SLOW PAYOFF FOR NEW PHILIPS PUSH Jan Timmer is rolling out innovative products, but besides the Japanese he's got to battle the Dutch electronics giant's almost immovable corporate culture.
By William Echikson REPORTER ASSOCIATE Ricardo Sookdeo

(FORTUNE Magazine) – ONLY A FEW months ago Jan Timmer, president of Dutch giant Philips Electronics, looked poised to win his high-tech showdown against the Japanese. Since taking over in 1990, Timmer has shaken up Philips's heavy bureaucracy, hacked away 45,000 jobs, and streamlined its hodgepodge of products, selling such businesses as appliances and computers. Then he put Philips on the offensive with a series of innovative consumer electronics products. First out was the Imagination Machine, which Philips introduced in the U.S. late last year and is about to launch in Europe. The company originally called it ''compact disk-interactive,'' or CD-I, and it is still widely known that way in the consumer electronics industry. The CD-I player hooks up to an ordinary TV set and uses a compact disk to reproduce sound and pictures. Instead of just passively watching, viewers can stop the presentation at any point to explore particular subject matter more deeply. One disk, for example, leads you on a tour through the Smithsonian Institution. With the click of a remote control, you select the exhibit you want to see. Another allows you to play all the golf courses around Palm Springs, California. Scheduled to follow this fall in both Europe and the U.S. is the digital compact cassette, or DCC, which records and plays music with the fidelity of compact disk sound. And down the road, Philips engineers are readying a new generation of high-definition television sets. But the ambitious battle plan is slow in paying off. In the first half of this year, Philips's consumer electronics division lost an estimated $250 million to $300 million, and Timmer acknowledges that it may be two years before the businesses making TV sets, compact disk players, and related products return to profitability. What's more, the company recently has been shaken by some high-level resignations, and the DCC introduction has fallen behind schedule. Instead of being in stores this September, the new device won't make it until late in the autumn. ''We shot ourselves in the foot'' by giving a too optimistic launch date, Timmer admits. Investors and analysts are fleeing from the turmoil. Philips stock has sunk some 35% since June, settling recently at $15 a share, down from a high this year of $23. Philips is Europe's last big integrated electronics group, the only survivor to battle Sony, Matsushita, and other big Japanese companies in the highly competitive European market. Stagnant demand and vicious price wars are squeezing profits throughout the industry. Even the Japanese powerhouses have been bloodied. Philips's problems go beyond a tough market. They show how difficult it is to inject dynamism into a secretive, slow-moving, bureaucratic corporation. They also raise disturbing questions about whether any European company will ever be able to compete against the seasoned Asian audio-video warriors. Says Timmer: ''You just can't change a deep-rooted corporate culture in one or two years. It takes at least five years or longer.'' If anyone can shake up sleepy Philips, it's probably Timmer. A baker's son who couldn't afford a university education, he represents a sharp break from his predecessors, pinched patricians who delivered their messages with the gravity of government ministers. Timmer, 59, is blunt and aggressive. He made his mark at the profitable Polygram music subsidiary pushing compact disk technology. While doubters wondered whether CD would ever catch on, Timmer kept charging. ''At the time,'' he recalls, ''there were an unbelievable amount of Doomsday Charlies who said, 'Don't do it.' If we had listened to them, the CD would never have been launched.'' Or at least not by Philips, since the company had developed it with Sony. Promoted to head of consumer electronics in 1987, Timmer orchestrated an impressive turnaround. He laid off 5,000 people, then established joint production ventures with competitors in Japan, Korea, and Singapore. Terrified middle managers -- once as secure as civil servants -- began to toil like the Japanese. Timmer's manner and methods, not to mention his broad shoulders and powerful build, earned him some fearsome nicknames, including Hurricane Gilbert, the Butcher of Eindhoven (where the company is headquartered), and, most recently, Norman -- for General Norman Schwarzkopf. Philips certainly needs a strong leader. From its beginnings a century ago as a light bulb manufacturer, it now is a sprawling electronics empire, with 400 factories and operations in 60 countries. Under such brand names as Magnavox, Norelco, and Philco, the company has produced almost everything that can be plugged into an electrical socket or equipped with a battery -- and a few things that can't. Though some products have disappeared in Timmer's pruning -- Philips no longer makes toilets or saxophones -- critics still say the company remains unfocused. ''What are they doing in such areas as medical systems?'' asks Chien Lie, a security analyst at Banque Paribas in Amsterdam. ''I think they should get back to basics, concentrate on two or three areas'' such as lighting and consumer electronics. Philips has always been renowned for technology. It invented the videocassette recorder and the compact disk. The problem is that it has rarely been able to translate great new products into robust sales and profits because it has been sluggish in responding to market trends. The Japanese took both the compact disk and the videocassette and ran much farther and faster than Philips did. THE COMPANY'S arrogance is legendary -- and self defeating. When Philips tried to sell light bulbs in India, for example, it refused to adapt its bulb to India's floating voltage. ''Philips comes in saying, 'Let India adjust to us,' '' recalls Rob Sweers, another analyst at Banque Paribas. ''So what happens? The Indian buys his Philips bulb and naturally it blows. He goes back and buys another, and the same thing happens. The third time, he buys a Korean bulb. The Koreans