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STRATEGY

The G Factor

Under scrutiny from overseas customers, a manufacturer improves its operation.
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Overseas-sales revenues are the least important result of exporting, argues Labconco's John McConnell. The real benefits of going global -- and the best reasons to do it -- turn up inside your company

Anyone can see that John McConnell runs a global business. Just look at his desk.

There's not much there. Off to one side sits a 95-page strategic plan. And your eyes can't miss the sheet that serves as his schedule, a grid of the month with every meeting typed in -- is it really possible to type that small? -- with times. Just now, shy of 9 a.m., McConnell is handing off his dictaphone, which is exhausted from an early morning of taped heart-to-hearts. He returns to his desk and sits, back ramrod straight, hands folded before him. "There's a certain discipline to the way we work around here," says the chairman and president of Labconco Corp. as he checks his watch. "Our foreign customers have taught us to be hard on ourselves, and we are."

Indeed the gleam of McConnell's polished desk radiates everywhere at Labconco, a maker of laboratory equipment. The company's numerous conference-room tables shimmer. Then there's the scrubbed tidiness of Labconco's in-the-round training room, where, rumor has it, it is possible to watch the hometown Kansas City Royals play amid the satisfying roar of surround-sound. Most days, though, the only lineup that appears there consists of samples from Labconco's half dozen or so product lines. "People come from all over the world to study these," says McConnell proudly.

Those visitors, he contends, exert an influence that seeps into every corner of Labconco, which posted sales of $28 million in 1990. No aspect of the company has remained untouched, from the way employees inspect products, to the design simplicity that guides engineers, to, yes, even the rigidity that McConnell and his executives bring to bear in organizing their own offices. "I could argue that it's our management or my leadership that does it, but really it's tough customers that make for better businesses," declares McConnell. "Foreign customers made us better in every way. That's the real benefit to going international."

McConnell, who counts on Canada, Europe, and Japan for 20% of sales, advances an intriguing and original argument: sell over there because it will make your company better over here. In recent years, as the nation's trade deficit has swelled, most cheerleaders for exporting have balanced their support for it atop a wobbly pyramid, preaching its virtues as the ultimate in civic responsibility. On the other end of the spectrum, brand-name futurists have warned that companies that do not don their global thinking caps will find themselves overrun by foreign intruders. But the 230 or so employees at Labconco consider such arguments largely irrelevant. "The company as a whole has just become more sophisticated as a result of emphasizing international," says Steve Gound, vice-president of finance. "From a product standpoint, from a marketing standpoint, and from a manufacturing standpoint, it requires you to think more about what you do."

Labconco has taken the challenge seriously. This is not a company where the CEO, flitting through Europe on vacation, stumbled upon a similar type of product and scrounged up the distributor. Labconco has moved far but not fast. "We're not big on bold strokes," admits McConnell, 52. "There's no ranch betting."

Until 1974 Labconco's principal offerings -- fume hoods -- were too weighty and price sensitive to travel well. But that year, sensing a gap, the then-$5-million company expanded into laboratory freeze dryers. Japanese distributors began to show interest. Eventually, Labconco chose one of them -- commemorating the crowning in 1977 at a sake-drenched banquet, during which Mark Weber, now national sales manager, dimly recalls bellowing out his college fight song.

But Weber, backed by many of his colleagues, was soon warbling a sadder tune. "The relationship turned rocky," he remembers. "The Japanese were constantly making not-so-subtle suggestions about our products. And they were adamant, even about things our folks thought of as superficial." See that paint scratch? they'd say, virtually handing McConnell a magnifying glass to examine it for himself. If a freeze dryer leaked some refrigerant in transit, Japanese engineers didn't just refill it, as domestic customers might. They called Labconco with suggestions about how the company might rethink its freon-charging methods. They were brimming with opinions: a better way to fit this part, a coating that would cut down on corrosion, and by the way, do you care that this unit's bladder could conceivably rupture if the user forgets to turn it off? Visiting Japan, McConnell reserved a special dread for pilgrimages to the service center, where they'd display Labconco products and then read aloud their deficiencies.

