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ANALOG DEVICES, INC.

(A)
Analog Devices Inc. (ADI) was a leading manufacturer of integrated circuits that convert between analog and digital data. From 1981 through 1996, ADI experienced periods of growth and stagnation, both achieving record profits and sales a experiencing its first loss ever. To meet the needs of the changing market, management at ADI introduced a number of different management tools to implement change. One such tool was its corporate scorecard. ADI's corporate scorecard was recognized as a management best practice in a survey the NolanNorton Group conducted in 1991. Despite this accolade, ADI's management was wondering in 1996 how to change the scorecard to best fit the needs of management, specifically, how fast to change it and how best to use it to focus management attention in the future.

BACKGROUND
Analog Devices was founded in 1965 in Cambridge, Massachusetts, by Ray Stata and Matthew Lorber. Stata had a B.S.E.E. and an M.S.E.E., both from MIT. In 1996 the company operated predominantly in one industry segment: the design, manufacture and marketing of a broad line of high-performance linear, mixed-signal, and digital integrated circuits ("ICs") that addressed a wide range of real-world signal processing applications. The company's principal products were divided among four classifications: general-purpose, standard-function linear, and mixed-signal ICs ("SLICs"); special-purpose linear and mixed-signal ICs ("SPLICs"); digital signal processing ICs ("DSP ICs"); and assembled products. SLICS were the largest product segment for the company, accounting for 65 percent of total sales. Nearly all the company products were components that typically were incorporated by original equipment manufacturers (OEMs) in a wide range of equipment and systems for use in communications, computer, industrial instrumentation, military/aerospace, and high-performance consumer electronics applications. The company sold products worldwide; in 1996 one-half the sales came from outside the U.S.
This case was prepared by Kirk Hendrickson [Tuck 97] under the supervision of Professor Vijay Govindarajan Copyright Govindarajan.

Analog Devices, Inc. (A) INDUSTRY BACKGROUND Real-world phenomenatemperature, pressure, sound, images, speed, acceleration, position, and rotation angleare inherently analog in nature, consisting of continuously varying information. Analog sensors can detect and measure this information. The signals are usually converted to digital form for input to a microprocessor, which is used to manipulate, store, or display the information. In many cases, the signals are further processed using a technology called digital signal processing. In addition, digital signals frequently are converted to analog form to provide signals for analog display, sound, or control functions. Collectively, these manipulations and transformations are known as real-world signal processing. Significant advances in semiconductor technology have led to substantial increases in the performance and functionality of ICs used for signal processing applications. These advances include the ability to create very large scale integration (VLSI) mixed-signal ICs that contain both high-performance analog circuitry and large amounts of high-density digital circuitry. The analog circuitry portion of the IC is used to manipulate real-world signals while still in analog form and to convert analog signals into digital form (or vice versa). The digital portion is used to further process analog signals after they have been converted to digital form. COMPANY STRATEGY In 1996 Analog Devices' strategy was technological leadership. The company wanted to be firstto-market with new products that had superior performance features. Analog Devices was one of the world's largest suppliers of SLIC products. During 19901996, Analog sought to balance its traditionally stable SLIC business with growth opportunities for SPLICs and DSP ICs. The company built upon its expertise in linear IC technology, developing special-purpose linear and mixed-signal ICs tailored to specific highvolume applications in target markets. Analog also extended its expertise in analog signal processing and data conversion to develop DSP ICs. These DSP ICs and its SPLICs addressed the emerging demand for high-performance levels in many communications, computer, and other high-volume applications. These products had a high level of functionality (i.e., many functions on one chip) to satisfy OEMs' requirements for an integrated solution with low cost per function.

Analog Devices, Inc. (A) To build upon its position as a leader in real-world signal processing, Analog was pursing the following strategies in 1996: (1) Expand traditional SLIC business; (2) Become a major supplier of general purpose DSP ICs; (3) Pursue growth opportunities for system-level signal processing ICs; and (4) Leverage core technologies to develop innovative products.

