Philips Maps Out a New Direction

Chief Executive Kleisterlee is refocusing the company on three primary markets, with new product lines and executive changes

by Jennifer L. Schenker

Not long ago, Royal Philips Electronics (PHG) was nowhere in the Chinese television market. But as liquid-crystal display technologies have taken hold, the Dutch conglomerate's flat-screen TV unit has shot up to the No. 2 spot in one of the world's fastest-growing economies. Markets change, says chief executive Gerard Kleisterlee, and so can Philips.

The affable but intense CEO, who took office in 2001, looks to have accomplished the impossible: turning around the once-lumbering electronics giant and putting it back on a growth track. Now, he has laid out his plan for the next step in Philips' long revival. At an Amsterdam press conference on Sept. 10, Kleisterlee unveiled a reorganization that will streamline the company into just three major units—and promises to double operating profits by 2010. Philips shares jumped 3.1% in Amsterdam trading on the news and closed up 4% in New York.

A Makeover in the Making

Kleisterlee's makeover has indeed been impressive. When he took over, Philips had more than a half-dozen divisions that barely communicated—and often worked at cross-purposes. Its products spanned toasters, low-margin electronic components, and semiconductors. Kleisterlee launched a multiyear divestiture program, culminating with last year's sucessful spinout (BusinessWeek.com, 9/5/07) of the volatile chip unit for $10 billion to a group of private equity investors. Meanwhile, he has shelled out more than $6.6 billion during the past two years buying companies to fill out Philips' portfolio.

The result is a much more focused company that is now staking its future on three primary markets: health care, lighting, and consumer "lifestyle" products, such as small domestic appliances and consumer electronics. The simplification—and a high-profile marketing campaign—also has helped increase Philips' brand recognition. The company has jumped 23 notches since 2004 in the annual BusinessWeek/Interbrand global rankings, from No. 65 three years ago to No. 42 this year (BusinessWeek.com, 8/6/07), while the value of its brand has soared 75%, to $7.7 billion, over the same period.

Kleisterlee also has emphasized market-driven innovation, with a particular focus on making Philips' myriad products easier to use. In BusinessWeek's annual ranking of the world's most innovative companies, Philips jumped from No. 67 in 2006 to No. 38 this year (BusinessWeek.com, 9/10/07). "Our focus on brand and innovation is paying off," Kleisterlee says.

Bottom-Line (and Other) Improvements

Yet for all his progress—including stemming a tide of red ink—the 61-year-old Kleisterlee hasn't been able to drive Philips' revenues through the €30 billion ($41.3 billion) mark, where they have stagnated for years, while also delivering the earnings growth demanded by investors. The reorganization, plus a continuation of Philips' aggressive acquisition strategy and a continued push into emerging markets, is designed to drive that growth. The CEO now says Philips will show at least 6% comparable annual sales growth for 2008-10, on average.

He's also looking for bottom-line improvements. Cost efficiencies from the simplified organization should save €150 million to €200 million ($207 million to $276 million). Add to that better margin management, increased profit contribution from recent acquisitions, and improvement in the product mix, and Kleisterlee figures pretax margins for the company's current businesses should exceed 10% by 2010. "This is one more big step—I'd like to think a giant step—in a long journey of transformation," he says.