When Sidney Harman, founder of Harman International Industries, asked Dinesh Paliwal in the spring of 2007 to succeed him as CEO of the maker of upscale audio and electronic gear once Kohlberg, Kravis Roberts & Co. and Goldman Sachs Capital Partners took the company private that year, Paliwal jumped at the opportunity. As president of Swiss automation provider ABB Group and CEO and chair of ABB North America, he didn’t question his ability to take over from the 88-year-old Harman, but it wasn’t going to be easy. The imperious Harman — an arts patron, fitness buff and author of a management book — had lost one CEO in 2006, and the replacement lasted just three months. Adding to the pressure, KKR’s co-founder Henry Kravis wanted Paliwal to make changes quickly and formulate his own strategy for the company, whose brands include Harman Kardon, Infinity and JBL.
It wasn’t the first time the India-born Paliwal had faced a major challenge. In 1998, after four years successfully growing ABB’s operations in China, he was tapped by ABB CEO Göran Lindahl to turn around the company’s ailing industrial automation business. “They saw that I was different,” says Paliwal, who came to the U.S. in 1981 on a full scholarship from Ohio’s Miami University, where he got an MS in applied science and engineering and an MBA. “I had the courage to speak my mind.”
Paliwal moved to ABB’s Zurich headquarters in 1998 and took on increasingly broader responsibilities. Between 2002 and 2007 he was one of five senior managers running the company and leading a massive restructuring. Under his leadership the global automation division, which represented half of ABB’s sales, posted 18 consecutive quarters of earnings growth.
In September 2007, just ten weeks after Paliwal became CEO of Harman, KKR and Goldman backed out of the $8 billion deal to buy the company, sending its shares tumbling. It was the beginning of the credit crisis, and leveraged buyouts were collapsing in the wake of banks’ retreat from funding deals. But the now 56-year-old Paliwal stayed on with the company that had pioneered stereo components and later moved into luxury automotive electronics, including multimedia, wireless and navigation systems. He had to fix problems that arose in the middle of the previous decade as the company faced hefty competition, a weak research and development pipeline, overdue product deliveries and burdensome costs.
The results speak for themselves. For the three months ended March 31, 2014, Harman’s operating income soared 63 percent, to $108 million, from 2013. Net sales were $1.4 billion, up 32 percent.
Having grown up with six brothers and sisters, Paliwal is a natural competitor. “If you’re not fast, if you’re not lean, if you’re not aggressive in your mind and thinking, you’re going to be left behind,” the Stamford, Connecticut–based CEO recently told Institutional Investor Senior Writer Julie Segal. During their far-reaching conversation, he explained the challenges of following in the footsteps of a legendary founder and how he has tried to inspire innovation among Harman’s employees.
What was it like to take over from such an iconic founder?
It was clearly a founder-driven culture. The decision making was always coming from one man or maybe a very small group of people. Why? Because the founder was bigger than life. I hate that because I have always believed in collaboration, in bottom-up listening. I’m a good decision maker myself, but I like to be well informed, and I like to hear the true opinions of people.
That’s got to be a hard environment to change.
Yes, I got in front of people, and I told them clearly, “Hey, guys, I don’t have all the answers. I want to hear you.” But they didn’t believe me and expected me to make all the choices without hearing from them. Every week I wrote a letter to employees. Every week. I still do that even after seven years. I wrote what was happening in the company, what was on my mind, what the challenges were and what we needed to do.
Why was the R&D pipeline so thin?
Harman was stifling, honestly. A lot of good innovation resources were stuck in silos. Within Germany we had 11 different operations, and they didn’t talk to each other. Within the U.S. multiple operations didn’t talk to each other. So I literally said to the organization, “I’m going to blow up all these silos. You have to start talking, or I will move you around.” And I started actually moving people around — within the businesses, within the divisions, within countries — to really create a culture of collaboration. I told everybody that we have to adapt to change, because if we don’t, we won’t survive. It really was a survival issue. Our stock plunged to $9 [during the financial crisis]. To take the company from $9 to $109, we needed to do a lot of things. You cannot just keep doing the same thing. We had a big manufacturing plant, for example, in the middle of Los Angeles. Can you justify that? I cannot.
What were some of the first changes you made to kick-start innovation?
