributions. Siemens AG has

diversified in the 1990s and in particular in the year 2000 much more than before, thus going

against the re-focusing trend.

5.3. International Diversificat

F

2004 it was present in over 190 countries. Given the data ava

g

Graph below.

Figure 32: Sales divided by geographic regions 1993-2004

0% 20% 40% 60% 80% 100%

Total Sales

1993

1997

2000

2004

Yea

r

Sales by Geographic Region 1993-2004, Siemens

GermanyEurope (excl. Germany)The AmericasAsia-PacificOther

Source: Annual report 2005

1993 to 1997

een in these years. One is the reduction of German sales from 62% in

1993 to 34% in 1997. The second one is the increase of total share of the sales of the Americas

from 13% to 20%, and a similar increase for Asia-Pacific from 3% to 11%.

Two major shifts are s

This distribution of sales and Germany’s decline in particular can be explained by several

d the control of the firm. The economic recession of early 1990s has had a

Europe (Siemens

the Americas had contributed to 25% of the total. For the first time Europe

xcluding Germany has had a higher figure, as the sales in this category accounted for 30% of

tal. Asia-Pacific sales had a modest growth, and counted for 13%. It is worth mentioning

ntries increased their

are of total sales from 30% in 2000 to 34% in 2004. Other contributions scored 8% of the

nd are becoming increasingly comparable to the Asia-Pacific figures.

factors beyon

profound impact on the whole Western European region, and even more so on Siemens’ home

market (Siemens Annual Report 1993, page 9). Also weak DEM as opposed to other European

currencies made German sales roughly equal to sales of other countries in

Annual Report 1993, page 9). At the same time Siemens AG entered into about 20 joint

ventures with local partners in China and ASEAN countries (Siemens Annual Report 1993,

page 11). Thus we can conclude that having expected stagnation in the European businesses of

the company, Siemens tried to capture new markets, i.e. internationalize. Siemens’ 1997 slogan,

“Think and Act Globally” seemed to have captured the moment well (Siemens Annual Report

1997, page 6).

2000 The trends from 1993 and 1997 continued to last, with a further decline in importance of sales

in Germany, and further increase in sales contributions from the Americas. In 2000 both

Germany and

e

the to

that 2000 was the first year ever, in which Siemens’ U.S. business volume exceeded the one in

Germany (Siemens Annual Report 2000, page 20). The reason for this was that the highest

earnings were reported from Sylvania, North American lamp business acquired from GTE

Corporation of the US in 1993 (Siemens Annual Report 1993, page 21).

2004 Sales from Germany and the Americas were comparable in this year, and they remained at the

2000 level. Also contribution of about 12% was recorded for Asia-Pacific region. Thus, it can

be said that some degree of balance was achieved. Other European cou

sh

total, a

A comparable but slight reduction of contribution to total sales by the Americas can be

explained by the weakening of USD against EUR especially in 2004, which had an impact on

the earnings of Sylvania lamp cash cow (Siemens Annual Report 2000, page 5). The company

also claims to have expanded above expected in China, but the results of this move have yet to

Despite the fact that Siemens AG has been increasing its global presence and has been

tivities, it remains one of the biggest European

loser look at European production figures will allow us not only to

nalyze the geographic presence of the firm, but also to establish a link between the production

be seen (Siemens Annual Report 2000, page 7).

5.3.2. A closer look at the European Level

Europe in 1987 and 1993

reporting a rise in sales from its worldwide ac

companies. That is why a c

a

and different European countries in which Siemens has been active.

As we can see from figure 33, production remained concentrated in Germany, and has not

changed much between 1987 and 1993. Despite being present in other major European

countries such as France and the UK, Siemens did not produce much in these countries in

those years.

