Back to the basics

Design engineering can add value to products and make them stand out in the marketplace, says Stephen Hardis.

Design News: What role will Eaton's design engineers play in growing sales from today's $7 billion to $10 billion by the year 2000?

Hardis: In the strategy that we've opted for, the design engineer becomes critical. Conditions in our markets are intrinsically deflationary. If you look around the world, you've got to assume your customer will only pay the lowest price for comparable products. You're now down to the fundamentals of business: fundamental productivity improvement and fundamental innovation. In most instances, the key to that is superior design engineering. We can't use financial engineering to compensate for a lack of it. When push comes to shove, product design will have an overwhelming effect on cost in terms of manufacturability and the attractiveness of that product in the market.

Q: How has outsourcing affected your company, and what will it mean in the future?

A: Outsourcing gives empirical proof to the idea that specialization at each level of the value chain--as opposed to vertical integration--is the most cost-effective business model. We have clearly benefited when OEMs have chosen to outsource. What outsourcing has tended to do at Eaton over the last 10 to 15 years is to help us surpass market growth in almost every one of our traditional OEM markets. The great bulk of the change now underway involves companies going from vertical integration to outsourcing. So if the market grows 3%, we have a chance to add X%, based on our outsourcing business.

Q:How important are foreign sales to Eaton today, and how important will they become? A: If you look at our consolidated statement, which includes those businesses in which we have at least 50% ownership, we describe ourselves as being approximately 20% non-U.S. If you take the value of our exports and companies in which we have less than 50% ownership, that figure comes closer to 32%. By the year 2000 we want to grow in China, India, Korea, Brazil, and Mexico by a minimum of another $500 million in 1995 dollars. We're moving toward attaining 50:50 parity between foreign and U.S. sales sometime in the next decade. That's not going to be good enough, because the truly global companies, like Coca Cola, by then will probably attain 80% foreign sales. But we will have materially changed our mix.

Q: How likely is it that overseas investment will create new foreign competitors?

A: That's always a concern. But when these countries industrialize, one way or another, they will get the technology. The answer is to make sure that the rate of our technological development is such that we're not vulnerable. And as long as we want this society to enjoy a high standard of living, that's the only successful management strategy. To the extent that what we're doing is redeploying our human and financial resources, our strategy will continue to be to commit ourselves more and more to advances in technology.

Q: How can you protect Eaton from such adventures as the collapse of the Mexican peso in 1995?

A: The word "adventures" is a euphemism. The short answer is that we can never be entirely insulated from currency volatility. From a purely portfolio point of view, we try to be in enough countries so that any one crisis doesn't totally undermine our overall results. From a business point of view, the answer has to be to think the way you would if you were an indigenous producer. The indigenous guy has to make a whole series of correct sourcing, pricing, and financing decisions or he'll die. And if there's an indigenous guy who can succeed, we can.

Q: How important are individual employees to corporate success?

A: Our great strength is the quality of our people. The 1982 recession was brutal to our businesses. By the time we were done we had almost halved our head count, closed 20 plants, and gotten out of an entire segment of business--material handling. How do you survive that kind of challenge? We survived because of the quality of our people; their loyalty, their ability. We have something called the Eaton philosophy. The heart of it is that people should always be treated as peers, as fellow adults. We work hard to maintain a culture that has genuine respect for the individual. We try to maintain our values so our people feel that Eaton is a place where they can meet their individual expectations.