Class act Featured

8:00pm EDT October 28, 2006
 Some of Kennametal Inc.’s employees get a surprise when they take a class in lean manufacturing methods at the company. The instructor isn’t a consultant or even one of the company’s own engineers. Instead, they’ll find Carlos Cardoso, the company’s president and CEO, at the front of the classroom.

“When we talk about lean, I’m Green Belt certified, I’ve been practicing lean for 15 years, so I can talk to anyone about lean, and I can talk to our employees about lean.”

It’s not a cost-cutting measure, not by a long shot. For Cardoso, the choice to teach the class himself sends a powerful message that reverberates throughout the organization.

“After that day and a half, when those people leave, there is no question in their minds that lean is important to this company,” says Cardoso. “No. 2 is they better learn lean because the CEO knows lean, and although the class is only 25 people, you know that five minutes after they enter that class or by the first break, a few thousand people know that I’m teaching that class.”

Cardoso lives the Kennametal Value Business System, or KVBS, when it comes to running Kennametal, a company that posted $2.3 billion in revenue in fiscal 2006.

Lean is one component of this management operating system that Kennametal and Cardoso use to guide the company. KVBS applies best practices and corporate values in six key areas of the business. In addition to lean, KVBS includes processes for mergers and acquisitions, strategy, talent development, customer acquisition and product development.

“One of my philosophies is that successful companies need three things,” says Cardoso. “I think that if you have 60 percent of your employees that clearly understand the vision and strategy and know what they’re doing to accomplish that vision and strategy, that’s very, very powerful. The second piece is the company has the right processes to drive that vision and strategy and last, the company has the right people to drive that vision and strategy.”

Cardoso says KVBS addresses all of those factors and provides a unifying force and guide for business conduct for a company that has operations in more than 60 countries and is planning on more.

Cardoso’s mission is to revamp Kennametal’s deployment of operations globally to increase its share of revenue from its off-shore operations where markets are growing. Currently, 50 percent of Kennametal’s sales come from North America, 30 percent come from Western Europe, 20 percent from the rest of the world. Kennametal is rebalancing its revenue picture with the goal of deriving about a third of its revenue from each region, and it’s eyeing a more profitable mix of products by bolstering its advanced materials business, a smaller but more lucrative portion of its offerings.

Key to its strategy is not only a realignment of its portfolio of businesses-shedding operations that are non-core and acquiring businesses that complement its traditional strengths, essentially commercial machine cutting tools-but creating and fostering a corporate culture that makes Kennametal a truly global company.

Kennametal completed four divestitures, three acquisitions and has increased ownership in three additional companies since Cardoso became CEO in January, some already under way when he took the helm, but were quite an accomplishment in any case. He attributes much of the swift progress to the application of the processes of the KVBS system.

“The CEO can move quickly and confidently when he truly believes that the company’s strategies are sound, the team is world-class and the supporting processes are robust,” says Cardoso.

He also believes that, as with teaching lean, it sends a strong message across the company.

“I have this expression that people listen to what you do, not what you say,” says Cardoso. “I also think it is imperative that the CEO sets the tone through personal example. If I move decisively to execute on decisions, my leadership team feels confident in doing the same-and in fact they see that it is the expected behavior.”

Talent development
Cardoso didn’t invent KVBS-it was developed over several years by a team at Kennametal while he was its COO-but he might be one of its biggest fans and certainly a beneficiary of it.

An effective succession plan, developed using the KVBS talent development process, made his transition to the CEO suite at Kennametal a smooth one.

Last year, Markos Tambakeras, Kennametal’s current chairman of the board, announced that he would step down as president and CEO on December 31, 2005.

“The board chose me as his successor and what followed has proven to be a seamless transition with no loss of traction or momentum on any front,” Cardoso says. “This successful transition at the top of the company was no accident. My own positions at Kennametal had been consciously designed to prepare me for the roles of president and CEO. This type of proactive succession planning is a key component of our KVBS talent development process.