Figure 33: Production level in 1987 and 1993

Production Level in 1987 and 1993 Siemens

0.0%10.0%20.0%30.0%

70.0%80.0%90.0%

BEL/LUXDEN FR

GER GR IT IRE NL

PORT SP UK

EU-12

Tota

l EU

duct

ion

40.0%50.0%60.0%

Pro Siemens 1987

Siemens 1993

Source: SPES data

Europe in 1997 and 2000

mentioned that the 1997 and 2000 data for Product and International

iversification are influenced by the enlargement of the European Union in 1992, thus, it

includes the data for 3 new countries (Austria, Finland and Sweden). Also this graph includes a

It has to be

D

group of Eastern European countries, labeled as AC (new accession countries to the European

r ROE) signifies other countries that came into existence after the

total sales declining, at the expense of sales in North America and

sia. However, in Europe, not much has changed (see graph below).

Union). Rest of Europe (o

fall of the USSR in 1991.

While 1997 brought almost no changes to the allocation of production and country by country

contribution of sales, the year 2000 showed changes, which are observed are comparable to the

ones discussed above (i.e. internationalization of Siemens on a global scale). Indeed, in 2000

Germany saw its share of

A

Figure 34: Production level in 1997 and 2000

Production Level in 1997 and 2000 Siemens

80.0%

0.0%

40.0%60.0%

AU

les

Siemens 1997

20.0%

Tl S

aot

a Siemens 2000

S

BEL/LUX DEN FIN FRGER GR IT IRE NL

PORT SP SW UK AC

ROEurope NAAsia ROW

Source: SPES data

What is worth mentioning here is the fact that Siemens AG did benefit much in terms of sales

from the opening of Eastern European markets in the early 1990s. The company entered into

29 joint-ventures in Eastern Europe; however, given the expectation of long and slow

transitions of the former communist countries, it did not anticipate much growth in this region

ens Annual Report 1993, page 10).

e smaller the Berry Index, the more

eographically concentrated Siemens is. The larger the Index, the firm has diversified in terms

of the geographical presence more. The table presents the results of the calculations.

of Europe (Siem

5.3.3. The Indexes

Berry Index for international diversification measures to what extend the company has spread

its production between different countries. Th

g

Figure 35: Berry Index for international diversification at Siemens in the years 1987-

2000

1987 1993 1997 2000

Berry Index 0.365036 0.326895 0.548299 0.885646

Number

Equivalent 1.5748924 1.4856523 2.2138539 8.744775

Source: SPES data

From the above table it can be concluded that there has been a major change between 1993

a pendence rom Ger replac sales f mericas

a acific. The 2000 at S be more

internationalized in 2000 than in 1997.

uivalent was also calculated to see the number of countries in which Siemens

its home market, Germany, by about half in the last ten

d, the Americas, and to a smaller extent Asia-Pacific region, have gained in

relevance. In Europe, it can also be conclude that production is still largely based in Siemens’

that opening of the Eastern European countries in the early 1990s did not

ffect the strategy of Siemens. Given the “Chinese ambitions” of the firm in the future, a

nd 1997 as de on sales f many was es by more rom the A

nd Asia-P index for suggests th iemens AG came even

Number Eq

would be present if it allocated its production equally between all the geographic areas. While in

1987 and 1993 Siemens was active only roughly in one country, i.e. Germany, in the year 2000

the firm seems to have internationalized and records number equivalence of 8. This is in line

with the previous findings.

4.3.4. Summary

Overall, the most important change in the geographical presence of Siemens AG is that the

company reduced its dependence on

years. Instea

home market, and

a

further increase in Asia-Pacific share in terms of total sales and in terms of this region’s share

of total production can be expected.

