Six Companies That Are Winning the Race

There is no finish line in the race to business success. Instead, victory goes to the most lithe competitors--those ready to adapt to swift technological change and global challenge.

The challenges are especially brutal in California, where the recession is deepest and the competition most profound.

But for all the handwringing, the fact is that many California companies--especially manufacturers, but a smattering of service firms as well--have found ways to expand and be profitable.

The mechanisms aren’t mysterious.

They were perfected in Japan, imported by America’s biggest industrial companies and transmitted to major suppliers and the small companies on whom they rely.

The buzzwords? Quality, continuous improvement, process, teamwork, empowerment and partnership.

Following are six stories of companies--large and small, private and public--that have leaned key lessons on the path to competitiveness.

HEWLETT-PACKARD: Just because you’re big, you don’t have to be slow

When Hewlett-Packard executive Bruce F. Spenner held aloft a one-ounce, green-and-gray packet the size of a matchbox at a news conference in San Francisco last June, even the jaded high-techies in Silicon Valley snapped to attention.

Nestled in his palm was a tiny disk drive held together by screws so minute they couldn’t be seen by the naked eye, yet it was powerful enough to store the equivalent of 20 long novels.

Dubbed the Kittyhawk Personal Storage Module, H-P’s nifty little invention represented a technological leap in the design of information storage devices.

“H-P skipped a generation and jumped ahead,” said James Porter, an analyst with Disk/Trend in Mountain View.

Talk about music to the ears of Hewlett-Packard executives.

Only two years ago, analysts were writing the firm off as just another inert giant. Fighting for his fabled company’s future--H-P was founded in a Palo Alto garage in 1938 and had grown by last year to No. 26 on the Fortune 500 list of industrial giants--recently retired Chief Executive John Young led a wrenching restructuring that cut out three levels of management.

His goals: intensified focus on customer needs and radically speeded-up innovation to feed the market’s chronic hunger for new and improved products.

So Kittyhawk’s debut represented far more to H-P than a burst of orders for Kittyhawks, which will power a range of miniaturized products such as pen computers and cellular phones with voice mail.

Instead, Kittyhawk--by following other triumphs, including the company’s ascent to No. 1 in laser and ink-jet printers--provided confirmation that the overhaul was yielding solid results.

The computer business lives and dies on new products produced in ever-shorter cycles, and H-P had demonstrated awesome power by bringing Kittyhawk to market in only 10 months, compared with the previous norm of about two years.

How did they do it?

A tightly knit group of 10 engineers and marketers accomplished this sleight of hand by sequestering themselves in a trailer separate from H-P’s disk drive division in Boise, Ida.

“The key is getting a team together in the right environment so that they can work through decisions quickly,” Spenner said.

Realizing that they couldn’t break the time barrier by doing everything alone, the team forged an unprecedented number of partnerships. AT&T;’s microelectronics group designed Kittyhawk’s circuitry, Milpitas-based Read-Rite produced the head that reads and writes data, and Citizen Watch of Japan helped design the manufacturing process--and today makes the Kittyhawk.

The triumph is all the more sweet for coming at a time when another computing giant, IBM, appears unable to right a ship listing from sinking orders and fleeing investors.

LARSON SOUND CENTER: The boss is only as smart as the people he employs

For several years after A. Richard Larson founded his Burbank-based sound center in 1986, things went swimmingly.

Larson Sound Center, which has garnered eight Emmy awards for mixing and editing sound for TV programs such as “Cheers”--and last summer mixed the sound for the Bill Clinton campaign documentary “The Man From Hope”--boasted clients from most major production studios, including Warner Bros. and Paramount Television.

But the recession that began to hammer television in 1990 rippled quickly back to Larson. The company lost money for the first time ever.

Unlike so many struggling firms--including several of the big studios he serves--Larson didn’t respond frantically with mass layoffs. “When you’re in a service business, you have to think long-term,” says Larson, 43. “If cutting back is going to affect your quality and level of service, you’re doomed to fail.”

Instead, Larson invested in a good business consultant, eliminated spending on new equipment and cut people and salaries 10%.

The key to survival, he says, was drawing close to his staff.

“We kept telling them we were in trouble, but we had to keep up our level of quality and service, we had to keep delivering the same product. They responded.”

Larson’s highly motivated and creative employees came up with suggestions for how to work more efficiently--ideas that helped keep the company afloat while it cultivated new customers in the cable and syndication markets.

Today, Larson derives 55% of its business from the Big Three networks, compared to 95% two years ago. Sales are back to 1990 levels, salaries for all employees except executives have been restored, and the company is again making money.

