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STRATEGY

Enduring Lessons From a Short War

Over the course of 21 days of war, seven companies faced a test: Would their best-laid plans work? And if not, could they quickly adapt?
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Some held prayer vigils, while others stuck to staff meetings. Some could hardly keep up with all the new business, while others laid off workers. Some fretted about colleagues and family members fighting in Iraq, while others saw the war only as a far-off, impersonal TV event. American business owners experienced in vastly different ways the period from the first missile strike against Iraq on March 19 until the fall of Baghdad on April 9. Still, there were commonalities. Everyone knew the war was coming. Most everyone feared the initial campaign would be far bloodier than it turned out to be. As business leaders, all had to address their personal concerns and the concerns of their employees, as well as the reality of operating a company during a period of deep uncertainty for the nation. For the 21 days from the start of the war until Saddam Hussein's statue toppled in Baghdad, Inc. decided to closely follow an array of successful business owners in various industries and regions of the country, choosing companies that might be the most affected by the war, including importers, truckers, restaurateurs, and retailers. Why? Most every business faces crises from time to time. Not all that often, though, does the same type of intense event face so many business owners at the same moment in history. Inc. set out to discover what business lessons might be gleaned from this unusual circumstance, as well as to document some of the more important business trends now taking place. The war, of course, did not turn out to be the crippling event it might have been. But the business owners facing the prospect of a crisis didn't know that when the shooting started. As Paul Kithcart of GTS, a small transportation management firm located in Twinsburg, Ohio, put it on day one: "Right now, everything is running smoothly. It really is just another day. But tomorrow, well, nobody knows."

"Nobody knows" is a phrase that can unsettle the best-run outfit. Expansion plans stall. Sales sputter. And new hires are a distant wish. In war, uncertainty was the new buzzword, as ubiquitous as "ramp up" during the Internet bubble. Questions about battle plans and casualties and how long the war might actually last became intertwined with volatile market swings, a flat economy, sinking consumer confidence, and the general pall over the U.S. economy. As Walter Russell Mead predicted in these pages in March, however, the onset of the war actually relieved much economic uncertainty -- and propelled many businesses back into growth.

Even in the course of following business owners during this short war, we came away with strong impressions of what went right for so many of them. The companies that were tuned into the economy, read the trends right, and diversified were way ahead. The successful entrepreneurs we followed also proved to have this in common: good planning moderated by flexibility. Relationships, policies, and innovations made in calmer times played pivotal roles when companies were tested by stresses. The best time to make good decisions is when things are going well. Owners should consider whether the decisions they make now will serve them well in times of turmoil. Yet not every contingency can be anticipated -- and even where plans are set, circumstances may call for a different course of action. Which leads to another point: Adaptability is a competitive advantage. As the following seven cases demonstrate, rolling with the punches is good business.

A Discretionary Choice


KNIGHT & CARVER YACHT CENTER, SAN DIEGO

"I don't have a clue what's going to happen now," Sam Brown, CEO of yacht builder Knight & Carver, says on day one of the war. "Nobody really needs a yacht." Knight & Carver is located in blue-collar National City, an industrial area just south of downtown San Diego. The company's bayfront property is almost adjacent to the home base of the "mothball fleet" of Navy vessels, nearly all of which were deployed to the Middle East. Just prior to the start of Operation Iraqi Freedom, the huge port was filled with hundreds of military tanks being loaded onto freighters. "You can't help but think of our employees, their families, and of war," says Brown. He's quick, though, to laugh at himself and his ruminations. "I don't own a boat, and I don't even have a skipper's license. But I do have a real responsibility to everyone who works here, and what we want to do is to keep on working."

In the two and a half years Brown has been at the helm of Knight & Carver (which also repairs commercial fishing and military vessels up to 200 feet long), the company has been profitable on revenue of about $12 million a year. But recently, "we've been expecting a slowdown because of the discretionary nature of what we do," says Brown, 45, referring in a roundabout way to the obvious: Nobody ever really has to buy a yacht. Brown has been working with the company for 14 years, previously serving as its outside lawyer. "When a client doesn't know what the future may bring, a client does nothing. And it's the 'does nothing' part of the equation that can screw up anybody's so-called business plan."

Brown is grateful that one part of the Knight & Carver business plan isn't at all contingent on the whims of wealthy boat owners. In fact, the plan would allow it to keep functioning through the war, albeit not at full speed, even if no repair jobs or new orders came in. In 1996, Knight & Carver took its first tentative steps into the alternative energy business, specifically, building wind turbine blades using their expertise with composite materials. Now, Knight & Carver builds the blades in a 100,000-square-foot indoor facility and business from wind turbines accounts for 25% of revenue. In the first quarter of 2003, Knight & Carver added about 60 employees to its roster, working seven days a week, two to three shifts, to handle the demand for blades. Diversifying into more than one revenue stream by leveraging existing knowledge and assets has proven to be a sound strategy for Knight & Carver.