5.4. Technology / Patents Diversification

To examine the importance of technological development of the company, the two figures

below are compared. Figure 36 is created by the author on basis of independently collected

data, though only from the European units of Siemens. Figure 37 is constructed

by Siemens AG and provides data for the total patents of the company.

igure 36: Patent applications and patents granted 1978-2002

patent SPES

F

Number of Patents Over Time, Siemens

2000

2500

0

500

1500

1978 1981 1984 1987 1990 1993 1996 1999 2002

Year

aten

ts

1000

# P

# Applications # Granted

Source: SPES data

Figure 37: Technological diversification 1850-2000

Source: Siemens Annual Report 2000, page 19

5.4.1. Patent evolution over the years

1980s From figure 35 it can be seen that for the thirty years until 1980s, Siemens AG has had about

2,000 patents and roughly the same amount of innovations. In the 1980s, this number went

down. A similar trend is captured in figure 34, where the sum of number of patent applications

and patents granted each year is close to 1500. However, from figure 35 it is observed that in

Europe the number of patents being granted has slowly increased in the 1980s, but the number

of applications has varied considerably from year to year.

re 35 reports a sharp escalation in number of patents and innovations beginning in 1990,

which increased the number of patents to about 6,000 patents in the year 2000 from below

ed for the European patents. Independent data states

that indeed the number of patents for which Siemens AG applied in Europe rose but only

om 1995 to 1999, while in this short time span the number of patents granted decreased. One

t changes in these years because lack

downward sloping trends on the graph. The

elf claims that in the year 2000 it was “strategically expanding our patent portfolio

sively exploiting all patent licensing opportunities” (Siemens Annual Report 2000,

1990s Figu

2,000 in 1990. The same was not observ

fr

of the possible explanations for the sharp rise in patent applications in the second half of the

1990s can be the 1993 creation of Infineon, which focused on development of new products.

The year 2000 and later It is difficult to make conclusive remarks about the paten

of data for the year 2000 and 2001, results in

company its

and inten

page 32). Siemens AG also reports to have filed 4,100 applications with the German Patent

Office. Some discrepancy in data can be attributed to the fact that the European data include

only the patents applied for at the European Patent Office, and exclude patents from e.g.

German Patent Office. Due to the lack of sufficient data, the company statements cannot be

confirmed.

5.4.2. Diversification b

y Field of Technology

To be able to assess what are the precise competences of a company, and which technologies

that are considered important, looking at a number of patent applications is not sufficient.

Therefore, the identification and analysis of technology fields, in which Siemens AG has been

active, is essential. This work presents the findings on technology diversification of Siemens

AG in Europe.

Figure 38: Number of patents divided by field of technology

Number of Patents by Field of Technology, Siemens

6000ons

0

2000

4000

1 2 3 4 5

# ap

plic

a

8000

Fraunhofer Technology Fields

ti 1980s1990s

ource: SPES data

Figure 38 illustrates technology fields, as defined by Fraunhofer, in which Siemens AG has

been active7. Through the years, Siemens AG has claimed patents in only five broadly defined

technology fields, being:

1 Electrical Engineering

2 Instruments

3 Chemical and Pharmaceutical

4 Process Engineering

5 Mechanical Engineering

S

7 For a detailed explanation of the technology fields see “Fraunhofer Classification, OECD, 1994

1980s In 1980s, Siemens applied for about 5,500 patents in the field of electrical engineering. The

second most important field was Instruments, with about 2,000 patents. Other fields

presented only a small amount of the total.

1990s In the 1990s, we can observe a substantial increase in the patents in field 1, confirming that the

most core technologies of Siemens lie in the area of electrical engineering, which includes such

reas as telecommunications and semiconductors. However, apart from continuous importance

f field 2, also patents for mechanical engineering (field 5) have risen above 2,000 applications.

his can be the result of increasing importance of the transportation segment of the company

nd investments into new projects (e.g. high-speed trains).

ens AG continues to be specialized in electrical

ngineering, instruments and mechanical engineering.

re

a

o

T

a

2000

The data for 2000 confirms the earlier trend (it only sums patents in this one year, as opposed

to the numbers per decade). Therefore, Siem

e

Figure 39: Patent applications divided by technology 2000

Patent aplications divided by technology in 2000

22%12

59%0%

5% 34514%

ource: SPES data

Overall, the company remained concentrated in few technology areas, and it can be concluded

that its technological diversification has been rather extensive. However, it has to be

S

remembered that these findings are based on the European patent data, and thus it cannot be

assumed that the company specializes in 3 of 5 Fraunhofer technology fields (See appendix 1).

