Having shown an impressive array of abilities since he joined the Phillips in 1986, François van Houten was a natural choice for CEO when Gerard Kleisterlee stepped down in 2010

Philips will be hoping that this year is a little kinder than the one that preceded it, which saw the company suffer a 66 percent fall in net income, with profits plummeting from €1.2bn in 2013 to just €411m at the end of last year. 2015, therefore, will be a challenge for the electronics company, but luckily its CEO, François ‘Frans’ van Houten, has a clear vision and strategy that will help refocus a brand that has suffered from the effects of over-diversification.

Though it is best known for its line of consumer electronics that include everything from domestic appliances to toothbrushes, those unfamiliar with the brand may be unaware of its participation in other markets. Less widely known is that the company is heavily involved in the healthcare industry, supplying hospitals with MRI scanners and X-ray equipment, among other things, as well as possessing an impressive range of lighting products.

But, while the company’s consumer electronics arm has performed adequately, the same cannot be said of its healthcare and lighting divisions, with the pair’s poor performance causing Philips’ share price to take a tumble. It fell by more than six percent to €25.12 after it was announced that the two divisions were unlikely to hit their sales targets for the next two years.

Luckily for shareholders, the news was acted on quickly by Philips’ CEO, who made the decision to split the company into two, joining its healthcare and consumer goods business under the same roof, while keeping its lighting unit separate. The purpose of the move was to help both divisions focus more on their respective products, improve performance and attract additional financial investment. But the decision is not just about trying to improve sales figures and rescue the company’s share price. It is part of a much wider plan by the Dutchman to transform the 123-year-old company. As he declared in a recent Financial Times interview, “the phoenix is coming out of the ashes.”

Splitting up
The decision to split in two may have come as a bit of a shock to those who know about Frans van Houten’s history with Philips. For starters, his father was once a member of the board that he now chairs so, although it is a publicly owned company, his position within it no doubt comes with a certain sentimental attachment. In a lot of ways he is very much a company man, something that is a bit of a rarity in the world of C-level executives, who often reach the top after a number of years building up experience in various companies. Indeed, he embarked on his distinguished career with Philips back in 1986, as a member of their sales and marketing department and, apart from a brief stint away, has been with the company ever since.

Needless to say, his experience within the company is extensive, providing him with not only deep knowledge of how the business operates, but also a personal stake in its continued success and survival. These qualities are likely what led to him being appointed CEO of Philips back in April 2011, and these same attributes are what the company requires in order to compete, strive and survive in such a highly competitive market.

Though he holds close ties with the business, they have not blinded him from seeing its flaws, far from it. Instead, they have helped him in understanding where the business is failing and how to address the challenges that it faces. One of the biggest problems he has identified, and a large part of why he made the decision to split the company up, was the recognition that it had spread itself a little too thin by over-diversifying its product line to the point where it exceeded demand, bringing with it a dramatic dip in overall profits.

It is also why he made the decision to focus his, and the company’s, attention on healthcare and lifestyle products, while leaving the lighting division open to alternative ownership.

At this stage, it is unclear what the future will hold for the Philips lighting business. It could see the company getting an offer from a competitor simply looking to expand its market share. But for now, the CEO has said it will continue to operate under the Philips name, and that the decision to split is designed primarily to help both companies flourish once more.

“We are preparing Philips for the next century”, said Van Houten. “Giving independence to our lighting solutions business will better enable it to expand its global leadership position and venture into adjacent market opportunities.”

Shifting focus
It is not much of a surprise that the Dutchman has chosen to devote more of his time to healthcare. Though both departments failed to meet sales targets, healthcare did manage to make double what lighting was able to muster, with its newly acquired HealthTech business bringing in sales of €15bn in 2013, while lighting only managed to make €7bn. But poor sales figures are not the only reason for his shift in focus. It is also about the direction in which Van Houten feels the healthcare market is heading, and how Philips can capitalise on it.

“Globally, governments are looking for ways to deliver better and more affordable healthcare beyond hospital walls”, he explained. “To enable this revolution, healthcare has to be delivered as an integrated service.” No wonder he has merged Philips’ healthcare and consumer electronics units into a single, unified entity. By doing so, the new entity will provide the necessary platform for the company’s future growth and allow it to better meet the demands of the market moving forward.

One of the newer products to come out of the recent merger has been a smart air purifier. Designed to aid individuals with respiratory problems, as well as help people combat the rising pollution found in densely populated cities, the product exemplifies the direction the company seems to want to move in. It’s a perfect amalgamation of the two divisions – a healthcare product for the consumer market.

The new direction is a smart move by Van Houten. The economic crisis has left many countries, particularly those in Europe, strapped for cash and, consequently, many of the world’s healthcare systems have been underfunded. Providing private companies with an opportunity to step in and fill the void by offering innovative solutions can hopefully reduce some of the pressure weighing down on the public health sector.

This gap in the market has provided the impetus for the company to begin working closely with healthcare professionals around the globe as, by doing so, the electronics company can better understand the needs of hospitals and those of their patients. Furthermore, it will allow the newly formed company to develop innovative technologies that can assist healthcare systems in desperate need of support.

Circular thinking
The future of Philips clearly lies with health and lifestyle products, with Van Houten admitting late last year that, though he wanted the company to remain a shareholder and partner of the new lighting spinoff, it is possible it may eventually hold only a minority stake. However, should this materialise, it would be a shame for all involved, as shareholders will lose the Dutchman’s impressive insight into the industry, along with the plans he had for shaping it.

“The lighting industry is experiencing the largest transformation since the invention of the light bulb. LEDs and connected lighting technologies are catalysing the shift from lighting products to lighting solutions and systems”, Van Houten told Business Beat. “We need to change how we build and run our cities. One key opportunity is to create a safer and healthier environment through energy-efficient lighting and replace the habits of the linear economy with principles of the circular economy.”

Before announcing the split, he had embarked on a revolutionary new way of looking at lighting in an attempt to combat the challenges that the industry was facing. As he saw it, due to the pace of technology and the global economic downturn, businesses and local governments had become reluctant to make large investments, leading Van Houten to consider delivering lighting as a service, not a product.

“After all, why do these customers buy light fixtures and luminaries? It’s not for the fixture but for the light itself”, he explained. “We therefore now sell lighting as a service: customers only pay us for the light, and we take care of the technology risk and the investment. We also take the equipment back when it’s the right moment to recycle the materials or upgrade them for reuse.”

But the principles of the circular economy will continue to apply at Philips Healthcare, where Van Houten has established leasing contracts with numerous healthcare providers. However, he admits that it has been a struggle to convince the industry of his vision, with many initially hesitant at the concept of having what they see as second-hand products circulating around hospitals and other institutions.

“We still have much more to do given the size of the market, but as we work with hospitals and establish ourselves as technology partners and not just sellers of a ‘box’, we can more easily convince customers of the mutual benefits of circular-economy principles.”

There is still a lot to of work to do if Philips and its CEO are going to make back what they have lost, with a lot more restructuring in the pipeline. Last year was a real challenge for the company. Efforts to transform the business were hampered by softness in end-markets, with China’s economy forced to slow to provide more sustainable growth and Russia’s looking more and more unstable with every passing day, due, in part, to heavy sanctions placed on it by the US and EU. To add to the company’s market woes, foreign exchange issues arising in emerging markets have further dampened its revenue streams. The electronics company might be down, but it is certainly not out. And with Van Houten at the helm, Philips is more than capable of accomplishing his dream and rising from the ashes.