IN THE DAYS before the television show “Dallas” became the city’s worldwide symbol, most non-Dallasites, certainly most non-Texans, viewed our city as home to “TI.” Texas Instruments’ revolutionary technological innovations regularly stunned American industry, leading to constant attention from the nation’s leading business publications. TI’s products were eagerly awaited and sought after-first, by major corporations and government, and later, by consumers.
“Texas Instruments is to Dallas as Coca-Cola is to Atlanta, or as General Motors is to Detroit,” suggested former Dallas Mayor Jack Evans. An exaggeration? Probably not.
The image of TI was pure Texas, pure Dallas. TI represented wildcatting gone electronic, big bucks, and big thinking. Texas Instruments was Texas’ answer to IBM, but while IBM marched to an East Coast button-down beat, TI swaggered with a sophisticated brand of cowboy culture. Business watchers in academia and in the media hailed the TI cowboys as the group most likely to defeat the Japanese in a coming trade battle. There was something of a “Japanese” mentality within TI itself.
Then came the Eighties, and fans began to cry foul. Long-time TI watchers began to suggest that the company was much like an old battleship, still awesome to behold but obsolete. The management techniques, the inventions, the corporate organization-indeed, the very giants who had led TI to greatness-were condemned as inadequate to the modern age. TI was a magnificent anachronism sailing into the sunset. The picture has darkened just in the past few months, as TI announced belt-tightening measures in the wake of disastrous losses.
Is the old ship ready for mothballs? Refurbishing, yes; mothballs, hardly. Texas Instruments is a company striving mightily to overcome its past mistakes and adjust to a rapidly changing world. Few doubt it has the technical, financial, even Ihe personnel resources to again become a feared dreadnought on the high tech seas. TI must change, but no battleship can turn on a dime. How fast TI can turn will determine how far it can sail.
THE RISE
Few may’ now remember it, but TI has been called “Texas Instruments” only since 1951. The company was christened Geophysical Services, Inc. in 1930 by two young employees of Oklahoma’s Amerada Petroleum Co., Dr. Clarence Karcher and Eugene McDermott. “Doc” Karcher had worked on submarine detection technology during World War I and had struck on the idea of applying the same technology to the finding of certain geological formations likely to hold oil deposits.
After securing the financial backing of another now-famous Dallasite, Everett DeGolyer, the two founders moved their base of operations to Dallas. But even in those days, TI’s foreiathers left little to chance. Fearing their easily stolen if developed so near the Texas oil patch, GSI situated its research shop in a Newark, New Jersey hotel.
One day, in need of assistance in obtaining some aluminum castings, McDermott called on a young man he had met some years before. The man was Erik Jonsson, who, at the time, was working as a sales engineer for Alcoa. Jonsson helped the fledgling firm find the castings and later assisted the two men in obtaining a small loan from a Newark bank. Impressed, Karcher and McDermott invited Jonsson to join up as superintendent of their Newark lab. In time, GSI became so successful in finding oil for others that the group decided to forge into oil exploration for its own account. Again, success. In feet, GSI’s “hit rate” forced its executives to realize that helping others find oil and finding it for themselves represented too great a conflict of interest. They sold the oil exploration group, Coronado Corp., to the Stanolind Co. in 1941. The decision led to a parting of ways. Karcher determined to stick with the oil business while McDermott and Jonsson opted to buy GSI. One day before the attack on Pearl Harbor, Jonsson and McDermott, joined by two fellow GSI employees. Bates Peacock and Cecil Green, obtained a loan from Republic National Bank and purchased the company that would grow to become a Dallas legend.
THE WAR WAS to prove a mixed blessing for GSI. Like many companies, GSI suffered from the sudden shortage of manpower. But the war effort also demanded sophisticated technology. Soon, GSI was adapting its seismic equipment for important war roles in submarine and aircraft detection. Before V-J day, super salesman Jonsson brought in about $1 million in war contracts.
During the war Jonsson worked with Patrick Haggerty, a bright young management and logistics expert for the Navy Bureau of Aeronautics; at the war’s end Jonsson brought Haggerty aboard the GSI ship. It was an auspicious hire. Throughout the go-go years of the Fifties, years when TI’s reputation as a technology wildcatter and a hell-bent-for-leather competitor was born, Haggerty constantly pushed TI past the frontiers of the industry.
Haggerty’s first bold stroke was in buying, for $25,000, a license from Western Electric to perfect a germanium transistor. At the time, the transistor was far more expensive than the conventional vacuum tube and far less reliable. But Haggerty’s TI, initially lacking the research and development resources, was to win the race by developing and producing a low-cost, high-frequency germanium transistor that would revolutionize the manufacture of radios and televisions. In 1954, Haggerty and his TI cowboys pulled an even bigger coup with the premiere of the “silicon” transistor, which, unlike the germanium model, could withstand a considerable amount of heat.
