Design Intervention

At Philips, a place long known for big ideas and small numbers, can there be too much of a good thing?

Last April, a select group of Broadway celebrities, New York—area business types, and employees of Royal Philips Electronics found their way across town to a gritty pier on Manhattan's west side, lured by a cryptic white invitation to "The Simplicity Event." As the partygoers entered the space, they were transported from a windswept industrial dock into a crisp world of white walls, white carpet, and white couches. Women in white floated ethereally by, bearing hors d'oeuvres. It felt, somehow, like falling into an iPod. But that was the last thing Philips—the $37.7 billion Dutch company that makes everything from televisions to MRI machines—wanted its guests to be thinking about that evening.

Andrea Ragnetti, Philips's chief marketing officer, gave a brief introduction, then stepped back theatrically as a white screen rose to reveal five different installations, each featuring working prototypes of products that were mostly three to five years away from the market. Oohs of amazement arose from the various stations (Share, Care, Glow, Trust, and Play), prompted by demonstrations of artifacts such as the Momento, which looked like a cross between a snow globe and a lava lamp (shake it, and it morphs into a home- movie player). The Glow section boasted sculptural lamp shades that changed color to match the fabric underneath them. Care showcased an AirTree that cleans and humidifies the air, much as a real tree would. The technology felt seamless, sleek. The products seemed simple—although they were anything but—and ready for the marketplace, even though they were far from it.

Philips is trying to capture that spark of possibility—of what could be rather than what is—as it looks to transform its reputation from a floundering, commodity- peddling conglomerate into a streamlined innovation machine. After years, even decades, of being defined by what it was losing, rejecting, or surrendering, Philips is eager to move forward again. Since the late 1980s, the company has pared itself down from 30 divisions to 4 and lost market share in industries such as semiconductors and consumer electronics. Since 2001, sell-offs have cut the number of employees by nearly half. "Design helps us to bridge the gap between the present and the future," says Philips CEO Gerard Kleisterlee, "and makes the future tangible today."

In short, Philips hopes to create a design-led organization (for more on how difficult that can be, see "Tough Love"). And mapping out just how it should function has fallen in large part to Ragnetti and Stefano Marzano, the longtime CEO and chief creative director of Philips Design, a freestanding unit with 450 staffers, a satchelful of prestigious awards, and an estimated annual budget of $250 million. Marzano has been tapped to unify the company through what it calls "simplicity-led design." He wants to establish his design principles—the unity of form and function, ease of use, and, in Philips's world, improving the consumer's life—as an organizing framework for the entire company, from its corporate structure to the ways departments and executives communicate, right on up to the user interface on every electronic gizmo.

By chance or not, Philips's broad embrace of design coincides with a period in American business in which design has become the ultimate executive elixir. But even at Philips—which has been thinking about the topic for more than 80 years, far longer than most companies—it's worth asking whether design is really the panacea it's cracked up to be.

Ragnetti isn't fond of questions about whether design actually pays off in the end, at least when discussing experimental projects such as the New York event. "'Why are you doing that?' 'What is the ROI?' These are the questions that kill," he says. "I made a clear point in the boardroom that whenever it comes to design, we have to keep business management out of the process."

That sounds odd coming from a company like Philips, which, despite its legacy, has a reputation for making cool objects that either never made it to market or lost out to the competition. The place that dreamed up such iconic products as the X-ray machine, the compact-disc player, and the audiocassette has routinely failed to capitalize on its own big ideas. "It has often been described as the company that made the most things and made the least money," says Scott Geels, senior equity analyst at Sanford C. Bernstein.

Philips's embrace of design coincides with a period in American business in which design has become the ultimate executive elixir.

Of course, the balance between big-picture thinking and smaller, focused, profit-generating ideas is a crucial one for any business. For Philips, it may be the fundamental one. Are high-concept snow globes that may never show up in a Best Buy flyer the ideal way for a public company to change its image and protect shareholders? Or is Philips risking its young, fragile recovery on an impractical dream? Either way, it's a bold experiment, one executives elsewhere are watching closely.

