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Has Philips Found Its Wizard?


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HAS PHILIPS FOUND ITS WIZARD?

On a sunny Saturday in California two years ago, Frank P. Carrubba and his wife, Pat, were discussing plans to retire to Italy. Then the phone rang. Twice before, a headhunter had called to recruit Carrubba, director of Hewlett-Packard Co.'s research labs, to Dutch giant Philips Electronics. This time, it was Philips Chairman Jan Timmer himself. "I want you, and I'm going to get you, so let's talk," he cajoled.

Timmer persisted for good reason. Philips was in chaos, having lost $2.2 billion in 1990. The company's vaunted innovation engine, which had pioneered the audio cassette, the compact disk, and the VCR, badly needed an overhaul. Too often, Philips made the wrong products--or delivered the right ones too late or overpriced. Research and product development weren't coordinated, so rich technology was going unexploited. Manufacturing was out of the decision-making loop. And after surviving 70,000 layoffs, few employees were willing to risk their careers by pushing for unconventional products or ways of working. Yet without radical change, Philips faced a bleak future of slashing prices deeper and deeper to hang on against fierce Asian and U.S. competition.

QUICK JUMP. Pressed to depart from business as usual, Timmer made Carrubba a once-in-a-lifetime offer: Take command of every link in the product chain, from research to purchasing to manufacturing. Rally the troops. And fix the whole thing. Such responsibility is rarely given to one individual, especially in a $31 billion company with 40 businesses running the gamut from electric shavers to medical scanning instruments. Carrubba jumped. "It's the last blast of my career," he says.

And how. Today, the 56-year-old Carrubba is working alongside Timmer on the most daunting reengineering plan in Philips' 102-year history. Timmer is beginning to wrestle Philips' short-term finances under control. In the second quarter, net income before extraordinary gains jumped 48%, to $62 million. Though that's a return on sales of less than 1%, progress in cutting debt and restoring profits is buying time for Carrubba to stoke up the innovation machine and restore long-term prosperity. Carrubba must keep profits flowing from low-margin commodities such as basic TVs and light bulbs, feeding into them new technology where possible. Simultaneously, he must lead Philips into futuristic products and services, ranging from interactive, multimedia TV to computerized lighting control systems.

For Philips' inbred, mostly Dutch management to give an American one of its top five posts may have been a measure of its distress. But it also reflected Carrubba's reputation for technical prowess and team-building management style. The son of a draftsman who emigrated from Italy, Carrubba grew up in a working-class section of Waterbury, Conn. He went to night school for his electronics and management degrees while working at IBM, where he became a star computer engineer.

At Hewlett-Packard, Carrubba was known as an "agent for change," says his boss there, research Vice-President Joel S. Birnbaum. Carrubba installed rigorous project-tracking measures and brought units together to generate new products such as handheld computers. "He has a very good intuition for which technologies will in the end work out," recalls Birnbaum. "He can survey the scene and pick out the winners."

Carrubba is also remembered for designing "town squares" in labs, lounges where researchers could mingle and help solve one another's dilemmas. He got the idea from the parks in Waterbury, where ethnically mixed neighbors congregated to hash out difficulties. Indeed, contrary to the brash, eat-'em-up management style often expected of Americans, Carrubba comes across as a very human manager, "charming and disarming people, sometimes by letting you see his frustration," says a senior planning manager at Philips. "People love Carrubba--not like him, love him."

BIG GAPS. Carrubba's skills will help Philips avoid mistakes in calculating technical challenges and market demands. Take high-definition TV. Until early this year, Philips doggedly pushed an analog-transmission standard for HDTV that was being rendered obsolete by American-developed digital technology--even though the threat from digital had been spelled out in a report by Philips' own labs as early as 1990.

When Carrubba arrived, he found gaps between products in planning and the technologies they required. For instance, Philips had invested heavily in its Digital Compact Cassette (DCC) before considering the feasibility of a crucial component, the magnetic head that reads both digital and analog tapes. The head cost far more to develop than expected, complicating Philips' battle against Sony Corp.'s MiniDisc.