Says Larson: “It was our people who helped us, not technology. I think top-down management is dead. I see my role as coach. I can’t do it all myself. We must use people’s wonderful, innate intelligence.”

DAYTON HUDSON: For long-term success, try teamwork in the boardroom

When the going gets as tough as it did in the last two years for Minneapolis-based retailer Dayton Hudson, unwavering support from directors and institutional investors is a priceless asset.

“If board members are your partners, it gives you courage to stay focused on strategic and long-range issues,” says Chief Executive Kenneth A. Macke, whose firm--as operator of the Target and Mervyn’s chains--is California’s largest retailer.

Macke should know.

Several times a month, his phone rings with another request from a corporate chieftain seeking to understand the widely admired relationship between Dayton Hudson’s managers and its shareholders, as represented by the board of directors.

Called “corporate governance,” the topic has vaulted from obscurity to prominence as institutional investors lobby directors of poorly performing companies to shake up management. The success of these shareholder activists--showcased by the coup in General Motors’ boardroom last fall in which Chairman Robert C. Stempel was toppled--sent a powerful warning to executives.

Macke stresses that Dayton Hudson’s model flows from the retailer’s origins as a family concern at the turn of the century. Five grandsons of the founders engineered the company’s growth from a single Minneapolis department store to a $16-billion merchandiser.

To ensure that Dayton Hudson’s value would increase over the long term, they established these checks and balances:

* The board approves all strategic plans, personnel policies, capital allocations and financial goals.

* It gives formal performance evaluations every year to the chief executive and the board itself.

* Dayton Hudson’s chief executive and president are the only members of management to serve on the board.

* The 13 outside directors elect a vice chairman who serves as a liaison to management.

* The board nominates new members, who must resign if their jobs change. Terms expire after 12 years.

* All outsiders are members of the executive committee.

Careful oversight means Dayton Hudson is that rare company that lives up to its promise to pay for performance.

Macke earned a $597,861 bonus in 1990. But the following year he got none. And it’s unclear whether he’ll get one for 1992. For the nine months ended Oct. 31, Dayton Hudson sales were up 20%, and profit rose 23%. But the all-important fourth-quarter results won’t be in until the firm’s fiscal year ends this month.

Shareholders are sanguine, however, because they believe that Dayton Hudson is well run. The board even backs Macke’s decision to continue building new stores in California, despite the state’s stubborn problems.

Such bedrock support allows him to be philosophical rather than panicky. “We didn’t become California’s largest retailer in a day and a half,” Macke says. “Our strategy is of far longer term than the present economic softness.”

SOLECTRON: Only continuous improvement is good enough

Solectron is an invisible name in high technology--to everyone but the blue chip computing giants it serves.

The Milpitas-based firm uses its knowledge of leading-edge manufacturing processes, technologies and inventory-control methods to build components and assemble products for such finicky customers as Apple Computer, Exabyte, Hewlett-Packard, IBM and Sun Microsystems.

The company benefits from an increasingly popular technique used by big corporations to cut costs, ensure quality and speed products to market: Its customers “outsource” hefty chunks of business to Solectron, a manufacturing specialist.

Solectron’s special draw is impeccable quality. The company’s commitment is so pervasive that it was a 1991 winner of the Malcolm Baldridge National Quality Award, an annual honor designed to showcase extraordinary achievement.

The company is led by two technologists: Winston H. Chen, a Ph.D. in applied physics who became chairman and co-chief executive in 1990, and Koichi Nishimura, a Ph.D. in materials science who serves as president and chief executive.

Since its founding in 1977, Solectron has enjoyed average annual revenue growth of more than 50%. Sales were $407 million last year, with earnings of $14.5 million.

Chen first applied for a Baldridge in 1989 to give structure to his commitment to continuous quality improvement. The company used feedback from Baldridge examiners to pinpoint problem areas, then devised action plans and timetables to solve them.

Today, Solectron executives continue their push for excellence.

Chen and Nishimura hold meetings three mornings a week to review various quality programs. To gauge progress--and identify problems quickly--salesmen calculate a customer satisfaction index for each client each week, after bombarding them with questions about the last seven days’ quality, delivery, communication and service.

The effort has paid handsome dividends. Defects have shrunk from 450 parts per million in 1988 to fewer than 50 now. Customers have demonstrated their gratitude by showering Solectron with 44 awards for sustained quality excellence and superior service.