TOTAL QUALITY AT ADI, 1983 TO 1986


From the inception of the company in 1965 till the early 1980s, sales at Analog Devices grew at a rate of 27 percent a year. Yet in 1983, Ray Stata recognized that ADI was having problems with the quality of its production. Its on-time delivery record was under 60 percent. Its process yields, in some cases, were as low as 10 percent.1 ADI's customers were complaining about quality, and its competitors had on-time delivery records and yields well above ADI's level. At this time, Stata attended Philip Crosby's Quality School. This was ADI's first introduction to the concept of total quality management (TQM). Interested in implementing TQM but not wanting to add additional staff to create a quality improvement function, Stata charged the human resources division with establishing a TQM program at ADI. The first TQM effort never got beyond managers trying to become TQM gurus on their own by reading books and going to seminars. As one general manager said, "I was focused on growing the business, not on TQM." 2 By the end of 1984, ADI's sales had reached $313 million. During fiscal year 1984, revenue had grown by 46 percent, profits by 105 percent, and orders booked promised another record year in 1985. ADI management felt it was in the middle of some of the fastest growing segments in the economy. Many in the company were starting to talk about ADI becoming a $1 billion firm by 1988. Unfortunately, between the end of 1984 and the end of 1986, sales had only grown 6.7 percent, and profits had fallen by 38 percent. As Stata stated, [F]or the first time, between 1982 and
1

Howell, Shank, Soucy, Fisher, Cost Management for Tomorrow, Financial Executives Research Foundation, 1992, p. 128. 2 Unless otherwise indicated, the statements in this case attributed to Analog Devices' Ray Stata (CEO and chairman), and Goodloe Suttler (vice president of strategic planning, quality improvement, and corporate marketing), were based on interviews.

Analog Devices, Inc. (A) 1987, we missed our five-year goalsand by a country mile. True enough, like other semiconductor companies we were affected by the malaise in the U.S. electronics industry and by the strong dollar. But the external environment was only part of the problem: something was also wrong internally, and it had to be fixed."3 The factory was missing over 40 percent of its committed delivery dates. When 20 executives with regular customer contacts were asked, "When the phone rings and it is an angry customer, what did he say?" The executives responded, "The customer said, 'Where's my order?!'" The defect level of product that reached the customer was more than 20,000 parts per million (PPM). Competitors such as Motorola were achieving results under 1,000 PPM. Furthermore, the poor quality caused a substantial amount of waste at ADI, such as front-to-back IC yields of less than 15 percent, meaning that only 15 out of every 100 ICs that ADI started made it through the process. These were well below industry yields. Although in 1985 ADI's analog IC sales declined by about 5 percent, 1986 industry wide analog IC sales grew by 25 percent. The analog circuits industry had returned to growth, yet ADI's revenues were stagnant and its profitability was declining.

THE QUALITY SPECIALIST


In 1986 ADI hired Art Schneiderman as vice president of quality and productivity improvement. Schneiderman had been a consultant with Bain & Co., where he had been directly involved in establishing many quality improvement programs. He was seen as someone who could link ADI to the "mainstream of experience and knowledge that is rapidly accumulating in [TQM]" and be a teacher who could "help [ADI's] managers become more expert practitioners."4 Stata wanted the quality improvement process (QIP), as ADI called its total quality program, to become a way of life at ADI.

Ray Stata, "Organizational LearningThe Key to Management Innovation," Sloan Management Review, Spring 1989, p. 63. 4 Ibid., p. 63.

Analog Devices, Inc. (A) Many of the general managers at ADI were skeptical of this new quality program, having undergone the earlier, unsuccessful quality program. Additionally, they believed the quality goals and the company's financial goals were in conflict. The financial basis of ADI's incentive and performance measurement systems reinforced this belief. HALF-LIFE Schneiderman believed that "any defect level, subjected to legitimate QIP, decreases at a constant rate, so that when plotted on semi-log paper against time, it falls on a straight line."5 The result is that every process can experience a 50 percent reduction in defects at a consistent time interval. Schneiderman called this the half-life of the improvement process. As Sterman et al. note, "The basis for the half-life dynamic is the interactive learning loop at the heart of TQM. Improvement teams identify the root causes of defects, rank them in order of importance, then propose, design, test, and implement solutions using the Plan-Do-Check-Act or 'PDCA' cycle. The team continues to cycle around the learning loop until the root causes of most of the defects are corrected, then moves to the next most important source of defects."6 Schneiderman had collected data on improvement activities. Exhibit 1 shows three examples of the data he collected. The examples are shown on log-linear graphs to capture the full effect of the half-life concept. By plotting improvements this way, it was easy for someone to see the line indicating the improvement rate. As Exhibit 1 illustrates, each process had its own unique rate, determined by finding the slope of the line fit to the data. This unique rate was the process's halflife. (Appendix 1, The Half-Life/Complexity Matrix, and Appendix 2, Relationship of Half-Life to the Experience Curve, give additional background on the half-life concept.) Using the 1987 five-year plan as a tool, Schneiderman introduced goals for a series of quality measures (Exhibit 2) that corresponded to what he considered to be ADI's critical success factors: having innovative, high-quality products and being a reliable, responsive supplier. The

