Philips' Big Idea

Can Gerard Kleisterlee and his team make Philips Electronics the leading player in health care technology? BY WILLIAM J. HOLSTEIN

After years of earnings disappointments, Royal Philips Electronics is attempting a transformation it hopes will catapult it into a leadership role in the U.S. health care technology market. CEO Gerard Kleisterlee and his management board sat down in New York to explain their strategy. Here are highlights:

Q: How are you trying to change Philips?

Kleisterlee: We are trying to create a company that, in a more predictable way, generates value for its stakeholders and particularly shareholders. We have to create a portfolio that is less volatile. In the portfolio I inherited, medical systems has stability and good margins. We also felt we could generate more growth in our lighting division by driving innovation and also in our domestic appliances and particularly personal care products such as shaving and dental care. That is the part of the portfolio where we have margins in the teens and opportunity to drive growth through innovation or acquisition.

Q: What about the less promising areas?

Kleisterlee: On the other side of the portfolio, you have volatile, low-margin businesses, such as the high-volume electronics businesses. The consumer electronics division is an element of that. We were fully integrated vertically with a components division where we made cathode ray tubes, liquid crystal displays and optical drives. The components division was getting squeezed in the middle, so we dissolved it and divested a number of operations. We de-verticalized our consumer electronics business. We said, "We have to emulate the Dell model. This is an industry that's going to work like the computer industry, which means you focus on designing your product, sourcing it in Asia, then leveraging your brand and your clout in your distribution channels." We've done that successfully in the U.S. and elsewhere, and turned more than 10 years of loss-making operations into a profitable and fastgrowing market position.

Q: So China and other manufacturing countries are commoditizing some areas of your business and you need to get repositioned in a hurry?

Kleisterlee: Yes, we've done that well ahead of most of our competitors. We use the strong presence that we have in China to optimize our sourcing. Most of our electronics comes out of China.

Q: But your real emphasis is on the higher value pieces of your portfolio?

Kleisterlee: Yes, we've made significant investments, particularly in the U.S., to strengthen our medical business. We acquired five companies in the U.S. by 1998 and took some time to consolidate. Most recently, we've acquired a medical information technology company in Brisbane, Calif., called Stentor. We've strengthened our lighting division by acquiring Lumileds, which had been a joint venture with Agilent Technologies.

Q: Lighting seems like it would be a commodity sector.

Kleisterlee: Not at all. That's a huge misconception. When you talk about lighting, most people think about buying lamps in Wal-Mart. But most of the lighting we do is office lighting and public lighting, and we have a number of OEM activities such as automotive lighting. We are aimed at the professional segment, not the consumer.

Q: Give me some numbers that show the overall magnitude of what you're trying to do.

Kleisterlee: Six years ago, medical systems represented 9 percent of our activity in the U.S. That's now 41 percent. Other activities such as the component division represented 23 percent of our business. That's now down to 4 percent. Most of that is gone. It's been replaced by health care. Globally, medical systems used to be 9 percent of our portfolio and now it's 21 percent.

Q: Why does medical seem more predictable?

Kleisterlee: There is no seasonality in people getting ill. Demographics also point toward health care being a growth industry everywhere around the world. Spending on health care globally is growing faster than GNP. People are getting older and they'd like to be healthier. They demand more and better care and technology can provide that.

Q: Which of your technologies are most promising in the medical sector?

Ad Huijser, chief technology officer: We have long been very strong in X-rays and X-ray applications. We also have introduced a broad spectrum of new technologies, including in magnetic resonance and ultrasound. But it's not only the technology that counts; it's the way that doctors use these technologies in their hospitals. The ease of use, the simplicity and the economics are very important.

Kleisterlee: If you take an MRI or a high-speed CT, you get a terabyte of data.

Huijser: Yes, and we can do that in real time, which makes it possible to have realtime imaging and observe what happens when organs act, when a heart beats. We call that 4D, with the fourth dimension being time.

Q: The American health care system in some ways is very primitive. Other sectors of this economy are much more computerized.