Manufacturing a global strategy

Smethills transforms Menasha Corp.

How does a privately held company in Wisconsin compete in a global economy, when fair trade is a foreign concept, rather than a reality? The answers to that question, of course, are as diverse as the American industries that are struggling to survive. More than 75,000 manufacturing jobs have been eliminated from Wisconsin’s economy since 2001, as more companies are outsourcing their production to China, where labor costs are miniscule, the currency exchange rate is regulated, environmental laws are nonexistent and intellectual property is pirated.
Menasha Corp. is directly affected by the outsourcing trend, because when American manufacturers ship their production overseas, Menasha Corp.’s packaging division loses another potential customer. However, the Neenah-based company, which manufactures corrugated boxes, displays, plastic returnable packaging, promotional graphics and high-engineered plastic containers, is not simply standing by, waiting for the federal government to change its trading policies to level the playing field.
Since Harold Smethills Jr. was appointed president and chief executive officer of the firm in 2000, Menasha Corp. has been in a perpetual mode of change to position itself to survive and grow on the global stage. Menasha Corp., which was founded in 1849 and has offices and plants in Neenah, Menomonee Falls and Mequon, has blossomed into a company with $1 billion in annual revenues, 5,360 employees and 65 plants in 17 states and 10 countries.
Smethills was tabbed by Small Business Times to be the keynote speaker at "The State of Manufacturing: How to be Competitive in Today’s Global Environment," an Oct. 1 panel discussion at the Wisconsin State Fair Expo Center. Smethills was recently interviewed by Small Business Times executive editor Steve Jagler. The following are excerpts from that interview.

SBT: Menasha Corp.’s packaging division does not have production facilities overseas, so when an American company shifts its production to China, your company is directly impacted, isn’t it?
Smethills: That’s true. You’re correct. Our packaging business does not have operations overseas, and when a major customer, like a Mirro or someone like that, moves from the United States to offshore manufacturing, that’s a huge impact. Those are our customers.
We take great pride in the fact that we’ve invested in our equipment, in our plant and our people, but we can be no stronger than our customers.

SBT: Many American manufacturers, particularly small manufacturers such as those in the SAMNow organization, are saying that there need to be major changes now in American trade policy. Those seem to be long-term answers, or things that will take some time to get done. Yet, those are significant problems right now, aren’t they?
Smethills: Those are issues. I think if you’re building a company to last, you have to look at external issues, such as those, but also internal issues. You have to look at what is the industry you’re in? Obviously, if you are in a high-labor content, low-margin business in today’s economy, unless it’s a product that cannot be manufactured outside the US, that’s a problem.
So, you need to first take a hard look in the cold light at your own business and make sure that the businesses you’re in are competitive on a world basis or there are sound and pervasive reasons that the business you’re in must remain domestic.
The other thing you have to do is you have to look at the competitiveness of your location. Is Wisconsin, for example, a competitive place to manufacture?
We are at No. 3 or 4 for tax burden on employees, which makes it hard to recruit into the state. We’ve actually been having a brain drain. When you’re looking at state taxes on your employees and on your business, that is a competitive factor.
It’s more than just cheap labor. Is Wisconsin going to adopt strategies to ensure we are competitive?
It’s also absolutely essential we maintain the quality of life in our state, because that’s a competitive advantage.

SBT: There are those who would say that is contradictory, that you get what you pay for. They would say that the reason Wisconsin has such a great quality of life is because of the taxes, which provide for an excellent educational system, a strong university system, a strong technical college system, health care programs for the elderly, a wonderful park system and a clean environment.
Smethills: Some of that is a valid link. You have to invest in that, which is important for the competitiveness of your state. But also, that can be a crutch, a way of rationalizing that we have a very high tax burden in this state. We have to be a little careful with that argument.
For example, our state taxes software. One of the key principles is that we don’t tax manufacturing equipment. You don’t tax things that create jobs. Well, software creates jobs. Yet, we have a tax on software. You don’t do that if you want to entice software-driven companies to your state.

SBT: You have been in recent discussions with Gov. Jim Doyle. Have you addressed that issue with him?
Smethills: I have addressed it with Department of Revenue Secretary Michael Morgan.

SBT: From a corporate strategy standpoint, Menasha has changed from a 1980s mode of acquiring other companies and creating a diverse portfolio of businesses to withstand downfalls in various industries. In recent years, you’ve gone to selling off businesses that were not capable of being leaders in their industries. You’re instead focusing on a handful of industries where you can be a market leader. Is that a fair assessment of your company’s strategy?
Smethills: Yes. That’s correct. Menasha Corp. has been here for what, 145 years? We’ve transformed ourselves many times. We started as a wooden pail business, and we transformed into corrugated (cardboard). Corrugated was a competitor for wooden applications, so we were cannibalizing our own products by moving into corrugated.
In the 1960s, we moved into plastics. We are now a leader in returnable packaging. Returnable plastic packaging cannibalizes corrugated. Well, if someone is going to cannibalize my products, it’s going to be me. I just want to cannibalize my competitor’s products faster than my own.
But we’ve always been transforming. It’s true. In the 1980s, we were in a number of small companies. But the world’s changed, where now you find that the balance of business, where your internal operations are so very expensive, that you really can’t afford to own a number of small businesses. The cost of managing them and supervising them is just excessive.
Also, the efficiencies of scale in many of the (industries) we were in have been huge. So, we have been going through a transformation in the last two and a half years, where if you look at the functionalities of our businesses, we were at 15-plus businesses, to where we’re down to three large ones and two businesses we’re developing.

