The Rembrandt Tower
Company Perspectives:
The Philips Values: Delight Customers. We delight our customers by anticipating and exceeding expectations thereby creating sustainable market leadership. Deliver on Commitments. We pursue business excellence, being rigorous in delivering on our commitments. Develop People. We inspire and enable each other to use our creativity and entrepreneurial flair, and maximize our potential. Depend on Each Other. We work as "one Philips" in an environment of transparency and trust to mobilize our collective competence and that of our business partners.
Koninklijke Philips Electronics N.V. is the holding company for the Philips Electronics group, Europe's largest electronics company. The company is a world leader in color television sets, lighting, electric shavers, medical diagnostic imaging and patient monitoring, and one-chip TV products. It has offices and manufacturing facilities in more than 60 countries.
Foundation and Growth: 1891-1930
The early years of the company were very much a family affair. On May 15, 1891, Gerard Philips, a young engineer who saw commercial potential in newly developing electrical technology, formed Philips & Company, a partnership with his father, Frederik Philips, to manufacture incandescent lamps and other electrical products. The elder Philips, a wealthy tobacco merchant and banker from Zaltbommel, provided the financing while Gerard contributed the technical expertise.
Philips & Company began operations in a small factory in Eindhoven, in the Netherlands. Production started in 1892, but the fledgling company encountered problems from the very beginning. The firm could not produce as many lamps as Gerard had forecast, nor did the lamps fetch the price he had expected. Father and son had underestimated the strength of international competition in the young industry, especially from the large German manufacturers who had entered the market in the early 1880s and were already well established.
The company suffered heavy financial losses in 1893, and by 1894 the two men decided to sell the business. That might have been the end of the family's venture into the electrical industry had it not been for the fact that the only offer they received was considered unacceptable by Frederik. After negotiations broke down with the prospective buyer, the Philipses decided to risk everything rather than sell at too low a price.
The company was clearly in need of someone with commercial skills and ambition to make it profitable. Frederik was preoccupied with his banking and commercial interests in Zaltbommel, and, while Gerard possessed the technical ability necessary to manufacture electric light bulbs and other innovative products, he was not by nature a businessperson. Frederik thus turned to his youngest son, Anton.
Anton Philips, who was 16 years younger than Gerard, joined the firm in early 1895. Anton had left school early to work in London for a brokerage firm. This brief training in business helped; once he assumed control, Anton began winning the company new customers both at home and abroad. In a few years, the company was growing at a healthy rate.
At the dawn of the century the company kept pace with constant innovations in the electrical industry by developing a skilled staff of technical and commercial specialists. When the carbon-filament lamp became obsolete after 1907, Philips and other companies pioneered the development of lamps that used tungsten wire, which produced three times as much light for the same amount of electricity. Philips was also at the forefront of revolutionary improvements in the manufacture of filament wire, which gave rise to the production of incandescent lamps of all types and sizes. In 1912, Philips & Company was incorporated as NV Philips Gloeilampenfabrieken and began offering its shares on the Amsterdam Stock Exchange.
As the company grew, it became increasingly evident to both Gerard and Anton that a strong R&D capability would be critical to its survival. Consequently, in 1914 Gerard appointed a young physicist, Gilles Holst, to lead the company's research effort. Dr. Holst and his staff worked as a separate organization, reporting directly to the Philips brothers; this laboratory eventually developed into the Philips Research Laboratories.
The Netherlands remained neutral in World War I, to the company's benefit. Shortages of coal for the production of gas resulted in gas rationing, which in turn stimulated the use of electricity. By 1915, Philips had succeeded in producing a small, economical argon-filled lamp that was immediately in great demand.
When Germany prohibited the export of argon gas, Philips avoided a production breakdown by completing its own argon-production facility. Similarly, the glass bulbs used in manufacturing its lamps, which had been obtained from factories in Germany and Austria before the war, suddenly fell into short supply. The brothers decided in 1915 that the supply problem could be solved only by constructing a glass works of their own. That factory opened in 1916, followed shortly by additional facilities for the production of hydrogen gas and corrugated cardboard. These moves were the first steps toward the vertical integration of the company's production processes.
After the war, Philips began to expand its overseas marketing efforts significantly. Before 1914, Philips had autonomous marketing companies in the United States and France. In 1919, La Lumiagere Economique was established in Belgium, followed by similar organizations set up in 13 other European countries as well as China, Brazil, and Australia.
