December 04, 2007
Ladies and Gentlemen,
It is a great honor for me to address such a distinguished audience here today on the important topic of innovation. The Chinese government has rightly made innovation one of China’s top priorities. At the Party’s 17th National Congress, President Hu Jintao explained the importance of transforming China’s model of economic development, stressing the necessity to increase both the quality and efficiency of economic growth.
I fully agree with President Hu and it is precisely this need for better and more efficient economic growth that makes innovation so important. Innovation will help China to combine economic growth with harmonious social development, with a rational use of energy resources and with a reduction of environmental pollution. Philips and various Chinese partners have already engaged in many mutually beneficial relationships to foster innovation. For example, Philips and Shanghai Institutes of Biological Sciences (SIBS) have recently established a joint research laboratory for research in the area of molecular medicine
Philips has thirteen Chinese R&D Centers, including one of our company’s global Research Centers as well as Centers for patient monitoring, lighting electronics and digital technology for consumer lifestyle. We are also very proud that, over the last three years, both prime minister Wen Jiabao and vice prime minister Hui Liangyu have visited Philips’ headquarters in Amsterdam to obtain first-hand knowledge of our innovative products and solutions!
Innovation has been part of Philips’ DNA since our foundation as a manufacturer of light bulbs in 1891. Over the last 115 years, we have reinvented ourselves many times, but we have always stayed true to our Mission: “Improve the quality of people’s lives through timely introduction of meaningful innovations”.
Today we are a global company with almost 27 billion euros of sales in 2006, and a workforce of over 128,000 employees. We have manufacturing sites and sales operations in all continents, focusing on the areas of healthcare, lighting and consumer lifestyle. Philips has always been an innovation power house. Our many inventions include the CD and the rotary shaver. Currently, we invest 6% of our sales in R&D and we have a portfolio of 80,000 patents. According to Business Week and the Boston Consulting Group, we are among the world’s 50 most innovative companies.
Philips’ most recent great transformation has taken place over the last decade. Ten years ago, we were basically a technology-driven conglomerate with strong positions in high-volume, low-added-value electronics. Now, we are a market-driven company focusing on high-growth, high-added-value activities in healthcare, lighting and consumer lifestyle. Not only did we radically change, we also adopted a more consumer-focused approach and a new brand message – Sense and Simplicity. At the same time, we now endeavor to extract value from synergies between our different product divisions and business units.
Philips has a long history in China. We have grown with the Chinese market from a very early start: Philips’ products have been sold in China since the 1920’s. Nowadays, we are one of the largest multinationals in this country with a total activity of 12 billion US dollar in 2006 and 14.000 employees. In China, Philips is market leader in lighting and domestic appliances; we are among the top three in Medical Systems and LCD TV. We are proud of our excellent relationships with the Chinese government, industry, universities and consumers.
Ladies and Gentlemen,
In China as well as in the rest of the world, innovation will help us all to make economic growth sustainable. In the long run, economic growth without social justice and environmental responsibility is not possible. Therefore, sustainability and corporate social responsibility are very important to Philips. When our managers take decisions, we try to balance economic, social and environmental interests. I am sure many of you will have to perform the same balancing act in government or business; it is not always easy, but it is the right way.
Sustainable business is sound business; sustainability is not only an ethical imperative, but also a business opportunity. In the 21st century, sustainable growth requires innovative solutions and the need for innovation provides business opportunities. Philips is especially active in two areas where there is a great social need for innovation: healthcare and energy management.
The area of healthcare is, of course, of essential importance. Every human being should have access to affordable healthcare of decent quality. To achieve this goal will require a huge effort. As a result, healthcare will be a very important driver of economic development over the coming decades. Business, government, insurers and healthcare institutions will have to work together to find innovative solutions. For example, we need a shift from costly treatment at a late stage of a disease to prevention and early detection. Prevention can be increased by healthier lifestyles and a cleaner environment. Remote patient management can help us to bring healthcare to areas where traditional healthcare is not available. We need innovative insurance and financing models for healthcare, so that healthcare becomes not only available, but also affordable for all. As a provider of products and solutions to healthcare institutions, Philips is doing its best to improve healthcare, working together with many partners.
As for energy management, climate change is one of the most pressing issues of our time. At the same time, we all know that energy resources, so necessary for development, are scarce. Energy efficiency helps to address both challenges. As the number one lighting company in the world, Philips is taking the lead in the promotion of innovative, energy efficient lighting solutions in houses, streets, offices, shops and cars.
