Philips 2006 Annual Report Download - page 89

Philips Annual Report 2006 89
Future acquisitions could expose Philips to integration
risks and challenge management in continuing to reduce
the complexity of the company.
Philips intends to make further value-adding acquisitions
and is therefore exposed to the risk of not capturing
suitable targets. In addition, such acquisitions could expose
Philips to integration risks, amongst others, in the areas
of sale and service force integration, logistics, regulatory
compliance, information technology and fi nance. Moreover,
such acquisitions could also challenge management in
continuing to reduce the complexity of the company.
The ability to secure and retain intellectual property
rights for products whilst maintaining overall
competitiveness, is important.
Philips is dependent on its ability to obtain and retain
licenses and other intellectual property (IP) rights
covering its products and its design and manufacturing
processes. The IP portfolio results from an extensive
patenting process that could be infl uenced by, amongst
other things, innovation. The value of the IP portfolio
is dependent on the successful promotion and market
acceptance of standards developed or co-developed
by Philips. This is particularly important for Consumer
Electronics where third-party licenses are important and
a loss or impairment could negatively impact Philips’ results.
Philips’ investments in the “sense and simplicity”
campaign, with a focus on simplifying the interaction
with its customers, translating awareness into preference
and improving its international brand recognition, could
have less impact than anticipated.
Philips has made large investments in the reshaping
of the Group into a more market-driven company
focusing on delivering advanced and easy-to-use products
and easy relationships with Philips for its customers. The
brand promise of “sense and simplicity” is important for
both external and internal development. If Philips fails to
deliver on its “sense and simplicity” concept its growth
opportunities may be hampered.
Market/Business environment risks
As Philips’ business is global, its operations are exposed
to economic and political developments in countries
across the world that could adversely impact its
revenues and income.
The business environment is infl uenced by economic
and political uncertainties that continue to affect the
global economy and the international capital markets.
Economic and political developments could have a
material adverse effect on Philips’ operating results.
Philips’ overall performance in the coming years is dependent
on realizing its growth ambitions in emerging markets.
Emerging markets are becoming more important in
the global market. Asia is an important production,
sourcing and design center for Philips. Philips faces
strong competition to attract the best talent in tight
labor markets and intense competition from local Asian
companies as well as other global players for market
share in Asia. Philips needs to be part of the growth
of emerging markets, invest in local talents, understand
developments in end-user preferences and localize the
portfolio in order to stay competitive. Furthermore,
growth in emerging markets, and especially China, could
be hampered if Philips falls short when extending
distribution to second and third tier cities.
Philips is exposed to markets with high complexity,
and is facing continued competition.
Philips continually faces competitive challenges such
as speed of innovation, fast-moving market trends, rapid
technological change, evolving standards, shortening product
life cycles, the cyclical nature of certain sectors and price
erosion. One example is the solid-state lighting and the
fast-growing LED market. If Philips cannot timely offset
margin erosion with the upgrading of its offering via for
instance innovation or differentiation, cost reduction and/or
effi ciency measures, operating results may be hampered.
Strategic
business risks
Market/Business
environment risks
Operational risks Financial risks Compliance and
nancial reporting
risks
Corporate Governance
Philips Business Control Framework
Philips General Business Principles
54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements