Specialty Lines Aid Western Digital
It’s no secret that high-tech industry has attracted more than its share of eccentric chief executives.
Apple Computer had megastar Steve Jobs. Atari Corp. had flashy, flamboyant Nolan Bushnell and Advanced Micro Devices has party-loving Jerry Sanders.
And then there’s Western Digital Inc., the computer parts maker. It has Roger Johnson.
Some employees at this Irvine-based company jokingly wonder whether their strait-laced, 52-year-old boss wears a white shirt and tie to bed.
But the back-to-basics, buttoned-down approach Johnson brought to the company five years ago has paid off too handsomely to be taken as a joke. Under Johnson’s direction, Western Digital has been quietly transformed from a scatter-shooting, jack-of-all-electronics firm to a highly disciplined, tightly focused supplier of just a few personal computer devices, many of which are the leading sellers in their markets.
“He’s not flamboyant and jet-setting, and neither is the company,” says Kathy Braun, Western Digital’s vice president for storage products. “We’re solid, and we stick to the rules. And that’s not so bad, either.”
Indeed not. At the same time that many American chip makers have fallen on hard times because of increasing foreign competition and sluggish worldwide sales, Western Digital has enjoyed high-flying growth, increased market share and record earnings. For the current fiscal year ending June 30, analysts are predicting sales will approach $445 million, up from $280 million in fiscal 1986. They estimate profits will surpass $40 million, about double last year’s record.
Sales could top the $1 billion mark by the end of the decade.
While high-tech turnarounds are becoming commonplace, Western Digital’s transformation stands out because it has coincided with increasing Japanese domination of the semiconductor business. Further, the strategy that Johnson has orchestrated over the last five years, experts say, shows that American chip makers can avoid bone-crunching competition from Far Eastern manufacturers by using their technical superiority and marketing savvy to sew up speciality markets.
To be sure, Western Digital, which collapsed into Chapter 11 bankruptcy reorganization 11 years ago, is by no means immune to the threat posed by the low-cost, high-volume Japanese chip makers.
The company’s strategy requires a steady stream of product advancements and continued pampering of its existing customers, a list of which reads like the “Who’s Who” of the computer industry. A prolonged downturn in personal computer sales, a miscue on a new technological development or a defection by a major customer, such as IBM, which accounts for more than 25% of the company’s sales, could be damaging.
Equally ruinous, Johnson says, is getting trapped by your own outdated ideas. “You get into more trouble falling in love with your plans and technology than you do changing them,” he said.
Johnson’s Key Changes
In fact, Western Digital’s success since emerging from bankruptcy in 1978 has come from the changes Johnson has made, and continues to make.
The key change, both insiders and outside observers agree, was the company’s move out of the traditional chip-making business five years ago. Although the company still churns out millions of tiny silicon wafers each year at its plants in Irvine, Ireland and Puerto Rico, more than 85% of them are never sold simply as semiconductors.
Instead, the wafers are the raw materials for the company’s lines of printed circuit boards--the hard, plastic-like sheets that combine chips and other electronic pieces with elaborate microcircuitry into a single device that helps computers perform specific tasks.
Western Digital makes three different types of boards.
Its major line, and the source of about two-thirds of corporate revenues, are boards that control the storage and flow of data within computers.
A second product line controls the flow of information among personal computers, a swiftly developing market also known as “area networks.”
The company’s third, and newest, product line controls how personal computers create charts, pictures and other video graphics.
Set It Apart
The switch into the board business didn’t just give Western Digital entree to a higher-priced line of business. It also permitted the company to create products that set it apart from competitors and to give customers one-stop shopping for controller circuitry.
“They made it easier for the customer,” said Daniel Klesken, an analyst for Montgomery Securities in San Francisco.
The strategy also made it easier for Western Digital to keep its customers, since they depend on the company not just for its chips, but for the extra circuitry and software the company adds to the boards.
Another important element in Western Digital’s turnaround has been its willingness to design and engineer its boards to meet specific customer requirements. The service, while requiring extra time and attention, has bred close working relationships with many customers that aren’t easily broken by competitors, particularly mass-production manufacturers in the Far East.
Design service has become so important that Western Digital is often entrusted with advance prototypes of still-secret computers to aid its work. For example, IBM is said to have left under guard a model of its powerful XT personal computer at the Irvine headquarters several years ago while company engineers developed a storage controller. Business with the computer giant today exceeds $75 million annually.
Although the combined $1.5-billion-a-year value of Western Digital’s three circuit board markets today is a fraction of the estimated $28-billion worldwide chip market, the three are among the fastest growing segments of the semiconductor industry.
By the end of the decade, analysts expect the three to have a combined sales potential of more than $4 billion. And by then, Johnson expects Western Digital to be generating sales of $1 billion a year.
Wall Street investors and analysts appear impressed. The company’s stock, which had been trading in the mid-$7-a-share range in late 1985, now hovers in $30-a-share territory. Analysts have been generous with their praise.
