Philips Electronics N.V. Business Information, Profile, and History

History of Philips Electronics N.V.

Inspired by the visions and leadership of several generations of the Philips family, Philips Electronics N.V. (known as Philips Gloeilampenfabrieken, or Philips Incandescent Lamp Works, until 1991) has grown from a small light bulb maker into one of the largest and most successful electronics firms in the world. Throughout the company's history, the family has sustained a strong commitment to technological innovation, market expansion, and stringent management policies.

An efficient organizational structure has helped maintain management's hold on the increasingly gargantuan company. Philips Electronics N.V. acts as the holding company of the Philips group, with nine chief product divisions responsible for global product policy and approximately 60 national organizations responsible for conducting general policy in their respective geographical markets. Into the 1990s, the nine product divisions remained: Communications Systems; Components; Consumer Electronics; Domestic Appliances and Personal Care; Industrial electronics; Lighting; Medical systems; Semiconductors; and Polygram (recorded music and music publishing). Consumer Electronics--with 47 percent of turnover in 1992--remained the most important division, especially as Philips poured new resources into R&D and marketing in order to directly compete with Japanese manufacturers and capture a greater share of that market into the 21st century.

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. 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 businessman. 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 turn 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 N.V. 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 research-and-development 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 Lumière 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's Lamp Works set up more overseas subsidiaries in Asia and Africa, as well as in Europe.

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 nonoccupied 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.

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 were now possible. With export to Common Market countries made easier, a new approach to product development was also necessary. Philips's factories were gradually integrated and centralized into International Production Centers--the backbone of its product divisions&mdash it made the transition from a market-orientated to a product-oriented business.

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 video cassette 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 work force.

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 American 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 research-and-development 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's 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; in 1988 Philips's profits rose 29 percent. 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. Indeed, by 1995, consumer electronics accounted for more than 35 percent of the company's sales revenue.

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 S.A. 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 research-and-development costs with other large corporations such as AT&T, Siemens A.G., and Whirlpool through joint ventures.

Despite these moves, Philips got slammed in 1990, reporting a loss of $2.2 billion for the year. The board of directors drafted Jan Trimmer as president to return Philips to profitability. Trimmer's expertise, and his long-standing experience at Philips, made him qualified for the task. From 1983 to 1987, he was president and CEO of PolyGram International, the company's music-industry subsidiary; and in 1987 he was promoted to head the high-profile consumer electronics division. Among his many credits, Trimmer was instrumental in spearheading the industry's switch to the digital audio compacts disc (CD), which spun out tremendous profits for Philips throughout the 1980s. With that under his belt, the new president intended to emphasize new developments in CD technology, as well as aggressive R&D in other high-tech areas, to ensure Philips's market leadership going forward.

Trimmer's initiatives were broad, bold, and swift. By implementing a so-called operation Centurion, the company hoped to make itself more responsive to the competitive marketplace by raising productivity, stimulating cost consciousness, and minimizing office bureaucracy. In 1991, the company's name was changed to Philips N.V. In July of that year, the company announced a plan to reduce working capital and the size of its property portfolio by several billions of guilders within several months.

In late 1991, Trimmer beefed up his ambitious reorganization plans for Philips by hiring former Hewlett-Packard executive Frank Carrubba as executive vice-president to take command of virtually every link in the product chain, from research to purchasing and manufacturing, and "fix the whole thing," according to Jonathan B. Levine in a September 6, 1993 Business Week article. Carrubba's experience as a star computer engineer at IBM and his reputation as an "agent for change" at Hewlett-Packard prepared him for the challenges at Philips. One of Carruba's first obstacles was to overcome barriers between R&D and product groups and factories, which had repeatedly stalled Philips's introductions of the right products at the right time. In response, Carrubba spearheaded a program of five-year product plans with labs and factories. Other projects initiated by the new VEP included cross-divisional task forces to develop products and businesses in order to bolster high-value, software-rich products and services, as well as R&D contracts with universities and institutions, with R&D objectives tied to broad corporate strategies in order to compensate for cutbacks in R&D budgets since the 1980s.

