Mini Nationals Are Making Maximum Impactby
When Frederick A. Krehbiel graduated from college in 1963, his older brother was already running U.S. operations for the family business, Molex Inc. That left Fred with the rest of the world, which seemed like a consolation prize for the No.2 son. His father gave him a paltry budget of $25,000 to start attacking the Japanese market. "I think he was merely trying to find something for me to do," Fred now says.
Undaunted, Krehbiel started his research at Chicago's Public Library. There he learned about Japan's booming television industry--the key market for Molex' electrical connectors and cables. He also took a course on exporting at nearby Roosevelt University. Within months, he had a joint-venture partner in Japan. Thirty years later, his business in Japan accounts for a third of Molex' sales--more than the U.S. operation. At 52, Fred now runs the entire company, and his brother is No.2.
NICHE-SCRATCHERS. What's a $776 million virtual unknown like Molex, from Lisle, Ill., doing behaving like a big multinational? Making money, that's what. And it's got plenty of company. Hundreds of midsize companies are bulking up abroad. There's Ametek in Paoli, Pa., making vacuum-cleaner motors in Italy. Pall Corp., of East Hills, N.Y., is beginning to make sophisticated blood filters in Britain. And Applied Materials Inc. in Santa Clara, Calif., is assembling computer-chipmaking machines in Japan.
Call them the little giants. Bigger and more sophisticated than legions of tiny exporters, this emerging tier of companies is opening factories, research labs, and sales units around the world. True, with sales of only $200 million to a little more than $1 billion, they're still dwarfed by the largest multinationals. But today, these "mini-nationals" are emerging as a boon to U.S. competitiveness and jobs.
Even with slow economic growth in Europe and Japan, U.S. exports keep eking out modest growth, thanks in part to the mini-nationals. Despite a decline in July, U.S. exports have grown by 5% so far this year in real terms. The mini-nationals' secret is that their products are often unique because of their technology, design, or cost. That helps insulate them from the vagaries of business cycles and currency fluctuations.
The government does not measure the international performance of U.S. companies. But BUSINESS WEEK sifted through hundreds of smaller, internationally active companies and identified 50 of the best. Their combined sales top $30 billion, or an average of about $600 million, and they've been growing at an average annual clip of 22.9%. On average, they make 44% of their sales outside the U.S., including exports and items made and sold abroad. That's significantly higher than the 1,250 U.S. manufacturers tracked by the Conference Board, whose foreign sales average 35% of their total.
Some experts are beginning to argue that these midsize stars are remaking the global corporation for the '90s and beyond. As the stumbling of so many leviathans has demonstrated, sheer size may no longer be a buffer against competition. The future could belong to younger, smaller companies with nimbler feet and stronger focus. "The newcomers have the huge advantage of starting fresh," says Christopher A. Bartlett, Harvard business school professor and co-author of Managing Across Borders: The Transnational Solution. "They can develop much more flexible structures."
Indeed, mini-nationals are noted for their lean operations. By taking advantage of today's more open trading regions and newer technologies, they're able to serve the world from a handful of manufacturing bases. That spares them the necessity of building a plant in every country, as Ford, Goodyear, or IBM once did. Their smaller bureaucracies have also allowed mini-nationals to move swiftly in seizing new markets and developing new products--a key competitive advantage in the rapidly evolving global market. For example, Symbol Technologies Inc. invented the field of handheld laser scanners and dominates it. In a field that didn't even exist five years ago, Cisco Systems Inc. claims 50% of the world market for gear that connects networks of computers.
Despite the wide diversity of businesses that these companies represent, the little giants have succeeded by hewing to some basic lessons. For starters, mini-nationals must be sharply focused. With their small size, they can afford to take on the world only in one or a handful of niches. The key, says Perkin-Elmer Corp. CEO Riccardo Pigliucci: "Do what you know how to do. Do it right. And do it everywhere." That helps companies grow without diversifying too far afield, which often leaves them vulnerable. The goal usually is to be No.1 or 2 in a niche globally.
To help accomplish this, mini-nationals typically avoid commodity businesses, where huge rivals with vast efficiencies of scale can bury them. Instead, they tend to focus on specialty markets where volumes are low, margins are high, and detail work is painstakingly precise. As a result, the plants of many mini-nationals feel more like workshops than factories. At an Ametek precision instruments plant outside Pittsburgh, technicians quietly piece together specialty gas-detecting machines that sell for upwards of $20,000.