5.4.3. Patents by Applicant Country Figure 40: Patents by applicant country 1978-2001

Figure 40 demonstrates that

between 1978 and 2001,

Siemens applied for its

patents mainly through the

German Patent Office. The

number of applications in

ource: SPES data

and its home country, no difference was observed in

e application on a country basis.

d

spread its total amount of patent applications over the different

the Berry Index, the more the firm has diversified its technology

the results of the calculations.

5000

15000

20000

25000

10000

0 other European countries

was extremely small. Due to

a

AT BE DE ES FR GB IT NL SE

Countries

Patents by Applicant Country, Siemens

# Patents

S

very strong connection between the firm

th

5.4.4. The Indexes

Berry Index for Technological Diversification measures the egree to which Siemens has

technology fields. The larger

portfolio. The table presents

Figure 41: Berry Index for technological diversification at Siemens in the years 1987-

2000

1987 1993 1997 2000

Berry Index

0.628202

0.600573

0.432152

0.581184

Number

Equivalent

2.6896

325 2.5035864 2.3140006 2.3876834 Source: SPES data

1987 and 1993 Siemens had a more diverse technology portfolio. However, in 1997 the

ompany seems to have reduced its Berry Index to 0.432152. Thus, there was some

oncentration of technological developments towards the end of the 1990s. However, the

dex for 2000 shows that Siemens has broadened its portfolio once again, though not to the

te 1980s level.

ke the interpretation of the index numbers more understandable the Number Equivalent

is presented. It illustrate number o ology fie which Sie AG would be

active if it had an equal share in all of the Fraunhofer categories. The results show us that

S be activ about its ac re eq d between

different fields.

ology diversification of Siemens AG, which occurred between 1978

nd 2001, is graphically illustrated below.

In

c

c

in

la

To ma

s the f techn lds in mens

iemens would e only in 2 fields if tivities we ually sprea

The change in the techn

a

Figure 42: Berry index of patent application and regression line

Si emens' Ber r y I ndex of Re

Pat ent Appl i cat i on and gr essi on Li ne

0. 5

0. 52

0. 54

0. 56

0. 58

0. 6

0. 62

0. 64

0. 66

1978 1981 1984 1987 1990 1993 1996 1999

Berr

y In

dex

ource: SPES data

It is clear that the degree to which Siemens’ technological portfolio has been diversified varies

over time. However, the regression line clearly highlights the fact that the firm has remained

relatively diversified.

5.4.5. Summary

It is difficult to identify a single trend in terms of the evolution of Siemens’ technological

portfolio over the last two decades. The number of patent applications has been steady in the

1980s and increased sharply in 1990s. The company was active only in five fields of technology,

with more applications for electric engineering patents (field 1) in the 1990s. The majority of its

patents were applied for in Germany. However, the Berry index illustrates that Siemens AG

remained relatively diversified over the years.

Siemens AG was among the top five companies in terms of sales in the four years of analysis

(1993, 1997, 2000 and 2004) in the European lighting industry. In order to understand what

S

5.5. Zoom in on Lighting: OSRAM

5.5.1. Introduction

allowed this electr

w

OSRAM: Worldwide Sales by Division in 2004

11%

6% 5%

51%

16%

11%

General Lighting

Automotive Lighting

Ballasts andLuminariesOpto Semiconductors

Precision Materials &ComponentsDisplay/Optic

onic and electrical company to be a dominant player in lighting business as

oys over 36,000 employees and in fiscal 2004

.5.2. Product Diversification of OSRAM

f Siemens AG has contributed 10% of the total sales of the firm in 1993,

ision 2004

business, i.e. lamps. Other

sections follow closely the

divisions available in Siemens,

ell, the performance of its most important subsidiary, OSRAM, is analyzed.

