Geneva, Switzerland?based ST, born of the 1987 merger of SGS Microelettronica of Italy and Thomson Semiconducteurs of France, took the third place in sales in 2001 behind Intel and Toshiba, and is now a leader in one of the hottest segments of the industry as well as a model for a new breed of multinational corporation that some have dubbed a "metanational."
A metanational is a large entrepreneurial multinational that is able to tap into hidden pockets of innovation, technology and market knowledge scattered around the world, especially in underexploited emerging markets, according to Yves Doz, the Timken Professor of Global Technology and Innovation at INSEAD, and Jos? Santos and Peter Williamson, both also of INSEAD. The trio, the authors of "From Global to Metanational: How Companies Win in the Knowledge Economy," says ST is one of a handful of metanationals they were able to identify from a five-year study of 36 international companies, a dozen each from the United States, Asia and Europe.
ST's partnerships and ability to sense changes in the global market are crucial sources of competitive advantage.
To be sure, an important part of ST's story are the lessons learned at the company from the special challenges of marrying French and Italian cultures and competing in the volatile semiconductor business. However, ST's accomplishments stand out most in its validation of the "centerless" corporation organizational model, which is based on minimizing overhead and hierarchy while pushing critical decision rights to the periphery.
ST's success also demonstrates the value of having a constellation of strategic alliances with market leaders in multiple businesses, building upon knowledge acquired from partners all over the globe and disseminating that knowledge internally so it can be used effectively throughout its own organization.
A surprise showing
The 1987 union of SGS and Thomson was a natural fit. Although both companies had advanced technology and seasoned management, as separate entities they lacked scale, and could never achieve sustained profitability if they did not move beyond their domestic markets. Italy and France together represented only 5 percent of the world semiconductor market, hardly a robust foundation for growth.
In 1987, no one could have predicted how fast STMicroelectronics would eventually grow. Post-merger, the first year was rocky: The combined company ranked a dismal 17th in chip sales. That year, ST lost $200 million on sales of $859 million.
But the new company also had some hidden virtues. ST's inclination to partner--its highly visible strength today--surfaced before the merger, when SGS and Thomson worked together in a strategic alliance to develop and produce so-called nonvolatile memory, a type of chip that retains data even with the power switched off. This strategic alliance created a growth product that commanded a premium, but, what was even more significant, the experience demonstrated that the French and Italian teams could work together. Furthermore, upper management at both SGS and Thomson had earned their stripes at such big U.S. chip companies as Texas Instruments and Motorola. This helped create a common mentality from the start.
Equally important to the combination's future was ST's deep expertise in analog technology, the devices that process continuous electronic signals rather than the ones and zeros of digital technology. An apparent bridge back to the predigital days, analog was actually a path to a vibrant future.
In the 1980s, when the world was going digital, most large U.S. and Japanese chip companies abandoned the manufacture of analog chips because desktop PCs, the growth market then, used relatively few of them. But analog chips are required to manage power, radio frequency transmission, sound and graphics. The proliferation of cellular telephones, wireless computers and consumer electronics products like DVD players created a resurgence of demand for analog devices in the 1990s, which ST was well positioned to exploit. Just as Intel drove the microprocessor revolution in the 1980s by combining most of the digital devices needed for computation on a single chip, ST saw an opportunity to combine analog functions, such as sound, graphics and power management, together with digital circuitry, such as logic and memory, on a single chip.
Entering the 1990s, mixed analog and digital devices like this "system-on-a-chip" presented a huge market opening that few other companies could address. "Very early, when the company was founded, we understood our market was moving to system-on-a-chip," says Alain Dutheil, ST's corporate vice president for strategic planning and human resources.
So great has the percentage of ST content become in some branded consumer products that many of the company's best customers decline to discuss it.
ST's system-on-a-chip technology is now ubiquitous, if invisible to the average consumer. A wealth of products people take for granted--pocket-sized televisions, MP3 players, DVD players, multimedia cell phones--are possible only because of mixed analog/digital chips, the lion's share of which are sourced from ST. One of every two cars on the road contains at least one ST chip, and that number will only grow as customers demand more electronic devices in their automobiles, whether GPS or voice-activated climate control. So great has the percentage of ST content become in some branded consumer products that many of the company's best customers decline to discuss it.
For all its strong positioning in analog technology, ST quickly recognized it could not exploit its advantage in the system-on-a-chip market through traditional arm's-length relationships with its customers. "You need to put together the silicon know-how, which we had, with the system know-how, which the customer had," says Dutheil. "Fifteen years ago there was a clear border between the two, but they had to come together on a chip. In the past, there was a buy-and-sell relationship, but now we have to co-design the product. We have to be willing to exchange technology. Now, that's quite obvious; 15 years ago, it was not."
