The Wall Street Journal-20080128-How a Firm Got Smart to Fight Grime- Rivals

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How a Firm Got Smart to Fight Grime, Rivals

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Beset by cheap imports from overseas and facing a slowing U.S. economy in 2002, Tennant Co., a big name in the small market for industrial floor-cleaners, could have tightened its belt and sent more of its factory jobs overseas.

Instead, the Minneapolis company decided to place a big bet that it could outsmart its competitors with innovative products.

It worked. In 2006, the latest full-year figure available, Tennant had a profit of nearly $30 million, up from just over $14 million in 2003. Its total number of employees has risen to about 2,800, from 2,351 in 2003. Tennant shares ended Friday at $31.88 on the New York Stock Exchange, about double the price five years ago.

Along the way, the company had to persuade customers to buy machines that clean in markedly new ways and sometimes had to bet heavily on products that showed promise but needed more funding to exploit their potential.

A key moment came in October 2002 when Chris Killingstad, then the recently installed head of North American operations, visited his first international trade show in the cleaning business, in Las Vegas. His main impression at the show was that "every machine looks like it's designed the same," recalls Mr. Killingstad, who became president and chief executive in 2005.

Mr. Killingstad returned to headquarters and helped push Tennant -- which makes vacuum cleaners, sweepers and scrubbers deployed in factories, schools, casinos and malls around the world and has 12% of the $5 billion world-wide market -- to boost research-and-development funding to fight back with better products.

Tennant's decision to push innovation over cost-cutting mirrors that of several other successful U.S. manufacturers. Like home-appliance giant Whirlpool Corp., motion-and-control-device leader Parker Hannifin Corp. and other manufacturers, it decided to dedicate a substantial portion of its resources to developing products that anticipate and solve customers' needs. In 2007, Tennant's R&D spending was an estimated $23 million, the company says, up 38% from 2003. About 10% of that went toward developing breakthrough products.

Tennant also manufactures outside the U.S., with about a third of its employees abroad. Of its five manufacturing plants, one is in the Netherlands and another, opened in 2005, in Shanghai. A Tennant spokeswoman says the company built the China factory to be closer to its customers in the region. The company says it has no plans today to open another plant outside the U.S.

Founded in 1870 by Minneapolis entrepreneur George Tennant to make wood products, the company evolved into a specialist in tools for cleaning wood and other types of floors. For years, the company grew by making its trademark teal-and-gray machines sturdier and acquiring other companies.

Early this millennium, growth stalled amid a U.S. recession and a flood of foreign competitors. In the summer and fall of 2002, two teams of about 40 executives and workers in total, including Mr. Killingstad and veteran lower-level employees, analyzed the company and its industry. Among their tasks: figure out whether the company should become a low-cost producer.

A new strategy emerged. At a time when Tennant had recently laid off about 5% of its workers and cut executives' raises and bonuses, it committed to spending 3% to 4% of sales each year on research and development. It dedicated about $2 million of those funds to create an Advanced Products Development group to carry out the innovation work.

Pete Swenson, an engineer, was tapped as director of the group. Hired in 2001 from an aerospace and defense contractor, Mr. Swenson decided the team should focus on improving the cleaning technology instead of making the machines more durable or productive. He also pushed the engineers to visit conferences unrelated to their specialties, take more initiative with their ideas, and tinker more. "I am not a believer in the big, giant-brain theory of running the research-and-development department," where one person must approve an idea before it can move forward, he says.

One of the first projects Mr. Swenson pushed forward was almost killed. In July 2002, a conceptual illustration of a new kind of carpet scrubber was shown to an influential customer, who rejected the idea, Mr. Swenson says.

The scrubber would tinker with the traditional cleaning method, which involves spraying water and cleansing chemicals onto the carpet, and then vacuuming it. Tennant's concept would inject water and cleaning fluid directly onto circular brushes under the machine. As a result, the cleaned area would dry in about 30 minutes -- a pressing concern for institutions such as casinos that otherwise have to rope off cleaned areas for as long as 24 hours, Mr. Swenson says.

"Before we put that machine in the field, four different people told me we should kill this project, including my boss," he says. Mr. Swenson pleaded for several more months and gave a prototype to the cleaning staff at a high school.

Bob Venne, the custodial supervisor who tested the device at Zeeland East High School, says the machine cleaned the carpet's topmost fibers thoroughly and quickly. "I used it on the dirtiest carpet in school, which is the cafeteria. It took out pizza sauce and mustard," he says, adding, "I was hoping we were going to get one" free after the test.

ReadySpace, as the machine would be dubbed, was launched in 2004 and became the company's best-selling carpet-cleaning device.

Last fall, Tennant announced a product that used an electrical current to turn tap water into an industrial cleaner.

A top Tennant researcher who was in Japan about two years ago doing field-testing for a different product noticed a hospital there was using a technology that harnessed electricity to sanitize surfaces. The machines briefly split water into two flows: one an acid that kills some bacteria on a surface and the other an alkaline stream that removes grime and dirt.

Back in Minneapolis, the researcher developed a prototype using the technology. To help the opposing streams stay separate longer, prolonging their effects, he injected air bubbles. In early 2006, the researcher showed a prototype to Mr. Swenson. The advanced-product budget was already committed to other projects, so Mr. Swenson approached the CEO to request "hundreds of thousands of dollars" to further test the device, Mr. Killingstad says. The executive says he recognized the device's potential. "If we were going to cut corners anywhere, it was not going to be on this project," Mr. Killingstad says. He says it was code-named "Martini" because "it did some wild things to water." The machine that resulted was named the ech2o.

The cleaning crew at the Minnesota Timberwolves' basketball court tested a prototype. "Cleaning-wise, it was night and day," says Scott Beine, custodial manager at the facility.

Today Mr. Killingstad says that the company is considering adapting the technology for surfaces other than floors. The ech2o floor- cleaning machine will go into full production this spring.

Tennant's new R&D effort hasn't always been successful. In early 2005, researchers started a project dubbed Mop & Bucket Eliminator, says Mr. Swenson. It used microfiber to clean surfaces differently than materials such as cotton. Over two years, the advanced-product group devoted about a third of its annual budget to the project. Fears about cannibalizing sales from existing products and the emergence of the electricity-and-water technology resulted in that project being shelved.

"I don't consider the MBE project a 'failure,'" says Mr. Swenson. Field-testing in Japan for the project, he says, helped Tennant researchers find more "ammunition to sell a better idea" -- the electricity-and-water technology.