But the niches aren't necessarily small. Pall keeps its focus on filters alone. But within that seemingly snug slot, it has uncovered scores of new markets and applications. Pall makes filters for the brewing and pharmaceutical industries, for jet engines and earth-moving equipment. One of its hottest lines is filters for blood, which labs use to strain out viruses such as the one that causes AIDS. "We've defined our markets, and in many cases invented them," says CEO Maurice G. Hardy.
BIG PUSH. Mini-nationals must also try to squeeze the most out of every scarce buck they have. To survive, these companies need to spend those vital dollars on R&D, and they must set up operations in pricey outposts such as Germany, Japan, and Hong Kong. Kenneth F. Yontz, CEO of Milwaukee's Sybron Corp., is running three businesses at the same time--laboratory instruments, water-purification systems, and dental products. He's pushing them all internationally with factories in Hungary, Mexico, and Wales. But Yontz keeps his headquarters lean. As a result of a restructuring during the 1980s, headquarters staff at the $382 million company is down from 155 to 22. Fewer managers also make for quicker decisions.
Successful little giants are also open to new ideas from around the world. A surprising number have set up R&D laboratories in other lands. This allows them to tailor products for each market while getting the jump on the latest technological trends.
Medtronic Inc., a Minneapolis mini-national that makes pacemakers and other medical devices, opened a plant two years ago in Japan--both for manufacturing and research. Now, says Executive Vice-President Arthur D. Collins Jr., the company is "tapping into exciting technology," including both micromachining and miniaturization. Similarly, the company's presence in Europe has already paid off in its recent U.S. introduction of a groundbreaking implantable device that treats rapid heartbeats. The market could reach $1 billion, and it was all possible because of research and early development work done in Europe.
Setting up in Japan proved key to making Applied Materials a world leader in a field in which many U.S. companies have been shoved out. In the late 1970s, CEO James C. Morgan realized that Japan was home to almost half the world's chip market. So he started with a sales and service office in Osaka and then built a $9 million technology center in Narita. Now AMI has 800 employees and 14 sales and service offices in Japan. Most of the manufacturing takes place in the U.S., with only final assembly and customization in Japan. But the lessons AMI learned in Japan about perseverance and emerging technologies have been applied around the world.
What's remarkable about mini-nationals is how few Americans are involved in managing offshore operations and how many foreigners have important jobs at home. Loctite Chairman Ken W. Butterworth is Australian, and the new CEO, David Freeman, is British. Perkin-Elmer's new CEO, Pigliucci, is an Italian who worked his way up the ranks of the company's European operations. No fewer than 16 nationalities pepper the top management ranks at Applied Materials.
One reason the mini-nationals lure so many non-Americans is that their own management has scant experience with global markets. That was the case with Haworth Group Inc., a privately held $600 million maker of high-tech effice furniture in Holland, Mich. After making 10 acquisitions in Europe, it decided to tap Manfred H. von Prondzinski as vice-president of its European operations. Von Prondzinski had been managing director at Comforto Group, a German maker of office seating products, which Haworth acquired in 1988. Now the Prussian, who speaks four languages, is helping the U.S. company to manufacture aluminum components of office chairs in Italy, ship them to Portugal for wood trim and upholstering, and then on to Germany for robot welding.
Employing non-nationals gives the little giants a better feel for foreign markets. Symbol Technology's key international strategist, Tomo Razmilovic, argues that a heavy presence of foreigners in his company's management ranks allows it to anticipate needs in Europe and actually design products for those needs, not merely treat those markets as an afterthought. "It's not good enough to have a general-purpose product and try to get local people to sell it," he says. "You have to bring some of those local people to the center of the whole company."
LEAN STRUCTURES. Finally, mini-nationals must focus on their customers. Many owe their births to finding a solution for a client. Cisco, the booming Silicon Valley maker of computer networking gear, grew out of Stanford University, where its founders, Leonard Bosack and Sandra Lerner, ran the computer operations of two different departments. The manufacturers of the computer systems had little interest in helping customers tie them together, but Bosack and Lerner desperately wanted to make their computers talk to each other.
So the two won a federal grant to devise a system to do it. When word of their success got around, Boeing Co. asked them to tie together its computers. And then Japan's Nippon Telegraph & Telephone Corp. got them to work on an emerging networking standard. By solving problems for its customers, Cisco has grown into a $340 million company. Last year, it grew 85%, one of the fastest rates for a company its size in all of Silicon Valley.
Big companies sometimes have trouble solving customers' problems because their own sales, research, and manufacturing units don't communicate smoothly. But that comes naturally to the little giants. With their lean structure, it's not hard to have the key players in sales, R&D, finance, and management all focused on the customer. If you stand in the labs at Pall, for example, you can see technicians working directly with customers. That triggers ideas for new products. Although Pall invests only 5% of sales in R&D, 70% of its filter products didn't exist five years ago. Research pours right into the marketplace.
To be sure, the little giants face challenges. With their tiny margin for error, some are sure to stumble in the marketplace. The failure rate in high-tech fields such as computer disks is particularly high. Others could become takeover targets, even succumbing to their foreign joint-venture partners.
One key dilemma: how to stay lean and focused when they're not so little anymore. Walter E. Blankley, president and CEO of Ametek, says that companies must be broken down when they reach $2 billion in sales "to avoid vertical structure." Thermo Electron Corp., a $947 million-a-year maker of energy equipment in Waltham, Mass., attempts to solve the dilemma by continually spinning off successful technologies into new companies. Cisco's CEO John P. Morg-ridge worries about "hitting the wall" at $500 million in sales, but plans to plow past that barrier without breaking the company into pieces.
For the moment, however, what's important is how these little giants are coming of age. The implication for the overall U.S. economy is that exports can still expand even amid slow economic growth in Europe and Japan, since many of the mini-nationals have only begun to exploit their niches. Despite current economic shock waves, they are playing a crucial role in creating the distribution system and on-the-ground savvy that keep U.S. parts, capital goods, and finished products flowing from U.S. shores. As a result, this distinctive breed is showing companies around the world, large and small, how to take advantage of global business in the fast lane.
LESSONS FROM THE MINIS BUSINESS WEEK surveyed 50 midsize companies with combined sales of more than $30 billion. On average, international sales make up 44% of total revenues. The lessons they offer: 1 KEEP FOCUSED Concentrate on being No.1 or No.2 in technology niches. Don't compete in commodity products. 2 STAY LEAN Lean headquarters structures save money. They also speed decision-making. 3 COMB THE WORLD Take ideas and technologies wherever you find them and apply them globally. 4 TAP THE FOREIGNERS Use foreigners to manage offshore units, and bring them into senior positions at home as well. 5 SOLVE THE CUSTOMER'S PROBLEMS Design products for customers--even invite them to the lab. Don't try to fob off existing standardized products.50 LITTLE GIANTS Here is a selection of U.S. manufacturing companies with a minimum of $200 million in sales. At least 20% of their sales are international, including both exports from the U.S. and goods manufactured and sold offshore. 1992* overall Percent NAME/Location sales ($-mil.) Int'l. PRODUCT NICHE INTERNATIONAL PROFILE ADVANCED TECHNOLOGY LABS/Bothell, Wash. $323.7 40.0% Medical ultrasound systems Subsidiaries, dealers in more than 80 countries AMETEK/Paoli, Pa. 769.6 30.0 Small motors, precision instruments Manufactures in Italy, Germany, and Denmark AMSCO INTERNATIONAL/Pittsburgh 498.2 20.0 Sterilization equipment, surgical tables Plants in Finland and Germany APPLIED MATERIALS/Santa Clara, Calif. 751.4 61.0 Semiconductor production equipment Manufacturing in Japan since 1986 BECKMAN INSTRUMENTS/Fullerton, Calif. 908.8 55.0 Lab equipment for biological research Relies mostly on exports, but also manufactures in Ireland W.H. BRADY/Milwaukee 236.0 30.0 A small version of 3M Big in Europe and the Far East CHERRY/Waukegan, Ill. 266.2 50.0 Auto parts, computer keyboards Big presence in Europe, with operations in Germany CIRRUS LOGIC/Fremont, Calif. 354.8 60.0 Controller chips Supplies PC and disk-drive makers in the Far East CISCO SYSTEMS/Menlo Park, Calif. 