Building a "Midwest Valley" Company

Joseph P. Keithley
Chairman, CEO and President
Keithley Instruments, Inc.

It's an honor to be asked to address such a respected audience.

I've always thought that Cleveland is a great place to grow a company, particularly an electronics company like ours. In fact, now that many laid off dot com employees have returned home to jobs in the Midwest, Fortune wrote an article saying that B-to-C no longer stands for Business-to-Consumer, but now refers to those who have gone Back-to-Cleveland.

2000 has been a year of tremendous growth and accomplishment for many in the electronics industry, and I'm pleased to say that included us at Keithley Instruments. It's truly been a remarkable time. Let me tell you why.

The electronics industry segment we live in, classified as the test-and-measurement sector, was actually mature, characterized by single-digit growth rates during the late 1980s and early 1990s. And that was during the times of economic expansion.

Our situation was complicated by the presence of a goliath competitor, Agilent, a spin-off of Hewlett-Packard. A tremendously able competitor, the multi-billion dollar Agilent brought fantastic resources to bear on product innovation and global sales and service capabilities that certainly made life difficult for our $150 million dollar company.

During the early part of the 1990s, we recognized that our company would stagnate if we were forced to continue to compete as we had, serving just the research community. We'd fail to attract the brightest management and engineering talent. Our product innovation would suffer. And we would struggle to build shareholder value.

We determined that in order to break from a single-digit growth rate destiny, we would seek out additional segments of the electronics industry. Rather than view the test-and-measurement market as a homogenous entity, we sought out the fast-growth pockets, those sectors whose companies are characterized by their innovation, high levels of product development, and investments fueling their own sales growth.

The double- and even triple-digit growth rates commonplace to our targeted sectors would fuel our own sales increases. In support of their emerging measurement needs arising from their next generation new products, we jointly defined new test and measurement products for them. For these sectors then, we would create specialized products, rather than general-purpose test equipment.

In the early and mid-1990s, we identified telecommunications, optoelectronics and semiconductors as those high-growth pockets, and we were successful in creating a series of unique products that even today continue to be superior in enabling our customers to increase throughput while keeping time to test at a minimum.

It actually looks simple today, and, in truth, most successful business strategies are built on a foundation of simplicity. Execution, as we all know, is a manager's ultimate test.

However, while it's gratifying to recount our past successes, I certainly feel a greater sense of urgency to answer questions about our future, because I think they are questions that affect all of our companies, and indeed our region: how do we sustain growth? And, even further, how do we energize innovation and change within our company ▄ and our community -- to carry us to even greater levels of expansion?

I'd like to talk with you today about innovation and change, and their vital importance to the future growth of manufacturing companies here in Northeast Ohio. As I was thinking about that theme, I remembered a story about one of our industry's greatest innovators, Thomas Edison. You may have forgotten from your elementary school lessons about Edison that in fact he did not invent the light bulb. Light bulbs had been around for 50 years before Edison began his experiments with electric light. And the first modern light bulb, based on a carbon filament, was actually patented not by Edison but by an English man named Joseph Swan.

What Edison did for the light bulb was to improve an existing design, develop a way to mass produce it at a cost which ensured 100% household adoption, and then build the infrastructure (power grids) that delivered the electricity needed to illuminate the bulbs.

In short, Thomas Edison did not stop at being an inventor; rather, his greatest contributions were as an engineer, a product developer, and a manufacturer ▄ all requiring innovation.

His success reminds us that the way people who develop and make things prosper is through the application of new technology embracing the changes that accompany it. Being first to market with a new kind of product does not guarantee success; indeed it is just the first phase in its adoption. Success comes from anticipating change, and then taking advantage of it. What a tremendously difficult challenge it is to create an organization that thrives on innovation and change, that seeks it out, that harnesses its energy in a way that produces sales growth.

It's become fashionable of late to criticize the dot-com phenomena, even to mock the Internet companies that flew so high, some with such confidence and even arrogance, only to fall in a manner equal to their spectacular rise.

Yet, there are many lessons we all can take from this phase of the adoption of the digital economy, the first of which is to separate the adoption of web-based communication offered to all of us from the dot coms which tried to capitalize on it. Some lessons are certainly meant to be avoided, but there are also many lessons all of us should attempt to incorporate into our own companies. I, for instance, have been fascinated by the dot-com industry's ability to define a need and work to fulfill it, and to energize their workforce under extreme pressures to create endless cycles of truly inspiring and creative innovation. They believed they were going to change the world.

Rosabeth Moss Kanter of Harvard, a renowned author and expert on innovation, recently chronicled the ways all types of companies respond to change in the Internet age. In her book, Evolve, she defines innovation as having three phases.

The first step is to deny that you need to change. In 1995 and 1996, Fortune and Forbes were filled with quotes from respected CEOs denying that this new Internet technology wasn't going to affect their core manufacturing missions. In fact, it's human nature to deny change, to work around it, to forestall it. Internet companies were wired exactly the opposite. They sought out new ways to think, new problems to solve, and were driven to incorporate creativity in whatever solutions they eventually created.

