As financial key performance indicators we choose Philips stock price, return on assets, and relative stock price as compared to competitors all presented in Exhibit 3, Exhibit 4, and Exhibit 5 respectively (see Annexes). All three graphs show stable poor performance until 1996, followed by rise until 1999, peak in 2000, rapid decline until 2002, and lastly rise until now.

Now let’s see, what the strategy was in those periods. In 1970s Philips management mainly focused on balancing the power between national organisations and product divisions. The plan was also to decrease the number of marketed products and achieve the economy of scale, by consolidating production and supply-chain. However, due to political and internal difficulties to close down redundant local overcapacities the implementation of this strategy was slow, which as the consequence resulted in another period of poor performance, both stock price and return on assets remained low.

In 1982, new CEO, Wisse Dekker, finally got it rolling and closed down 40 out of 200 plants in Europe. Under Dekker Philips focused on following the cost-advantage strategies of Japanese counterparts, sold some non-core businesses and established technology-sharing agreements to share R&D costs. By further empowering PDs over NOs, Dekker, at last, established the current company’s structure. However until 1987 the overall performance didn’t improve much, though compared to the previous period small increase in the stock price and 1-2% increase in return on assets was observed. The company still could not match its Japanese rivals; furthermore, internal issues cost the company performance too. As result, the sales declined further and profits languished.

By 1987, Philips lost its leadership position in the electronics industry to Matsushita. This time another CEO, Cor van der Klugt, set a target to match higher return margins of Japanese companies and GE. He urged to further consolidate different PDs, from 14 to 4 (Components, Consumer Electronics, Telecomunication, and Lighting; the latter was the company’s cash cow). Surprisingly, the management did not acknowledge the potential in DAP and Medical Systems and spun them off into joint ventures with Whirlpool and GE respectively. Despite of the fact that the latter two were among most attractive ones as it was discussed earlier, see Exhibit 1, they got attention only later in 1990s.

In 1987, van der Klugt also got control over rebelling US national organisation by buying back its shares for US$700 million. He also tackled Philips overspending on fundamental research by halving it to 10% of total R&D costs. Finally, another 35 of remaining 420 plants were closed worldwide eliminating 38,000 employees out of 344,000 (21,000 through divestment). Again, the share price did not raise much until 1989; neither did improve return on assets. In 1990 the company incurred huge losses and van der Klugt was replaced by CEO, Jan Timmer.

Timmer, known for turning around unprofitable businesses at Philips, announced tough measures and eliminated 68,000 jobs in just 18 months. Because of the local laws, these layouts were quite expensive and had cost the company another US$700 million. In those cuts, Timmer tried to put burden on NOs, though they initially resisted; thus weakening them again and giving extra oxygen to PDs. He also established new performance metrics linking managerial contacts to the financial performance; those who broke it, where replaced, often by outsiders. Few non-core businesses were divested, among others, the rest of appliances to Whirlpool. This time, the increase in Philips performance became visible, in both, share price and return on assets that after long time made it to double digit figures.

In 1994, a McKinsey study revealed another reason of sluggish performance compared to Japanese: their value added per hour per employee was 68% higher than that at Philips. Timmer announced a new strategy: to expand software, services, and multimedia to contribute to 40% of revenues in 2000. He believed in company’s ability to innovate as its salvation. However, previous divestments and cuts of 37% in R&D personnel supplied the company with more failures, among others: interactive CD (CD-i), digital compact cassette (DCC), high definition TV (HDTV). None of these technologies made it as an industry standard and the resources were again wasted.

In 1996, Timmer stepped down and new CEO, Cor Boonstra, opened a new era at Philips. His marketing expertise cropped into the beginning of shifting the focus to market-driven strategies. Boonstra fiercely focused on performance: “#1 or #2 or out”. He required from businesses return on assets at least 24%. And he sold the underperformers: 40 out of 120 major businesses. Further, Boonstra strove to reduce the organisational complexity (consolidated 21 PDs in 7 bigger ones) and shifted the job to Asia. In three years, 100 out of 356 plants were closed.

In 1998, new Philips strategy proclaimed that the future of the company lies around consumer electronics, in particular, around digital ones, mobile phones, DVDs, digital and web TV. Further more, Boonstra, as a true marketer, boosted advertisement expenditures by 40% and consolidated it around Philips brand de-emphasising other 150 brands owned by the company. Global economy was also on rise and together with all above it peaked into the top performance by year 2000.

In 2001 Boonstra passed the harness of Philips into hands of Gerard Kleisterlee, who continued the reorganisation started by the former. Slowing economy was in first place to blame for drop in performance in 2001 and 2002. All industry players were affected by it, see Exhibit 5.

In 2002, Kleisterlee closed down struggling Components divisions, divesting it and dividing the rests among remaining five divisions. In 2003, he further continued to stimulate marketing, hiring for the first time in Philips history a chief marketing office, Andrea Ragnetti, who was successful with Procter&Gamble and Telecom Italia.

In the same year, Kleisterlee announced new strategy of Philips being a healthcare, lifestyle, and technology company. Around that time, Medical System grew tremendously through M&As to catch with the company’s goal to go after 17% of GDP spent in US on healthcare.

On the other hand, low sales put Semiconductors and CE back in red. These two divisions were left on their own tagged “for sale”. Top management was still bothered by their contradictory and competing strategies. E.g., for DVD recorders Semiconductors designed a new chip, but CE refused to use it, buying the one from competitors. The future will show how much of these businesses will remain with the company in the next decade.

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