Approximately 19% of the world’s electricity bill comes from lighting, according to Rudy Provoost, CEO of Philips Lighting. As such, Philips, the world’s largest producer of industrial and consumer lighting products, has a big role to play in the ongoing transformation from incandescent to solid-state lighting using LED technology. Provoost, who until last year was CEO of Philips Consumer Electronics, is no stranger to new technologies, which he says are “just a vehicle to respond to needs.” Figuring out what those needs are, weeding out needless complexity and innovating with an eye on the bottom line are the keys to growth, Provoost says. He recently spoke with Wharton marketing professor George Day, academic director of Wharton Executive Education’s program, Full Spectrum Innovation: Driving Organic Growth, and with Knowledge at Wharton, about the challenges of staying ahead in a rapidly changing industry.

An edited transcript of the conversation follows.

Day: Tell us a little bit about why you are here at Wharton, and about the transformation that you are undergoing, both in a new job and in an industry that is undergoing a transformation.

Provoost: I recently became the CEO of Philips Lighting, after having been, for three years, the CEO of [Philips] Consumer Electronics, which I call the “University of Life.” So, I thought that it was the right way to start a new life by going through a full immersion to refresh everything that I’ve ever been exposed to when it comes to strategies and how to make growth happen and drive innovation. It’s “Full Spectrum Innovation” week [at Wharton], and that fits into my full immersion program. 

Day: Philips is the worldwide leader in lighting and has been for many, many years. You’re coming into this business at a pivotal time, with a very interesting background. The pivotal time, of course, is the steady and perhaps accelerating transition into solid-state lighting. Could you tell us what the consequences of this big transformation are for Philips Lighting? And, at the same time, maybe talk a little bit about how you’re going to manage the decline of the traditional business while this is going on?

Provoost: [Those are] many questions at the same time, but indeed lighting is at the crossroads — and I say that both from a marketing perspective and from a company perspective. There are some very important real trends that change the dynamics of the business and even the business models that go with it. There’s the whole shift from incandescent lighting to new forms of lighting, solid-state lighting in particular.

There is the whole energy efficiency ‘green wave’ that really forces society to change, and lighting can contribute significantly. I mean, 19% of the electricity bill in the world is lighting, and so we have a contribution to make. Obviously, there are many, many companies with new disruptive technologies that are coming in, who maybe will become part of the lighting game — which until now was very much an oligopolistic game, where the giants like Matsushita, GE, OSRAM and Philips were fighting the war.

The whole landscape is changing. Now, change means opportunity, and in that sense we have actually been anticipating what is happening. In the past two years, we did a $4 billion acquisition program. We acquired five companies: Color Kinetics, Genlyte, many of them are U.S. based. That allows us to step-up significantly. I think that we have all of the ingredients and we have the building blocks. And now the fact of the matter is that we need to put the pieces of the jigsaw puzzle together, take all of those ingredients and bring them together into a winning formula. That is what I’m supposed to do. It’s a very exciting moment and I look forward to it. This is like writing history.

Day: Yes, it’s a daunting prospect. But, you’ve had some really exceptional experience that I think equips you for this particularly, and maybe you can reflect on your experience in consumer electronics and how that might help guide you through this transformation.

Provoost: There must be a reason why they have asked me to do this job. [Laughs] And so, yes, I’ve been working in different businesses: Proctor & Gamble, Canon, Whirlpool, and Philips Lighting — the last seven years in Philips Consumer Electronics, which I always call a “life-altering experience.” That’s a place where all forces come together. You know, consumer electronics, the whole ICT sector has gone through a dramatic transformation.

Also, there are the shifts from analog to digital; in the TV business, there are the shifts from CRT to LCD and Plasma. There was a notion before that when we talked about consumer electronics, the emphasis was on the electronics, on the hardware. And now it’s about a unique combination of hardware, software services and content.

