EXCLUSIVE. MUST CREDIT EDISONREPORT. On 4 December, your humble editor sat down with Bruno Biasiotta, President & CEO Lighting North America, at Philips Lighting. Below is our discussion.
ER: What keeps you up at night?
Mr. Biasiotta: Thinking about the value we can bring to each customer and their customers along the value chain. Business is all about the value we create. To do that, we need to understand what the customer needs. As someone new to the lighting industry, I am excited about these possibilities and I am constantly thinking of new and innovative ways we can better serve the needs of our customers.
ER: You are from Johnson Controls. Did Philips bring you in because you don’t have the same paradigms as others in Philips and that you could be more objective and not worry about the sacred cows?
Mr. Biasiotta: (laughter) You should ask someone in Eindhoven that question. But I do think my background with Johnson Controls is a key. Johnson Controls is a system integrator. They have been successful in building a service business based on selling a complete solution and have navigated through different technology transitions and business models.
Philips recognizes significant trends are affecting the market and thus the customers. And we focus on the customer. There is a demographic and population shift. 70% of the world’s population will be in major urban areas. What does that mean for lighting? Energy costs will rise by 53% between now and 2035. What does that mean? Buildings account for 40% of energy use and Lighting is 28% to 30% of energy in buildings. This is one of the reasons I came to Philips. Huge opportunities. It is a real privilege for me to lead this company at this particular time of change.
ER: How have you learned the business?
Mr. Biasiotta: The first thing I did was to visit 50 plus customers including lighting designers, end users, distributors, agents, and installers. I asked a lot of questions. My fair share of dumb ones, I might add but essentially I attempted to focus on gaining insight from customers and salespeople. For example I would ask salespeople to flow chart the business. I would ask what happens when we get an order. What happens when the agent or distributor calls and can’t get product? The sales people fight the fight every day, and it was a great experience for me.
ER: I will mention a technology and you state the first thing that comes to mind.
Mr. Biasiotta:
- Incandescent—Thomas Edison
- Master Color Elite—transition
- Light Emitting Plasma—functionality and innovation
- OLED–$52 M investment we made in our Aachen facility
- LED—art of the possible
ER: What are Philips’ strengths and core competencies?
Mr. Biasiotta: We are very well positioned along the value chain primarily because of the vertical integration. We understand the future of where the industry is going and the potential for growth opportunities. But the most important strength we have is the relationship and trust with our customers. We try to understand our customer’s needs, gain insights and then develop innovative products that help meet our customers lighting goals.
ER: Historically there may have been three Philips organizations in a territory such as a Daybrite rep, a Crescent rep, and a direct person from Lightolier. Now with the blue and red team, there are only two, and we hear it is going to one. How will that be good for customers?
Mr. Biasiotta: Structure follows strategy. I don’t want to get into details about what we might or might not do, but business models have expiration dates. A lot of companies have not jumped the ‘S’ curve at the right time and not recognized the trends. Clearly we at Philips are thinking along those lines, more holistically. What are the trends that impact lighting? I am going to share with you portions of our strategy. Think of a Lighting Nexus with the following interdependent factors:
- Energy Efficiency/$
- Technology convergence
- Software/applications intelligence such as the HUE
- Security/safety—as we move to urban areas security and lighting increase in importance
- Legislation
We plan to be at the intersection of the customers’ buying objectives—which are changing–and the exponential gains in lighting performance. Our opportunity is to link how lighting drives facility performance and the impact that has on a company’s business objectives. We will continue to sell hardware, but we will also earn revenue from software, integration services, and solutions. In addition to a single sale, there will be recurring revenue. We will manage systems for ten, twenty, maybe thirty years and thus focus on outcomes.
ER: Will Philips focus more on the component side or the luminaire side of the business?
Mr. Biasiotta We will focus on the entire Philips portfolio of businesses but luminaires is the largest opportunity and the segment undergoing the most significant change. In 2017, the North American Lighting Market should be about $19B; this beaks down as follows:
Drivers/ballasts $1B
Lamps $4.5B
Luminaires $12B
Controls $1B
Our strategy is to: 1) Protect and grow core business, and we will do this by investing in new platforms and extending our capability. 2) Offer operational excellence. We will have better execution; there is always room to improve our level of service and the customer experience. 3) People. We will continue to have the best people in the industry.
