Tyco Electronics weathers the storm

Juergen Gromer doesn't want to look back at the last three years—and who can blame him? Over that time, Gromer, president of Tyco International's second-largest division, Tyco Electronics, was fielding customer questions about the long-term viability of this $10 billion electronics component supplier. His parent company's top management—specifically, CEO Dennis Koslowski and CFO Mark Swartz—were indicted in September 2002 for defrauding the $36 billion conglomerate of more than $600 million. As the Kozlowski story unfolded and alibis unraveled week by week, rumors started to damage customer relationships, says Gromer.

"I'll be honest—it was very uncomfortable," recalls Craig Conrad, senior vice president for distributor TTI, a major reseller of Tyco components. "Nobody knew what the implications were." Customers began questioning whether Tyco Electronics could stay in business and were voicing concerns about Tyco's corporate ethics.

Now, two years after Kozlowski's resignation, the electronics group has not only survived but is actually growing. In fact, its sales grew consistently during three years of bad publicity (and the industry downturn). Tyco Electronics' fiscal 2003 sales of $10.4 billion were up 4 percent from 2002 (see the chart, "Tyco Electronics Outperforms Market," below). The group expects to grow between 4 percent and 8 percent this year and reach $12.8 billion in 2006. In 2003 product segments within Tyco's electronics group outperformed the market (see the chart, "Tyco Electronics Sales by Industry" chart below). There has been little turnover in Tyco Electronics' management—none related to the Kozlowski debacle—and no significant customer fallout. Gromer claims that the group did not lose market share and, in fact, that it gained market share.

How did the electronics group avoid being tarred by the same brush as its parent? More important, how did it convince customers, employees and analysts that it was going to survive a huge corporate disaster and come back stronger than ever? Part of it was the way Tyco International was organized, and the rest of it was how Tyco Electronics' management met the challenge head on.

"I'll be honest—it was very uncomfortable. Nobody knew what the implications were."
—Craig Conrad, senior vice president, TTI

Interestingly, the same corporate structure that may have enabled misconduct in the executive offices benefited Tyco's business units. Tyco International was vastly decentralized—there was no coordination, communication or accountability among Tyco's five business groups—electronics, healthcare, fire and security, engineering products, and plastics and adhesives—and the corporate offices. "There was literally no interaction between the business segments—each followed its own strategy and its own business," says Gromer. Ultimately, though, this allowed the business units—as it turns out, justifiably—to distance themselves from the Kozlowski scandal.

"We were not part of what was going on," says Gromer. "We immediately got that across to our customers. And at the end of the day, why should a customer punish 80,000 Tyco employees because of a few questionable people in the holding company?" Tyco Electronics, according to Conrad and others, didn't miss a beat—service and supplies were never interrupted. "Our long-term relationships and performance history with our customers and partners helped ensure some stability during that rocky time," says Carla Mahrt, worldwide channel manager for Tyco Electronics' Power Components Division. "There was never an ethical or legal issue with the electronics group," says TTI's Conrad.

"Tyco Electronics did an extraordinary job of keeping us informed about the events with Kozlowski. We weren't concerned about Tyco going out of business, but we were concerned about some of the strategic changes it might make as a result of the negative press," says Matt LaRont, director of electromechanical components for contract manufacturer Solectron, which buys millions of dollars' worth of Tyco components each year. Both Conrad and LaRont say communication from Tyco Electronics was immediate and candid when the scandal broke. "We got regular updates, and our contacts were very forthcoming with the information," says LaRont.

Customers and Tyco employees say that that initiative came from the top. "The media broke the news first," says Mahrt. "However, we were quickly informed internally via memo about what the allegations were at the time. There were no panic moves—we all didn't hop on a plane to meet with customers, but we developed written and verbal communications with our customers that at Tyco Electronics—from Dr. Gromer on down—it was business as usual. We were told to address concerns individually for those customers or channel partners that had questions or issues. This was done via several avenues: in letters, face to face—whatever the customer or channel partner needed."

Both Gromer and Conrad recall the same anecdote illustrating Tyco's strong customer support. "Two years ago, we were at a big customer reception at Electronica," says Gromer. "We had invited about 1,800 customers to the reception, and many went out of their way to tell us they trusted us—we got a lot of confirmation that we were on the right track."

"Gromer and Tyco board members spent a good amount of time at that reception—I'd say an hour or more—explaining the ethics of Tyco Electronics," says Conrad. Mahrt says Gromer also met extensively with employees during this period, including a town hall meeting in Tyco's Menlo Park, Calif., facility.

Tyco Electronics has not been unchanged, however, since CEO Ed Breen took over in July 2002. And that's what Gromer really wants to talk about. Gone are the days of a decentralized organization: Tyco International is now on a common IT platform across its business groups. Communication between the groups—and between the groups and Tyco International management—is frequent. "We talk about best practices and ways we can all accelerate our success," says Gromer. Tyco International now holds regular management meetings and weekly management conference calls. It has also been rolling out a company-wide program for operational excellence, which includes a unified sourcing initiative, Six Sigma quality training and lean manufacturing practices.

For example, the Tyco groups have united as a single purchasing organization for materials and service across all the businesses. "We use a lot of common materials, such as metals. With the combined volumes, we are really enjoying some significant cost savings on the purchasing side," says Gromer. And within the electronics group, the various brands Tyco has acquired over the years—such as AMP, in connectors, and Raychem, in power products—are uniting under a single Tyco brand.

This is playing well at Solectron, which used to deal with each Tyco product group separately. "When they modeled themselves as individual business units, we structured our group the same way—now we have a single point of contact," says LaRont. Tyco's response time has improved significantly, he says. The supplier has also become more flexible and more collaborative. "We are hearing more of 'tell us what you want to focus on' rather than encountering situations in which Tyco does something on its own and hopes it's what you want."

It's also playing well on Wall Street. "Although we have always identified pockets of excellence at Tyco, the enterprise-wide excellence program is relatively new," says Wachovia Securities analyst Wendy Caplan in a June 2004 report. The programs initiated at Tyco have long been used by other industrial companies, she points out, and usually result in a "pop" in profitability. "We expect that the early years may drive earnings even higher than our estimates suggest." For its third fiscal quarter, ended in June, Tyco beat Wachovia's EPS estimate of 42 cents, with EPS of 45 cents. Wachovia rates Tyco's stock as "outperform."

Management throughout the organization has also become more visible—employees and customers who never glimpsed Kozlowski have met personally with Breen. "People at the business units are engaging at more levels than they did in the past and are a lot more accessible," Solectron's LaRont adds. "Gromer has empowered his staff, and it is taking a more direct role with customers than ever."

The biggest change internally, says Mahrt, is that all employees now receive intensive ethics training. The training is done over the Internet, and employees who complete the training receive certification.

Gromer says that the cooperation across Tyco International has vastly improved morale and revitalized the company. "I have never had more fun than I have lately," he says. "You have to manage during bad times, but it's more fun to do so in good times."

TYCO ELECTRONICS OUTPERFORMS MARKET2003 sales growth vs. market