I established a corporate technology group, an internal innovation studio, with resources around the world. I also put mechanisms in place so that everybody could contribute new ideas for product development, for process development, for people development, as long as their peers nominated them to go to the next round. Good ideas don’t just come from a bunch of technology people sitting somewhere. We also started a very unique thing called the innovation council, which includes chief technology officers of companies like Texas Instruments, Intel, Broadcom, Qualcomm, Motorola. We even reached out to people like Frank Zhao, the chairman of the automotive department of Tsinghua University, the MIT of China. Their job is to challenge my business model and tell me how an external company could disrupt my business. I want this group to poke their fingers at my strategy, my technology, my product development pipeline. People can also get up to $5,000 of cash or stock for an innovative idea. And if it becomes a breakthrough patent or product or service, then they get additional stock awards.
How is the structure of the corporate technology group different from the company’s previous organization?
My chief technology officer gets technology people from the different businesses and from different countries to sit in one room and put everything on the table. They’re asked to share what they have been working on in the last six months or three months and what their big ideas are. And we see people’s eyes pop out as they hear things, and they jump in and say, “I’m also working on the same thing.” Or, “I wanted to look at that. How far have you gone on it? Can I use that?” People used to think that this or that is exclusive to their division. But that’s where the CTO comes in and says, “No, this is company property.”
When we develop intellectual property, new ideas, a new product or new technology, it is Harman property. It is not one person’s domain or one business’s purview exclusively. I will tell you honestly that this didn’t happen in one year. I initially got complaints from division presidents asking why I was forcing their people to share what they’re doing. I said, “Is sharing wrong?” They would say no, that their people were busy. Well, people were busy because they weren’t understanding what other people here had already accomplished. Sharing and collaborating is good for the company. It can give us better goods and speed to market so that our consumers can see what we do a lot faster.
Tell us about the recent deal with Sprint to offer an HTC smartphone with high-end sound from Harman Karman.
As background, I don’t think we need to do everything ourselves. I want to put our precious dollars into our core competency and collaborate with partners outside of the company for other things. Last month we launched the world’s first smartphone with full audio capability. That was a collaboration between the Swedish CEO from Spotify; the Taiwanese CEO of HTC; an American-born CEO, Dan Hesse, of Sprint; and Indian American Dinesh Paliwal of Harman. We four put our goods on the table. We bring the best audio technology, called Clari-Fi, which restores the original recording studio quality lost in compressed music. This is the first time it will be available in the mobile market.
What’s your strategy for the automotive business?
When you sit in your car, the command center is in front of you: the instrument cluster, the odometer, the gas meter. You have a screen, most likely, where you see your radio, your navigation systems and other functions, like rearview and front-view cameras and a few other things. We’re developing natural-language capabilities to control all of this. English, for instance, is spoken 560 different ways around the world. We all speak with very heavy accents, confounding voice recognition systems. Our systems will work with the cloud and figure out accents in real time. Once we perfect that, you’ll have total command in the car, as if you’re speaking to your children and they understand every word you say. People will be able to update Facebook and Twitter, all without having to move their hands from the wheel or their eyes from the road.
How do you work with Silicon Valley?
Smartphones are getting smarter and a lot more capable than five years ago, featuring functionality that in the past was only possible through the infotainment system in the car. Automakers, us, Apple and Google are all at a crossroads. People are constantly accessing, checking, googling, Instagramming, Facebooking. But when they do that in a car, it’s dangerous. At the same time, you cannot deprive people of gadgets that are at the core of their lifestyle. Many people in LA spend 15 to 18 hours in a car in a week. Tell them that they can’t put that precious private time to good use. We are solving that problem by working with Apple, with Google and taking some of the most popular applications and rewriting them in an automotive grid environment.
Meaning you can’t have any bugs?
Exactly. Car companies are rightly very paranoid that one accident would create havoc. Car companies are asking us to be a bridge between Silicon Valley and them, because life cycles of cars are eight to ten years. The life of a handheld device is 12 to 18 months. So there’s a big gap, No. 1. No. 2, the ecosystem of a handheld device and the ecosystem of a car are like night and day in complexity. And, of course, cars are life-threatening. We’re using our unique knowledge of that ecosystem to be a bridge. We actually take unique applications like Apple’s CarPlay and integrate them into your car. Apple’s and Google’s innovations are very healthy for us and for our industry. They’re creating tremendous buzz and awareness of what is possible to have. That’s creating more business for the car industry and for us to bring more and more applications to market.
But at the same time, these companies may be competing with you.
Yes, headlines these days say that Apple and Google are getting into the car. What does that mean for companies like Harman or others? I have a positive view. The more we collaborate with them, the more business will grow for us. • •
Follow Julie Segal on Twitter at @julie_segal.
