Interview with Ray Stata
Ray Stata is co-founder of Analog Devices, Inc., based in Norwood, Massachusetts. As of 2009, ADI serves over 60,000 customers, has 9,000 employees and a market capitalization of over $6 billion. Mr. Stata received his bachelor’s and master’s degrees in electrical engineering from MIT. He served as ADI’s CEO from 1971 to 1996 and is currently chairman of the board. We met with Mr. Stata in Norwood to explore his thoughts on bootstrapping a start-up, leadership in innovative companies, and the challenges and opportunities of globalization.
Kaizen: You were injured playing basketball in high school in Pennsylvania, and that led to your going to the Massachusetts Institute of Technology?
Stata: Right. It was quite fortuitous that I jammed myself in a wall and injured my neck. So I ended up in a hospital for several days—in traction. Next to me there was an elderly gentleman who had spent his career as an engineer. By that time, as a sophomore in high school, I already was thinking about engineering as a career. I didn’t know much about engineering or anything about engineering schools. So I used this opportunity to quiz this guy. He told me a lot about what engineers do and about the best engineering schools.
What came out loud and clear was, “If you want to become an engineer and get an engineering education, there’s really only one place to consider, the Massachusetts Institute of Technology.” He said, “Just focus on MIT and go there; it’s the best.” I had never heard of MIT, but when I returned home I started reading up on MIT and set my sights on going there.
Kaizen: MIT is expensive, but you came from a family with limited means. How did you pay for your education?
Stata: Well, MIT has what they call a “need-blind admissions policy,” which promises that if you are admitted and you don’t have any money, you can still go. They have various means to help you through; loans, scholarships, and also back in those days they required you to work a fair amount—cleaning rooms, working in the libraries, whatever. You had to earn part of your keep. But nonetheless, you could go there without any financial resources, really. It’s one of the many great things about MIT.
It turns out that I had won a four-year NROTC (Naval Reserve Officers Training Core) scholarship. Unfortunately, MIT didn’t have the NROTC program. The other school, Rensselaer, that I considered and was admitted, did. With no money, it was a struggle to give up this scholarship. And if it hadn’t been for that chance meeting in the hospital and the advice I received, I don’t know that I would have had the perspective or courage to make that decision; but fortunately I did.
Kaizen: What is the most valuable thing you learned in college about how to be successful?
Stata: I come from small town farm country in Pennsylvania, where in our small high school I was top of the class. But you don’t know where you stand in the world at large when you live in Oxford, Pennsylvania. When I went to MIT, I found that everybody was like me—they had all graduated at the top of their classes. So I found myself competing academically with the best and brightest from around the world.
I soon learned for sure that I wasn’t the brightest of those who attend MIT. But on the other hand I learned I was bright enough to compete and do well. That gave me the self-confidence to always set ambitious goals and believe I could achieve them.
Kaizen: Your education was in electrical engineering—did anything in your formal education help prepare you for your career as an entrepreneur and business executive?
Stata: Yes. There were many things. For one thing, discipline and hard work are essential to survive and succeed at MIT. It is a grinding experience. I learned to use my time wisely.
And, of course, problem-solving skills and analytical thinking are fundamental principles of an engineering education. And for me, electrical engineering was the technology base for my company, Analog Devices. Being well grounded in the technology gave me a bottom-up understanding of our products and how they were applied by our customers.
And besides that, MIT—only a few years before I went there—made a major shift by introducing humanities as an important component of undergraduate education. For me, the history of Western Civilization was totally captivating and fascinating. It introduced me to philosophy and to the great thinkers of the ages, and got me started on a lifelong process of learning more and more about our intellectual heritage and about the human side of the equation and of thinking more deeply about principles, values and the purpose of life.
The other thing about MIT is for a long time it has been a hotbed for entrepreneurship. So it’s like—monkey see, monkey do. If you see others start companies and become successful, you say, “If they can do it, so can I.” Whereas, if you don’t see that up close and personal, there’s a fear and a mystery about how to do it. Can I do it? The entrepreneurial spirit at MIT gives you confidence. If you want to start a company, just do it.
Kaizen: After receiving your bachelor’s and master’s degrees from MIT in the late 1950s, you went to work for Hewlett-Packard, mostly in sales and marketing. What did you learn, good or bad, from your experience at HP?
Stata: I had decided early on, even in high school, that I wanted to start my own company someday, primarily because I had an aversion to authority and I wanted to be my own boss. Therefore, when I got out of MIT, I wanted to learn about business, so I picked what was clearly one of the premier corporations in America at that time, with great leadership. I took a job in sales, because I thought seeing business through the eyes of customers was the best way to get a perspective of what makes business tick.
Now it turned out, but I didn’t know it at that time, that Hewlett-Packard was a pioneer in adopting the stakeholder model. That is, the purpose of business is not just about creating stockholder wealth. It’s about meeting the needs of all the constituents—employees, customers and stockholders—in a scenario where everybody wins. HP was also one of the early companies that embraced [Douglas] McGregor’s ideas about the human side of enterprise—Theory Y versus Theory X—a cultural belief about people, that they’re innocent until proven guilty, that they want to do a good job if given the opportunity and resources, and that they are honest and ambitious, that you don’t have to beat them with a stick to get them to perform. Hewlett-Packard really embraced these principles.
So for me, HP was my mini MBA program, where I learned by watching and doing. The culture I established at Analog Devices and the way I ran the company were built on my observations and experiences at HP. It was a great company.