So, if you think about paradigm shifts and transformational change — that is what I have been dealing with for the past seven years. And there’s no escape: I will have to deal with it again in lighting. But, having gone through that “University of Life” and having been exposed to it, I think that we’ve found a successful formula to compete in a very global and dynamic market. It is hopefully going to help me to be successful going forward. So, yes, I hope that I can use everything that I have learned in the past years and apply it again and add to the learning.  

Day: I have this vision of a lighting plant that I was in one time which was immense and automated, and they could tell me the cost of everything down to a tenth of a pfennig. They managed that all for efficiency. And I’m sure that Philips is fabulous at that sort of thing. And so, you’ve got that kind of model, that culture and that system. How are you going to transform and disrupt that? And, what are the assets that you bring from that into the new game?

Provoost:  I think the issue is not so much how good we are in the process industry, or whether we should manufacture everything ourselves. I really believe that the issue is: Where do we have to be a vertically integrated business? And/or, where should we depend on others or partner with others, whoever that might be? Outsourcing parts of the process or establishing value added partnerships with suppliers, open innovation. 

In that sense, again, we will not be a successful lighting company by excelling in manufacturing processes. It’s really about [looking] outside and understanding what the market needs are, what the future applications are, what the requirements are for lighting solutions and experiences in various places and spaces: What does it mean in the office? What does it mean in the shop? What does it mean in terms of city beautification, street lighting?

On the technology side, we very much know what is possible. On the marketing side, we have to be more specific in answering the question of what is required — and then bring the two together. Technologies are just a vehicle to respond to needs and come up with absolutely brilliant solutions and applications. In that sense, my focus will [much more] be outside-in, understanding what needs to be done and how I can connect the dots also between the capabilities and competencies we have now in the new lighting company, which is a mix of existing Philips businesses and acquired companies, then make sure that we are obsessed with end-user-driven innovation and just take that to its full consequence.

Again, if you want to be successful and in terms of business model control points, in some aspects, if we need to be vertically integrated, we will be. It’s really more about the business model than about bits and pieces of processes — you cannot disconnect the two.

Day: It’s market-driven innovation at a scale beyond anything that you’ve ever had to manage — or at least Philips Lighting has ever had to manage. What will be the biggest barriers that you think you will have to overcome, [especially] around maintaining your leadership position? 

Provoost: I guess it’s a bit of a paradox, but the success of the past could be the biggest barrier for the future. This lighting company has been extremely powerful and has invented the space and came up with particularly winning technologies and there were many control points. Right now, it’s all about mindset. It’s about, at the end of the day, we, me, the people are probably the most important limiting factors, and so that’s where the challenge is.

What I learned here is that statement of Darwin’s — that it’s not about being the strongest, but it’s about being the most responsive and agile [when it comes to] change. That is what it’s really all about. And so, making sure that we have the culture right and that we use the DNA of success in the past, but blend it with new DNA.

As a matter of fact, in the world of solid-state lighting, LEDs [light-emitting diodes], everybody has access to LEDs; everybody has access to the basic technologies. If you have IP, fine, but a lot of the IP can be bought. It’s really about a more segmented end-user application solution approach to it, rather than a pure technology view of it. This will require people changing, it will require different prioritization, and it will require different ways of spending our money and allocating resources.

Day: We did talk about one of your competitors GE, who has seen the need to bring in a lot of outsiders, a lot of fresh faces, different mental models. Do you see a substantial number of new employees, or will the acquisitions that you have already made bring in enough fresh talent for you?

Provoost:  We have got all of the fresh talent, of course, through these acquisitions. There is a very intense exchange of talent between the different sectors, within Philips. And, it is remarkable how you can blend everything together. We have a consumer lifestyle business, a lighting business, a healthcare business. There is a lot of internal talent. But, absolutely, the team of today is not the team of the future and so we will have to strengthen it.

But the answer is not only in our own talent pool. It’s also about connecting with the world and working with the right partners. I mean, just here, during this week, we had the chance to listen to the lighting science group and CEO — well, he’s actually a partner. And that is typically the case, where you work with companies who, for example, can act as, to put it in IT terminology, value-added resellers or system integrators. So, it’s not only about your own talent pool; it’s about an extended pool of resources. To win, in the future, we need to add brain power and horsepower; and then, make sure that we have the willpower to stay the course.

