Let’s Make Things Better

My second book about Philips Electronics. In the years 1990-1997 Philips was saved from bankruptcy, but also faced strategic indecision and a succession drama. A huge bestseller. In Dutch. Re-published as an e-book in 2016.

Review, February 1998
by: Barbara Smit, freelance journalist for a.o. the Financial Times

Frank Carrubba was filled with wonder as he strolled around the Philips laboratories in Eindhoven, shortly after his recruitment as a Chief Technology Officer eight years ago. The American, a former board member of Hewlett Packard, later said that he had felt like a child in toy store, thrilled by the electronic gadgets and other ingenious novelties that surrounded him. With such wealth of expertise at hand, Philips seemed certain to win the next technological battles. Carrubba quickly sobered up, however. Knowing the trends in the consumer electronics market, he had come to the conclusion that Philips should urgently invest in multimedia products. This stance was supported at the highest level by Jan Timmer, the chairman who rescued Philips from the brink of collapse in the early nineties. But when it came to the crunch, the executive board hesitated to make a clear, strategic commitment.

For about two years Carrubba watched in growing exasperation as the management continued to postpone decisions. Until in November 1993, at a meeting of the Group Management Committee, he could not contain his frustration any longer. In no uncertain terms, he told his colleagues that Philips was wasting crucial opportunities in the multimedia arena, which was likely to determine the future of the electronics market.

The outburst was understandable. After all, Carrubba was one of the outsiders whom Timmer appointed in the early nineties to inject fresh and expert blood into the management of the troubled electronics group. He had never witnessed such indecisiveness before. But for those who had watched Philips in the previous decades, this was an all too familiar phenomenon.

Marcel Metze, a Dutch investigative reporter, has already exposed the inconsistencies of former Philips managers in “Kortsluiting” (short circuit). Published in 1991, this best-seller painfully detailed the absurd blunders committed by previous Philips leaders, as well as the structural shortcomings that lead to the company’s near-bankruptcy one year earlier. It helped explain how Philips had ruined its technological ingenuity – through managerial incompetence, arrogance and bureaucracy.

In the following years many believed that this era would come to an end, as Jan Timmer launched radical cutbacks and vowed to turn around the Philips culture, to the benefit of customers. But Metze’s latest book, “Let’s make things better”, makes it clear that Philips was still crippled by its cultural heritage when a bitter Timmer relinquished his chairmanship in October 1996, and stepped down as a member of the non-executive supervisory board in February 1997.

The book, published in December last year, contains many crunchy revelations about boardroom squabbles and other clashes. It describes the most memorable episodes of Timmer’s chairmanship (1990-1996), from the Centurion rescue operation to ill-fated product launches and timid investments in the media business, as well as the early days of Cor Boonstra’s reign. But perhaps most interestingly, “Let’s make things better” highlights the weakness of the Philips management and the erratic aspect of its strategic moves in recent years – thereby providing a clear picture of the challenges that lay ahead.

Metze points out that the root of many problems at Philips is to be found in the clashes between the different structures that share managerial power in the organisation. Under a set-up that dates from the post-war years, this used to be divided between the heads of national organisations (NOs) and product divisions (PDs). The NO chiefs, who supervised production and sales in their country, often dealt directly with the executive board. Meanwhile the heads of PDs coordinated the development and overall marketing for a specific group of products. To make matters worse, until the beginning of the eighties, each of these groups was headed by two different people: one technician and one marketing man, who often held diverging views.

As the NOs expanded in the fifties and sixties, on the back of rising economic welfare, their chiefs seized power within the Philips structure. This often lead to ludicrous situations, in which NO executives could open factories and push or reject products as they saw fit. The drawbacks of this situation became obvious when the head of the company’s operations in the United States (North American Philips Corporation) refused to take part in the launch of the Philips V2000 video recorder, and started pushing products with the competing VHS standard instead.

At a time when the world was rapidly turning into a global market place, such behaviour was clearly detrimental to the company. So in the late eighties, chairman Cor van der Klugt attempted to redress the balance of power within the Philips organisation, by shifting some of it back to the PDs. One of his initiatives to this effect was to create the all-powerful Group Management Committee, that included all the members of the executive board as well as the heads of three important product divisions. Still, Van der Klugt’s efforts proved too weak to really undermine the (excessive) power of the NOs.