Kaizen: Did you have natural marketing and sales talent, or did you have to work at it?
Stata: Sales was certainly not a natural talent. I’m basically an introvert and a nerd at heart. Sales responsibility forced me to learn how to engage with people and to hold productive conversations, as opposed to “You don’t bother me, I don’t bother you,” which is more the instinct of a nerd.
I also found that the particular style by which I engage with people worked remarkably well, although you would never consider me a typical salesman, particularly at that time. That is, I had a commitment to really understand the products, so that when I engaged with customers I brought value to the conversation. Also, I have a natural predilection toward listening and understanding customers’ problems and what they are trying to accomplish. Based on my knowledge, I was able to help them objectively understand the alternatives and what I had to offer. I learned you really don’t sell technology intensive products; you basically facilitate buying decisions.
Also, my way of being is to build trustful relationships through competence, honesty, sincerity and reliability, which are all valued by customers. All those things taken together worked out to where I wasn’t a bad salesman, although that wasn’t my natural talent.
Kaizen: After three years at HP, in 1962 you co-founded Solid State Instruments with Matthew Lorber and Bill Linko, whom you knew from MIT?
Stata: Right. We met at the Instrumentation Labs at MIT, where we all worked together. The Instruments Labs were pioneers in inertial navigation systems. Among other things, they designed the Polaris submarine missile system. So we all had experience with instrumentation and control systems.
We shared an urge to start a business, and so we said, “Hey, let’s just do it.” We didn’t have a strategy of any kind, really. We didn’t have any money. We just had an urge. We figured we’d find some way to exploit our common knowledge of instrumentation and control systems, in part by doing some consulting on the side and by focusing on gyro-test instrumentation.
Kaizen: At this point you were 26 years old. What was the most difficult thing about launching the company?
Stata: Well, first we didn’t have any money. We survived on sweat capital with no salaries. My wife didn’t know what she was getting into. I quit my job just as we were getting married and she supported me. But the biggest problem, which I didn’t understand at the time I jumped into the pond, was that we were a partnership. There was no real boss; we were all our own bosses, so to speak. And since we didn’t really have a clear strategy and direction for the company, there was continuous debate about what to do and how to do it, which led to dissention and the lack of alignment amongst partners. So, with no money, it was a real struggle.
Kaizen: SSI was later acquired by Kollmorgen Corporation’s Inland Controls Division. What about SSI was attractive to them? Was it that they wanted to have you three on board? Did they like your products?
Stata: We ended up developing a precision rate table for testing gyros, which used Kollmorgen’s direct driven motors and precision tachometers. This product was one reason they were interested, but more importantly their goal was to build an electronic controls division to complement their motor division. They saw us as a way to create a technology foundation to implement the electronic control side of their business.
Kaizen: So they offered you $50,000 each in stock, and you stayed on as Vice-President of Marketing?
Stata: Right. In 1963, $50,000 was a fair amount. I continued my focus on figuring out what products to develop and how to sell them. Matt Lorber basically drove engineering and Bill Linko was the division head with responsibility for operations. But still there was no real boss.
We signed a two-year contract and worked hard. As a matter of fact, we were successful in delivering what they wanted, so it all worked out for us and for them. And we learned a lot about starting and growing a new business, so we were better prepared the next time.
Kaizen: In 1965, you co-founded Analog Devices, Inc. with Mr. Lorber?
Stata: That’s right. Matt and I decided early on that we would do a good job in fulfilling our two-year employment contract, but beyond that we were going to look for an opportunity to start another company. Based on the dissention at Solid State Instruments we decided that three is a crowd, so we jettisoned one of our partners and brought it down to two.
Kaizen: How did the idea for the new company arise?
Stata: Matt and I spent nights and weekends talking about what to do next. At the time, as a company designing and manufacturing instruments, you had to build products from the ground up—that is, you had to design and manufacture all your circuits. One of the critical circuits in instrumentation is the operational amplifier, which amplifies and conditions analog-based signals. Operational amplifiers largely determine the performance of analog instruments and systems.
After a short time in business, new startups emerged that offered operational amplifiers as standard products, which we could buy versus design and make ourselves. We analyzed the economics of specialization and the economics of scale and concluded that as a small instrument company we would be much better off to focus our resources on instrument design and to buy components like op-amps. So we switched from make to buy.
That’s when the light went off. Wow, if we made that decision, why wouldn’t a growing number of instrument companies come to the same conclusion? And besides, as customers for these products, we had good insights into strengths and weaknesses of our would-be competitors and believed we could beat them. So we decided to go into competition with our suppliers and design and manufacture operational amplifiers, which we already knew how to do.
Kaizen: You had some capital from the sale of your first business, SSI. Did you need to raise more?
Stata: We didn’t, as a matter of fact. Once we decided that op-amps would be our next business, we hired a consultant even while working at Kollmorgen to develop a line of products, so that when we opened the doors, we would be ready to go. We helped on nights and weekends to give direction, but we were careful not to actually do the engineering work ourselves to avoid any conflict with our current employer.
With this head start, by the end of the first year Analog Devices was already profitable. Our nest egg from the sale of Solid State Instruments was sufficient to get us to break-even. In those days, venture capital was virtually an unknown idea. Banks served that purpose. So we worked out a deal with the First National Bank of Boston to fund our growth. For every dollar we earned, the bank would loan us a dollar, which is like a one-to-one debt-to-equity ratio, unheard-of these days. We essentially bootstrapped the company’s growth with bank loans. The implication of this approach is that you have to kill to eat—every day you’ve got to earn those profits.