OSRAM has almost as long a history as the whole company itself. It was registered in 1906 at

the German Imperial Patent Office and was born as a business from the 1919 merger of AEG,

Siemens & Halske AG and Deutche Gasgluhlicht AG, all of Germany. Today light from

OSRAM shines in more than 140 countries, empl

it produced sales of Euro 4.2 billion (OSRAM Annual Report, 2004, page 5).

5

The lighting sector o

13% in 1997, 6% in 2000 and 5% in 2004. The figures for 1993 and 1997 include the Drives

and Standard Products (DSP), which makes lighting for the industrial projects such as lights on

airport lanes. It is thus clear that OSRAM have always been an important business division of

Siemens, Osram can hold the percentage contribution high even under high growth in Siemens.

Figure 43: Worldwide sales by div

Dissection of OSRAM

provides further insights.

Figure 41 illustrates that over

half of this units sales come

from General Lighting

with Automotive and Source: Osram Annual report 2004, page 46

Semiconductor lighting complementing products in the same areas.

5.5.3 Technological Diversification

It is difficult to assess which of the patents that Siemens AG applied for to the European

ting industry. Thus, there was

AM. However, innovation is a

nvested 5% of sales into R&D,

shed (OSRAM Annual Report

OSRAM: Sales by Region in 2004

0% 10% 20% 30% 40% 50%

Europe

Americas

Asia-Pacific

Other

Total Sales

Patent Office between 1978 and 2002 that were used in the ligh

no data to be able to analyze the technological portfolio of OSR

key to the development of the company and in 2004 OSRAM i

and a new OSRAM Innovation Management Team was establi

2004, page 9). In particular, focus has increasingly been given to the development of modern

ith Power of Siemens AG, OSRAM has been a part of

be energy-efficient and

.5.4. International Diversification

igure 44: Sales by region - 2004

Sylvania of the US. European Source: Osram annual report 2004

les remain high. In 2004, the acquisition of Russian fluorescent lamp manufacturer SVET,

foreign lighting industry plant in Russia. Also the firm’s

to many acquisitions and joint ventures. 2004

acquisition of Felco, second largest lamp manufacturer in

commitment to the region.

light sources. Therefore, together w

many initiatives to channel alternative sources of energy, and to

environmentally friendly.

5

F

The diagram illustrates the

geographical presence of

OSRAM, a truly global player of

the lighting industry. The sales in

the Americas accounted for over

40% of total sales in 2004, thanks

to a great performance of

OSRAM’s sister company,

sa

llowed OSRAM to establish the firsta

presence in Asia-Pacific has been increasing due

China, clearly indicates OSRAM’s

5.5.5. Summary Figure 45: Sales data 2000-2004

The sales of OSRAM over the last 5 years

have varied, but have remained in the

range of 5% to 10% of the total Siemens’

sales. Although lighting is not the main

domain of Siemens AG, the products

developed and provided by OSRAM

complement company’s core businesses.

OSRAM is internationally diversified and

o

diversification in Siemens are plotted in order to com

ry indexes of Siemens

both technology, international and on products.

technologically innovative and as such it

w is created. The berry indexes of

pare the levels of diversification.

Figure 46: Ber

OSRAM: Sales Data 2000 - 2004

440045004600

s of

EUR

3900

410042004300

2000 2001 2002 2003 2004

Years

Sa in

Mill

ion

4000

les

Source: Osram annual report 2004

should remain an important part of Siemens AG.

5.6 Conclusion on Siemens

In order to answer hypothesis 1 and 3, the figure bel

Ber r y I ndexes of Si emens

0, 40, 5

0, 8

1987 1993 1997 2000

erry

ex

0, 91

0, 60, 7

Ind Pr oduct i on

I nt er nat i onalTechol ogy

00, 10, 20, 3B

Sourc

e: SPES data

In Siemens, diversification has been broad on

On international diversification, Siemens is becoming more diversified over the years.

specially from the beginning of the nineties, a huge increase in international diversification

as taken place. At the same time, product diversification seems to increase as well.

echnology diversification has been quite stable with a slight decrease in the late nineties.

ens has most likely decreased considerably in the analyzed years. Both product

iversification and international diversification has increased and this will, ceteris paribus,

have

llowed over the years, we have constructed the two graphs below. Figure 47 and 48 illustrate

Philips

E

h

T

The risk in Siem

d

create lower risk in Siemens.

