MOM AND POP GO HIGH TECH
Michael Allawos' tool-and-die shop isn't very big. Housed in a tiny building in an industrial park in San Dimas, Calif., it makes metal parts for Northrop Grumman and Bristol-Myers Squibb Co. But it has big plans--and big-company technology on its side. On sales calls, Allawos whips out a laptop computer to confirm the status of a customer's order--and verify that all the materials for the job are on hand. Orders for new parts are dropped electronically into his job-tracking system, and a financial package traces to the penny the cost and profit of every order, every step of the way.
Allawos' Mikana Manufacturing Co. will close the year with not even $2 million in sales. But Mikana is just one small example of a quiet revolution in the way small companies view and use information technology. To Allawos, there was no choice: either automate or die. "If I hadn't been computerized in this last recession, I wouldn't have been competitive. My customers wouldn't have given me an opportunity to stay in business," he says.
Consider Aspen Press Ltd., a $1 million children's-book publisher that started its business two years ago. It receives orders and payments electronically from customers such as retailer J.C. Penney Co. and Dillard Department Stores Inc. But without the electronic link, says Aspen Chief Executive Richard Feldstein, the publisher might be out of the loop. Penney and other big customers are paring their supplier lists, eliminating companies that are behind the curve in technology. "Those who don't [network] are usually the first to go," says Feldstein. Embracing computer and network technology, he adds, "levels the playing field for small business."
MAIN STREET. Exceptional examples? Think again. State-of-the-art digital technologies once available only to deep-pocketed big companies are making their way to mom-and-pop stores and garage shops. Once the last refuge of mechanical cash registers and shoe-boxed receipts, small businesses such as Mikana and Aspen are latching on to sophisticated manufacturing, financial, and inventory management systems. Their operations are being transformed with easier-to-use software, cheap computer power, and global electronic networks. At the same time, small companies are getting a push from big businesses that have lost patience with old-fashioned ways. As a consequence, many of America's 15 million small businesses are becoming as adept at exploiting technology as their bigger counterparts.
There's no turning back. Call it The Information Age meets Main Street. The forces that have reshaped Corporate America--greater competition, relentless cost-cutting, and demands for higher quality--now reach businesses of every size and in every segment of the economy. Megastores such as Home Depot Inc. and OfficeMax are forcing rival retailers and merchandise suppliers, both small and large, to adopt high-tech inventory-management and electronic-ordering networks. Companies that can't keep up with these giants are likely to wind up among the small-business casualties.
The impulse to automate isn't totally defensive, however. Newer, computer-literate employees, some of whom are sons and daughters of the founders, are giving these small fry a dose of computer smarts. Brought up on computers from high school or college, these offspring are helping parents shake off their technophobia. Likewise, newly minted entrepreneurs who toiled until recently in major corporations understand the value of information technology. "We went through our files recently and looked at the history of companies formed in the last four years," says Joseph W. Duncan, chief economist at Dun & Bradstreet Corp. "It's amazing how many were senior corporate officers--ex-IBM and ex-Citibank."
The result: Small businesses are entering the Information Age with the same zeal Corporate America did a decade ago. For these companies, which have annual sales of $50 million or less, information systems and related high-tech gear such as computerized milling machines make up half of their capital spending, estimates the National Federation of Independent Business. In 1985, only 25% of small businesses reported having any computerization. By 1990, 67.5% of small businesses were running on digital power. And since 1992, purchases are up 14%. What's more, the fastest-growing small businesses are also the ones that are the biggest technology believers (table). They plan to spend 8.7% of revenues on computer equipment over the next 12 months--well above the 7.6% average for the largest 1,000 U.S. companies, says consultant Coopers & Lybrand.
Computer makers cite small business as the next great untapped market--after home PC users. "The smaller guys are adopting new technologies faster than our larger accounts," says Thomas B. Martin, vice-president for worldwide marketing at Dell Computer Corp. And Wirt M. Cook, an IBM general manager responsible for small-business markets says these companies are "without question one of the most important opportunities for IBM." He estimates that about $3 billion of Big Blue's $63 billion in annual revenues comes from sales to small businesses in the U.S.