Arthur M. Schneiderman, Setting Quality Goals, Quality Progress, April 1988, p. 53. John D. Sterman, Nelson P. Repenning, and Fred Kofman, "Unanticipated Side Effects of Successful Quality Programs: Exploring a Paradox of Organizational Improvement," Management Science 43, 4 (April 1997), pp. 504 505.
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Analog Devices, Inc. (A) goals were determined by combining customer demands with realistic expectations of each measure's half-life. He proposed reductions such as dropping process defect levels from 5,000 PPM in 1987 to fewer than 10 PPM by 1992. Many managers just laughed at him. Stata recalled, "The first reaction of our organization was to recoil from what looked like unrealistic objectives. But we reminded our managers that if a company really gets its quality improvement act together, there is no fundamental reason why these goals cannot be achieved."7 ADI'S SCORECARD Schneiderman put together a single-page scorecard that showed three categories of measures: financial, new products, and QIP (Exhibit 3). Measures within these categories indicated how well ADI was moving toward its goals. The scorecard was prepared once a quarter. ADI considered the scorecard to be a breakthrough because it condensed pages of reports into a simple, single report. It measured each critical success factor as well as financial performance. Schneiderman added to it the half-life and target for each of the measurements for the next few periods. He did this to provide a link between short-term results and ADI's long-term plans, such as improving on-time deliveries to 99.8 percent by 1992. MAKING THE SCORECARD WORK Schneiderman developed the following rules about how to construct the scorecard: The entire scorecard had to fit on one 8 by 11" sheet of paper. The font size had to be 12 points or bigger. There were to be six times as many nonfinancial measures as financial measures.

Ray Stata, "Organizational LearningThe Key to Management Innovation," Sloan Management Review, Spring 1989, p. 70.

Analog Devices, Inc. (A) In addition to the scorecard and TQM, Schneiderman helped change ADI from doing five-year planning every five years to doing five-year planning every year. He also helped create divisional scorecards. The measures for most divisions overlapped; all could be tied directly to ADI's overall scorecard. The company allowed each division to use the same scorecard or a unique one. By tailoring scorecards to each division, Schneiderman gave all divisions the means to negotiate their goals and determine the appropriate half-lives of their measures. In 1988 Schneiderman began to roll out the balanced scorecard to the entire company. Each division gradually developed its own scorecard and had successive levels develop theirs. They also were not required to have unique scorecards. Lower-level management scorecards typically placed less emphasis on financial measures than on nonfinancial measures on which managers could have an impact. Each division was required to share the quarterly scorecard results with all its employees. Division results for each scorecard measure were compared. Exhibit 4 shows how different divisions compare in on-time customer service performance results. Each division was shown together, and the slope, or half-life, of the improvement was shown. In addition to distributing reports like Exhibit 4, Schneiderman compared the scorecard performance results with the target results during executive council meetings. He pointed out large favorable variations (which he circled in green) and large unfavorable variations (circled in red), and asked divisional general managers to explain the causes. According to Goodloe Suttler, a graduate of the Tuck School at Dartmouth College and a vice president and general manager of ADI's semiconductor division, the company used the corporate scorecard as a communication tool. To the employees, it said, Measurement is the key to determining success. You cannot know how well you are doing unless you have measures. Here is what is happening in your division/plant.

To management, it said,

Analog Devices, Inc. (A) These scorecard items are the metrics of success. Focus on the items critical to success. You must meet objectives measured in the scorecard.

