(FORTUNE Magazine) – There's a standing joke about Philips Electronics that has dogged Europe's largest manufacturer of television sets, light bulbs, dictation machines, and shavers for an embarrassingly long time. "Have you seen how cheap Philips is?" asks a Continental broker. "That stock," comes the cynical reply, "is always cheap." Like most cruel humor, there's a large dollop of truth in the barb. An innovator that introduced the world to the music cassette and the compact disk, Philips has also shown amazing ingenuity in miniaturizing shareholder value. During the last quarter of 1996, the stock was trading at the same price as in 1969, with only one small stock split in between. "The management has been good at destroying value, which is an absolute bloody tragedy," Dudley Eustace, Philips's chief financial officer, admitted to FORTUNE the day after the company reported losing another $313 million of stockholders' money last year.

Along with such other grand dames of the European industrial aristocracy as Germany's Siemens, the Netherlands' Philips has been stuck in a rut for almost as long as anyone can remember. Its last turnaround drive, boldly named Operation Centurion and launched six years ago by former chairman Jan Timmer, shed 35,000 jobs and slashed capital expenditures. Sadly, the name proved more aggressive than the plan: While Centurion saved the company from certain bankruptcy, Timmer's restructuring solved none of Philips's underlying problems--and barely reduced its bloat. By comparison, Sony Corp. of Japan, which competes in many of the same electronic product sectors, churned out $43 billion in sales last year (vs. $37 billion at Philips) with just 151,000 employees--57% of Philips's 262,500-strong work force. Oh, and Sony also generated a tidy $511 million profit.

Despite this gloomy history, the big news these days is that shareholders have bid Philips's stock up 30% since last October. This surge reflects a wave of hope surrounding the appointment of a new president and chief executive, Cor Boonstra. A plain-talking, silver-haired Dutchman, the 59-year-old Boonstra has enchanted audiences by promising finally, once and for all this time, to change the entrenched culture at Philips. His mantra, music to investors' ears, is a pledge to generate one billion guilders (around $540 million) of positive cash flow and sustainable, double-digit profit growth starting in 1997. While such promises are nothing new at Philips, Boonstra has one strong plus: In a company hobbled by poor leadership, he's the first chief executive to take charge without a long Philips pedigree.

Rather than rising through Philips's byzantine ranks, Boonstra spent 20 years at U.S. food giant Sara Lee. A high school dropout with no technical expertise, Boonstra established himself as a gifted marketer of consumer products, a skill widely regarded as the black hole of Philips's corporate management. He also acquired a reputation as a ruthless cost cutter whose specialty was eliminating management layers--something else Philips needs.

Boonstra's reform efforts at Philips represent, astonishingly, the fourth large-scale restructuring at the company in the past 20 years. Since taking office five months ago, Boonstra has jettisoned 18 companies--including Philips's European cable TV operations--that he termed "bleeders." He also told FORTUNE in his first interview since taking office that another 13 businesses have been slated for disposal.

At a minimum, Boonstra's rhetoric marks a real break with the company's past. Improving shareholder value, he declares, is his top priority, and he makes it clear that even after the divestitures of his first six months, further large staff cuts seem inevitable. "If we want to come even close to the middle range of the companies we compare ourselves with, it's going to be quite an operation," he says. Indeed, Boonstra put a spotlight on just how great a leap forward is required when he revealed to FORTUNE that of the 20 companies that Philips benchmarks itself against--a list that includes not only Sony, Toshiba, and Hitachi but also IBM and General Electric--Philips ranked last in 1989 in terms of sales per employee. Seven years later, it's still dead last (see chart).

Yet Boonstra has already disappointed some analysts by taking a methodical, time-consuming approach toward reform. Without more radical action, says Joost van Beek, an analyst at HSBC Van Meer James Capel in Amsterdam, "the question is whether Philips can achieve durable profit growth. I don't think it will."

Van Beek and other skeptics fret over Boonstra's refusal to draw up a new corporate strategy until 1998--which suggests it could be even later before a major reshaping of the company's structure takes place. The new boss also categorically rules out the kind of wholesale layoffs used to quickly restructure troubled U.S. giants like AT&T and IBM. "I disagree with the approach that for the whole Philips organization you take off 25% of the individuals," he says. "It's a rough approach that doesn't serve our shareholder value. It's a process you have to do very carefully."

Instead, Boonstra is hoping he can selectively prune enough deadwood from the long list of Philips's money losers to restore individual divisions to profitability. Still, with the stock hovering around $42 a share, analysts note impatiently that the company's breakup value could easily be north of $60, if not considerably more.