"A REAL SHOT." The payoff that larger companies have already seen from effective technology use--higher
productivity, quality improvements, and faster turnaround--should start kicking in for small businesses in the second half of the 1990s. Indeed, a new Coopers survey of fast-growing small businesses finds that revenue per employee at companies with high computer use is 2.5 times as much as at low-tech companies. As more companies automate, productivity increases in the economy should continue, says Dun & Bradstreet's Duncan. "The net result is, with a small employment growth in highly technical activities, we're seeing a real shot in productivity," he says. Across the economy, output per hour has jumped 6.7% in the past three years, but economists figure small businesses may have done even better.
There's a rippling effect at work, too. As big companies have downsized and eliminated departments, they have farmed out more and more work. That makes small manufacturers and service companies the lifeblood of Corporate America. Now, as the small fry automate, they pass on productivity gains to their customers in the form of lower prices, higher quality, and faster time to market.
Not every small business will automate. Some may never need more than a phone and cash register. But the greatest impediments to wider use have been a lack of resources and training. "It's very difficult to persuade the person running a small business to take one to five days off to learn a new tool. Efficiency in the short run declines," says John W. Newman, a consultant to small businesses and director of the family business program at Babson College. Indeed, the two biggest concerns small-business owners have about adopting information technology are staff training and planning.
That may be changing. Hundreds of easy-to-use programs built on Microsoft Corp.'s Windows operating system are now available. With 60 million copies of Windows in use, the selection of off-the-shelf software is expanding, creating systems for every conceivable enterprise and pulling thousands of small businesses into the Information Age. "The thing really driving it is the incredible improvements in software technology," says William C. Dunkelberg, chief economist at the National Federation of Independent Business. "When the first computers were put in, no one knew how to use them. User-friendliness is resulting in tremendous efficiency even in the service sector."
And it's not just application programs. Small businesses today can choose from among easy-to-install computer networks such as Novell Inc.'s NetWare and Artisoft Inc.'s LANtastic. IBM's latest version of the OS/2 operating system includes software that lets customers connect directly to the Internet, the worldwide computer network. Microsoft's next version of Windows will do that, too. "We're just starting to see business-to-business use of tools like the Internet," says IBM's Cook (page 85). "It is a significantly growing opportunity."
RUNNING SHORT. Indeed, today's entrepreneurial success stories almost always include a chapter on information technology. Take Kevin Palmer's Sports Venture Inc. Just three years ago, the Mesa (Ariz.) retailer of sports attire was up to its neck in unsold inventory and was running short of cash. Palmer cobbled together a system that shows which items are selling and when to order more. "That system saved our business," says Palmer. The result: Sales rose 30% to 60% at his three stores--and profits followed. He calculates that the inventory-control program alone has boosted profits by $100,000. Palmer's next step: a new network link to his supplier's factory that will allow him to see a picture and order items electronically--rather than wait for a sales call.
Improvements in hardware also make it easier for small businesses to adopt information technology. Rising computer power lets developers pack more into their applications. And falling prices put systems within the grasp of more companies. Consider Apex Engineering, a Pittsfield (Mass.) product-design and -development company. It recently acquired computer-aided-design workstations for $8,000 apiece that can do more than the $22,000 workstations bought just two years ago. The new equipment lets Apex designers redraw parts at the push of a button. And plummeting computer prices make it easier to afford more equipment. Today, Apex can test designs before sending them to a parts maker. Soon, it hopes to automate areas such as toolmaking.
"Computers are today what we expected them to be 10 years ago. They're great tools," says Apex President Don Rochelo. His 11-year-old company has grown 22% a year for the past five years, and he expects to hit $3.5 million in revenue this year. As it has put more technology to work, setting up robotic lines and expanding to 24-hour production, Apex has gained a high-tech reputation. And the new technology has enabled Apex to raise its sights from just being a tool-and-parts maker. Computer-aided design now lets it design entire products for customers. And now, it is even building entire products for big customers such as Polaroid Corp.
