Once bleeding billions, how Philips reinvented itself for the digital age

Once bleeding billions, how Philips reinvented itself for the digital age

Seemingly past its heyday as an electronics giant, the company turned to healthcare to survive – and now thrive. Inside the Storm looks at how it saw the light.

A doctor stands next to a patient at the Dutch Royal Philips Electronics Hospital research facility,
A doctor stands next to a patient at the Dutch Royal Philips Electronics Hospital research facility, at its Eindhoven-based Research Laboratories AFP/LEX VAN LIESHOUT

EINDHOVEN: It invented the audio cassette. For baby boomers, its brand was synonymous with the portable radio and the light bulb, its first and perhaps its most famous product.

Dutch company Philips once built an empire on such pioneering products. In Singapore, where the company set up in 1951, its household and consumer appliances, from toasters and televisions to electric shavers and compact disc players, were the rage from the 1950s to the 1980s.

But then its fortunes began to change.

In 1990, the company lost more than US$2 billion - the biggest corporate loss in Dutch history. Its large product portfolio had begun to cause it problems.

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The light bulb was its first and perhaps its most famous product.

As it went from a reputation for innovation, to products that looked more and more outdated next to its rivals', the next two decades were ones to forget for Philips. It barely avoided bankruptcy as it continued to rack up losses.

But a drastic change of direction in recent years has now brought the company back to the top echelons of the global market. The story of how this electronics juggernaut transformed the core of its business just to survive, is told in Inside the Storm – a series about legacy companies that have rebuilt themselves from near collapse.

STRATEGY GONE WRONG

Founded in 1891 in the city of Eindhoven, Philips made it big in light bulbs, illuminating everything from streetlights to the Russian tsar’s Winter Palace.

As the company grew, it began to produce other household goods, starting with its first radios in 1927. Within five years, it sold one million sets.

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With this taste of expansion began a strategy that prioritised a wide product range, which would dictate Philips’ path for the rest of the 20th century. By the 1980s, its products included irons, vacuum cleaners, microchips and toothbrushes.

That was when its profit margin dropped to less than 1 per cent, and its market share eroded in the United States, Europe and Asia, said National University of Singapore associate professor of management and organisation Sarah Cheah.

Philips was over-diversifying. It just had too many products and was spreading itself too thin. 

"Even if it had superiority in certain technologies, it wasn’t able to focus on it and do it really well," she added.

Following its record loss in 1990, the company had to lay off more than 60,000 workers over 18 months, she noted. And yet, Philips was still overstretched and overstaffed in the mid-90s compared with other global electronics companies.

When it lost more than US$300 million in 1996, it had 110,000 employees more than Sony’s workforce - yet its revenues were 14 per cent lower.

Philips had morphed from an innovative company with expertise in core products - to a conglomerate comprising 11 divisions and more than 120 businesses, which even included video games. 

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New chief executive officer Cor Boonstra knew he had to streamline the company. His first move was to close down its loss-making divisions. 

But this did not stop Philips from re-entering the mobile phone market in a joint venture with telecoms manufacturer Lucent. This failed after a year and a loss of about US$500 million.

IN THE GRIP OF A REVOLUTION

In 1999, Philips was a shrinking company: 40 businesses had been divested and 50 factories were in the process of closing down. And the pressure was about to increase.

By the mid-2000s, a technological revolution was in full flow. But as the world was going digital, the company stuck with its analogue TVs, when its rivals were making liquid crystal display (LCD) screens.

“Philips was slow to embrace LCD technology because, at that point of time, the cathode ray tube (CRT) TV was basically a cash cow for (the company),” said Euromonitor International senior consumer electronics analyst Karissa Chua.

Going into the LCD TV market would cannibalise the sales of its own CRT TVs … But I think what it had underestimated was the development of LCD technology.

Emerging players Samsung and LG targeted marketing campaigns for their newer, sophisticated TVs at younger consumers. Mr Ricky Primalani, whose family business in Singapore started selling Philips TVs from the early days, saw the Korean companies “take everything by storm”.

Said the Parisilk head of marketing, communications and events: “The Korean revolution … came very strongly and really got a foothold and dominated the market. And that caused Philips to be sort of left behind.”

At their peak, Philips’ picture tubes were in one in every seven TV sets worldwide. But from 2007 to 2011, its TV unit lost more than US$1 billion. And there were similar stories across its electronic products.

With outdated products and falling profits, its future looked dim. In 2011, the company lost US$1.7 billion.

Amsterdam-based Philips was once best known for the manufacture of lightbulbs, electrical appliances
Amsterdam-based Philips was once best known for the manufacture of lightbulbs, electrical appliances and television sets but it pulled out of these activities in face of fierce competition from Asia to focus on health technology AFP/REMKO DE WAAL

AFTER 123 YEARS, A NEW CHAPTER

Behind the headlines, however, the management had been laying the foundations for a transformation, spending about US$8 billion on an acquisition spree between 2007 and 2010. So the 2011 loss was “not really a bad thing”, said Assoc Prof Cheah.