Predictably enough, the firm’s 1995 goal is perfection: to manufacture components at a rate of zero defects, a quality level called “six sigma” in the Silicon Valley.

Richard W. Allen, director of corporate quality, says that shiny brass ring is within Solectron’s grasp. “In some areas we are very close,” he says. “We always try to do better tomorrow than today and to do things twice as well as expected.”

KAVLICO: Diversify--but don’t lose sight of quality

Kavlico, a privately held manufacturer in Moorpark, has accomplished what dozens of Southland companies only dream of: a shift from dependence on dwindling aerospace contracts to a diversified group of customers in autos and heavy industry.

In 1985, about 95% of Kavlico’s business derived from the manufacture of sensors used in every U.S.-built military and commercial aircraft and related military systems.

Today that figure has shrunk to about 30%, with the balance spread among customers that include Ford, Chrysler, Cummins, Detroit Diesel, General Electric, John Deere and Caterpillar. Kavlico’s estimated sales last year totaled $67 million.

When it became apparent in the mid-1980s that Kavlico needed to diversify, President Michael C. Gibson says, “we were making custom-designed sensors for advanced military aircraft that cost hundreds or thousands of dollars each.”

With his team of engineers and manufacturing experts, Gibson decided to diversify one step at a time by concentrating on Kavlico’s “core competency”--another ‘90s buzzword.

Adapting Kavlico’s sensor expertise to penetrate previously untapped markets called for building a robust second business of much lower-cost--but equally high-quality--sensors for use in mass markets.

One of the company’s biggest new customers was Ford, which found a place for Kavlico sensors in its auto-emission systems. Success with quality-conscious Ford drew additional clients, including Chrysler.

A logical next step was to create other automotive products, such as sensors for brake and power-steering systems. From there, Kavlico breezed into related markets: designing and supplying sensors for diesel engines used in trucks, trains, earthmoving equipment and, most recently, power plants. Kavlico, founded in 1958 by Norwegian physicist Fred Kavli, who patented the company’s pressure-measurement sensors, must turn out components that meet rigorous standards. Like many manufacturers today, the company rejects the old-fashioned method of checking quality after a component is manufactured.

Instead, Kavlico has adapted the teachings of quality guru W. Edwards Deming--a method called statistical process control that emphasizes correcting the manufacturing process in progress so problems can be caught before they worsen.

The result: Kavlico has maintained its world leadership in aircraft sensors at the same time it penetrated new markets. Says Gibson: “The benefits of SPC have gone both ways. Working with the auto companies taught us how to make a cost-effective, better product in the military aerospace arena.”

IMPULSE DESIGNS: Make your customer your partner

Alan M. Wiener, president of Los Angeles-based Impulse Designs, recalls vividly the first time one of the mass merchandisers his company supplies with framed art suggested that they form a partnership aimed at mutual well-being.

“I wondered if I had died and gone to heaven,” he recalls. “I grew up when a salesman pleaded on bended knee to get an order. Now someone was telling me, ‘We want you to grow and be successful.’ ”

Partnerships, yet another concept borrowed from the Japanese, are a hot business trend. At privately owned Impulse Designs--which supplies big chains such as Kmart, Target, Ames, Jamesway and several warehouse clubs--the results are plain to see. While revenue has grown fivefold, the firm has only had to double its investment in inventory. The lead time for orders, meanwhile, dropped from three weeks to three days.

“Ten years ago,” Wiener says, “I felt I could wake up one morning and my business could be gone tomorrow. Today I have the confidence to invest in long-range development.”

Partnerships require suppliers to invest heavily in information systems tied directly to their customers’ computers. The arrangement benefits retailers by shifting the cost and management of inventory back to suppliers. The retailers’ goal is “just-in-time inventory”: Goods that come in one side of a distribution center in the morning are shunted into containers on the other side and sent on their way to stores by afternoon.

Suppliers benefit because point-of-sale computers at their customers’ stores flash back so much detailed information that the supplier can also manage with far less inventory. A trickle-down effect creates even greater efficiencies when a firm such as Impulse Designs asks its suppliers to become partners.

“By getting information from cash registers, we know what’s selling and what isn’t,” Wiener says. “We see trends so fast we can plan production before we even get orders.

“The epitome of a strategic partnership is when each is concerned about the other,” he explains. “We must meet certain goals for sales per square foot, turnover ratios and gross margins. In return, my partner understands he can’t beat my price down if he wants me to remain healthy. I have gone to certain customers and said, ‘This isn’t working for me; here’s what I need.’ Now they listen.”