Dr. Harman speaks.

Head Of JBL & DOD Parent Corp. And Former Commerce Dept. Chief Explains What's Right And Wrong With Global Industry

Few individuals in the music and sound industry have a career that matches that of Dr. Sidney Harman for breadth and achievement. During a 40-year period the current chairman of Harman International distinguished himself in both the public and private sector. In 1953 he and partner Bernard Kardon helped create the home hi-fi industry with the creation of the first receiver. Harman bought out his partner in 1956 and subsequently built Harman Kardon into an audio powerhouse. Dissatisfied with the traditional labor-management relationship, in the early '70s Harman began experimenting at one of his factories in Bolivar, Tennessee. Dubbed The Bolivar Project, the ground-breaking management experiment involved cooperative labor-management operation of the plant in which workers were given the chance to set their own schedules and goals. From a business standpoint, The Bolivar Project produced mixed results; however, broad national publicity on the experiment led to Harman's appointment as Undersecretary of the Department of Commerce during the Carter administration.

When Harman moved to Washington in 1976, he sold his company to conglomerate Beatrice Foods to avoid a conflict of interest. In 1980, after leaving government service, he repurchased selected parts of the company, including JBL, Harman Kardon, and Infinity and Epicure loudspeakers. Subsequently, the company has acquired Soundcraft Electronics, Lexicon Corp., and DOD Electronics. For the most recent fiscal year Harman had sales of $604.4 million and net income of $3.4 million.

We had the opportunity to talk to Dr. Harman on the occasion of the DOD factory opening, where he held forth on a variety of issues relevant to the state of the industry.

How has competitiveness of U.S. firms changed since you were Undersecretary of Commerce in the Carter administration in the late '70s?

SH: There is no doubt that in many industries, surely the audio industry, there has been very considerable increase in effectiveness and productivity. I would say that there is a mix of elements behind all of this. Over the past dozen or so years American firms have been forced to review how they are organized and get rid of the extra lard and layers of management which lead to strangulation and incompetence. There was a general recognition that "Hey, if we keep on going along in the same way, we're going to be dead."

We have also observed our Japanese competitors, who have been dominant players in the industry, facing trouble. The Japanese economy has been staggering for some time now, and numbers of Japanese companies, both large and small, have experienced significant setbacks for the first time in memory. We are beginning to see a drawback from the historic commitment to uninterrupted employment in Japanese plants. I am highly respectful of how Japanese companies proceed with their business. Most of their focus for the last few decades has been on market share, almost regardless of cost, and product cycles that were staggeringly frequent and quick. It seemed to many of us that the product cycle for our Japanese competitors was 15 minutes. Today Japanese firms are backing off from the "market share at any cost" approach, and they are slowing their product cycles. Clearly, the industry is shifting into an area where we can be more competitive. When you combine general conditions in Japan with the efforts American companies have made to be more effective, of this U.S.-based firms gain a competitive opportunity that has not existed before.

President Clinton recently met with Japan's Prime Minister Miyazawa and called for improving U.S. exports to the Japanese market, using quantitative goals for U.S. products to achieve market shares. Will these discussions have an impact on the audio and m.i. markets?

SH: Not likely. I don't tend to look for salvation in negotiated trade agreements. The problem is that economists traditionally fail to consider market factors that don't lend themselves to arithmetic. The soft factors and relationships in business are frequently overlooked by policy makers.

What the U.S. is trying now is an effort to affect our trade imbalance through control of currency. We tried the same macro-managing 12 and 15 years ago with little consequence. This policy has led to the most severe dollar-yen relationship since World War II. What policy makers have failed to consider is the Japanese ability to deal with these dramatic currency shifts. So, after our trade representatives do all these negotiations, nobody tells the Japanese business people to continue to do everything just as you did when the yen was at say, 140 to the dollar.

Better-managed Japanese companies have for some time been planning for how to compete with the yen at 100 to the dollar. This is one of the reasons I am so respectful of them. I see this enormous opportunity for U.S. firms, but we should not be smug in thinking that Japanese firms are so damaged that they won't be able to react. You can never underestimate the pace or elements of change.

DOD Electronics, one of your more recent acquisitions, has just doubled its factory capacity with a new plant. To what do you attribute this dramatic growth?

SH: I attribute the company's success to a few things. The only things you can really do in a business is improve the odds. There are no formulas to guarantee anything. DOD has a number of elements in place that really improve their odds of success, which is what attracted me to the firm in the first place.

First, and of critical importance, the company is run by a group of people who really understand the business very well. They don't subscribe to the silly notion that if you understand basic business concepts you can run anything. They don't proceed with the conceit that whether it's a pair of speakers or a pair of pants, it's all the same.