Still, repairs and boat building are the core of the Knight & Carver business. Brown says that by day three of the war, he was feeling distracted and "downright cranky." There was nothing but bad news coming out of Iraq. Driving into work that day, passing the empty Navy boatyard, he couldn't help but think how "the mess" would affect new business orders, and how the soldiers were faring. His mood was buoyed, though, when he arrived around 7 a.m. that day, at least in terms of business. He walked past the repair yard, where a dozen or so vessels, resting on out-of-the-water blocks, were in for major repairs. The yard was full, jam-packed. "At least we're doing okay out here," Brown says. Repair brings 70% of Knight & Carver's bottom line.

By March 28, a client who was sitting on the fence about refurbishing a vessel finally gave the go-ahead to replace an aging deck. By April 4, several more calls came in for refurbishing jobs, everything from totally rebuilding an Italian vessel to electrical work. Total dollar value: about $1.5 million. "It was as if the war came, and some people said, let's just do something," Brown says, pointing out that Knight & Carver is now working on two new yachts and will begin work on another in May. By April 9, the fall of Baghdad, there were 22 boats in the yard ready to be refurbished, ahead of a "modest plan" for 2003.

What's more, the company was working on 300 wind turbine blades for one energy client alone. The plan, says Brown, is to keep pushing into this more stable source of revenue. "We don't want to be the biggest player in wind energy," he says. "But we do want to be a player."

As U.S. troops marched through Baghdad, Brown heard news of a competitor in the yacht repair and boat building business that had filed for bankruptcy. "Maritime is taking a beating," Brown says. But, he says, he received yet more inquiries for purchases in the week Baghdad fell, and the inquiries are "pretty big-ticket. You don't count that stuff until you get the check. But we have some clients who can pay for a $100,000 repair with a credit card. They don't even blink. I think we're going to be okay."

Getting the Price Right


PROXIMO RESTAURANTS, WASHINGTON, D.C.

Roberto Alvarez and Rob Wilder pride themselves on their timing, and with good reason. Ten years ago, they opened a tapas restaurant in a Washington, D.C., neighborhood that was slated for urban renewal and often resembled Dodge City on a bad day.

Now, more than a decade later, that first restaurant, called Jaleo, has morphed into a mini-empire of Spanish-themed eateries under the umbrella name of Proximo Restaurants. There are two of the low-priced Jaleo restaurants, the second in downtown Bethesda, Md., plus a brand-new moderately priced restaurant that opened in October called Zaytinya, and the upscale Café Atlantico, both of them located in downtown D.C. The restaurants have become D.C. institutions, with combined sales expected to reach more than $18 million this year.

Around mid-March, Alvarez and Wilder figured it was time for a much-needed vacation. And then the war started. "I'm on a French island, Roberto is in Mexico, and the U.S. is at war," says the 43-year-old Wilder. They remembered all too well that their restaurants had suffered revenue losses of almost 15% across the board after September 11. It took more than a month to recover. For restaurateurs, even a slight dip in sales can decimate earnings. "Restaurants are pretty much day-to-day," Wilder says.

D.C.'s Jaleo is usually jam-packed. Diners can wait more than a hour for seats at one of the restaurant's 50 tables, each stacked with small, brightly colored plates to hold the tapas. Its raised bar is usually hopping. On day one of the war, "sales were noticeably down," says Wilder, but in large part that was because an angry tobacco farmer who claimed he had a bomb drove a tractor into Constitution Gardens, paralyzing D.C. for two days. When they returned home on March 31, Wilder and Alvarez discovered that nighttime diners clearly needed a break from the 24-7 barrage of war news. All the restaurants were jammed, with an increase of about 5% over expected sales. One of the main reasons: Customers seek value in a harsh economic climate. The food at all their restaurants is relatively cheap. A diner can get away with about a $20-25 per person tab at the Jaleos and Zaytinya. Even the top-priced Café Atlantico only costs about $35 per person. Compared to a vacation cancelled as a result of war, dining out is inexpensive for D.C. professionals.

The effects of war have become part of a "sad kind of new normal," Wilder says. "Even in Tel Aviv, where people live day-to-day wondering when the next attack will come, restaurants are packed. People want to be together." Adds Alvarez: "I've learned that people continue to enjoy life no matter what. Life does go on and even the most tragic events do pass."

A Key Executive Joins the Fight


DATAWORLD, BETHESDA, MD.

"The biggest mistake I made was trying to do Jeff's job, as opposed to having someone do it," says Dave Doherty, CEO of Dataworld, a 10-person information and engineering service provider based in Bethesda, Md. The Jeff to whom Doherty is referring is Jeff Mcintosh, who used to run Dataworld's computer networks but was now off in the reserves. "That meant I was paying more attention to doing his job instead of what I needed to be doing in product development and marketing. And that had a negative impact on the revenue stream."