Silicon was a material of great consequence for Texas Instruments. In 1958 a TI scientist named Jack Kilby discovered how to put a circuit that previously required miles of wiring and thousands of transistors, resistors, and capacitors on a single silicon wafer no larger than a human fingernail and not much thicker. With the birth of the semiconductor, the electronics industry was revolutionized. The information age was inaugurated, and TI quickly found itself on the multimillion-dollar cutting edge.
At the end of World War II, GSI sales had registered little more than $250,000 per year; by 1950 sales at TI approached $10 million. By 1958, they rocketed to a dizzying $100 million. In that same very good year, TI bought 350 acres on North Central Expressway as a site for its semiconductor manufacturing plant. In 1958 Jonsson moved up to the chairmanship and Pat Haggerty became president of the company. And in 1961 a bright young engineer named Mark Shepherd ascended to the post of executive vice-president,
With the major figures of the crew aboard, the TI ship was ready to sail. And in the Fifties and Sixties, TI mushroomed phenomenally. From 1946 through 1966 the company boasted a compound growth rate for both sales and earnings of 30 percent per year. From 1958 through 1966, TI’s profits increased by 600 percent.
By the end of the Sixties, TI was manufacturing products ranging from nuclear reactor cores to frying pan thermostats, from radar units to camera components. TI pioneered the concept of bonded metals, a process by which two metals are literally sandwiched together at the atomic level, now used in U.S. currency. In 1960 TI set a lofty goal for itself: $1 billion in sales by the early Seventies. Despite a major recession in the semiconductor industry in 1960-61, the company hit that goal in 1973.
“How do they do it?” asked a constantly amazed U.S. industrial leadership. The question had several answers, starting with the man at the top. The consummate Mr. Outside, Erik Jonsson, dealt deftly with the public and the financial community. Pat Hag-gerty, according to most who observed him firsthand, was a genius as Mr. Inside, a brilliant innovator of management technique.
The Haggerty management system and approach is a key to understanding the company’s rise and its later problems. In the late Seventies Haggerty’s management theories were hailed across the nation as the fountainhead of TI’s success. By 1980, they had become suspect. By 1983, Haggerty’s system was damned as a rotten, antiquated infrastructure trying in vain to support an ultramodern company in a fast-changing world.
The TI management system was in effect two management systems superimposed one on the other. One management structure contained the “operating” unite or product-customer centers, the PCCs. The theory was to orient the company to the product and the customer, not to a function such as accounting or personnel. Each PCC could conceive a product, produce it, and then market that product any way it saw fit. In effect, each PCC was a semi-independent small business with its own profit plan and the responsibility for achieving that plan.
The other leg of the management structure was the OST (Objectives, Strategies, Tactics) management. The OST structure was to aim at long-term development while the more conventional “operating” units, or PCCs, concentrated on the short term.
In OST, objectives were writ large. For example, an objective of the early Sixties might have been to obtain a specific amount of NASA’s budget by a certain year. To attain such an objective, TI would then develop a number of strategies. Haggerty was fond of differentiating among strategies with such descriptions as “hold-the-line” strategies, “modest-gain” strategies, or “breakthrough” strategies. Each strategy was then, of course, further refined into any number of tactical action programs, known in company parlance as TAPs.
“The idea was to develop a system that would keep the entire company thinking long-term while at the same time getting its day-to-day tasks performed” explains TI chairman Mark Shepherd. In practice, one manager might direct the manufacturing of a specific product while putting in think-tank time on a long-range TAP. A manager might report to someone in a PCC while reporting to a different person in the OST framework. Indeed, it was conceivable that one man might report to another in the PCC structure while in the OST system the roles would be reversed.
The entire OST management structure represented a mammoth bottom-up, future-oriented planning system intended to put Texas Instruments’ corporate resources-both people and machines-to their best use. If a bottom-rung engineer came up with an idea, he was encouraged to take that idea to management. If the notion strucka responsive chord, it was cranked into the OST system; if it proved viable, it could wind up as one or more new PCCs.
Critics were quick to point out the flaws of the OST system: too many people saddled with too many responsibilities and tangled in too many overlapping lines of authority. In the early days chaos was averted by having each PCC manager and each OST manager fill out lengthy status reports. These monthly performance reviews contained dozens of statistical categories for judging progress. When one TI executive first saw the thick three-ring blue binders holding me reports, he said, “Isn’t that pretty?” The name stuck; the books became known as the “pretty” books.
Even then, Haggerty admitted that the system was highly complex and required painstaking coordination and considerable commitment by employees. But it was hard to argue with its success-at least in the early days.
ANOTHER INGREDIENT in TI’s thundering progress from the Fifties to the mid-Seventies was its pricing strategy. For its semiconductors and calculators TI used “forward” or “learning curve” pricing strategies in which the introductory price of a product was tied to an estimated future volume. Recalls one manager of the glory years: “We spent large amounts of money to build plants quickly that could produce a very high volume, thereby pricing our units very low. We then assumed that over a given period of time we would be able to sell X millions of, say, semiconductors. We would then introduce the product at a very low price, one our competitors couldn’t possibly match in the short run.” Usually, the “short-run” strategy paid off, with TI snaring a dominant share of the market. Explains Shepherd, “This is the method the Japanese have used to reduce costs and capture dominant market share. They learned it from us.”