Philips supplemented its internal rehabilitation program with new alliances and profit-oriented sales. In 1991 it announced a partnership with Nintendo to develop CD-based video games. Philips also sold most of its computer business and its stake in Whirlpool (appliances) back to that company. In 1992, the company consolidated its VCR and camcorder operations at Grundig, the German electronics manufacturer, while consolidating its 36 percent stake in Grundig with the company's own accounts. Philips also collaborated with Motorola to establish a state-of-the-art facility to manufacture video circuits for the new multimedia CD player. In 1992, Philips sold its Magnavox Electronic Systems units and its interest in Matsushita Electronics. And the following year Philips's music division turned up the volume by adding the revitalized Motown label to its fold of record companies.

Philips continued to ply its strategy of gaining market share by developing new products and then buying into companies that sold them directly to the consumer. In 1992, for example, Philips bought a 25 percent stake in Whittle Communications, a company that produced a news program for American teens and numerous software packages that could be upgraded using Philips' CD-Interactive system. Though such a strategy proved successful in numerous other ventures, Philips wrote off most of its $175 million investment in the failed Whittle venture in 1994.

In the 1990s, Philips placed increasing emphasis on R&D, allotting more than two-thirds of that budget toward research directly linked to the company's products divisions. With consumer electronics still occupying the lion's share of the company's profits, it was not surprising that many key products in the development pipeline were in that division. Such products included: digital compact cassette (DCC), a digital extension of the compact cassette system, providing both recording and playback capabilities; High Definition Television (HDTV), with better clarity of vision and wider screens than conventional televisions; D2MAC, the intermediary stage between traditional television and HDTV; and CD Interactive (CD-i), optical compact disc that merges audio, video, text and graphics into one digital system. Intense research was also conducted toward development of screen telephones, flat panel displays, and multifunctional digital signal processors for multimedia markets--an area of expertise largely assigned to the company's new TriMedia division based in the United States.

Philips's aggressive R&D efforts boosted product development in other divisions as well. The lighting division moved closer to development compact fluorescent and halogen lighting, featuring compact designs and very high efficiency. Other lighting systems combined lighting with security, telephone, environmental, and computer systems. Responding to new burgeoning applications for semiconductors, the company also beefed up its semiconductor research, signing a cooperative agreement with IBM in January 1995 to develop new semiconductors in a jointly owned facility in Germany, while forging ahead in DRAM process know-how.

Despite the company's precedent of excellence and innovation, several of its research endeavors ran into obstacles in the early 1990s, shedding uncertain light on their chances of translating into sure market success. In the area of CD-i and DCC technology, for example, many analysts projected that Philips had missed the opportune time to claim market leadership. CD-i met stringent competition from a flood of other multimedia products, and DCC ran head-on against Sony's MiniDisc system (MD), with which that company was trying to set the industry standard as well. Still, Trimmer insisted that MD and DCC systems each met different consumer needs and that there was room enough for both to succeed in the marketplace. In the closely-related introduction of Multimedia CD (MMCD) products, Philips and Sony eventually joined forces in an attempt to win market share away from a similar product co-developed by Toshiba and Time Warner, Inc. In 1995, Sony and Philips were pushing a single-sided product that could store the equivalent of 135 minutes of a movie (or any combination of images, computing and audio recording power); while the Toshiba/Time Warner product--called a Super Compact Disk--could store much more information with its double-sided format, but required new hardware that was incompatible with older CD-ROMs. Ultimately, the only sure test of market share remained time ... and marketing prowess, which both Philips and its competitors possessed in equal share.

Still, Philips' future looked bright, not only because of its expertise in lighting systems, but because of its long history of impeccable research and innovation. With its renewed focus on R&D, as well as its aggressive cost-cutting strategies, the company's diverse products in lighting, consumer electronics, domestic appliances, professional systems, and components remained poised for larger market shares. Philips, after all, had developed the cassette tape, the VCR, and the CD, which all became standards in consumer electronics industries. With the advent of a new age in interactive technology, there was no reason to doubt its supremacy in those technologies as well.