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STRATEGY

Is Peace Bad for Business?

Businesses that formerly relied on government military contracts will have to adapt due to lower defense budgets.
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Not for companies that are fast on their feet

The Cold War is winding down, and that has some people out here in southern California worried. Just about every week, another major military contractor announces a new round of layoffs in response to defense cutbacks. Recently we've heard about jobs being lost at Northrup, Lockheed, and Hughes Aircraft. Such news tends to foster a particularly insidious bit of common wisdom, namely, the notion that peace is bad for business.

In fact, peace is bad only for some businesses -- the ones that have a hard time adapting to change. That includes, almost by definition, the aerospace and military electronics giants. But not all military contractors are so sluggish. The more agile among them can anticipate the effects of defense cutbacks, reorganize their businesses accordingly, and turn the outbreak of peace into an economic boon.

Consider Kavlico Corp., a small aerospace contractor in Moorpark, Calif., north of Los Angeles. Its products are high-tech sensors that can be used, among other things, to measure pressure and position aircraft and missiles. Accordingly, Kavlico supplied almost all its sensors to missile-and-aircraft makers for many years, with aerospace military contracts accounting for about 85% of company sales in 1985. But Kavlico president Michael Gibson, 44, is a man who pays attention to world affairs. By 1986 he was convinced that the combination of Gorbachev's policies in the Soviet Union and our own federal budget problems would make defense reductions inevitable. So he moved quickly to start shifting away from reliance on military contracts. "I saw a pressing need to diversify out of being a one-cow company," Gibson says. "We had a great technology that we figured could be put to other uses."

One potential market was the automotive industry, which could use Kavlico's sensors to manage engine emissions. But tapping that market posed an enormous challenge. The entire company was geared toward making and marketing products that were used in a few state-of-the-art military aircraft -- not in thousands, or even millions, of cars. Product aside, Kavlico had never sold to mass-market manufacturers. It was accustomed to the world of defense spending, where most contracts are let on a long-term basis and where the decision-making apparatus tends to be highly structured and heavily concentrated. Automobile companies, in contrast, have sprawling bureaucracies that demand constant attention. To complete a sale, you need more than the support of top executives; you also have to win over a host of other people, from quality-assurance personnel to purchasing people to plant managers.

"We had to learn to be proactive," Gibson says. "The aerospace industry basically reacts to contracts. In the automotive world, you have to pursue the business aggressively. You have to be after those people all the time. It's a case of constantly networking within organizations." To reach this market, Gibson realized he needed a new -- and separate -- sales organization. He proceeded to set one up, staffing it largely with people who had experience in the industrial and automotive fields.

At the same time, Gibson was faced with the challenge of overhauling the company's engineering and manufacturing culture. Fortunately, quality was not a problem -- you can't skimp when you're building parts for the F-16. Volume was another story. The company was accustomed to relatively short production runs. If it was going to tap into the mass market, it would have to revamp its entire approach to manufacturing, from materials handling to financial controls. Consultants with mass-manufacturing backgrounds were brought in to help develop new systems, but for the most part Kavlico relied on internal resources, Gibson says. Kavlico's own engineering staff designed the company's advanced automation equipment and systems, for instance. "We already had great talent in the company," he says. "It was a gradual process, but people simply took their talents and transferred them from big aerospace projects to mass manufacturing."

The result: Kavlico today sells more than half of its high-tech gear outside the defense industry. Its customers include heating, ventilation, and air-conditioning systems manufacturers as well as such automotive giants as Ford, Chrysler, Mazda, and Yamaha Motor. Meanwhile, sales over the past three years have more than doubled to some $45 million, while employment has soared from 250 to more than 600 people.

To be sure, the transition was not easy. Transitions seldom are. The end of the Cold War will undoubtedly pose difficulties for many businesses. Like Kavlico, some of them will rise to the challenge. Others won't. I do not mean to minimize the dislocation that will ensue. Such turmoil is inevitable when an economy undergoes a major change and companies have to develop new ways of doing business. My point is that turmoil should not be confused with economic decline. In the end, a certain amount of turmoil can make an economy stronger and often does.

We in southern California should know that by now. After all, we have been through this process before -- following World War II, the Korean War, and the Vietnam War. Each time there have been dire warnings that the impending military cutbacks would devastate the local economy. Each time the local economy has emerged stronger than before. And each time it was the entrepreneurs who led the way, people such as the late Charles B. "Tex" Thornton, the founder of Litton Industries Inc., in Beverly Hills, who moved his company from defense work to commercial pursuits following the Korean War. Indeed, this entrepreneurial adaptability has reduced the region's dependence on military and aerospace industries from approximately 7% of employment during the 1960s to less than 4% today.

So there's little reason for panic in southern California. On the contrary, our experiences contain lessons for people in other regions currently threatened by an outbreak of peace. Don't pay too much attention to the doomsayers in your community. Look instead to such entrepreneurs as Michael Gibson of Kavlico. They are the ones who prove that peace can be good for business.




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