After posting a six-figure loss in 2002 and facing the challenges of a recession and looming war, Doherty assumed in January that 2003 would be another year in the red. Almost four months later, Dataworld was "a very profitable company again." Doherty hesitates to put his finger on any one contributing factor, but he believes that finally going to war after months of anticipation took at least some uncertainty out of the economy, propelling nervous customers to move ahead with projects. Revenue in March was about four times what it was in November, providing a cash infusion that put the company on stable ground.

Should business continue to boom for the next few months, Dataworld will embark on capital improvements it had delayed. Ironically, as the head of networking and computing, Jeff Mcintosh would have been the one to implement such changes. Doherty says with the benefit of hindsight about his overextending himself, he's leaning toward using a $200,000 SBA loan to hire an outside contractor to move forward with the development plan, rather than getting off track again by doing the job himself. Reservists on active duty, by law, can't be fired by their employers. Not that Doherty would anyway. As an American, he says the country owes its troops a debt of gratitude, including his chief network guy. --Rod Kurtz

Creative Marketing Keeps the Music Going


J&R MUSIC AND COMPUTER WORLD, NEW YORK CITY

New Yorkers spending time at home glued to CNN meant "business as usual" for Rachelle Friedman, 52, who founded J&R more than 30 years ago with her husband, Joe, using money given to them as a wedding present. Occupying an entire city block across from City Hall, the 300,000-square-foot J&R store stocks everything in audio, video, cameras, home office, music, and movies. The World Trade Center site is directly visible outside of J&R's windows.

"We were psychologically getting prepared for the worst," says Friedman of the war. Friedman took no specific steps to remedy a possible downturn, but J&R had already been aggressively marketing itself since it reopened October 25, 2001, after serving as a crisis center for the 9/11 disaster. She and Joe wanted to bring business back to lower Manhattan, so they lobbied successfully for sales-tax-free weeks. They also hosted 60 free musical fetes, with appearances by artists such as Judy Collins and Wynton Marsalis. Friedman has also put in place agreements with local radio stations for live in-store broadcasts. It worked. Thousands of consumers flocked downtown. But the loss of tens of thousands of daily downtown workers still reduced traffic into the store by about 20% compared with pre-9/11 levels. Between layoffs and early retirement since 9/11, J&R cut staff by about 50 employees, from more than 600. When the Iraq war started, Rachelle was leery. But business was, in fact, better than usual, as homebodies new and old poured into the store -- which prominently advertised itself as having the lowest prices and biggest selection around. Big sellers? Home air purification systems, vacuums with HEPA filters, security products, appliances, shortwave radios, large-screen TVs, surround-sound systems, digital cameras, and video products. By week three, sales increased by 15% across all of these categories. "When things get tough, people gravitate to the companies they feel comfortable with, and they are loyal to those that have always given them good service," Friedman says. "Our customers have shopped here for 32 years and know we will always be here for them."

Controlling the Bleed


IMG HOME, SAN FRANCISCO

Tony Abrahim doesn't like to talk about war and business in the same breath. For the Afghan native, who immigrated to New York City with his twin brother, Sam, during the Soviet occupation of Afghanistan, "war is misery." And business, "well, that's just about money." He knows both. He and his twin brother were born Mirwais and Masud Ibrahimi 43 years ago in Afghanistan, the last two in a family of 11 children. Their father was a successful merchant. They lived in luxury, "like princes," Tony is fond of saying. All that changed in the 1970s, with a civil war followed by a Soviet invasion. The boys were about to be drafted into the military. "We needed to leave," Tony says. "Everything was destroyed." Sam left for Germany. Tony went to New York City. The brothers ultimately met up in New York, and worked as dishwashers, busboys, waiters, and bartenders until they left for San Francisco in the early '90s.

On the first day of the war, the Abrahim brothers did little work. Instead, they sat in their offices above their flagship showroom on Harrison Street in San Francisco watching CNN for most of the day. Their offices are adorned with photos of the brothers standing beside some high-profile friends such as former Treasury Secretary Paul O'Neil. Surveying their showroom stocked with imported new and antique tribal rugs, kilim pillows, ethnic furniture, and objets d'art from Korea, Japan, Afghanistan, Iran, India, Morocco, and Turkey, Abrahim worries: "I think we're going to see some of this stuff collect a lot of dust. I think this may be the beginning of something very bad."