So the need for innovative solutions is clear, not only in healthcare and energy management, but in many other sectors as well. The question is: how can we foster innovation? How can we ensure that we get the maximum result from our efforts to stimulate innovation? I would like to share my ideas with you on this topic from Philips’ perspective.
First of all, we should understand that ‘innovation’ is not the same as ‘invention’. Of course, inventions in laboratories are important, but an invention only becomes an innovation if it is transformed into a product or service that is successfully introduced into the market. For a product or service to be successful, it needs to answer a real need felt by its users. What good is a smart, technically ingenious invention if nobody is really interested in its application? It is extremely important to make the needs and aspirations of consumers the starting point of innovation. The more you understand consumers, the better you can direct your research and development efforts. Technology is important, but insight in user needs is the starting point.
That’s why in our company the people involved in R&D talk regularly with the people involved in marketing. The marketing people have a lot of information about the changing aspirations and needs of consumers. It is also important to involve users in the early stages of any research project, to get their feed-back, to see if we are on the right track. At Philips, we do this with our so-called Experience Labs, where ordinary people can experience applications of our latest R&D efforts in the natural setting of a home or a shop.
Not every invention becomes innovation. At the same time, you do not always need an invention to be innovative. Sure, a new invention that meets a clear user need is great news for a company such as Philips, especially if it creates not only a new product but a whole new market. But innovation is not limited to inventions brought about by basic research. A lot of economic progress and growth is driven by the development of original applications of technologies that already exist. At Philips we create a lot of innovations that we can categorize as “experience enhancement”. Examples are our Flat TVs with Ambilight (creating a richer, more immersive infotainment experience), City beautification (lighting architecture solutions, improving the safety, comfort and atmosphere of urban spaces) and Ambient Experience (creating a more patient-friendly experience, while increasing the throughput of MRI scans). But innovation can also be found in new business models. In recent years, we have introduced several innovative products developed in close cooperation with partners in the consumables industry. An agreed shared revenue model ensures a recurring stream of income and allows reducing the purchase barrier for the hardware product.
Successful innovation is a collective process. An open and cooperative mindset is nowadays absolutely necessary if you want to be an innovator. The number of companies and public or semi-public institutions conducting high quality research has increased dramatically. So has the number of locations where this research takes place. From Shanghai to The Netherlands, from Silicon Valley to Germany, new knowledge is blossoming everywhere. In this era of ‘Open Innovation’, companies, universities and research institutes are increasingly sharing costs and opportunities by working together in R&D and by looking outside their own laboratories for useful inventions from outsiders.
A good example of Open Innovation is offered by the High Tech Campus in Eindhoven, the town in The Netherlands were Philips started off more than a century ago and that has always been an important research location for our company. A few years ago, we decided to open up our High Tech Campus in the city. Nowadays, it is an open environment, where researchers from Philips mingle with colleagues from other companies and research institutes, both public and private. The High Tech Campus is buzzing with networks and partnerships! With more than 6000 people, the Campus has become the center point of a new regional ecosystem of innovation.
Open Innovation allows companies to concentrate on that area of R&D where they are most efficient and have the strongest competitive advantage. Joining efforts means faster time-to-market, lower costs and better adoption of new products and services. Here in China, Philips has various partnerships with Chinese companies and universities. We are proud to build ‘Brain Bridges’ between China and Europe. We are an integral part of partnerships between two Dutch universities (Eindhoven Technical University and Erasmus University Rotterdam) and various Chinese universities including the NorthEastern University in Shenyang, the University of Zhe Jiang in Hang Zhou and the Fudan University in Shanghai.
To foster innovation, we have also drastically transformed the way we organize our business. On the one hand, we have eliminated vertical integration. For a company such as Philips, it doesn’t make sense anymore to own the whole production chain from components to sales. In the era of globalization and Open Innovation, we have chosen to concentrate on our competitive advantages in innovative applications, marketing and brand building.
That’s why we have divested our components and semiconductor operations and outsourced large parts of our manufacturing operations, also here in China. We concentrate our growth investment on growing and reshaping our businesses in the application areas of healthcare, lighting and consumer lifestyle.