We were growing 80-90% a year and making good money, because it was a virgin market and we had superior products and better sales and marketing. We went public in late ’68, just four years after starting the company. The primary reason for the IPO was not to raise money, but to facilitate the exit of my partner from the company.
Kaizen: What was your initial division of labor with Mr. Lorber?
Stata: Matt was Mr. Inside; he did the engineering and manufacturing thing. I was Mr. Outside, deciding what products we should design, driving the sales and marketing processes and tending to the administrative aspects of the business.
Kaizen: There were some difficulties that led to Mr. Lorber’s wanting to leave in 1968 or 1969? What happened?
Stata: We had a pretty clear strategy; we knew what we wanted to do and we were being very successful at doing it. The major problem was that as soon as we got to the point where the company was worth anything, Matt wanted to sell but I wanted to continue to build the company. That was the fundamental problem.
And besides, it was still a partnership. We called it a two-headed monster since neither accepted the other as the boss. As a myriad of little problems arose along the way, there was no authority to resolve them, so we spent a lot of time hassling over little things. It worked and we were friends, but it was hard. Successful partnerships are rare.
The problem was resolved by Matt selling half his stock at the IPO and leaving. It is unusual for a founder to sell shares at an IPO and leave, but there was a hot IPO market at that time.
Kaizen: After Mr. Lorber left, you wanted to concentrate on development and marketing, so you hired a president to run the company. Why didn’t that work out?
Stata: Neither Matt nor I had a very clear idea of what the CEO of a public company was supposed to do. We both felt we needed a more experienced executive. We thought that the important stuff was deciding what products to make, getting them designed, getting them manufactured, and selling them—for us, that’s what business was all about. My view was that the CEO was like a super clerk, an administrator that took care of assigning the parking spaces and raising money, you know, administration. That is how naïve I was.
So we hired what we thought was a competent executive, but he was not technical, and didn’t really understand our business. And as we got into it, surprise, surprise to me, he began to assert himself in areas where I had ownership, and where he didn’t really have any understanding. This led to conflict and again to questions about who had the authority to decide what. But in this case, the CEO had a clear idea about who had the authority.
This forced me to do some soul searching. My motivation in starting a company in the first place was that, as I said, I have a significant aversion to authority and I don’t like being told what to do—I want the freedom to control my own destiny. It’s built into my DNA and personality. So I realized that if I wanted to avoid the hassles with partners and now with the CEO, I had better figure out what a CEO is supposed to do and learn how to do it. So I went to the board of what was now a public company and convinced them I could provide better leadership than the person we had, especially since his deficiencies were beginning to show.
Even though I didn’t have any experience as the CEO of a public company, the board gambled and put me in charge.
The first thing I did was to stand up in front of all the employees and say, “For all these reasons we’re going to change leadership. I don’t have a clue about how to be a president, but I’m going to take the next twelve months to learn. And if at the end of that twelve months you guys collectively decide, or if the board decides, that I’m not the person who can provide leadership, I’ll step down. But in the meantime, while I’m learning, you’ve got to help me.” So everybody dug in, and there was then no way I could fail. Over the next twelve months I learned how to be a president and that process has continued for four decades.
Kaizen: Concurrently, ADI then shifted from assembling components to manufacturing high-performance linear integrated circuits. What convinced you that that was an important move to make? What data and trends were you looking at?
Stata: Just two years after we started Analog Devices, the first monolithic integrated circuit (IC) operation amplifiers (op-amps) were introduced to the market. The way we manufactured op-amps was to manually assemble resistors, transistors and capacitors on printed circuit boards. It was a very labor-intensive, primitive approach to manufacturing. With semiconductor-integrated-circuit manufacturing, you automatically fabricate these components through complex materials processing techniques with little labor required. While the manufacturing cost of IC’s (Integrated Circuits) was more than an order of magnitude less, performance wasn’t adequate to meet the requirements of our markets. But each year, the performance of linear IC’s was dramatically improving.
As I dug into it and learned more about IC’s, I concluded that, while we would continue to do well for the foreseeable future, eventually IC technology, because of its dramatically lower cost, would take over. I was not sure when or exactly how, but for me the hand writing was on the wall; either we learned how to design and manufacture linear IC’s, or we would have a short-lived history.
Kaizen: But it was hard to sell that idea inside the company. Why?
Stata: Nearly everyone in the company and on the board disagreed. We were very successful, growing rapidly, and making high profits. It was a classical case of what [Clayton] Christensen at HBS later called the innovator’s dilemma: Why would you want to re-direct resources to a riskier business, about which you know little, when your current business was so successful?
Another argument from our engineers was that IC technology would never perform well enough to meet our customers’ needs.
Others argued that large semiconductor companies already had a head start. How would we ever catch up?
The financial types argued that we didn’t have the financial resources to invest in expensive manufacturing equipment and compete with the giants.
And finally, the clinching argument was that nobody in the company knew anything about how to design or manufacture IC’s.
By then we were a public company. The board was unanimous in saying, “Ray, this is just too risky. We can’t do it.”
Kaizen: To make it happen, you set up a separate company, Nova Devices, with a can’t-say-no offer to ADI?