TI also blossomed because of its vaunted ability to sell “engineer to engineer.” Until the early Seventies, when the company made its fateful plunge into consumer markets with pocket calculators and watches, TI’s customers were government agencies or manufacturers of finished products such as radios. The clientele were mostly technical types, scientists, and engineers who spoke a common language with the company’s engineers. TI sold-and sold well-on its technical strengths to a relatively inbred market. Later, when TI ventured into the more uncertain waters of consumer sales, this no-nonsense strategy proved inadequate. Unfortunately, TI’s marketing crew knew little about luring customers with sexy design or grabby “point-of-purchase” displays. TI was good at selling steak, not sizzle, and had yet to learn that customers often buy what they want (or can be enticed to want), not just what they need.
In September 1978, BusinessWeek further inflated TI’s reputation with a cover story proclaiming that “Texas Instruments Shows U.S. Business How to Survive In the 1980s.” A sidebar was headlined, “Under Its Ten-Gallon Hat, A Japanese-Style Culture.” Said BusinessWeek: “TI’s struggle to the top and its game plan for the hot trade competition of the 1980s with Japan… stand as strong examples of what other U.S. companies must do if they, too, are to survive in the next decade.”
Chairman Mark Shepherd and president Fred Bucy, TI’s leaders since 1976, drew glowing praise. Shepherd was the man who made Hagger-ty’s OST model work to its optimum; Bucy was the personnel expert whose cagey handling of top managers had defused ticking time bombs in the ranks. Yes, the TI top brass were tough-but they were leading a great Texas army to war against the crafty Japanese. Toughness and discipline came with the territory.
Those within the industry were just as awed by TI’s success. One MIT professor summed it up: “The TI style creates a TI culture, and for the kind of people there it works.” The president of American Micro Systems, Inc. hailed TI as “an innovator in applying technology and exploiting it.” Even the company’s rocky entry into the consumer electronics market (with a hand-held calculator in 1972) was tabbed as “very judicious” by Morgan Stanley & Co. analyst Benjamin Rosen. Though few understood just why, TI was working-and nothing succeeds like success.
At its annual meeting in early 1978, TI management had outlined an ambitious program to reach $10 billion in sales by the late Eighties. At the time it seemed that TI was sure to miss a goal already set ($3 billion in sales by the late Seventies). Some viewed the new benchmark as ambitious, to say the least. But even the cautious, caught up in TI euphoria, shook their heads and refused to bet against the mighty Texas Instruments.
Shepherd and Bucy were counting on three major sales areas to catapult them toward the $10 billion mark: semiconductors, distributed computing (for offices), and consumer electronics- anything from “speak and spell” educational toys to home computers, hand calculators, and PCs. Slower but still respectable growth was expected from areas such as military contracting, petroleum instrumentation, and other non-electronic businesses.
Publicly, Shepherd and other members of the management team admitted some past mistakes. They agreed that the drive for a presence in the consumer products arena had been costly in financial and human resources. TI had lost momentum in the drive to maintain leadership in the semiconductor and microchip markets. While TI was busy focusing on electronic components for its calculators-particularly custom chips-a company called Intel marched in to steal the lead in pioneering computer memories.
Particularly embarrassing to TI at that time was Intel’s 8-bit microprocessor (a microprocessor tells a microchip’s circuits what to do and when). Texas Instruments had developed and dominated the market for the 4-bit microprocessor, but, distracted by its calculator activities, had failed to see the 8-bit market developing. Assuming the market would quickly demand the even more sophisticated 16-bit microprocessor, TI announced it would leap-frog to that product.
Analysts were delighted. They were confident TI would hit it big in the distributed computing and consumer electronics markets, and that it would quickly make up lost ground in the components free-for-all. The BusinessWeek article in particular trumpeted TI’s preparations for entering the home computer market. One industry watcher was quoted as predicting confidently that TI would “. . .dominate the [home computer] market within a year.” Few were willing to dispute the prediction.
One reason for TI’s rosy picture was a gambit in Lubbock. In a daring and expensive move, TI assembled an entire management and technology center in West Texas for its new line of consumer products. The plant boasted an assembly line so highly automated that it greatly reduced plant square footage and greatly increased unit productivity. While the plant spewed products, engineers in back rooms worked feverishly to further innovate by reducing the number of parts in each watch or calculator.
THE SURGE OF enthusiasm for Texas Instruments had another source: a corporate “culture” that many believed had the inner mettle to whip the Japanese. The business world was buzzing with talk of Japanese “Theory Z” management tactics for wringing even more productivity from workers. TI was fighting fire with fire. The TI way was described as “spiritual” with roots sunk deep in a Texas work ethic, a can-do spirit, and toughness. “It wasn’t just hype,” recalls one engineer employed at TI during the Seventies. “There was a real sense of being the custodians of a Texas tradition, of being at war, of an all-consuming dedication to corporate goals.”