SBT: Who are your core customers these days?
Smethills: That is continually shifting. Probably our largest customers today are household name product companies (including Rayovac, Kimberly Clark, Subzero, Toro and Huffy).

SBT: Given those products, what are you doing right from a strategic standpoint to remain competitive in the global marketplace?
Smethills: Understand that the first thing you have to do is understand who is your customer? What would a customer want? What would a customer pay for? What are your products? What products can you afford to deliver, and where can you be better, faster, cheaper than your competition? More innovative?

SBT: Is that the key, when it comes down it, Harold, for competing on the global stage?
Smethills: Absolutely.

SBT: It almost sounds like a bumper sticker: Better, faster, cheaper.
Smethills: Those are the economics, the drivers of your business. And innovation is a key.

SBT: I think American companies have proven they can be better. They can be faster. And the quality of the workforce and the quality of the work can be superior. It’s that cheaper part of the equation that is the problem, as it relates to China, isn’t it?
Smethills: You have to be realistic. One of the things that happens in this kind of a situation is you can almost get into denial. You’re not realistic. Businesses and products have a cycle to them.
In businesses where you have a high labor content and low margin, that can be made anywhere – if you try to stay in that business, it’s hard to win.
What is that Jack Welch quote? When the world’s external market is changing faster than you are internally, the end is in sight. There’s never been a time like today to be focusing on that.
If you can’t find a competitive advantage, that’s a serious problem.
At the same time, you can take a product that is high labor and low margin, and innovate around it and stay ahead of your competition and do very nicely.
A lot of the trick today is to take advantage of our very intelligent workforce, to take costs out.

SBT: Your company has invested in that by creating its own Menasha University. It’s even got its own dean. In a nutshell, what is Menasha University?
Smethills: It’s the institutional vehicle that we promote knowledge and change and build leadership throughout our company. Roughly, I’m estimating that about 10% of our employee base will go through it this year.
It’s a whole series of programs. There’s a series for leadership. We have advanced courses in leading for value, where we teach people how to analyze costs and balance sheets and income statements, and how you determine margins and gross margins.
We have another course for employees on pricing. It’s called Van Gogh pricing. Most manufacturers, if they had a Van Gogh, will say, "OK, the canvas is worth a buck, and we’ve got 25 or 30 cents of paint on it. And we had three hours of labor. So, we’ll sell it for $30 and make a big profit." Well, it’s worth millions. So, when you price your product, price it to the value to your customer, not your costs, plus some basis. And if the value to your customer is lower than your costs, plus some basis, then you know you can’t be selling that product.
And sometimes that happens.

SBT: So, you’re investing in your people, you’ve divested some of your businesses. Heck, you’ve even changed your company’s logo. And you also have positioned yourself to provide one-stop value to your customers, where they can get the packaging, the displays and the printing done all in one shot, from your company. Is that depth of service a key component of your strategy?
Smethills: It’s part of the value proposition. But you always have to be careful that you’re providing value propositions customers will pay for.
But I want to circle back to Menasha University. The issue is the transformation of the business. The larger the business, the harder a transformation is. And if the people don’t transform with the business, you’ve accomplished nothing.

SBT: I think that’s true for a smaller company, as well.
Smethills: You need vehicles through which you can impact people in an efficient way and get your message to them as you transform a business. That’s what Menasha University is. It’s a tool, a vehicle.
Research and development – if you can’t conceive of it, you can’t do it. That puts a huge premium on getting people to think about the future and customers’ needs and getting people to think outside the box.
I think we forget, that the net worth of your business is not your bricks and mortar. The net worth of your business goes home for dinner every single night. You need to invest more time on that than you do in your bricks and mortar.
As the United States becomes more of an information-based society, that means we have to have a workforce of people who are information-competent and growing.

SBT: You’ve outlined many strategies for competing. Let’s play a hypothetical game for a moment. You’re now President Bush. The US trade imbalance with China is ballooning. American manufacturers say they’ve become as lean as they can get. What would be your immediate priority today? What is the one thing you would focus on like a laser beam?
Smethills: I think long-term, strategically, we need to expand the concepts of trade to include environmental. The planet needs a better standard of environmental care. The idea that you lose jobs to other parts of the world, strictly because of the (lax environmental standards abroad) is troubling. There needs to be some basic, universal standards.
The biggest thing is to make America more competitive. There are certain kinds of industries, that as much as you’d like them not to leave, the economics are just that they’re leaving. So, how do you provide an environment in the United States that promotes growth? We have the most productive workforce in the world. We need to have a tax policy that fosters investment.
And we need to invest in our people. Smart people.

Oct. 3, 2003 Small Business Times, Milwaukee

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