Research conducted under the direction of Dr. Holst played a critical role in the development of new products during this time. Fields such as X-ray radiation and radio reception were given high priority, resulting a few years later in product-line additions such as X-ray tubes and radio valves.
In 1920 a holding company, N.V. Gemeenschappelijk Benzit van Aandeelen Philips Gloeilampenfabrieken, known as N.V. Benzit, was formed and assumed ownership of Philips. Gerard Philips retired in 1922 and was succeeded as company chairman by Anton, who was 48 years old.
Under Anton's management, the company began to manufacture complete radio sets; it displayed its first model at the Utrecht Trade Fair in September 1927. From then on, rather than manufacturing just electrical components, the company started to manufacture complete products whenever possible--a significant change in management strategy.
During the 1920s, the company's headquarters at Eindhoven underwent extensive renovation and expansion, with the construction of additional buildings for new and existing industrial products. Toward the end of the decade, Philips Lamp Works set up more overseas subsidiaries in Asia and Africa, as well as in Europe.
Depression and War: 1930-1946
The worldwide Depression of the 1930s, however, stalled the company's robust expansion, forcing employee layoffs and an administrative reorganization. As a result, new budgeting methods and an improved cost-price calculation were introduced to facilitate a faster response to changing market conditions. Research continued with considerable vigor, producing new products such as gas-discharge lamps, X-ray equipment, car radios, telecommunications equipment, welding rods, and electric shavers, all of which ultimately helped alleviate the company's financial difficulties. And, despite its problems, the company opened a number of new offices in South America.
The international trade barriers erected by many national governments during the 1930s in an attempt to protect domestic industries from foreign competition forced a major change in the structure of the company. As a result of the barriers, it became extremely difficult for Philips to supply its overseas marketing companies from its headquarters in Eindhoven. Management responded by establishing local production facilities in foreign countries.
Anton Philips retired in 1939 as president, though he remained active in a supervisory role. He was succeeded as president by his son-in-law, Frans Otten, while his son, Frits Philips, was made a director of the company.
The ominous political developments in Europe at the end of the 1930s prompted management to prepare for the worst. The North American Philips Corporation (NAPC) was founded in the United States in anticipation of the possible Nazi occupation of the Netherlands. When the Nazis invaded in May 1940, Dutch defenses crumbled and the country capitulated within a week. The management of Philips followed the Dutch government into exile in England. Eventually, the top management made its way to the United States, where NAPC managed operations in non-occupied countries for the duration of the war. Frits Philips, while attempting to maintain as much independence as possible from Nazi authorities, remained behind to manage operations in the Netherlands.
Philips' activities in the Netherlands suffered seriously as the war progressed. In 1942 and 1943 company factories were bombed by the Allies, and in 1944 the Nazis bombed them a final time as they withdrew. Thus the first order of business after the war ended was reconstruction. By the end of 1946, most of the buildings had been restored and production had returned to its prewar level.
Postwar Expansion: 1946-1971
The postwar years were a time of worldwide expansion for the company. The existing Eindhoven-centered management structure was revised to allow overseas operations more autonomy. National organizations, responsible for all financial, legal, and administrative matters, were created for each country in which Philips operated. Manufacturing policy, however, remained centralized, with various product divisions in Eindhoven responsible for overall development, production, and global distribution.
The research arm of the company remained a separate entity, expanding in the postwar years into an international organization with eight separate laboratories in Western Europe and the United States. Philips' laboratories also made major technological contributions in electronics, including the development of new magnetic materials, and work on transistors and integrated circuits.
The growth of the Common Market, established in 1958, presented the company with new opportunities. While factories had previously manufactured products solely for local markets, larger-scale production units encompassing the entire European Economic Community (EEC) were now possible. With export to Common Market countries made easier, a new approach to product development was also necessary. Philips' factories were gradually integrated and centralized into International Production Centers--the backbone of its product divisions--as it made the transition from a market-orientated to a product-oriented business.
The Japanese Challenge: 1971-1990
Frits Philips was named president in 1961 and managed the firm during a very prosperous decade, so that when, in 1971, Henk van Riemsdijk was appointed president, he took over a company riding the crest of 20 years of uninterrupted postwar success. The 1970s, however, were a difficult time, as competition from Asia cut into Philips' markets. Many of its smaller, less-profitable factories were closed as the company created larger, more efficient units. The company also continued its innovative efforts in recording, transmitting, and reproducing television pictures. In 1972, for example, the company introduced the first videocassette recorder to the market.
