Back to our roots: why are innovation and entrepreneurship important for success?
Frans van Houten, CEO of Royal Philips
In his presentation, Frans van Houten, CEO of Royal Philips said his time at the Erasmus School of Economics, at Erasmus University Rotterdam, had been a ‘tremendous time’ and had helped him to become a doer and entrepreneur. He started in the IT division at Philips in 1986 just as the computer age began. “It was truly exciting,” he said. In the intervening years developments had brought machine-to-machine communications through the cloud. “If you didn’t reinvent yourself during that time, you would become obsolete as a company,” he said.
To live and flourish as Philips has done for 123 years, the company had to transform all the time, particularly with respect to behavioural change, said Frans van Houten. “I fundamentally believe it is people that make or break a company.”
In 2011, the company’s need to reinvent itself became urgent. The share price had ‘tanked’ to just €12 and at that point, ‘you’re not in control of your own future’ he said. Philips needed new business models, to add value and to be relevant to its customers.
Learn from the past
Philips’ transformation involved the company making a deep assessment to find what it did well and where it could be on the offensive. As a result it went back to its roots to address the losing battle against competitors from the Far East. Van Houten related the actions of company founder Anton Philips at the age of 24, who took a train to Russia in 1898 and came back with huge orders, including one for 20,000 lamps to light the palace in St Petersburg, and added: “Don’t be sentimental about the past, but learn from it and be dynamic.”
When he became CEO, it was an ‘agonising‘ environment, said Van Houten, but with optimism and a belief in the ability to transform, he led Philips by being ‘tough with one hand and investing with the other’. Philips was no longer afraid of the far eastern companies, but had its own recipe for winning with its Accelerate! programme, which called for confident action to reinvent the company that employed more than 100,000 brilliant people but was working ‘in a chaotic way’. Philips’ 60 SAP systems for security and data integrity meant the company’s ‘left hand didn’t know what its right hand was doing’.
The company continued to grow as it reorganised, to raise investment in research and development and to commit to innovation. The transformation meant managing the portfolio to add value and its execution was results-driven, said Van Houten. It addressed five different areas.
Crisis is an opportunity
First, it meant improving its focus on solving customer problems. Second, an immediate stepping-up of investment in opportunities, ‘so that when we finished the clean-up we were already ahead’ said Van Houten. Investing while the transformation was taking place brought end-to-end customer value chains that work with speed and excellence. Third, re-engineering systems and working on the company culture so that people ‘want to do something and are prepared to have courageous conversations’. Fourth, reducing overhead costs, which act like ‘a backpack of stones when you’re running a marathon’. Philips therefore improved profitability and reinvested for growth. Fifth was examining the allocation of resources to identify opportunities all over the world. “Crisis is an opportunity,” he said, and described the company’s new investments in China, South East Asia and Russia.
What matters is how you deal with innovation, not how much you have, said Van Houten. “We felt that as we looked at our portfolio and reengineered the company that we needed a clear focus.” The company made tough portfolio choices, such as saying goodbye to its TV and audio-visual divisions because they were no longer paying off.
A lamp is not just a lamp but a lighting system
The result? The majority of the company’s turnover is now business-to-business rather than business-to-consumer, a massive shift for the company, he said. “We no longer treat a lamp as a lamp, but as a lighting system”.
The company has a similar approach for its healthcare division, which is ‘not just people and pharmaceuticals’ said Van Houten. Technology plays a role in diagnostics too. Philips developments mean a heart valve can be replaced with minimally invasive surgery, and can be monitored remotely in real time, explained the CEO, meaning healthcare systems can become dramatically cheaper. Observations can be made ‘through the cloud’ in patients’ homes, not in expensive hospital beds.
That kind of thinking made Philips’ healthcare division more productive. Strategic steps and bold moves into areas where the company can add meaningful value were part of Philips’ aim to become a company that helps to make the world healthier and more sustainable through innovation.
In context with this changed view and role, the company dropped the ‘Electronics’ from the company name as a symbolic move to align employees within all its divisions.
‘By no means are we done yet’
The Accelerate! Programme is now in its third year, and showing signs of success. Shareholder confidence has returned and the share price has doubled, ‘but by no means are we done,’ said Van Houten. The process will take several years longer, but the company has its roadmap, its confidence and its spirit and these attributes are contagious, and visible to customers.
Van Houten referred back to his earlier mention of driving innovation into areas where there is opportunity to be meaningful to customers, and to where the company can add value. This is not where everyone else sits, where there is heavy competition, he said. Philips sets its horizon further out, and lets itself be guided by ‘mega trends’ in order to find unmet needs.
The rise in global population, increasing lifespans and chronic health conditions that need to be managed over decades rather than years, increasing urbanisation, sustainability, smart lighting and security means the company needs to team up with governments, architects and decision-makers. In China, Philips already works with the government on revenue-generating smart street lighting.
Digitisation is another trend, and there are predictions that every device will be connected. Philips has risen to the challenge by setting up a digital innovation laboratory – a late decision, admitted Van Houten, but the company is moving fast, with products like smart buildings and the crowdsourcing effort which accompanies the 'Hue' LED lamp, which can be connected to the internet. Philips has invited the development of software ‘apps’ that introduce new ways to use it.
Shift to emerging markets
Philips’s focus on added value is accompanied by a shift to emerging markets. “It’s amazing that many companies don’t expand beyond Europe,” said the Philips CEO. Philips will embrace emerging markets in China and India, and has a division which conducts research and development in China for China; China is now the company’s second biggest market after the USA. “Profitability in China is as good as in the western world, and we call it our second home. It offsets the shrinkage in Europe,” he said.
Competencies for innovation are never all in-house
Innovation comes from and through new business models and new locations, and from being agile enough to shift the business focus. “It sounds obvious, but if you don’t do it, then other companies will overtake you,” said Van Houten. But, he cautioned, you can’t do it alone. A company never has all the necessary competencies in its own house to do all the stuff it needs to do. It engages with universities and other institutes, with customers and with other companies. It can rapidly co-create in an agile way, make mistakes and quickly improve on them to gain business.
Move into uncharted domains, take risks
His major piece of advice to the Summit audience was this: Business must be prepared to go into uncharted domains and move towards the uncertainty of the future, and make it rewarding. Quick advances need cross-disciplinary teams and the absence of any ‘silo working’ mentality.
“We’re making great headway at Philips, but we have much to be humble about and much more to do. We consider the glass to be half full. Opportunity is out there, when we look for it,” he said.
“The Netherlands has every ingredient except for the determination and preparedness to take risks, and to ‘head back to the farm’ to get there. Instead of hunkering down and making ourselves prisoners of the situation, wouldn’t it be fantastic to get out? We can all help each other to step up and create value. We won’t get there if we don’t sail out of the harbour.”