For this report, I chose to compare business strategies of two companies that have vastly different economies of scale, contrasting access to resources & investments, but are producing some products that are similar in their function and are intended for essentially the same audience. By juxtaposing these two companies, I wanted to learn whether a new entrant can survive and what tradeoffs they had to make in order to stand up to a Goliath of their market.
Philips (also known as Royal Philips), a Dutch company founded in 1891, is one of the largest electronics manufacturers in the world. Its focus is in the areas of healthcare, electronics and lighting. It operates in more than 60 countries and has over 100,000 employees. In 2016 Philips had revenues of €24.51 Billion and €1.491 Billion in profits.
As of 2017, Philips owns 79,000 patent rights, 49,000 trademarks and 86,000 design rights. It licenses rights to its technology to over 800 companies that have to pay royalties on the sales they make.
A world leader in lighting products, Philips Lighting N.V. ,formerly a division within Royal Philips, separated from Philips and became its own entity in mid-2016. Same year Philips Lighting N.V. posted €185 million in profits from selling lighting products (Philips Lighting), mainly using LED technology.
LiFi Labs Inc.
LiFi Labs Inc., is a Richmond, Australia – based company founded in 2012 by a group of five entrepreneurs. Its first product, LIFX smart light bulb, was a Kickstarter success that raised over $1.3 million in just 6 days of the campaign (LIFX Kickstarter). LiFi Labs Inc. manufactured and sold over 130,000 LIFX light bulbs in the first year of operations and now sells products including LIFX bulbs to customers in over 80 countries.
As of 2017, LiFi Labs Inc. employs 43 people in the US, China and Australia (LIFX.com). It owns 8 patents and doesn’t have any of its own manufacturing facilities. In 2014 LiFi Labs Inc raised $12 million in Series A round from Sequoia Capital to grow its business following a successful launch on Kickstarter.
Both, Philips Lighting and LiFi Labs sell what is now known as “smart lightbulbs”, specifically an internet-connected LED (light emitting diode) bulb capable of changing colors. Philips Lighting sells Philips Hue, a line of white or color-changing LED bulbs that was introduced in October 2012 as an Apple Store exclusive. LiFi labs sells LIFX, a line of internet-connected LED bulbs that was launched on Kickstarter in September 2012.
Key differences in capabilities and operations
These two firms couldn’t be any more different in their history, capabilities and strengths. Here’s some context:
Philips started manufacturing lighting products over 125 years ago, shortly after the light bulb was invented, and remained a global leader in lighting products for over a century. In 2012, Philips was the largest manufacturer of lighting products in the world in terms of revenue, and 22% of total Philips lighting sales were LED-based products (Philips, p. 77).
In September 2012 LiFi Labs was a new entrant that didn’t have any manufacturing facilities or a clear idea of how the LED lights are manufactured. All they had was a very rough prototype, a draft of an iPhone app and a Kickstarter video about a new kind of smart light bulb.
With this in mind, let’s take a look at the components of each firm.
Philips / Philips Lighting
Philips owns a strong multibillion-dollar portfolio of companies that research, develop and manufacture lighting products. In 2005 Philips acquired Lumileds, US manufacturer of high power LEDs. Two years later Philips acquired Color Kinetics for its LED lighting IP portfolio and Genlyte, A leading North American luminaires manufacturer specializing in Solid State Lighting (SSL). These acquisitions helped Philips design and manufacture any LED products in-house going forward.
In 2012, Philips Lighting had over 50,000 employees and manufacturing facilities in 25 countries (Philips). Leveraging past acquisitions, Philips utilized the following assets for production of LED light bulbs:
- Color Kinetics’ IP for control aspects of LED systems
- Lumileds’ plants in the US and Singapore for manufacturing of LED wafers and chips
- Its own expertise in manufacturing LED products
- Genlyte’s distribution channels in the US
- Over 1100 patents around lighting components and control systems
By 2017, Philips Lighting had 38 manufacturing sites: 16 in Europe, 15 in the Americas,
7 in China and India (Philips). Working together, these manufacturing facilities are capable of turning raw materials into LED light bulbs, complete with packaging. To develop and produce the physical aspects of LED light bulbs, Philips employs the following types of people that are distributed across 60 countries:
- Material scientists
- IT and IT Security professionals
- Experience designers and User Researchers
- Development engineers
- Product managers
- Distribution center supervisors
- Manufacturing managers and engineers
- Electrical Engineers
- Quality assurance and compliance engineers
- Maintenance Technicians
- Supply Chain analysts and supervisors
- Industrial Designers
- Project Managers
Besides technology-related positions, Philips employs their own accountants, patent attorneys, distribution experts, marketing and social media professionals.
As of 2012, Philips owned a portfolio of over 1,200 patents relating to manufacturing, development, connecting and operating LED-based products (Philips).
Philips Lighting Home, a subdivision of Philips Lighting is the group responsible for development and manufacturing of connected home lighting products starting with Philips Hue. In 2016, it comprised 1,199 full-time employees (Philips). To develop a line of smart lighting products in 2012 Philips had to leverage external agencies and services because of its own lack of software development capabilities that were necessary for deploying connected lighting products. For example, Dutch agency “q42” was used for infrastructure consulting, website design, the smartphone app / app support and backend architecture for Philips Hue. To this day, q42 is used to maintain the smartphone apps and expand cloud infrastructure for Philips Hue.
Philips was able to avoid building its own server infrastructure for supporting millions of Philips Hue light bulbs by using Google Cloud platform. Nevertheless, Philips Lighting employs the following types of engineers to maintain and scale their digital operations for Philips Hue:
- Android developers
- iOS developers
- js Developers
- Dev Ops for own server maintenance
- Web Developers
- User Researchers
- Integration engineers
- Product engineers
- UI Designers
A crucial component of Philips Hue system is the “bridge”, a Wi-Fi connected hub that connects to Hue light bulbs using ZigBee protocol. Every customer that purchases Hue bulb must have at least one of these “bridges” in order to use the Hue. Philips, a member of ZigBee Alliance, has been investing in ZigBee protocol for over 10 years and had dedicated resources that supported its development.
LiFi Labs Inc
In September 2012 LiFi Labs Inc. set out to develop and manufacture their own smart light bulb from scratch. At the time LiFi Labs had five team members that had the following experience:
- Four people had previous Software engineering experience
- One person had previous Hardware engineering experience
- All five had previous entrepreneurial experience in the realm of building websites
- As far as crowdfunding, only one person previously, rather successfully, raised money for a cardboard box that turns a smartphone into portable document scanner (!!!)
After raising more than ten times their original goal (a total of $1.3 million in six days), LiFi labs had to pause the crowdfunding campaign because of worries of not being able to scale the product after launch (Kickstarter updates). In the course of the next six months they were able to find and hire around ten professionals, increasing the core team size to 12-15 people:
- App Development engineers for iOS and Android apps
- Industrial Designer
- Software Development engineers
- Electrical Engineers
Having very little manufacturing experience and no existing manufacturing capacity, the team had to spend a lot of time in Shenzen, China, where they found a potential manufacturer for the LIFX series of products. The same manufacturing plant is known to produce similar products for at least three other companies. At least one person from LiFi labs was continuously working with this plant for 6-9 months to develop an initial prototype of the LIFX bulbs and oversee its initial production runs.
LiFi Labs used off-the-shelf components to build its light bulbs and did not manufacture their own LEDs or chips. Specifically, components from Qualcomm and Texas Instruments were used to provide Wi-Fi functionality, necessary for the LIFX light bulbs. Using off-the-shelf components allowed LiFi labs to decide on the circuitry necessary to make LIFX work and further scale the production based on component availability.
Similar to Philips, LiFi labs did not build its own cloud infrastructure to support thousands of LIFX light bulbs. They extensively used existing cloud providers to outsource digital infrastructure operations, and had only 2-3 full-time employees dedicated to developing and supporting this infrastructure.
LiFi labs initially didn’t have any IP related to its products and eventually was forced by Philips to enroll in “EnabLED Licensing program for LED Luminaires and Retrofit Bulbs” for using technology owned by Philips. This means that LIFX pays Philips ~5% of every sale on products that use Retrofit Bulb technology.
LiFi labs doesn’t have its own warehouse; and instead uses third-party distribution services based out of centers located in Hong Kong and California (Lifx.com).
LiFi labs relies heavily on third parties to execute nearly every aspect of their business. Below is a list of the services and companies they use to run the business:
- Single manufacturer in Shenzen is used to source all components, manufacture and package all of LIFX physical products
- Shopify is used to sell the product on the website
- Zendesk is used for customer support
- InteractiveAccounting is sharing an office with LiFi labs in Melbourne, Australia, and is doing LiFi Labs’ accounting(InteractiveAccounting)
- Over 5000 retailers around the world are storing & distributing the product for LiFi Labs
- Amazon is storing & shipping the product in the US and throughout Europe
With the seed money raised, LiFi labs was able to hire more engineers to develop the mobile apps and support the infrastructure necessary for smooth operation of the LIFX bulbs. By the fall of 2017, LiFi labs had representatives or offices in the following locations:
- HQ in Richmond, Victoria, Australia
- Software engineers in Cremorne, Victoria, Australia
- Customer support center in Redwood City, CA
Now let’s take a look at the processes that were put in place to develop, manufacture and sell the Philips Hue and LIFX light bulbs.
Philips / Philips Lighting
Philips Lighting controls every aspect of Philips Hue development and manufacturing process. From overseeing the sourcing, to developing the LEDs and microchips, to creating software and firmware for the Philips Hue, Philips does it all in-house:
The only component that is currently outsourced is the Cloud platform that the Hue depends on. “q42” is the agency that helps Philips with the aspects of digital infrastructure for the Hue. Most of the engineers at Philips Lighting that work on Philips Hue are located in Netherlands in close physical proximity to the q42 agency. This enabled tight integration between the teams from these two distinct companies and allowed to iterate on the product before first manufacturing runs were performed .
When designing the Hue, firmware engineers, software engineers at Philips and developers from q42 had to be working in tandem. Leveraging existing knowledge and expertise in manufacturing LED lights and LED control systems, the engineers at Philips had a wide range of technologies at their disposal.
To test and refine the product, Philips used its internal resources, leveraging existing design experience in lighting products.
To rapidly expand integrations of Philips Hue with other products and platforms, Philips utilized the work of open source software developers from the early days of Hue by providing an open API (application programming interface). By publishing a set of documents outlining the set of instructions for the Hue, Philips was able to enroll hundreds of engineers all around the world to participate in the expansion of the Philips Hue ecosystem.
At launch, the Hue bulb was initially sold exclusively at Apple Stores. After about a year of selling at Apple Stores, Philips ramped up the production of the Hue and utilized hundreds of other sales channels in its possession to rapidly expand its market.
LiFi Labs Inc.
Philips Hue appeared on the market within a month and a half after the LIFX Kickstarter campaign was over. Not having any of the LIFX bulbs manufactured at that point, LiFi Labs took their time to make adjustments in their original plan in order to build a product that could be in some ways superior to what Philips released.
In a small team of five, LiFi labs worked closely with an experienced LED bulb manufacturer in Shenzen, China, to engineer the Wi-Fi connected light bulb from the ground up. The engineering process lasted over nine months, during which LiFi labs team had gone through many iterations of the LIFX hardware and firmware. After the hardware designs were finalized, FCC and UL certifications were obtained through channels in Shenzen (Kickstarter 2013 update).
At the same time, 3-5 software engineers in Australia and San Francisco were developing the mobile applications for iOS and Android and working on the server infrastructure for the LIFX products.
Before shipping the initial batch of the LIFX bulbs, the founder of LiFi labs was actively building partnerships with distributors and retailers around the world, securing a few deals with major retailers in the US and Asia.
After initial 130,000 light bulbs were shipped within the first year of operations, LiFi labs received some outside investments to expand their operations and to sell the LIFX products globally (LIFX blog). The investments allowed them to hire more engineers to work on the mobile apps and on the backend infrastructure.
The two firms are similar in a way of using somebody else’s services for the cloud infrastructure necessary to power their connected products. Philips uses Google Cloud, LiFi Labs uses Heroku. This is where their operational similarity ends.
The two firms are very different in how they design, manufacture, test and ship their connected lighting products. Philips is entirely in control of the supply chain, development and manufacturing process and is using its entire suite of past investments. LiFi Labs, being a relatively new entrant, to this day relies on almost a dozen third parties to run its business smoothly.
Philips’ IP portfolio and operational capabilities cannot be matched by LiFi labs. Because there is such contrast in components and processes between these two firms, there is very little that LiFi labs can do to create any strategic advantage from operational perspective.
In what ways are the two firms’ operations optimized for different segments of consumers for the same product?
The way these firms market and sell the Hue and LIFX is very different and comes from having strengths in different sets of capabilities.