“Our talent development process encompasses hiring the best person for each position, tying each person’s performance objectives ultimately to the CEO’s performance objectives, paying for performance, and helping each person develop in his or her Kennametal career. Globally we spend about 2 percent of revenues on development and it pays off in a motivated workforce and a deep bench for many key positions. This means that when key individuals leave Kennametal or take other internal assignments, we have the bench strength to keep up our momentum without missing a beat.”

Easing acquisitions
Applying the KVBS to Kennametal’s current strategy helps the company avoid bad decisions as it decides to sell and acquire companies to fulfill its goal of redistributing its business globally and bolstering its profitability.

“It is very true that the wrong acquisition, probably more so than the wrong divestiture, can endanger shareholder value,” says Cardoso. “However, I will go back to what for me are the three basic components of a great company-the right vision and strategies, the right processes to support the vision and strategies and most importantly, the right people to implement the processes.”

All of three of those, Cardoso points out, are developed using KVBS, and the process of evaluating the merger or acquisition deal comes out of it as well.

“A Kennametal growth strategy is to aggressively grow share in emerging markets so that in just a few years these geographies represent a third of our total business,” he says. “We also have said that we will grow our advanced materials business to represent 50 percent of our total revenue. Every time we consider an acquisition, we go right back to these growth strategies for guidance. If the proposed acquisition furthers the strategies and falls within our core competencies, then we proceed on through the steps of the mergers and acquisitions process.

“So, as the CEO, I make the final decision, but I do that as the head of a strong global team that is implementing our corporate strategies through our world-class processes. The final go or no-go decision on an acquisition, for example, is built upon a thorough execution of our mergers and acquisitions process.”

The KVBS process follows an acquisition from the beginning through the final integration of the acquired company.

“It is also important to have a plan for the brand or brands that you will acquire,” says Cardoso. “How will the acquisition fit into your brand strategy overall? Will sales continue as before or will the model change? Our integration process includes important elements such as a strategy for the brands as well as a robust 100-day plan that covers everything from communications to IT support and reporting.”

Cardoso has seen good companies acquire other good companies and then fail at the integration by moving too broadly on too many fronts, something the KVBS system helps Kennametal avoid.

“The buyer literally overwhelms their new company with helpful people and processes causing both morale and sales to suffer,” says Cardoso. “To avoid this, we assign a senior Kennametal integration manager who becomes the single point of contact after closing.

“This individual works with Kennametal and with the leadership of the acquired company to conduct an integration that makes sense for both businesses.”

A common language
The processes of KVBS are used to run Kennametal around the world, Cardoso referring to it as “our one common global language.”

Such commonality likely will prove to be even more valuable as Kennametal executes its growth plan, which includes global strategic acquisitions.

“You can probably count on your two hands the number of companies that have defined a way that is well-understood around the world,” Cardoso says. “(KVBS) was developed in the last three to four years by different people with different experiences that said we have to come up with a documented process as to how we’re going to run this company that’s well-understood globally. I think there are a lot of international companies, but I would say very, very few global companies.

“My definition is one that understands different cultures, that truly operates as one company throughout the world. I would say we have done that within the last three or four years.”

The ultimate barometer of how well you’re doing and how well your strategy is working, says Cardoso, is financial performance. He points to Kennametal’s strong performance quarter after quarter in key measures like EBIT and return on investment capital as evidence that the strategy is on track.

Says Cardoso: “Practically doubling EBIT and ROIC in just three years helps reinforce to us and to our stakeholders that we are on the right path. We believe that the same proven strategies, executed with speed and urgency, will take us to our new targets and beyond. I think continuing to deliver on the financials is important, because they’re the scorecard.

“The financials tell you whether or not you have a good strategy, and whether or not you’re executing well against that strategy. To continue to drive financials going forward is key because it will continue to validate to all constituencies that we have the right strategy.”

How to reach: Kennametal Inc.,