Struggling With Success

By CHARLOTTE FALTERMAYER

WANTED: REALLY COOL PEOPLE. There's more to life than a job. Experience the difference between loving work and living work, where your sense of humor and family life are truly valued as much as your abilities.

That isn't an ad for a 12-step program for workaholics. It's an act of employer desperation. Steve Loegering, president and CEO of Loegering Manufacturing, ran the pitch to attract workers to his firm in Casselton, N.D., 20 miles west of Fargo, in what Loegering jokingly labels the state's "tropical corner."

It's not that business is bad for Loegering, which makes over-the-tire tracks for front-end loaders like Bobcat vehicles. On the contrary, the firm has revenues of just under $25 million; 50 employees are working flat-out, and Loegering wants to hire 10 more in the next year. But in the Fargo area the unemployment rate is a teensy 1.4%, and finding good help is no small task. Last year Loegering's traditional newspaper ads drew only 15 to 20 resumes apiece, even for upper-management positions with competitive salaries. That's when Loegering decided to "step out of the box" to start getting noticed. The company's new ads, running in newspapers and on the Internet, get 450 to 500 responses each.

Loegering is not alone in having to look for new strategies to thrive in the turn-of-the-century economy. Business is booming across America, but small business is not doing--and cannot do--business as usual. Start with the search for workers. Unemployment has dropped nationally from 7.8% in June 1992 to its current 4.2%. Add to that the challenges of meeting tough demands from Big Business customers, avoiding the pitfalls of e-commerce and financing a fledgling firm without losing control, and you've got a climate for small businesses that is at least as challenging, and sometimes as fatal, as a sharp business downturn.

How they manage is important for the whole country. Small businesses (those with fewer than 500 employees) make up roughly 90% of all U.S. businesses and employ 55 million Americans. According to the Bureau of the Census, 99.9% of enterprises that are born and buried each year are small firms. And the challenges to a long life expectancy are growing. While the gross domestic product of the U.S. was up 3.8% in 1997, the U.S. Small Business Administration reports that business failures increased 15.9% that year, to 83,384--the highest level since 1993.

As Loegering's story illustrates, hiring and keeping employees is perhaps the biggest challenge to small businesses today. In a survey conducted last month by the National Association of Manufacturers, 83% of respondents said they found it extremely difficult to find and retain employees. The problem is as much quality as quantity. Says Giovanni Coratolo, director of small-business policy at the U.S. Chamber of Commerce: "The No. 1 challenge of small businesses in this marketplace is hiring those who have a certain amount of education."

The sister problem of hiring good employees is keeping them. Fattening employees' paychecks is not always enough to get them to stay. Says Arnold Sanow, a small-business strategist and author of Entrepreneur Boot Camp: "Money is important, but you can get a job anywhere today. Why stay where you're not appreciated?"

That's a sentiment Loegering understands well. "We want our employees to have fun," he says. Loegering has gone to great lengths to keep his employees in good spirits, by such measures as requiring teamwork training, installing lighting that mimics sunlight "so that mood is affected" and instituting a carefree company dress code (business casual every day; floor workers choose to wear uniforms). In addition, Loegering offers generous salaries and benefits that include full medical, dental and vision coverage. "Once we get them in the door, keeping them is not a problem. We walk the talk," he boasts.

Most small businesses are not so lucky when it comes to providing health care. Kathie Rothschild-Zuroweste, who with her husband owns the Colony House, a family-style restaurant that seats 68 in New Haven, Mo., says she lost one of her best employees last month because she could not afford to offer her health coverage. The employee took a job at a factory willing to provide her with a comprehensive benefits package. Rothschild-Zuroweste says she has shopped around to determine how much it would cost to cover her three adult employees (most of her help are part-time teenagers). The conversations were not promising. "We're having a really good year," she says. "But to add this money onto our payroll every month would blow us out of the water."

Help may be coming. Included in the Quality Care for the Uninsured Act, a Republican-sponsored bill that passed the House Oct. 6, is a provision that would allow small businesses to get better rates for care by latching onto plans that could be provided by existing groups like the National Restaurant Association or the Chamber of Commerce. Says Jim Talent, chairman of the House Small Business Committee and a co-sponsor of the bill: "There are 44 million uninsured Americans. About three-quarters of them either own a small business, work for a small business or have family who are employed by a small business. If FORTUNE 500 companies can do this, why can't small-business owners band together and do it too?" Conservatively, Talent claims, the association plans could reduce costs to small businesses 10% to 20%.

