Royal Philips electronics badly needs to fine-tune its image, especially in the U.S. The company, which started out in Holland in 1891 as a light-bulb factory, is the world's third-largest maker of consumer electronics. Yet American consumers are more likely to associate Philips with milk of magnesia, screwdrivers or petroleum than recognize it as the company that pioneered the compact disc (CD) and the digital video disc (DVD). Gerard Kleisterlee, Philips' new CEO , is determined to change all that. Two months ago he took his message to perhaps Philips' most important audience: the buyers, trade media and other jaded gadgeteers who gather every year at the Consumer Electronics Show in Las Vegas. As the first Philips CEO ever to give a keynote address there, he was not about to let the opportunity go to waste. "Just as the Philips brothers leveraged the technologies of electricity and making incandescent lamps into a wide variety of products, Philips today is leveraging convergence, digitalization and the Internet, especially broadband, into an even more exciting future," Kleisterlee told the audience.
A Dutchman who, like his father, has worked for Philips all his life, Kleisterlee says he is determined not only to transform Philips' image with consumers but also turn it into a high-growth, high-tech company, something that more than 10 years of restructuring, under two predecessors, failed to do. Even a global marketing campaign based on the theme "Making Things Better" hasn't — so far — made things better for Philips.
Can Kleisterlee? In the nine months since he became CEO, the 54-year-old electrical engineer has replaced all of the top executives at Philips' consumer-electronics division in the U.S., outsourced the production of such sacred cows as mobile phone handsets and video cassette recorders, cut the number of factories from 269 to 160, sold a number of low-growth businesses such as fax machines, slashed overhead and forced divisions to share services to achieve projected cost savings of around $850,000. And he has promised to sell off another 27 businesses over the next 18 months to save an additional $850,000.
Still, Philips, reeling from the economic downturn that turned off consumer spending and battered its important semiconductor business, recorded its first negative year since 1996 in February. Sales declined 15% to just above $27 billion, resulting in a net loss of $2.25 billion. "I can't control the economy, but I can control the pace of change at Philips," says Kleisterlee, an avid Formula One motor-racing fan.
He made his reputation as head of Philips' components division, where, among other things, he orchestrated a partnership that vaulted Philips to the No. 1 position in liquid crystal displays. And as CEO he has proved fast off the blocks. But Philips is too big and too bureaucratic to change easily. Despite having one of the best research and development labs in the consumer-electronics industry (it filed some 3,000 patents last year), Philips is plagued by an inability to transform its technological edge into successful products and a corporate structure in which various divisions compete against each other rather than cooperate.
"Throughout the 1990s and back even longer than that, Philips has been unable to grow," says Kleisterlee. "We have remained more or less a $30 billion company, which on the one hand has created excellent intellectual property and research and development but on the other hand failed to consistently translate that into winning market positions."
His predecessors tried. Jan Timmer took the helm at Philips' Eindhoven headquarters in 1990, the year the company came close to declaring bankruptcy. He earned the nickname "the butcher of Eindhoven" for eliminating 50,000 jobs and pulling out of the telecommunications-equipment and computer businesses. But the areas the company did focus on flopped, revenues sagged and Timmer was replaced in 1996 by Cor Boonstra, a marketing veteran of both Unilever and Sara-Lee.
Boonstra sold music giant Polygram — the heart of Timmer's media strategy — moved the company headquarters 115 km north to Amsterdam and orchestrated an ill-fated entry into the telephone-handset business. Still, Philips' profits went up along with the booming economy. Boonstra's critics say that while he created a healthy balance sheet, he had no clear technological vision for the company.
Matt Medeiros, the California-based CEO of Philips' component division, agrees. "What we lacked was a vision going forward," he says. "Gerard has it." Says Paul O'Donovan, a consumer-electronics analyst at Gartner Dataquest: "He has the opportunity and knowledge to tidy up Philips' structure internally and the vision to move it forward."
Kleisterlee is now focusing Philips' efforts in areas where he thinks it can win, namely display, optical-storage, connectivity and digital video processing. At this week's CeBIT, the large technology trade fair in Hanover, Germany, Philips will unveil products that represent the vision: a personal computer monitor that morphs into a detachable Web pad that can connect to the Internet from anywhere in the house; a liquid-crystal display PC monitor that doubles as a TV; a Bluetooth-enabled mobile phone; a portable CD burner; a broadband-connected hi-fi that lets you listen to Internet radio stations; and a line of new DVD recorders that allow you to record TV shows and home movies on to discs.
Kleisterlee points to the DVD recorder as an example of
the way the new Philips works. To produce the device,
cross-sector project teams were set up from Philips' consumer-electronics,
semiconductor and optical storage divisions. For perhaps
one of the first times in the company's history, the divisions
worked in parallel,
| Products reflecting the new Philips
include the flat screen display |
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TOM STOCKILL for TIME
READY, SET, GO "I can't control the economy," Kleisterlee says. "But I can control the pace of change at Philips." |
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rather than sequentially, and were given common objectives, shared bonus targets and a tight deadline. The result: the first DVD recorder based on the new DVD+RW standard, completed six months ahead of schedule. This line of DVD recorders, which won innovation awards at January's U.S. Consumer Electronics Show, is already on sale in Europe
Another urgent project was the development of panels and projection engine panels used for projection TV based on liquid crystal on silicon (LCOS) technology. LCOS offers high resolution — at low cost — for large-screen monitors, high-definition televisions and camcorder viewfinders. Philips claims it is the first to market LCOS components. "There is an enormous sense of urgency within Philips to change the way we work together internally," says Kleisterlee.