adjust their standards.'' In the early 1980s this arrogance produced one of the classic marketing goofs of all time -- Philips's video disaster. Though generally considered technically superior, the Philips V2000 standard was outflanked by the Japanese with VHS. (It's worth pointing out, though, that Sony's Betamax lost out too.) Philips's prices were high, and its quality was poor. Worst of all, the company did almost nothing to persuade software makers to produce films and shows using the V2000 format. Soon, even Philips's own North American operations dropped the V2000 system in favor of VHS. In the end the company bowed to reality, pulling the V2000 off the market. Recalls Henk Bodt, head of Consumer Electronics: ''We had a better product, but the market share of VHS was such that most of the software was available in VHS.'' Philips recognizes that it needs a new, sharper marketing edge. In direct contrast with its video fiasco, the company developed DCC with Matsushita and has taken care to line up most major record companies before the launch. The product can use present analog audiocassettes as well as the new digital ones, giving it another big edge over Sony's competing minidisk, a recordable compact disk that is incompatible with past systems. ''This time we have both the carrier and the music,'' Bodt boasts. ''From day one, DCC starts with an enormous repertoire of recorded music.'' DCC's introduction was scheduled for the beginning of September in Europe and the U.S., and early indications were that the product would be hot, hot, hot. Then in late July, Philips announced that unexpected bugs would push back the launch. When it does arrive by the end of October, DCC will not be available throughout the Continent, but only in Britain, Germany, France, and the Netherlands. It will hit the U.S. around the same time. The delay will wipe out the big lead Philips would have had over Sony, which plans to bring out its competing product in December. It has also shattered already weak confidence in Philips's ability to keep its word. The company also faces daunting problems with its two other key products, CD-I, the Imagination Machine, and high-definition television (HDTV). Initial reviews for CD-I have been mixed. Tandy Corp. recently dropped CD-I from its Radio Shack stores, and Gaston Bastiaens, the top executive heading Philips's CD-I program, quit to take a better offer at rival Apple Computer. Though Henk Bodt calls CD-I ''a complete new product that will change the way we look at the world,'' it is not without competition. It is similar in some ways to CD-ROM, which uses a special disk player to present text, pictures, and music through a personal computer. The big advantage of Philips's system is that it uses a TV set, and there are still more TVs around than PCs. To spur sales, the company cut the suggested retail price in the U.S. from $999 to $699. But until more software is available, Philips faces a gigantic marketing challenge. ''Jan Timmer has in the past compared multimedia to the smell of a rose,'' says Barry Fox of Audio Week Magazine. ''How do you describe the smell of the rose to someone who has never smelled one?'' Disks can cost up to $59. In addition, a format war may be brewing. Apple, Toshiba, and Tandy are rumored to be readying their own multimedia machines. EVEN MORE SERIOUS technical and commercial doubts hang over Philips's plans for a new-generation HDTV. Most Europeans receive TV signals from earthbound transmitters, so European broadcasters favor abandoning Philips's satellite- based high-definition standard in favor of the digital system being developed in the U.S. Though the digital signals produced by the American system can be bounced off a satellite, they can also be transmitted through microwaves or cable.

Executives at Philips reportedly are divided over what to do about HDTV. Pieter Groenenboom, who led the company's HDTV program, recently was bumped upstairs to an advisory council. The company said he had sought a less strenuous job, but analysts think he was moved out because he wanted to kill HDTV. Philips's HDTV future now depends on additional aid from the European Community. Timmer is pressing for a subsidy of $1.2 billion to help produce and broadcast programs. The EC is scheduled to make a decision by the end of this year. If it doesn't approve the subsidy, or substantially reduces the amount, Philips could be forced to write off its entire HDTV investment. ''That would mean an enormous waste in capital,'' says Timmer, while declining to disclose how much Philips has invested in the project. The reluctance to give hard figures plagues Philips's campaign to regain investors' confidence. As much as its marketing and product failures, investors and analysts say, Philips's present plight is exacerbated by the way the company handles shareholders. Unfamiliar accounting methods are adjusted with bewildering frequency, figures are hidden under the company's many divisions, and requests for information are often rebuffed. ''When you expect good results, you get bad results,'' complains Rudi Broeder, managing director of Suez Kooljman NV, the Dutch division of Banque Indosuez. ''And when you expect bad results, you get good ones.'' Timmer typically is refusing to flinch. Though he admits further job reductions can be expected, he denies that the company plans to sell any operations to raise cash. DCC and CD-I will eventually succeed, he insists, just as the compact disk did in the 1980s. As for HDTV, he says the company's exposure has been overstated. ''Philips won't go bankrupt'' if the company has to write off HDTV, Timmer says. ''All the gloom and doom is exaggerated.'' Philips no doubt retains a strong technological base, with world market leadership in a wide range of products, a broad distribution network, and an acknowledged record of innovation. The problem is that technological superiority may no longer be the key issue in consumer electronics. Marketing agility and price have become the crucial competitive factors, areas where the | Japanese hold a distinct advantage. In his war to save Europe's electronics standard-bearer, General Timmer simply may not have a nimble enough strategy to overcome his Japanese foes.