A voluble Italian intellectual trained as an architect, Marzano took over Philips Design in 1991. He sees his purpose as being as cosmic as it is practical. "How can we provide more happiness, a more relaxed life," he asks, "without actually entering the utopian idea that the world should change overnight?" He calls design nothing less than a "catalyst for a paradigm change," the mechanism behind the improvement of the human condition. Global warming, the quest for personal safety, sustainability, the Renaissance—no notion is too big or too amorphous to inform Philips Design's work.

In other words, Philips Design isn't about slapping on a flywheel or a little candy-colored plastic. It's a global think tank, a freewheeling idea farm. In fact, Marzano isn't even required to make money: His group charges market rates both internally (when "hired" by one of Philips's units) and externally (its hundreds of outside clients have included Ford, Nike, Procter & Gamble, and Securitas ); in return, Philips asks only that the group break even. "I don't have to deliver cash to the company," Marzano says. "I have to deliver talent, knowledge, and ideas."

Yet Marzano's attempt to overhaul Philips through design is not just some right-brain fantasia. There is a method here, one that draws together the data-driven old guard, the truest of blue-sky thinkers, and everyone in between. Marzano has devoted his career to exploring meta-trends in society and has put that experience at the center of product development at Philips. So, where a company of this scale would typically rely on designers or engineers to generate ideas in-house and then force them into the market, at Philips the process starts out as macrofocused as possible.

It starts, in other words, with a mandate not to develop the next iPod but to assess what, exactly, would change consumers' lives for the better, whether a lightbulb or a music player. Drawing on broad, proprietary sociocultural research, the group— a small army of designers, social scientists, cultural experts, and assorted brainiacs—might identify, for example, an emerging baby boom, a global water shortage, or a growing desire to spend more time at home. It then distills its research into a series of "personas," each representing a group with like-minded interests, needs, and values—on child rearing, maybe, or the ideal home. Only then do designers and engineers try to imagine and build a series of products such a composite person might want.

"I admire them greatly," says Claudia Kotchka, vice president, design innovation and strategy at Procter & Gamble, who benchmarked the company when leading P&G's new design focus. "Their practice of design has always been on the leading edge, and their insight into consumers' lives is outstanding."

Just how well Philips sees into our souls was driven home for me in a simulated living room I visited in Eindhoven, Netherlands, where Philips Design is headquartered. A team of researchers and designers had created the room just for me—or rather for "Simone," the persona Philips created to represent people like me: a professional woman in her thirties, pregnant, somewhat comfortable with technology. There were three different "rooms": one for "Justin," a tech-savvy 29-year-old with a huge music collection; another for "Alexandra," a fiftysomething technophobe who loves hosting dinner parties; and Simone's.

Percentage of Philips's total 2005 revenues from products introduced in the previous 12 months: 49% Percentage in 2003: 25%

Settling into Simone's chair, I clicked on the stripped-down remote control, which turned on a device that put the term "idiot box" to rest forever (or perhaps resurrected it, since even an idiot can handle it). There were virtually no buttons, and organized neatly on the screen was information selected just for "me"—my favorite shows, my music, photos, movies, even prenatal yoga instructions. Customizing the screen of the clean, white television required only a simple click and drag. On the table below lay a light wireless digital "tablet," a device that lets you carry the content with you from room to room, take notes, or share pictures. And if another family member were to pick up the tablet, a technology called BodyAura would sense the change and display the corresponding interface. If a friend came to visit, she could download her own pictures just by tapping the top of the tablet with her phone or camera.

For Simone, what counted was not the technology itself but quick access to the information she needed. Alexandra's room, by contrast, struck a lower-tech note, with objects such as a table with changeable mood lighting. Justin's had a vast array of gadgets to create visual displays and allow him to access his thousands of CDs, sorted by album cover and music type.

The look, feel, and capacity of everything on display that day was the result of a project called "Lifestyle Home," in which Philips designers and researchers in the consumer-electronics division visited 75 households in four countries to figure out what people crave at home. Before coming to Eindhoven, I'd participated in a condensed version of the study, filling out a complex questionnaire focused not on my product preferences but on my values and desires. If I'd been a real research subject, I would have spent several hours with the team in my home as well.