Intel could design its microprocessors in private and leave its customers to incorporate them in finished products because it owned the standard chip architecture at the core of the PC. ST, in contrast, came from the periphery of the industry, with expertise in graphics, sound and other devices surrounding the microprocessor. Combining these analog and digital devices in a system-on-a-chip required deep understanding of each customer's design, as well as its needs and wishes. Essentially, each customer gets a custom product.
Novel customer alliances
ST was compelled to partner early and intimately with consumer electronics manufacturers in order to convince customers to replace their complex circuit boards with its system-on-a-chip. Recalling that would-be customers would ask--seriously--whether Italy even had a semiconductor industry, Andrea Cuomo, ST's corporate vice president for advanced system technology, says, "The fact is, we had to listen to customers" to attract business. That willingness to listen led directly to the system-on-a-chip concept and underpinned a collaborative culture that has maintained ST's market leadership. "Every time we can deliver a solution to a customer problem, we get an advantage, but this doesn't require us to be a technical ayatollah," says Cuomo.
ST entered early alliances in consumer electronics and telecommunications with Thomson Multimedia and Alcatel in France, which prospered. But senior management knew the real growth opportunities lay outside the country. The first truly big alliance win came with Seagate Technology, the world's leading maker of disk drives, which is based in Scotts Valley, Calif. The assignment: to shrink all the components of Seagate's hard disk drive controller board onto one or two custom chips.
The company's growing importance to many of its customers has forced a sea change in the very structure of the supplier/customer relationship.
Customers say ST has handled well the possibility of conflict of interest. "We have and we believe ST has fairly good firewalls between design teams," says Rob Ryan, manager of power chip engineering at the Western Digital, another major disk drive manufacturer, which is based in Lake Forest, Calif. ST, he says, does "a pretty good job keeping proprietary things proprietary. I bring them into the lab. We've educated them about how to make a drive, and they've educated me about their process, so I can tailor the design to their expertise."
In disk drives, ST supplies critical components, but drive manufacturers add considerable value themselves, with constant improvements in disk technology. For many other products, however, ST's system-on-a-chip has replaced essentially all of the components manufacturers formerly assembled themselves. In car radios, for example, ST supplies a complete system to nearly all of the leading automotive manufacturers, which now differentiate their products primarily by brand name, features and faceplates.
Clearly, a combination of technology and strategy has allowed ST to capture a large percentage of the value in many markets it serves. But the company's growing importance to many of its customers has forced a sea change in the very structure of the supplier/customer relationship. In other words, the architecture of the product, which spurred the growth of customer partnerships, has altered the architecture of the company; it has even redefined roles for ST executives. For example, Otto Kosgalwies, ST's vice president for European sales and marketing, is leading a corporate initiative in supply chain management. The combination is not as odd as it sounds, he says. "Today there's not the classic purchase order. There's a contract and we have to manage the deliveries. There's constant feedback, so the customer more or less drives our supply chain."
Such a transparent process requires a great deal of openness where none existed before, Kosgalwies says. "In the past, the customer issued a purchase order he didn't understand and received a confirmation he didn't understand. Now we have an open door policy, sharing information you never used to share. It used to be absolutely unheard of to tell the customer your own component inventories. Now it's standard for us."
ST has to share component inventories with customers because in many cases it is the sole supplier of a chip that may be 90 percent of the finished product's technology content. Without the ST chip that controls the print head, Hewlett-Packard cannot sell its printers; without the radio frequency chips supplied by ST, Nokia cannot sell its cell phones; without ST's system-on-a-chip, Scientific-Atlanta's set-tops are hollow boxes. This kind of single-sourcing used to be rare, but today it is mandated by the high degree of custom design and proprietary manufacturing processes in ST's products.
Virtues of virtuality
Close cooperation and sole sourcing of critical components also requires ST's customers to make structural and cultural changes. Companies that once prided themselves on their vertical integration or the depth of their engineering capability now depend on working with ST for their systems design, manufacturing and even packaging.
Change can be especially trying for many of the companies ST serves because their market success has long been predicated on technology leadership. Sharing proprietary information with and outsourcing systems development to a supplier like ST does not come naturally to them. That's why ST pursues a gradual approach to partnerships, creating confidence by increasing both the percentage of ST content in the customer's product and the closeness of the relationship over the years.
Partners prefer this gradual approach too. For Nokia, ST has been elevated over a period of 10 years from what the Finnish cell phone giant deems a simple supplier to a premier supplier, to a partner; ST is one of only 10 such partners. ST supplies Nokia both with radio frequency circuitry, which is the core of a cell phone, and with a power management system, which is critical to battery life--a major differentiator in Nokia's market. Over years of working together, the two companies found they had compatible cultures and values, which, in turn, enabled them to set long-term goals and follow operating principles together.