I'll tell you that General Electric is not denying the need to change. According to a recent article in Forbes, even as GE cuts back in other areas, Jack Welch is investing in e-purchasing and information technology. While other CEOs delay spending on IT projects due to the slowing economy, this year GE will spend $3 billion on high tech, 12 percent more than it spent last year when the economy was stronger. Welch believes that digitizing his company gives it a competitive advantage, and he sees his competitors' reluctance to change during the downturn as his chance to "widen the gap."

Perhaps he heard Thomas Edison whispering in his ear. Edison once wrote that "Discontent is the first necessity of progress." If we are content with the status quo, our competitors will pass us by.

GE is not the only company taking advantage of the lull in the economy to pull ahead of its competitors. A recent survey by InternetWeek of 400 large companies (with revenues over a billion dollars) indicates that 87 percent of the top 100 "e-business" companies will increase Internet spending this year, some by more than 40%. I'm not talking about dotcoms when I speak of e-business companies. The big spenders will be chemical and pharmaceutical companies, followed by telecommunications companies and utilities. Phillips Petroleum will increase Internet spending to $15 million this year from just $2 million last year. Most of that budget will go toward online procurement.

The second step of innovation, Kanter says, is cosmetic change. That's when we seek to keep up by simply copying what other people have already implemented. We put our inventory online and build a customer database and convince ourselves that we are innovating. In fact, these moves do little to improve inventory turns, or increase customer satisfaction, or create new product solutions. Kanter refers to this stage of cosmetic change as "putting lipstick on the bulldog."

What a powerful image. The innovation transformation has to be cultural and organizational, or, guess whatâ we're still bulldogs.

Automating an existing process has little to do with innovation, and creates no added value to a company's customers. Putting a catalog online is somewhat convenient, yet offers little in the way of innovation. Consider instead what Honeywell is doing. They've created a web tool known as myplant.com, designed for engineers constructing a process control system. Rather than relying on hours of engineering to define and configure these complex systems, plant engineers can visit the site, describe their needs, and view a system instantly configured by myplant.com. Of course, they can even order the components for the system online.

That of course describes the third step -- true innovation, new ways to serve existing customers, new products to offer, new customer groups to serve and new processes that drive competitive advantage resulting in increased shareholder value.

Companies that live in this third phase of innovation and change realize that culture matters more than technology for profound innovation to take place. In fact, a culture dedicated to change may be essential to company survival.

Consider Ford Motor Company, which is literally on the precipice of great, great change. Chairman William Ford defines change not merely as online ordering of your next car, or electronic supply chain management and e-auctions to reduce vendor costs. Those are important initiatives, but they clearly achieve only the second level of change. If they stopped there, their executives would just be putting lipstick on their bulldogs.

Actually, Ford has committed his company to nothing less than the abolition of the internal combustion engine, and challenged his engineers to get there before his competitors. Success in this breathtaking third phase of innovation rests upon many smaller engineering innovations ▄ in electric motors, batteries, and materials ▄ and it will be accompanied by the innovative application of electronics, including RF sensors, speed control, and LED headlights.

This brings me to my second theme for today, which is the critical role electronics can play for a company seeking innovation and rapid growth. I believe that the electronics industry is a primary driver for corporate expansion and economic development, and there are many lessons around us we can adopt in our own businesses and as community leaders.

Consider how innovative electronics content has fueled growth at local companies. Circuit breakers are a commodity- but after Eaton Corporation embedded electronics, they became a way to prevent house fires. TRW aligns with Michelin to develop advanced tire-pressure sensing systemsâ adding electronics to add value. And I am anxious to mention Brush Wellman, where I sit on the board of directors. Not satisfied with being a supplier of commodity metal alloys, they created new housings deployed by telecommunications service providers at the bottom of the ocean to protect the network's optical electronic components. Brush Wellman as an enabler of fiber optics ▄ not how you'd think of that company just a few years ago.

I realize that many of our region's leaders are intrigued with the growth potential biotechnology presents for our local economy, and it certainly holds tremendous promise. However, from a broader perspective, I believe our region would benefit from a similar focus on the electronics sector and the benefits it could bring to our economic development. Of course, this sector already exists today, already employs thousands, and already creates hundreds of new jobs each year. Further, innovation spurred by a vibrant electronic industry has proven, in other parts of the country, to serve as a tremendous engine for regional economic expansion.

One need look no further than San Diego, to see the economic development fostered by Qualcomm there, or Ottawa, to see the explosion in opto electronics companies that trace their genesis to Nortel, to realize the economic development engine presented to use here in Ohio by building upon the electronics infrastructure we already have in place.

Research suggests that regional success will be determined by building up local strengths that foster productive investment, not on attracting investment through tax incentives. Strengthening local assets requires a focus on research capabilities, skilled workers, and networks that connect business with resources.

