Profiting From Precision

Just outside Cleveland, a city with a heavy-industry base, is a company that offers the kinds of high-technology products normally associated with Silicon Valley firms serving the electronics industry. Keithley Instruments Inc., under the leadership of Joseph P. Keithley, chairman, president, and CEO, has created a pocket of Valley-like expertise and entrepreneurial spirit, and combined them with the work ethic and values of the Midwest. The company, in fact, coined the term "Midwest Valley" to describe its hybrid culture. Whatever it's called, the combination of expertise and location has resulted in measurable success for the Solon, Ohio-based manufacturer of test and measurement devices for wireless communications, optoelectronics, and semiconductor markets. Revenues jumped 51% last year to $151 million, and although business has dipped with the economic downturn, the company finished last year on a run of eight consecutive quarters of record earnings, reaching an industry-leading pretax return on sales of 25%. "What we're trying to do is create a climate where people can trust one another, but at the same time we're taking risks, we're moving fast, we're changing the organization around so innovation and change is a major part of who we are," says Keithley. Described as a meticulous man who is willing to take calculated risks, Keithley transformed the company in the '90s from a manufacturer of test and measurement equipment primarily for the research community to one focused on production applications in some of high tech's hottest markets. The company's success results from a focus on targeted industries, which are served by Keithley's cross-functional, entrepreneurial teams that are supported by centralized research and manufacturing operations. Intimate knowledge of customer applications allows Keithley to leverage its platform-based, cost-effective innovation process to carve out profitable niches in next-generation products. Creating leading-edge products in close collaboration with its customers, "Keithley provides a window into the future of technology," says New York-based Paul Knight, partner and research analyst, instrumentation, Thomas Weisel Partners LLC, San Francisco. As the company's leader, CEO Keithley spends considerable time communicating his vision in both large and small employee gatherings. He endorses a focus on a limited number of objectives supported in multiple ways, and has organized the company to drive profit responsibility deeper into the enterprise. "We try not to do too many things at once, and we try to have the things we do be reinforced several different ways so we can really leverage the energies we put in with the maximum output. [And] we now give people more responsibility much earlier in their careers than you might think pru-dent. That's another class of risk, but I think challenging capable people, knowing they will rise to the occasion, increases our chances of success." While focusing on high-tech markets, some of which have cooled for the short term, Keithley has done anything but back off, adding 125 employees over the last year while increasing R&D expenditures 25% compared with 2000. For its hottest market, optoelectronics, Keithley has tripled R&D spending since 1999. Like other technology companies, Keithley's stock peaked in 2000 and then tumbled, yet at midyear shares had doubled since April and were trading at four times their mid-1999 level. The company's rapid growth and potential have been recognized and rewarded by Wall Street insiders. Last year Keithley was added to both the Russell 2000 index of small-capitalization stocks and the S&P SmallCap 600. Tradition Of Innovation The company began in 1946 as a one-person shop founded by Joseph F. Keithley, the current CEO's father. The senior Keithley created electrical measurement devices for physicists and space scientists. Known for innovation, the company developed some of the most precise measurement equipment in the industry, able to distinguish resistance, voltage, and current to 16-decimal-place accuracy at up to 2,000 tests per sec. Last year Keithley received its 17th award from R&D magazine, which recognizes products that exhibit technical significance. In 2000 the company also won an Edison Award for innovation from the State of Ohio, and CEO Keithley was named Northeast Ohio's Technology Entrepreneur of the Year by Ernst & Young LLP. Throughout the mid-'90s the company continued its innovation through product-based divisions, each with individual engineering and manufacturing support. "While this focused our energy around device-performance excellence, it limited visibility into customer applications," says David Patricy, vice president. Joseph P. Keithley assumed the reins of the company in 1994 with the intention of focusing on growth. He expanded the company's horizons from its devices-for-research roots to higher-volume, production-test applications. In addition, he identified and shifted resources to consumer-driven emerging technologies such as cell phones and fiber optics, areas where the company had little expertise or measurement capability at the time. "Our objective was to focus on the fastest-growing sectors in the global electronics industry and develop specialized expertise in those areas," says Keithley. Starting with one application at one customer, Keithley now serves all major wireless phone