Dump the Cookware
William J. Holstein / Business 2.0 05/01/2001
Stoke the innovators. How Corning has thrived for most of its 150 years.
Folks in Corning, a small town in rugged upstate New York, were used to devastation. A flood in 1972 nearly wiped out the town. Then plant closings during the deep recession of the early 1980s by GE Foundry, Remington Rand Typewriters, and Moore Business Forms cost the region at least 10,000 jobs. By the 1990s, Corning residents could see that most of the towns in upstate New York were being bypassed by the great American economic boom.
So it came as a cruel blow in 1997 when Corning Inc. (GLW, info) announced it was selling its consumer division, which made Pyrex, Revere metal cookware, and Corelle laminated glass tableware. Corning had been making kitchenware here since 1915, and the town's identity was inextricably linked to the company and its most famous product. Locals thought that Corning, like other companies in town, would close the plants. Letters poured in from retirees accusing the company of betrayal. It was of scant consolation when in 1998 the company finally found a buyer in Kohlberg Kravis Roberts & Co., a Wall Street investment firm. "When they sold, it was a traumatic experience, like you're selling your children," recalls Steve Mandell, president of Local 1000 of the American Flint Glass Workers Union. "We went through hell for two or three years."
What many Corning residents didn't realize was that out west of town, near the company's Sullivan Park research facility, scientists had already found Corning's future-and that the sale of the consumer division was the key to developing it. Research scientist Doug Hall had helped invent the erbium-doped optical amplifier, a breakthrough technology that would have an enormous impact on optical fiber networks. Pilot production proved successful, and the company opened a factory to make the amplifiers in October 1997. While that was happening, Hall had gone back to the labs to commercialize another hit, this one a new way of making optical fiber, the hair-thin strands of light that are replacing copper telephone wire. Hall was a long-time resident of Corning and knew that he was helping fight for a way of life. "We're living in this little valley and it was a question of whether we could keep living here or not," says Hall.
Today Corning is the No. 1 maker of optical fiber, with a 40 percent share of the world market. It enjoys strong positions in components such as lasers and amplifiers that make optical networks and the Internet work. The company is pumping out wave after wave of optical technologies, sometimes in six to nine months, which is lightning fast compared to other companies' time-to-market period of three to five years.
Meanwhile, the region, with a population now at 45,000, is booming. Numerous cranes are erecting buildings and factories all around the vast 1.5 million-square-foot Sullivan Park. Traffic has become a problem and parking is a nightmare. Some scientists park their cars at Kmart and take a shuttle to work. School space and housing has been in short supply. The consumer division, now called World Kitchen, is still headquartered in the area. Although it fired many workers and the experience was traumatic, many of the people who lost their jobs were hired when Corning grew to 7,700 employees from 5,600 over five years.
In today's wrenching economy, the transformation of Corning from an old-line conglomerate into a technology powerhouse should be of keen interest to denizens of the New and Old Economies alike. Over its 150-year history, Corning has repeatedly been on the cutting edge of technologies that change the world. It perfected Thomas Edison's light bulb and then invented a rapid-fire machine in 1926 that could produce about 200 of them per minute. Decades later, it made television tubes for a nascent TV industry. Over and over again: Corning creates and then moves on when conditions shift or when technologies are overtaken. "If any company has a long-term claim on these kinds of skills, it's probably Corning," says McKinsey partner Richard Foster, co-author of Creative Destruction. "They've been through five or six major transitions. They are going through another one right now." Although Corning has recently laid off a few hundred people to better weather the current economic downturn, Foster says he thinks the company is positioned for the "sweet spot" of future growth.
Corning's executives have figured out an important maxim for prospering in a new economy. Running a successful business is about more than just knowing when to destroy. It's also about knowing how to create an innovation process that gets research into the marketplace as fast as possible. To do that, Corning stripped out layers of bureaucracy separating technologists from key decision-makers who controlled spending. It consciously tried to create a culture that encourages innovation and cross-fertilization among disciplines. And it has been spectacularly successful in using incubators and "skunkworks." All of which stands in stark contrast with Lucent Technologies (LU, info) and Xerox, which haven't been able to exploit the vast potential of their labs.
In the early 1990s, Corning looked much the way Lucent and Xerox appear today: limp growth projections and tepid profits. Indeed, it had been content with a low rate of profitability. James Houghton, the chairman and a scion of the founding family, was pushing the company to improve quality, but by definition that was incremental change. Although it enjoyed growth in the kitchenwares division and attempted to diversify by purchasing a laboratory testing company, Corning wasn't going anywhere in a hurry.
In the spring of 1996, blunt-spoken engineer Roger Ackerman took over and began pressing for radical change, not modest improvement. It was an unusual tack for a career man. Although Ackerman started in research and development in 1962, he had ambition and a belly for change. "I said, 'Hey, we can do better.'"