Aside from understanding the business, they also understand the human factors that are so important. The several hundred people who work at the DOD plant are not merely spare parts in the machine. There is no way you can walk through the factory without getting a sense of their dignity and the emotional equity they have in the company.

The third is simply paying attention. The people at DOD are vigilant in watching over the markets they serve.

The fourth is that they eschew all of the fashionable garbage that cycles through industry. When I read editorials by American businessmen, I marvel when I hear them say, "We'd do great with the Japanese if only there were a level playing field," and then add, "Our salvation lies in becoming more like the Japanese." How they can say both of these things without recognizing the irony and internal contradiction amazes me.

Paying attention to the fundamentals of blocking and tackling and not getting seduced by magic nostrums is vital. The current magic nostrum is Total Quality Management. Is there anything wrong with it? Absolutely not, as long as it's seen as a system built on a foundation with the fundamentals of the business. All too often, American businessmen reach for things like TQM as solutions, without dealing with the fundamental problems of their business. At DOD they have been doing TQM all these years without really knowing it, or needing to hang fancy labels on it.

Getting back to the question of the comparative strengths of U.S. and Japanese firms, why do you think DOD has been so effective in meeting offshore competition from much larger Japanese firms?

SH: When I think about Japanese electronics firms, I am mystified. The Japanese garden is probably the ultimate human expression of artistry through simplicity. Yet when you look at the Japanese electronics industry, you see that it is overwhelmingly dominated by bells and whistles and technological overkill.

Most of the products they make reflect what the engineers can do, as distinguished from what the consumers really need or want. No better example illustrates this than the fact that 85% of the people who own a VCR have never been able to figure out how to program it. How does a nation the produces artistic expression of such extraordinary simplicity do this?

The closest I can come to answering my own question is that there is a technocratic sub-culture in Japan that dominates industry. Overwhelmingly, companies are dominated by engineering mentality with engineer managers at all levels.

DOD is in stark contrast, because it is managed by musicians who approach everything from the point of "What do the customers want?"

What bright spots do you see in the audio market today?

SH: First of all, there is no society in recorded history for whom music was not a central consideration. So, for those business that are engaged in music, it is predictable that there are going to be some opportunities. If businesses in this industry pay attention to what consumers need and want, or to put it more elegantly, think more in anthropological terms, rather than just in technical terms, there are enormous bright spots. More specifically, there is the appropriate adaptation of emerging new technologies that make it possible for consumers to do things that previously were not possible.

I'll give you one quick example. Think about the concert halls and recognize that for centuries the creation of these halls has required a certain type of black magic. Think about Avery Fisher Hall at Lincoln Center, which is now on its fifth redesign by the acoustical wizards. They haven't been able to come up with a solution that the musicians think is right. With digital signal processing, we can take a bare room and by chancing the acoustic character electronically, make it acoustically ideal for an orchestra, a soloist, a string quartet, or Ella Fitzgerald. The amount of control we can offer musicians through DSP and better loudspeakers represents a quantum chance in sound reproduction.

These opportunities can be completely screwed up, however, if we come at it with an attitude that we need to show off all the things we can do. If we come at the market with the perspective that says, "Let's make technology the servant of the consumer" instead of making the consumer a terrified servant of the technology, an enormous opportunity exists. Beyond that, let me tell you that for DOD and all our other Harman companies there are many more concrete dollars-and-cents opportunities that I can identify. Our lives are now so complicated that almost the only time we have to be reflective is in the car. Music reproduction in the car is a developing field of great consequence.

1993 marks your 40th anniversary in the audio industry. Over the years you have made numerous acquisitions, and in the past two years alone you purchased seven companies. What markets would you like to see Harman compete it, and are there any potential acquisition targets you are interested in?

SH: We would like to be more active in guitar amplifiers and microphones. As for acquisition, we would love to add either Peavey Electronics or Shure Brothers to our family of companies, but we have been told that both companies are unavailable.

You were once quoted as saying the manufacturing floor is the garden of innovation. Could you elaborate on this a bit?

SH: The integration of manufacturing and research is critical. There is more opportunity to innovate on the factory floor than any other area you can think of. Over and over, the best ideas are born on the manufacturing floor. One interesting example is the area of noise cancellation. Harman will be central in this area because no matter how you come to this technology, you need to have a device which can respond instantaneously to offending noises. The solution is a linear motor, the very essence of a high-fidelity loudspeaker. From the experience gained on the factory floor, our people know more about how to make those linear motors than anyone else does. So I am confident that they will be at the forefront of this technology.

One of the policies we have at Harman is that all executives at the Northridge facility spend at least half a day, twice a month, working on a manufacturing line. Last Wednesday, I was at the factory floor at 5:45 a.m. and finished work on the line at noon. We view working on the factory floor in an open shirt as a badge of honor. We have much to learn there about improving all aspects of business.