“The ‘value-added’ products are what have made the company,” says William McClean, an analyst with Integrated Circuit Engineering, a market research firm in Scottsdale, Ariz. “Western Digital isn’t pretending to be a ‘Top 10’ chip maker. They’ve decided to concentrate on boards.”
It was not always that way.
When Johnson joined the company in mid-1982, Western Digital had several separate divisions with no single focus. One division built personal computers for scientists. Another wrote sophisticated military software. One more offered consulting services. And still another made chips.
About the only thing the company didn’t make, insiders still joke, was money.
Within months of his arrival, Johnson closed or sold most of the divisions, laid off about 25% of the work force and, after evaluating the company, decided to focus on two little-noticed markets: storage and communication controllers. Putting the controllers on printed circuit boards followed two years later.
In early 1986, the company moved into the retail “after market” with its storage controller boards. The strategy was to “leverage” the company’s investment by giving it additional sales outlets. For its first product, the company wrapped its newest controller board in some extra-fancy packaging to appeal to retail shoppers.
When sales took off beyond expectations, the company introduced an entire line of retail devices that allow personal computer owners to upgrade their machines with the latest equipment, much as auto owners do by adding fancy stereos and the like.
Although the retail business now accounts for about 25% of corporate sales, the company’s focus has not wavered from its computer-building customers. “Our core business is still providing leading-edge products for our manufacturing clients,” Johnson says. “But, by definition, every time I do that, there’s an installed base that doesn’t have this nifty new product.”
Johnson is perhaps most proud of the fact that the retail revenue has required very little new corporate investment. The additional sales, he is fond of saying, are being “leveraged” out of existing manufacturing operations.
While Johnson was not the first Western Digital executive to see the sales potential in the retail arena, insiders credit him with focusing senior management on the need to expand the company’s distribution network to increase revenues and reduce its reliance on the volatile market for new personal computers.
“He plays all the angles,” says Edward Marinaro, Western Digital’s chief operating officer. “You can just see him mentally turning a cube to see all the sides. He wants to get the most out of what he does.”
Johnson’s management style and philosophy has evolved over the last two decades from a series of ever-rising executive posts at a variety of electronics manufacturers. He got his start at General Electric Co. in 1956 and stayed there for the next 13 years before moving to Singer Co., Memorex Corp. and finally to a small software house later bought by Burroughs Corp.
When Johnson joined Western Digital in 1982, he was the company’s president and chief operating officer and second in command to then-chief executive and chairman Charles Missler. A year and a half later, when Missler resigned to take the helm of Helionetics, the troubled Irvine defense contractor, Johnson took over the top spot. He was named chairman in 1985.
While at General Electric, Johnson says he noticed that most managers acted like elephants, unable to see what was happening on the ground and likely as not to squash good work under their clumsy weight. According to a story he relates when asked about the several dozen elephants lining his office shelves, Johnson decided early in his career never to become an elephantine executive. Friends and co-workers have given him elephants over the years to remind him of the pledge.
Within the company Johnson is roundly credited as its best strategic thinker and the person responsible for teaching the rest of senior management how to think strategically and how to sense opportunities within existing markets.
One of the latest strategies to emerge from this process is a plan to combine all three of the company’s controller chips--storage, communication and video--on the circuit board containing the personal computer’s microprocessor, the so-called “mother board.”
Analysts say the plan, which is nearing the implementation stage, would make Western Digital the first company to combine its custom chips with an off-the-shelf microprocessor on a mother board. They predict lively sales.
The major advantage of the move is that it saves precious space within the computer by combining four functions, which now require separate territory, on a single board. Further, the strategy drastically reduces the number of components computer makers have to worry about gathering and installing.
Although the strategy seems too simple to have been overlooked for so long, analysts say the plan requires “surface mount technology,” an advanced manufacturing capability that few U.S. companies besides Western Digital have.
The technology, which Western Digital invested about $25 million to install in its three board-making plants, uses sophisticated robotic equipment to affix chips to the surface on the printed circuit board. The system represents a major improvement over conventional methods, which push the tiny wire legs encasing each chip through pinholes on the boards, because both sides of a printed circuit board can be jammed full of chips and circuitry, doubling the use of each board.
“It’s a good strategic move,” says market analyst McClean. “There’s more profit potential, and it’s bound to give the company a differential advantage against its competition.”
But a question lingers. If the company is moving from printed circuit boards to mother boards, can a leap to making a fully outfitted computer be far behind?
Johnson winces at the question, remembering the company’s history and similar jumps by other component makers. “I say ‘no.’ Just because we know how to make the pieces doesn’t mean we know how to put them all together,” he says.
WESTERN DIGITAL’S EARNINGS
Fiscal REVENUES EARNINGS Year in millions in millions 1981 $26.7 $-.6 1982 $34.8 $-7.1 1983 $50.5 $1.5 1984 $113.5 $7.8 1985 $177.3 $-4.6 1986 $279.4 $21.5 1987+ $445.0 $44.5 ended June 30
+ estimate by analysts
