Philips 2007 Annual Report Download - page 97

Philips Annual Report 2007 103
supports close cooperation with suppliers to enhance,
amongst others, time to market and quality. In addition,
Philips is continuing its initiatives to reduce assets
through outsourcing. These processes may result in
increased dependency.
Due to the fact that Philips is dependent on its personnel
for leadership and specialized skills, the loss of its ability to
attract and retain such personnel would have an adverse
effect on its business.
The retention of talented employees in sales and marketing,
research and development, nance and general management,
as well as of highly specialized technical personnel, especially
in transferring technologies to low-cost countries, is critical
to Philips’ success. The loss of specialized skills could also
result in business interruptions.
Diversity in the IT landscape could result in ineffective
or inefcient business management. IT outsourcing and
off-shoring strategies could result in complexities in
service delivery and contract management. Furthermore,
we observe a global increase in IT security threats and
higher levels of professionalism in computer crime,
posing a risk to the condentiality, availability and
integrity of data and information.
Philips is engaged in a continuous drive to create a more
open, standardized and, consequently, more cost-effective
IT landscape. This is leading to an approach involving
further outsourcing, offshoring, commoditization and
ongoing reduction in the number of IT systems. The
global increase in security threats and higher levels of
professionalism in computer crime have raised our
awareness of the importance of effective IT security
measures, including proper identity management
processes to protect against unauthorized systems
access. The integration of new companies and successful
outsourcing of business processes are highly dependent
on secure and well controlled IT systems.
Warranty and product liability claims against Philips
could cause Philips to incur signicant costs and affect
Philips’ results as well as its reputation and relationships
with key customers.
Philips is from time to time subject to warranty and
product liability claims with regard to product
performance. Philips could incur product liability losses
as a result of repair and replacement costs in response
to customer complaints or in connection with the
resolution of contemplated or actual legal proceedings
relating to such claims. In addition to potential losses
arising from claims and related legal proceedings, product
liability claims could affect Philips’ reputation and its
relationships with key customers, both customers for
end products and customers that use Philips’ products
in their production process. As a result, product liability
claims could impact Philips’ nancial position and results.
Financial risks
Philips is exposed to a variety of nancial risks, including
currency risk, interest rate risk, liquidity risk, equity price
risk, commodity price risk, credit risk, country risk and
other insurable risks which may impact Philips’ results.
Philips is a global company and as a direct result the
nancial results of the Group may be impacted through
currency uctuations. Furthermore, Philips is exposed
to other movements in the nancial markets in the form
of interest rate risk, commodity price risk and also equity
price risk as Philips holds minority stakes in a number of
listed companies where market value currently exceeds
the equity investment reported in the nancial statements.
A decline in the market value of these investments could
result in a future impairment. Moreover, failure to further
improve capital management may reduce investor,
creditor and market condence.
For further analysis, please refer to the section Treasury
that begins on page 104 of this Annual Report.
Philips has dened-benet pension plans in a number
of countries. The funded status and the cost of
maintaining these plans are inuenced by nancial
market and demographic developments, creating
volatility in Philips’ results.
The majority of employees in Europe and North
America are covered by these plans. The accounting
for dened-benet pension plans requires management
to determine discount rates, expected rates of
compensation and expected returns on plan assets.
Changes in these variables can have a signicant impact
on the projected benet obligations and net periodic
pension costs. A negative performance of the nancial
markets could have a material impact on funding
requirements and net periodic pension costs and also
affect the value of certain nancial assets of the company.
For further analysis of pension-related exposure to changes
in nancial markets, please refer to the section Pensions
that begins on page 109 of this Annual Report, and for
quantitative and qualitative disclosure of pensions, please
refer to note 20.
98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements