Overall, Group sales fell 15%, contributing to a net loss of EUR 2,604 million. This figure includes special charges of EUR 2,007 million and gains of EUR 311 million. Excluding these items, the net loss came to EUR 908 million. The loss is disappointing as it is due not only to the adverse economic environment, but also to operational issues in some parts of the organization, notably in the areas of innovation to market and supply chain management. However, their operational cash flow was EUR 1,2 billion positive, notwithstanding the negative net income, thanks to keeping focus which led to a sharp reduction in inventories. Another encouraging development was the performance of Philips' share price. During the early part of the year their share price declined, as did other technology stocks, and then was substantially negatively impacted in the second half of September. Since this time, there has been seen a significant recovery and over the whole year Philips' relative performance against their peers has been good.
As the economic weakness in many of our markets continued, they took further measures designed to cut overhead costs by 25% (EUR 300 million), e.g. by lowering spending on consultancy and sponsorship and, more fundamentally, by changing the way they work as a company - cutting back bureaucracy and, wherever possible, sharing internal resources11.
When facing the facts, it would be too easy to attribute all our problems to the general economic situation. Despite the excellent year Philips had in 2000, several problems were already beginning to surface. Some of their processes are not up to benchmark standard, the fragmented organization makes them carry too high costs for infrastructure and overhead, and they have allowed too many low growth, low-margin businesses to develop. They account for an unacceptably high percentage of Philips' total portfolio.
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