On the other hand, we actively look for synergies between these three focus areas, now even more so than in the past. For example, we apply our lighting expertise in our Intelligent UV Water Purifier. As you know, water-related diseases are responsible for millions of deaths every year. Therefore, clean drinking water should be a priority in any integrated healthcare program. Philips’ UV lamps kill bacteria and viruses, and can be built into more traditional water purification systems. As for lighting and consumer lifestyle, in our Aurea and Ambilight televisions, we use light effects to enhance the viewing experience.
We have also learned that we have to be flexible if we want to maximize the value from our innovative efforts. Not every promising idea can be nurtured within the environment of our established businesses – sometimes because the idea is too much of a break-away, sometimes because the expected returns or scale up are too slow for our global businesses. We would be destroying value if we just left those technologies on the shelf. That’s why we have set up three incubators, to develop these technologies in a separate, entrepreneurial environment. An environment that measures performance in terms of growth, not earnings; an environment where risk is tolerated and people are stimulated to push the boundaries.
After nurturing and developing these ideas for a few years, successful incubator initiatives make it into new businesses, often within Philips, but we have also spun out some of them as independent companies. The incubators create a win-win solution. Society at large profits, because promising technologies do not rust on the shelves and can be developed into new business. Philips profits, because the incubators allow us to extract more value from our R&D efforts.
Ladies and Gentlemen,
Innovation thrives when ideas and technologies are pooled, shared and exchanged. In order to share technology in a commercially sustainable way, companies and research institutes need protection of their intellectual property rights. That’s why innovative companies favor clear laws on the protection of intellectual property and a resolute implementation of those laws. Without IP protection, innovation suffers.
This is not only true for companies such as Philips. A good system of intellectual property rights is extremely important for innovation in countries such as China, too. It stimulates investments and R&D by the most innovative Chinese companies themselves. It also fosters direct investments by foreign companies in China; it enables transfer of technology and cooperation between Chinese and foreign partners, both inside and outside China.
As a result, the transfer of foreign technologies and related intellectual property rights to China receives a boost, which in turn stimulates the generation of local technology and intellectual property rights. In other words, a real virtuous circle of innovation that will strengthen China’s international competitiveness, moving from low-cost to high-value. The Chinese government has put a lot of efforts in the past years to improve IP protection and to support the Chinese government in enhancing the knowledge-base in China regarding intellectual property rights, Philips has set up various intellectual property academies in China, in cooperation with universities such as Renmin, Tsinghua and Fudan).
Innovation is also stimulated by clear standards that allow for the combination and communication of technologies and products from different sources. Philips clearly understands that in some areas, China currently prefers its own standards to ensure that local technologies are included. In fact, Philips cooperates with China in the development of some local standards, such as digital TV and TD-SCDMA. On the other hand, Chinese industries and research institutes can also actively participate in the creation of global standard through joint development programs with the multinational companies. The combined local and global market potential provides China a clear advantage of faster returns if a global standard perspective is taken into consideration at an early stage.
Innovation has to come from companies, universities and research institutes. Public authorities, however, can play an essential role in the development of an innovative economy. They can ensure that there is an attractive climate for investment in innovation. For example, it is vital for China to continue investing in the improvement of its physical infrastructure. Just as important is an attractive business environment with financial incentives for investment in innovation and with legal certainty: clear rules, strong enforcement. Education is, of course, vital, too. Creativity, inventions, innovation: it has to be produced by smart, original, enthusiastic people. Last but not least, China needs to have a social value system which encourages, recognizes and values a longer term way of thinking and a step-by-step attitude of people, companies who commit to their efforts in innovation. We are very happy to see that how to establish an appropriate core value system is high on the agenda of the recent National Congress.
Let me conclude.
Innovation is about flexibility. It is about concentrating on your main areas of expertise. It is about really understanding the needs and aspirations of consumers and finding original, creative solutions for their demands. Innovation is also about protecting your ideas and technologies in order to share them, pool them and exchange them. Innovation is about putting the right conditions in place for innovative business to thrive.
I am sure that after the phenomenal, peaceful rise of China over the last three decades we will see another miracle over the next thirty years: the transition of China to an economy based on innovation, creativity and knowledge. This will allow China to achieve economic development, social harmony and a cleaner environment. Philips has participated wholeheartedly in China’s exciting journey of the last two decades. We are ready and eager to continue with China on this new voyage!
Thank you very much for your attention.
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