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Into Plowshares
Defense-oriented Israeli industries are revamping management
and marketing approaches in a bid to survive in the civilian sector.
JENNIFER FRIEDLIN SPECIAL TO THE JEWISH NEWS
ack in 1966, when he
founded Elron, Uzia Galil
envisioned a company that
would develop both mili-
tary machinery and the mini-
computer.
With separate assembly lines
working under the same roof, the
company would simultaneously
break into the defense industry
and become a leading player in
the fledgling personal computer
market. Or so he thought.
In reality, things turned out dif-
ferently. Indeed, though Elron's
highly skilled engineers had the
know-how to make the company
a contender in what is today a
multi-billion dollar mini-comput-
er market, Mr. Galil says it was
his naivete as a manager that
caused his dual vision to fail.
"If we were structured along
two separate companies, and the
two entities were dedicated to
producing different products, we
probably would have been a main
player in mini-computers today,"
B
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says Mr. Gall, who ultimately
turned Elron into one of Israel's
largest holding companies, with
stakes in both defense and civil-
ian businesses.
Recent years have been tough
ones for the defense industry.
The fall of the Berlin Wall
sounded a death knell for many
aerospace, munitions and arma-
ments contractors around the
world. In Israel, military manu-
facturers had already suffered
a blow of their own when the
Iranian market collapsed in the
aftermath of the Shah's downfall.
As the worldwide defense bud-
get continues to shrink and mil-
itary-goods manufacturers scour
the civilian market for alterna-
tive sources of income, many com-
panies are relying on trial and
error to learn what Mr. Galil al-
ready knows: Sword producers
can't enter the plowshare mar-
ket without dedicated manage-
ment teams armed and ready
with feasibility studies and busi-
ness plans.
Take TAAS. The Israel De-
fense Ministry's veteran arma-
ments manufacturer, which has
"But in those cases where the
technology applied for military
systems is identical to commer-
cial systems, they have been suc-
cessful."
However, even if defense con-
tractors can develop products for
the civilian market, they may still
have problems making the right
contacts and developing effective
channels to make headway in the
market.
"The civilian market requires
a different culture," says Yona
Yahalom, TAAS's director of cor-
porate business development,
adding that the company has
shed virtually all civilian prod-
ucts. "Defense executives don't
know the culture."
While both military and com-
mercial companies aim to devel-
op top products that can earn a
significant market share, the
ways in which they go about do-
ing this differ dramatically. Un-
like civilian companies, that must
identify a niche and then create
products to satisfy a need in the
marketplace. Defense companies
tend to be customer driven.
When a government
puts out a bid for new mis-
siles, manufacturers may
spend up to $1 million de-
veloping a tender-winning
corporate presentation.
Contracts in the defense indus-
$30 million market. Inevitably, try tend to extend over several
the plan failed. An attempt to en- years and once a company wins
ter the medical electronics field a contract, it will spend as much
with a line of ultrasound prod- money as it takes to satisfy its
ucts also backfired when compa- customer.
"The modus operandi of a de-
ny executives realized they had
fense company is primarily to
no expertise in the field.
Even Elbit, one of the sterling achieve a certain target within
holdings in Mr. Galil's portfolio, certain specifications," Elron's
got ensnared in the same trap. Gall! says. "If you make the best
The company tried everything missile but you overspend, maybe
from acquiring a medical diag- somebody will be upset, but so
nostic imaging company to man- what. Money isn't the object."
Most defense companies pay
ufacturing televisions. But after
a number of years of recording less attention to their bottom
mixed results, Elbit decided that lines than commercial companies
the only way to leverage its because governments — which
strength was to focus on the sep- are their main customers, and of
arate industries, and in late 1996, ten part- or full owners — hay(
the company became three enti- a vested interest in making surf
ties, focusing on electronics, de- they turn out the most dynamic
fense and medical equipment.
and advanced weaponry.
TAAS accumulated $1.5 billiol
Defense companies have not
succeeded in understanding the in losses between 1985 and 199 1
way the commercial market op- and still received governmen
erates. "Experience around the hand-outs of $800 million fro
world shows that if a company is 1993 through 1995. Arms devel
making tanks, machine guns and oper Rafael, which has a histor
missiles and wants to go into of financial problems, is part arc
kitchen utensils, it won't be suc- parcel of the Defense Ministry
cessful," says former Israeli De- while Israel Aircraft Industrie
fense Minister Moshe Arens, (IAI), a government-owned corn
himself an aeronautics engineer. pany which hopes to enter th
been registering non-stop losses
up until 1996, initially took it for
granted that the civilian market
would generate profits. And so,
several years ago it opened pro-
duction lines that made locks,
chemicals, sporting guns, car-
safety devices and building ma-
terials.
All those projects failed.
Their hunting rifle had a bar-
rel that overwhelmed recre-
ational hunters and marketing
directors simply didn't know how
and where to sell the other prod-
ucts.
El-Op, a leading manufactur-
er of laser-based night vision and
infrared equipment, also floun-
dered in the civilian market.
Thinking it could employ its
imaging technology to scan ce-
ramic tiles for cracks, the com-
pany, which was successful in the
military marketplace, decided to
try its luck. Without conducting
market research, El-Op set up a
production line to enter a tiny