By 1991 the corporate scorecard was being used aggressively on a daily basis throughout the organization. PERFORMANCE8 Analog Devices showed dramatic improvements in its quality measures by 1990. Between July 1987 and July 1990, on-time delivery increased from 70 percent to 96 percent, cycle time decreased from 15 weeks to 8 weeks, average yields improved from 26 percent to 51 percent, and defects in products shipped declined from 500 PPM to 50 PPM. Other variables did not improve during 19871991. Product development time did not decline. The stock price dropped from $25 in 1987 to $9 by 1991, a much larger decline than performance by the market as a whole or the semiconductor industry in particular. In 1990 Analog Devices experienced its first loss (Exhibits 5 and 6). It missed its profitability goal for 1991 by 50 percent and suffered its first-ever layoff of 600 employees (12 percent of its workforce). In response to the financial crisis, Analog decided to shift its strategy of focusing predominantly on the SLIC business to emphasizing the growth areas of SPLICs and DSP ICs. CHANGING ROLES During this time, ADI's management directly under Stata changed considerably. The company promoted Jerry Fishman to president and named eight new vice presidents, including five from outside ADI. A number of longtime vice presidents retired. The changes reflected ADI's efforts to infuse a different culture. As one of the new vice presidents from the outside said, "Analog had a product orientation, not a customer orientation. The financial dip helped bring dramatic changes."

John D. Sterman, Nelson P. Repenning, and Fred Kofman, "Unanticipated Side Effects of Successful Quality Programs: Exploring a Paradox of Organizational Improvement," Management Science 43, 4 (April 1997), pp. 503 521.

Analog Devices, Inc. (A) Following Stata's lead, the entire senior management team stepped up to the role of quality leaders to demonstrate that improvement is everyone's responsibility. Schneiderman had been ADI's torchbearer during the era of the quality specialist; now it was time to begin the era of senior management. In mid-1992, Art Schneiderman resigned from ADI and passed the torch to the new management team. TQM OFF-TRACK TQM's primary focus on cost reduction left many managers feeling most cost reduction was done by the early 1990s. Many also believed the investment necessary to stay with, and constantly improve, the TQM program outweighed the many advantages of continuing it. Some at the company simply had no faith in the program. "There is some closeted cynicism about quality [programs] in the company," noted Stata. "Among the engineers, it isn't even closeted. They think it's crap."9 The end result was increased pressure to abandon TQM. By the mid-1990s, ADI was bouncing back financially. Management believed that QIP had improved the firm's profitability by reducing waste but, because it was primarily a cost reduction tool, did not credit it with ADI's growth. In fact, although ADI was experiencing high growth and profitability, many of the measures of quality were declining. The program appeared to be at a standstill. Management still recognized TQM's value but felt that it was insufficient to address the new problems facing the company. CHANGING SYSTEMS After Schneiderman left, many of the systems he had put in place changed or withered away. In Goodloe Suttler's opinion, there was a "performance paradox." Borrowing ideas from Professor Marshall Meyer at University of Pennsylvania's Wharton School of Management, Suttler believed that all performance measures would eventually degrade. Performance would improve. Variability would be reduced to the point where further improvements were of little value. People would game the system. As a result, new performance measures would need to be constantly introduced. According to Meyer, with new performance measures driving faster

Analog Devices, Inc. (A) change, "accelerated learning rates suggest we will cycle through measures with greater rapidity." Simply put, the better your measure helps you to improve, the sooner it will lose its value. As Stata observed, "We are now recognizing as we get more sophisticated, it is harder to get numbers that are meaningful." ADI began to look for new tools that could make the numbers more meaningful, particularly numbers that were leading indicators of value growth. As Suttler said, "The big problem with TQM is that it has little to say about business strategy. TQM works well at stopping wealthreducing activities, but wealth creation doesn't naturally come from TQM." Suttler pointed to evidence that TQM had been successful at ADI, such as the reduction of outgoing electrical defectives from more than 20,000 PPM in 1987 to fewer than 50 PPM in 1994, and the improvement of front-to-back IC yields from fewer than 15 percent to more than 60 percent in the same period. On the other hand, he noted that ADI started TQM at a point where the cost of waste was 2535 percent of sales and reduced that to under 15 percent in seven years. ADI believed that reducing the cost due to waste to 3 percent would take another seven years. Although management considered cost reduction important, it was considered less critical than finding ways to grow revenues. Using a model of dynamic complexity (see Exhibit 7), ADI's management concluded that growing revenue was a more difficult process than reducing cost and would take longer to implement. HOSHIN ADI began searching for new methodologies to create wealth. Ray Stata learned about a technique called Hoshin kanri as part of his participation in the Center for Quality Management. For Stata, Hoshin was an extension of the QIP effort at ADI and a realistic approach to center the company's energies on wealth creation. Its main idea was to focus improvement on one or two breakthrough objectives for the company. Hoshin, as described by Suttler: "literally means policy deployment and control. Hoshin tells us to focus on the most important objectives. Analog Devices has two: on-time delivery and new