Stata: Right. I couldn’t accept their conclusion. The greater risk would be to do nothing. So I make an offer the board could not refuse. That is, I agree to pledge my Analog Devices stock to fund a group of engineers from a Boston company who I knew wanted to start a linear IC company. The deal was that the new company, Nova Devices, would design and manufacture the IC’s and Analog would sell them. If Nova Devices succeeded, Analog Devices would have the option to buy at a fixed option price with no gain to me in order to avoid a conflict of interest. If the company failed, I would suffer the loss.
The board thought I was foolish, but they couldn’t say no. Fortunately, it worked, since, as I believed, IC’s did eventually completely obsolete our early manufacturing technology.
Kaizen: But when you were making that decision there was a confidence in your own judgment about what the trends were? You didn’t really think it was going to fail?
Stata: Yes, I believed we could do it, but still there were big risks. I correctly observed that we didn’t need to worry about competition from the large semiconductor companies since their strategy was to supply what we called “jelly beans,” that is to accept whatever performance they could achieve from standard, high volume semiconductor manufacturing processes. Our challenge would be to figure out how to compensate for the variances in semiconductor manufacturing processes in order to achieve performance acceptable to our customers who demanded performance and were willing to pay for it. To achieve high performance from our assembled products we had to manually select resistors, and then later we learned to sand blast thick film resistors to compensate for the variances of the discrete transistors we used. We were able to transfer this learning to IC manufacturing by depositing thin film resistors on the surface of the IC’s and then laser trimming these much smaller device structures. We would follow a market driven innovation strategy to optimize performance, whereas the semiconductor industry at that time was focused on manufacturing process innovation mostly to reduce cost. This lack of competition gave us time to work out more complex manufacturing techniques.
Kaizen: The idea worked, and at the same time the older, assembled boards were declining. Nova was then acquired by ADI, and became very profitable? At what point was it really clear that you had made the right decision?
Stata: Actually, the assembled products business continued to grow and make good profits for many years. But in a few years after Nova Devices had its IC fabrication facility up and running and Analog Devices had demonstrated success selling IC products, the risks declined to a point where our directors concluded, “Okay, let’s acquire Nova Devices and get serious about the IC business.”
Still within the company, the engineering community questioned if IC performance could ever catch up with assembled products. It took five to seven years before the nay-sayers finally surrendered, especially since there was a big learning curve to get the cost of IC’s to the point where profits were comparable to assembled products. Fortunately, assembled profits continued to grow and make money to support the IC learning curve.
Kaizen: You became CEO in 1971. Was it an easy transition for you personally?
Stata: Not really. I remember very vividly thinking, “How do I learn to become a president?” Fortunately, in digging around I found that the American Management Association had an organization called the President’s Association. The AMA reserved this program for presidents only, and particularly for new presidents. The program was developed and delivered by presidents who had gone through this learning experience themselves. It was a one-week course given in Acapulco. My wife and I hadn’t vacationed for a long while, so I figured what did we have to lose, although it didn’t turn out to be much of a vacation.
It was a marvelous learning experience. My mental models got much clearer: What is my job? How do I go about doing it? What are the important challenges in leading a company? This was my MBA program crammed into a week.
Even more important, I got acquainted with the most impressive instructor in the program who himself was a CEO of a modest-sized company. I invited him to become director of Analog Devices and he accepted. He became my mentor, and he also taught others over many years at Analog Devices what I learned about management and leadership in Mexico.
By the end of the first year, with the benefit of that experience and with the growing success of the company, everyone at Analog Devices, including the directors, had confidence that I could do the job and so did I. Over the next thirty years I continued to learn as the company grew and faced new challenges.
Kaizen: You are now CEO, and your job includes high-level management. Earlier you mentioned learning a lot at HP, and you have also said that running a company “is nothing more or less than meeting the needs of the employees for self-actualization.” What self-actualization needs do you mean here?
Stata: One of the most important constituents in the HP model are employees. In my view, if you satisfy ambitious employees, then in their own self-interest they will be motivated to meet the needs of customers and stockholders, particularly if you share the results of success.
The question is: What are the needs of employees and how do you address them? Maslow’s Hierarchy of Needs is the best model. At the bottom of the hierarchy are basic needs for survival, food and shelter, money to pay the bills, and also a sense of security about your job is important. The need for socialization through affiliation with interesting, thoughtful and caring managers and co-workers ranks high, along with recognition and rewards for achievement. But the last step of Maslow’s hierarchy, self-actualization, is the most important, especially for ambitious, professional workers. People want to reach their full potential and become all that they can possibly become. They value a work environment where they are not limited in terms of their growth and development potential, but rather are encouraged and supported to achieve their personal goals. Employees’ goals are best achieved in a company with a winning strategy that builds alignment and confidence in shared goals and objectives. Employees want a voice in deciding how to achieve their personal goals and the goals of the company.
Kaizen: You are known for your anti-authoritarian leadership style. And bright, innovative people don’t like being told what to do, so an authoritarian style won’t work well. How then do you lead with this leadership style?
Stata: You’re right. To some degree, nobody wants a boss. Everybody wants to do their own thing; they want to pursue their own purposes.
Prior to WWII the operative assumption of American management was that employees would and were expected to sacrifice their personal goals and interests for the privilege of working for a company and earning a living. That assumption began to breakdown in the ‘50s with greater education achievement and job mobility and with more women in the workforce as second breadwinners. Management has been forced to recognize that people have legitimate purposes of their own, and the onus shifted to management to help employees achieve their personal goals in order to retain the best and brightest.
