The Innovator's Solution

Seagate Technology, one of the oldest firms in the disk-drive industry, has developed a set of five operating principles that allows it to out-innovate even the most nimble young competitor. The result: an innovator that poses a dilemma for its rivals.

Can you identify this quote? "The history of the disk-drive industry shows that the established firms ... have well-developed systems for killing ideas that their customers don't want. As a result, these companies find it ... difficult to invest adequate resources in disruptive technologies — lower-margin opportunities that their customers don't want — until their customers want them. And by then it is too late."

This passage comes from the opening paragraphs of The Innovator's Dilemma, a 1997 book by Harvard Business School professor Clayton M. Christensen that has become a modern-management classic. Whether you make cars or cornflakes, you've almost certainly been exposed to Christensen's central argument: Well-run industry leaders are constantly at risk of being outdone by innovative newcomers.

But in the disk-drive industry, which prompted Christensen's research, a lot has changed recently. Far from finding itself surpassed by creative challengers, Seagate Technology, the leading disk-drive manufacturer of the 1980s, has recovered from setbacks in a big way. It has reestablished itself as the industry leader; it's beating smaller, supposedly more nimble rivals in getting new drives to market. By the end of the fourth quarter of 2001, Seagate's profit margins had climbed tenfold from the depressed levels of the previous year, while shipments surged to a record 14.6 million drives.

Most striking, Seagate has seen much of its growth from smaller, cheaper drives that are going into the likes of Microsoft's Xbox, the heavily promoted new video-game console. And, at least according to Christensen's theory, that's not supposed to happen. To crack such markets, Seagate has had to get rid of many of the high-performance features that help it sell to big-time computer makers such as Dell, Compaq, and Hewlett-Packard. It needed (at least briefly) to stop listening to its best customers so that it could instead pay attention to raw new markets.

So how does Seagate create innovation now? And what can companies that are competing in less frantic industries learn about serious innovation from the leading innovator in disk drives?

Seagate's answers began with a new management team that took charge in 1998, after company founder Alan Shugart departed. New CEO Stephen J. Luczo came from an investment-banking background. Luczo's president and COO at Seagate, Bill Watkins, had worked for several rival drive makers. They agreed that Seagate had become too insular, too slow, and too departmentalized.

As Luczo explains, "If you want to change results, first you need to create a new culture." Here are five crucial ways that Seagate's CEO and his leadership team have infused this Scotts Valley, California company with a fresh approach to the future.

Get new ideas from your customers' customers. Seagate traditionally gathered the majority of its market intelligence from its top-20 corporate customers, which included nearly all of the leaders in the personal-computer or server markets. That's good, but it isn't good enough, says Brian Dexheimer, Seagate's executive vice president for worldwide sales, marketing, and customer service.

"As much as I admire our top clients, if I'm not doing anything but listening to their opinions, I'm going to be led down the primrose path," Dexheimer says. "We have to get past their horizons and understand their consumers' preferences so well that we'll never be surprised by a sudden turn in the market. Take something like the potential for usage characteristics of MP3 players. Our traditional desktop customers aren't going to be able to tell us a whole lot about that. We'd be better off gathering a dozen 19-year-olds at a college campus and asking them, 'What would you do with this sort of device?' "

The end-user intelligence that comes back can be a lot hazier and harder to sort out than a nice two-hour PowerPoint presentation by an existing big account, Dexheimer says. But he doesn't mind. "We go into these exercises figuring that 90% of what comes back won't have anything to do with the type of devices we build," he says. "But there will always be that 10% that means the difference between success and failure."

Consequently, outreach programs are flourishing at Seagate. The company typically looks for free-spirited engineers and salespeople and pairs them in two-person teams to gather consumer intelligence. In the old days, such scouting might have been done entirely by sales or marketing specialists. Adding engineers makes each outing more productive, Dexheimer says. "This way we're thinking right from the start about what would be involved in making a new product."

Force your research team to think five years ahead. At many big companies, it's all too easy to let research initiatives fall into one of two categories: safe bets — incremental improvements that could help the next product cycle — or long shots for the distant future, with no clear path out of the lab or even a timeline for completion. And hardly anything happens between those two extremes.

Seagate's research chief, Mark Kryder, forces many of his 160 researchers to focus on the harder but more valuable middle zone, the kind of ideas that could lead to remarkable breakthroughs many product cycles down the road. When he took office in 1998, Kryder ordered his researchers to devise ways that Seagate could manufacture disk drives capable of storing 100 gigabits of information per square inch. Their research resulted in a 30-fold improvement over the best drives on the market at the time.

Do something like that, Kryder says, "and it's impossible for researchers to simply squeeze more efficiency out of ideas that have been around for years. If we're really going to add value in research, we need to take a fresh look at basic technologies and materials and see if we can find the next big ideas."

Kryder feels that his approach works better, and he points to stunning success from his 1998 initiative to make his case. The 100-gigabits-per-square-inch aerial density drive is going into production within the next 12 to 18 months — far ahead of the competition. Some of the challenges that looked daunting in early 1998 turned out to be easier to solve than expected, once scientists and engineers got cracking.

Now Kryder has given his researchers a new challenge: Produce drives with a density of one terabit (or one trillion bits) of information per inch.

If you really want to be fast, fix your supply chain. Five years ago, Seagate president Bill Watkins walked into a meeting and pulled apart the company's two leading models. "I said, 'Out of 200 components in these systems, we've got only 3 that are the same. We've got different screws holding the same things together, for goodness sake! If I had told you to make them as different as possible, I bet you would have used more parts in common, just to piss me off.' "

That sort of absurd overspecialization was jacking up Seagate's manufacturing costs and making it difficult to achieve economies of scale. Even worse, every new-product rollout was a one-of-a-kind adventure that was prone to delays and manufacturing bottlenecks. As a result, Seagate was becoming known as a "fast follower" rather than a true innovator.

