How to Re-Invent a 60-Year-Old Company

Harman CEO Dinesh Paliwal, 57, advises CEOs who find themselves in this position to “never completely ignore the founder. Keep him informed. Make him feel he is part of it. If you abruptly cut the founder off, then you invite trouble or a boardroom coup because an outgoing founder has board members who love and adore him.”

“Never completely ignore the founder. Keep him informed. Make him feel he is part of it.”

For Paliwal, who spent 22 years with ABB, the Swedish-Swiss-based $50 billion global energy and industrial conglomerate, taking over from a founder CEO was especially demanding. Having co-founded Harman Kardon in 1953, a company noted for its premium audio products, Sidney Harman was struggling with more than a succession problem. He had sold his company to Beatrice in 1976 only to buy it back in the 1980s, then face competitive turbulence and the need to revamp operations to get it back to fighting trim.

Two different CEOs came—and went. Each clashed with the founder and his board, which was comprised of numerous friends of Harman’s, including, at one point, his daughter. Paliwal, who had worked and lived in six different countries, including the U.S., China, Switzerland, Singapore, Australia and his native India, was brought in first as vice chairman prior to becoming CEO in July 2007. “When I was first interviewed,” he recalls, “I told Dr. Harman that I needed room because I’m decisive. I don’t want to be second-guessed every day.”

Around this time, Goldman Sachs and KKR had made an $8.3 billion offer for the company, only to pull the plug when internal problems proved bigger than they were led to believe. At the time, credit markets were also drying up. Faced with an existential crisis, the board, including Harman, turned to Paliwal asking, “What will it take to keep you?” “It will take a few years, but I will fix it. However, I need the freedom to choose my team and do the right things,” he responded.

Given that Dr. Harman, who died in 2011, was dividing his time between running the company and his philanthropy and political interests (he served briefly as Undersecretary of Commerce under President Carter), he accepted Paliwal’s terms, if a bit reluctantly. Early days were bumpy. A profit warning sent the stock price plummeting. More trouble followed when German car makers began blacklisting Harman automotive audio products. And for good measure, they were 18 months behind on every product in the pipeline.

“Paliwal told Harman’s board and investors that if they expected all of the company’s problems to be fixed by next quarter they should take their money elsewhere.”

Paliwal remembers telling Harman’s board and remaining investors that if they expected all of the company’s problems to be fixed by next quarter they should take their money elsewhere. But he promised something they had not been getting: monthly updates. In addition, he revamped the entire management team of 10 executives, retaining only one person from the former regime. Soon, the board, too, started to change with the addition of two Europeans and one Asian executive.

Today, the Stamford, Connecticut company is a $6 billion, 16,000-employee enterprise with half of its revenue coming from in-vehicle infotainment and the rest made up of lifestyle and professional products and systems. The acquisition of Dallas-based AMX, which develops hardware and software solutions that simplify the way people interact with technology, gives Harman an edge as a leading supplier of turnkey AV solutions. The move prompted Raymond James analyst Tavis McCourt to upgrade the stock from Outperform to Strong Buy.

The company continues its audio innovation with Clari-Fi, a new technology that uses four algorithms to restore the dynamic range of digital music that has had to be compressed to be streamed. Soon, it will be available in portable earbuds, autos and to music-streaming sources for a nominal cost. With 6,000 engineers throughout the company, Harman continues to push on all technological fronts. Recently, Chief Executive spoke to Paliwal at his company headquarters.

With so many problems facing you in your first days as CEO, how did you know where to start?
My first days on the job were spent in Germany because our business there was about to go up in smoke. I showed up there asking to understand the nature of the problems. That first week, I did five town hall meetings and visited all four German customers. I was declared dead on arrival. They said KKR was coming in and would take everything away from us, including R&D. I said, “No, no, no, you don’t understand. That’s not me. Give me a fighting chance.”

“That’s not me. Give me a fighting chance.”

I was in Germany twice every month. I would come home basically to sleep. We had two headquarters; one in Washington, D.C. and one in L.A. Both were political, Washington was for Sidney and L.A. was for his wife, Jane Harman (the former U.S. Representative for California’s 36th congressional district). I told Henry [Travis of KKR] that neither made sense. Either we do it in New York or somewhere in Connecticut, where the cost base was lower but access to Europe was good.

