Questions for Philips

Just when you thought a company was on track, another flurry of news forces a pause and raises the obvious question: What's really going on there?

The spotlight falls again on {complink 4267|Royal Philips Electronics N.V.} Last week, executives told analysts that they were simultaneously deepening their cost-cutting efforts and reconfirming 2013 financial targets. A few months back, the company sketched out plans to get out of a consumer spending rut and reshape its core businesses. Evidently, it underestimated what it will take to achieve that. (See: Will Philips Get It Right This Time?.)

In a presentation at the Credit Suisse Capital Goods Conference in London, Ron Wirahadiraksa, Philips' CFO, outlined where it is heading:

Continued growth in core businesses.
Accelerate!, our performance improvement and change program, is gaining traction.
Overhead cost reduction scope now €800 million
[just under $1.1 billion; Philips announced in July that it would cut costs by €500 million, or about $705 million, by 2014.]…
We will continue to invest in market penetration and accelerated innovation (€200 million program). We are confident in our mid-term performance targets of 4-6 percent comparable sales growth, 10-12 percent EBITA and 12-14 percent ROIC by 2013.

Honestly, I don't know what to make of it. I want to believe that Philips executives –- who, I assume, are much more knowledgeable about the market and their company's response to market shifts than I am — are sincerely trying to get it back on course. I appreciate the approach, as well, which seems to be tracking along a thoughtful, slow, and steady improvement-turnaround path, instead of an off-the-wall, knee-jerk reaction plan.

But I'm a cynic — an attribute linked both to my journalist DNA and to too many years of hearing executives ramble on with similar promises and their slick way of talking in circles. In July, I was willing to take a step back and say, “Congratulations on seeing the problems your company is facing, and great, let's see where these proposed changes take you.” Now, though, after hearing how much more the company needs to cut, a cautionary red flag goes up for me. It makes me wonder what's under the surface that we aren't seeing.

Seriously, you have to cut another $400 million or so to reach targets two years out? What are you going to cut? What do these cuts mean in the long term for employee morale and supply chain partner confidence? What next?

I understand electronics companies must constantly take on the hard job of recreating themselves in a fickle world where consumers become more emboldened every year by their spending power. I applaud Philips for taking what sounds — at least in public announcements — like bold and painful cost-reduction steps while putting money aside to kick-start innovation. I hope it works out.

And I get that our expectations of 24-hour turnarounds are completely unrealistic and mostly a fantasy-world idea. Companies need time to digest what's happening in end markets, make smart choices about which segments to expand, and shed underperforming activities. I guess what I don't get is whether asking customers, shareholders, and supply chain partners to wait two years for results is feasible. Are the electronics industry and its customers patient enough for a veteran big-name OEM to reboot operations and reprove its worth? Or has that well of calm, composed market acceptance dried up?

15 comments on “Questions for Philips

  1. elctrnx_lyf
    September 20, 2011

    I think the market may be getting toucgher everyday even for a big companies like philips. When this happens they always need to think about trim down, reduce the operating expenses and bring back the company into profits. This is unavoidable and no wonder philips is thinking so hard about reducing costs. We should wait and see what will be the implications on the market and mainly the employees.

  2. Eldredge
    September 20, 2011

    I assume they are witnessing market errosion beyond what was originally expected. If they can come out with needed innovative technology they will rebound, but timing and market conditions are difficult.

  3. Daniel
    September 21, 2011

    Jennifer, I don’t think it’s an exceptional case. Now most of the production companies have started cost cutting and re building the budgets because of global financial crisis. Companies are forecasting a global recession and economic slowdown in near future. So they are preparing to face the challenges.

    September 21, 2011

    Philips is not unlike any other massive multinational seeking to reinvent itself.  It is the luminary of the lighting industry and a respected leader in medical and consumer goods.  However with the global downturn and increased competition from Asian companies it is understandable that Philips needs to do some out of the box thinking to prevent it becoming a dinosaur.

  5. Jay_Bond
    September 21, 2011

    After hearing news like this coming from the executives at Philips, it makes me question how much of it is true. For such a significant change over the previous announcements, were they under playing their numbers previously in hopes of a quick turnaround? Or is Philips facing so much increased pressure from Asian companies that they are trying to right a sinking ship before all is lost?

    Either way, when executives talk about such drastic changes over such a period of time it makes you wonder if this is just the beginning of the end.


  6. Jennifer Baljko
    September 21, 2011

    Jay_Bond: I have the same questions. While I agree with the others in that another global slowdown (in Spain, it's still the same slowdown, not a new one) will force all companies – big and small –  to evaluate and adjust operations and budgets and Philips is wise to take steps now, I wonder what bugs are still hiding under rocks that may not been turned over yet. Or maybe Philips has already turned over the rocks and that's what they found. Guess we'll see what guidance they give in the coming quarters.


  7. SunitaT
    September 23, 2011

    Another flurry of news forces a pause and raises the obvious question: What's really going on there?

    @ Jennifer, I think no body knows what is really going on in the market. If we look at the stock market swings it moves up sharply one day and moves down sharply the next day indicating that the market sentiment are mixed. That is why even CEOs are finding it tough to sense the mood of the market.

  8. t.alex
    September 24, 2011

    Yes, Phillips is leading the LED lighting industry. I guess there are more competitors coming from Asia?

  9. elctrnx_lyf
    September 24, 2011

    I think it is not a big deal for the company like philips to understand where it is going wrong. Fundamentally your sales or not as good as before. It may not be because of slow down but it may be because every one have the product you are trying to sell or may be you are losing market share to competeitors. To alleviate this probably philips should venture into new businesses or launch new products or reduce the profit margins on your products.

  10. mario8a
    September 24, 2011

    a while a go I read an article about Philips, and they have the goal of reducing cost by implementing the best projects from their AMC (Autonomus Manufacturing Center) where the employees have the opportunity to compite with the projects and innovations around the globe, they called “Loving and living the brand”.

    this has increased their motivation for cost reduction in more than 30 countries where Philips has prescense and motivate the employees to grown inside the company.


    Idon´t think Philips will have strugle to mantain the level of success they have so far.

  11. JADEN
    September 24, 2011

    Hope this Philips savings plan does not includes job cuts.

  12. Anna Young
    September 25, 2011

    “Seriously, you have to cut another $400 million or so to reach targets two years out? What are you going to cut? What do these cuts mean in the long term for employee morale and supply chain partner confidence? What next? “

    It is evident that Phillips executives are trying to wright a wrong. In addition the economic global downturn is another added pressure. Whatever the situation, I hope the decision to further cut $400 million yields target results 

  13. saranyatil
    September 27, 2011


    I Wish the same too they should not remove resources. Instead they can look at other investment plans and also work on strategies to improve their business and market share.

    They can start new ventures where they can use their previous experience and exposure.

  14. electronics862
    September 28, 2011

    To run a successful business, it just takes a lot of planning. You want to provide a superior product or service to your customers, and always treat them well. Take risks if they benefit your company..i think philips has to follow these things to maintain its success..

  15. Anne
    September 29, 2011

    The cost cutting is as a result of a massive profit shortfall the company experienced, I hope it won't affect emplyees job.

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