Watkins insisted that Seagate develop basic manufacturing platforms that could allow the company to make a variety of disk drives within a single plant without having to retool the entire production line. He also courted the company's key suppliers. Instead of squeezing them for the deepest discounts, Watkins created incentive contracts that let suppliers earn more if they could help Seagate get to market faster with drives that surpassed what its competitors were able to do.

Although fixing the supply chain may be unglamorous, it saves crucial weeks or even months in getting new products to market, says Luczo. That time savings is vital in an industry where it can take one and a half years to develop a new product — a product that can then be sold profitably for only six to nine months before new breakthroughs and price cuts doom it to obsolescence.

"I think of this industry as an extreme sport," Luczo says. "We've got the fastest product cycles, the shortest selling seasons, and the most-relentless price cuts. First to market matters tremendously. But first to volume matters even more. Once you start production, you'd better be able to ramp up your volume from 100,000 a week to 1 million a week in almost no time. Otherwise, you're foregoing sales that you'll never get back."

Seagate's overhaul of its supply chain paid off richly last summer, as it raced to bring the Barracuda IV drive to market. The device was meant to be a mainstay of high-end PCs — a market that Seagate once dominated but had largely lost in the late 1990s. But in late-stage developmental work, the company realized that a crucial part of the disk was overheating, causing errors when the disk drive tried to write data. The best hope of fixing it involved encasing the key part of the drive in a more heat-diffusing material that Seagate hadn't used before.

"We spent more than $1 million to help our supplier fabricate that material in high enough volume," Barracuda IV project leader Emil Yappert recalls. "But we cut the amount of time needed to get that part by one-third. In the old days, it would have taken us eight weeks. We got it done in five weeks. On a project like this one, each day that we save — or lose — means about $500,000 to the bottom line. So it's worth it."

Constantly build teams that can cut across old lines of command. Are you in sales? Research? Manufacturing? Development? At Seagate, if you're smart, you view your job more broadly than any of those classic categories. Engineers get on the road and meet with customers. Plant managers come into the R&D centers and discuss the best ways to build new disk drives. Expertise becomes something to share rather than something to hoard.

To hammer home this message, Luczo takes dozens of senior Seagate executives on an annual multiday retreat, where they must form five-person teams and climb ropes, ride mountain bikes, and face other challenges. The twist: The members are judged by the performances of their entire team. The result: Stars learn that their personal success doesn't count for much. The only way the team can do well is if everyone helps the person who's having the hardest time.

Those lessons become invaluable when Seagate is racing to get a new disk drive into production. "If something is going wrong," Luczo says, "we want to bring in everyone who can help. The worst thing that can happen is for someone to hide a minor problem until it becomes a major one."

Intense teamwork can also help Seagate make the most of its successes. Well before the Barracuda IV was ready for manufacturing, the company flew several of its top Asian-plant managers to Colorado to sit in on weeks of development meetings and to see how the new drive was taking shape. Managers were encouraged to question anything that looked odd or inefficient, so that when the final design was locked in, it would be one that their factories could produce with total efficiency.

"You could see the old silo mentality starting to break down," explains Rob Pait, a member of the Barracuda IV launch team. "Problems were resolved in days instead of weeks. It was a real interdisciplinary effort." And when Seagate did begin production, its factories were able to escalate from careful test runs of 10,000 drives a week to full-bore production of 1 million drives a week in record time.

Set some prices lower, so new markets can grow. In its long-established markets, Seagate can charge anywhere from $50 to $500 per drive without alarming anyone. Its machines typically account for 8% to 13% of the cost of a desktop computer or server, which are often priced in the thousands of dollars.

"But consumer devices only get interesting if the whole device costs less than $499," says Dexheimer. "They only get really interesting below $199. And they begin to get phenomenally interesting when they start at $99."

The upshot: If Seagate wants to take those new markets by storm, it needs to be comfortable selling much different drives at much lower prices. Typically, technology leaders can't stomach such low-end projects. Their internal culture points them toward developing sophisticated — and costlier — products that cater to their best customers. But Seagate has detached some of its leading mavericks to pursue cheap mass markets — ones that don't look anything like the enterprise-computing business.

"There are all kinds of ways that disk drives could become important parts of handheld devices," Dexheimer explains. "Right now, there are at least six distinct markets. Several of them have significant potential. And we want to play there."

For the Xbox game console, Seagate proved that it could meet price points and manufacture a much smaller disk drive with just one-tenth of the storage of its high-end computer drives. (Game consoles don't require as much storage.) Seagate officials won't talk in detail about their profit margins on mass-market projects like the Xbox. But Dexheimer suggests that Seagate is comfortable pursuing less profit now in hopes of bigger gains later.

"This is a young and very promising market," he explains. "You could see our whole industry selling 200 million drives a quarter — up from 50 million today — if we really penetrate the home consumer market. And down the road, we might see customers wanting more-powerful drives to download new versions of games from the Internet. When a market has that kind of potential, you want to make sure you're helping it grow."

At Harvard Business School, Professor Christensen is watching his old favorite industry's most recent transformation with considerable interest. "The fundamental elements of The Innovator's Dilemma are always at work within all companies," he says. "It's like the laws of gravity. But in the same way that airplanes can fly, companies can sometimes overcome some of these pressures. If Seagate is figuring out how to sell smaller, cheaper, and simpler drives to a big new class of customers, it has a high probability of success."

Or, as several Seagate executives put it, "Around here, the mantra is, 'Stand still, and you die.' "

George Anders (ganders@fastcompany.com) runs Fast Company's West Coast bureau from San Francisco. For a collection of articles on innovative best practices in Silicon Valley, click here.

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