Philips Hue was initially sold exclusively at Apple Store, targeting Apple fans, iPhone / iPad owners and lovers of good design. Philips, being the number one manufacturer of lighting products in the world, was leveraging this partnership with Apple to make a bold statement about its brand entering the market of connected lighting for the home.
The Hue initially appealed to customers who recognize the Philips brand and who like “plug and play” products that resemble the simplicity of Apple design. In 2015, the Hue appeared at Best Buy and Home Depot, targeting customers that are looking for reliable and trusted products in the “smart home” category. Shortly after, Hue was sold worldwide through thousands of retailers, expanding the market to a wider audience.
This staggered approach leveraged Philips’ brand and existing operational capacity while allowing them to make improvements & refinements in the product’s design before taking the Hue to a wider target market.
After two years of the Hue being on the market, Philips started to leverage its strengths in marketing of lighting products to businesses to sell the Hue to a wide range of hotels, vacation rentals and spas, capturing these high-end customers.
By using a wide range of internal resources and the q42 agency partnership, Philips was able to make the Hue work with a wide range of other smart home devices, convincing many potential customers to choose the Hue as their favorite smart lighting product that works with their existing smart home devices.
LiFi Labs Inc.
As a new brand, LIFX initially attracted early adopters looking to buy their first smart home lighting solution. Without the Hue on the scene yet, those customers were excited to see a product that enables them to control the lights in their home by using a smartphone.
Right after delivering all Kickstarter pledges, LiFi labs started selling LIFX through major retailers in the US like Best Buy, Amazon and Target. Having no distribution chain of their own, they had to rely on heavy marketing and social media presence to take their share of the market.
By working together with an experienced manufacturer in Shenzen, LiFi labs was able to innovate within the technical aspects of the bulb. Two key innovations by LiFi labs allowed LIFX to have some leverage over Philips Hue in the minds of potential customers. First, the LIFX light bulbs didn’t need any additional hubs or “bridges” to work, reducing the number of parts necessary to be constantly plugged in. Second, since launching the first iteration of LIFX lightbulb, LiFi labs was able to deliver a bulb that is much brighter than the Philips Hue, taking some potential and existing customers away from the Hue.
How do these two firms differ in terms of their critical success factors and in their likely trajectories of future improvement going forward?
From this analysis, it appears that even a new entrant with no prior experience could take hold in the market of smart light bulbs, increasing the number of potential players competing for the same audience.
Five years after the Philips Hue first appeared on the market, the price wars between LiFi labs, Philips and others have been fought, slashing the original price of the smart light bulbs almost in half for these two brands in particular. Let’s take a look at the current strategy of both companies and see what are their likely trajectories of future improvements.
Philips Lighting – Home, the division behind the Hue, has had over €559 million in sales in 2016 (Philips), mainly from the sales of the Hue (approx. 6-8 million bulbs sold). While selling millions of Hue bulbs, Philips Lighting created an ecosystem of related products to appeal to loyal customers and to expand its offerings in the smart home category.
As more “smart devices” penetrate the market, making Hue compatible with them will be crucial. Philips Hue already works with Alexa, Google Home, Siri and others, and major efforts are going to be put in to support those devices and anything new that is at scale worthy of Philips’ attention. For example, customers in China will need integrations with devices other than the ones in the US or Europe. Capturing the market in China can give Philips Lighting stronger position there.
Beside individual consumers, Philips Lighting sells Hue to hotels and businesses, potentially shifting their focus in that direction as the demand grows.
LiFi Labs Inc.
LiFi Labs Inc.’s current strategy is to shift the focus from everyday lighting to “accent” lighting and specialized lighting. The new products, “LIFX +”, “LIFX BEAM” and “LIFX TILE” are quite a departure from standard light bulbs offered by Philips or other brands. Targeting the loyal users by making new products for them can work in the short term. At this point, LiFi Labs is focusing on the existing loyal users to be profitable.
LiFi Labs’ reliance on third parties is drastically reducing their profits and likely some of those services will be brought in in-house in the near future to improve overall efficiency.
Working with external partners, LiFi Labs has developed a full bulb reference design that other companies can sell under their own brand name, creating a licensing – based income stream.
Without strong leadership and somewhat stagnant product line, LiFi Labs seems to be just maintaining its existing position.
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 Philips Lighting Named Industry Leader in the 2017 Dow Jones Sustainability Index