When Frans van Houten took over as the chief executive of Philips in April 2011, he had a crisis on his hands.
The Dutch multinational – once synonymous with televisions, cassette recorders and CD players – had issued three profit warnings in a row. Its core lighting and electronic consumer goods businesses were fast losing ground to the likes of LG Electronics and Samsung, and reasserting itself was going to be costly.
Without a radical change in strategy, there was a chance the 120-year-old electronics behemoth would suffer a slow, painful death.
After years of poor results, Philips decided that televisions would not be part of its future.
Van Houten, who had left NXP, a Philips spin-off in 2008 to run his own consultancy, was parachuted back in on a rescue mission. His job was to make tough decisions, and make them quickly. “It was a tumultuous time,” he says. “I initiated a whole reflection … what is the goal of Philips? And how can we be crafting a future that is truly successful?”
After several months of soul-searching, van Houten and his team decided Philips’ future lay not in highly competitive, commoditised markets such as white goods and TVs, but in healthcare technology.
“We looked at the core DNA of the company, and that is to be highly innovative,” he says. “That meant [we had] to start focusing on health, given that is such a huge opportunity, where a lot still has to be innovated compared to more commoditised markets where there is a lot of competition, for example, in televisions. So I said let’s get out of commoditised businesses.”
Van Houten, who had studied economics at Erasmus University Rotterdam, saw that factors such as ageing populations and the strain on the resourcing of public healthcare opened up commercial opportunities in healthcare innovation and service delivery.
He wasted no time. Philips sold its TV business in 2012. The audio and video businesses went in 2014, and in 2016 the company listed its lighting business as a separate company with an initial public offering (IPO) on the Euronext stock exchange in Amsterdam.
All acquisitions, such as Australian Pharmacy Sleep Services, which develops sleep apnoea programs for retail pharmacies, had to fit into Philips’ new healthcare technology scope.
“It made us a little bit smaller, from €25 billion a year in revenue to €18 billion today, but we are now growing 5 per cent per year, where we were [almost] stagnant in 2011, and our overall profitability increased from 5 per cent in 2011 to 13 per cent now,” van Houten says.
As of May, Koninklijke Philips NV was trading about €37 ($60) per share, up from lows of about €12 per share in September 2011.
Philips’ health technologies include a suite of prevention, diagnostic and home-care tools, including HealthSuite, a cloud-based platform that collects, compiles and analyses clinical and other data. It is also rolling out a diagnostic imaging business in China.
The company was founded by Gerard Philips in 1891 with 26 workers to exploit Thomas Edison’s recent invention of the incandescent light bulb.
Philips, an inventor, was an unstoppable force when paired with his brother, Anton, a commercial genius who steered the Philips ship until his death in 1951.
For more than a century, Philips was Europe’s trailblazer in lighting and consumer technology, so it is not surprising that the decision to reinvent the group was not without controversy.
Van Houten, who was reappointed CEO at the company’s annual general meeting in May this year, says that in The Netherlands, it’s as if Philips has two sets of owners: shareholders and the public.
“[The public] all believe that Philips belongs to them as we’re kind of an iconic company in Europe,” he says. “Philips started as a lighting company. So the decision to exit lighting, like your birthright, is quite emotional."
“There was a significant debate because lighting is a good business. But we still said we wanted to just focus on health.”
Former employees objected loudly, as did more senior members of the public.
“It was actually the retirees who were the most critical, because they wanted to keep Philips in their memory the way it was,” van Houten says. “It was the retirees, the pension people, who said, ‘Blasphemy! You cannot do this to the company’. ”
Perhaps they were forgetting Philips had a long history of shedding products that no longer made commercial sense. Electric bicycles, a hand-powered shaver, a hand-powered torch and an electric clock were all scrapped over the years. Of the torch, the company noted it was useful during the blackouts of World War II but “demand stopped when the lights came on again”.
If you lean back or are afraid to change, it will happen to you, rather than with you at the driver’s seat. — Frans van Houten, Philips CEO
Since 2009, Philips had closed factories and laid off thousands of staff around the globe to slash costs. In van Houten’s eyes, the company could not afford to be wedded to a particular technology. It had to be at the forefront of the technological revolution. The CEO lifted annual expenditure on research and development to 10 per cent of revenue.
Staff who had survived the restructuring got behind the idea of pivoting to health technology. To help generate a shared sense of involvement, the company asked them what they thought Philips’ future in health could look like, and what the topic of health meant to them personally.
Technology might now be Philips’ lifeblood, but van Houten says screen breaks have helped get executives from around the world on board with the new vision and the challenges ahead. Philips executives have met several times at sites such as the Utah desert where there was no phone reception and no computers.
Never waste a crisis
“To be with the 60 leaders of Philips off-site and have quality time to talk about the strategy, about the culture you want to have, it enables you to actually be more effective afterwards,” van Houten says. “[It’s] because of those personal connections.”
A number of ASX-listed retailers – including Myer, Kathmandu and Big W – have had a rocky time over the past few quarters, buffeted by the housing downturn, wage stagnation and, of course, disruption caused by e-commerce business models. What would van Houten’s advice be to the leaders at those companies?
“Be courageous, don’t procrastinate, and move. You either disrupt, or be disrupted, right?” he says. “In my experience, you need to embrace change. If you lean back or are afraid to change, it will happen to you, rather than with you at the driver’s seat. Never waste a good crisis.”
Philips’ ASEAN Pacific chief executive, Caroline Clarke, concurs. “As a leader, you have to be brave and make those changes. You can either shape the future, or you’re a victim.”
Originally posted here.
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