Rahul Jacob, "TQM, More Than a Dying Fad?" Fortune, October 18, 1993, p. 6672.

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Analog Devices, Inc. (A) products. Everything you do in Hoshin is based on data collection and PDCA [Plan-Do-CheckAct cycle]." Hoshin also leveraged many of the techniques that ADI learned from its QIP program. Nevertheless, the company found that implementing Hoshin required more effort than expected. Hoshin was believed to provide a mechanism for growth, so it assumed a prominent place on the ADI scorecard. The computer products division placed its Hoshin measures at the top of its 1996 division scorecard; the measures took a key position on scorecards throughout the firm. Hoshin goals for ADI in 1996 were (1) 98 percent on-time delivery to platinum accounts and (2) 25 percent sales from new products (products introduced within the last six quarters). KEY SUCCESS FACTORS Complementing ADI's scorecard were measurements called key success factors that measured milestones related to the firms business plan. These factors were monitor points for the tactical plans of ADI's strategy. They derived from the companys five-year plan, which was updated yearly or, in some cases, quarterly because of the speed at which ADI's market was changing. The company believed its key success factors were more closely related to wealth creation than was the scorecard. One difference between the two measures was that the key success factors were discrete events. As Suttler stated, "The key success factors do not lend themselves to quarterly monitoring. On the other hand, the measures on the scorecard are intrinsically limited, failing to capture key milestones in each business strategy that also need periodic review." The key success factors either were met or they were not. They did not continue from quarter to quarter. The scorecard measures, such as on-time delivery, continued to be tracked every quarter. In 1994 Stata charged Suttler with integrating TQM and planning. Suttler introduced several new tools, such as the 10-step planning methodology adapted from Hewlett-Packard, to try to understand wealth creation in a way TQM had not addressed. These techniques were used during the five-year planning exercise and in developing tactical plans for ADI. The key success factors were developed with these tools.

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Analog Devices, Inc. (A) One aspect of the new planning system was that teams, rather than a centralized planning group, did the planning. These teams included individual contributors, line managers, and mid-level managersthe very people responsible for implementing the plans they developed. Sixty teams were set up in 1997 to work on topics such as business plans and competitor analysis. ADI management believed the teams would be highly committed to the business plans because they had developed them. COMPENSATION SYSTEM Analog Devices did not link incentive compensation to performance on the scorecard measures. Compensation for corporate officers (senior management) was based on appreciation in stock prices. Compensation for all other employees was based on an equally weighted combination of two factors: growth in company revenues and operating profits for the company before taxes. Noted Suttler, "We do not tightly link managers' compensation to scorecard performance. We are in an industry that is moving like the wind. We've got to change our scorecard every year to respond to that environment. Our compensation philosophy is based on cross-functional coordination and the highest degree of teamwork."

VISION 2000
Now is the time to set a new vision for the future that builds on the accomplishments of the past; fully exploits our leadership in signal processing; captures new opportunities in rapidly emerging markets; and catapults ADI to a multi-billion dollar enterprise.10 As part of its 1995 planning process, ADI developed what it called Vision 2000 which set forth three major objectives: Build leadership positions in seven critical areas of signal processing. Increase the growth rate for sales and profits to greater than 20 percent.

10

Vision 2000: Leadership for the 21st Century, Analog Devices, Inc., 1996.

