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The New Face of Philips

When people think of Royal Philips Electronics (PHG), they probably think of consumer electronics like flat-screen TV, personal-care products like Norelco razors and Sonicare toothbrushes, or maybe even the company's newest kitchen appliance, its Senseo coffee maker. That's not what President and Chief Executive Gerard J. Kleisterlee envisions. In his mind's eye, Philips is a high-tech manufacturer of medical equipment, semiconductors, and lighting that also happens to market brand-name housewares.

Reputations often are slow to change, of course. Since ascending to the top in 2001, Kleisterlee has been laboring relentlessly to remake the Amsterdam-based company. He has jettisoned and outsourced operations, including Philips' entire components division, lowering the overall headcount by 60,000, or one of every four workers. He has acquired hospital-products outfits and cut off almost all investment in household goods. Yet even internally, Kleisterlee concedes, Philips is still largely the company it was before.

BETTER, BUT NOT GREAT. Its financial performance seems stuck in the past, too. At today's exchange rate, Philips should earn $3.5 billion on revenues of $36 billion in 2005, according to Dresdner Kleinwort Wasserstein Securities. That would be up by single-digit percentages from last year and a turnaround from crushing losses in 2001 and 2002.

Even so, the latest numbers don't come close to 2000's records, when Philips pocketed $11.3 billion on $44.4 billion in sales. Indeed, Kleisterlee points out that adjusted for inflation, the results are no better than they were 10 years or 20 years ago.

Still, Kleisterlee believes Philips' transformation is accelerating. Though dating to 1891 and boasting pioneering work in X-rays, radio, and compact disks, Philips had become rigidly compartmentalized with each division focused mainly on defending its own turf. As a result, it missed out on new products and markets. But by encouraging interdivision teamwork, Kleisterlee says Philips belatedly is learning how to innovate again.

WORLD OF OPPORTUNITIES. His favorite example: A van that Philips has outfitted with diagnostic and lab equipment and a high-speed satellite link to a top-tier hospital. The vehicle is now traveling India's back roads, delivering medical care to people who otherwise might never see a doctor. With some 700 million people in rural India and even more in rural China, demand for such a mobile clinic could be huge.

Born in Germany, Kleisterlee, 59, took at job in Philips' medical systems division in 1974 after earning a bachelor's degree in electronic engineering from Holland's Eindhoven Technical University. In Chicago for the Radiology Society of North America's trade show, he spoke with BusinessWeek Senior Correspondent Michael Arndt. Edited excerpts of their conversation follows:

Though the public may not have noticed, Philips isn't the company it was five years ago. Why the changes?

When I look back at the company we were in the 1990s, we had a focus on high-volume electronics. It said to people who were not part of that value chain that they were not the focus of the company -- people in medical systems and lighting and domestic appliances. Ironically, those were the people who quite consistently made decent money and earned good returns on shareholder investment.

In addition, we looked at how consumer electronics would look a few years out. And our view was that with digitalization and the convergence between telecommunications and consumer electronics, this industry would look much more like the personal-computer industry than traditional consumer electronics. So that meant action. We were a fully integrated manufacturer. We said we had to get out of that.

What's wrong with being a company that does everything from start to finish?

There is, in principal, nothing wrong with that. It very much depends on the industry. In consumer electronics, as in the PC industry, a number of processes had become so standardized that people who focus on these processes gain economies of scale. For all the others, there is no differentiating.

If you take other value chains, however, such as automotive lighting and specialty lighting, it pays for us to be fully integrated. There is no standardization in processes. On the contrary, there is a competitive advantage not only in how we have designed the product, but in how we have designed the manufacturing. If I were to outsource those processes, I would be giving away our advantage.

But the light bulb is more than a century old. Why would a company that wants to be innovative invest in lighting?

We hear that from investors: You're a leader in the lighting industry. So what? But there is a whole wave of innovation in lighting. The lighting industry is making the step from vacuum technology -- from traditional light bulbs to solid-state technology LEDs [light emitting diodes]. Even in vacuum technology, there is still so much innovation that we have started several new businesses. For example, we built a whole new business on ultrahigh-power lamps for projectors.

This will be a transformation that will take place over decades. Fifteen years ago, you saw the first liquid crystal displays in lighting. But only now are LCDs starting to penetrate the TV domain in a significant way. What you see usually in new technologies is that they occur first in applications that were impossible with old technology. You couldn't make a laptop with a picture tube, for example. So LCDs developed with laptops.

Where do medical products fit into this continuum of self-sufficiency versus outsourcing?

Medical has some of each. If I take CT scanners and other detector technology, that's where the cutting edge is. This is a source of competitive advantage, so you develop it, you own it, you manufacture it, you market it. But the printed circuit-boards in the control cabinet? I heavily outsource that. That's a standardized process.

Can you talk a little more about the promise you see in the health-care market?

Everywhere, health care is a Top 3 issue, and that offers tremendous opportunities for companies like Philips. The biggest health-care market in the world is the U.S., followed by Japan. But already today, China is the third-largest market out of areas where we operate. If you go to India, China, or Thailand, you will find high-end hospitals that are totally comparable to what you see in the Cleveland Clinic or the Wisconsin Heart Hospital. But on the other hand, there also are people who live on a few dollars a day who need very basic access to health care.

Your product catalog features lots of big-ticket items, such as MRI machines or even entire IT systems for electronic patient files. But what do you do in developing countries that cannot afford these products?

I was just in India where we are running a pilot project. We set up a van with basic equipment such as X-ray and ultrasound machines and some basic laboratory equipment to do blood and urine testing.

The van is equipped with a satellite link, so that wherever it goes, it has a video-conferencing link and a data link so that the doctors in the hospital we work with can consult face to face with the doctor in the truck and the patients. They can exchange the data from the examination to come quickly to the right diagnosis.

If people in rural India have to see a doctor today, they have to travel to the nearest city. That costs them money for transportation and other expenses, and when they go to the city, they don't earn income. Now the doctor comes to them. Treatment is cheaper. They hardly lose any time, so their income doesn't suffer. And for us, it's also an economic proposition.

Do you see a role for Philips in making medical equipment that is in effect a consumer product?

We have a presence in the home and a presence in health care, and we can bridge the two. One of the things currently in a pilot phase is home health-monitoring.

We have a product we call Motiva, which combines several medical devices: a heart-rhythm monitor, a blood-pressure meter, a weight scale, and some equipment to measure glucose. Heart patients can measure basic body functions without physically going to their doctor. Then we use the TV as an interface. We have a modified set-top box that links to a broad-band connection to a hospital group that provides the medical expertise.

The clinical evidence shows that if you can bring people quicker from the hospital back to their homes, not only do you save costs, but people recover better. That is one way of bringing health care into the home.

Where else do you see growth for the company?

We also see opportunities for semiconductors, particularly in automotive. Car manufacturers see the car increasingly as an extension of the home: All of the electronics we have in the home, we also want to have at our fingertips in the car. They therefore look for companies like Philips that have the basic technology and know the home situation. Still, growth so far has been erratic, and in reality, Philips has not been able to take advantage of it


Because Philips became so internally focused and so compartmentalized that any time that a growth opportunity could be captured by regrouping resources, we missed it. The resources were in different silos and weren't accessible. That's what we've tried to change. When we created backlighting for LCDs, that required the cooperation between consumer electronics and lighting and semiconductors. You have to have the resources from these three groups together. In the old Philips, we had walls that made it almost impossible.

You're talking about changing the company's culture.

It doesn't happen overnight. I would say we're one-third down the road. But that's the most difficult third, getting going.


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