Koninklijke Philips N.V., generally known as Philips, is a Dutch multinational conglomerate based in Eindhoven. Since 1997, the company is headquartered in Amsterdam. The company was founded by Philips brothers Gerard and Anton in 1891. The company grew to become one of the largest conglomerate organizations in the world. The company started manufacturing light bulbs and was awarded the honorary Royal title in 1998; the company has pivoted from consumer electronics to healthcare technology. The company now operates through three main divisions: Personal Health, Connected Care, and Diagnostic & Treatment. The company has a global footprint and has almost 80,000 employees globally. The company has spent €1.5 billion in research and development in 2019 (Philips, 2021). Philips was rated as the top Medtech company rated by Boston Consultancy Group (BCG). Philips has a rich history, and the company has embedded the values that promote sustainability and are environmentally responsible. Porter’s five forces model is a valuable tool for analyzing the opportunities Philips can avail and the threats it is exposed.

Competitive Rivalry in the Market

The market competitiveness varies from industry to industry. The consumer electronics and digital health market spheres are both highly competitive. The consumer electronic market is expected to be valued at $1.06 trillion in 2021 (EPT, 2021). The global digital health market is expected to be valued at $660 billion in 2025, with an expected CAGR of 25% from 2019 to 2025 (Stewart, 2021). Philips’ significant competitors are LG Electronics, Schneider Electric, and General Electric (GE). Philips was placed at 374th place in Fortune Global 500 companies list; the company reported $29 billion in revenues with a percentage change of 1.1% and profits of $1.6 billion with an impressive year-on-year increase of 123.8% in 2017 (Fortune, 2021). In 2020, Philips earned $22.3 billion in revenues and a profit of $1.4 billion (Forbes, 2021). In 2020, LG reported revenue of $53.6 billion and a profit of $1.7 billion (Forbes, 2021). In the same fiscal year, Schneider Electric earned $2.7 billion on revenues of $30 billion (Fortune, 2021). GE, the largest US electronics company, placed at 33rd rank on Fortune, has reported $5.7 billion on revenues of $79.6 billion (Fortune, 2021). Considering the facts mentioned above, there is tough competition in the market.

Threat of Substitutes

The threat of substitutes is high in the presence of better alternatives, the consumers’ acceptance of the alternative product, and the product targeting needs of the users. However, the threat of substitutes is moderate in the short term and reasonable in a long time. Competitors and startups are offering better products by incorporating intelligent devices and making products more environmentally friendly. Governments are also encouraging greener product developments by providing tax breaks and credits; the Dutch Green Funds Scheme (GFS) is a tax incentive instrument used by the Dutch government to encourage environmentally friendly initiatives (Scholl et al., 2010). These established incumbents are trying to fend off the competition by innovating and taking advantage of their established position and resources. Other benefit incumbents have a significant market share with a variety of products at their disposal. The newcomers are selling one-off products thus, not providing solutions for the range of products. Therefore, the threat of new entrants remains low.

The Threat of New Entrants

The threat of new entrants is gauged by the level of interest in the industry, the regulatory framework governing the sector, and the need for financing. The threat of new entrants is moderate in the industry. As there is a favorable environment for the startups to grow and capture the market share, both consumer electronics and health care technology domains feature a long list of potential unicorn startups trying to take on the incumbents. The financing from venture capital firms and a supportive legal environment has enabled startups to take on real-world problems and innovate and solve them. The aspirants can even acquire decent get-go funding through accelerators (Adams, 2020). On the other hand, the current environment pushes the incumbents to evolve, leverage the technology, or leave behind. Therefore, the threat of new entrants in the industry is moderate to high.

Bargaining Power of Buyers

Buyers have higher bargaining power when there are better alternatives available; they can influence the price due to competition in the market. There is low switching cost and a lack of brand loyalty. Consumers are generally retail customers in consumer electronics; they highly price sensitive and can exit the brand even with minor changes. There is no switching cost, and buyers are aware of their impotence and can impact the business’s bottom line. Low switching cost increases the risk of customer exit (Pereira, 2004). In digital health, the same situation persists owing to lots of available options. Considering the above, consumers can exercise higher bargaining power.

Bargaining Power of Supplier

Suppliers’ bargaining power depends upon the underlying factors, suppliers’ concentration, the importance for the buyers, and the supply chain risk. The most important supplies are the electronic parts and silicon chips used in manufacturing the product; these suppliers are concentrated in few countries, especially in South East Asia. Therefore they have the supply chain oligopoly, and they sell the products at the desired rates. The over-dependence on the supplier and their concentration can cause business disruptions due to supply chain risk (Khan & Burnes, 2007). The risk of forward interaction is low, but it is not negligible; suppliers can try to forward integrate into manufacturing if they assume higher returns in the buyers’ business. Therefore, suppliers have moderate to increased bargaining power.

References

Khan, O., & Burnes, B. (2007). Risk and supply chain management: creating a research agenda. The international journal of logistics management.

PEREIRA, P. (2004). Some implications of search and switching costs for the price dynamics of electronic markets. International Journal of the Economics of Business, 11(3), 303-327.

Adams, P. (2020). Financing Your Digital Health Venture. In Digital Health Entrepreneurship (pp. 59-70). Springer, Cham.

Philips. (2021). About Us. Available at: https://www.philips.com/a-w/about.html

EPT. (2021). Growth anticipated for global consumer electronics revenues. Available at: https://www.ept.ca/2021/03/growth-anticipated-for-global-consumer-electronics-revenues/#:~:text=The%20Statista%20data%20show%20global,hit%20a%20%241.16%2Dtrillion%20value.

Stewart, C. (2021). Projected global digital health market size from 2019 to 2025*. Available at: https://www.statista.com/statistics/1092869/global-digital-health-market-size-forecast/#:~:text=In%202019%2C%20the%20global%20digital,660%20billion%20dollars%20by%202025.

Scholl, G., Rubik, F., Kalimo, H., Biedenkopf, K., & Söebech, Ó. (2010, February). Policies to promote sustainable consumption: Innovative approaches in Europe. In Natural resources forum (Vol. 34, No. 1, pp. 39-50). Oxford, UK: Blackwell Publishing Ltd.

Fortune. (2021). Schneider Electric. Available at: https://fortune.com/company/schneider-electric/global500/

Fortune. (2021). Royal Philips. Available at: https://fortune.com/global500/2017/royal-philips/Fortune. (2021). General Electric. Available at: https://fortune.com/company/general-electric/fortune500/
Forbes. (2021). LG Electronics. Available at: https://www.forbes.com/companies/lg-electronics/?sh=6683f9052b68
Forbes. (2021). Philips (PHG). Available at: https://www.forbes.com/companies/philips/?sh=1b14322d55ce