How Philips is transforming its business model for sustainability

If Philips is to remain competitive in the future, it'll require the company to continually adapt to the huge macro trends that it faces. Photograph: PhilipsIf Philips is to remain competitive in the future, it'll require the company to continually adapt to the huge macro trends that it faces. Photograph: Philips

One of the first things Frans van Houten did on taking over as chief executive at Philips two years ago was to set the 122 year old company on a new strategic course. If successful, his five year Accelerate! programme will see the Dutch-based multinational begin to look like a different business. Expect it to have a greater presence in fast-growth emerging markets, a larger slice of the business-to-business market, a leaner inventory and a fatter innovation pipeline.

All are eminently sensible steps. Indeed, if you were to throw a team of strategy professors into a darkened room, these are exactly the kind of growth-orientated measures you'd expect them to suggest. But, like all businesses, Philips doesn't operate in a darkened room. Equally important in its strategic thinking, therefore, are the external mega trends unfolding in the 100 plus markets where it operates.

Climate change and its impacts on energy security, the world's increasingly aging population, the growth of the middle-classes in emerging markets, new diet and lifestyle trends giving rise to health issues such as obesity and heart disease: all are global factors that are impinging in one way or another on Philips' core markets – namely, lighting, healthcare and consumer lifestyle.

Pre-empting future change

The pivotal theme that connects all the dots here is sustainability, says Henk de Bruin. Maybe you'd expect him to say that. As chief sustainability officer at Philips, it's his job to flag up the importance of social and environmental issues. Corporate-wide, the company has pledged to improve the lives of three billion people on the planet by 2025. By 2015, its goal is for half of total sales to be 'green' (at present, the proportion stands at 47%). Nor is it entirely new. Philips set its first sustainability standards back in 1994.

Despite past progress, De Bruin doesn't deny that much remains to be done. If Philips is to remain competitive in the future, it'll require the company to continually adapt to the huge macro trends that it faces. Some strategic tinkering here and there won't cut it. What's needed is a systems-level shift across the entire business.

Those at the top of the tree at Philips seem to get that. Moreover, in the circular economy, they have a concept on which they can hang the company's future transformation. In its simplest form, the idea revolves around "decoupling of material use and energy consumption from economic growth", De Bruin explains. The implications from a business process perspective are profound. Out the window goes the traditional, linear approach to resource use: namely, extract it, use it and then dump it. Instead, management focus turns to principles such as re-manufacturing, refurbishment and reuse.

Circular approach, on-going advantages

De Bruin is confident that a circular way of doing things will unleash new opportunities. The most obvious are on the cost side. Philips saved €471m last year just by simplifying its operating model. Less resource use should, in theory, represent a boon for the planet too. De Bruin acknowledges that the idea of big business being part of the solution rather than the problem sits ill with many in the environment movement. He remains unapologetic, however. "Business innovation really is the solution for the planet in 2050 where we have nine billion people looking for a high quality of life", he states.

Presuming he's right, there's still the problem of releasing such innovation. Breakthrough technologies and transformative business models don't just happen. They require time, resources and a hefty tolerance of failure. To Philips' credit, it has a track record here. The company's R&D budget last year stretched to €1.8bn, equivalent to 7.3% of sales revenue. Of that, €569m was directed towards green innovation. In addition, all new and existing projects are all assessed to determine their social and/or environmental contribution, De Bruin adds.

The results of such efforts are trickling through into Philips' product portfolio. In its healthcare business, for instance, the company has developed a technology that enables doctors to conduct internal examinations without the need for surgery. The interventional x-ray system also produces 70% less radiation than industry norm.

New developments are also apparent on the business model side as well. It's currently experimenting with a range of leasing contracts, for instance. So it's offering a pay-for-use MRI service to hospitals rather than selling the equipment up front. Philips is experimenting with lighting in the same way, with customers buying illumination (and energy) services rather than an expensive lighting system.

Lots to learn

Change is never easy, whatever the pace. Philips, as you'd expect of a company its size, is crammed full of bright engineers and competent managers. But the circular economy requires people to approach their day job differently, De Bruin says. Making and selling lamps is one thing. Monetising 'units of flexible lux', as Philips describes its new light leasing service, is quite another. "It requires completely different training to provide circular solutions like these", he notes.

A second challenge revolves around cooperation. The circular economy is not a strategy you can pursue alone. It requires relationships with recyclers, retailers, consumers, resource providers, regulators and so forth: basically, everyone involved in a company's value chain, from start to finish.

Partly in response to these two challenges, Philips has initiated a partnership with theEllen MacArthur Foundation (EMF), a non-profit dedicated to promoting progress towards a more circular economy. EMF is currently putting together relevant training materials for an internal 'university' that Philips is currently establishing for its employees.

"We also really want to learn from those other [EMF] members, such as Cisco, Renault and B&Q, who perhaps started with the circular economy approach a little earlier than us, as well as to see what they can learn from us", De Bruin adds.

Content on this page is produced and controlled by Philips


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