The four pillars of our strategy are:
1) Protect and grow our core business around lamp, drivers luminaires, etc with our current customers.
2) Invest and incubate around new new growth platforms and services directed at the channels and markets
3) Drive operational excellence across the organization that leverages our scale
4) Focus on our people. We will continue to attract, retain, and grow our people so they remain the best in the industry.
ER: What does it mean to Invest and incubate around new new growth platforms?
We are going to broaden our offering, potentially extending to new markets. But primarily we intend to deepen our capabilities around both our current offerings along the lighting ecosystem but aslo extend our value proposition into adjacent capability and new offerings.
ER: How will you do this as you lay people off?
Mr. Biasiotta: We have 5,700 employees in lighting. Keep that in perspective. But we have to adapt our business model. Look at the camera on your cell phone. It was invented by Kodak, and where is Kodak today? Look at Nokia who used to dominate the cell phone business. Where are they?
ER: Do you see channels changing? Are there opportunities to sell direct?
Mr. Biasiotta. The market behaves in a natural way, and we must be very respectful of the way the natural market behaves. There are many companies lying on the side of the road that have tried to go counter to the way the market behaves. About 55% of the market goes through the Rep-Distributor market. Do we want to swim upstream against that? Absolutely not. We are firm believers in that market. Let me emphasize that the specifier or lighting designer, the agent, distributor, and the installer are very important to our strategy. Further, we respect those strong local relationships, as the markets are local and based on personal interactions. I am a strong believer in the ability of agents to impact markets based on their local connections.
If an electrical distributor out there today is buying our ballasts and they do not purchase our luminaires, that’s ok. We would like them to purchase our luminaires, but they don’t have to. We value that relationship and that component business.
ER: When will we see the tipping point where the LED will replace the incandescent lamp?
Mr. Biasiotta: Today! (laughter). We just launched the Airflux. It may not be today, but a few years ago LED was 2 to 3% of our business. Today it’s 20%, and it will be 50% in two to three years. By 2020, 75% of the business will be LED.
ER: …and it’s less profitable…
Mr. Biasiotta: It is, which is why we are adapting to look at what can be. When you make a statement like you just made, it shows you are focused on a single sale of a product and not the downstream opportunity for ancillary services. Think about the data that a ballast has and what happens to that data today? Nothing! We want to communicate with the ballast and suck that data out. Intelligence is already built into many of the products we make today. The opportunity is to put it in the context where we can deliver a value-added service. Net zero buildings are just around the corner.
As I mentioned earlier, we are looking at broadening the offering and extending the capability. LED unlocks huge profit potential as we expand into new markets. There is no such thing as a smart grid without a smart building. Again, recall my background at Johnson Controls and what we accomplished with complete systems, integrating technologies, and creating a recurring revenue model.
Now, when we consider profitability, we have to look at three types of competitors: legacy players, new entrants, and adjacent competitors. We have a tremendous respect for competitors, as they are very bright people. Some have different goals….
ER: …such as raising venture capital?
Mr. Biasiotta: Yes or going public or several other goals that are different that ours. Many don’t have the manufacturing investments or the market channels of Philips. They need to be very careful.
ER: One of your competitors has recently introduced a 10-year warranty. How important are long warranties and are they healthy for our industry?
Mr. Biasiotta: Warranties are important, but if we are going to manage a complete system for ten or twenty years, they become irrelevant. Further, obsolesce becomes irrelevant. We’ve been here for 120 years and we’ll stand behind every project and product. If a company is not a significant player in the market, will they be around to cover any warranty?
Editor’s note: at this point we spoke off the record about one specific company in the marketplace with a very low price and an even lower quality product. We spoke of the concern about end users trying LED for the first time and the possible long-term impact of these low quality products.