Day: So, you’ve got a number of partners out there. One of the big challenges always in managing open innovation, with lots and lots of partners, both providing ideas and helping you to commercialize them, is who gets to keep the intellectual property and monetize that?

Provoost: Well you know, through the acquisitions that we made, we made sure that we have a very good intellectual property platform [laughs]. 

Day: That’s definitely one way to do that. [Laughs] 

Provoost: We have quite a lot of intellectual property there, but if you really want to and have to partner, then you have to make sure it’s a win/win. So, I guess in the way we structure partnerships, in whatever shapes or forms — from joint ventures to alliances — you need to make sure that it’s a mutually rewarding partnership. It’s not only about the IP, but the IP of course is an element. It can be an enabler, or it can simply be a control point; or it can be a shared interest. And so, I would say that we should be open to any business model and just pick the one that creates the most value.

Day: We’ve talked about two of what I think are the four main levers that you are working with. One is leadership and you are exercising that and you have a vision. The second of course would be the structure that you put in place, including all of the people. The third, which is the one that I want to turn to now, is the motivation part of it, the incentives and the metrics. Do you see the need for new metrics and new kinds of incentives?

Provoost: Yes, but you need all three — I call it the “Triple As.” One, the leader has to be an advocate — he has to be an activist almost for innovation. The second A is accountability. I don’t like the word “structure” too much. For me it’s about accountability, it’s not about org charts and re-drawing the reporting lines. It’s really about accountability — make sure you have owners with a face and a name and then connect the right people together. So, the informal network, so to speak — that is very critical.

The third A for me is you need amplifiers. Now, one amplifier is the reward schemes that you use. And there, it’s always about the trade-off between incentive schemes that stimulate the feeling of belonging and the joining forces behavior versus the incentives that reward individual or team accomplishments. Now, we’ve made a very deliberate choice to actually go for the incentive scheme that stimulates the kind of “one lighting,” joined forces, all-hands approach.

This is because if you want to win in the future, particularly in the context of Philips Lighting today, you need to make sure that all of the business groups, all of the units, all of the acquired companies as well as the existing teams — you need to make sure that these teams are working together. I mean, if you just let Lamps do what they think is the best for lamps, or Lighting Electronics do what is best for lighting electronics or the Luminaires Group do just what is best for luminaires — we will end up with a suboptimal situation.

For me, the innovation agenda is actually part of a larger growth agenda and I want to make sure that everybody feels part of that same growth objective and signs up for the same bottom line. This will make resource allocation, reprioritization or sharing of competencies and capabilities much easier. So, that is the way we are going to deal with it.

Day: This goes hand in hand with a partnering orientation, or a share-to-gain mindset.

Provoost: Absolutely.

Day: I have one final question, which is really looking at innovation in large organizations, at a time of recession. For the last five years, we have had a robust economy, notably in North America, Europe and in Asia. Innovation is at the top of most CEOs agendas as it is in yours. Now, looking at your experience and thinking about your competitors and companies that you know, what do you think is going to happen if we have a recession? What will happen to innovation, the enthusiasm for it, the willingness to support it and make the long-term investments that are necessary?

Provoost:  Well, I cannot answer for the world or for other companies. But certainly from a Philips Lighting perspective, in times of recession, the last thing you want to do is cut off the oxygen. In times of recession, you need to work harder, run faster and so you need a lot of oxygen and for me innovation is about oxygen. So, we are not going to cut the oxygen and we’re not going to cut the lifeline — because no lifeline means no survival.

Of course, a recession will probably force us to make choices. So, it’s not about doing less, it’s about picking the right battles. And I think that in times of recession, actually, it’s a bit of a paradox. Value becomes more valuable. At the end of the day, consumers have to make choices too. And so, it’s about share of wallet and the choices they are going to make. Are they going to buy Philips Lighting or something else?

