Transform the company to become truly market-driven
1 Intro slide
Ladies and Gentlemen
It’s a great privilege to address such a distinguished audience on the broad theme of global competitiveness.
I’d like make a start with a very obvious point that’s partly hidden behind the harmless-sounding word “competitiveness”. You can’t have competitiveness without competitors. Trading blocs, countries, industries, companies, technologies and even individuals all compete with each other in the global economy.
It’s common wisdom to say that competition makes one stronger. I believe competition makes us change and grow. My topic today is the process of transformation that companies must undergo to become truly competitive on a global scale.
Every child knows exactly what Transformers are and so, I believe, do you …. They were invented right here in Japan.
Transformers only became a big worldwide hit this summer thanks to a Hollywood movie. One moment Transformers are harmless children’s toys with familiar shapes, and the next a mysterious change turns them into robots with awesome power.
But even Hollywood’s wildest imagination is dwarfed by the pace and scale of change in the real world unleashed by competition.
Today I want to talk about Transformers in business – and I hope you’ll allow me use my own company, Philips Electronics, as a case study in change-led innovation. So my story is all about transforming Philips from a high volume electronics company to a global leader in Healthcare, Lighting and Consumer Lifestyle.
We see huge changes out there affecting other industries – pharmaceuticals, telecoms and IT to name just a few. I hope what I have to say about change may be applicable to your own area of business.
Slide 2. Smiling curve slide
Our transformation journey started in the late 1990s with the observation that the days of vertically integrated technology companies were counted. In the world of electronics, we found that most added value was increasingly to be found at the two ends of the chain. On the one hand, a lot of value is created on the technology side, i.e. in R&D, by means of patents and the creation of standards with the corresponding licensing programs.
On the other hand, in a world where the consumer is faced with endless choices, a strong brand and direct contact with the consumer provide excellent opportunities for creating added value. The middle part, the straightforward assembly of electronics, is no longer an activity with which companies like ours can distinguish themselves or achieve a competitive edge.
This phenomenon is known as the ‘Smiling Curve’, which Stan Shih, the well-known founder of the Taiwanese computer company Acer, formulated for the High Volume Electronics sector in the 1990s, and in today’s digital world, this phenomenon is even more apparent.
So after we noted this, the very first thing we did was getting rid of our manufacturing activities where we did not have a competitive advantage. Mind you, we’re still producing a lot of products ourselves. In lighting for example, or in our rotating shaving heads, there is a lot of high tech manufacturing that no one can do better than us. But assembly type of work has all been outsourced long ago.
But there was more to do. We realized that increasingly the traditional, vertically integrated electronics industry increasingly was parting into three different sectors – a technology-focused, components type of industry, a manufacturing industry and an applications industry. Each of these play a different game, with different rules, and each attracts different stake- and shareholders.
We at Philips were one of the first companies to anticipate this development and fundamentally reposition ourselves. We have made the strategic choice to play the applications game. This decision formed the basis of the transformation process we have subsequently pursued.
Slide 3. Redefining strategy – becoming market driven
Choosing the applications game was not an obvious choice, because at that time Philips was very much perceived and operating as a technology company. Our volatile Semiconductors, Components and Consumer Electronics divisions were at the heart of the company, while the more application oriented Medical, Lighting and Domestic Appliances businesses were solid performers in the background.
We have completely rebuilt this portfolio. The majority of our Components activities have continued on their own or with others, for example the successful LCD manufacturer LG.Philips LCD was founded in 1999. Last year we had a major success in selling a majority stake of our semiconductor division to a group of private equity investors and founding the new company NXP. On the other hand we have invested almost EUR 5 billion in acquisitions over the last two years alone to strengthen our healthcare and lighting business. And we fundamentally changed our consumer electronics strategy by going beyond traditional audio and video technology appliances to consumers’ broader lifestyle, emotional and experiential needs and interests.
But rebuilding the portfolio is not enough to transform a company with a century-old heritage. We realized that if we wanted to be in the applications business, we also needed to make the users of our applications the focus point of all our decisions and actions. In short, Philips had to become people focused and market driven, rather than technology driven. This is the essence of our transformation, representing a huge turnaround compared with our position in the industry only a few years ago. A turnaround that many of our competitors still have ahead of them. Let me go into more details on a few of the things we did to achieve that.
We relaunched our brand in 2005 around the promise of sense and simplicity, reflecting our vision that people want the benefits from technology without the hassles. The establishment of a strong, single, recognizable and appealing brand helped us rise from 65th to 42nd place in the Interbrand list of the world’s most valuable brands.
Slide 4: Brand Iceberg
Simplicity isn’t just a brand slogan: it’s our differentiation, both in the products and services we offer and in the way we interact internally and with our customers and stakeholders. Simplicity is way of behaving that affects everything we make and do. For instance, on November 15th all 128,000 Philips employees will celebrate Simplicity Day, during which everyone gets together to develop ideas and proposals for living the brand.
This illustrates that transforming a company involves many stages and has many layers – some straightforward business school assignments, some involving the softer stuff of people motivation and cultural change.
