How Royal Philips Is Moving Toward Its Complexity Sweet Spot

Business complexity can be good or bad. At Royal Philips, CEO and Chairman Frans van Houten emphasizes the need to capitalize on good complexity and reduce bad complexity by distinguishing “rewarding” from “unrewarded” complexity. 

In a previous MIT CISR research briefing,[foot]M. Mocker, P. Weill, and S.L. Woerner, “Finding Your Complexity Sweet Spot,” MIT CISR Research Briefing, Vol. XIII, No. 12, December 2013, https://cisr-mit-edu.ezproxy.canberra.edu.au/publication/2013_1201_ComplexitySweetSpot_MockerWeillWoerner[/foot] we introduced the “complexity sweet spot,” a state in which a company is creating value from product complexity—which we define as the degree of variety and links in a company’s product portfolio—while keeping customer and employee processes simple. Companies in their sweet spot exhibit above-average financial performance. But many are not able to reach their sweet spot because, as they work to companies distinguish their products and services from their competitors by adding variety and links, they are often unable to keep processes simple.

This briefing describes how Royal Philips—a.k.a. Philips—is increasing value-adding product complexity while decreasing non-value-adding process complexity in order to move to its complexity sweet spot (see figure 1).[foot]This research briefing is derived from the MIT CISR case study by M. Mocker, J.W. Ross, and E. van Heck, “Transforming Royal Philips: Seeking Local Relevance While Leveraging Global Scale,” MIT CISR Working Paper No. 394, February 2014, https://cisr-mit-edu.ezproxy.canberra.edu.au/publication/MIT_CISR_wp394_Philips_MockerRossVanHeck[/foot]

Royal Philips 

In 2011, Frans van Houten took the reins of Royal Philips, a €23 billion diversified technology group active in more than one hundred countries. Philips enjoys strong brand recognition in all three sectors in which it operates: Consumer Lifestyle, Lighting, and Healthcare. But when van Houten arrived, the company had just endured ten consecutive years of declining financial performance. To turn the company around, van Houten initiated Accelerate!, a transformation program with the underlying intention to increase valuable product complexity while decreasing unnecessary complexity in business processes—and thus gaining competitive advantage through mastering business complexity. 

Adding Value Through Product Complexity 

Accelerate! was designed to add variety and links to products by three means: locally relevant innovations, integrated solutions, and connected products. 

Locally relevant innovations address the specific needs of a particular market that might differ from the needs of other markets for a similar product. 

To truly satisfy customer needs, you cannot just offer a global solution because you oversimplify the differences between regional markets and individual customers. 

Frans van Houten, CEO and Board Chairman 

For example, recognizing that facial hair differs significantly depending on ethnicity, Philips’ Consumer Lifestyle sector introduced new beard-grooming products for different customers within North American markets. Such locally relevant products were seen as a way to address the threat from competitors that could produce and sell standardized products globally at lower cost. 

We typically lose out when a market commoditizes and we no longer differentiate […] like in televisions, mobile phones, chips, etc. But by embracing local market distinctions and deeply understanding customer needs, there are always possibilities to differentiate. 

Frans van Houten, CEO and Board Chairman 

Another approach to avoiding commoditization was to introduce integrated solutions. Integrated solutions recognize that customers are less often shopping for a specific product than for a solution to a problem. By packaging products to target customer problems, Philips could further distinguish its products from those of competitors.

Though x-ray machines are high-end products, they also will commoditize and that game will be cracked by the Asians eventually. But if we integrate our medical scanners with clinical decision support software and workflow management to create more holistic solutions deeply integrated within the organization[s] of our customers, that will differentiate us from standard equipment vendors. The more complexity such a solution entails, the more we can keep the Asian competitors at bay […]. We are looking to make such rewarded complexity our competitive weapon.

Frans van Houten, CEO and Board Chairman 

Finally, Philips was creating potentially valuable product complexity and hence competitive differentiation with connected products, or in other words, by connecting products over the internet. For example, Philips’ hue wireless lighting delivers a range of functionality, including time-controlled color transition of a room’s lighting, configurable using a mobile app.

[We asked] how can we reinvent the value proposition of lamps? Can we add value to it, make it more complex, put more in it, helping us to differentiate? And we have done it by making digital lighting a home automation game. So we are capturing value from the adjacency in home control systems, which is way more complex, [but] attractive as it creates more value for our lighting solutions. 