Another engineer of that era points to a system that “gave each employee a sense of personal responsibility for success.” The Japanese were a homogenous people, and many believed that TI employees possessed a ’Texas” sameness. Asserts a personnel executive of the Seventies: “If you were a Texan, or if you were a young college graduate who could be Texanized, or at least molded to the TI way, you had a leg up in getting hired.” Says a more critical ex-exec: “TI was what today would be called a cult.”
George Heilmeier, senior vice-president and chief technical officer for research and development and a non-Texan, laughs off the “cult” notion. “I arrived here in 1977 after years of work with other companies and the Pentagon, and I have never felt for a moment like an outsider.” Heilmeier believes, however, that the TI ambience does constitute a private culture. “This is not a society outfit,” he says. “You don’t get ahead here with golf course talents; you get ahead because you have a very strong work ethic and because you are the best at what you do.”
At the 1980 stockholders’ meeting company leadership was still aglow. Both sales and income had increased by 32 percent. That $10-billion goal set for the late Eighties was raised to $15 billion. But a cloud on the horizon went virtually unnoticed. Consumer products, one of the company’s three potential boosters to the $15 billion goal, had gone flat, contributing about $400 million of the company’s 1979 sales of $3.2 billion.
TI’s venture into digital watches was largely to blame. Originally, the watches were a bonanza for the company. The original TI timepiece had been an instant hit with its low price of $9.95, but it had fatal flaws. You had to push a button to get the time; in bright sunlight it was almost impossible to read the dial. Soon, other companies entered the market with a technology TI had pioneered but dropped-LCDs or “liquid crystal displays,” which kept the time, date, temperature, and perhaps a brief horoscope visible at all times.
In 1979, the division that produced TI’s watch suffered a $10 million loss. In retrospect, most TI executives believe that would have been a good time to bail out of the watch market, but due to pride or stubbornness TI stayed in the game. To meet the competition the company began buying parts abroad and selling them under the TI brand name. By the time the company finally got its own house in order the Japanese had all but driven domestic watch companies out of the business.
TI’s total dominance of the hand computer market had also suffered challenges from the Japanese and a new model manufactured by California’s Hewlett-Packard. Even the company’s excellent educational products, like Speak & Spell, were hurt by overly conservative sales projections and financial forecasts that left the division short of the semiconductors required to operate these machines.
The flatness in TI’s consumer products effort drew the attention of some analysts who began to question whether or not the company’s management style was suited to the fast-paced consumer products market. They suggested that the company’s carefully crafted financial models, the engines that determined production levels, were too rigid and conservative in their forecasting. Explains a top TI planner of that period: “There was innate Texas conservatism at work; each year we planned for a worst-case scenario, and if things turned out far better we couldn’t adjust upward to accommodate.”
In short, some began to suspect that TI’s massive planning apparatus was too cumbersome for a fickle retail market. The company’s marketing expertise with manufacturers and the government had taught it nothing about what housewives wanted to buy at the shopping mall. One top TI exec recalls the opening of the Texas Instruments retail outlet at NorthPark mall. Stanley Marcus cut the ribbon that day, and afterward took the executive aside to offer some friendly advice. “This will never work,” Marcus told him. “First, you don’t have the range of products available to draw the numbers of customers you need. Second, you are going to [anger] every retailer you want to carry your product because you are going into competition with them.”
Other problems were looming. TI engineers understood technology and functional design. They didn’t understand that a man or a woman buying a wristwatch might want beauty as well.
By 1982’s annual meeting the leaks in the bow first spotted in 1980 had grown to gaping holes. The TI ship was taking water fast. Profits in 1981 had fallen by 50 percent. More startling was the news that 1980’s pre-tax profit from the semiconductor division, $170 million, had turned into a staggering $50 million loss for 1981. Even in the awful semiconductor market crashes of 1970-71 and 1974-75 the company had not suffered losses.
TI’s stock had also gone on a roller coaster ride, felling from a 1981 high of $126 per share to a low of $71 in 1982 (see chart, facing page). Perhaps most embarrassing was the fact that both Motorola and Hewlett-Packard, once mere FT boats against the TI dreadnought, were boasting healthy increases in earnings while TI drifted toward the rocks.
The word was being passed to management that shareholders, the giant institutions who then owned 66 percent (today institutions own approximately 75 percent) and even the families and trusts of the founders, who then owned some 13 percent (about 7 percent today), were growing concerned and wanted changes made.
At the 1982 shareholders’ meeting, management responded. Although Bucy made the presentation, it was Shepherd who insisted most strongly that management admit past errors. Bucy announced that Haggerty’s management system was outmoded and was undergoing reevaluation and redesign. Analysts agreed that the PCC managers simply didn’t have the authority to order the company’s functional units to supply what they needed. “You would have a PCC manager requesting a certain type of chip and the production people saying the volume wouldn’t be great enough to justify production,” recalls a PCC manager of 1981.
