Philips 2005 Annual Report Download - page 11

Philips Annual Report 2005 11
brand campaign. What really matters, though, is what our
customers think. And two of the best proof points here
are American customers voting Medical Systems ‘most
customer-driven’ for two years in a row in an independent
external benchmark, and Wal-Mart naming Philips
‘International Supplier of the Year’ in 2005.
Focusing on innovation
We believe that by combining market focus with innovation
we can and will achieve further growth. In 2005, 49% of
our sales came from products introduced in the last three
years, up from 39% in 2004.
In order to create a strong platform for future growth,
we have fundamentally redesigned our R&D efforts in
recent years, directing resources towards growth markets
– e.g. healthcare and wellness – and emerging applications.
Our philosophy of ‘open innovation’ also implies a
commitment to alliances as a means of leveraging our
innovative capabilities. Along with a number of leading
universities, we have, for example, recently established
a Center for Molecular Medicine, which will be at the
frontier of medical technology.
We pursue innovation – in the broadest sense of the
word – in other areas of our business too, e.g. in the way
we market our products. This may involve marketing
alliances, for example with leading consumer brands to
deliver appealing product/consumable combinations such
as the PerfectDraft home beer system we have launched
together with InBev. Or partnering with leading European
operators in joint promotions to stimulate awareness of
HDTV among consumers, e.g. around the 2006 FIFA World
CupTM Soccer.
Reduce earnings volatility
Overthelast12monthswehavemadesignicantprogress
in making Philips a more stable and predictable proposition
for shareholders. Consumer Electronics (CE) has made
great strides with its Business Renewal Program. After a
number of challenging years, particularly in the US, we
have seen its underlying performance improve quarter-to-
quarter over the past year. CE completed the deal to
transfer its OEM monitor activity and our industrial and
R&Doperationsformonitorsandentry-levelatTVsto
TPV of Taiwan. This will create a more competitive cost
base for our branded activities.
Similarly, in the highly cyclical technology sector,
Semiconductors continues to pursue its asset-light strategy,
outsourcingasignicantpartofitscapacityneeds.This
means a higher proportion of variable costs, which allows
thedivisiontobemoreexibleandeffectiveinfollowing
the market throughout the cycle. In December we
announced our plans to create a separate legal structure
forSemiconductors,givingusexibilitytopursueoptions
for future growth of the division while creating value
for Philips’ shareholders.
In the course of 2005 we reduced our stakes in non-core
businesses such as LG.Philips LCD, which are also exposed
tocyclicality-relatedearningsuctuations.Andtowards
the end of the year we announced our intention, pending
regulatory approvals, to merge our Mobile Display
Systems (MDS) business unit with Toppoly.
As well as acting to reduce earnings volatility, we have also
made a number of acquisitions designed to deliver stable,
sustainedprotabilityinthefuture.BesidestheStentor
dealinthehealthcareeld,weacquiredAgilent’sremaining
stake in our Lumileds venture in 2005, enabling us to build
a leading solid-state lighting business. And we announced
major investments in the production of state-of-the-art
lamps at our facilities in the Netherlands and Belgium.
Further simplify Philips
We have made considerable advances in simplifying the
company and how it operates. Our International Retail
Board is a good example of how we are becoming easier to
do business with. We continue to simplify our organization
and drive down costs wherever possible. For example, we
have lowered the number of ERP systems within the
company from 59 to 43 and reduced our supply base from
50,000 suppliers to 30,000. We also continued to improve
theefciencyofbusinesssupportfunctionssuchasFinance,
IT and Supply Management via the further roll-out of our
shared service centers. Altogether, these measures allowed
us to achieve savings of some EUR 250 million in 2005.