Besides, career patterns within the organisation continued to be unduly influenced by one’s belonging to one informal network or the other. Until the turn of the decade, the top layer of management comprised several members of the Philips family, and the company’s culture is

still tinged with a touch of paternalism. Many of the executives who currently run Philips have never known any other corporate environment.

Another permanent problem was the distance between the company’s technicians and its commercial staff. The products that rolled out of the laboratories often failed to respond to market demand and to the basic needs of the consumers. In some instances, these were simply ignored. Convinced of their technological superiority, Philips technicians repeatedly pushed products and standards that were doomed to commercial failure. This deeply-rooted divide has never been bridged either.

The ensuing flops were so costly and embarassing that Timmer had plenty of ammunition to justify his call for drastic changes – it was like shooting fish in a barrel. His Centurion restructuring programme, which entailed about 45 000 job losses, paid off to some extent: the productivity of some factories shot up by a whopping 40 per cent within a couple of years and the cutbacks removed some layers of bureaucracy. Partly thanks to large-scale divestments, the company’s disastrous financial situation was redressed, in the short term at least. But as Carrubba found out, all of this did little to solve underlying cultural and strategic problems.

Arguably, Philips was in such dire straits when Timmer assumed the helm that he could simply not afford any other strategy than survival. This lead to the divestment of several large chunks of the business, such as the sale of the computer activities to DEC, the pull-out of the Megachip project and the withdrawal from MEC, a joint venture with Matsushita.

Yet still, the company’s structural problems remained. Though Philips reported record earnings in the mid-nineties, these were largely inflated by the sell-offs as well as incidental factors like the upturn in the cyclical semiconductors business. Frustrated young executives whose promising ideas were discarded by bickering chiefs testified that entrepreneurship was still an empty phrase at Philips. And worst of all, Timmer failed to come up with a strategy that could reverse the company’s fortunes in the long term, as the traditional consumer electronics market continued to dwindle.

In this respect, Timmer upheld a long-standing tradition at Philips. On several occasions in the previous decades, Philips executives had produced extensive studies that underlined the lack of a binding factor between group’s extremely diverse activities, and proposals of a split-up were regularly discussed. But the recommendations in such reports were only partly implemented.

In the meantime, Philips continued to invest here and there – almost at random it seemed. The group’s involvement in the computer business, from the early sixties, was perhaps the most blatant example: it went into the wrong segment, with the ludicrous ambition of challenging IBM mainframes; and it (temporarily) pulled out at the wrong time, when the PC market was about to explode.

As Metze sums it up: “Strategy was a matter of hap-hazard decisions; changes were founded on emotions instead of rational arguments; and the management often shied away from truly decisive choices”. In other words, the company’s past was haunted by plenty of vague visions, but no clear strategic directions.

True, Timmer inspired several product launches that became known as “presidential projects”, but all of them flopped: from the compact disc interactive (CD-I) to the Digital Compact Cassette (DCC) and High Definition Television (HDTV). Investments in sotfware distribution, such as the stake acquired in Super Club, proved equally misguided.

In 1993 Timmer set up Philips Media, that was to involve the company in the latest software and cable developments under the leadership of the American Scott Marden. The effort sounded ambitious but it was half-hearted too: in reality, Philips Media was made up of an ill-assorted collection of interests, with no clear purpose or identity.

In June 1995, it was Frank Carrubba who came forward with detailed proposals to invest in multimedia. These resulted from three thick studies (covering Asia, North America and Europe) which he had produced in the previous months, on the back of countless interviews and piles of market research. The “global strategy for multimedia” entailed that Philips should pump billions of guilders into fresh digital techniques and products, as well as multimedia software. If Philips did not have the technology in-house, then it should expand in these areas through sizeable acquisitions.

Together with PolyGram’s chairman Alain L√©vy, Scott Marden of Philips Media and Doug Dunn, then in charge of semiconductors, Carrubba presented a complete list of priorities, including digital HDTV, the Digital Video Disc (DVD) and the ATM technology for telecommunications and data networks. The team further advocated that Philips should strengthen its marketing position in the United States by dropping the old-fashioned Magnavox brand and selling products under the Philips name.

Carrubba was warmly congratulated for his efforts. Those who read the study were invariably impressed by the depth of his research. At the same time, Philips finally produced a “Masterplan” for the coming years. But at the end of the day, only a small number of the recommendations contained in the two studies were implemented. Philips invested in the cable business, mobile phones (belatedly), palmtop computers and Web-TV. On the other hand, the board could never muster enough courage (or resources, arguably) to go ahead with the proposed acquisitions, and its smaller investments remained scattered.