Even with their employee problems solved, for many small companies a bigger hurdle these days is the corporate customers who want more--and more--for their bucks. Cindy Kerr, vice president of sales and co-owner of automotive supplier PHC Industries of Camden, N.J., says, "Being in the supply-chain end of things has become almost an Olympic sport." PHC, which has 130 employees and revenues of around $10 million, is in the automotive-interior trim industry. One of its products is the air bag label that adorns the front seats of current car models. With stiffer regulations for air bags and with the automotive industry trying to get more from suppliers for less, PHC is struggling to be more things to more people.

"Because we're in a global economy," Kerr says, "there are so many options for our customers, we've got to run faster and jump higher to find opportunities." Just weeks ago, she relates, "we got a phone call from an automotive supplier with whom we're working on a vehicle launch. We are manufacturing a tiny piece that's going into the end product. They're struggling with the next piece of the process. They said they had already shipped us eight boxes with 800 pieces; they needed them assembled and returned in less than 12 hours. We can only produce about 100 assembled pieces an hour. Then they wanted them shipped 2,000 miles west." In the end, Kerr agreed to do the job if PHC was given an additional 12 hours to finish it. But, Kerr says, "we practically had to stand on our heads to get it done."

The fundamental issue, Kerr observes, is that in the auto industry this is a boom with a cost squeeze attached. Says Kerr: "Suppliers want a cost reduction of 5% from us overnight. Ten years ago, you could be a small business and be a little sloppy, be a little behind the times. Now we have to have the level of sophistication of some of our customers, who are often 100 times larger than we are."

And if you can't deal with it, maybe a competitor can. Ruth Stafford, president of Kiva International, a family-owned and -operated business in Phoenix, Ariz., that makes fiber corrugated boxes, says the rivalry in her niche is getting a bit too close for comfort. In fact, in her region, competition has gone up 46% in two years. "Profitwise," Stafford says, "we're not as strong as we used to be." Kiva has recently seen two price increases of 12% each for its raw materials. "We are having trouble meeting those costs," Stafford says. Yet she is confident that her company has staying power. "We'll hop through hoops for our customers. When things get a little tight or a little slower, that's when the competition gets shaken out."

For start-up small businesses in particular, the Internet appears to be both a panacea and a Pandora's box. While e-commerce can create overnight success, many firms can't meet their clients' instantaneous demands, so they end up taking a hit in customer satisfaction. Says consultant Sanow: "If I send out a message advertising my business to 4,000 people, and 1,000 people get back to me, how am I going to get back to them? You've got to have a plan."

The Internet can also create a host of legal issues for small businesses. Susan Nycum, an international partner with the law firm Baker & McKenzie and one of the original legal advisers on building the backbone of the Internet, warns that "e-commerce is global. So theoretically, small businesses are going to be subject to the laws of more than 200 countries." There are "huge jurisdictional problems," Nycum says, that include knowing where and when a contract has been entered into and what language to use on a company's website. "If, for example, you are doing business in France, the law says your website has to include French."

In the same vein, finding money to start a business isn't as simple anymore as just going to the bank. Venture capitalists have a greater role to play, and their demands are different. Michael Heller, chairman of the emerging-business and venture-capital group at Cozen and O'Connor, a Philadelphia law firm, says he gets 10 to 12 calls a month from start-up companies. According to Heller, venture capitalists also bring sophisticated knowledge and business contacts to help young entrepreneurs who may not have much business experience. But the price might include more restrictions on the emerging company.

Gregg Garnick learned a lesson about control the hard way. In 1994 he started a technology business in his basement with $100,000 in personal savings. His company developed video-capture cards for laptops, the forerunner to digital-video-disc technology. When the business started to grow, Garnick went to a venture capitalist. By 1996 Garnick's company had come up with the technology for DVD decoding. Says Garnick: "We were the first company in the world to demonstrate working dvd capability on the PC."

But when a big-dollar deal fell through, Garnick felt increasing pressure from his venture capitalist to hit the numbers in his original business plan. He was eventually told to hire a president to oversee operations. Garnick says he stepped down as CEO "for the good of the company," though he continued as chairman. But he says, "I was being boxed out of key decisions." Garnick resigned from the board of directors a few months before the company went public last July. The company's market capitalization is now about $250 million, 5% of it Garnick's. The moral of his story? "Don't go into starting your own business with rose-colored glasses," Garnick says. "Go in with your eyes wide open."

For all the challenges, small business is still bullish. As just one example, the National Federation of Independent Businesses' small-business optimism index, a measure of perceived growth prospects, rose to 102.4 in September, a jump of nearly three points from a year ago. Says NFIB chief economist Bill Dunkelberg: "Small businesses love challenge and change. There's no better time to be a small business."