"We both understand that we can set objectives as a virtual company that will be greater than if we have a supplier/customer relationship," says Jean-Fran?ois Baril, Nokia's senior vice president for sourcing and procurement. "We establish objectives in technology, quality and cost that are bigger than our own simple interest, in the spirit of one plus one equals three. This is not so easy if you are a short-term-oriented company. If you are a long-term company, it is very strong."
"When you are in the technology race, you are forced to buy machines that are not mature, so partnering with suppliers is becoming more and more vital."
Nokia and ST have regularly scheduled "dream days," when engineers from both companies get together to create wish-list products, without interference from management or marketing executives. "Our engineers get excited by what ST can provide. Then we align peer-to-peer communication," says Baril. "It's really from the core, or the DNA, that we see the need to align."
Personalizing customer relationships also helps make them work. "It's a special relationship with a few guys who have demonstrated that in difficult times, people are able to help each other. Two years ago, the world was running short in terms of capacity and ST treated us very, very nicely," recalls Baril.
Flexibility is also a key to maintaining strategic alliances. "Quite often we are asked how does it work and the answer is, the way the customer wants," says Dutheil. "We go as far as they want us to go, whether it's common design teams, at their facility or ours, employee information, access to technology, or priority access to manufacturing."
Another factor in ST's ability to partner is the company's status as a chipmaker only. Unlike Motorola or many of the large Japanese semiconductor manufacturers, ST has no finished-goods business that might compete with its customers. And at a time when many chip companies have gone "fabless" (meaning they have outsourced manufacturing altogether), ST retains a major strategic advantage through its ability to supply customers with complete solutions. Some of its partners have gone so far as to sell off their internal semiconductor manufacturing because they can depend on ST's efficient production.
As a way to maintain its manufacturing edge, the company has joint development agreements with its own suppliers, such leading equipment makers as Applied Materials and Canon. Through these alliances, ST's engineers are able to ensure that solutions to their needs are designed into succeeding generations of manufacturing equipment. "When you are in the technology race, you are forced to buy machines that are not mature, so partnering with suppliers is becoming more and more vital," says Orio Bellezza, group vice president for operations and technology. "There is still a lot of value in the way you manage manufacturing. The machines are standard, but there is room for differentiation in how you use them."
Although ST plans to form more alliances--particularly in Asia where it has very few--the total number will remain small, so that each receives the necessary attention, Dutheil notes.
Partner and prospector
ST's network of strategic alliances contributes more than revenue to the company. The alliances also have helped the company access and assimilate complex knowledge from disparate sources. For a chip company created far from the talent pool of Silicon Valley, this is a core competency and a major source of differentiation.
"ST really benefited from being born in the wrong place,'' says Professor Doz of INSEAD. "Lacking the depth of local technologies and market understanding around its birthplaces in France and Italy, ST had to source a great deal of specialist knowledge from outside its home."
Metanationals like ST that scan the world for competitive knowledge are global "prospectors, not projectors," says Professor Doz. Traditional multinationals are projectors, he argues, because they project their own business formulas and standards around the world, the way Intel projected its X86 microprocessor design, turning it into an industry standard by virtue of its incorporation in the original IBM PC. Although Intel may manufacture in a foreign country to reduce labor costs, it tends not to look for innovation outside Silicon Valley. This is not a criticism of Intel, the world's most successful chip company, but as competitors like Advanced Micro Devices and Cyrix have discovered, it is not an easy model to emulate.
ST has made a learning culture central to its strategy and has institutionalized the learning process to a rare degree.
In the beginning, there surely was an element of necessity in ST's emphasis on learning, just as there was in its reliance on alliances. But ST has made a learning culture central to its strategy and has institutionalized the learning process to a rare degree. Learning at ST is both a continual, distributed process, in which the company seeks innovative thinking wherever in the world it is based, and a more formalized and central process, with its in-house ST University offering classes at campuses in the south of France, Sicily, Singapore and Phoenix and at all of the company's plants around the world--classes that every employee must attend.
Like all chip companies, ST has moved labor-intensive assembly processes (so-called back-end operations) to developing countries like Morocco and Malaysia. But to a limited extent, it has also moved higher-value activities, like product development, to emerging markets. If properly cultivated, these countries can be a source of both new customers and new ideas.
"SGS was the first Western company to set up front-end operations in Singapore in 1983," says Carmelo Papa, a corporate vice president and chairman of the emerging markets task force. "We were the first to understand that it was not only a place to find cheap labor.'' Now, in almost every country in which ST operates, the local organization has a sales force, as well as designers and technical support people who develop products for the local market.