To avoid such snafus, Carrubba has installed a "roadmap" process throughout Philips, forcing divisions to coordinate five-year product plans with the labs and factories. Such concurrent engineering, though common in the U.S. and Japan, remains rare in Europe. "Finally, we have a tool to discuss long-range visions in a rational way," says Teun Swanenburg, a senior research director.

One sign that Carrubba is on the right track is Philips' herculean effort in flat-panel displays. Philips plans to ship its first screens in September, after more than a decade of R&D. The roughly $200 million project is the first outside Japan to make thin, liquid-crystal displays for handheld TVs and other mass-market products. Philips has tightly coordinated European and U.S. research, lined up advance orders from in-house product divisions, and honed a low-cost production process. "Outside of the Japanese, Philips has done its homework better than anyone," says Lawrence Tannas, an Orange (Calif.) consultant.

HANDICAP. It could take nearly 10 years before the company knows if Carrubba's efforts will pay off. He himself notes that only about 37% of Philips' revenue comes from products introduced in the past three years, vs. 72% at HP when he left. At that rate, profits from new products probably generate only about 60% of the money that Philips is plowing into R&D, calculates Michael McGrath, managing partner of Pittiglio Rabin Todd & McGrath, a Weston (Mass.) product-development consultant. That's below average for electronics systems companies, though statistics are fuzzy because of differences between companies. And McGrath says improving the ratio is never easy: "The [industry's] record of success is low."

It doesn't help that Carrubba is starting off with a big handicap. In jettisoning divisions to raise money in recent years, the company lost vital software skills. Particularly harmful were the 1991 sales of its computer division to Digital Equipment Corp. and of its military electronics unit to France's Thomson. Those units' software wizards could have helped develop the products Philips is counting on for the future. For example, the company is working on new TV designs that change features on the fly. Want a four-way split screen to watch football games next Sunday? Just dial it up from a remote data base with a Philips-made touchpad controller and receive a bill in the mail.

Philips sees huge revenue opportunities in such services. Yet aside from Carrubba, "maybe only two or three of Philips' top 100 executives really understand [the required software]," says Feye Meijer, Philips' managing director for research coordination. With 30 years of computer systems expertise at HP and IBM, Carrubba is one of the few advocates for new software and services who has the credibility and management authority to lend them support. In fact, Carrubba personally heads a task force to spread software knowhow through the company. He's also trying to infuse miniaturization skills by setting up a training and prototype center for ultracompact products.

TINY TRIUMPH. In hopes of spurring big-think projects, Carrubba recently set up a committee of top division executives to screen ideas. In the past, new projects were sometimes choked off by lower-level managers worried about tight budgets or concerned with protecting existing product lines. For instance, a new business in automated lighting controls was stalled for two years by conflicts between the lighting and semiconductor units. The chipmakers, concerned about their mwn bottom line, held back investments in critical circuits because they feared that the new products wouldn't succeed. After the new-business committee intervened, the lighting unit answered the chip unit's concerns and the stalemate was broken.

That's a tiny triumph amid Carrubba's many challenges. But if he can get the rest of Philips to follow suit, he can start thinking again about that retirement home in Tuscany.SOME OF CARRUBBA'S

CHALLENGES--AND SOLUTIONS

Barriers between R&D and product groups and factories have kept the right

products from reaching market on time

-- All now coordinate their efforts on 5-year product plans

Skills for creating high-value, software-rich products and services have been

depleted by asset sales

-- Formed cross-divisional task forces to develop products and businesses

Cut of 30% in R&D staff has weakened internal research

-- Has arranged R&D contracts with universities such as MIT

Internal R&D was inefficient--fragmented and open-ended in scope

-- Has established R&D milestones tied to broad corporate strategies

DATA: PHILIPS ELECTRONICS

Jonathan B. Levine in Eindhoven, Netherlands, with Robert D. Hof in San Francisco and bureau reports


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