Bucy’s response was to reduce the number of PCCs, to reduce the number of employees by more than 10 percent-most through attrition-and to reduce the amount of time the PCC managers were required to spend on the long-term OST effort.
In September 1983 another BusinessWeek article appeared, this time much less complimentary. Now the company’s declining earnings were blamed on the very management system that was the envy of the industry a mere five years before. Bucy and Shepherd, the geniuses of 1978, were reviled as villains and tyrants strangling TI’s spirit with a style verging on management by terror. The cigar-chomping Shepherd in particular was held up as the epitome of the Bad Boss. The swift transformation of Bucy and Shepherd from gods to goats pointed out another business axiom: nothing fails like failure.
THE DECLINE
Bucy’s tinkering with his officers and crew didn’t stop the company’s drift. In June 1983 TI had announced its first quarterly loss ever-$119 million, or $5 per share. Stock prices plummeted from $157 to $107 in a single day. Toward the end of 1983 TI pulled the plug on its disastrous home computer venture, swallowing a $145 million loss. And things weren’t going too well in the personal computer business, either.
TI had been the first to build a digital computer (for the Air Force) and the first to develop a commercial mini-computer, which was then about the size of a desk. TI’s entry into the personal computer market, the Business-Pro, was far superior to the IBM model in terms of speed, resolution, color, graphics, and a host of other characteristics. Unfortunately the TI computer owed its superiority to a TI chip that was not compatible with IBM’s machine. Hence, software designed for the IBM was incompatible with the TI model.
Whether through hubris or unrealistic forecasting, TI planners had believed their own home computer and its software would become the industry standard to which all rivals would be forced to adapt-or, at the very least, that it would be an open market with no quickly established industry norm. They were wrong. IBM soon secured that position through superior consumer merchandising and the cachet gained by its leadership as manufacturer of the industry standard “selectric” typewriter.
So TI rushed to play catch-up, a new and unfamiliar game. The Intel chip, compatible with the IBM PC, quickly replaced the TI chip in the TI computer. Sales began to recover. Still, the company’s continued failure to market effectively, combined with confusion on the part of consumers who believed TI’s retreat from home computers also meant it had pulled out of business computers, left its computer products division with a $15 million loss in 1984.
The litany of allegations against TI were becoming a familiar refrain. TI couldn’t market to the consumer; TI was high-handed with its distributors; TI could no longer read the markets; TI was too insulated in Texas and lagging behind developments in places like the Silicon Valley; and TI was unable to price to market- By 1983, the hail of abuse was falling on Mark Shepherd and Fred Bucy.
Shepherd, a six-foot-plus hulker, had been Pat Haggerty’s personal choice as successor. A child prodigy who had entered SMU at fourteen and received his BS degree in electrical engineering at nineteen. Shepherd was an engineer’s engineer, fascinated with making things work in a structural sense. “Mark is a man who truly believes the secret to success lies in the proper design of the proper system, whether the problem to be solved is one of electronic engineering or people,” says a former TI executive who worked closely with Shepherd for years.
In 1951 Mark Shepherd was assigned to run the company’s new Semiconductor Design Engineering Department, supervising development of the inventions that put TI on the industry map. In 1954 he rose to assistant vice-president and general manager of the Semiconductor Components Division with responsibility for expanding its operations around the world. In 1962, at age thirty-nine. Shepherd was named by Life magazine to its list of the nation’s “one hundred most important young people.” A year later he was named a TI director.
Shepherd could be intimidating and demanding. He was not one to suffer fools easily, he did not readily accept excuses for screw-ups, and he was not reticent about letting his displeasure be known. Yet many ex-TI execs believe he was a perfect foil for his mentor Haggerty.
Haggerty was a dynamo, always on the go, always thinking in visionary terms. Past associates recall that Haggerty was capable of an occasional blowup and that he could shout and harangue with the best of them, but they say his vision for TI was so compelling that the chastised employee was even harder on himself for failing to play his part in making that vision a reality.
After Haggerty’s retirement. Shepherd seemed unable to paint the inspiring vision that had allowed Haggerty to escape the criticism and outright dislike Shepherd engendered. Of course while TI was sailing smoothly there was little pressure to trigger Shepherd’s famous temper, but as the ship began to take water the Captain Bligh side of his nature emerged.
Former TI managers are full of tales of Shepherd’s tantrums. “I recall standing in a hallway and hearing someone on the other side of the wall shouting at the top of his lungs,” recalls one ex-manager. “When I went in to break up the argument I found Shepherd towering over some poor engineer, nose to nose, barking like a drill sergeant.”
Stories about Shepherd began to appear in the press. A 1985 Fortune story told of one Shepherd explosion in which a notebook was hurled against a wall with such force that the binder disintegrated. For weeks, the story held, TI executives were scouring the country for binders that could withstand sudden, violent impacts.
In many ways, Bucy, though a smaller, slighter man, was cut from the same cloth as Shepherd. He too was a product of the TI culture, a no-nonsense type. Still, Bucy is remembered as more patient, more willing to listen, more adaptable.