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Analog Devices, Inc. (A) Grow the organization and develop the skills and competencies of all employees.11

Through the Hoshin process, these goals had been translated into specific and measurable objectives for every function of ADI. Vision 2000 also included a plan for 1996 that divided the critical measures into four business drivers (see Exhibit 8). Each business driver was supported by underlying objectives. For example, the objective of 95 percent on-time delivery by year-end supported the customer satisfaction business driver. The objectives for the four business drivers for 1996 were clear and measurable. Some of these objectives, such as on-time delivery, were also part of the scorecard. Others objectives, such as achieving $175 million in net research and development spending, appeared as key success factors. ADI was using Hoshin, QIP, the corporate scorecard, and critical success factors to create, deploy, and implement strategy. While the systems were in place, the questions still remained: How should Stata and ADI implement needed change? How important was ADI's corporate scorecard in creating change? How must these systems evolve for ADI to achieve its objectives for Vision 2000?

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Ibid.

13

Analog Devices, Inc. (A) Exhibit 1: Three Examples of Half-Life12

12

Ray Stata, "Organizational LearningThe Key to Management Innovation," Sloan Management Review, Spring 1989, p. 69.

14

Analog Devices, Inc. (A) Exhibit 2: Analog Devices Quality Improvement Goals13

Measurement

1987

Half-Life (in months)

1992

External On-Time Delivery Outgoing Defect Level Lead Time Internal Manufacturing Cycle Time Process Defect Level Yield Time to Market 15 weeks 5000 PPM 20% 36 months 9 6 9 24 4-5 weeks <10 PPM >50% 6 months 85% 500 PPM 10 weeks 9 9 9 >99.8% <10 PPM < 3 weeks

13

Ibid., p. 70.

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Analog Devices, Inc. (A) Exhibit 3: Example Corporate Scorecard for FY 1988

FY88 Target Actual Financial Revenue Revenue Growth Profit ROA New Products NP Introductions NP Bookings NP Break-even NP Peak Revenue Time to Market QIP On-Time Delivery Cycle Time Yield Outgoing Defects Cost Employee Productivity Turnover $M % $M % # $M # $M Months % Weeks % PPM $M % %

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Analog Devices, Inc. (A) Exhibit 4: On-Time Customer Service Performance Monthly Data (August 1987July 1988)14

14

Ray Stata, "Organizational LearningThe Key to Management Innovation," Sloan Management Review, Spring 1989, p. 72.

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Analog Devices, Inc. Exhibit 5: Consolidated Statement of Income, 1986 to 1995

(dollars in millions except per share data) Net Sales Cost of Sales Gross Margin Research and Development Expense Selling, Marketing, General, and Administrative Expense Total Operating Expenses Operating Income Total Non-Operating Expenses (income) Income before Income Taxes Net Income Net Income Per Share

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

941 464 476 134 184 319 157 (2) 159 119 1.00

773 394 379 107 170 277 102 5 97 74 .64

663 351 315 94 159 253 63 7 56 44 .39

567 302 266 88 151 239 26 7 19 15 .14

538 272 265 89 152 248 17 8 9 8 .08

485 244 241 80 136 235 6 20 (14) (13) (.28)

453 215 238 69 126 194 44 7 36 28 .58

439 201 238 60 122 183 55 4 52 38 .80

370 172 199 56 108 164 34 9 26 19 .40

334 151 183 45 97 143 40 8 32 23 .51

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Analog Devices, Inc. Exhibit 6: Consolidated Balance Sheet, 1986 to 1995

(dollars in millions) Assets Current Assets: Cash, Cash Equivalents, Short-Term Investments Accounts Receivable, Net Inventories Total Current Assets Property, Plant and Equipment, Net Intangible Assets, Deferred Charges and Other Assets Liabilities and Stockholders Equity Current Liabilities: Short-Term Borrowings, Current Portion of Long-Term Debt and Capital Lease Obligations Accounts Payable and Accrued Liabilities Deferred Income on Shipments to Domestic Distributors Income Taxes Payable Total Current Liabilities Long-Term Debt & Capital Lease Obligations Other Non-Current Liabilities Stockholders Equity

