Lighting up Philips (cont. )

By Nelson D. Schwartz, Fortune senior writer

"It was clear that if you wanted to work for shareholders, it made no sense to be in the semiconductor business," says Paul Smit, senior vice president for strategy and business development in medical systems and a 28-year veteran of the company. "What good is being in lighting and medical if your stock moves with the SOX semiconductor index?"

What made the decision so difficult, says Smit, was that Philips, like many European companies, had historically followed what he terms "the Rhinelandish model," where shareholders' interests were balanced - sometimes outweighed - by the needs of employees and local citizens. When Cor Boonstra, Kleisterlee's predecessor, first hosted a day for financial analysts in the late 1990s, recalls Smit, "people were really shocked. The attitude was, Who are these people?"

Financial discipline was also an afterthought. "There was always enough money," says Theo van Deursen, a classmate of Kleisterlee's from university who is now in charge of Philips's lighting division. "When I came back from Korea in the 1980s to run a unit in Eindhoven, I wasn't making my numbers. But nobody asked. Philips money wasn't real money."

Although Boonstra restructured in the 1990s - selling off PolyGram to Seagram, for example - Philips remained a collection of varied product lines with a high-wage, heavily European manufacturing base. "We had overstretched ourselves in the late 1990s," says Kleisterlee. "The rules of the game were changing, and the days of vertical integration were over." Kleisterlee pushed to outsource production of its TVs, CD players and components to companies like Flextronics and Jabil, while keeping the license to popular brands like Magnavox.

Kleisterlee also created joint ventures with Asian rivals like Korea's LG to stay competitive in the increasingly commoditized market for TV picture tubes and flat-screen LCDs. Today Philips owns a 32.9 percent stake in LG.Philips LCD, worth roughly $3.5 billion, which it is gradually selling off.

All-business

Although Kleisterlee had spent years in Asia running Philips's components business, he says he had no special attachment when it came time to spin it off or even shut parts down. "I've sold several businesses I managed, including the first one I ran, professional audio," says Kleisterlee without emotion. "I had no problem with it."

Even as he unloaded units whose future he didn't feel was promising, Kleisterlee has continued to shut factories and move manufacturing in profitable divisions like lighting to lower-cost locales such as Poland, Mexico and China. A decade ago Philips had 110 factories for bulbs and other lighting products; today it has fewer than 70, and 60 percent of its 50,000 employees are in low-wage countries.

Philips is now closing another three lighting factories in Holland, laying off more than 500 workers, although it is still investing in the production of high-end automotive bulbs and street lights in Germany and Belgium. "When people ask me what the future of European manufacturing is, I say complex systems," explains Kleisterlee. "We know the future has to be higher added value and services. China and India are catching up, but as long as we keep moving, that's where we will still have something to add."

Although even friends and people who have been colleagues for decades, like van Deursen, describe Kleisterlee as "serious," he is not a micromanager. Van Deursen, who runs lighting, and Andrea Ragnetti, who oversees marketing as well as domestic appliances, say they typically communicate with him at least once a week. He's not the kind of CEO who likes to e-mail or call at all hours. "If things go well and you keep him updated, he leaves you to be free," says Ragnetti. "I've had all the freedom I've wanted."

Ragnetti, the company's first chief marketing officer, is typical both of the type of manager Kleisterlee is trying to attract as well as the culture he wants to create. At 46, Ragnetti is a decade younger than several other top execs. He isn't Dutch - Kleisterlee is trying to broaden the mix of senior execs, drawing talent from around Europe as well as increasing the number of American and Asian managers.

"The language we use in the building is English," says Kleisterlee. "Dutch is the exception." And perhaps most significantly, Ragnetti is not a Philips lifer; he owned his own marketing company and worked for Telecom Italia (Charts) before joining Philips in 2003.

Along with overseeing Philips's new "Sense and simplicity" marketing campaign, Ragnetti is also spearheading an effort to change how Philips employees think of the company. During the past decade, he says, "the energy was focused on downsizing and selling companies." With the semiconductor division gone and much of the cutting done, Kleisterlee and other top execs are eyeing growth opportunities, but the culture hasn't caught up. "If I give employees a cost-cutting exercise, they do it in three minutes," says Ragnetti. "A growth exercise is more of a challenge."