01 Jun 2012
Made in the USA
Meet two entrepreneurs who confronted competitive challenges—and wonby Deborah BlaggTopics:
Will business leaders reconnect with their communities and do their part to restore American competitiveness? That’s a central question, and key challenge, posed by the School’s US Competitiveness Project. Professors Michael Porter and Jan Rivkin, the project’s cochairs, contend there’s reason for optimism.
Almost 2,000 of the nearly 10,000 HBS alumni who responded to the project’s fall survey cited specific actions their companies had implemented to remain competitive. The majority had taken steps such as improving worker training, investing in technology, growing exports, and expanding to new markets. Among the survey’s respondents were Jim Knott Sr. and Paul Scharfman. Both run companies that are case studies in surmounting competitive threats and fostering community pride.
Jim Knott Sr. (OPM 17, 1991) relishes a good fight. During his first prep school wrestling practice, his coach put the inexperienced freshman up against a much larger and older competitor. “I pinned him in 30 seconds,” recalls the feisty octogenarian. “I had spent previous summers hauling up 125-pound, wooden lobster traps, so my upper body strength exceeded his.”
Summers spent lobstering in Gloucester, Massachusetts, and a competitive spirit—along with an economics degree from Harvard College, mechanical engineering courses at Northeastern University, and two years as a second lieutenant in the Army (“doing a major’s job”)—proved to be ideal credentials for Knott’s eventual role as founder, president, and CEO of Riverdale Mills Corporation. Located in a 150-year-old mill building on the banks of the Blackstone River in Northbridge, Massachusetts, the factory manufactures zinc-galvanized, plastic-coated welded wire mesh used to make lobster traps, security fencing, and other wire products, using a process Knott invented.
The company’s first success was Knott’s patented Aquamesh, a product that today accounts for more than 70 percent of Riverdale’s sales. When Knott launched Riverdale in 1980, virtually all US and foreign lobster traps were made from wood. Today, nearly 90 percent are Aquamesh traps, which are far more durable. The manufacturing process that produces Aquamesh is easily adapted to other wire-based products, such as WireWall security fencing, which has become one of Riverdale’s best sellers in the security-conscious, post-9/11 era.
Like most companies, Riverdale Mills has experienced good years and bad, but the company has weathered economic swings and foreign competition better than most. When asked how his $20 million, 100-employee operation has maintained its foothold when other small US manufacturers have faltered, Knott responds pointedly, “We keep our costs low.”
That philosophy has been a guiding tenet at Riverdale from Day One. While rehabbing the abandoned mill he bought at a bargain price, Knott began assembling his manufacturing machinery by cannibalizing parts from a printing press a previous tenant had left behind. “I’d come in every morning at 5 and start cutting and tacking up pieces of metal,” he recalls. “The next day I’d have a welder here to put them together.”
As the company has matured and expanded, Knott has continued to implement innovative, money-saving measures, such as generating electricity via hydropower, recirculating heat from manufacturing processes to warm the factory complex, and using water from his own wells to cool machinery. In a decidedly gritty, old-school manufacturing industry, he also invests heavily in quality control and state-of-the-art equipment, a strategy that has helped him fend off competitors.
A case in point is a Chinese company that launched a product similar to Aquamesh in 2000. “They tried to invade my market with a product that cost 30 percent less,” Knott comments. “Of course the lobster industry tried it, but in less than two years, the traps rusted and the welds broke. Our customers came back, because they realized cheaper wasn’t better.”
Equipment that automates repetitive tasks—such as a $2.5 million, computer-controlled welding machine—helps ensure Riverdale products’ quality while keeping its workforce small. “We can’t compete with China’s low wages,” Knott says, “but by investing in computer-controlled equipment, tended by in-house-trained workers, we can afford to pay more than the Chinese and still beat their prices.”
Knott is fiercely committed to the integrity of his business and has successfully defended Riverdale against allegations of workplace violations launched by OSHA and the EPA. His epic battle with the EPA, which began with the agency’s armed raid on the factory in 1997, attracted the attention of national and international news media and provoked him to initiate a $16 million damages suit against the government.