In hindsight, it is obvious what was needed. Cookware was in trouble partly because of the growing power of Wal-Mart (WMT, info), Kmart, and Target, which controlled a majority of America's shelf space. "They were saying, 'We want a commitment from you to cut your price by 5 percent a year for the rest of your life. And if you don't, we have plenty of suppliers in Asia who can duplicate what you have,'" Ackerman recalls. "Talk about a gun to the head."
Then litigation against the Dow Corning joint venture, which made silicone for breast implants, forced that company into Chapter 11 bankruptcy. Corning was a half-owner of Dow Corning. "Twenty-five percent of our earnings went poof!" he recalls.
Ackerman took his seven-man senior leadership team to the Boulders Resort in Carefree, Ariz., for a three-day strategy session. Borrowing tools developed by the Boston Consulting Group, the Corning executives looked at the profitability and growth of each business in their portfolio and plotted them on those two axes (see chart). It became clear to the managers that, in terms of assets, the consumer division and laboratory testing-which earned about 50 percent of the company's revenues-were low-profit and low-growth businesses. And it was likely to stay that way. "I didn't wake up in the morning and say, 'Let's get rid of the consumer business,'" Ackerman recalls. But to get the cash to grow other parts of the company, that's what he'd have to do. Sure, he would cut the company's revenue in half, from $5.5 billion to $2.5 billion, but he would double profits and rev up growth.
Ackerman put his technologists through a grueling six-month study, what they called a "deep dive." Where was the optics industry going and how was Corning positioned for that change? Managers came up with a road map of what they could see coming-greater demand for bandwidth thanks to the Internet. "This was going to be a fiber world," says John Loose, then president of the company (now also CEO, he succeeds Ackerman as chairman this year). Corning knew it needed to produce better fiber and more of the components that shoot light through the fiber and help manage it, such as amplifiers. The psychology shifted under Ackerman's relentless pounding. He squeezed company "cash cows"-such as display technologies and environ-mental technologies units-that were profitable but slow-growth, freeing more cash to fuel startups. He held meetings devoted purely to promoting growth. "I don't want to talk about anything else," he said. "What is it going to take to win?"
By early 1997 Corning had mapped out its optics strategy. It called for some acquisitions, particularly of companies with laser know-how. But the bigger risk was a doubling of R&D spending. Then came the Asian economic crisis in the summer of 1997. In what Ackerman regards as the single boldest decision of his career, the company stuck to its guns even though sales were in a free-fall. From a starting point of $179.7 million in 1995, R&D spending doubled to $378 million in 1999. (It continues to spend more than the average industrial company: $725 million this year or about 8 percent of sales.)
Of course, spending more doesn't necessarily result in market-ready technology, as the top brass at Lucent Technologies, Xerox, Eastman Kodak (EK, info), IBM (IBM, info), and other major research companies have discovered to their dismay. Bell Labs, after all, invented the transistor, laser, and UNIX operating system, but AT&T (which then owned the labs) was never able to exploit them. Researchers sometimes come up with a great idea and "throw it over the wall" to manufacturers who may not have any emotional investment in the idea or even understand its potential. Seeing inventions make it to market depends heavily on the culture and mentality that prevails in the lab and on how the process of innovation is managed-areas where Corning excels.
Consider the problem of the amplifier. As light travels down a fiber, wavelengths begin to lose power and the integrity of the digital information they carry begins to deteriorate. Every 50 to 60 miles, you need to amplify the signal, revving it back up for the next leg of its journey. It was one thing to do that when there was a single channel of light going through a single fiber, but with dense-wave division multiplexing, more lasers were used to convert more signals and to send them shooting through the fiber with increasingly precise and rapid blasts. Up to 80 channels of light could fit through a single fiber. And as many as 488 fibers were packed in a cable. Capturing all that light and amplifying it was an incredible challenge.
How could an amplifier capture incoming streams of light, amplify them, and retransmit them without converting them to electrical protons? In the mid-1980s, Corning research scientist Doug Hall was working his way through rare earths in search of a solution. It was well-known in the scientific world that if erbium in a glass was excited by energy from a pump laser, the erbium could capture an almost limitless amount of incoming optical signals, amplify them, and send them on their way.
The innovation could have dead-ended there. What Hall did next helped make the difference. He agreed to become a research super-visor in order to guide the team of scientists developing the erbium doping technique. Many research scientists are so interested in advancing the state of knowledge for the sake of knowledge that they aren't interested in becoming managers. They're content to read their research papers at scientific confabs and secure patents.
After applied research confirmed that the erbium idea was workable, Hall became a development manager to help discover ways to actually manufacture the product for customers. He went along on the first sales calls in 1992. "I got dragged to visit customers and that's what I wanted to do," says Hall. "We have a culture in which making stuff is important."
