By Mark Diorio
In November of 1998, I wrote about a market decline that was largely fueled by dynamic growth rates in 1996 and 1997. With these growth rates having significantly exceeded the average, it was inevitable that a correction would be required in 1998. And now, just three years later, we find ourselves in the same murky waters, in part because we learned very little from the past.
Who's to blame? The dot-coms? Cisco? The stock market? Sure, they have all played a part, but rather than focus on them, let me ask a difficult question: What has your management done to avoid an inevitable downturn and to reduce its impact to your company?
The Reaction Game
Have you ever noticed that management seems cocky and self-assured when times are good? They brag that sales are beyond expectations, that their new products are spectacular and the future is bright. Such managers are also likely to take credit for a company's magnificent growth (which incidentally is the rate at which everyone else is growing). They spend money, expand operations and overlook the obvious – that their competition is doing the same thing and, sooner rather than later, supply will exceed demand.
So when sales forecasts are not met, it always generates concern on the part of management. An alarm is sounded and great analysis and efforts are applied to ferret out the problem. But have you ever noticed how few of these companies apply the same concern to when sales forecasts are significantly exceeded? Have you ever heard management say, “Hey, we need to be careful, because something isn't quite right”? I doubt it. Most executives basked in the sunshine of over-the-top sales, cashing in on their bonuses and commissions, never truly recognizing that a correction factor was inevitable – never attempting to determine how to position the company before an impending downturn. So now there are lots of companies busily reacting to today's market situation, as very few of them have been proactive.
In early 2001, our wafer fab brethren began to cut back severely. We did the same in packaging and assembly, but we lagged behind (in some cases, severely). In fact, it took some assembly equipment companies an additional six months or more to make their cost corrections. One significant equipment supplier cut its workforce by nearly 30 percent in July, seven months behind the fab equipment companies.
One way for suppliers to limit their exposure in the semiconductor market is to broaden out into other industries. For instance, when the semiconductor sector is down, it can be wise to take note of which markets are up and to devise a plan to sell your products into those markets during the upswing cycle.
Now, of course not all companies can do this. Some products are so specialized for semiconductor applications that companies really have little choice but to weather the storm. But recently, one packaging supply company chose photonic component assembly to be its market diversification “hedge.” However, because photonics is very closely linked to the semiconductor market, this was probably not a good management move. Such a strategy reflects a lack of market understanding.
While I advocate photonic component assembly as holding a variety of packaging opportunities for service, equipment and material suppliers,
I would be incorrect to suggest that the photonic and semiconductor market cycles are not related and as such provide for alternating complementary business opportunities that allow oneself to shore up against a market downturn.
Stock Options for Management
Over the course of the past year, many senior managers took advantage of their stock option positions. In many cases, this occurred at the expense of the employees themselves. While many employees never benefited from the stock options, some company executives did. The true absurdity of management taking advantage of their stock option positions is that they were doing this while laying employees off. Company managers, in some cases, were making tens of millions of dollars cashing in on their stock options (see, for example, the June 17 edition of San Jose's The Mercury News) while simultaneously laying off employees. I suppose one could say that these managers did what they had to do and that it took an especially tough person to make such difficult decisions. Personally, I would have trouble looking myself in the mirror knowing that I had received significant monetary benefits from the labors of employees who were now without jobs and incomes. This, to me, is loathsome. These managers should have been encouraged to reinvest into their companies and the employees.
Who Would You Invest In?
Everyone's a genius when times are good. But it is the truly well-managed companies that minimize the losses when times are bad. These are companies that are good investments. They may not have grown at a staggering rate during the up-turn, but they didn't fall from grace either. I suppose one could say that by limiting growth, you limit disaster. The fact of the matter is that a company can take advantage of a market up-turn in a controlled and strategic manner by deciding margin over market share and, thus, limit the effects of excessive growth and soaring cost structures.
It's frustrating when we can't learn from the past, making the same mistakes over and over. But as employees, you can have an effect. Make sure you have confidence in your management. Just because you survived this time doesn't make it right. Take a good look at your company's management. Do they have the right stuff? And if not, what are you going to do about it? Better decide before the next downturn, or they'll decide for you.
Mark DiOrio, chief executive officer, can be contacted at MTBSolutions Inc., 1630 Oakland Road, Suite A102, San Jose, CA 95131-2450; 408-441-2173; Fax: 408-441-9700; E-mail: [email protected].