Not all of the distressing demands centered on quality; the distributor also wanted a 2% price cut. McConnell felt inclined to grant it, especially since Labconco's revenues in Japan were some $1 million by 1979. By 1982 Asia accounted for 10% of Labconco's nearly $15 million in sales. But that growth didn't come quietly, and the badgering rattled McConnell. "I got to the point where I didn't feel good about our level of quality."

But Labconco's wrenching metamorphosis is not simply one more story of an American company being driven by the perfectionist Japanese into a head-on collision with quality. After the company outfitted itself for Japanese business, McConnell, who had risen to CEO in 1980, tar-geted Europe. "The Japanese were tough," observes McConnell, "but the Europeans made me aware that the Japanese were not out of line." German customers, for instance, would complain if a condenser coil performed at lower temperatures than promised. "We began to see that maybe our U.S. customers weren't all that demanding," he says.

In any case, domestic customers have benefited from Labconco's struggle to satisfy its tougher critics abroad. "The changes we made for the Japanese, we made for our domestic units as well," notes Deborah Kenny, director of marketing. It's not just improved products or processes that have enabled Labconco to keep a growing number of domestic competitors at bay; the biggest shift has occurred in Labconco's thinking. "We're now pushing toward perfection," says Richard Rosewicz, vice-president of manufacturing.

Just as the Japanese had ripped off the back panels and scrutinized every Labconco unit, so John McConnell began picking apart his own company to see what was inside. "They forced us to look within ourselves," he says, "and that has made us stronger."

How so? Forget, for the moment, the obvious boost to sales that exporting can provide; what follows are some of the equally compelling reasons that McConnell sees for companies to dive headlong into foreign markets.

1. Exporting Makes Your Company More Competent

It's not that John McConnell didn't want to satisfy his new Japanese distributor right off the bat. He simply couldn't. The more he tried, the more flaws he seemed to uncover. Like lava spewing from a volcano, he says, "the problems were coming down the mountain, and suddenly I'd see one here, and here, and here." The rumbling started, naturally enough, in Labconco's engineering department. The Japanese couldn't help noticing that each Labconco freeze dryer looked slightly different from the next. Ordering five at a time -- which domestic dealers rarely did -- they'd behold five distinct philosophies of wiring, say, or insulation. McConnell found such technical inconsistencies unsettling.

From the start Labconco had been a marketing-driven company, but McConnell didn't realize just how modest the company's technical skills were until Japanese engineers came to town. And at meetings at which he tried to pinpoint problems -- investigating, for instance, why his engineers ordered parts separately for the console and bench-top models of the same laminator unit -- he found "there was too much finger pointing."

A stickler for results, McConnell replaced his vice-president of engineering, bringing in Kerm Dyer in 1980. Dyer, in turn, eventually recruited about 10 new (but experienced) engineers. "The Japanese had some legitimate concerns," Dyer admits.

He couldn't hope to address them quickly, but Dyer attempted to show good faith by making some cosmetic changes in the freeze dryer. He added harnesses, for example, to contain the unit's unsightly wire potbelly. Later Labconco completely redesigned all its product lines, emphasizing simplicity.

But new designs matter only if they are translated into better products. In attempting to ensure that, McConnell found himself uncomfortably aware of the overpopulated and undersupervised Labconco factory. He painfully calculated that sales per factory employee worked out to a flabby $59,000 (compared with $120,000 today) and that turnover hovered at about 50% a year (now 15%). Working with a consultant and an industrial psychologist, he hired a handful of new foremen -- changing the job title to "department manager" -- and enrolled the others in leadership training. Dipping into the benefits of Labconco's 15-year aversion to debt, McConnell earmarked some funds for more advanced tooling, a new model shop, and, most significantly, better testing equipment. "When a product fails in Japan," notes Rosewicz, "it gets real expensive to fix real fast."

Traditionally, Labconco's products weren't tested -- at least not as fully as the Japanese wanted. These days Labconco products endure a virtual boot camp. Some glove boxes or freeze dryers may be run for an entire week straight, with monitors tracking their vital signs. Every other week a diverse group of employees grabs a product out of finished-goods inventory and picks it apart. Is the printing on the carton legible? Are the nuts and bolts flush with the screws? What can we do about this cardboard dust?