Now, if the value proposition is attractive enough — and it can only be attractive if there is a real innovative component to it. And, that could be a real energy efficient lighting solution, which helps in time of recession to keep the costs down. Then, we should be the most attractive offer for that consumer. I don’t think the answer should be or could be to cut budgets. But, as consumers need to make choices, we have to maybe make choices.  And that is, for me, the way that we will deal with it. So, in that sense, I am very optimistic.

For me innovation is a little bit like acupuncture: You need to put the needles where the energy points are. This is true in general, but in times of recession, that’s probably even truer. And so, I hope that we can manage it in the proper way going forward. Again, I am optimistic, even in times of possible recession.

Day: Some years ago, there was a very interesting study which looked at a couple of recessions and looked at the changes in industry structure, both before and after the recession. And it turned out that was when market shares shifted because there were some competitors who were forced, or who chose to maximize current earnings — cutback on marketing, cutback on innovation, not to mention Executive Education and all of those other things — and they invariably lost a lot of ground…. And that is when you can pile on and gain share. 

Provoost:  We referred to Darwin earlier and this is again Darwin at work; it is survival of the fittest. A recession can indeed trigger shake-outs and the one that prevails is the one that was the most flexible and responsive to change — and the one that speaks to the hearts and minds of the consumer. 

Knowledge at Wharton: I have a couple of questions. Whose job is it to innovate in your company?

Provoost:  There are probably two answers to that. One, it is everybody’s job because innovation is not only about product innovation or service innovation. In essence, you can innovate everything, every day, in every process. I think the notion of innovation, in my opinion, should be a very inclusive notion. This is so everybody can ask themselves, every morning: What can I do differently? And that goes from taking out unrewarded complexity in the spirit of Philips ‘Sense and Simplicity’ to just challenging the status quo — and I think that that is everybody’s job. 

Now, at the end of the day, if you really want to push the envelope, and you do not want to limit yourself to the small “i’s” (incremental innovation) but you also want to hit the big “I’s” (breakthrough innovation), you will need to have the big boss to have skin in the game, too. And so, I think that it’s very important that the leader is the chief activist, so to speak, and leads by example.

Knowledge at Wharton: You referred to the sort of disruption that innovation causes. Innovation is inherently a somewhat messy process. How do you manage the balance between creativity and organization in managing innovation?

Provoost:  I don’t think that the process should be messy. I think that the process should be very structured and disciplined. But what you put into the process — and what comes out of it — and the cycles of, I would say, diverging and converging solutions and elements of innovation — that could be a very creative process. But, the best creative process is the one that is well structured at the end.

You look to the benchmarks, from the ideas of this world, to some companies that are very well known for their success. I mean, they all have a very structured and disciplined way of dealing with innovation, but within the boundaries, their bandwidths, they allow a lot of creativity. And, I guess that is the way to handle it and to manage it.

Knowledge at Wharton: How do you measure the returns that you earn on your investment in innovation?

Provoost:  I think it is extremely important that with whatever point of measurement you take, whether it’s what you put into the innovation process, like R&D resources, or the process itself, the effectiveness of the innovation, or the output of it — that there is always the notion of profitability. So, in one way or another, if you think about outcomes, things like R&D as a percentage of sales, I don’t believe in. R&D in relation to EBITDA, I believe in.  

Every innovation project should have a return on investment, an internal rate of return, a net present value. And, you need to hardwire it and keep yourself honest, because at the end of the day, it’s about generating returns. The top line is interesting, but the bottom line is what matters. You need that bottom line in order to continue to generate resources and to continue to invest in innovation. And so, that for me is a very important element — the most important element.

And of course, there are many lagging indicators, like new products that were brought to the market in the last two years or three years. That is for me a lagging indicator. I’d rather have leading indicators like: What do we have in the pipeline? And, there again, that should stimulate that culture of innovation, of not just trying to be satisfied with simple measures that do not mean a lot.