Lighting up Philips (cont. )

By Nelson D. Schwartz, Fortune senior writer

illuminating the brand

Besides bringing in fresh blood like Ragnetti, Kleisterlee has been making acquisitions both in Europe and the U.S. to kick-start this change. Over the past 18 months Philips has shelled out more than $1.5 billion buying smaller lighting-technology firms, such as Lumileds, a Silicon Valley company that makes specialty diodes that go into cars and computers and high-end stores. On the health front Philips has spent nearly $2 billion acquiring U.S.-based companies like Intermagnetics, a maker of components for MRI machines.

Lighting looks especially promising. Philips LED bulbs offer low-heat, low-energy light with bright colors and have been used to illuminate buildings like Buckingham Palace. The company is also pushing its energy-efficient fluorescent bulbs to consumers as a way to curb global warming, arguing that switching from traditional incandescent bulbs in Europe alone would save $18 billion a year and reduce CO2 emissions by 59 million tons. Although they cost roughly seven times as much as incandescent bulbs, the fluorescent lights, Philips is telling shoppers, can last eight times longer and save them $15 a year.

As the new bulbs become more popular, Philips is pledging that its lighting division (annual sales: $7 billion) will deliver 6 percent annual sales growth, with profit margins of more than 13 percent. The early signs are that the marketing efforts are working: Sales doubled in 2006, and Philips got an additional boost when it joined with Wal-Mart in November to push low-energy lighting at the giant retailer's stores.

For all the advantages its bulbs might offer, the hard part for Philips has always been its lackluster name recognition among consumers, especially in the U.S., where few people know that Norelco shavers or Magnavox TVs or Sonicare toothbrushes are among the Dutch company's offerings.

In 2005, Ragnetti replaced Philips's defensive-sounding "Let's make things better" campaign with the "Sense and simplicity" slogan. "The multiplication of options with technology is good in principle, but it creates stress," Ragnetti says, ticking off examples like difficult-to-operate digital cameras and confusing remote controls. Instead, Philips wants to emphasize easy-to-understand machines, like a coffeemaker with just two buttons: one cup or two.

What's more, Philips is also raising awareness by rebranding products as Philips Norelco and Philips Sonicare, as well as doing some high-profile media buys like spending $2 million to be the only advertiser on an episode of CBS's 60 Minutes in October.

The goal is to reach the consumer who Kleisterlee and Ragnetti believe buys the bulk of Philips products, whether it is a hospital administrator looking for a $1 million CT scanner, or a weekend shopper deciding on a $3,000 flat-screen TV or a parent purchasing a $139 electric toothbrush: age 35 to 55, annual income greater than $70,000, college-educated and evenly split between men and women. "Our positioning used to be all over the place," says Kleisterlee. "That's how 'Sense and simplicity' was born. There should be only one way of seeing the brand."

Big challenges ahead

Although the campaign seems more focused than previous efforts, sometimes life is more complicated than marketing slogans. In December the company got some publicity it didn't need: LG.Philips disclosed it was being investigated by the U.S. Department of Justice, along with government agencies in Korea and Japan, for allegedly conspiring with other manufacturers to set prices of LCD screens.

For his part, Kleisterlee insists that the day-to-day management of LG.Philips, which is based in Hong Kong, is completely separate from his company, despite the 32.9 percent stake Philips owns. "It's a public company where we are a large minority shareholder," he says. "It partly bears our name, but it's a very Korean company."

With the semiconductor division sold and more than $10 billion in cash on hand, Kleisterlee faces two less glamorous but equally challenging tasks in the year ahead.

The first is putting that money to use. Besides a $5 billion share buyback due to be completed by the end of the first quarter, the most likely scenario is an acquisition in the medical or lighting sectors - or maybe both. "We have several U.S. companies on our radar screen," he hints. "But I definitely prefer friendly deals to hostile ones."

The other challenge is breaking through the 30-billion-euro mark in sales, where Philips has stagnated for years, while also delivering the earnings growth Wall Street wants to see. That means raising profit margins from the current 5.9 percent to the target of 7 to 8 percent - and any hint that growth is fading would probably send Philips shares tumbling.

Indeed, for all of the company's recent successes, memories of Philips's past failures linger among investors. "The market is taking a show-me attitude," says Merrill Lynch analyst Jonathan Crossfield. "Neither we nor other analysts are giving them full credit for their growth target."

But Kleisterlee has taken his company this far, and he's confident the way ahead is just as bright. After spending the "1980s and 1990s restructuring and trying to find our way," he says, "my goal is to leave behind a company with a successful path of steady, profitable growth."


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