She explained: “The acquisitions, the restructuring effort and the cost of them incurred in the earlier years did help the next CEO to continue to build on the strategy of focusing on three key areas, which were lighting, consumer business and healthcare.”

Philips had acquired mostly medical companies and was planning a shift away from electronics towards healthcare.

And in 2011, the CEO who would lead it into this new chapter was appointed: Mr Frans van Houten, an economist by training who had spent 25 years in the company.

“As the new CEO, he brought a lot of leadership to the company,” said Philips chief medical officer Jan Kimpen.

“What he did very well was to read the outside world – to read the transformation that was going on in healthcare. And he decided to change the company.”

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Philips’ healthcare division had started small, with its roots in repairing – and then producing – X-ray tubes during World War I. To make it the company’s main focus, Mr van Houten announced a strategic decision in 2014.

After 123 years, Philips would split into two companies: Lighting and healthcare, which it had identified as an industry that will grow in importance as the world's ageing population increases.

And it has set itself a big goal in this industry: To improve the lives of three billion people every year by 2025.

“Look at China, which has a huge population and where the middle class has increased dramatically,” cited Dr Kimpen. “There are huge numbers of people who have the resources to buy healthcare … They have needs.”

LEARNING IN SINGAPORE AND THE REGION

Last year, Philips invested more than US$2 billion in research and development. It also opened a multi-million-dollar regional headquarters in Singapore, which employs close to 1,000 staff today.

The company expects demand to be great in Asia, where the number of people aged 60 or over is projected to increase by 66 per cent between 2015 and 2030. So it is tailoring its healthcare technology to prepare for this spike in seniors.

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For example, Philips has digital programmes like a remote monitoring system for patients in Singapore who measure their health data, such as blood pressure, heart rate, temperature and weight, using devices at home.

The data is automatically sent to the HQ, where Philips Asean Pacific’s general manager for health systems, Mr Diederick Zeven, and his team monitor the patients’ health status.

If the readings are abnormal, his staff would call the patient to do an assessment as a preventive measure. Some 120 people are enrolled in the pilot stage of this system, which will be expanded across Asia in due course.

“We’re learning here in Singapore, we’re also learning in Australia – two very different countries (and) different healthcare systems,” said Mr Zeven. “As soon as we get to a critical amount of learning, together with our partners, we'll for sure roll this out.”

Similar technology is already being used in remote parts of Indonesia, where Philips’ mobile obstetrical monitoring project uses telehealth and home visits to monitor pregnancies. The company also plans to extend this to other communities in Asia.

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These are examples of the new Philips, which is not only selling medical hardware, but also providing new ways of delivering healthcare.

‘WE HAVE TO TRANSFORM MEDICINE’

A decade ago, the company’s medical systems accounted for a quarter of sales; now its health technology portfolio represents nearly three times that.

While there had been restructuring attempts over the previous two decades, this time it has been matched with a change of attitude. Employees are now united on the new direction.

This is perhaps most seen in the company’s laboratories, where scientists who were previously encouraged to work on a wide range of products have a different directive now.

“Philips became really big … Whatever you’d invent would be useful in some place in the company,” said Philips Research Europe principal scientist Martin van der Mark.

“This has changed because in a health technology company, we have to be more focused, so I think it’s a logical consequence of who we are nowadays.”

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The scientist is now working on a prototype of a catheter that uses light instead of electricity to measure heart pressure and blockages, which would make it safer and more precise than traditional catheters.

He said: “What this technology could mean in the real world is that you replace all the electrical wiring in a catheter with optical fibres. These catheters will become cheaper and therefore can be used more easily in the treatment and diagnosis of patients.”

The device adapts the technology behind light-emitting diodes (LED) – so Philips has not disregarded its expertise in lighting. 

In fact, the company that used to produce more than 2.4 billion incandescent lamps a year has pledged to deliver two billion LED lights by 2020.

Its products are still sold in about 180 countries, and it recorded US$26 billion in sales last year. But it has gone from a company that first specialised in light bulbs, to one of the top global healthcare companies over the last two years.

“We’re on the right track to addressing the big challenges in healthcare,” said Dr Kimpen.

“(But) it’s unconceivable that we can address the enormous burden on healthcare just by doing things better than we did yesterday. We have to do a lot of things. We have to transform medicine.”

Watch this episode, as well as earlier episodes on Nissan, Olympus and Marvel on the series Inside the Storm here.

A shift towards medical equipment has helped Philips heal its financial performance.
A shift towards medical equipment has helped Philips heal its financial performance. AFP/Koen van Weel

Source: CNA/yv

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