35 Years After Inventing The CD, Philips Is Doing Everything Right

35 Years After Inventing The CD, Philips Is Doing Everything Right


Back in 1978 in a boardroom near Lake Geneva, a bunch of nervous Philips inventors demonstrated a device that was to revolutionise the entertainment industry for the next three decades. Called the “Pinkeltje” after a small Dutch gnome in a children’s story, the device performed flawlessly — and so the world’s first Compact Disc (CD) player was born. Thirty-five years later the Netherlands’ Philips, once one of Europe’s best-known brands for radios and televisions, is ditching the consumer electronics business that used to be its bread and butter, and is thriving. The Philips story is a business case of how a leading global industrial group, with leading technology, went through several rocky years of restructuring, and found a successful strategy to re-invent itself in time.Now the company is reaping the rewards of emerging from the restructuring cycle.

In January, Philips announced the sale of its lifestyle entertainment branch, which makes stereos and DVD players, after selling its troubled TV-making arm in 2012.

In February, Philips said it intended to drop the word “Electronics” from its name to indicate its shift in strategy.

Faced with dwindling margins and fierce competition from Asia, the manufacturer born in southern Dutch city Eindhoven is refocusing on high-end health care, space-age lighting and the global explosion of a middle class interested in healthy living.

This example of transformational strategy is working, analysts say. Profits are strong despite the recent financial and eurozone debt crises, and in a high-stakes roller-coaster climate for high-tech companies which has claimed high-flyers such as Nokia of Finland and BlackBerry of Canada.

Last month, Philips announced that its third-quarter profits jumped almost three-fold from the equivalent 2012 figure ,to 282 million euros ($380 million) this year.

The latest results were even driven by sales of household appliances in the emerging markets from whence came much of the new competition which threatened Philips.

Marc Schauten, assistant finance professor at the Erasmus School of Economics in Rotterdam, said the company is doing well because “they made the shift into areas where they really have a competitive advantage.”

“Combined with the fact that they involve their clients (in development) and the reliability of their products they really have the cutting edge,” he told AFP.

At Theodoor Gilissen bank in Amsterdam, senior analyst Tom Muller said: “It was a tough choice for Philips to exit consumer electronics.”

He added: “This segment was one of its old pillars.” But competition had become “murderous, with all kinds of Asian producers on the market,” he told AFP.

Even Asian giants such as Japan’s Sony, Panasonic and Sharp have been undergoing major restructuring to keep up in the low-margin television business.

Over the last two years Philips “has taken decisive steps to move away from low-growth, low-value businesses,” the company’s chief executive Frans van Houten said in London in September.

The company is now focused on three segments: healthcare, lighting and consumer well-being.

Nowhere is the shift in Philips more visible than in its healthcare division, which now accounts for about 43 percent of investments.

Philips has seen a steady rise in full-year figures for its healthcare solutions, from 6.6 billion euros in sales in 2007 to a staggering 9.9 billion euros last year.

From innovative operating theatres to remotely-monitored Intensive Care Units, Philips has clinched a series of mega-deals with hospitals around the world to provide medical equipment.

Analysts draw another lesson from the case: Philips is constantly collaborating with smaller innovative companies, such as Israel’s RealView Imaging to develop 3D holographic projections for surgeons.

The system was used for the first time last month, bringing the world of sci-fi films into the reality of saving lives.

Another lesson, in Philip’s case, is to build on positions which have strong potential.

Philips shipped its first lightbulb shortly after being founded in 1891 and the company today pins its hopes on innovative lighting ideas such as light-emitting diode (LED).

As eco-friendly LED technology becomes more popular, lighting everything from hospital operating theatres to headlights on the latest cars, Philips expects to benefit: it owns most of the world’s LED patents, thanks to years of research and development.

The third prong of Philips’ new strategy lies in consumer well-being products, including ingenious kitchen appliances to service humanity’s growing obsession with healthy living.

“We see a world with a growing middle class,” CEO Van Houten said in his London presentation.

Philips has been forced to make tough choices, but people such as Hans Mons, one of the original demonstrators of the “Pinkeltje” in 1978, is philosophical about the decision to drop consumer electronics.

“Of course I’m nostalgic, but technology simply evolves, the whole world is changing. You have to change with it to stay in the competition,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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