Part of the problem was that, in the last years of his chairmanship, Jan Timmer had become weary, physically exhausted and distracted by marital troubles. Fellow board members testified that he gradually lost his drive and his ability to steer the board. Furthermore, his emotional allegiance to the old Philips establishment, in which he made his entire career, rendered him unable to make a radical break.

Discussions about strategy also intensified tensions within the board. They highlighted an apparent split between two factions: the old Philips men, like Henk Bodt and Wim de Kleuver on one side; and the newcomers who were clamouring for action on the other side, like Frank Carrubba and Doug Dunn. Dudley Eustace, the British Chief Financial Officer, was somewhere in the middle, essentially preoccupied with the company’s financial health. As for the Belgian Pierre Everaert, the former Ahold chairman, his position was almost irrelevant anyway, because he was never taken very seriously.

Cor Boonstra, the latest addition to the executive board, in charge of Lighting, still had a lot of learning to do. He pushed for rapid expansion in the Far East and launched a corporate slogan for the company, “Let’s make things better”. But as he later admitted, Boonstra felt so ignorant about the company’s business after Carrubba’s presentation that he immediately rushed out to consult a few books.

The tensions came to a head after Boonstra’s appointment as a successor to Timmer. Soon after he jumped in the saddle in October 1996, Boonstra introduced himself with much the same fire-and-brimstone speech as Timmer had held a few years earlier. He wanted to halve the corporate staff; to get rid of “bleeders” like Grundig, the ailing German electronics group; to clean up the media business; and to reorganise the company by setting up about 120 semi-independent business units, each of which should be held accountable for its own results. Philips, that looked like “a plate of spaghetti”, should be transformed into a neat row of asparagus.

Boonstra’s hasty withdrawal from all the media projects set up by Timmer caused deep irritations, which the former chairman was unable to keep to himself. Supported by Floris Maljers, chairman of the non-executive supervisory board, Boonstra asked other members of this body to postpone Timmer’s planned appointment as Maljers’ successor for one year. Boonstra even threatened to resign if Timmer was to become his superior. Eventually, it was Timmer who resigned from the supervisory board, thereby putting an end to his long relationship with Philips.

Boonstra’s plans, paired with clear and ambitious financial objectives, were warmly applauded by investors. Financial results so far also tend to prove that his moves were well-inspired. But as Metze concludes, it remains to be seen whether the former Sara Lee executive will succeed where all the others failed – by defining a clear-cut strategy for the company’s future and actually pushing ahead with it. The presentation of a fresh strategy, planned earlier this year, was already postponed until an unspecified date. One may argue that Boonstra is taking time to thoroughly study the options, but the delay may also bode ill.

Boonstra himself has admitted to Metze that it would require radical personnel changes to turn around the Philips culture and transform it into a modern, competitive company. He coolly stated that, to this effect, about 70 per cent of the group’s current executives would have to be replaced. Even if one takes into account the large proportion of managers who are close to retirement anyway, that still leaves an enormous lot of cleaning up to do.

Given the company’s appalling reputation among international executives, Boonstra may also find it diffuclt to hire fresh talent. The stories of dispirited former employees like Scott Marden and Frank Carrubba, whose departure leaves Philips without a Chief Technology Officer, only contribute to the image of a company that systematically quashes entrepreneurship. The move of the head offices from Eindhoven to Amsterdam is unlikely to make Philips all that much more attractive as an employer.

Furthermore, the structure envisaged by Boonstra may not be adequate to put an end to the squabbles and power games that proved so counter-productive in the past. The asparagus scheme may introduce clear lines of responsibility, shifting power back to the PDs, but the NOs are still firmly in place. On top of this Boonstra has created so-called regional centres that may only add to the confusion and create new imbalances in the distribution of power within the organisation, Metze writes.

And finally, it remains to be seen whether the current executive board disposes of sufficient technical expertise to understand the dynamics of the modern electronics market, and to determine where the opportunities lay for the company’s future. After all, it is not exactly reassuring that Europe’s largest electronics group is now lead by two men, Cor Boonstra and Floris Maljers, who have little affinity with their products – and, apparently, even less interest in learning about them. Are they really the right men to bring about a crucial reconciliation between technology and marketing at Philips?