Online Extra: How Philips Found New Spark

CEO Gerard Kleisterlee tells how an emphasis on smart design pushes innovation, makes happy customers -- and boosts the bottom line

Since becoming president and CEO of Royal Philips Electronics (PHG ) in 2001, Gerard Kleisterlee has had anything but a smooth ride. The company suffered total net losses of $3.9 billion in 2001 and $3 billion in 2002, and it had to cut some 55,000 employees to get itself back on track. Despite more positive results in recent years, Philips announced on July 18 that the sluggish European consumer-electronics market had dragged down sales in the second quarter, as it has for rival Samsung Electronics.

To fight the tide, Kleisterlee is steering Philips away from commodity consumer electronics and repositioning it as a maker of products that are smarter, more aesthetic, easier to use -- and worth paying a premium for. The new focus is visible in the elegant, slick, Senseo coffeemaker, its retro-meets-modern audio-video components, and in recent innovations at its medical division.

The shift is making an impact. In June, Philips scooped four medals at the annual Industrial Design Excellence Awards (IDEA), run by the Industrial Designers Society of America and sponsored by BusinessWeek (see BW, 07/04/05, "The Best Product Designs of 2005").

That compares with only six in the preceding four years. A gold medal went to "The Ambient Experience for Health Care," an MRI machine fitted with a system that helps reduce patients' stress by allowing them to choose music, lighting, and wall projections in the hospital room to suit their mood.

This year, Philips leaped 12 points in the BusinessWeek 100 Global Brands list, to No. 53. Kleisterlee, a 31-year company veteran, recently talked to Rachel Tiplady, a writer in BusinessWeek's Paris bureau, about the importance of design for his business. Edited excerpts of their conversation follow:

Q: What has changed at Philips since you became CEO?


We are in a transformation period at Philips. Since becoming CEO, I set about [adding] a strength I always found lacking at the company. Philips has never been short on innovation, but it hasn't been good enough at marketing. So I hired a new marketing head, Andrea Ragnetti, in 2003, and we repositioned our brand last September with the new campaign "Sense and Simplicity." It has struck a chord with customers.

Q: What recent products do you think typify your new vision of design at Philips?


The Ambient Experience for Health Care is an example of how we can bring expertise in several disciplines together -- in this case medical technology and design. It gives patients an opportunity to have a happier experience of hospitals.

The award we got from IDEA was great, but frankly what topped that was the e-mail I received from the doctor after he'd scanned his first patient [with the new machine] at the Advocate Lutheran General Children's Hospital in greater Chicago. He was a young boy who would usually have needed to be sedated for a scan. His mother was terribly worried, but the boy was fine, and the experience was so much nicer and more human for everyone involved.

Q: What changes have you instigated in the design arm of the company?


I have given our designers -- of which there are more than 400 in 12 sites worldwide -- the opportunity to communicate at the right level. The design teams always had the innovative capability, but we've given them more business muscle, ensured that they're better connected to the business side of Philips. I've helped put researchers in Philips Technology together with those at Philips Design, where before they were often competing against each other.

Q: How has this helped improve your business?


HomeLab was created thanks to this move. This is a permanent concept lab that sits in the middle of our facility in Eindhoven, The Netherlands. It was created three years ago, and we get real people to live in it for a few days or longer and interact with prototype products to see what they like. Ambilight TV [a flat-screen TV that projects mood lighting out of the back that changes with the programs you're watching] was created, thanks to the [HomeLab] because we saw people were interested in the prototype.

Q: How do you measure design success at a company?


We have two metrics in place to measure innovation effectiveness -- or design success as you put it -- upon which we're increasingly focused. The first metric is the revenue derived from products that are less than two years old. Here we've seen a significant increase. In 2004, it was 38% of total revenue, up from 25% in 2003. This year, we hope to increase this to 42%.

The second metric we look at is how we spend our R&D money. Is it on emerging, growing, or mature markets? We realized the first year we looked at this that we were spending far too much money on mature markets. Now we've corrected that. The result, thanks also of course to improved financial results, is that our brand value has leaped this year, something we hope to continue in years to come.

Edited by Patricia O'Connell

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