Cleveland already boasts a tremendous concentration of electronic intellectual capital, with companies such as TRW, Rockwell, Eaton, ABB, Pioneer-Standard, GE Lighting and many others in our midst. In fact, there are 503 local businesses engaged in the Instruments and Controls sector alone, and I applaud the Growth Association's efforts to nurture this infrastructure, with its Cluster Project. I encourage other regional development officials to contribute to their effort. We have the beginnings of critical mass; now we need to cultivate a climate where entrepreneurs find the balance of risk and reward conducive to innovation.

Improving technology transfer between the public and private sector would further fuel the local electronics industry's ability to drive local growth. I chair the Technology Transfer Committee of the Board of Trustees at Case Western Reserve University, where we are redoubling our efforts to strengthen ties between companies and university research.

The irony of the global economy is that even as geographic borders matter less, location matters more. Wealth concentrates in regions where the right conditions and resources can be leveraged to produce high-value products. These clusters have as their hallmark a strong partnership between the private and public sector, where university research and both State and NSF/NIH Federal investment encourage economic development.

Study technology centers such as Austin, Boston, Silicon Valley, Atlanta and Research Triangle and consider what made these places become centers of innovation. It was fueled with major research universities nearby that partnered with state officials, private industry and local angel investors, to provide cutting edge research and highly skilled workers. These cities grew because they and nearby universities created a climate for the free-flowing exchange of ideas.

Our efforts at Case are a good start, but it is far from sufficient. All of us, as leaders at our companies, need to get involved with some kind of university partnership, and encourage our employees to do the same.

Finally, we need local and state government to get serious about supporting the community's initiatives to foster innovation. Government officials must invest in projects of the future with the same enthusiasm and commitment with which they commit to the steel industry, projects that foster the kind of innovation that leads to dramatic, sustained and long-term growth.

Consider how the advent of today's Knowledge Society has affected, or actually bypassed, Ohio. By the middle of the century we were a leader in steel, rubber, aerospace, automotive, and chemical sectors. In the late 1950s our per capita income was more than 5% above the U.S. average. Then came the transition into the knowledge-based society. Downsizing, mergers, facility relocations to lower cost labor markets, and technological change reduced the number of workers and wage scales for those employed in the traditional manufacturing sectors. Cleveland, Toledo, Youngstown, Cincinnati, Dayton, and the Ohio River sector were all seriously affected. Per capita income as a percent of the national average dropped by more than 10% from the highs of the 1950-1960 period. The latest results show some improvement, but we are still nearly 4% below average.

How about some perspective. The Governor's Office of Science and Technology reports that Ohio is 7th in population among U.S. states, but we are:

A clear overview of our position was shown by a recently published annual report card of the Corporation for Enterprise Development, which ranks states based on employment, earnings, job quality, and equity. During a four-year period, Ohio dropped from 25th to 30th place. States with a strong technology focus and investment moved up: Georgia from 32nd to 7th, Maryland from 32nd (tied with Georgia) to 21st, Massachusetts from 35th to 18th, and North Carolina from 22nd to 9th.

The good news is that Ohioans can learn from the economic development strategies successfully implemented in other states. For example, twenty years ago Georgia used to be known for cotton, peaches, and peanuts. But efforts by then Governor Zell Miller, working with industry leaders, transformed the state into a mecca for innovation. Today Georgia ranks first among the states in high tech job creation, and fifth in venture capital.

Georgia accomplished this primarily through state initiatives starting in the 1980s. The state funded efforts to attract top academic researchers in cutting-edge technologies: microelectronics, biotechnology, and environmental technology. These researchers attracted exceptional students and faculty who in turn became a magnet for federal and industry funding.

Luis Proenza, now President of the University of Akron, worked on this initiative in Georgia, and he understands the leveraging effect of investing in university research. One example he remembers is the state investing $3 million dollars to bring a top scientist and his team to a Georgia university. Within two years the scientist had secured $6 million in funding, and then he and some of his colleagues started businesses based on their innovations. In other words, the state's investment was multiplied many times, creating high-paying jobs and building an infrastructure for future innovation and growth.

I would like to see the state of Ohio do the same kind of investment here, in electronics research, building on the Instrument-cluster companies and fine research universities already present here in Northeast Ohio. We need to invite our government officials to embrace innovation and change with the same enthusiasm found among leaders in the business community.

I am reminded of the flame burning over LTV Steel, visible from downtown Cleveland. To me this flame is an icon of our region's manufacturing heritage, of which we all can be proud.

But I'm anxious for our region to carry a new torch ▄ one lit by innovation ▄ from the board room to the university laboratory to the development lab to the factory floor. Thomas Edison challenged us to do just that, when he said, "Good fortune is what happens when opportunity meets with preparation." We have the opportunity here in Cleveland. Now, we must prepare for the good fortune within our reach.

Thank you for your time today.