A rough calculation of the market value of just four major operations--Philips's 75% stake in record and film producer Poly-Gram; its lighting business; semiconductor manufacturing; and Origin, its $1.3-billion-a-year computer software company--suggests that these are worth more than the current market capitalization as a whole. In other words, the rest of the company--businesses that generate more than a third of sales--comes free. But Boonstra flatly rules out selling the PolyGram stake or spinning off lighting. "It's worthwhile to see if we can do better," he says.

One way to improve: Boonstra aims to wring profits out of existing businesses by outsourcing more work to Asia, a step taken by Japanese rivals more than a decade ago. That won't be as easy as it sounds. Because of its history of technical expertise, Philips is probably the most vertically integrated consumer electronics company around. "We have to carefully decide what we want to produce and what we want to be produced by third parties," Boonstra says. "In the past we did not execute that part of our business correctly."

There are also signs of a profound philosophical change that reflects the company's move from an engineer-dominated business to a marketing-driven one. The shift is visible in its handling of Digital Video Disk, a hot technology that will begin appearing in stores in April. DVD can store a full-length feature film on a disk the size of a standard CD, and can hold five times the data of a regular CD when used in a computer.

In the past, Philips would have tooled up an expensive factory for a product like DVD and rolled it out without much consideration of what everyone else in the business was doing. But under the new, more market-sensitive regime, Philips waited until it reached agreement with every other major electronics manufacturer on a standard for the new system. Deals were also lined up with Hollywood studios to make sure movies will be available for the format, a problem that has torpedoed a number of Philips's past hardware launches.

In even more of a heretical move, Philips has outsourced the manufacture of the first generation of DVD to Japanese rival Toshiba. "We want to do it in a way that doesn't cost the company an arm and a leg," says Doug Dunn, a British executive who was appointed last July to run Philips's loss-making consumer electronics arm, Sound & Vision, after successfully turning around the semiconductor division. "We want to get in quickly at low cost, measure the response, get out quickly if necessary. If it's going well, we'll rapidly invest and move up the curve."

That's a sea change for a company that only three years ago had one of the largest product failures ever, in a technology called CD-i. An advanced device that made possible interactive access of CD-ROMs using a television set instead of a computer, CD-i was a marketing calamity that cost the company an estimated $1 billion.

Along with the CD-i fiasco, Philips suffered a series of marketing and investment disasters in the early 1990s, including DCC, a digital tape cassette system that flopped, and SRAM memory chips, on which the company spent $1 billion before pulling the plug. "Nearly everything Timmer did strategically didn't work," says Gert Steens, an analyst at SBC Warburg in Amsterdam. Timmer declined repeated requests for an interview.

Some critics argue that Philips should bite the bullet and abandon its consumer electronics business, much as GE disposed of its television and radio business when CEO Jack Welch issued his famous dictum to get out of any business where GE wasn't first or second on a global basis. The numbers are stark: On cumulative sales of $137 billion over the past decade, the company earned only $3.7 billion in the consumer electronics division, which includes the profits from PolyGram.

With such a history, it's little wonder that analysts are currently biting their nails over Philips's decision to plunge into digital cellular telephones at a time when Nokia, Ericsson, and Motorola already dominate the market, and Sony and NEC are piling in at the low end. Philips has already suffered two costly failures while trying to crack the mobile phone business; finally realizing that it lacked an understanding of the market, the company in 1995 hired Mike McTighe, a former Motorola executive, to head its new venture, Philips Consumer Communications. He has spent an estimated $500 million building factories in Singapore, Silicon Valley, and Le Mans, France, to make digital mobile phones.

McTighe forecasts breakeven by the end of 1997 and boldly predicts the company, which now has 5.2% of the market, will be one of the top three by 2000. That comes as news to the current leaders. "We expected more of an impact from the new entrants like Philips than we have seen," says Jorma Ollila, CEO of Nokia.

In response, Boonstra says that he is prepared to pull the plug on the cellular business if it doesn't live up to expectations. "It's one of the biggest challenges we have," he says. "We have to sail between two rocks to get this executed properly."

Of course, he might as well be talking about the company as a whole. With so much value locked up in Philips's bloated group structure, no one would be surprised if the stock took another healthy bounce even before the hard decisions had to be made. But given its determination to remain in consumer electronics--and to continue launching risky new undertakings--it will likely take a long time before Philips works its way off the list of Europe's sick companies. Meanwhile, you can't help but wonder what would happen if the men at the top could ever steel themselves to make like Jack Welch and put the fat lady of Eindhoven on a crash diet.

REPORTER ASSOCIATE Andrea L. Prochniak