339.6 36.0 "Internetworking" gear Connects networks of personal computers worldwide CONTINENTAL CAN/Syosset, N.Y. 511.2 58.0 Packaging Manufacturing in Europe. Recent acquisition in Czech Republic DEXTER/Windsor Locks, Conn. 951.4 38.0 Specialty materials and coatings Production in Europe, Canada, and New Zealand DYNATECH/Burlington, Mass. 528.0 33.0 Intercommunications systems British manufacturing units EMC/Hopkinton, Mass. 349.1 35.0 Data storage technology Major manufacturing plant in Ireland for Europe and Asia FERRO/Cleveland 1,097.8 57.3 Plastics, chemicals Manufacturing in Europe and Australia JOHN FLUKE MFG./Everett, Wash. 271.8 36.0 Testing and measuring equipment Just bought Phillip's European operations GENERAL DATACOMM IND./Middlebury, Conn. 197.9 38.0 Multimedia and telecommunications gear Significant expansion in Latin America and China GUARDIAN INDUSTRIES/Northville, Mich. 1,200.0 50.0 Automotive and architectural flat glass Manufacturing in Europe, South America, and Asia HARNISCHFEGER INDUSTRIES/Brookfield, Wis. 1,390.8 50.0 Heavy manufacturing equipment Acquisition in Poland HAWORTH/Holland, Mich. 650.0 20.0 High-tech office furniture Made 10 acquisitions abroad IDEX/Northbrook, Ill. 708.2 48.6 Material handling, conveyors Big buy in Germany recently INTERLAKE CORP./Lisle, Ill. 277.1 28.5 Fluid-handling products Manufacturing in Ireland, Britain, Canada, and Singapore INTL. FLAVORS & FRAGRANCES/New York 1,126.4 70.0 Flavors and fragrances Plants throughout Europe, Asia, and Latin America INVACARE/Elyria, Ohio 305.2 35.0 Home medical equipment Manufacturing in Europe KEYSTONE INTL./Houston 528.4 57.7 Valves and actuators Plants in France, China, Australia, Japan, and elsewhere LOCTITE/Hartford 608.0 60.0 Adhesives and sealants Strong position in 33 nations outside U.S., Canada & Mexico LORD/Erie, Pa. 242.2 32.0 Industrial adhesives, fasteners Plants in France, Japan, Germany, Brazil, and Mexico MEDTRONIC/Minneapolis 1,328.2 40.6 Heart valves and medical implant Research and manufacturing in Japan and Europe MILLIPORE/Bedford, Mass 777.0 63.0 Scientific instruments, filters, separators Plants in Japan, Brazil, Germany, and Australia MINE SAFETY APPLIANCES/Pittsburgh 502.4 42.0 Gear used in mining Big markets in Germany, Britain, Hungary, Mexico, and China MOLEX/Lisle, Ill. 776.2 72.0 Electronic components Molex is strong in Japan and China NORDSON/Westlake, Ohio 425.6 67.0 Adhesive application equipment Sells in 25 countries; manufactures in Europe and Japan PALL/East Hills, N.Y. 685.1 62.0 Maker of filters Relies heavily on offshore manufacturing PERKIN-ELMER/Norwalk, Conn. 911.1 53.0 Analytical instruments Production in Britain, Germany; representation in 90 nations PIONEER HI-BRED INTL./Des Moines 1,261.8 29.0 Sophisticated seed hybrids Big international push in Japa and former Soviet Union READ-RITE/Milpitas, Calif. 389.4 85.0 Recording heads for disk drives Ships directly to U.S. drivemakers' plants in Far East RPM/Medina, Ohio 625.7 22.0 Specialty coatings Manufacturing in Europe SEALED AIR/Saddle Brook, N.J. 446.1 31.0 Protective packaging Plants in Europe and Asia; wholly owned subsidiary in Japan SENSORMATIC ELECTRONICS/Deerfield Beach, Fla. 309.9 55.0 Electronic security devices Sales in 55 countries SILICON GRAPHICS/Mountain View, Calif. 866.6 47.0 Workstations Strategic alliance with Siemens SNYDERGENERAL/Dallas 750.0 45.0 Air filtration Plants in Europe, Singapore, India, and Mexico STANDARD MICROSYSTEMS/Hauppauge, N.Y. 250.5 44.0 Local area network hardware Sales operations in Europe, Asia, and Australia STRYKER/Kalamazoo, Mich. 477.1 31.0 Special surgical products Plants in U.S., Netherlands, and Hong Kong SYBRON/Milwaukee 382.6 30.0 Laboratory equipment Has production facilities across Europe and Asia SYMBOL TECHNOLOGIES/Bohemia, N.Y. 344.9 35.0 Handheld laser scanners No.1 in its niche in Europe; has joint venture in Japan SYNOPTICS/Santa Clara, Calif. 388.8 31.0 Computer networking products 15 sales offices outside the U.S. 3COM/Santa Clara, Calif. 617.2 50.0 Personal computer networking gear Opened first European plant in Dublin; joint venture in Japan THERMO ELECTRON/Waltham, Mass. 947.0 23.3 Energy equipment Owns British, Dutch, and French manufacturers TJ INTERNATIONAL/Boise, Idaho 400.5 20.0 Manufactured wood Strong exports, manufacturing in Canada VISHAY INTERTECHNOLOGY/Malvern, Pa. 664.2 50.0 Electronic resistors Has made major purchases in Israel, France, and Germany WESTERN DIGITAL/Irvine, Calif. 938.3 43.0 Computer disk drives Most of its manufacturing is in Singapore *1992 OR LATEST FISCAL YEAR DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC., BUSINESS WEEK