The real challenge then is how to achieve alignment between the purpose of the whole, the enterprise, and the purpose of the parts, employees, teams, divisions, etc., voluntarily without heavy-handed command and controls. Management practices have been evolving over the past 50 years to address this challenge, for example the notion of shared vision within a culture which makes it clear that, as the company achieves its purpose, it is important that the people who make it successful will in the process fulfill their purposes as well. It’s okay, in fact desirable, for employees to have their own goals and purposes. The job of management is to merge the interests of the company with the interests of employees.
Kaizen: One element you emphasize here is listening skills—what goes into being a good listener?
Stata: You don’t come up with winning strategies by sitting alone in your office. You have to build on the knowledge and the intelligence that exists in your company and in the environment. By listening to customers and employees and learning, you sense and respond to change and opportunity, in contrast to companies and people who say: “I already know it.”
How the leader or leaders approach conversations can influence the listening skills of an organization. My approach, although I don’t always practice what I preach, is to listen first and then speak. I often say that if God had intended us to speak more than listen, He would have given us two mouths and one ear. It’s not natural to listen and then speak. Human beings aren’t built that way; they want to first speak and then maybe listen.
It takes discipline and practice to become a good listener. When you encounter views that are different from your own, your instinct is to shout them down and refute conflicting opinions. But it is more productive to inquire why/how others reach different conclusions. What are the facts and reasoning that lead to a different opinion? You have to stay open to the possibility that other views, if you understand them, may be better than yours. Or you may discover common ground that is better than your views alone. Or you may gain perspective to be more effective in your advocacy. But it pays to listen.
Kaizen: The CEO is also the big-picture decider and has to be decisive—at the same time, you have said that you must be open to the fact that you could be wrong. How do you do that?
Stata: Well that’s a continuing challenge, because on the one hand when you make a decision, you want to display confidence and enthusiasm for your position, you want to drive ahead without ambiguity. But on the other hand, as Andy Grove said in his book, Only the Paranoid Survive. There has to be coexistence of confidence on the one hand but concern on the other.
The future is characterized by a set of assumptions, not by facts. As the future unfolds you have to be fact-driven, and continuously monitor the facts to either validate your assumptions or raise questions about inconsistencies. Don’t deny the facts; respond to them. It’s what the Japanese call a “weakness orientation,” an openness to the possibility of being wrong and an orientation to always be looking for a better way.
Russell Ackoff, one of the great systems thinkers of our age, makes the point that you never actually learn from doing things right, surprisingly, because you already know it. Your greatest source of learning comes from making mistakes, but only if you admit the mistake, diagnose the reasons and learn from the experience.
You have to establish a culture where making and admitting mistakes is acceptable. This has to start at the top. The leader has to lead by example: “We thought we had it right. But as it turns out, here are the reasons we didn’t, and here is what we’re going to do to correct the situation. Incidentally, I take full responsibility.”
Kaizen: So when you have cases where there are disagreements within a company and the leader has made a decision, if the leader has communicated that he’s open to facts, open to change, then that’s going to go down a lot easier?
Stata: After listening to differing points of view, in most instances a group reaches a consensus so that everyone is happy and aligned with the conclusion. But if not, it is important that everyone signs up to support the conclusion with no second-guessing. But, after a reasonable time, new facts or information may justify a re-examination. You want everyone to believe that you will not deny the facts if the plans and assumptions are not holding up.
The resolution of differing points of view and process for reaching a consensus is itself a very important part of making decisions. If you enter a conversation, one group to another or one person to another, with an attitude of “I already know it,” then your only goal is to impose that view on others. But if you enter a conversation with the point of view of “This is what I think and why; tell me what you think and why,” you stimulate mutual learning that may lead to more informed judgments and decisions. So again, listening skills and learning to balance inquiry and advocacy are key to reaching and implementing the best decisions.
Kaizen: That comes up in customer relations as well?
Stata: Right. As I mentioned earlier, a lot of selling is not selling. It’s about listening to customers, learning their concerns and their needs, and then making offers. “I understand your issues. What about this? Would this work for you, or not?” But you have to build trustful relationships before customers will openly share their concerns that will permit you to make constructive offers.
Kaizen: Leadership also means handling strategic challenges. For example, ADI had great growth until the mid-80s—25% per year on average and by 1985 ADI’s stock was worth 35 times what it had been in 1975. But starting in 1984 sales suddenly went flat, and you had to re-strategize?
Stata: It was a crisis, because after consistent growth year after year, all of a sudden sales flattened, and our profits dropped. It was not a happy time. We had initially focused on instrumentation, military electronics, industrial controls, medical electronics, areas where high performance products were required, in relatively low volumes, but with attractive profits. That was the nature of our business.
But as peace broke out, military sales shriveled. The Japanese were invading many of our customers markets. The dollar was strong, which impeded exports. Everything was going wrong, not just for us, but for the entire American semiconductor industry.
That was the bad news, but for Analog Devices the good news was that, for the first time, there were new markets that in the past had no interest in the performance we could deliver—they just wanted jellybeans at the lowest possible cost—that all of a sudden needed what we had.
The first evidence was when Sony, with their compact disc players, came to us as the leaders in converter products, to discuss their needs for high performance digital to analog converters. They needed to get costs down, and we had integrated circuit converters that few others had. While they would buy millions, they would only pay $5 when we were getting $50 for 16-bit digital to analog converters from instrument companies, admittedly in much lower volume. So we refused. They went to our competitor, the only other company that could achieve this performance, and they said yes. Within a few years our competitor was cranking out these products by the millions and in fact selling them at $5 and making a profit. That was a huge wakeup call.