For some years Shepherd and Bucy were reported to be at each other’s throats. Dallas cocktail parties regularly buzzed with the latest rumors about one man’s efforts to oust the other. Both denied the rumors and expressed outrage as the tales of disharmony found their way into the national press.
“Actually, there was a competition of sorts,” suggests a TI director who still sits on the board. “I think the two actually somewhat liked each other, but Mark and Fred were constantly trying to out-macho each other. Each wanted to prove himself tougher than the other.”
There was another way in which Bucy and Shepherd were bound to each other. That same director says, “Neither man is terribly good at delegating, a common failing of most engineers. They were both constantly butting in everywhere in the company. And once one butted in, the other fell compelled to, too. Neither wanted the other to be able to claim success alone, and neither was willing to take the blame alone when something went wrong.
One of the strongest insider raps on Shepherd and Bucy was their tendency to second-guess line managers. Complains one former executive: “You would take months to do an agonizing analysis and make a painful decision. Then Mark or Fred or both would walk in and tell you in no uncertain terms you were stupid and that you were going to do it their way when you knew they hadn’t seen any of the data you had. Pat Haggerty built this organization by bottom-up management , by always tending to the corporate roots. These guys seemed to think everyone in the company was a moron except them.”
Needless to say, Bucy and Shepherd didn’t see it that way. In the rare interviews he granted at the time, Bucy insisted that as long as things were running smoothly, neither man became involved; it was only when plans went awry that the two heavyweights stepped in. He also denied reports that TI had a problem in retaining strong middle managers and top executives. Shepherd goes a step further, claiming he actually protected those bottom-line managers whose decisions nearly cost TI its shirt: “Yes, many of the plans that didn’t work out were submitted by managers, but top management approved those plans and have to take responsibility for their failures.”
But former TI executives, many of whom now head major companies in the electronics industry, almost uniformly tell a different story. “TI lost its best middle management from 1976 until the early Eighties because of top management’s autocratic style,” insists a former TI man, now the CEO of a top TI competitor, “People were treated either like children or dogs. Executives making presentations could regularly expect to be interrupted and humiliated by [Bucy and Shepherd].”
Many in the industry and on Wall Street began to grow disenchanted with the TI board’s failure to act. Those on the inside were not. “Mark Shepherd owned the board; he still does,” offers a former top executive. Many believed that the board was full of Shepherd cronies and ex-TI types who believed that taking action against either Bucy or Shepherd meant striking out at the TI culture. In the words of one executive, “The board may have agreed the two were S.O.B.s, but they were TI S.O.B.s.”
By late 1984 Bucy and Shepherd found themselves in a very real battle-for survival. In fairness, many of TI’s financial problems were not of management’s making. The oil industry was sinking into a deep recession, and the market for the company’s seismic and other instruments had fallen through the floor. Military contracts had been a rapidly growing component for the company during the years of the Reagan defense buildup, but by 1984 growth in that division had gone flat; the lull was temporary, but it compounded the company’s other problems. And, the company was caught up in the semiconductor market crash and the fierce Japanese onslaught.
Whether fair or not, an industry consensus was forming: TI had lost it. Despite an illustrious history, despite launching the semiconductor revolution, TI was now seen as a company with no more miracles, no more rabbits in its hat. Rival corporate chieftains talked confidently and smugly about TI’s no longer being a serious competitor.
The second quarter of 1985 had seen a 16 percent drop in sales from a year earlier and a $3.9 million loss; the outlook for the third quarter was even more dismal. TI shareholders were muttering that changes had to be made.
IN MAY OF 1985, the problems at TI reached the boiling point. After long and delicate negotiations, Shepherd was allowed to remain as chairman, but Bucy was forced to walk the plank. Reportedly, Bucy at first insisted that he wouldn’t go quietly unless Shepherd went with him. Others close to the situation say that Bucy was almost relieved to go.
Despite rampant rumors to the contrary, there was never serious talk of Shepherd’s getting the ax. He and Bucy had made a poor team, a team that had reinforced each party’s weaknesses rather than complementing each other’s strengths. But the directors-who have always maintained a firm hand in governing TI-were strong Shepherd supporters. They remembered the glory days when Haggerty’s protégé was charging from triumph to triumph. What TI needed, most directors believed, was a new team-one that would play up Shepherd’s global genius and play down his past mistakes.
A new commander was anointed to carry on the day-to-day battle. Jerry Junkins, named president in May 1985, spent twenty-seven years rising through the ranks of TI. Before replacing Bucy, Junkins headed the data systems division, where he showed considerable courage by killing the disastrous home computer and bringing (he division back to the break-even point.
The Shepherd/Junkins team has its work cut out for it. And that point was hammered home when the company’s year-end figures were released in late January. TI recorded sales of $4.9 billion, a 14 percent decline from the previous year’s $5.7 billion. The firm’s annual report also revealed a pre-tax loss of $115 million, including $63.8 million for closings and employment cutbacks. The loss amounted to $4.76 per share, a dramatic fall from 1984’s $13.05 per share profit.