In 1977, Nico Rodenburg became president. Under Rodenburg sales grew steadily for most of the late 1970s and early 1980s, but increased profits did not follow. As Japanese companies, with their large, automated plants, flooded the market with inexpensive consumer electronics, Philips, with factories scattered throughout Europe and rising labor costs, saw its market share continue to decline.
The company's fortunes began to change with the appointment of Wisse Dekker as president and chairman of the board in January 1982. Dekker initiated an ambitious restructuring program intended to control Philips' unwieldy bureaucracy and increasingly haphazard productivity. After only a few months, Dekker had closed more than a quarter of the company's European plants and had significantly pared down its global workforce.
Dekker also began to seek acquisitions and joint ventures designed to help concentrate the company's resources on its most profitable and fastest-growing product lines. Philips bought the lighting business of the U.S. company Westinghouse outright, and acquired a 24.5 percent stake in Grundig, the largest West German consumer-electronics firm. In the United States, North American Philips consolidated the operations of its Magnavox Consumer-Electronics division with the Sylvania and Philco businesses it had already purchased from GTE Corporation, in 1981. Two years later, the company announced a 50-50 joint venture with AT&T to manufacture and market public-telephone equipment outside the United States, a deal it hoped would save millions in R&D costs.
When Cornelis van der Klugt assumed the presidency of Philips in 1986, he continued to seek acquisitions and joint ventures to improve the company's market position. Philips' research in solid-state lasers and microelectronics, resulting in advancements in the processing, storage, and transmission of images, sound, and data--also helped regain part of the market lost to the Japanese. This research produced innovative items such as the LaserVision optical disc, the compact disc, and optical telecommunications systems.
Van der Klugt reorganized the company, eliminating an entire layer of management and setting policy by committee. Van der Klugt also made an effort to globalize the company's structure, improving profitability; Philips' profits rose 29 percent in 1988. Rationalization of operations also played a role in this restructuring. In 1987, Philips geared up for a major international push into consumer electronics, and targeted U.S. markets hoping to broaden its market share in TVs, VCRs, and CD players.
In response to Japanese competition, van der Klugt also began to drop non-core activities in favor of development in electronics. In late 1989, for example, the company began a graceful withdrawal from the defense market, where it had maintained a leading stride since developing nuclear control instruments (chiefly for nuclear power generation) and fire control and radar instruments for missile systems in the 1950s. Philips sold its Dutch defense electronics subsidiary, Hollandse Signaalapparaten (HSA) to Thomson SA of France at the end of 1989 and put other European defense subsidiaries (and interests) up for sale shortly thereafter. Philips also began to share rising R&D costs with other large corporations such as AT&T, Siemens AG, and Whirlpool through joint ventures.
New and Continuing Challenges: 1990-2002
Despite these efforts, profits for the first quarter of 1990 plunged from Dfl 223 million in the first quarter of 1989 to a mere 6 million. Even worse, the plunge was announced only two months after Philips had released its 1989 annual results, forecast an improvement in 1990 profits, and gave no hint of pending problems. Eleven days later Cornelis van der Klugt resigned, and Jan Trimmer became chairman of the company.
Philips had designated Trimmer as van der Klugt's successor in March 1990, but his succession was slated for July 1991, on van der Klugt's scheduled retirement. Trimmer went to work immediately, using the special shareholder meeting called to ratify his appointment to announce plans to eliminate 10,000 jobs and to predict a 1990 full-year loss of Dfl 2 billion. Nevertheless, profits again plunged during the second quarter, this time by 84 percent to Dfl 37 million.
By October, Trimmer announced the initiation of "Operation Centurion," aimed at raising productivity, stimulating cost consciousness, decentralizing decision-making, and reducing employment levels to match those of the company's competitors. He also promised to sell or scale back operations that lacked the potential to make a reasonable profit. The first specific actions under the program were the imposition of an additional 35,000 to 45,000 reduction of jobs and the withholding of dividend payments in 1990. The company's final 1990 loss amounted to Dfl 4.24 billion. In addition, the company's debt reached 160 percent of its equity, and interest costs alone consumed 84 percent of operating profit.
In early 1991, Philips announced that it would simplify its legal structure and change its name. Gemeenschappelijk Benzit van Aandeelen (NV Benzit), Philips' holding company, would dissolve. Philips Gloeilampenfabrieken NV would change its name to Philips Electronics NV and would become the holding company for the entire group. In addition, the company sold its 47 percent interest in Whirlpool International, BV, its home appliance joint venture. It also sold most of its loss-making computer business. These actions, and the elimination of the dividends for another year, contributed to a net gain of Dfl 1.2 billion in 1991 compared to 1990's loss of Dfl 4.2 billion.
