Can Philips Learn to Walk the Talk?

Gerard Kleisterlee's turnaround program for Royal Philips Electronics is a high-stakes bet on a simple, catalytic idea: strategic conversations.

Royal Philips Electronics is a global technology powerhouse, and it always has been. Since Anton and Gerard Philips began making lightbulbs in 1891, inventors in the Netherlands-based company's Eindhoven labs have been churning through patent applications at a rate of 3,000 a year. Relentless investments in R&D have generated such breakthrough inventions as the rotary head shaver in 1939, the compact cassette in 1963, and CD and DVD formats in the 1980s and 1990s.

But ask a shopper at Wal-Mart to name her favorite Philips product, and she may not be able to come up with one. Where is Philips' Walkman? Its iPod? Its killer app?

With annual sales of $28.8 billion, Philips is Europe's largest electronics outfit. The company produces 2.4 billion incandescent lamps a year and fits picture tubes to one in seven TV sets worldwide. But in the critical consumer-electronics sector, neither Philips' size nor its innovation has produced satisfactory business results. Here's the troubling technology punch line: While the consumer-electronics sector accounts for one-third of Philips' sales, it contributes none of its profits.

That is the reason why Gerard Kleisterlee, who became Philips' president in April 2001, has announced his bold, unyielding challenge to everyone at Philips: The consumer-electronics division must make money in the United States, the world's biggest market for consumer electronics, within the next few years, or he'll simply shut it down.

There's nothing in Philips' recent performance to suggest that Kleisterlee's ultimatum will be easy to meet. Just 10 years ago, Philips was close to bankruptcy after a series of strategic blunders and operational mishaps. A decade of financial restructuring has restored order to the balance sheet, but the legacy of limp branding and lazy diversification remains. Record losses in 2001 combined with a 15-year losing streak in the United States set the stage for Kleisterlee's arrival.

But Kleisterlee clearly believes that he knows what it will take to make Philips profitable. He has already made a number of textbook moves: He's selling nearly 30 noncore businesses with combined annual sales of about $1 billion. He's outsourcing the unprofitable production of cell-phone handsets. And, in a split from the policies of Cor Boonstra, his predecessor, Kleisterlee is now moving aggressively to centralize a number of service functions, such as human resources, payroll, and finance.

But what is at the heart of Kleisterlee's plan to create "One Philips" isn't technology or tactics: It's talk. In order to build internal confidence, stimulate cross-boundary cooperation, and spark new-product speed to market, Kleisterlee is sponsoring what he calls "strategic conversations": dialogues that center around a focused set of themes that Kleisterlee believes will define Philips' future.

Can We Talk?
When Kleisterlee took the reins, he found a company that was rigidly divided into six business divisions, with little or no communication among them. "We had become an armada of independent companies that all acted independently," he says.

His first step was to define four key themes that would describe a technology future that Philips could win: display, storage, connectivity, and digital video processing. By definition, those themes crossed technology boundaries. Winning, Kleisterlee saw, would require new and fresh dialogues across the business divisions. "Those four themes are critically important in a converging, interconnected world," he says. "Whether your vision is of a PC, consumer-electronic, or telecom-centric world, it's all about capturing information, sorting it, transmitting it, and displaying it."

Kleisterlee's strategic conversations for each theme begin by gathering together everyone who has a contribution to make -- regardless of rank -- for a one-day summit. Attendees exchange views, debate scenarios, and, ultimately, agree on strategies and road maps for key projects. "These meetings result in very clear goals and much better cooperation between the different divisions," says Kleisterlee.

As a result of their strategic conversations, for example, the board of management determined that winning in optical storage meant winning in the DVD-recorder market. The project team that was tasked with developing and bringing to market the first DVD recorder based on the new DVD+RW (rewritable) standard pulled in managers from Philips' semiconductors, components, and consumer-electronics divisions. The benefits, Kleisterlee proudly points out, are already visible: Cross-boundary collaboration allowed Philips to cut its typical development time by a stunning nine months. Philips' range of DVD recorders (including a sub-$1,000 model) now claims 60% of the U.S. market.

Strategic conversations in the display category have identified a similar technology path. There, the cross-boundary team determined, winning means leading in the flat-screen-TV market. "Through strategic conversation, it became clear that we had too many resources invested in conventional TV development," says Kleisterlee. So at this month's consumer-electronics show in Las Vegas, Philips will unveil a full range of LCD TVs and a projection TV based on liquid crystal on silicon technology.

Backing the Talk
Philips staffers are no strangers to false starts and broken promises. But Kleisterlee appears to have their support. "Before he arrived, we were bitterly divided," says one senior manager who has worked for Philips in the United States and in the Netherlands. "But I know of many people who are sticking with Philips just because they have faith in Kleisterlee."

Kleisterlee -- an electronics engineer who, like his father, has worked for Philips for his entire career -- knows that a lot is riding on what happens in the move from technology to market, including the fate of the entire U.S. operation. Kleisterlee has written off 2002 as a "lost year." That means that the next 12 months will reveal whether his strategic conversations are truly inspired collaboration -- or just a whole lot of talk.

Sidebar: The New AI (Ambient Intelligence)

Philips president Gerard Kleisterlee's strategic conversations go right into the company's R&D labs, changing the practice of innovation. Right now, Philips' 8,000 R&D workers from all six business divisions are dispersed around Eindhoven in the Netherlands. By 2006, Kleisterlee aims to move them all to a single 1,873,900-square-foot high-tech campus in that city. The new buildings will be flexible, making it possible for "theme teams" to assemble and disband as the need arises.

At the same time, Philips is turning to a new source of inspiration: consumers. Eindhoven is also home to HomeLab, an ambitious experiment in developing "ambient intelligence": homes and offices where spoken requests or even facial expressions will trigger music and movies to play, control environments, and respond to owners' particular needs. The lab rats in this modern homemaking experiment are flesh-and-blood humans who volunteer to live in the home 24 hours a day while Philips' researchers observe how they interact with the company's electronic prototypes. It's another part of Philips' attempt to break down boundaries between R&D and the rapid commercialization of innovation.

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