Kaizen: At that point, was it that you didn’t think you could do them for $5, or that it wasn’t worth your time to do them for $5?
Stata: Some of both. First we all thought, “Why sell for $5 what you can get $50 in other markets?” That’s great, except the market for the $50 ones was tiny and not growing. We had never made a million of anything. So we had to come to grips with the fact that, if you manufactured in very high volume, you could dramatically reduce the costs and the price. But to do it would require a dramatic transformation of the company.
Kaizen: So what changes did you as CEO decide the company had to make?
Stata: First we had to centralize manufacturing and learn how to manufacture in high volume with high quality. Previously, we had a highly decentralized structure, organized around technology. Every division had their own manufacturing facilities. Everybody did their own thing in their own way. But to achieve the cost required, we had to centralize manufacturing, introduce Total Quality Management techniques, and standardize our processes, which were seen as the antitheses of innovation, which had always driven our success. We had to accept the fact that innovation alone was not enough for continued success; we also had to excel in manufacturing.
There was huge resistance to making these changes. The people who were running the divisions said, “Unless I control my own manufacturing, you can’t hold me responsible for profits.” The engineers in the United States and Ireland, who were in fact competing with each other with different technologies, were now being told, “You’re all going to be part of the same product group, you’re going to use the same fab, and you’re all going to have to get along with each other.” They came back and said, “I don’t like those guys; they have a funny accent. But more important I can’t manage engineers, unless they’re within walking distance of my desk, let alone 3000 miles away. Remember, this is high technology. We are talking about managing highly creative people.” Of course, history has disproven these myths. But at the time, people felt deeply about their beliefs.
The hard part of making changes of this magnitude is unlearning the things that have made you successful and changing your beliefs about what is important and what is possible. The changes required were so dramatic that we created a motto: “Creating the new Analog,” which I used in meetings with employees around the world to explain what we were doing and why. It took years to pull it off, but we finally succeeded.
Kaizen: You mentioned that the changes in Analog were considered the antithesis to innovation. How did you maintain innovation in this new centralized and standardized environment?
Stata: It’s not an either-or world. It’s innovation and manufacturing excellence. Either one alone would not work in addressing the new high volume growth opportunities. So we had to evolve manufacturing excellence, in a way that it didn’t destroy our capability to innovate. That is hard to do, in fact so hard that the strategic thinking of that era was that companies had to make a strategic choice either to be an innovator or a low cost producer. You can’t be excellent at both ends of the spectrum. It starts with a change in mindset, that is, to believe that you can and must be excellent at both.
While we standardized manufacturing processes we still looked for opportunities to differentiate and to optimize product performance, not just cost. But no doubt, it takes greater skills to design breakthrough products when you are constrained to use standardized manufacturing processes. To attract and retain the very best circuit designers, we implemented a technical parallel career ladder early in the company’s history. Many companies have parallel ladders, but they don’t work, in the sense that engineers who want to make progress in their careers believe they have to become managers to achieve their goals. At Analog we’re saying, “If you want to continue to be a great engineer for your whole career, we’ll provide opportunities and rewards that are commensurate with managers if you ascend the ladder and achieve technical excellence.” The highest rank of the parallel ladder is Analog Fellow. Fellows at Analog do extremely well financially and they are recognized and valued not only for their technical contributions but also for their judgment and views about policy and strategy and how to make the company a great place to work.
To sustain an innovation culture when there are competing interests to optimize cost, you have to demonstrate in big ways and small that innovation counts. For example we spend 20% of sales on R&D. We hold a technical conference annually at which 1500 engineers from around the world give papers and learn from each other. It costs millions. Even in this disastrous year, where we are scraping to save every nickel, we didn’t cancel the conference. This spoke volumes about the importance of innovation.
As I have already said, how you respond to failure is critically important. As an innovative company we have to take risks. Not every program succeeds.
Kaizen: The transformation worked—by 1995 Analog Devices had 6,000 employees and sales of $941 million.
Thirty years earlier the company had been two guys working out of their basement. When you look back on that spectacular growth, how do you feel about your role in making that happen?
Stata: I never imagined we would become a billion dollar company. We just took it one step at a time, solving problems and addressing the opportunities that would take us to the next step.
I have a deep sense of pride, shared by everyone in the company, that we not only continued to grow, but that we emerged as the undisputed leader in high performance linear integrated circuits worldwide. That’s because we continue to attract and retain great innovators in our ranks and because we figured out how to turn jellybeans into high performance IC circuits long before anybody else did.
For me and many others, Analog has been a vehicle for personal growth and development. I was pushed by the company’s success to learn in order to keep up with the requirements of my job. As a result, I grew, as did many others, well beyond what anyone could have imagined possible. It is very satisfying to have seen so many people develop to their full potential and become leaders in our industry.
Kaizen: You’ve also received many honors: You’re a member of the American Academy of Arts and Sciences and the National Academy of Engineering, a recipient of the 2003 IEEE Founder’s Medal and of the 2008 ACE Lifetime Achievement Award from the editorial board of EE Times. Do those add to your sense of accomplishment?
Stata: Well, I certainly appreciate these honors, but what’s more important is my own inner sense of self-esteem for what I accomplished.
