Philips Needs Laser Speed

Philips CEO Jan D. Timmer brooded at the podium. Despite his enthusiastic 30-minute demonstration of Philips Electronics' multimedia technology, there was tension in the hall. Shareholders at the annual meeting on May 5 in Eindhoven, The Netherlands, were not convinced Philips' future looked bright. One by one, they stood up and asked why new products were selling so slowly.

This wasn't the script Timmer had imagined. Indeed, it should have been a triumphal moment for the 61-year-old Dutchman. It was he who managed to revive the world's third-largest consumer-electronics company, wringing out healthy profits in 1993 from an unwieldy giant that lost $2.3 billion in 1990 and dipped into the red again in 1992 (chart). Nicknamed "Hurricane" Timmer, he slashed 70,000 jobs and axed money-losing businesses. Despite a flat market, the company rebounded from a $486 million loss in 1992 to a profit of $1.06 billion in 1993.

But Timmer has done only half the job--the easier half. To keep pace with global electronics powerhouses such as Sony Corp. and Matsushita Electric Industrial Co. beyond the year 2000, Philips must quickly find new engines for growth. Timmer has been hammering on that theme for three years. Yet Philips' sales rose only 1% in 1993, and $600 million of its profit was nonrecurring income from divestitures. Such promising products as Digital Compact Cassettes and Compact Disc-interactive have never gotten off the ground, offering fresh evidence that Philips is still struggling to turn great research into hit products.

Timmer, a stout man with a commanding presence, knows that he doesn't have forever to get Philips moving. "There are obstacles," he admitted to shareholders in May. But, he insists, "we will conquer them." In mid-June, Timmer will present a new strategy to the Philips supervisory board. Sources close to the company say it will accelerate Philips' move into software, services, and multimedia, where Timmer hopes to generate 30% to 40% of revenues by the year 2000, compared with just 20% today.

It's a bold plan for a company desperate to prove itself. "We can't continue to restructure. We have to develop new initiatives," says Henk Bodt, board member in charge of consumer electronics. According to top management, Philips is already hunting for a major acquisition, probably a leading U.S. interactive-software house.

Philips' PolyGram recording house is one of Timmer's bright spots. The unit, 75% owned by Philips, is striving to transform itself into a rich source of media products of all kinds. PolyGram, with $4 billion in sales last year, snapped up Motown Record Corp. for $325 million and acquired a handful of independent film producers. It has a surprise hit this season with Four Weddings and a Funeral. Polygram is also eyeing MGM/UA Communications Co., which Credit Lyonnais aims to sell by 1996.

"the game is over." Timmer's drive into new multimedia markets also includes developing telecommunications services. As a start, it's licensing advanced messaging software from General Magic Inc. in Palo Alto, Calif., and selling it to European phone companies such as France Telecom.

Trouble is, many of Philips' thrusts into multimedia aren't designed to produce profits until the end of the decade. In the meantime, Timmer has to grapple with a number of problem areas, including his all-important consumer electronics division, which still makes up 36% of sales. After a slight loss in 1993, it eked out a small profit in the first quarter. But Timmer still has a long way to go to reach his target of a 4% profit margin.

One big trouble spot is Philips' Compact Disc-interactive technology--the one Timmer raved about at the shareholders' meeting. Announced in 1985 and shipped only in 1991, CD-i was to offer a myriad of educational and entertainment possibilities as it transmitted text, images, and digital sound via compact disk (CD-ROM) to a TV screen. Philips had hoped CD-i would tap a huge market niche by proving to be a system more versatile than game players such as Nintendo's and Sega's but less expensive than computers.

But by the time CD-i hit the market, the niche it sought was vanishing. Consumers either opted for personal computers with CD-ROM capabilities, which offered more performance for the money, or simple game machines, which had better software and cost less. Now game machines, too, are adding CD-ROM drives. "Their potential market is being eaten at from both sides," says Dataquest Inc. multimedia analyst Bruce Ryon, who expects Philips to sell only 200,000 units this year, vs. Timmer's projected 700,000.

"The game is over [for Philips]," sniffs Satjiv Chahil, vice-president for new media at Apple Computer Inc., which has sold 3 million PCs with double-speed CD-ROM drives. "Their technology is dated, and the market has taken off in another direction." Philips says it still sees a niche for CD-i. But bowing to the inevitable, it has started developing CD-ROM software for PCs.

Another big problem is Philips' Digital Compact Cassette technology. Analysts estimate Philips poured hundreds of millions of dollars into DCC, but it looks increasingly like a flop. DCC offers the sound quality of a compact disk but uses a digital cassette instead. Despite their name, DCCs are the same size as regular cassettes, so machines that play them will also take standard tapes. That way, consumers don't have to heave their collections. But at $500 or so, only about 100,000 players have been sold.

A third bet that hasn't paid off yet for Philips: active-matrix flat-panel displays. They're already used in laptop computers and will become ubiquitous in all kinds of electronic gadgets from personal communicators to car dashboards to TVs. The Japanese hold 95% of the world market and are frantically adding capacity as they cut costs. After challenging the Japanese in 1991, Philips now says it won't fully ramp up production until yearend. "They may not be technologically behind, but they are unequivocally behind in bringing the technology to market," says Arthur Firester, director of display research at SRI International Inc.'s David Sarnoff Research Center in Princeton, N.J.

uphill battle. To speed the transformation at Philips, Timmer already has shaken up the top ranks at the inward-looking company, bringing in a slew of non-Dutch managers, many with strong international and marketing backgrounds. Floris A. Maljers, who retired as chairman of Unilever PLC in May, succeeded Wisse Dekker as chairman of Philips' supervisory board. Timmer also lured the director of Hewlett-Packard Co.'s research labs, Frank P. Carrubba, with the mandate to thoroughly overhaul research and development at Philips. "I sense a change in attitudes," says Dataquest's Ryon.

But Timmer clearly faces an uphill battle. When employees asked at a recent colloquium where Philips was headed and why, Timmer was stunned that his troops had failed to comprehend the plan he has tried to hammer home for three years now. In a fresh attempt at communication, Timmer plans to ask all 236,000 employees where they think Philips has come with his program of renewal, dubbed Operation Centurion. "It's an invitation for people to be very critical, even about people in charge," he says. "We must encourage entrepreneurial behavior at all levels." That's what Philips must do, all right--or endure a painful future of permanently diminished prospects.

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