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

151 181 144 526 432 44 1,002

182 162 131 505 282 29 816

81 146 150 403 248 27 678

18 112 142 297 237 27 562

17 95 117 249 224 30 503

8 98 108 232 224 31 487

30 82 98 223 209 21 453

23 88 97 221 201 27 449

6 76 84 176 186 35 397

6 66 79 162 173 34 369

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11

10

174 28 50 254 80 11 656 1,002

135 19 29 206 80 8 522 816

99 16 15 133 100 13 432 678

82 13 2 100 71 17 375 562

77 9 5 97 37 15 354 503

93 0 2 106 24 14 343 487

51 0 4 63 12 14 363 453

55 0 11 73 23 13 341 449

46 0 5 58 30 12 298 397

37 0 14 60 29 10 270 369

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Analog Devices, Inc. Exhibit 7: Dynamic Complexity of Processes

Organizations CrossIndustry National Standard of Living

CrossOrganizational CrossFunctional

Increasing Dynamic Complexity

Supplier Network

Product Development

Multiple Function Single Function

Manufacturing Cycle Time

Scrap & Repair Costs Time Hours Days Months Years Decades

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Analog Devices, Inc. Exhibit 8: The Four Business Drivers for 199615

Customer Satisfaction
95% on-time delivery by year-end 107,000 6-inch CMOS wafers from external foundries 13,000 6-inch CMOS wafers from Limerick 3,500 6-inch wafers from Wilmington Mod D 2,000 6-inch wafers from Sunnyvale

New Product Development


$300 million in new product sales at 45% gross margin 90% success rate from first silicon with customer samples 6 months to first silicon 15 months time to market 1.5 tapeouts per new product

Organizational Capabilities
1,000 new employees 150 new college graduates Employee turnover less than 7% 90% of new employees on board within less than 90 days of requisitions Voice-of-the-Employee baseline score established

Financial Expectations
$1.2 billion in revenue for 25% growth 50% gross margin, including new fabs $175 million in net research and development spending $200 million in sales, marketing, general, and administrative (SMG&A) spending or 16% of sales $225 million in operating profit

15

Vision 2000: Leadership for the 21st Century, Analog Devices, Inc., 1996.

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Analog Devices, Inc. Appendix 1

The HALF-LIFE/COMPLEXITY MATRIX By Arthur M. Schneiderman, 1999 If you are using a state-of-the-art improvement process, you should be able to close the gap between your current performance and the ultimate process capability at a constant rate given by the process half-life. The half-life is not the same for all processes. Instead, it depends on the complexity of the process. There are two dimensions to complexity: technical and organizational. As an example of technical complexity, a numerically controlled machine tool is more complex than a lathe. Technical complexity is high for new technologies, where part of the learning process is related to understanding and refining that technology. Over time, as the technology matures and its use becomes more routine and familiar, technical complexity declines. Organizational complexity arises when a process has linkages (intermediate inputs and/or outputs) to processes outside of its boundaries. These processes may be internal or external (outside suppliers or customers) to the organization. The linkages may be one-way or two-way, one time or interactive, routine or requiring real-time negotiation. So processes can run the full organizational gambit, from completely self-contained (uni-functional) to cross-functional or cross-organizational. We would expect the rate of improvement to slow as the cultures, goals, and objectives of the various players come into potential conflict. By sorting the improvement efforts that I studied into the nine bins formed by classifying each in terms of the process's apparent organizational and technical complexity (low, medium, or high), I arrived at the following matrix of average half life:

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Analog Devices, Inc. TARGET HALF-LIVES Months High Organizational Complexity Medium Low 14 7 1 Low 18 9 3 Medium 22 11 5 High

Technical Complexity For processes of low organizational and technical complexity, I observed a rate of improvement of 50% per month, while for processes at the other extreme, the rate of improvement slowed by more than a factor of 20 to 50% improvement every 22 months. Note also that organizational complexity had 2 to 3 times the effect of technical complexity in slowing improvement. Note that flattening organizational structure or organizing around processes rather than functions does much to reduce organizational complexity and thereby increase the potential rate of improvement (that is reduce the process half-life). This half-life/complexity matrix can be used in several ways. As a goal-setting tool it allows rational determination of future performance based on the use of state-of-the-art incremental improvement tools and methods. As a diagnostic tool, it allows a team to benchmark its improvement efforts against best practice for processes of similar complexity. As a measure of organizational learning, it is easily consolidated from the level of the team, through the business unit to an overall organization-wide metric. As a specification for an improvement process, it allows potential users the ability to make comparisons with alternative methodologies.