ER: JF Simard, Chris Hamelechec, Tim Berman, John Campsmith, Cheryl Fraga, and Jim Haworth were key entrepreneurs who ran independent businesses within the company, and they are all gone. Comment?
Mr. Biasiotta: We cannot speak to what happened in the past, and we are not looking in a rear view mirror. Our focus is where to take the organization and to explain what we are going to do and how we can listen to the voice of the customer and adapt to best serve those customers.
ER: We hear that your people are nervous. Your agents are very anxious. Some may be sitting on orders to see if they will still have the line.
Mr. Biasiotta: … We must get this right.
ER: But there is turmoil right now…
Mr. Biasiotta: Remember, I started July 1st. There is a lot to do, and we are talking about people’s lives. This is very serious business. My parents were immigrants. I get it. I know what hard working families go through, and we want to be very respectful of our people and their families. This is the worst part of the job. I keep telling the leadership team, if this ever becomes easy, we should remove our selves and stop doing this. These are gut-wrenching decisions, but we have to get it right.
ER: As you reorganize, do you expect any backlashes—and our industry has a few famous backlashes?
Mr. Biasiotta: With any change there is bound to be a response, but we like to focus on the glass being half full. We feel there is an opportunity to bring more value in the market. When we make these decisions, we will look at several things.
First, we will protect and grow our core business while supporting our existing channel partners such as agents, distributors, specifers, installers, the professional channel, consumer, and OEM. We are absolutely committed to these channels. And as a result we have assigned Ed Crawford to lead that part of the business moving forward.
Second we will nurture, grow, and invest in new platforms. Bill Schoettler will lead a group of National accounts and services that will support the existing channels.
The third is services and software. Do our agents and distributors understand the impact of things like demand side management and how all of this new technology will integrate? Do they know how to properly commission a job? Are they familiar with energy services or all the ancillary support services that are evolving in that space? Most are not, and we are changing the organization to better support them in these new endeavors, which will increase the value we create for distributors and agents. The Philips line will be more valuable than ever. Who better to do this than Philips?
ER: Let’s speak about Intellectual Property. How Important are licensing agreements?
Mr. Biasiotta: They are important for three reasons: 1) They makes us better and keep us on our toes. It will only be a matter of time before prodcuts are reversed engineered and thus we need to continually improve. 2) These agreements drive innovation because different companies have different viewpoints and 3) It benefits the industry.
ER: The new organization, whenever it starts, how will it look?
Mr. Biasiotta: We will have zone managers that will have absolute authority in their territory. At this level there will be one throat to choke: luminaire, lamp and ballast. They will know the local markets and we believe in local decision making as close to the customer as possible. These zone managers will have total empowerment. Bill Tortora will run the Northeast; Jim O’Hargan in the South; Jeff Ridgell in the Mid-West; John Gusella in the South Central, and Conrad Smith in the West. In addition, there will be 30 to 33 territory managers within these zones that will focus on project management. We are committed to our channels, and we have different models. We may have different solutions within the same territory. The plan is to keep integrity with the relationship. One size won’t fit all.
There will also be category sales managers—subject matter experts on specific product–probably 44 to 65 people, and they will be grouped by application. They will focus on the solution-selling model.
Bill Schoettler will manage our National Accounts and Services—the new capability. National accounts will be segmented by verticals such as: retail, office, industrial, installers, and specifiers.
We are taking a strategic account management approach to build out the platform. It is a complete enterprise approach that respects existing channels.
To effectively support this new organization and key strategies we have embarked on significant investments in a seamless customer support and fulfillment center being enabled with upgraded systems and webtools. This work is being done behind the curtain. We want to provide a best in class experience, and it won’t happen out of the gate. The goal is a differentiated customer centric seamless support organization aligned by channel and segment.
ER: Prior to our discussion today, our team of eight voted, and EdisonReport is naming you our 2012 Person of the year.
Mr. Biasiotta. Why me? We haven’t done anything yet.
ER: But you are making transformational changes right now. You are the one that has to really integrate the company. To your point earlier, you have to get it right.
Mr. Biasiotta: Yes we do.