A 6-Point Analysis of the Philips Lighting Business Restructure

Philips announced on Sept. 23, 2014, it would separate its health care and lighting businesseses into a twonew companies, each ofy which would continue to leverage the Philips brand.

“I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips, as we continue on our transformation,” said Frans van Houten, chief executive officer of Royal Philips. “At the same time, giving independence to our led high bay light fixture wholesale business will better enable it to expand its global leadership position and venture into adjacent market opportunities. Both companies will be able to make the appropriate investments to boost growth and drive profitability, ultimately generating significantly more value for our customers, employees and shareholders.”

Investors have been bullish about the Dutch firm’s restructure. Philips stock prices were up 3.5 percent (EUR 0.81) to EUR 24.31 on Sept. 23 after the company announced the spin-off of its lighting business. Philips shares were among the few on the Amsterdam bourse that increased that day.

Osram, a global lighting manufacturer and competitor of Philips, separated from its parent company Siemens before the Philips restructure and became an independently listed company. Some analysts believe Philips copied the Osram strategy. Others say Philips planned its lighting business spin-off well in advance, and that Osram’s separation from Siemens first was coincidental.

LEDinside will analyze the reasons behind Philips lighting business restructure from six different aspects to explain the logic behind the lighting giant’s decision making process:

1. Philips returns to core healthcare business, by separating less relevant lighting business

Philips’ lighting business restructure can be seen as a continuation of its long-standing business strategy, which focuses on its highly profitable health business. Indeed, over the past decade, Philips has focused on that health business, and ended its chip manufacturing and TV businesses. With the lighting business now a stand-alone company, Philips can channel resources to its health-care business, which has a higher entry threshold.

Refocusing on core businesses emphasizes the correlation between a company’s core businesses and capabilities, requiring a firm to concentrate its resources in its most vital business lines. Companies are still diverse after implementing a core business strategy, but distinct company business lines become more relevant and competitive advantages more pronounced.

2. Spin off of subsidiaries to save costs as benefits of economics of scale become less evident. The two independent companies will have their own independent decision-making mechanisms to quickly respond to market changes.

Large enterprises tend to enjoy economics of scale, but at the same time massive size can be a liability and even damage profits. Philips Group has more than 113,000 employees worldwide, but its massive corporate structure has attracted much criticism in recent years. Stifling bureaucracy in the company’s multi-level organizational structure has offset benefits from Philips’ economies of scales.

By splitting the less relevant led high bay light for sale and health care business, the two new companies will become more streamlined, allowing Philips to respond to market activity in a more flexible manner. The Dutch firm estimated the new operating structure would enable cost savings of EUR 100 million in 2015, and a further EUR 200 million by 2016.

3. Brands: company moves from a multi-brand platform to one of individual branding, enhancing brand influence in the respective fields.