Along with doing in-depth testing, Labconco has begun documenting all results. "We have a history of each unit," notes Rosewicz. That way, when a customer calls -- be it from Tokyo or Tempe -- a Labconco service rep can pull the dossier. You say your freeze dryer has a gauge problem? Well, our records indicate we already replaced the gauge while the unit was being built. So check for a loose wire or a bad terminal. "By improving our database of service knowledge, the Japanese made us better at service," says Paul Sullivan, international sales manager. "That information has been very valuable here at home."

It should go without saying, perhaps, that all customers benefit from redesigned products that perform better: a more flexible glassware washer, a quieter fume hood, a more reliable freeze dryer. And Labconco's improved shipping procedures -- using tight packing that doesn't rely on the recipient's understanding the word fragile -- have also shattered previous customer perceptions. "The Japanese broadened our level of frustration, but they also broadened our knowledge," says McConnell. "We've learned to look at our own products through the eyes of the toughest customer."

* * *

2. Exporting Sharpens Your Competitive Skills

Your future competitors aren't hiding. Their wares are out in the open, ripe for inspection. And all you have to do, McConnell insists, is head toward that next international trade show. "It's a good source of product intelligence," he says.

Going head-to-head with foreign manufacturers on their own turf has provided Labconco with some crucial advantages at home. For one thing, it distracts the foreign companies from any U.S. plans they might harbor. For another, it enables Labconco to size up any product before it ships here, allowing the company's troops to sell against it effectively from day one.

Or even earlier. Back in 1985 Labconco executives happened upon a British company that was churning out lightweight fume hoods. By the time the new competitor washed up stateside, Labconco had fashioned a persuasive argument to convince distributors that the product didn't conform to U.S. safety codes. "We pointed it out subtly, of course," says Weber.

In many of its niches, Labconco competes against much smaller, dedicated companies that make only fume hoods, say, or freeze dryers. "It's hard for us to stay on top of all these lines," says McConnell. But as far back as 1974, he has been trekking to Europe and lugging back suitcases of literature. Why can't we do this? he'll ask, pointing to a specific feature. He and others have even shipped back specific products, such as Japanese freeze dryers, tearing them apart quickly because "our distributors were beating us up to make a more competitive product," he says. Labconco engineers have whiled away many an hour figuring out how the chambers drain on a certain model or mulling over the coil design.

And Labconco executives are always on the lookout for new features. Some, like digital readouts, interchangeable front panels, and rounded corners, have been incorporated into products. "These ideas keep us fresh," says McConnell.

Foreign distributors can also offer valuable advice. Last March 1, the company spent $12,000 or so to detour its European distributors -- they were heading to a Chicago trade show -- to Kansas City for a visit. Viewing one new product, all 12 distributors seemed to agree that the company ought to add a special safety feature. "It could be a big selling point for our domestic customers," says Julie Sperry, director of product development. "We like the idea. And we really like the fact that our competitors here don't have it."

* * *

3. Exporting Brings You New Products

Foreign exposure has provided Labconco with more than just ideas for its own products. By pacing trade shows and hanging out with distributors, the company's executives have actually landed agreements to distribute foreign companies' products in the United States.

Naturally, not even the best-performing imports can meet the plump margins of the units that Labconco produces itself. But these pickup products offer shortcuts, giving the company the ability to plug a hole in a product line, reinforce a commitment to a particular market, or gain an introduction into a new clique of customers much faster than it could otherwise.

On average, it takes Labconco four frustrating years to design, develop, and distribute a new product and generate a decent revenue stream. With imports, the gratification is almost immediate. A new chloride station, which measures the salt content of substances, was brought to Labconco's attention courtesy of its Japanese distributor. While Labconco already offered a similar product aimed at medical users, this one appeals to another big market segment: food labs. "We didn't have the time to go back and redesign," says Sperry. "This way, we didn't have to."

* * *

4. Exporting Forces You To Plan Profitably

"When the Japanese asked for a price concession of 2%, we just gave it to them," recalls McConnell. "After that we learned how little we knew about our own costs."

