Philips 2015 Annual Report Download - page 68

Risk management 7.3
68 Annual Report 2015
The growth ambitions of Philips may be adversely
aected by economic volatility inherent in growth
geographies and the impact of changes in
macroeconomic circumstances on growth economies.
Philips may not control joint ventures or associated
companies in which it invests, which could limit the
ability of Philips to identify and manage risks.
Philips has invested or will invest in joint ventures and
associated companies in which Philips will have a non-
controlling interest. In these cases, Philips has limited
inuence over, and limited or no control of, the
governance, performance and cost of operations of
joint ventures and associated companies. Some of
these joint ventures and associated companies may
represent signicant investments. The joint ventures
and associated companies that Philips does not control
may make business, nancial or investment decisions
contrary to Philips’ interests or decisions dierent from
those, which Philips itself may have made. Additionally,
Philips partners or members of a joint venture or
associated company may not be able to meet their
nancial or other obligations, which could expose
Philips to additional nancial or other obligations, as
well as have a material adverse eect on the value of its
investments in those entities or potentially subject
Philips to additional claims.
Acquisitions could expose Philips to integration risks
and challenge management in continuing to reduce the
complexity of the company.
Philips’ acquisitions may continue to expose Philips in the
future to integration risks in areas such as sales and service
force integration, logistics, regulatory compliance,
information technology and finance. Integration difficulties
and complexity may adversely impact the realization of an
increased contribution from acquisitions. Philips may incur
significant acquisition, administrative and other costs in
connection with these transactions, including costs related
to the integration of acquired businesses.
Furthermore, organizational simplification and resulting cost
savings may be difficult to achieve. Acquisitions may also
lead to a substantial increase in long-lived assets, including
goodwill. Write-downs of these assets due to unforeseen
business developments may have a material adverse effect
on Philips’ earnings, particularly in Healthcare and Lighting,
which have significant amounts of goodwill (see also note 11,
Goodwill).
Philips’ inability to secure and retain intellectual
property rights for products, whilst maintaining overall
competitiveness, could have a material adverse eect
on its results.
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 is the result of an extensive
patenting process that could be inuenced by a number
of factors, including 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 applicable to
Consumer Lifestyle where third-party licenses are
important and a loss or impairment could have a
material adverse impact on Philips’ nancial condition
and operating results.
7.4 Operational risks
Transformation programs
In 2011 Philips started a very extensive transformation
program (Accelerate!) to unlock Philips’ full potential.
Accelerate! spans a time period of several years. In 2014
as a next phase in the Accelerate! transformation
program Philips announced its plan to sharpen its
strategic focus by establishing two stand-alone
companies focused on the HealthTech and Lighting
opportunities respectively. Failure to achieve the
objectives of the transformation programs may have a
material adverse eect on the mid-term and long-term
nancial targets.
In addition, the transformation program of the Finance
function may expose Philips to adverse changes in the
quality of its systems of internal control.
Failure to achieve improvements in Philips’ solution and
product creation process and/or increased speed in
innovation-to-market could hamper Philips’ protable
growth ambitions.
Further improvements in Philips’ solution and product
creation process, ensuring timely delivery of new
solutions and products at lower cost and upgrading of
customer service levels to create sustainable
competitive advantage, are important in realizing
Philips’ protable growth ambitions. The emergence of
new low-cost competitors, particularly in Asia, further
underlines the importance of improvements in the
product creation process. The success of new solution
and product creation, however, depends on a number
of factors, including timely and successful completion
of development eorts, market acceptance, Philips’
ability to manage the risks associated with new
products and production ramp-up issues, the ability of
Philips to attract and retain employees with the
appropriate skills, the availability of products in the
right quantities and at appropriate costs to meet
anticipated demand and the risk that new products and
services may have quality or other defects in the early
stages of introduction. Accordingly, Philips cannot
determine in advance the ultimate eect that new
solutions and product creations will have on its nancial
condition and operating results. If Philips fails to
accelerate its innovation-to-market processes and fails
to ensure that end-user insights are fully captured and
translated into solution and product creations that
improve product mix and consequently contribution, it