6. Company comparison on diversification

6.1. The Berry indexes compared

To be able to clearly see the types of diversifications that both Siemens and Philips

fo

changes in Berry Indexes calculated for each of the companies.

Figure 47: Berry indexes of

Ber r y I ndexes of Phi l i ps

0, 6

0, 9

1987 1993 1997 2000

inde

1

0, 70, 8x

Pr oduct i on I nt er nat i onal

00, 10, 20, 30, 40, 5

Berr

y

Technol ogy

Source: SPES data

Figure 48: Berry indexes of Siemens

lso internationalized, but retained its product diversification at a stable level. Technology

ortfolio of Siemens remained diversified over the years, while Philips tends towards

oncentration on their core technological activities. Nevertheless, both companies are active

ainly in Electrical Engineering field.

hus, the two companies follow similar trends in international and product diversifications,

hile they have a different approach to technological diversification.

to diversify because of the competitive environment in

e market. The market analysis should tell if the market gives reason for any of the

r a time span. Therefore,

is important to assume that the competitive environment has been at the same level since the

beginning of the 80´s in order to be able to make some valid comparisons.

he competitive environment in the lighting industry is strong, and according to theory, this

he environment is both competitive

Ber r y I ndexes of Si emens

00, 10, 20, 30, 4

0, 60, 70, 80, 9

1

1987 1993 1997 2000

Berr

Ind

ex

Pr oduct i onI nt er nat i onal0, 5y Techol ogy

Source: SPES data

Siemens has seen a sharp internationalization and an increase in product portfolio. Philips has

a

p

c

m

T

w

6.2. Comparing the firms with stock prices

6.2.1. Diversification and competition in the market

As mentioned earlier, firms can choose

th

diversifications, the companies have made. The problem with this analysis is that the five forces

analysis is a static analysis while the diversification analysis is made ove

it

T

competitive environment should foster diversification. T

and able to create the necessary profits for diversification to take place. The industry is

is important to say that comparing the two firms is not entirely correct. The focus of this

e not covered in this project. The diagram below illustrates the

ock prices.

igure 49: Stock prices in Siemens and Philips

dependent on scale economy and this provides a reason for international diversification. Other

diversification methods will be more company specific and the competitive environment does

not provide reason for these.

6.2.2. Comparing stock prices of Siemens and Philips

It

work was somewhat on the lighting industry and Siemens is a big player in that industry thanks

to OSRAM. Yet, Siemens is also active in many other industries, which are not analysed in this

seminar. Philips is a key player in the lighting industry but is not active in as many other

industries as Siemens. Comparing stock prices of the two companies with regard to lighting

sector might thus provide a distorted picture. It is due to the fact that Siemens could be very

successful in industries that ar

st

F

Stock Prices in Siemens and Philips

020406080

100120

30-09

-1997

30-0

1998

1999

200

9-

30-09

-

30-09

-0

28-09

-

30-09

-

30-09

30-09

28-03

Time

2001

2002

-2003

-2004

-2005

Stoc

k Pr

ice

SiemensPhilips

Source: German and Dutch Stock exchange

It is clear that the stock price for Siemens has been higher throughout the whole period but the

stock prices seem to have been following a similar trend. Both of the stocks had a big rise in

price from 1999 to the middle of 2000 and after that both had a long fall.

To analyse growth, the stock prices have been indexed with 1997 as the index year so the

growth rate between the two stock prices can be shown. In the diagram below the stock prices

have been index and now it is possible to see which of the companies had the highest growth

from 1997 to 2005.