IMG Home is a $12 million business that includes 11 stores (nine of which were opened in 2001 alone) and showrooms in California. More than 300 retailers throughout the U.S. carry its wares. The brothers began their business by selling rugs out of a truck. Today, they have about 120 employees stateside and more than 600 weavers and artisans overseas in places such as Morocco, Egypt, and Pakistan. Year to year, the brothers grew revenue by $2 million, up from $10 million in 2001. With a loyal customer base of about 20,000, and what Abrahim calls "high-quality goods and the lowest prices in California," the brothers are struggling to maintain revenues at about $12 million for 2003. "We had some really good years," says Tony during week one. "This year, let's just say kind of bad. I can't tell you if it's the economy, if it's uncertainty, if it was the war, or all three. All I know is that once the bombs started to drop, business went to crap."

IMG usually does about $100,000 of weekend business at its Harrison Street store. What with war protests and clogged pedestrian and car traffic, business dropped by half. And it hasn't recovered. Across the board, business is down by about 20% to 30%, Tony estimates.

IMG has the added problem of importing goods from troubled areas throughout the Mideast. Two years ago, the brothers started manufacturing in China, Indonesia, the Philippines, Burma, and Vietnam. They are working to move the bulk of their manufacturing to these somewhat more stable locales, but that plan didn't come to fruition in time for the war. By the second week, because of disruption in supply chains, the brothers had only about 50 shipping containers of goods from the Middle East, enough to last about two months in normal circumstances. The disruption of supplies and decline in revenues presented the brothers with some difficult choices.

They decided to close two stores, one in San Francisco and another in Los Gatos, Calif. About 20 people stateside will be laid off. About 200 overseas employees will lose their jobs. "We have to downsize, so we can expand in the future," says Tony, who dreams of a 100-store chain and opening a large factory in their native Afghanistan. "Sometimes business is up. Sometimes business is down. The most important thing is that while many businesses are closing, we are not. We are making some tough choices now so we can weather any storm. You have to stop the bleeding now and keep your eyes on the long-term goal."

Monitoring the Globe


PPR INTERNATIONAL, JACKSONVILLE, FLA.

Keith Frein, CEO of PPR International, a Jacksonville, Fla., company that recruits and places domestic and international traveling nurses, starts his day by checking the color-coded icons on his computer desktop that track the daily terrorism threat. Frein proceeds to review a steady stream of real-time numbers tracking nurses in the pipeline. And he reads immigration laws. "I never stop reading, because every country has different rules," says Frein. "I've become a culture keeper." * PPR hires nurses from countries such as India and the Philippines and contracts work for them in American hospitals. The 74-employee company, founded in 1996 by Frein and Dwight Cooper, is profitable because of a drastic U.S. nursing shortage. But post 9/11, PPR suffered a severe drop in business. Frein learned that the INS can become terribly disrupted during periods when foreign nationals must be scrutinized intensely. Immigration delays can create havoc in the lives of foreign nurses, and many decided not to come to the U.S.

In the year leading up to the war, PPR allocated a greater portion of its budget to the domestic side of its business and increased its dedication to monitoring global changes. When the war started, PPR sent blasts of e-mails to nurses keeping them abreast of their immigration status. The company divided up the countries it does business with in-house so that one person was in charge of the e-mails from India, one from the Philippines, and so on. Frein compared the back-and-forth communication during the war to a sudden spike on an EKG monitor, adding, "Technology is great, but many nurses still want a personal response." The extra effort helped PPR retain its nurses this time around. --Patrick J. Sauer

Making It Happen


GROUP TRANSPORTATION SERVICES, CLEVELAND

By week two of the war, Group Transportation Services founder Mike Valentine was looking at some weak numbers. GTS had failed to meet its first-quarter projected growth by about 10% and wasn't signing up many new clients. But in the glass-half-full scenario, revenue was still up by about 19% for the first quarter from a year earlier, an "enviable position" in its industry, says Valentine. Still, Valentine was used to much more. From 1997 to 2001, GTS sales increased by 2,335% to more than $15 million.

GTS bills itself as a transportation solutions company -- a kind of one-stop resource for shipping. It figures out the fastest and most cost-effective way for its clients to ship almost anything; they also audit, track, and trace freight. Valentine achieved his meteoric growth in large part by courting trade associations. With a diversified client base and agreements with 26 trade associations, GTS has a stable client base not dependent on any one account.

The highly ambitious Valentine decided from day one that the war was "absolutely not going to stop us from success." At the beginning of the war, the staff had gathered for a prayer vigil. During week three, Valentine gathered together the staff again and laid out an aggressive plan to reach $200 million in sales over the next five years, a 1,333% expected growth. The plan? The entire crew, not just the marketers, will look for new customers, new sales, new opportunities. And they're going to focus on big-ticket sales. Last year, they landed a $16 million contract to handle all domestic shipping for an international freight forwarder, and are working hard to get more business like that. Valentine also announced that he was bringing in a highflying new salesperson known for his multimillion-dollar deals. "We can't sit around and wish things were better. You need to make things better."

Joan Raymond is a freelance writer based in Cleveland.


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Last updated: Jun 1, 2003




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