It involves remodeling the portfolio of businesses and relaunching the brand, as I just discussed. It involves a process of internal tidying up to increase efficiency and improve financial performance by optimizing the balance sheet. It means a sharper strategy and, as I’ve said, a market led approach that ensures the business provides what its customers want. That’s the easy part.
The harder part, is, as I’ve hinted, the people-based bit. Truly great companies have common characteristics. An entrepreneurial culture. A workforce that’s aligned and engaged to give of its best because there is enthusiastic acceptance of the vision and values of the company. Such people don’t just come to work to get by: they come to work to do some good.
And we’re prepared to engage customers, thought leaders and stakeholders in the product creation process. Last week we launched our third Simplicity Event in London. This features ground breaking concepts and working models that may – or may not – become Philips products. Like a jetlag-busting lighting system to soothe and restore travelers in international hotels. Like a family-friendly pre-natal scanner suite that allows couples to experience the wonder of a new baby, without technology getting in the way. Like a hospital room that feels just like being at home, yet allows the doctors to do their work better.
Slide 5: Innovation
I’ve explained you that we made the choice to be in the applications industry, rather than in the technology industry. That does not mean we’ve given up innovation. On the contrary! We bet heavily on innovation. We’ve risen almost 30 places in the Business Week ranking of the world’s 100 most innovative companies, putting us on place 38.
What has changed is our focus in innovation. Where in the past innovation was mainly driven by the latest technology, we now take user insights as the starting point. Across the company we are using a tool called Value Proposition House, which is a standard way of representing a value proposition we want to bring to market, capturing what's in it for the target group, why they would believe it, and what makes the offering distinctive. We also make sure we bring the two ends of the innovation chain (R&D and marketing) together and we are involving end users in the very early stages of our R&D.
We also changed innovation to focus much more on real break-through innovation rather than incremental steps. This has already paid off. Our new product rate has increased from about 25% in 2003 to well over 50%.
Innovation means investing in ideas and the people who create them. Philips has a substantial R&D program. But more than that, we are a leader in exploring what’s called ‘Open innovation”. Instead of working on innovaton in secrecy and trying to take the world by surprise, we are joining forces with industrial and academic partners, we speed up innovation of new concepts which lead to a faster time-to-market for products. Not every idea we dream up suits our manufacturing operations – so we sell these ideas. Sometimes we see an idea outside that suits us. So we buy it.
Let me say a few words about the incubator concept, where we give promising breakthrough innovations a chance to develop new business by providing a start-up like environment in which not just the technology is developed further, but also the business case (with all options, including spin out, finding external investors, etc.).
Slide 6. We are well positioned
Competition didn’t force us to make every one of those changes – but it certainly inspired us. Now we’re a different organization. You could say that we’re no longer the hunted: we are becoming new hunters. That’s the prize for those able to transform their company to become truly market-driven.
For a century, our evolution has been closely linked with technology of the vacuum tube. We started in incandescent light bulbs, moved into X-ray tubes, then developed the cathode ray tube for TVs. Today of course, we live in a solid state world.
Technologies change, but our customers are always people. Philips strives to improve the quality of people’s lives through the timely introduction of meaningful innovations.
Any company that’s been around for over a century has seen – and ridden – successive waves of change. In our children’s lifetimes we’ve seen the way IT has replaced industry as the dominant economic force.
Now comes a huge new industry – one that our futurologists tell us will dwarf traditional players like IT, telecoms, and steel. It’s the health and wellbeing industry.
Slide 7: Vision 2010 slide
Big opportunities demand a “big bet” and that’s exactly what we at Philips have done. Our ten year journey of change isn’t finished – in fact it will never finish. But now we have a clear goal in sight. We call this Vision 2010, a strategic plan that outlines the next steps in our journey towards becoming a market-driven leader in Healthcare, Lighting and Consumer Lifestyle.
We put people at the center of our business model – and consider what people want, what they care about. Increasingly, the empowered consumer cares about four key categories: my body, my appearance, the space I occupy, and what stimulates my mind.
For these individuals, care and wellbeing forms a continuum; they want to look good, to feel good, to stay healthy – and to do some good. As well as caring for themselves, they care for others too. For family members, communities – and for the planet. Living an empowered lifestyle means consumers want to co-create leisure experiences, and change the look and feel of their habitat – for instance through lighting.
We also put people in the centre of attention when addressing the needs of professionals who improve the quality of life in the domains of body (healthcare) and space (lighting).
By placing people at the very heart of what we do, Philips has realigned the entire organization around the needs we see in the marketplace.
As a result, from January 1st 2008 we will group all our productive activity into three broad market sectors named Healthcare, Consumer Lifestyle, and Lighting.
What will not change is our ambition to distinguish ourselves with our innovative power and the strength of our brand.
Slide 8: Building a sustainable future
Of course, we’re not just selling solutions. We’re all global citizens and -- it goes without saying -- responsible leaders. One of our responsibilities is to seek partners for a global debate.