Figure 50: Growth in stock prices with index year 1997

Growth in stock prices with index year 1997

050

100

7-9-30 -9-30 -9-30

9-200

150

250300

199

1998

1999

30-0

200x Siemens

0

200

2002

200

200

200

Inde

Philips

1-9-28 -9-30

3-9-30

4-9-30

5-3-28

Time

Source: German and Dutch Stock exchange

Stock prices still move in the same pattern but with the indexed prices, it is clear that stock

wth rate compared to Siemens. From 1997 to 2000,

Siemens increases from index 100 to 160 in 2000 and then falls back to 100 in 2005. For

Philips the growth rate is higher. The index goes from 100 to 255 in 2000 and then falls back to

111 in 2005. This also means that the company with the least amount of diversification has the

highest growth rate in stock prices, ceteris paribus. This means that the empiric analysis of

Philips and Siemens confirms hypothesis number 2.

It is though very likely that the risk in Siemens is lower than in Philips since the berry index

values are higher hence Siemens is more diversified and therefore has a lower risk associated to

the company value.

7. Conclusion This paper aimed at investigating the relationship between diversification, growth and risk in a

eoretic perspective – and to determine whether this connection fits to Philips and Siemens.

prices at Philips have had a higher gro

th

By connecting the empiric investigations of Scott, Laeven and Nielson, it is possible to cre

link between diversification, growth and risk in a given company in a competitive environ

Companies in competitive environments will use excess profit to diversify. However, high

diversification will lead to lower growth – but also to lower risk.

Siemens and Philips act in an industry with mod

ate a

ment.

erate competition. The companies have

erefore embarked upon intensive international diversification, and moderate product

rmance analysis of the companies indicates that Philips seems to be better

off than Siemens, since its growth in stock price is higher.

iemens has been able to hold the company value at the same level throughout the analyzed

ut the analyzed period and has

een able to maintain risk at the same level. Focusing on core product divisions and creating a

ns has a high level of diversification

these areas.

companies and the

th

diversification. However, while Philips has refocused on its core technological activities (in the

Fraunhofer’s field 1: Electrical Engineering), Siemens maintained a diversified technology

portfolio. The perfo

Bearing in mind the shortcoming of this project, such as lack of comparable data in terms of

recent developments in technology patents, we can conclude the following;

S

period and at the same time been able to lower the risk in the company by following a strategy

of intense product and international diversification.

Philips has been able to create a higher company value througho

b

high degree of international diversification have been the means to reach that risk level.

According to theory, the competitive level in the lighting industry is a reason for international

diversification and it is a fact that both companies have increased the level of international

diversification through the years. The academics however also agree that intensive technology

and product diversification decreases value – but still Sieme

in

There seems to be some connection between diversification methods in the

growth in stock value. Philips has had the highest growth rate in stock prices during the years.

The reason for Siemens to have a relative low growth rate could be due to the fact that Siemens

is following a broader diversification on products.

8. Bibliography

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restructuring and economic performance”,

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European Commission, DG Enterprise and Industry (2004), Additional

European Union legislation affecting electrical products

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Better"

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Conglomerate, is ready to make some big acquisitions. Feb 13th 2003.

Appendix 1 Patent data description. On the following pages the patent data which has been use in this paper are published. CNT_EPO: Country of Applicant APY: Application year ISY: Issue year (if patent was granted) IPC_SCL: IPC code (technology field) FTC_CL: Fraunhofer tech field classification, 5 groups FTC_SCL: Fraunhofer tech field classification, 30 groups Her skal der indsættes de tal der er I excel arket Kopi af patents seminar men det er for stort til at blive klippet ind så det skal printes ved siden af.