Having said that, I can’t deny that recognition is a basic human need. If we get recognition from people and organizations we respect, it reinforces how we feel about ourselves.
Kaizen: Looking back on your years as CEO, what was the thing you consistently enjoyed the most?
Stata: It’s really creating something that in some small way will change the world, by creating new market opportunities and new solutions for human needs. Entrepreneurship has always been the most interesting and exciting thing for me even as Analog grew larger. It doesn’t always work, but when it does work, it’s very satisfying.
Kaizen: Most companies fail as they get bigger—inertia, complacency, bureaucracy, leadership mistakes. How did ADI succeeded at avoiding those pitfalls?
Stata: We’ve had our share of mistakes and problems, for sure. But maybe one of the differences goes back to what I talked about earlier—a weakness orientation, a discipline to look at the facts, to not deny the facts, and the willingness and ability to change and respond as we see things in the world around us changing. Nothing fails like success. Unlearning is the most difficult part. Somehow we’ve been able to avoid getting hung up by past success.
I have also mentioned some of the challenges and approaches to keeping innovation alive. A big part of this is sustaining your capacity and willingness to take risk. It takes constant vigilance as a larger company to assure that everything doesn’t have to be perfect and guaranteed before taking action.
Kaizen: One bigger-picture survival issue is whether the United States will remain the world’s innovation leader. Around the world, where are the new rising centers of technological innovation? China? India? Brazil? Ireland?
Stata: The two that come up most often are India and China, and what role they will play in the world of innovation in the future. There’s no doubt that the United States has been and is still today the technology leader—we’re still way, way ahead.
But at the same time, these countries are continually learning and growing. They’ve got great universities that are getting better and huge populations from which to draw talent. So it is evitable that the technology gap will narrow over time. But in many ways we have met the enemy and it is us. It is what we do or don’t do that will make the difference. The thing I worry most about is the decay of our K-12 education system. By many objective measures we are losing ground. Also there is a disturbing erosion of America’s spirit of self-reliance, entrepreneurship and free market orientation.
Kaizen: You have made personal investments in India. Why India especially?
Stata: The IIT’s (Indian Institutes of Technology) are India’s premier technical universities, but, to a large extent, they have not played the role that MIT and Stanford have played in promoting entrepreneurship and economic growth. There is a group of professors at IIT Madras who, 25 years ago, went back to India after graduate education and work experience in America with the mission of making their university more like MIT and other great research universities in America. As you get older, you look at opportunities to make a difference. I thought if somehow I could help them achieve this important and ambitious goal, that will be very rewarding. That’s why I’ve done it.
Kaizen: The US’s two biggest centers of technical innovation have been California’s Silicon Valley and Massachusetts’s Route 128 corridor. The proximity to the great universities Stanford and Berkeley, MIT and Harvard have been essential here. One study I saw noted that in Massachusetts alone over 6,900 MIT graduates have founded companies currently generating over $164 billion in worldwide sales.
Stata: There is lots of evidence that indicates a strong influence of research universities on economic development for the simple reason that, on the one hand, they produce the graduates with the skills and knowledge to fuel the development of leading edge technologies and companies, and on the other hand, they generate knowledge and ideas that lead to new products and markets.
Today there are many excellent research universities in states other than in California and Massachusetts, so technology intensive industry is diffusing more broadly in America. Over time, we’ll see this model also working in China, India and many other countries around the globe. Fortunately, there is plenty of opportunity for everyone at the leading edge of technology.
Kaizen: Yet you worry that we are producing too few engineers. Why do you think this is so? Is that a problem at the university level or at the K-12 level?
Stata: The biggest problem is our K-12 education system. Our research universities are by far the best in the world. But forty percent of students who begin engineering studies drop out due to inadequate preparation in mathematics. If we don’t get that fixed, there is no way America can sustain leadership in technology-based industries.
Moreover, for a lot of complicated reasons, engineering as a profession is not held in high esteem in the same way as medicine, law and finance. Sixty percent of the students who attend MIT come from families where they are the first generation to attend college. Engineering has always been a primary career path for upward economic and social mobility in America. But second and third generation college going families don’t see engineering as attractive as other careers. In my opinion that is a distorted view. Science and engineering careers are very exciting. That’s the source of entrepreneurs who start and build great companies. And it doesn’t help that high school teachers and guidance counselors have no idea what engineers do, so students are not encouraged or inspired to explore engineering as a career.
As a result, not enough of our best and brightest are motivated or prepared to study engineering. And you have to be motivated, since engineering students generally have to work harder. Thus we find ourselves as a nation dependent on immigrants to staff our technical workforce, especially at the graduate level. Sixty to seventy percent of our engineering graduate students are foreign-born. As economies of developing countries improve, the best and brightest will stay home to study and work. That is a frightening prospect.
Kaizen: As globalization intensifies, the US is increasingly outsourcing not only manufacturing but innovation and design? When did that trend become noticeable?
Stata: Manufacturing outsourcing for high-tech companies started two or three decades ago. But over the last decade high tech companies started moving design offshore.
Analog Devices has established design centers in Shanghai, Beijing, and Bangalore. We did it for two reasons. Number one, to augment the long-term growth of our engineering staff. In the middle of a recession it’s hard to remember, but in the good times it has been a problem to hire enough engineers in America. We are establishing engineering design organizations in China, India and elsewhere to take advantage of the talent base, which is growing rapidly in these countries. In the short-term engineering salaries are less there. Overtime the salary gap will decline, but the talent gap will grow.