THE FUTURE
The first move Junkins made was to set out on a long tour of most of the company’s plants in the U.S. and abroad. “I wanted to visit each plant and learn first-hand what the problems were, and to meet the people.” explains Junkins. “When things aren’t going all that well it’s important there be no unanswered questions.”
Junkins also journeyed to Wall Street to reassure doubting analysts that the TI ship had not yet hit the shoals. E.F. Hutten analyst Ed White Jr. believes Junkins was well received. “I think most Wall Street analysts agree with Junkins that many of the company’s problems have had more to do with external market conditions beyond the company’s control, and that TI has in fact taken those actions required to get the ship turned around and moving.”
Back home after his lour of the empire, Junkins announced a reorganization of top management. Four executive vice-presidents were confirmed: Bill Sick in semiconductors, Pat Weber as executive vice-president for corporate development including R&D, Grant Dove as an operating executive vice-president, and Bill George as a second operating executive vice-president. The Junkins management team is young, but all are trusted TI veterans.
TI execs no longer pursue that elusive goal of $15 billion in sales by the early Nineties. Junkins is determined to fix on specific shorter-term goals. “We are not going to sacrifice the company’s future for a quick fix in the next quarter,” he says, “but we are going to pay more attention to setting more intermediate goals directly related to the performance of specific divisions.”
Junkins is firm in asserting that Texas Instruments is in a position to make a strong recovery based on its technology. “We are going to stay in semiconductors because we believe you must be a leader in memories if you are going to be a lop player in this business,” Junkins says. “We believe we will be a leader in the development of the 1- and 4-megabyte DRAM, and that will give us a competitive edge.”
Two other areas of long-term corporate strength are military contracting and artificial intelligence. “Things are a bit flat at the moment in the military area but they will be strong over the long haul,” says Junkins. “Electronics is an increasingly important segment of the defense budget and will likely fare better than other elements of the budget under the Gramm-Rudman mandated cuts. Artificial intelligence is in a developmental stage with potential applications for TI, and the size of the market is still largely unknown. But I think everyone agrees we are in the forefront of this very exciting area.”
Wall Street is nodding agreement, or so it seems. E.F. Hutton’s White holds that TI should recover as the world semiconductor market recovers this year, and that TI’s military contracting business has considerable upside potential. Bill Ablandi at the Dallas-based industry research firm Future Computing is high on TI’s technology base in general and its artificial intelligence work in particular.
Not surprisingly, there is little agreement as to the future of TI’s consumer products division. Some analysts believe that as long as TI remains in consumer markets it must show strong progress there. Hutton’s White maintains that it was the consumer division that got TI into trouble and that it must be turned around-or abandoned.
As for TI’s computer business, the scuttling of the personal computers bred confusion among consumers over whether TI is in the computer business at all. Shepherd believes that perception is changing. He also feels that the personal computer market will, in time, come back.
After years of active press-hating, TI has begun to show a willingness to communicate with the public. “S.T. Harris [a TI director] for years laid down the doctrine that the press can do no right, that it constantly gets its facts wrong and reports sensational news without regard to consequences,” explains a former top TI exec. “Harris hammered at this over the years, and the result was that the company wouldn’t confirm the best of news at times, let alone the worst.” Ironically, many of TI’s problems worsened because the company refused to communicate. In the place of hard information, rumors have become the order of the day.
Overall, TI’s position-while still uncertain-may not be as perilous as the swirling rumors indicate. The mighty fall hard, and TI’s early success and ambitious plans set standards that make even subsequent strong showings pale.
It is possible that TI’s decision to stay inthe semiconductor market and slug it out toeto toe with the Japanese will prove wrongand continuing losses will result. It is possible that its military contracting will be dealta disastrous blow by the Gramm-Rudmanbudget-cutting ax, or that artificial intelligence may be slower in developing thanmost experts think. If that bleak scenariobecomes reality, TI may well founder on therocks and sink. But the best bet is that whenthe fog lifts, the ship that Erik Jonsson andFat Haggerty built will once again be fearedon the high tech high seas.
MARK SHEPHERD:
MARK SHEPHERD, Dallas native, graduate of SMU, and current chairman of Texas Instruments, has been a key member of the TI crew since 1951. A colorful man with strong opinions, Shepherd has been at the center of most of TI’s victories and defeats. He was the moving force in TI’s decision to enter the Japanese and Pacific marketplace before most U.S. companies even realized that such a marketplace existed. Relaxed in his north Dallas home, surrounded by the memorabilia of his long career, Mark Shepherd shared bis views of TI’s triumphs and failures in a rare interview.
D: You worked for years with some of TI’s legendary figures, men like Pat Haggerty and Erik Jonsson. What were they like?