Production data The following pages contains production data spread over countries and SPES industries. All the numbers are given in million ECU. Remark: -data 1987 and 1993: data for 11 EU countries is given (Belgium and Luxemburg are taken together) -data 1997: data for 14 EU countries is given (Belgium and Luxemburg together) -data 2000: idem data 1997 + the production data is alsogiven for AC (accession countries, those 10 countries who have become recently member of the EU), ROE (European countries - 25 current EU countries), Asia and ROW (rest of world) Production data per country 1987

FIRM NAME

COUNTRY OF

ORIGIN

EU PRODUCTION BEL/LUX DEN FR GER GR IT IRE NL PORT SP UK

SIEMENS GER 20649 645 194 972 16362 19 1014 0 487 103 410 444PHILIPS NL 16255 1248 291 1312 2327 0 2080 0 8022 141 209 625 1993

FIRM NAME

COUNTRY OF

ORIGIN EU

PRODUCTION BEL/LUX DEN FR GER GR IT IRE NL PORT SP UK

SIEMENS GER 29363 831 172 889 23998 90 1234 0 364 311 518 956 PHILIPS NL 19404 1105 193 3190 4578 0 1048 0 6900 127 162 2102 1997

FIRM NAME

COUNTRY OF

ORIGIN

EU PRODUCTIO

N AUS B/L

DEN

FIN FR GER GR IT

IRE NL

PORT SP

SIEMENS GER 37784 877

1463 363

333

1632

25025

208

2076 64

1579 898

998

PHILIPS NL 16219 9091822 0 0

2106 3337 0 0 0

4592 0

595

SW UK

250 20160 2859

2000

FIRM NAME

COUNTRY OF

ORIGIN total sales AUS B/L DEN FIN FR GER GR IT IRE NL PORT SP SW UK

Siemens GER 78396 1716 482 96 29 1920 26284 166 869 0 216 321 751 251 1874Philips NL 37862 729 2312 0 71 3681 2466 0 0 0 2894 0 350 0 209

Production data per SPES industries. 1987

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

0 0 0 0 0 0 0 523 0 0 0 0 0 0 0 0 0 4883 3295 386 1527 290 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 731 138 0 1262

27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

23-26

7341 1150 0 308 0 0 0 0 0 947 0 0 0 0 0 0 0 0 0 0 0 0 9087 2622 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

49 50 51 52 53 54 55 57 58 56+59+60 61 62 63+64 65 66 67 68 69 70 71 72 73

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 100 0 100 0 0 0

1993

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

0 0 0 0 0 0 0 350 0 0 0 0 0 0 150 0 0 4300 4733 500 2515 15480 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 425 290 0 1739

23-26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

11243 0 1292 0 300 0 1000 0 0 0 1182 250 0 0 0 0 0 0 0 0 0 0 12278 2117 2315 0 0 0 0 0 0 0 80 0 0 0 0 0 0 0 0 0 0 0

48 49 50 51 52 53 54 55 57 58 56+59+60 61 62 63+64 65 66 67 68 69 70 71 72 73

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 36 0 125 0 0 0

1997

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 26 27

0 0 0 0 0 0 0 0 0 0 0 0 0 0 682 0 0 5587 3651 1877 3987 2708 5435 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1006 0 0 0 224 1862

23 24 25 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 57 58 56+59+60

2139 7094 0 1420 0 0 0 1657 0 0 0 1480 66 0 0 0 0 0 0 0 0 0 4579 1241 2793 2612 0 0 0 0 0 0 0 1676 0 0 0 0 0 0 0 0 0 0

44 45 46 47 48 49 50 51 52 53 54 55 61 62 63+64 65 66 67 68 69 70 71 72 73

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 224 0 0 0

2000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6908 0 382 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 366 0

21 22 23 24 25 26 27 28 29 30 31 32 33 34

2904 4587 3782 7066 0 1051 0 2464 0 0 0 2435 0 00 0 3654 1578 2230 622 1896 1415 0 0 0 0 0 0

35 36 37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

57

58

56+59+60

61

62

631

2766 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 950 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

63+64 65 66 67 68 69 70 71 72 73

0 0 0 0 0 0 0 0 0 00 0 0 0 0 0 0 0 0 0

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