So we started here [in Stamford] with one person, my secretary, at first, because no one from D.C. or L.A. wanted to move. We built a corporate team from scratch—a brand new chief of tax, treasurer, head of internal audit, CFO. You had to reinvent the company from the ground up.

No kidding. This may surprise you, but my first hire was a chief human resource officer (John Stacey), We had no human resources, so I said, ‘You and I have to do a lot of heavy lifting in creating, first of all, the top team, and then the bench.’

Today, we review 400 executives every year. I personally go through 400 people. That’s massive work, but I need to do it. We came from $2.9 billion sales to $6 billion this year—in seven years—and our profitability is robust with a $22 billion auto backlog. This requires a different mindset, so we give people the opportunity to make mistakes, to take risks and see where they fail and where they succeed. At the same time, I’m a big believer in promoting from within.

“We need to establish the right cost base, because without the right cost base and without the right innovation, there is no future.”

That’s what we did at ABB. Creating a strong culture sends a signal that people can have a tremendous career here. Harman used to bring everybody from outside. But today, my board of directors is happy to see I’ve got not one, not two, but three or four people capable of replacing me. Taking 4,500 people out of a company of 12,000 couldn’t have made you very popular.

And 4,500 people were relocated. Do you think I would get positive notes from everybody? No. I told my head of communications, I won’t look at any of those internal messages until we get past this. I told people in a series of town hall meetings that these were difficult times. We’re changing the course of the company. We need to establish the right cost base, because without the right cost base and without the right innovation, there is no future.

The result is that we have shifted our business. It used to be a hardware, silver-box-driven business. In 2007, 75 percent of the value-added came from hardware. Today, it’s the reverse—75 percent of the value-added comes from applications, system design and system architecture solutions. When I came in, 100 percent of engineering was in five countries: Germany, UK, France, Italy and Switzerland. Today, 66 percent of engineering is in best-cost countries: Hungary, Poland, Romania, China, India, Mexico and Brazil. Eighty percent of our North American manufacturing is where it should be—in Mexico; we have 11 production lines in Hungary, two in China, two in Brazil and one we’re opening in India. We still have manufacturing in the U.S., and I want to keep it here because mission-critical things for BMWs, Audis and Porsches and Harley Davidsons contain ultra-high-end audio systems.

What is behind your acquisition of AMX?
Bank of America worldwide, Deutsche Bank, Goldman Sachs, IBM, Boeing and a lot of the three-letter government agencies are using Harman enterprise automation. And no, it’s not like ERP (enterprise resource planning) software. We leave that to SAP. It is basically data and video management. If the CEO of Deutsche Bank wants to communicate to all employees worldwide, he will want to do WebEx, video and audio conferencing. We will manage that. We’re the engine. We supply the network hub and the switching of audio and video. And we do the security encryption—the digital signage. That’s a big deal.

“How do we pull more people from the machine we have, and how much risk can we take? That’s a challenge. I’m not saying I have an answer for that. But it’s something I think about a lot these days.”

For example, when you go into any Apple store, when you see the digital signage, (the numbering)—each store has probably 50 terminals—[we manage] what is shown on the televisions in one store versus the rest of the stores worldwide through our hub and our network.

So you’ve become a software company.
In many ways. There’s no change to strategy, but directionally, Harman is going to be a leader in all three connected spaces: the connected home, the connected car and the connected enterprise. We’re also heavily invested in [the] cloud and cybersecurity. Cars were never designed to be used as computers, so they don’t have any safety layers to protect from the bad guys, the hackers. With more and more devices on cars and greater computer power, there are risks and vulnerabilities that we hadn’t considered until now.

So we have designed the software and have shared it with many car companies, and it’s based on very similar structure of what banks do—in fact, what I used to do in my former company. When you supply a nuclear power plant or a pharmaceutical plant, you build in safety layers to keep the bad guys out.

What’s the biggest challenge you face going forward?
My biggest challenge is the bench; it’s the people. We’ve grown very fast in the last couple of years. Do we have enough people who can manage this fast, breakneck speed of growth? Hiring people from outside takes time to indoctrinate them in our culture. How do we pull more people from the machine we have, and how much risk can we take? That’s a challenge. I’m not saying I have an answer for that. But it’s something I think about a lot these days.

" J.P. Donlon : J.P. Donlon is Editor Emeritus of Chief Executive magazine.."