Philips said it will break its 120-year-old company in two, creating a stand-alone lighting business and merging consumer and healthcare divisions into a €15 billion business.
The company said in a statement the new structure will bring cost savings of €100m next year and a further €200m in 2016.
Philips said it expects to incur a charge of around €50m for restructuring from 2014 to 2016.
"I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips,” chief executive Frans van Houten said.
The light bulb manufacturer established by Frits Philips expanded into a multinational electronics company that invented the compact disc. It has now shifted to focus on healthcare and advanced lighting products.
Philips said its latest move would create two market-leading companies, HealthTech and Lighting, with both companies using the Philips brand.
Philips said it would move the €7 billion lighting solutions business into a separate legal structure and consider various options for "alternative ownership structures with direct access to capital markets."
In a revised outlook, Philips also said today that adjusted earnings before interest, taxes, depreciation, and amortisation (EBITA) in the second half of 2014 were expected to be slightly below a year earlier.
In the healthcare business, core profit in the second half of 2014 is now expected to be lower than the reported core profit in the second half of 2013.