Rochelo is an example of the self-taught techie. He took the time to go to trade shows to see how the technology works. Many entrepreneurs don't have the time or the skills to do that. But they can still put their companies on the path to automation. One way is by tapping consultants, customers, or franchisors (page 90). Burglar-alarm installer Sonatrol Security Systems in Cambridge, Mass., got consultants to adapt an off-the-shelf sales-contact package so it would incorporate information from Boston-police theft reports. The system automatically matches addresses culled from police reports with a computerized directory of names and telephone numbers. That way, Sonatrol's sales staff gets a list of people with a high interest in installing alarms. The result: Sales of its security gear rose from $50,000 a month to $120,000.
Franchisors are also a great source of information technology. In the 1980s, outfits such as Mrs. Fields' Cookies Inc. equipped stores with up-to-the-minute computer and communications systems. Now, small chains are doing the same. Pro Image Inc., a $50 million Bountiful (Utah) company with 250 stores in its franchise network, is developing a system that searches its warehouses and its franchisees' inventory for needed items--something already in place at such retailers as Gap Inc. Now, sports buffs who might have walked out because of the lack of a Seattle Seahawks team jacket in a Tampa store can have it delivered overnight. Says Pro Image President Brian Carmack: "Rather than operate a store with $80,000 or $100,000 in inventory, they will have $20 million in inventory to pull from."
NO WAREHOUSE? Just as amazing, Carmack plans to offer store owners both the system and the required electronic links to inventory for about $6,000--little more than a top-of-the-line PC. "Imagine you're an independent trying to compete with us and don't have access to that," he boasts. After the store network is up and running, Pro Image plans to extend it to its clothing manufacturers. That way, stores may one day submit orders directly to the manufacturer, further speeding deliveries and possibly eliminating the need for a warehouse.
Still, the greatest prod to automate is coming from big businesses that rely on small companies for everything from parts to new designs. Increasingly, Corporate America is dictating the way suppliers--large or small--work with them. Sheet-metal fabricator PDQ Manufacturing Inc.'s use of electronic invoices, networking, and design was driven by IBM, a major customer. After IBM required PDQ to accept invoices and payment electronically, it helped with the software and hardware selection and installation. That stirred PDQ President Scott Hutchins to go paperless on the Staatsburg (N.Y.) company's shop floor.
Today, the 30-employee business passes electronic blueprints between its designers and customers and taps into the Internet network for market information. It scours the network's many bulletin-board sections for opinions of products and potential suppliers. With automation, "we've cut lead time from 16 weeks to 4," says the 33-year-old executive.
PDQ liked the initial results so much that it is incorporating new technology throughout manufacturing and purchasing. "Once you start the process, you like what you find," says Hutchins, who had no computer experience before taking the job. Now, he is thinking about adding so-called workflow software that would automatically grab orders and route them simultaneously to administrative and manufacturing departments to speed operations. The idea? Make billing and electronic payments as automatic as his stamping machines. Thus far, Hutchins has gotten output per employee up from just $60 an hour five years ago to $100 and boosted sales from $3 million to $5 million--with fewer employees.
Technology can also help a small competitor take on the giants. That's what happened at Philadelphia's Rittenhouse Hotel, which boosted the occupancy in its 98 rooms to a stellar 70% and hiked the average take per room by $21 this year, with help from off-the-shelf PCs and software. The system, supplied by Newmarket Software, a small Portsmouth (N.H.) outfit founded by a former hotel executive, automates the hotel's event and catering schedule. Rittenhouse can now estimate meeting and catering fees at the time of booking to determine in advance which events will bring high returns to the hotel. What's more, by helping the hotel schedule meetings better, it reduces the need for room discounting. Plus, with no manual record-keeping, the sales staff can spend more time with prospects.
QUICK O.K. Rittenhouse's size has been a distinct advantage in getting the technology it needed. Its chief rival, part of the Four Seasons Hotels Ltd. chain, still manages its sales and catering operations on paper. "Where we benefited as a small, independent hotel is we didn't have to get 5 million people at national headquarters to approve this," says hotel Director of Sales and Marketing Sandy Heydt. With faster decision-making, small companies can use their technology to negate a larger firm's economies of scale. "We said we wanted it, and it was done in a couple of months," says Heydt.