I knew the beautiful, cutting-edge stuff in Simone's living room would make my life easier. But even though everything worked in Eindhoven (Philips makes working prototypes, rather than mock-ups or sketches, in the belief that everyone reacts more naturally to a real product), it's still a long way from Wal-Mart. In fact, as with the New York event, it's a very open question whether I'll ever get my hands on any of these things. "It's not that we have an idea of a product in our mind," says Stefanie Un, senior research consultant.

"I don't have to deliver cash to the company," says design chief Marzano. "I have to deliver talent, knowledge, ideas."

Given the rap on Philips as a company with bright ideas that often go nowhere, that sort of statement provoked some head-scratching on my part. No idea of a product? I found myself wondering if this was a business or an ivory tower. Marzano argues that it takes a combination of both in an era when consumers control the marketplace. "Innovation is not a linear process," adds Ragnetti. "There's a lot of waste and useless discussion, but you have to try stuff."

Adding to the confusion, Philips has experienced the perils of this process before. A 1995 Philips Design project called "Vision of the Future" was conceptually very similar to the Simplicity extravaganza in Manhattan—a flood of flash-forward products and ideas. Indeed, the concepts unveiled back then read today like a laundry list of the technologies that are changing our lives, including personal digital assistants and voice-recognition systems. Three years later, though, Philips went back to see how many of those concepts had actually gone into production and discovered that while a laudable 60% were already for sale, only 3% of them were made by Philips. "Their design and technical specs were usually good," says Enrique Dans, a professor at Instituto de Empresa Business School, "but they were disconnected from the market." That's a disconnect that Philips can hardly afford to continue.

At a company such as Apple, integrating design into virtually every business decision seems a relatively straightforward task. The visual vocabulary is the same, the products all exist within a narrow functional spectrum, and the audience for them is well defined and understood. Philips, however, is a very different animal, a sprawling company with constituencies that include doctors buying complex medical equipment, music-loving teenagers, and urban planners ordering massive streetlights. Creating a consistency of design isn't easy. And while Philips has shown major improvement—its stock has risen 47% over the past two years as it expanded into health-care equipment and sold off most of its ailing semiconductor business—it is hardly out of the woods. Its consumer-electronics business has fallen from an estimated 11% of the market in 1999 to 6.5%, where it has stalled. Most Wall Streeters, meanwhile, couldn't care less about what's happening at Marzano's funky office inside a former lightbulb factory (in Europe, no less). "The things they've done have been modestly clever," says Geels, the analyst with Sanford C. Bernstein. "They're doing a better job, but we haven't had a big hit. They really have to get out products in the near-term."

In a nod to the analysts, CEO Kleisterlee admits that the notion of simplicity-led design as embodied in Philips's new branding campaign, "Sense and Simplicity," will seem abstract and even absurd to those who've tracked its recent travails. "This is a long journey, and we're just at the outset," he says, although he is two years into the process. "But we're increasingly confident that we have created a business driver that is transforming Philips both inside and out." Kleisterlee believes that short-term thinking will never lead to the breakthroughs needed to take the company from middling behemoth to world leader.

Philips's design-based brainstorming has led to some real product successes in the past, even if they came out differently than originally conceived. One exercise Philips Design put on in 2000, called "Nebula," looked at the experience of going to bed. It came up with a "smart sheet" that sensed what was going on in the bedroom and projected appropriate ceiling lighting. If you were trying to sleep, you might see clouds and stars; if you were in for a night of unbridled passion, the lighting got sportier. Philips never developed its libidinous linens, but the idea of using lighting to help people relax resurfaced in 2003 in the company's MRI and CT scanners, which project imagery on the ceiling to help people, particularly children, feel more at ease during their scans. In the first of six hospitals that have installed them, the need for sedation of nervous children has fallen by 30%. Now Philips is gaining share in both MRI and CT scanners, says Geels—and new uses of lighting are being explored throughout the company.

A similarly upbeat story is the Ambilight television, which originally stemmed from a 1994 design project called "Television at the Crossroads." Research showed that people wanted a more immersive, relaxing experience with their TVs; design reported this to the technical research groups, which developed a way to project the colors on the screen beyond it, creating a more cinematic feel and reducing eye strain. Philips designers then came up with two "wings" on the outside of the set to cast the light and lend it a sculptural element. Ambilight came to market in 2004 and already makes up 50% of Philips's LCD-TV sales, taking its market share in the past two years from 7% to an estimated 12% to 14%.