Shepherd: I knew Pat Haggerty longer than I knew my own father. Pat was a tremendous guy. I can’t say enough good things about him. He was a towering intellect, a true visionary. His greatest shortcoming was that he sometimes spent too much time being visionary and not enough with the nitty-gritty, but the nitty-gritty was what he had folks like me around to take care of. I suppose I had more violent arguments of a business nature with Pat than anybody I have ever worked with, and he would respond in kind. The important thing is, and I know it’s hard for people to understand this, but we never attacked one another personally, we attacked the proposition at hand. It never had any adverse affect on our relationship- that never changed, it was always excellent. Now, Erik Jonsson was a father figure at TI, and still is. But frankly, the nature of my job in those earlier days was such that I didn’t work closely with Erik. By the time I was in a position to do so, he was mayor and was spending most of his time on city business.
D: Everyone hears about the famous TI culture. What is unique about working at TI?
Shepherd: We are an outfit that believes strongly in making its living through innovation. We also believe in using all the capabilities of all our people. This, of course, means we have to ask a lot of our people. Now, if you’re going to have so many of your people playing key roles in your organization, you have to make your management understand that they must be leaders and not bosses. Believe me, there is a hell of a difference between a leader and a boss.
We try to have a company where people are treated the same. We don’t have reserved parking places; we don’t have an executive dining room. We have an open-door policy that allows an employee to come directly to me or to President Jerry Junkins, and Jerry and I probably handle twenty calls per week. We haven’t been successful in achieving utopia-no one has-but we feel we have created a good work environment for creative people.
D: The most visible blunder in TI history was its entry into the consumer products market. Although you were very successful in some of those ventures, others obviously didn’t pan out. Why did you go into the consumer market at all?
Shepherd: It had been a corporate objective for a long time to enter the consumer marketplace because of its sheer size, and because we figured that would be a way of moving a lot of semiconductors. For a while we were very successful in watches. Our strategy was right in watches, but we made a classic mistake: we didn’t provide the support we should have out of the semiconductor division. We are accused of being stupid marketers and maybe we are. But our failure in watches wasn’t a marketing bust so much as a management bust. We saw the market and successfully attacked the market, but we just failed to keep up.
D: What about the home computer?
Shepherd: That’s a little different category. We busted our toes with that one and the extent to which we busted them gives me no great pleasure. The problem is simple: that market wasn’t there and still isn’t there today, because home computers aren’t that easy to use. I think a lot of people, including us, confused the popularity of video games with home computers. But a lot of people made mistakes. Even the Jolly Blue Giant screwed up on PC Junior.
Maybe it’s sour grapes, but I really argue with the folks who say we are such dumb marketers. My definition of marketing is defining a problem a customer wants solved and then solving it in a timely and cost-effective way. We have always done a good job at identifying marketplace needs and meeting them. In fact, I don’t think anyone has created more markets than TI. We may not have been very good merchandisers, but that’s not marketing.
D: The other big thorn in TI’s side has been trying to compete with the Japanese in the semiconductor business. In fact, you are just about the only U.S, company still trying to compete with them, and that has brought criticism from analysts who say you should pull out. Can any U.S. company compete with the Japanese?
Shepherd: The answer to that problem is complicated. The structure of the Japanese financial markets is very different from ours. Japanese companies are highly leveraged, with debt-to-equity ratios running upward of 80 percent where most U.S. companies are around 20 percent. The reason is, the Japanese people love to invest in low interest postal bonds [the equivalent to our U.S. government savings bonds]. The Japanese government then loans these funds at low interest rates to Japanese companies. Of course, if the Japanese government wants someone out of business, they can put them out pretty fast. But the effect is that it costs them about half as much to fund production and development as it does us. The other thing is the strength of the Japanese educational system. Their high-school graduates have a more intense exposure to the sciences, they can all speak English, and they work like hell. College graduates in Japan must spend time in the trenches before moving up to management roles. An engineer is not even called an engineer until his peers say he’s worthy.
D: What does this country need to do?
Shepherd: One thing is sure: we have to have investment capital in this country, and that has to do with the tax system. If we could get the folks in Disneyland East, Washington, D.C., to understand this, our financial problems would be on their way to being solved, We have to become competitive in education. The problems we have in our schools and in the family may take a generation to correct.
D: TI is just about the only U.S. company to successfully enter the Japanese market. Why did you enter that market, and how have you managed it?
Shepherd: Well, we went to Japan for the same reason we went to Europe: there were markets there. At the time we decided the Japanese market was going to be much larger than the European market. So we started trying very early, maybe in 1957 or so. We were a little rambunctious going in: we insisted on 100 percent ownership. We had to allow the Japanese some face-saving, so we went in as fifty-fifty partners with Sony. In a year or so, we just bought them out. Now let me add that there is much more to talk about in the Pacific and in Asia than Japan and Korea. I don’t personally think China will develop as quickly as many people think it will. The nation to watch is India. I have met with Rajiv Gandhi and I am very impressed; he is a modern thinker. Something else people forget when you talk about India is that, while there is much poverty there, there is still a large group comparable to our middle class. If you take 15 percent of 700 million people you have more than 100 million-that is a lot of sophisticated consumers.
D: With so much bad economic news being announced, what is the morale of TI employees today?
Shepherd: Surprisingly good. And that’s because we talk to our people a lot-and we shoot straight with them.