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Analog Devices, Inc. Appendix 2 Relationship of Half-life to the Experience Curve By Arthur M. Schneiderman, 1999 In the 1970s, Bruce Henderson, founder of The Boston Consulting Group, promoted, under a new name, the Learning Curve that was discovered by T. P. Wright and published by him in 1936. The learning curve, developed in the aircraft industry, was based on the observation that unit direct labor usage, expressed in total man-months, declined with increasing experience. Henderson noted that the same was true for unit cost. Based on this observation, he went on to develop a strategy model with the experience curve at its foundation. The experience curve, like the half-life, is also an empirical observation. It states that for each doubling of cumulative experience (total units produced from the very beginning, not just this year), real unit cost drops by a constant percent, for example 20%. If your first million units cost $10 each, then your next million units should cost $8 each. The next two million units, $6.40, the next four million units, $5.12, etc. Because cost is driven by cumulative units produced (1+1+2+4 million in our example), the rate of decline of cost drops over time. The half-life method, on the other hand, predicts that the rate of decline of defect level is constant over time. Why the difference? We can't say for sure, since the experience curve is a purely empirical observation and is not based on any underlying theory. We can list the things that probably affect the slope of the experience curve, but we can't write an equation in which they are the independent variables. On the other hand, there is a theoretical basis for the half-life model. The Pareto chart is a graphical tool (bar chart) for displaying the rank ordered causes for a particular defect. With very rare exceptions, these charts follow the 80/20 rule: 20% of the causes account for 80% of the defects. This leads to exponentially declining Pareto diagrams. In fact, the biggest cause, that is the "root cause," usually accounts for 20% to 40% of the total defects. Let's take 30% as a typical number. For a process of average complexity, an experienced improvement team takes about four months for each cycle of improvement; 30% improvement in

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Analog Devices, Inc. four months corresponds to a half-life of 8 months, consistent with the half-life/complexity matrix. For less complex processes, the root cause is often larger and the improvement cycle time shorter, accounting for the shorter half-lives. For more complex processes, there tend to be many more causes so that the root cause is smaller while the improvement cycle time is longer. Note that I said an "experienced" improvement team. Proficiency in using the improvement process takes several improvement cycles, so that initially, half-lives can be significantly longer. For this reason, I encourage organizations to attack less complex processes at the beginning as the organization masters their new improvement paradigm. Also keep in mind that the half-life deals with defects, not cost. Of course defects, defined as any gap between current and potential performance, are the principal driver of unit costs, so the two are clearly related. Twenty years ago, experience curve practitioners were baffled by the unexplainable leapfrogging done by Japanese industry. How could they possibly achieve experience curve slopes two or more times steeper than their Western counterparts? Initial reaction was that they were using predatory pricing, selling below cost. The furor even made its way to the U.S. Congress. But careful study showed that their hyper-fast cost reduction was real and the result of a new approach to process improvement.

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Analog Devices, Inc. QUESTIONS TIME FRAME: 19861990 1. What was Analog Devices' strategy in the second half of the 1980s? 2. Critically evaluate the "half-life" concept, in light of Analog Devices' strategy. What are the potential and limitations of the half-life concept? How would a company develop the half-life for different processes? How is the half-life concept different from the experience curve concept? 3. Identify the conflicts that exist between the QIP measures and the measures reported by the financial system. Which numbers should we believe? Can they be reconciled? 4. Critically assess the usefulness of the information contained in the corporate scorecard in Exhibit 3 as a way to implement Analog Devices' strategy. What role does each set of measures play in strategy execution? What should be the relative importance of financial versus nonfinancial measures? What additional information would you like to see included in the scorecard? TIME FRAME: 19901996 5. Evaluate the evolution of the corporate scorecard and related management planning and control systems at Analog Devices during 199095 in light of Analog Devices' strategy in the first half of the 1990s. 6. Do you agree with the compensation philosophy of Analog Devices? 7. Describe Analog Devices' strategy as of 1996. How should the corporate scorecard and other management systems change in 1996 to best fit the strategic needs of the company?

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