The company's accounting weaknesses weren't like its other problems. It wasn't a question of finding better people, as it had been in engineering. Nor did money need to be spent on tools, as McConnell had found in the factory. What he needed, McConnell soon realized, was more detailed information. "The cost system needs more integrity to handle international," he says.

Questions kept popping up: How will it affect profitability if our charges in Madrid are different from Cincinnati's? If we have to modify this freeze dryer -- adding a transformer to comply with European electrical codes -- what do we need to charge to safeguard our standard margin? "There's the potential for financial surprises," says McConnell. "We don't want any."

Instead of treating international products as onetime sales, McConnell worked with Gound, who heads finance, to assign a component part number to each one of them, enabling the products to flow through Labconco's normal costing system. Then, since they required only slightly more labor to produce, international products could be priced the same as domestic ones. Now McConnell may decide to sacrifice margin for the sake of expanding into a new country or keeping a competitor out, but he knows -- more or less -- how such moves will affect earnings.

While the figures remain a bit sketchy, Gound estimates that Labconco's international sales are probably a smidgen less profitable than its domestic offerings, because of the extra labor involved in meeting foreign electrical requirements. But Labconco's overall efficiency and profitability are obviously enhanced by the added volume. "We're much better with it than without it," says Gound. "We're simply spreading our overhead over more sales dollars."

The exercise of scrutinizing component costs seems to have sharpened Labconco's tracking abilities. With the help of cooperative vendors, and a more conducive factory layout, Labconco has reduced its inventory of self-manufactured metal fabrication parts by 60% in the last couple of years. And Gound's department has become "much more organized from a follow-up standpoint" regarding collections, given that international receivables tend to stretch out to 60 days.

* * *

5. Exporting Grows Your Business

The argument for selling abroad goes something like this: when your domestic market is sputtering, Europe could be revving up. And when Europe stumbles, Japan might rise. And when the United States, Europe, and Japan all disappoint -- as Labconco has experienced this year -- the company is still well positioned to pick up profitable one-shot deals from Saudi Arabia or Canada or Korea. "Spikes of activity come from different countries," says McConnell. "They offset each other."

Or they help, anyway. Last year Labconco was staring at its first flat year in the last decade, during which sales grew by at least 10% each year. Any growth that comes in the next two or three years, McConnell predicts, will result from increased international sales. "It's the key market for us," he says.

But global sales have grown Labconco in more ways than just broadening its sales base.

Consider employees. Labconco engineers have studied electronics; factory workers have explored testing techniques; financial types have come to master letters of credit. Even the marketing department, in preparing simple text for foreign dealers to translate, has "learned how to boil down our copy," says Kenny. Specifics aside, "all the exposure to the world makes you smarter," says Kerm Dyer. "You're in their plants; you're talking to their technical people. You get ideas about everything, from new products to bending a bracket better." There's no question that Labconco, in McConnell's words, has "developed, as a company, a broader knowledge base."

And McConnell never lets employees forget their best teachers. At companywide meetings, international sales manager Sullivan stands up and reports; he'll even pass around pictures of a product being used in some exotic locale such as Indonesia. "People love that," says Sullivan. McConnell, whose top executives all travel abroad, encourages them to share ideas by offering information "ad nauseam" himself. "I tell them I want them to be inquisitive," he says. "Then I kick them out of the office."

* * *

On this particular night, though, most employees seem to have departed voluntarily. McConnell, returning to his office at 8 p.m., finds the exact sales information he expects in the same spot on his desk as always. At his request, Labconco's computers spit out two detailed daily sales reports: one international, one domestic. It's another way for him to communicate the importance of foreign sales. But it also gives him a chance to see what's selling where and compare margins on a product-by-product basis. Not that anything he sees is likely to narrow the scope of his thinking.

"We'll invest more, because international is where the long-range potential is," McConnell says. "Why can't it become 30%, 40%, or even 50% of our business? It can. There are so many more things we could try." His eyes trail his index finger down a row of numbers. He takes a moment to gaze out the window, where he has a bucolic view of several birdhouses and the occasional turtle meandering across the road.

"The international marketplace really teaches you lessons," he says, returning the report to exactly where he found it. "It has already made us a hell of a lot better. But we have just scratched the surface."

Last updated: Jan 1, 1992




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