By mid-1992, Hall and his research team won permission to take the project into pilot production. But to do that, he needed to break out of research headquarters at Sullivan Park. So he rented space at the Ceramics Corridor Innovation Center, a low-slung building down the hill from Sullivan Park.
The move served another purpose. Isolated Corning researchers would be less distracted and could zero in on the erbium project. Hall needed to gather lots of new equipment and break down walls, and do it all in a hurry. He even rented trailers to accommodate as many as 700 Corning employees.
When the amplifier had been in commercial production, Hall let go of his baby and returned to being a research manager. That was another of Corning's unusual techniques to encourage change. A scientist moves "downstream" toward commercial application and then returns "upstream" to research. This time around, Hall recognized a new technique (actually invented by someone else) to optimize the fiber to handle dense-wave division multiplexing. When so many channels of light are forcing their way through such a tiny space, they tend to interact, causing the signals to deteriorate. Scientists have long known that if you can change the shape of the index of refraction of glass, it can have a profound impact on the way light travels through it. By spreading the light over a larger area of the fiber, the signal interaction and deterioration decreases. Called Large Effective Area Fiber (LEAF), this product hit the market in 1998, even faster than the erbium amplifier project reached fruition. LEAF is a disruptive technology because it renders obsolete all other long-distance fiber, including Corning's own.
Corning's destroy-and-create strategy resulted in $7 billion in sales last year. Roughly two-thirds of those sales are in optic-related fields and another third in technologies such as liquid crystal displays and environmental products. And here's the remarkable part: Eighty-four percent of the products Corning sold in 2000 had been introduced within the past four years, an extraordinary burst of innovation. But it was innovation possible only because the company could cast aside those green "crazy daisy" Pyrex casserole dishes.
Last year the company saw its stock soar as high as $113 from $20 a share in 1999. With the Internet investment bubble popped, the company's stock is back down to 1999 levels, like most everyone else's. It has had to ratchet back its earning expectations for the year, but overall it expects to grow to $8.2 billion in sales.
And research continues. Optics are "migrating" from the backbone networks where they have long been dominant to metropolitan networks, meaning closer to actual homes and businesses. The torrent of data has to slow down somewhat, but as long as data stays in optical form, the system moves faster than an electric transmission system. Corning has just come to market with yet another Hall special, this one called MetroCor Fiber, which is aimed at making metropolitan networks operate more efficiently and less expensively by allowing the optical signal to travel farther before requiring amplification. It could shave off up to half the cost of building an urban network. Researchers also are working on the Holy Grail: all-optical switches which would bring the power of light even closer to end users.
If Corning managers stay the course, no one should be too surprised when, 20 years from now, the company brutally discards optical fiber technology, by then a slow-growth sector, for something that is now merely a niggling question in the mind of a young lab technician. That's the Corning way.
The $1 Billion Man
DOUG HALL
To do something really significant, you need technology mass.
Photo: Mike Greenlar
What keeps a scientist in Corning, N.Y.?
"I get calls from headhunters every day," says Doug Hall, Corning's division vice president and technology director of optical transport products in the photonic technologies division. "Their offers are no better than what I have today."
That's something Corning must be pleased to hear. The 48-year-old Hall is credited with inventing the erbium-doped optical amplifier and with helping commercialize a series of new products that bring perhaps $1 billion a year in sales to Corning. Compensation for a star scientist like Hall can run into six figures a year, and he has been receiving Corning stock options for 10 years. But why hasn't he gone off to get filthy rich on his own creativity?
Quite simply, he's happy. Even though Corning, N.Y., is a small town, Hall's job is global. One hundred twenty people around the world report to him, including employees at a lab in France, working on a dozen projects related to amplifiers. "To do something really significant, something different that changes the world, you need technology mass," Hall says. "At a startup, you can take existing pieces and parts and redesign and rearrange them. But you don't get fundamental breakthroughs." Corning has that technology mass inside its huge Sullivan Park research facility. "At Corning, I can get stuff that other people can only dream about," he says.
It may seem corny to more pecuniary types, but there's also something about being part of a community that appeals to Hall. In Los Angeles, where he hails from, he didn't know his neighbors. But at Wegmans supermarket in Corning, scientists, executives, and union leaders bump into each other and know each other's families. He's on a first-name basis with the CEO. He believes his three daughters have had a more stable environment in Corning than their cousins in California have had. He can look out his window and see a factory employing hundreds of people making the optical amplifiers that he invented.
For Hall, it all works together. "At Corning, living in a small town, you can't put on airs. It's the output that counts."
William J. Holstein is an Editor at large in the New York office of Business 2.0 |