The new Philips also has a more realistic
attitude toward partnerships. It teamed up
with Sony on the DVD recorders — that's
how it came up with the DVD+RW format that
analysts say is well-positioned to become
the de facto world standard. Since DVD recorders
will eventually replace video cassette recorders,
the market potential is huge.
"We have learned our lessons from the past," says Ad Huijser, Philips' chief technology officer. While the standards battle was raging in the 1970s between the Betamax and VHS formats for video cassette dominance, Philips came out with its own format, called Video 2000. Its superior technology allowed consumers to record TV programs on both sides of the tape, says O'Donovan. But Japan's JVC struck a deal with Hollywood to put films on VHS tapes, and Video 2000 disappeared before it ever got off the ground. (It took Sony's Betamax a little longer to give up the ghost.)
Philips invented the CD in the 1980s and jointly introduced it with Sony, to huge success. But then Philips tried to go it alone again with interactive CD technology (CDi), which allowed the addition of text to the video. "CDi was a great technology from the multimedia point of view, but we could not rally other partners to bring it massively into the market," Huijser says. So it too went into technology's dustbin.
Around the same time Philips became locked in a battle with Sony over a standard for digital audio. Philips backed a format for digital compact cassettes (DCC), while Sony supported the digital audio tape or DAT. Neither could compete with the CD. Since then Philips has teamed up with Sony to co-develop the DVD and recordable DVDs and super-audio CDs (SACDS), a new standard for a truer sounding CD.
Both Philips and Sony are strong in optical-disc technology, and their combined weight can set industry standards. That helps explain why Sony, one of Philips' fiercest rivals in consumer gadgets, is also the Dutch company's favorite partner. But Philips has such a diverse product range that there are lots of businesses in which the two can't possibly compete. Among other things, Philips makes lighting equipment (it is the world's No. 1 producer), electric shavers (also ranked No. 1), picture tubes (one in every seven TV sets on the planet has a Philips tube), medical equipment (such as diagnostic imaging and patient monitoring machines), domestic appliances (it invented the Cellesse, a cellulite-removing device) and semiconductors (the company's stock rises and falls with the semiconductor cycle). Diversification is both a strength and a weakness. "The fact that Philips has such a broad portfolio is the reason I came here," says Medeiros, who arrived from Allied Signal. But all these products have to compete for corporate attention and resources.
Kleisterlee's response is that Philips can leverage all its divisions to make cutting-edge products — even lighting, its oldest business, is a technological asset in developing displays for patient-monitoring machines. While financial analysts see some synergies between Philips' divisions, they often ask whether the company would be more valuable if it were in even fewer businesses.
Analysts would also like to see Philips work to better establish its brand. "Its marketing and branding have been atrocious," says O'Donovan. "Even now they haven't got it right." In comparing Philips to its perpetual partner the Gartner Group Dataquest analyst says, "Both companies are very innovative, but Sony has the brand advantage for quality, reliability and design." Kleisterlee acknowledges that marketing has not been up to industry standard and that the consumer-electronics division, which accounts for around a third of total group sales, hasn't been performing well enough for several years. Though parts of the business, like DVD video, recordable media and TV sales, have strong market positions in Europe, other areas need a lot of help — again, he is talking about the U.S.
The company is increasing its focus on marketing, appointing chief marketing officers for all its major divisions. And American Larry Blanford, a former president of Maytag Appliances, has been hired as the ultimate repairman. As CEO of Philips Consumer Electronics North America, he will try to improve Philips' distribution channels in the U.S. and help it differentiate its consumer products. "We are determined to position Philips as a high-end digital company in the U.S.," says Guy Demuynck, chief executive officer of Philips Consumer Electronics division worldwide.
The company's success — or failure — in the U.S. will determine Philips' future. Though the lighting and medical-systems divisions provide the cash flow to act as a counterweight to the cyclical semiconductor business, it is the consumer-electronics division that is critical for the development of the Philips brand. And it is one of the areas where Kleisterlee has moved most quickly and decisively.
"Boonstra made similar promises," says one financial analyst of Kleisterlee's early days. "It will come down to performance — the difference between what is said and what kind of change can be pushed through a bureaucratic infrastructure." If Kleisterlee wants to continue to share the stage — in Las Vegas and elsewhere — with the world's strongest consumer-electronics companies, he'll need winning products, successful partnerships, better marketing and more of the right kind of name recognition in the U.S. Otherwise his restructuring will look a lot like the ones Philips has gone through before — only played back on a fancier new machine. |
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PROMOTION
