Just a few years ago, Key Tronic Corp. seemed ready to fold its hand. Once the biggest and best-known maker of computer keyboards in the U.S., the Spokane (Wash.) company was struggling to survive the onslaught of cheaper Asian imports. But last year the company's board had an inspiration: It hired veteran turnaround artist Stanley Hiller Jr. to lead Key Tronic back from the brink.
The 69-year-old Hiller had no experience running a high-tech company. But that hasn't seemed to hurt him: Key Tronic has slashed costs, overhauled its stale product line, and automated production in a brutal battle against the import invasion. And Key Tronic is hitting the competition where it hurts: with a low-cost keyboard that is shaking up the industry and is winning market share. Nicknamed Kermit by employees, Key Tronic's newest keyboard wholesales for as low as $14, compared with the industry average of $18.
Even better, Key Tronic moved into the black in the second half of last year. For the fiscal year ending this June, analyst Thomas Friedberg of W.I.G. Securities of San Francisco estimates that the company will post a profit of $5.7 million, compared with a loss of $7.4 million a year ago (chart). Revenues in the current year could climb by 6%, to $132 million. Even foreign competitors are taking note of Key Tronic's rebound. "We've started to see them aggressively pursuing many of our major accounts," says David Snyder, keyboard sales manager for NMB Technologies Inc., a subsidiary of Japan's Minebea Co.
Key Tronic's turnaround can be credited to Hiller. Despite his lack of high-tech experience, he does know about fixing sick companies. Hiller, who heads his own management consulting firm, started in 1971 with Texas oil-field-equipment maker Reed Tool Co., now part of Baker Hughes Inc. He went on to repair the moving company Bekins Co. and air-conditioner maker York International Corp. All were money-losers, and Hiller successfully turned them around by cutting costs and improving products. "Any company in any field, if it gets back to basics, can be successful," says Hiller.
It was because of his record that Hiller was hired in March, 1992, by Key Tronic's board, which included founder and former Chief Executive Lewis G. Zirkle. Under the terms of his contract, Hiller could receive stock options currently valued at roughly $17 million. Since Hiller's arrival, Key Tronic's stock has nearly tripled, to about 10.
Hiller was quick to apply his philosophy of stick-to-your-knitting at Key Tronic. He also sought outside advice. One of his first steps was to assemble a high-powered board to advise him on everything from sales to research and development. Members include former Microsoft Corp. President Michael R. Hallman and former Memorex Corp. CEO Clarence W. Spangle.
Drawing on their advice, Hiller revved up Key Tronic's sluggish product line. In the current fiscal year, Hiller intends to boost R&D spending by 25%, to $6.8 million. To help ensure that his company's final products have willing buyers, he set up a system of informal consultations with such key customers as Compaq, Reuters, Hewlett-Packard, and American Telephone & Telegraph. In each case, Hiller tried to outflank his rivals by establishing closer ties to customers, while trying to determine their future needs. He also convinced some customers to invest in the joint development of new keyboards.
'LIKE A WAR.' The results have been impressive. In the past year, Key Tronic has introduced 10 new products. Hiller's proudest achievement by far is the Kermit. By dedicating a full-time team of engineers to design a low-cost quality keyboard, Hiller cut the development time from 18 to 8 months. The Kermit uses only 17 parts, vs. the usual 150. A revamped, heavily automated production line in Spokane can churn out 2,400 Kermits every 24 hours--with only 14 workers. Other keyboards need 40 workers. "If you design the labor cost out of a product, you can build it more competitively in the U.S.," says Hiller.
Hiller says his engineers are now working on a new generation of input devices that use pens or voice recognition. He also has beefed up Key Tronic's marketing efforts in hopes of challenging competitors such as NMB and Honeywell Inc.--and IBM's sole supplier, Lexmark. "It's like a war," Hiller says. "The enemy has the hill, and you've got to take it."
The problem is, the enemy isn't standing still. Personal-computer prices are dropping steadily, and the keyboard industry is working overtime to keep pace. Hiller must ieep Key Tronic focused on innovation while he maintains a firm hold on costs. Of course, he isn't the only chief executive facing that challenge. The computer industry's other well-known turnaround specialist, IBM CEO Louis V. Gerstner Jr., is seeking solutions to a similar dilemma. The big difference between the two: Key Tronic's boss has already found some.