“One of the things Marty Marshall stressed in our OPM classes,” Knott says, “was that to succeed as a business owner, follow what you know is right, even if other people don’t see it your way.
“I’m not sure I needed Marty to tell me that,” he adds, “but it’s great advice, all the same.”
Most cheese connoisseurs know all about the merits of Wisconsin cheddar, but how about Wisconsin Ackawi or Wisconsin Asadero?
Twenty years ago, Paul Scharfman (MBA 1979) acquired a small, undercapitalized cheese manufacturing operation in rural Wisconsin, about an hour’s drive from Madison. “From the start,” says Scharfman, whose food industry résumé includes a dozen years at General Foods, “our strengths were highly flexible assets and a deeply skilled workforce. Our niche clearly was in products where skilled cheese making was more important than capital investment for high throughput.”
Based on that assessment, Scharfman decided to test the collective expertise of generations of Wisconsin cheese makers and dairy farmers in the burgeoning US market for ethnic cheeses. “Ethnic cheese wasn’t huge in Wisconsin when we launched the Specialty Cheese Company,” he notes, “but you really didn’t have to look much further than US Census Bureau data to know that across the country, the population of ethnic consumers was growing.
“I’ve always subscribed to the theory that trends are like horses,” adds Scharfman. “It’s easier to ride them in the direction they’re already going.”
Ackawi, a soft, white cheese native to Lebanon and Syria, and Asadero, a tangy, yellow cheese used in many Mexican dishes, are just 2 of more than 35 varieties of ethnic cheeses produced today at Specialty Cheese’s three rural Wisconsin plants. Soft and hard cheeses that appeal to the palates of immigrants from Mexico, Central America, South America, Poland, India, the Middle East, Armenia, and the Philippines have buoyed sales and enabled Scharfman to double the size of his workforce to 100 over the last five years. “Our selling point is that we make ‘homemade,’ ethnically authentic cheeses, but with the quality and shelf life you would expect from products made in modern manufacturing facilities,” Scharfman says.
The company’s growth has led to plans to consolidate Specialty Cheese’s disparate manufacturing operations under one roof. Centralizing operations in an expanded version of its Reeseville plant (located in the town’s old high-school building) will allow efficiencies that will fuel further growth and local job creation.
In conjunction with the project, local and state authorities are working with the company to facilitate funding for improved wastewater treatment. “Securing debt financing for industrial development in a rural environment is never easy. If the venture fails, whatever’s left will not have much resale value,” Scharfman says. “So getting help with financing wastewater treatment was a big deal.”
In Scharfman’s case, that help came recently in the form of $2.8 million in public funds to upgrade the municipal treatment plant both for Reeseville’s purposes and to treat Specialty Cheese’s effluent. Wisconsin governor Scott Walker supported the venture, saying, “It’s important to assist projects that can upgrade local infrastructure and support business growth.” “It was a good outcome for all of us,” Scharfman adds.
Although it is a separate venture, these days Scharfman also is excited about the potential of the Fresh Cheese Company, a new enterprise started by his son, David, to manufacture cheese for the ASEAN (Association of Southeast Asian Nations) market. Based in the Philippines, the nascent company will bring Specialty Cheese’s manufacturing expertise to a market where there is increasing wealth and consumer desire for high-quality, convenience foods.
Scharfman admits to being “a little envious” when he compares the cost structure of his son’s operation with his own. “I’m a card-carrying member of the Sierra Club,” he stresses, “but I have to acknowledge that some regulations create a disincentive to manufacturing in the United States.” Although his Wisconsin company has found a way to prosper in lean economic times, Scharfman says that “being a manufacturer in the United States means you’re constantly swinging back and forth between optimism and wanting to throw yourself off a cliff. It’s not for the faint of heart.”
Commenting more broadly, Scharfman observes, “I’m like a lot of Americans: I want to live in a society that is consumer-friendly, worker-friendly, and environmentally responsible. But I also want to live in a society that’s manufacturing-friendly. Reconciling those goals is a conundrum.”
Class of OPM 17
Class of MBA 1979, Section B