The early signals from emerging technologies are often weak and hard to interpret. The possible disruptions envisioned may fizzle-- or scale ra
The early signals from emerging technologies are often weak and hard to interpret. The possible disruptions envisioned may fizzle– or scale rapidly when new entrants launch novel business models. In such cases, entrenched players must assess whether to wait and see, invest in strategic options, or get ready to exit vulnerable business segments before it is too late.
The lighting industry’s response to the gradual rise of light emitting diodes (LED) over decades is instructive here. As explained in our book See Sooner-Act Faster , Philips used three key strategies to figure out what to do. First, its leaders probed the challenges and opportunities of LED technology early on, starting in the 1990s. Second, they formulated and tested competing hypotheses about LED applications as well as market trajectories. Third, they used these insights to develop multiple scenarios to test their strategies as well as educate their organization and the industry about potential market quakes ahead.
The Lighting Industry. Philips, Sylvania and General Electric (GE) constituted a long-standing oligopoly, followed by several tier 2 regional OEMs. The three main players held about 65% of the U.S. lighting market, especially in lamps and controls, before the new millennium. But around 2000, industry leaders became increasingly concerned about the potential disruptions that LEDs might pose. Would the 100+ year old lighting paradigm created by Thomas Edison in 1880 finally come to an end?
In early 2003, the major stakeholders in the lighting industry joined forces to map out the future of the business and launch a drive for market transformation. They developed wide-ranging scenarios about the future of lighting, some scary and others more promising. The scary scenarios were intended to shake the industry out of its complacency, assuming that shock therapy now would be better than waiting for major disruption later. Philips’ in-house projections served as a starting point for the ‘Bridges in Light’ initiative at the Lighting Research Center (LRC) to foster an industry-wide perspective. These scenarios were later used by a major trade group, the National Electrical Manufacturers Association (NEMA), to launch an education effort along with a broad marketing program to help the industry adapt to LED. One positive outcome was that LED technology became part of its standards setting around 2005.
How Philips Responded. The impact of LEDs depended on several factors beyond the technology itself, such as changes in customers’ buying behavior and needs, emerging regulations, and the overall focus on energy efficiency. CEO Gerard Kleisterlee set up a separate LED business unit in 2005 to break away from the established industry rules. He situated the unit in the U.S., as the LED market was most advanced there and sufficiently removed from headquarters in the Netherlands. This new unit entered into unusual partnerships from 2005 to 2010, teaming up with players from adjacent industries, traditional OEMs, and even a few competitors.
Some early marquee projects undertaken by Philips, such as lighting up the Saks Fifth Avenue building façade for the holidays in 2005, required partnering with a small upstart LED company that did not have sufficient resources to scale its innovation. Building on the success of these forays, the new business unit embarked on bolder projects, such as converting the lights in the New Year’s Eve ball in Times Square from halogen bulbs to LEDs. This headline-grabbing initiative at the end of 2008 likewise required collaborating with another small, innovative design- and- technology company to create the desired lighting effects using LEDs. It was a smashing success, covered the world over, and gave LEDs even more prominence. However, this stark turn by the LED unit dismayed some traditional lighting advocates within Philips who wondered “why help accelerate a disruptive technology that may put us out of business?”
But Philips’ organizational culture continued to offer a supportive context for fostering deeper inquiries and constructive doubt. Even though many traditional lighting managers were skeptical, and the lighting industry remained hesitant, a few senior executives devised internal avenues to explore LEDs further. To acquire the necessary manufacturing capabilities, Philips entered into several joint ventures (JVs), starting with Lumileds, co-owned with Agilent Technologies. Philips then acquired the remaining 47% of Lumileds from Agilent in August 2005. These and other technology investments benefited from Philips’ well-known brand and broad channel access to markets globally.
The new LED business unit allowed Philips to forge ahead of the industry even though the internal process of debate to resolve conflicting priorities was often laborious and bureaucratic. Indeed, the board had to throw its weight behind the new internal LED group at times to fight uphill battles against powerful traditional business units within Philips that favored investments in the conventional technology.
Scenarios For LED. Around 2005, Philip’s leaders became especially interested in two key uncertainties, whose outcomes could significantly shape their future business environment. The first uncertainty was about how quickly the shift away from conventional lighting–where Philips was strong– could happen. The second uncertainty concerned the market’s adoption rate of integrated digital solutions for existing or new applications. LED technology would likely enable genuine lighting innovations due to its small size, long life, low voltage and wide temperature range. This meant it could be embedded in all kinds of materials or application, such as lighting urban landmarks, enhancing medical applications or enabling military technologies.
In the most challenging scenarios envisioned by Philips, hardware controls for lighting –such as fixed switches on walls– gave way to digital controls operated from anywhere. Lighting controls would be transformed into software applications offering features far exceeding traditional hardware controls. Architects, designers and interior decorators would gain market clout once new versatile digital controls reached attractive price points for consumers. This switch towards intelligent, integrated lighting solutions could use very little of the old analog systems and it would amount to a brave new world for many traditional players.
The End Game. By 2013, LED-related sales accounted for around one-third of Philips Lighting’s total, having risen by 75%. This growth put Philips in the lead LED position compared with traditional rivals. But Philips’ leaders also realized that LED would profoundly disrupt the old lighting industry and decimate the long-standing oligopoly. The low gross margins of LEDs, due to cheap manufacturers in China and a shrinking light bulb replacement business, made it an unattractive business for Philips, a company accustomed to high margins. It saw the bleak future sooner than its main rivals thanks to early probe-and-learn strategies followed by disciplined strategic scenario analyses. All this required strong support from the CEO and board, starting with forming a stand-alone LED unit and then shielding it from legacy business units determined to protect turf. Leadership vigilance is ultimately what allowed Philips to see the gathering LED clouds sooner than GE and Osram, which gave it a longer time window to divest its traditional lighting assets.
The strategic question for Philips became how best to exit, and when, before the other two major players would do likewise. Philips started to explore the sale of its lighting business in 2014, which resulted in a two-part divestiture in 2017 , while keeping a minority stake in a new company called Signify. This company continued to market the Philips brand for some time, while the Philips itself shifted its focus further toward consumer health and medical systems world. GE took notice and started to unload its lighting business as well, in the face of steadily dropping profits. Osram followed suit in part but decided to stay in some key market segments, such as Automotive LED lighting. In short, the powerful lighting oligopoly has largely folded its cards after many decades of being on top.
Playing the end game well when markets quake deeply, due to digital disruption, regulatory changes or other exogenous factors, remains a key leadership challenge for many firms. Social media companies, like Facebook and Google, are still struggling with new privacy regulations and nefarious players hijacking their platforms. Remaining vigilant requires heeding the lessons from those who failed to see ahead, such as Kodak, Wells Fargo, Nokia or Boeing, while also developing internal capabilities to let the company see around corners and act on early warning signals in a timely manner.
Co-authored with Govi Rao, former leader of Philips’ LED unit and later President and CEO of Noveda Technologies. Govi presently serves as Managing Partner of the Carbon Group.
Published on: Mar 30, 2020
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