This debate is about changing things for the betterment of human life. In our own case we seek allies and partners interested in changing the rules of the healthcare game, and in promoting sustainable use of our planet’s precious resources.
In the last few months I have participated in a fascinating series of open forums with opinion formers and stakeholders – mostly here in Asia. It’s been an inspiring, yet humbling journey. I have found so much wisdom, so much creativity – and so much willingness to change.
We believe that big changes start small and that every one of us should contribute to saving our planet. What’s more, we are convinced that those companies that combine the principles of economic growth and good stewardship will be the winners of the future.
Slide 9: EnergyCare
Let me share a few of the insights we’ve gained from our EnergyCare debates.
The arguments over climate change have, effectively, been won. And while it is a scientific truth to say that changed weather patterns can only be assessed over an extended period, extreme conditions and globally-broadcast pictures of melting ice-caps or polar bears have powered the widespread belief that human activity is changing the climate.
Increasingly, we all know what it is we need to be doing to ensure energy efficiency. But how we get widespread and accelerated adoption of good energy practices is one of the biggest hurdles we face, as industry leaders, governments, and policy makers.
First, there is the motivation of responsible energy consumption among all consumers, whether as individuals in their own homes, or as professionals during their working lives.
Secondly, we have to address creating the right incentive system to enable energy efficient investments in infrastructure and renovation. This could be further accelerated via effective policy and follow-through.
Finally, we must visit the options facing businesses as we seek to balance our commercial needs with our obligations as global citizens.
And we have a duty to walk the talk.
For over a century, Philips has been a leader in lighting – and lighting consumes almost 20% of the world’s energy. We’re mindful of our own responsibilities. Three quarters of the world’s lights still depend on technologies that generate a lot more heat than light. Our latest estimates are that we can realistically save 40% of all energy used in today's installed base, using technologies now becoming available today. Philips invented the energy-efficient compact fluorescent light bulb back in 1980 and is committed to dramatically reducing carbon emissions caused by the world’s lighting needs. For example, if new lighting technologies were adopted throughout the world, CO2 output would be reduced by more than 500 million tons per year, the equivalent of 1.5 billion barrels of oil or more than 500 medium sized power plants.
A month ago we launched our 4th Philips Ecovision program. This commits us to doubling our investment in green innovations to EUR 1 billion in the next five years. By 2012 30% of total revenues will come from Green Products, compared with 15% today. Philips Green Products have a significant improved environmental advantage for customers, users and society in one or more of the Philips green focal areas: energy consumption, packaging, hazardous substances, weight, recycling and lifetime reliability. And it goes without saying that by the end of 2008 all the company's offices will be outfitted with energy efficient lighting systems.
Slide 10: HealthCare
Now let me share a few of the insights we’ve gained from our HealthCare debates.
Everyone working in healthcare does so in the face of the growing reality and burden of demographic and epidemiological change, rising costs and medical and scientific advances.
So we know what’s happening to populations. And we know how that will impact on healthcare costs. Those of us working the healthcare field know we must deliver better patient outcomes at lower cost.
Once again, Philips is mindful of its responsibilities. For decades, we’ve worked at the forefront of medical innovation and today are a global leader in medical diagnosis – cardiology, oncology and ultrasound.
Philips is passionate about healthcare. I earnestly believe that we cannot achieve prosperity without quality healthcare. In the 21st century, access to quality healthcare is a basic human right. We believe it is much more than just another large industry or business. In healthcare, more than in any other sector, we can make a difference. We can do well by doing good. We must address access issues at every stage of care from prevention, to early diagnostics and after-care.
To illustrate this point briefly, we have been working to improve the quality of life at the bottom of the pyramid by bringing cost-effective innovations to the four billion people around the world who earn less than USD1,500 a year. We are providing advanced medical diagnostic equipment that’s appropriate for hospitals and clinics across the developing world. We are developing water purification devices and reducing indoor smoke pollution in rural homes. And we’re lighting up homes beyond the reach of power grid with rechargeable, wire-free lighting solutions.
Slide 11: Realizing global competitiveness
We’ve come a long way from products derived from the basic technology of the vacuum tube that gave Philips its start in life over a century ago. We’ve come a long way in the last seven years. When I took over this job, magazine commentators compared my task to turning a supertanker. I like to think we’ve made some right turns – and also made a completely new ship.
Competition – and the rise of solid state technologies – has changed us, transformed us – and I believe made us better global citizens. I believe all this has made us better competitors too.
In summary I would say that the greatest learning we derived from competition was that it forced us to think less about ourselves, and more about our customers. To get inside their hearts and minds, to discover, anticipate and fulfil their needs. Becoming customer centric -- and above all people-centric – is the best and fastest route to global competitiveness.
I hope that the story of Transforming Philips from a high volume electronics company to a global leader in Healthcare, Lighting and Consumer Lifestyle contains themes that are relevant to other industries. We’re proud of what we’ve done so far – but very much aware of the long journey that lies ahead before we can sincerely claim to have achieved true global competitiveness.
Now I would be delighted to answer any questions you may have.
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