Number two, the markets for technology-based products is growing more rapidly in China, India, Brazil, wherever. For example, China today, is the largest market for cell phones. And these countries are making huge investments to build their infrastructure in communications, health care, energy, and transportation. To participate in this growth, you’ve got to have engineers who can speak the language and understand the culture. So in part it is long-term business development, and in part it’s long-term organizational development.
Kaizen: So we need more engineers, but we also need engineers with a broader range of knowledge and skills—what you call “Renaissance Men” engineers?
Stata: Right. We’re finding that it is very, very challenging to be at the top of your game as an engineer. First, the technical knowledge required is both deep and broad, often cutting across multiple disciplines. And products are so complex that it often takes large teams of engineers with different specialties working across international borders. That requires human skills and communication skills to encourage collaboration and manage teams with quite varied backgrounds and experiences. And engineers must understand the financial implications of manufacturing and product development cost, as well as customer requirements and where products should be positioned in the market with respect to competition. The most successful engineers truly are “Renaissance Men” and not just technical specialists.
Engineering schools are aware of these emerging requirements and they are searching for ways to enhance the human side of the equation, which is often characterized as leadership skills. But in general they are not happy with the results so far.
Kaizen: So your ideal college education would be rigorous engineering combined with business and liberal arts education?
Stata: The liberal arts component of education in engineering schools is extremely valuable, but it doesn’t bring closure on what you need to know in the same way as the technical side. When you graduate as an engineer, you have a body of knowledge that prepares you to go to work. The faculty thinks very carefully about how to integrate this body of knowledge into a coherent program. On the liberal arts side there is a smorgasbord of literature, history, music, economics, philosophy and whatever, without as much attention to how the pieces fit together. And that’s okay; there is value in accommodating a broad range of student interests. But at least some aspects of engineering education should focus specifically on what you need to know on the human side to be a successful engineer. It is hard to fit this broad education agenda into a four-year degree. So many engineering schools are concluding that it takes five years, a master’s degree, to prepare graduates to become professional engineers. Four years is still an adequate technical background for those who wish to pursue graduate programs in law, medicine, business or elsewhere.
Kaizen: In addition to all of the above, you have served on the federal Executive Committee of the Council on Competitiveness, you gave major funding for the Ray and Maria Stata Center complex at MIT, and you are currently mentoring and funding several entrepreneurial startups. Where does all of your energy come from?
Stata: Well, we don’t exactly know from where our motivations arise. They just happen to us. I can say I developed the capacity and discipline for hard work from an early age. No doubt this was influenced by the fact that I was raised in farm country where people work extremely hard and are very self-reliant. And I do have good health and stamina. But then there is the motivation to accomplish something in life that came from sources, which at least for me, I don’t understand.
Kaizen: Is it habit-driven or passion-driven that leads you to want to work hard?
Stata: I think it’s both. On the one hand, we do develop habits and/or inherit habits that take on a life of their own. A place like MIT, as I mentioned, forces you to be disciplined and work hard, or you don’t survive. That reinforced my natural inclination maybe to the point that it became an addiction, like the Blackberry. Who knows? But there is no doubt that I am a workaholic.
On the other hand, they say that some people work to live while others live to work. I find purpose, satisfaction and fulfillment in my work. So in that sense work is not work, it is something I want to do.
To return to Maslow’s hierarchy of needs and self-actualization, through work, I continue to learn and to develop in many different ways, I find ways to have an impact on the world around me and I’m able to enrich the experience and lives of those I care for. I can’t imagine life without work.
Kaizen: You also have a family, friends, and other interests, but each day has only so many hours. How do you approach achieving your career goals with achieving your other life goals?
Stata: That’s a continuing challenge. The most important thing I did to help with that dilemma was to have married a woman who has supported and encouraged me to do what I do. She took on a lot of the responsibility of raising our children and for looking after the necessities of life. She’s given me degrees of freedom that I truly appreciate and honor. Our success has been a true partnership. Without that support and without good health, it would not have been possible to keep up the pace of work.
What I’ve observed is that most of the successful people I see around the planet don’t have balanced work lives; they have a passion for work that dominates their lives. That’s not to say that family, children, grandchildren, hobbies, sports, vacations, travel are not important too. But when it comes down to it, most of their time is centered around their career and their work, because it’s so satisfying.
Kaizen: In closing, for younger people starting out, what is the most important thing they should know?
Stata: Well, maybe I can pick a couple. First, one way or other you’ve got to be good at something, even though that something will no doubt change over time. As you enter your career, strive to achieve excellence at whatever you do.
Back to some of the things we talked about, you soon find out that you don’t get very much accomplished in life on your own. Now there are exceptions, like musicians, artists and writers who can go off on their own and accomplish remarkable things. But most of us find that we accomplish more by working in concert with others to leverage our combined skills and competencies.
I’ve found that one of the most important factors in being a leader, or more generally in engaging with people, is to build trustful relationships. What does that mean? Trust is built on honesty, integrity, reliability, sincerity, competence. Conduct yourself so that people can depend on what you say and what you do, on the fact that you’re more often right than wrong, on the fact that you meet your commitments, on the fact that you are straight with people and tell it how it is. If people trust you and you trust them, you can get a lot more out of relationships and out of life.
This interview was conducted for Kaizen by Stephen Hicks. To learn more about Ray Stata, please visit www.analog.com.
© 2013 Stephen R. C. Hicks. All rights reserved.