When Gerard Kleisterlee took the helm at Royal Philips Electronics in 2001 the Dutch conglomerate's vast empire spanned sectors from TVs and light bulbs to semiconductors and medical devices. But one important thing was missing: a coherent brand. For years, Philips (PHG) had focused on the different technologies behind each of its five major businesses instead of what unified them in the market.
"It was clear the missing link between Philips' great technology and business success was marketing," Kleisterlee says. "We had to choose whether Philips was a company built around its core technologies or one built around its core brand."
Kleisterlee wisely chose the latter. Countless focus groups across the company's divisions—medical, lighting, consumer electronics, domestic appliances, and semiconductors—all led to the same conclusion: New technology was often just too complex. So Philips stopped talking tech and started speaking the language of its customers. Instead of trumpeting the benefits of say, liquid crystal displays or light emitting diodes, Philips now talks about the better picture quality of its flat screen TVs or how lighting can change a room's mood.
TOP GAINER. It's all part of a new branding effort launched two years ago called Sense and Simplicity. The idea is to create a "health care, lifestyle, and technology" company whose products promise innovation but are easy to use and designed around consumers. Kleisterlee hired a new marketing boss and quickly moved to ensure the company's strategy filtered down to the troops.
As branding initiatives go, it has been remarkably successful: In the 2006 annual BusinessWeek/Interbrand global brand study, Philips was one of the top gainers, registering a 14% increase in the value of its brand, to $6.73 billion, and jumping five places in the rankings, to No. 48 (see BusinessWeek.com, 8/7/06, "The World's Best Brands").
The company hatched a variety of strategies to pull this off. For instance, looking for new sources of creativity and innovation, Philips turned to outsiders and formed a think tank known as the Simplicity Advisory board. Made up of an unlikely coalition of a British fashion designer, a Chinese architect, a U.S. radiologist, a Japanese auto designer, and an MIT professor, the group is an informal sounding board for management.
HOME BREW. Last year, Philips copied a longstanding practice from the auto industry and launched a road show for investors, suppliers, customers, and media aimed at highlighting future Philips products. The tour visited Paris, Amsterdam, and New York in 2005 and will swing through London, Hong Kong, and Brazil this fall (see BusinessWeek.com, 10/26/05, "The New Simplicity").
Kleisterlee points to a few new products that best exemplify the simplicity brand. For instance, any lay person can operate Philips' Heart Start defibrillators to shock a stopped heart back into action, thanks to simple audio guided instructions. There's also the Perfect Draft beer dispenser, a twist on Philips' hugely successful Senseo coffee makers, which allows you to "enjoy the same cooling, pressure, and foam at home that you do in the pub," Kleisterlee says.
Another recent change is the creation of consumer test centers around the world. Here products are extensively reviewed and critiqued by consumers, sometimes leading Philips to delay a product's release in order to make suggested changes. Before Philips launched its new WACS7000 Wireless Music Center, for instance, it ran the product through eight months of rigorous tests at its Consumer Experience Center in Singapore.
Subjects had complained that the system was difficult to install and lost patience with the complexity of the technology. So Philips rewrote the product software and reintroduced all the manuals with improved quick install guides before launching the product in August, 2005.
UNIVERSAL CONTROL.Philips also is working on two of consumers' biggest pet peeves: complicated remote controls and incomprehensible instruction manuals. Philips' latest range of flat screen TVs now show users a split screen image and ask them which one they like best. After doing this a few times, the TV automatically adjusts the picture quality to the preferences of the viewer.
There are also now simplified instruction cards designed to get Philips consumer products up and running in 8 to 10 easy-to-follow steps. And for those tired of countless remote controls littering the living room, Philips is bringing out a range of universal remotes for all your audio and video devices.
At the same time, Kleisterlee is trying to boost brand awareness in markets—including the U.S.— where many of Philips' products are marketed under other brand names, such as Norelco razors, Sonicare toothbrushes, and Magnavox audio and video systems.
BULKING UP. Philips is working with focus groups to find the best brand positioning. The company recently decided to market its Norelco shavers as Philips Norelco, with Philips as the "endorsement" brand and Norelco as the "category" brand. "Everyone in the U.S. knows Norelco shavers but few realize they are a Philips product," says Kleisterlee. "The brand repositioning addresses this."
Under Kleisterlee, the structure of Philips is also changing. At the time he became CEO five years ago, the medical division was the laggard, accounting for 8% of Philips' revenue and less than 4% of its operating income. Without the huge range of products and services offered by rivals General Electric (GE) and Siemens (SI), Philips was losing ground to the giants (see BusinessWeek.com, 12/1/2005, "The New Face of Philips").
Kleisterlee decided the only way to compete was to bulk up, and spent billions on acquisitions over the last five years, adding medical companies such as Witt Biomedical and Stentor. Last year, medical systems accounted for 21% of Philips' revenue and 38% of operating income.
DITCH THE CHIPS. Other divisions are also getting the Kleisterlee treatment. In the past year alone, he has spent more than $4 billion on acquisitions to spur earnings growth in the appliances and lighting divisions, as well as medical systems. And by the end of this year, Philips will spin off its semiconductor division, Europe's third-largest chipmaker. Recent reports claim a number of private equity firms are eyeing the business, although Philips won't comment on the speculation.
Ditching semiconductors, analysts say, is a smart move. That's because the cyclical nature of the business has been a drag on the company's share price, which is intrinsically linked to the chip industry. "Semiconductors is Philips' worst-performing business and the only thing moving their stock," says Scott Geels, a senior research analyst at Sanford C. Bernstein in London.
Thanks to the roller-coaster nature of chips, Philips' share price rose throughout 2005, then fell 20% in the first half of this year, and is now up 7.7% for the year. Investors are undoubtedly reacting to an 11.7% first-half revenue increase and near doubling in operating income, to €702 million ($895 million). But they're also cheered that one of the world's great consumer products companies has finally got some fresh brand buzz.