In June 1992, Philips announced that both its second-quarter and full-year earnings would fall sharply. The company attributed its problems to a declining market for consumer electronics. In July, Philips announced that it would sell several billion florin of real estate to raise funds to pay down its crushing debt and reduce annual financing costs. In September, Philips announced additional cost-cutting measures aimed at saving several million florin. These measures had little effect on the company's financing costs, however. By the third quarter, net financing costs had ballooned to Dfl 464 million from Dfl 199 million the previous year. Philips recorded a 1992 full-year loss of Dfl 900 million.
By 1993, Philips' cost-cutting measures, the sale of its interest in Japan's Matsushita Electronic Industrial Co., the liquidation of its debt, and improvements in results in its Consumer Electronics and Consumer Products divisions produced an annual profit of Dfl 856 million. Both 1994 and 1995 were also profitable.
This profit recovery, however, concealed some major marketing problems at Philips. The 1991 U.S. introduction of the CD-interactive player, a system that could be attached to a television and serve as a platform for game playing, teaching or entertainment software, illustrated these problems. Having invested more than US$1 billion in the system in the hope that it would become a major revenue producer and strengthen the Philips brand in the United States, the company saw the system fail in that market. The system lacked software that would appeal to the U.S. consumer. Its operation was too complex. And it was too expensive. In five years, only 400,000 units were sold in the United States. Similar fates met the company's Digital Compact Cassette and its high-definition television standard.
By 1996 a decline in the demand for semiconductors, poor performance at the company's PolyGram record company unit, Asian competition and declining European demand contributed to declining first-half results. In July, Philips announced the elimination of another 6,000 jobs. Nevertheless, the company recorded a Dfl 500 million full-year loss.
Cor Boonstra assumed the chairmanship in October 1996. He initiated yet another restructuring program. In the first five months of his tenure, he sold 18 companies and identified another 13 for future disposal. He made plans to outsource more production work to Asia. He also indicated an intention to change the company's traditional engineering orientation to a marketing one.
This marketing shift paid off when the company introduced its DVD recorder. It arranged to have Hollywood movies available for use with the system. It saved money by outsourcing production and it negotiated a standard for the system with other major manufacturers. The system's 1997 introduction was a success.
In 1995 the company formed Philips Consumer Communications (PCC) in an attempt to compete in the cellular equipment market. In 1997, Lucent Technologies folded its retail telephone equipment business into PCC. By the end of 1988, the venture had lost more than US$500 million, and Lucent withdrew from the venture.
The company sold its 75 percent owned PolyGram unit and announced the closure of about a quarter of its worldwide factories by 2002. Nevertheless the virtual meltdown of Asian financial markets and the consequent decline of Asian and Latin American demand for Philips products contributed to a 56 percent decline in operating income for 1998. By 1999, the company's income had increased substantially. Philips Electronics also changed its name to Koninklijke Philips Electronics NV.
By 2000, Philips was enjoying the boom in electronic products seen by other electronics and telecommunications companies. Its yearly results were outstanding. Sales rose by 20 percent and income increased from EUR 1.8 billion to EUR 9.6 billion. It appeared that Philips had finally overcome the problems that had afflicted it during the preceding decade.
By 2001, however, the bottom had dropped out of the Internet and the telecommunications markets. The September terrorist attacks on the United States, further worsened the environment for Philips' sales. The consequences for Philips were disastrous. Its full-year sales declined by 15 percent, and it recorded a record loss of EUR 2.6 billion.
Even before the end of the year, restructuring began again. An additional 10 percent of the workforce had been slashed by the end of 2001. The company indicated that job cuts and additional outsourcing would proceed in 2002. To increase revenues, Philips launched a DVD recorder in 2001. In 2002, it announced marketing and distribution deals with Nike, AOL Time Warner, and Dell Computers.
The company reported a EUR 9 million profit during the first quarter of 2002 and predicted a full-year profit. It was just possible that Philips was again on its way toward recovery.
Principal Subsidiaries:ADAC Laboratories, Inc. (100%); Atos Origin (49%); LG Philips LCD Co. (50%); MedQuist (71%); Origin BV (98%); Philips Electronics North America Corp. (100%); Philips Oral Healthcare, Inc. (100%); Taiwan Semiconductor Manufacturing Co. (23%); VLSI Technology, Inc. (100%).
Principal Competitors:Hitachi; Matsushita; Sony; Fujitsu; NEC; Siemens.
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