manufacturers. To gain the agility needed to compete in these fast-growth markets, Keithley reorganized from its relatively autonomous divisions to one with centralized manufacturing and engineering. Products now are brought to market by cross-functional teams clustered around industries, resulting in many more Keithley employees having customer contact. "We moved from a product-oriented company in terms of assessments of our markets to a customer-focused operation with marketing capability on a par with our engineering capability," says Patricy. Along the way the company also sold two businesses that didn't fit into the new Keithley model. "By the process of subtraction we actually became a stronger company," says Mark Plush, vice president and CFO. "That allowed us to refocus closer to a narrow customer base and more narrow technology and concentrate on doing what we do well." The new industry orientation pushes investment decisions down to the individual-team level, sparking the entrepreneurial component of the Midwest Valley culture. "These are all fairly young teams, and we give them a charter to take us into an industry and identify the opportunities," says Patricy. "Then we provide just enough guidance so they don't hurt themselves. It creates a very stimulating environment, a sense of running a business, almost an incubator, within a larger business." Success is rewarded at Keithley through a number of compensation programs, sweetening the pot for a wide range of employees. When the company reorganized, Keithley also reengineered its profit-sharing plan. In the past, bonuses were paid based on the success of the autonomous divisional units. In the new structure profit sharing rewards overall company success with a portion also tied to activities the individual can directly control. These changes are in addition to an employee stock-purchase plan, as well as a stock-option program that is available to some 100 employees in a workforce of 675. "We give options not just to some high layer, but also to new college grads when they start and to individual contributors, particularly in technical areas of applications or marketing or development engineering," says Keithley. "We're not a capital-intensive business; we're a people-capital-intensive business," he adds. "We want everybody to enjoy the success of meeting the goals we've set for ourselves, as opposed to a two-tiered system of the 'yous' and the 'theys,' which I think is important when you're trying to engage everybody." Platforms For Success Having one centralized engineering function means individual businesses at Keithley must vie for engineering resources. Funding and manpower decisions are made based on the size of the market opportunity in question, as well as the potential to leverage new technology across multiple product platforms. With its reorganization and focus on emerging markets, Keithley adopted a platform model for new-product development that has reduced costs and slashed time to market. In this model, new measurement-capability platforms are invented every year or so, and these building blocks of capability are assembled and modified into new products to meet specific market needs in many industries, as opposed to engineering new products from scratch. In the past, capability-platform invention and specific product development were run in parallel, with the result that "projects would be 90% complete with the exception of the 10% new technology that differentiated products from previous generations," says Patricy. "And how long it took to complete the 10% was unpredictable." To better control development time, the company separated technology invention from new-product development. New invention now is led and funded separately through proof of concept, at which time new-product development is launched. In addition, Keithley now uses a formal stage-gate process to move new products more systematically through their evolution. Products can spring off the platforms in three to six months compared with development times of two to three years in the early '90s. According to Patricy, products based on new technology account for only about 10% to 15% of new-product sales in any one year; the remaining 85% to 90% is derived from the growing platform library. Currently, close to 40% of Keithley's sales are based on products introduced in the last three years, compared with a goal of 33%. Keithley's success and spirited entrepreneurial culture give it an edge in attracting the kind of talent required to create and market the company's precision test equipment. Nevertheless, the company maintains strong recruiting efforts at the electrical engineering departments of universities including Purdue, Cornell, Carnegie Mellon, and Case Western Reserve. Once in the fold, employees continually are reminded by CEO Keithley of the basic objectives of the company and how they are to be achieved. While he presents quarterly results to employees en masse, Keithley makes it a point to invite small groups to join him for more intimate luncheons every couple of weeks. In these gatherings, eight to 10 employees, spanning all levels and functions of the company, discuss their jobs, address company issues, and ask questions of the boss. "People leave that room really excited about the company because they hadn't realized the richness and the talent that we have in this organization," says Keithley.