Frans van Houten, CEO and Board Chairman

Philips anticipated that adding locally relevant innovations, integrated solutions, and connected products would improve Philips’ revenue growth. At the same time, management wanted to ensure that the resulting increase in product complexity did not lead to complex internal business processes.

We are not Samsung, shipping the same devices worldwide; our products reflect the specific needs of each market. [But] we also want to maintain the principle of “globally scalable” to exploit the economies of scale that we can realize across the world.[foot]D. Rijsenbrij and H. Zijlstra, “Jeroen Tas, CIO Philips, ‘Transformatie Onder Architectuur,’” CIO Magazine, Volume 9, Issue 2, 2013, 17. Translated from Dutch, adapted.[/foot]

Jeroen Tas, Executive Vice President and former Chief Information Officer 

Adding Value Through Process Simplification 

Prior to Accelerate!, Royal Philips had allowed each product manager to define business processes as he or she saw fit. The impact of this process variety, however, was high costs in both systems and operations, which diluted the bottom-line benefits of valuable product complexity.

I cannot allow hundreds of product managers to invent their own process. It’s unrewarded complexity when everybody invents their own process, as it hampers cross-learning and efficiency.

—Frans van Houten, CEO and Board Chairman 

Accordingly, Philips set out to standardize business processes. Standardization offers the potential to reduce systems complexity—Philips intends to reduce its legacy systems environment from roughly 10,000 applications to around 500—as well as the complexity of internal processes. But the diversity across geographies, sectors, and product offerings posed major challenges to process standardization efforts. 

How do you standardize across 60 categories in 17 markets that do anything from building a light bulb to building a fully customized hospital suite, with lead times of 24 hours or lead times of almost a year? How do you deal with that diversity?

—Rob Theunissen, End-to-End Transformation Manager 

Philips addressed that challenge in part by identifying three end-to-end core processes: idea-to-market, market-to-order, and order-to-cash. In idea-to-market (I2M), an idea is turned into a product and brought to market, and the product’s lifecycle is managed. Market-to-order (M2O) concerns product marketing and the generation of sales orders. Order-to-cash (O2C) involves the processing of orders and includes fulfillment, distribution, invoicing, and payment handling. The intention was to standardize these processes plus supporting systems; accordingly, M2O processes were built to operate on a Salesforce.com foundation, and Philips had selected technology platforms for the other two processes. 

It was clear, however, that selling an integrated healthcare solution to hospitals was not the same process as selling an electric toothbrush. So Philips defined four different business models: products, i.e., off-the-shelf products like shavers and MRI scanners; services such as providing training or maintenance; software, e.g., a web portal for doctors; and systems, or integrated solutions such as uniquely customized municipal lighting. Management distinguished the unique process requirements of each business model and assigned each of Philips’ sixty business categories to these business models. 

Philips was building modular technology platforms to limit systems complexity while accommodating the differences in core processes across the four business models. A key element of the systems architecture was the “information factory” data platform, which would provide a central repository of master data apart from applications. Philips IT would then “plug and play” application modules from the public cloud, purchased packages, and custom systems. To avoid creating unnecessary variety in systems going forward, Philips adopted a “configuration instead of customization” principle. 

Implementing the Change 

Given Philips’ long history of independent process design, process standardization represented a significant change to people throughout the company. To win commitment to this change, the entire management team of each business participated in workshops to better understand its business model. Working from a generic list of around one hundred high-level processes used by companies with similar business models, workshop participants identified those few high-level processes that differentiated Philips from its competitors. The understanding was that all other processes would be standardized in accordance with common industry practices, with exceptions for local legal and regulatory requirements. 

To anchor standardized processes organizationally, Philips added several roles. Each of the three sector leaders also served as Business Model Owner for at least one business model across all sectors. Business Model Owners were responsible for the design and implementation of all the processes associated with their business model. In addition, Philips also assigned Executive Business Process Owners (BPOs) for the I2M, M2O, and O2C processes to help define, govern, and enforce process standards across markets and business models. While Philips previously had BPOs, they were relatively low in the organization. Now, Executive BPOs were part of the Executive Committee, making end-to-end process improvement a leadership task. 

Two years into Accelerate!, Royal Philips had turned around performance, but management was still in the throes of helping 115,000 employees understand the journey and change their behavior accordingly. 

This requires us to think in terms of global platforms and customization for local customer needs. [It] requires people to differentiate between what complexity is wasteful and therefore should be eliminated, and what complexity is rewarded.

Frans van Houten, CEO and Board Chairman  

Not surprisingly, Philips’ move to its complexity sweet spot is proving to be a long, but rewarding, journey.