As part of "Sense and Simplicity," the design group has also been called in to rethink the way consumers experience each product. With the consumer- electronics division, the group created a common set of controls and displays that will eventually hold constant across some 80,000 products—a Herculean task in itself. Now it is working on a common look across all of its divisions. Even Philips's packaging and operating instructions have been harmonized in an effort to present a front unified by design.

Philips's market share for LCD-TVs in 2004, before the introduction of the Ambilight TV: 7% Share now: 12% to 14%

Given that visual and functional continuity are integral to strong brand identity, these initiatives make it easier for Philips's business side to sign on to the new design-driven approach. Still, for data-centric executives, Ragnetti says, "the set of skills required to really use design and innovation as value drivers are completely different from management skills." He can only hope more execs learn to think like Kevin Lewis, vice president of business development for consumer electronics. "Just having design is a minimal requirement to get off the shelf," Lewis says. "Yes, it's expensive, but if you don't spend it, forget it."

To avoid repeating the Vision of the Future problem of too much dreaming and not enough doing, Philips has to position itself at the intersection of innovation and accountability. It must change the design experience from a random collision of great ideas into a strategic, organized approach that both unleashes creativity and somehow tethers it to the real world. It must convince skeptics that "Sense and Simplicity" is more than just a breezy tag line and a series of free cocktail parties. And it must prove that the process actually leads to elegant, exciting, and—above all—successful new products.

With that in mind, Ragnetti established a new vetting process three years ago in which design, marketing, and technology evaluate each new product idea as a team at every stage of development—both to translate the big think for more-analytical types and to anchor that big think in reality.

Philips is also trying to better track the impact of design at the company, an acknowledgment of the Vision of the Future default. Now, design shares its broad-based research at every early meeting to ensure that each proposed product is backed up by a real "validated proposition," in Philips jargon. This means it's based not on a hypothesis about what people might desire but rather on hard research that shows what people actually desire. Since March, the company has been tracking the percentage of R&D funds spent on such propositions; products that are now "mission critical," meaning one to two years from the market, must be tied to research or they will not go forward. And thousands of managers have had to be retrained to understand these new metrics. The theory is that this clear linkage with the customer will lead to speedier product development and fewer products having to be abandoned or rethought in midstream. "The problem was not the number of ideas translated into products," says Ragnetti, "but the fact that we did not really follow up on those concepts."

Is all this working? We don't know: Philips won't release results, saying it's too early. The best example the company could provide of the new disciplined approach is its "Wardrobe Care Solution," which it insists is "a new revolution in wardrobe care." Like all new products, this $1,200 iron/steamer had to meet the Simplicity requirements: It had to be "designed around you," "easy to experience," and "advanced." Apparently it met all three, and went from concept to roll-out in two years. Still, that's a lot of iron.

Will Philips emerge as a shining example of an organization that fueled its renaissance with design, or as one that ultimately failed because it lost sight of its real objective? At a time when hundreds of companies are grappling with what it really means to use design as a true differentiator, Philips's gamble is a case study for businesses everywhere.

And there are at least a few encouraging signs. Philips's total sales from products introduced in the last year were 49% of total revenues in 2005, up from just 25% in 2003. In medical systems alone, an industry with long product cycles, some 70% of revenues came from products less than two years old—up 20 percentage points from the previous year. And despite disappointing LCD results in 2006's second quarter, from a less-than-expected World Cup boost, growth in Philips's medical systems and consumer electronics came in better than expected, at 9% and 10%, respectively.

Ragnetti resists being judged on the "basis of the next sensational iPod-like product." But, tired as we may be of hearing about it, it was the iPod that overhauled Apple, turning it from an innovative niche player into a corporate icon. "You have to have your head in the clouds and your feet on the ground," says Marzano. "But the feet and the head have to be connected." We couldn't have said it better.

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*Prices derived from Philips's NYSE-traded ADRs

Jennifer Reingold (jreingold@fastcompany.com) is a Fast Company senior writer.

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