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Signify Premium Insight: Philips’ Leadership Change Marks Switch From the Grand, to the Granular

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In August, Philips announced that its chief executive, Frans van Houten, is set to leave the company in October, and will be replaced by the head of the company’s Connected Care business, Roy Jakobs.

Van Houten will be leaving the top job after almost 12 years at the helm, during which time he reshaped the business from a broad conglomerate into the healthcare technology-focused business it is today. During that time shares rose from below Eur13 in September 2011, to a peak of more than Eur50 in 2021. However, since then the company’s performance has been marred by a recall of several respiratory devices. A misstep instrumental in the fall of the vendor’s share price to Eur17.

Given such adversity, will Jakobs follow van Houten’s lead, or will the transition mark the opportunity for fundamental change?

The Signify View

As with so many things in life, when it comes to business succession, timing is everything. Sadly, for many CEOs, the optimum time to hand over the reins often only becomes apparent after it has passed. So it is for Frans van Houten. Had he left the job in January 2020, the focus of the discussion surrounding his tenure would have, almost wholly, focused on his successes.

Of which there are many to choose from. He effectively navigated the complex challenges of turning a century old conglomerate, with operations in countless sectors, into a leaner business focused on healthcare technology. In doing so he shaped a growing company, with three clearly defined and complementary segments, which consistently posted healthy financial results and  technical leadership in some clinical segments.

However, since van Houten did remain in post, the adversity that has marked the final years of his leadership cannot be ignored. The most high-profile challenge has been the ventilator recall, which has affected more than 5.5m devices and cost the business almost Eur1bn, not including any litigation stemming from the recall.

However, the recall is only one, albeit the most acute, of these challenges. A more pervasive concern is the vendor’s inability to react to such challenges as dynamically as its competitors.

Time to Act

This ponderousness was also visible in the vendor’s response to the Covid 19 pandemic. While the impact of the virus was severe for all vendors, Philips’ supply chain and infrastructure appears to have been more exposed to risk, and more susceptible to disruption than its chief competitors. This raises the question of whether the vendor was too aggressive with regards to its emerging market strategy.

In a similar vein, the operational capability of Philips under the hand of van Houten could also be found wanting. While the outgoing CEO performed very strongly against broader strategic aims and realising the vision of Philips as a healthcare company, Roy Jakobs could make his mark by focusing on the minutiae. During the reorganisation of Philips over the past decade, the company made numerous acquisitions, but the full fruits of these purchases have, in some instances, not been realised from a perspective of integration.

In some cases these barriers are technical. Carestream, for example, bestowed the Dutch vendor with a range of sophisticated imaging IT capabilities. However, to derive the full value of these capabilities, resource must be expended on a complex and time-consuming integration; a process which appears to be taking longer than originally expected. In other instances, the challenges are grounded in operations and logistics, with the vendor not consolidating supply chains or standardising materials and components across the range, for example.

Jakobs could, particularly based on the evidence of his handling of the recall, be the right person to drive such operational changes, and therefore represent an ideal candidate to follow van Houten, enabling Philips to best capitalise on the latter’s vision.

Central Sway

Increasing central oversight of the sort that could enable significant operational improvements does, however, also have its potential pitfalls. In a bid to streamline processes and improve operational performance, an increasing emphasis on centralised compliance could begin to hamper innovation. One of van Houten’s key strengths was establishing and capitalising on the vendor’s leadership in sectors such as cardiology. If Philips’ research and development programmes are forced to be overly considerate of costs and operational efficiencies, their engineers’ abilities to continue to make progress could be stymied.

There are some signs that this could already be happening. At present, customers’ needs are clear. They need solutions that enable them to tend to patients as efficiently as possible, and they need vendor partners that enable such efficiency. Philips is performing strongly in this regard, and has developed solutions to aid providers’ operational workflow, and offering practical tools to enable them to improve their services such as telehealth and patient monitoring, for example. However, providers who buy into Philips’ portfolio also buy into its technical mastery and its bolder vision.

While some other vendors focused on medical imaging’s technical peak talk boldly of precision medicine and digital twins, for example, Philips risks becoming overly focused on pragmatic solutions. If this is sustained, Philips could begin to lose some of its cachet as a technical leader and begin to be considered less of a visionary and more of a workhorse brand, taking Philips directly into a category rife with cutthroat competition. This could be particularly damaging if, as seems likely, GE HealthCare, enjoys something of a rejuvenation following its spin out.

A Time for Reflection

Such existential introspection is also made more challenging by the current economic climate. Philips, like its competitors will have to deal with increasing inflation and the fine balance between accommodating customers’ squeezed budgets and raising prices to sustain margins. All this while adapting to a changing situation and increased volatility in China and other key emerging markets, lingering supply chain disruption and component shortages, and energy prices at a record high.

Given this climate, it may have been better for Philips to have retained van Houten in a bid to avoid internal change at the same time as external pressure. However, by promoting Jakobs, the man guiding the recall, Philips aims to show how serious it is about dealing with those issues. By promoting a person from within, who already has an intimate knowledge of Philips’ operations, Philips also hopes to avoid too greater disruption at a time when focus and clarity are needed. Such a move does, however, risk perpetuating rather than addressing any operational weaknesses.

Necessary Changes

It is imperative such perpetuation is avoided. Any successor must take the successful elements of their predecessor while not being bound by their approach. This is especially apt given that Philips, under van Houten’s watch, got so much right. The company is a market leader in many of the segments in which it has entered, and it has established a large, loyal customer base.

But improvements can still be made, for Philips, this means operational improvements and a focus on its vision. A change of leadership is also an opportunity for a change of attitude. Over recent years Philips has revealed ambitions around AI, or the integration of Carestream, for example, on which it has failed to deliver. Despite this, communications from the vendor at results presentations and investors’ events tend to gloss over any weaknesses, focusing only on the positives.

A change of leadership offers the opportunity to address this. Roy Jakobs could offer a more realistic alternative. He could, for instance, explain that Philips, like its competitors will be facing a difficult spell. That Philips is facing more risk than it has recently thanks to volatility in emerging markets, and that new products and new integrations have been delayed. He could also detail the progress that has been made so far and explain what customers and investors can expect next. Jakobs should also celebrate his company’s strengths and highlight how the vendor will capitalise on them, and explain how he intends to replicate that success in other areas.

Building for the Future

Jakobs could continue to build on van Houten’s efforts to streamline Philips, possibly with a sale of the Personal Care business. Although profitable, it is a segment which shares no obvious synergies with the company’s broader portfolio so such a move would likely be popular with investors.

Such realism, combined with a focus on continuing to refine the detail within van Houten’s broader vision will restore the faith of investors and customers after a challenging episode, allowing the vendor to move on and rally. This will require Jakobs to quickly resolve the recall issue which has blighted the company, as well as fixing any continuing supply chain issues so Philips can realise the revenue from its record high order book.

All this must be achieved without Philips letting slip its progress in other areas. These include increasingly pivoting to more consultative customer partnerships, leveraging HealthSuite to continue Philips transformation into a company that delivers fully integrated solutions, and looking to the future with further investment in precision medicine.

If Jakobs can make this happen, results will be seen quickly, as margins creep higher over the coming quarters, Philips returns to a healthy growth trajectory, and investors once again buy into the vendor.

This, above all else, will define Jakobs’ tenure at the top.

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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify ResearchTo view other recent Premium Insights that are part of the service please click here