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Will Philips Get It Right This Time?

{complink 4267|Royal Philips Electronics N.V.} is facing significant challenges in its operation. The company is losing momentum in the consumer electronics market, and regaining its footing will require some painful actions, according to company executives.

In the second quarter, the company reported sales of 5.2 billion euros ($7.3 billion), compared with 5.4 billion euros ($7.5 billion) in the comparable 2010 quarter. During the same period, it reported profit of 262 million euros, versus a loss of 1.4 billion euros in the second quarter of 2010. The lighting and consumer lifestyle divisions were particularly susceptible to the demand drop-off. With no performance improvement in sight for the rest of 2011, Philips is taking numerous short-term steps to get back on course. Among them, the company aims to cut costs by 500 million euros, or $705 million, by 2014, and will buy back 2 billion euros worth of its shares over the next 12 months.

Frans van Houten, president and CEO, said during an analysts' call that Philips has set additional targets, including increasing sales by 4 percent to 6 percent by 2013 — assuming real gross domestic product growth of 3 percent to 4 percent — and getting margins on earnings before interest, taxes, and amortization to between 10 and 12 percent (from the current 7.1 percent).

He also spoke about Philips' plans to capture growth in the healthcare segment and restore profits in the lighting group. He talked, too, about the decision in April to spin off its money-losing TV unit and form a long-term joint venture partnership with Hong Kong-based TPV Technology Ltd., which has a 70 percent stake in the entity.

“It's been quite an eventful three months since assuming the CEO position at Philips. I've been working with my team on improving execution and performance across all sectors,” van Houten said. “We have gone deep and been hands-on on our approach. Despite operational challenges we see in some of our businesses, I'm hopeful that Philips has the potential for profitable growth.”

To actually achieve the turnaround, van Houten and CFO Ron Wirahadiraksa, as expected, pulled out all the buzzwords one would expect to hear in a call outlining wishful improvements.

Executives are reviewing management layers and staffing levels while looking to reduce complexity, increase efficiency, and provide greater accountability. Accelerate, a comprehensive performance and change improvement program, is being implemented company-wide “to realize value potential and speed up growth.” And highly-attractive markets and geographies will win business portfolio favor and product innovation investment.

Almost as a nod to the anticipated eyeball rolling and muttered whispers claiming “Yeah, we've heard this before,” van Houten bounced back by asking: “So, what will be different this time?” His answer in the quarterly earnings slide presentation is this:

  • We have a strong portfolio, with good positions in growth and mature markets, and
  • Have identified the operational issues which we will deal with decisively, to
  • Drive granular execution of our plans and make the necessary investments in people, systems and markets to deliver profitable growth and return on invested capital, by
  • Leveraging a new culture of entrepreneurship and accountability.

After hearing this, I kind of shrugged my shoulders. It doesn't matter if it's 1997 or 2011, does it? Promised recovery, after any significant decline, always seems to circle back to commitments to get a handle on operations, efficiency, spending, and execution. Time will tell if anything novel sticks from the latest pledges. For Philips' sake, I hope something different does take root this time around.

12 comments on “Will Philips Get It Right This Time?

  1. HM
    July 18, 2011

    I think philips is still in good books of consumers. Even if they just retain a moderate percentage of their existing multimedia consumer market share I think they will do good. Let us hope they get it right this time.

  2. Nemos
    July 18, 2011

    Ι think Philips suffers from the “disease of the giants.” The “disease of the giants” affect all the successful and mature companies that let the things to evolve, and they have stopped taking part in the evolution process. In addition,   gives them the impression that the market will be the same regardless time passing.

  3. eemom
    July 18, 2011

    Its the same formula no matter what year we are in.  At least it is good to see that the CEO is very much hands on in making changes aimed to improve Philips' performance.  Getting rid of its TV business will probably help in that regard.

  4. Ariella
    July 18, 2011

    That's a very good observation, Nemos. Markets should be regarded as the proverbial river: you can't dip into the same one twice because it is always changing and flowing.

  5. Daniel
    July 19, 2011

    Philips once enjoyed the “Royal” power in consumer electronics sector.  Sometimes back they had done the diversification and formed Philips medical electronics and NXP. Initially both these companies performed well and contributed much to the flag ship company. But later, I don’t know really what happens internally. Hope they will back in royal position once again through though financial control and better business strategy.

  6. jbond
    July 19, 2011

    Philips still has a good following with consumers, and in this day and age that is definitely needed if you’re going to survive. Selling off their television segment was a good idea based on all the options out there for televisions. The unfortunate downside to all of this reorganization will surely be some job losses. If Philips can start to get back to new and innovative products and continually improving best sellers, they have potential to remain profitable.

  7. Jennifer Baljko
    July 19, 2011

    Nemos: Yes, disease of giants definitely seems to be an appropriate way of thinking about Philips and others. And like Ariella said, no river is the same as it changes constantly. Companies want to get big and global, but then become less focused and cumbersomely complex when they reach a certain maturity.Like you all said, Philips has a good reputation and plenty of consumer loyalty. Deciding how it will serve its most important niches while innovatively thinking ahead is now one of its biggest challenges.

  8. Kunmi
    July 19, 2011

    Gone are the days when everyone was really drunk of Philips products. I cannot emerging how the name started fading away from the our generation. Philips products are still highly respected, the glory can be restored if they remain focused and maintains the quality that the company believes in. Philips and Sony are just like brothers and sisters that had made land marks in electronics. I still remain confident that Philips can revamp the strength and regain the consumer confidence.

  9. JADEN
    July 19, 2011

    Philips experience in consumer electronics can happen in any business, the good news is that they still have focus with plans and strategies to bounce back.

  10. hwong
    July 21, 2011

    In this fast paced economy, we have seen way too many Corporations going down. Recently the Borders bookstore, Good guys, Circuit City, Blockbusters…. 

    Companies are really not like the old days where consumers are mostly loyal customers. Nowadays people go where they can get the cheapest price at the highest quality.  Also the products need to meet  consumers taste buds. Having said that, a company can thrive only if they can do all of the above. Or else you are like Apple with the best innovations.  Philips need to re-evaluate its corporate strategies to align with the market trends and execute it with diligence to ensure they are providing the highest grade of products at the lowest costs and shortest lead time

  11. Mr. Roques
    July 22, 2011

    I dont know if they'll make it — although they can't be blamed for not taking action. Their plans seems logical and the right way to go. But in today's world, that might not be enough.

  12. Anna Young
    July 24, 2011

    @Nemos, you have rightly analysed phillips situation accurately.

    Moreso, as backed by Ariella in a proverbial expressions, that “you can't dip into the same river twice, because it is always changing and flowing”.

    Ariella, you are right, Phillips did not evolve with the changes in the electronics industry. It relied on its good old name and suffered the “disease of the giants” as put by Nemos. ( I like both analytic expressions)

    Nevertheless, Frans Van Houten the CEO and president believed phillip can still capture growth based on the company's new direction under his leadership.

    Well, we'll watch the space and hope it works out as planned.

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