Suddenly, computer makers are more obliging when small businesses call. IBM, Digital Equipment, Compaq Computer, among others, are stepping up their appeals to America's 15 million small businesses. This fall, the major PC suppliers are introducing lines packaged with business software or designed specifically for small businesses. IBM, for instance, has run eight small-business technology seminars across the country this year and sponsors local support groups for fledgling companies. It's a market that has become more important at the highest levels of the industry giant. IBM Chairman Louis V. Gerstner Jr. opened the first seminar in May, and he was the first IBM chairman to address the annual get-together of IBM's business partners--mostly small businesses that work with IBM to sell gear to customers that are too small for the computer maker to deal with directly.
CUSTOM PACKAGING. To snag more small-business customers, Dell Computer has changed the way it bundles software. Instead mf giving a fixed package of programs--the top-sellers for corporate customers--it allows companies to pick the software to be factory-installed. It's not that there is any particular set of software that small businesses want, but rather that they don't want to settle for a standard package, say Dell marketing officials. DEC is putting more of its resources into retail sales, hoping to attract small-business owners. "It's a segment forecast to grow significantly and one where nobody is doing a good job today," says marketing director Rod Keller. DEC's new Starion PC line has built-in tutorials with each business program. Like many other PC makers, DEC provides on-line links to diagnose and fix problems--recognizing that small companies don't have technicians to troubleshoot their PCs.
Software kingpins also are zeroing in on small businesses. The October deal to purchase developer Intuit Inc. makes Microsoft the largest supplier of small-business accounting packages with Quicken Books. It will compete against Computer Associates International Inc., the mainframe software giant that has been selling its Simply Accounting small-business program for the past seven years. Early next year, the biggest developer of mechanical-design software for manufacturing giants, Parametric Technology Corp., plans to release specially configured versions of its Pro/Engineer software priced for small manufacturers that will be able to compete directly against AutoCAD from Autodesk Inc.
UNCLE SAM'S RULES. Crafting programs specifically for the needs of small businesses is becoming a growth industry itself. A word-processing program or a spreadsheet may work just as well for a small company as a large one. "But for process-control or job-shop bidding programs, they buy little programs from little companies," says Leslie Schneider, director of TECnet, a Medford (Mass.) group that helps small manufacturing companies build electronic networks. Software developer SBT Accounting Systems Inc. in San Rafael, Calif., expects revenues to soar 40%, from $12 million to $16 million, this year because of a Windows version of its program. But possible government rules--requiring even companies with fewer than 10 employees to file payroll reports electronically--should make the future even brighter. "That encourages people to do their accounting on computers," says Chief Executive Robert H. Davies.
Systems integration--tying different types of hardware and software into a single information network--is as much a challenge for small companies as for
big ones. The difference is that usually nobody in the small company can do it. Since many small-business accounting systems don't accept electronic invoices, their electronic-data interchange (EDI) links to big customers often have more value to the customer than the supplier. Small businesses typically have to reenter the invoices--losing a key benefit of networks, says Schneider.
No matter how hard the transition is for small businesses, it's increasingly clear that mastering information technology pays off, sometimes in unexpected ways. Mikana Manufacturing, the 10-person tool-and-die company, recently was tapped by Northrop Grumman to help automate the defense contractor's receiving department. The giant's internal efforts had hit a snag. "I find small business overall is understanding and rapidly absorbing technology better," says Doug Marshall, manager for material systems at Northrop Grumman in Hawthorne, Calif. Indeed, Marshall says he looked to Mikana for help because of its reputation for tracking orders. So, as the Information Age reaches Main Street, the payback from automation of the U.S. economy continues to spread. WHAT SMALL BUSINESS IS BUYING
These rankings are drawn from a poll of 410 owners of companies
DATA: COOPERS & LYBRAND
PAYROLL, TAX, AND BOOKING 74%
SALES INFORMATION 52
ORDER-ENTRY AND BILLING 65
FINANCIAL ANALYSIS/CASH MGT. 54
INVENTORY CONTROL 36%
CUSTOMER SYSTEMS 22
DISTRIBUTION AND LOGISTICS 17
Gary McWilliams in Boston with bureau reports