When ST identifies a need, or something lacking in its knowledge, it moves quickly to place people where that knowledge can be found. After identifying a professor in Hong Kong with expertise in a particular emerging field, the company hired two people in Hong Kong to work with and learn from him.
As the company opens itself up to learning from sources everywhere, unusual ideas can appear from unexpected places. "Each year we award the best suggestions, wherever they come from," says Carlo Ottaviani, group vice president for corporate communications. In one case, a woman working in Morocco used ST's Total Quality Management (TQM) system to suggest a way to improve the bonding of the semiconductor assembly operation, drawing on her experience using a sewing machine. The concept was accepted, and the woman received one of the awards for "Best Suggestion of the Year."
"Because product design must be close to the customer, we have dispersed it all around the world."
"Very often we visit Daimler, BMW and Ford, or they visit us," says Paolo Gonella-Pacchiotti, director of ST's car multimedia business unit. "It's important for us to understand what carmakers want, although we are going to sell the product to the component manufacturers, like Bosch, so that we can help them meet the requests of the car manufacturers."
The knowledge gained from such visits enables ST to achieve design wins for products that have never existed, except on some engineer's wish list, such as the single-chip telematics system combining GPS, voice recognition and wireless communications that the Italian electronics manufacturer Magneti-Marelli now supplies to automakers Alfa Romeo and Fiat.
A centerless corporation
The marriage of SGS and Thomson was described and accounted for, as a merger of equals. The company, initially named SGS-Thomson Microelectronics, changed its name to STMicroelectronics in 1998. For a time, ST maintained dual headquarters, in Paris and Milan. Dual locations rapidly proved impractical, but settling on one or the other of these sites guaranteed to offend half of the new company. So a compromise was reached by moving corporate headquarters to Geneva, Switzerland, where it occupies a few floors in a nondescript office building near the airport.
Although some executives still grumble that this solution merely succeeded in making French and Italian employees equally unhappy, it also helped create a company with a very lean corporate infrastructure. The Geneva office is spare and sparsely populated and even those executives who call it home are almost never there. They may be in Agrate, Italy--near Milan--on a large campus that combines Silicon Valley-style metal and glass with the decades-old concrete headquarters of ST's state-owned predecessor. Or they may be at the company's other big campus in Crolles, France, near Grenoble. But they are just as likely to be in Russia, Turkey, Brazil or China because these markets are not just outposts, and the company's facilities in them are ST's real functional core.
"The way we think about globalization is strategic, to have an integrated presence in all the major markets: R&D, sales and marketing, manufacturing," says Dutheil, the chief strategist. "Technology R&D is centralized in Crolles and Agrate; product development is dispersed. Because product design must be close to the customer, we have dispersed it all around the world."
One of the ways ST coordinates development efforts across multiple geographies is through the use of virtual teams. Linked by e-mail, Web-based collaboration tools and teleconferencing, employees need not share a location to share a project. In winning the Magneti-Marelli telematics contract, for example, ST drew on team leaders based in France, England, Italy, India and, in the U.S., California and Arizona. The team members spanned 14 time zones and spoke six languages.
"There was no way ST could achieve what it had to do through traditional hierarchical command-and-control management," says Jon Katzenbach, founder and senior partner of Katzenbach Partners LLC and coauthor of "The Discipline of Teams: A Mindbook-Workbook for Delivering Small Group Performance"
Of course there is a price to be paid for working this way. The cell phone can ring at any time, day or night; the business-class lounge in Singapore or Santiago becomes your office. Carmelo Papa, the emerging markets expert, has trained himself to sleep in three-hour shifts, even at home in Geneva, because he never has time to adjust for any single time zone. "It's a way to survive," he shrugs. "My body has adapted."
But Papa says it is essential to maintain operations in all major markets, even if it results in a more complex organizational structure. "You have to understand different mentalities. That's the tough thing. Doing business in Brazil is not like doing business in India. You have to respect the local mentality without forgetting the rules of business that apply everywhere," he says.
One benefit of operating with a lean central organization is that ST was able to avoid the mass layoffs and losses that most semiconductor companies endured during the industry downturn of 2001. And because of ST's diversification across industries and geographies, even as the chip market fell by 32 percent in 2001, ST declined by just 18 percent and remained profitable. The company also gained market share during the downturn and emerged a stronger competitor.
"For 18 months, business was booming, up 40 to 50 percent and then suddenly, overnight, the market went down," says Jean-Philippe Dauvin, the company's chief economist. "For six months, bookings were almost zero, but we had to maintain motivation, so we would be ready when things accelerated again. In the market downturn, many companies changed strategy. We at ST didn't change our strategy or our portfolio; we adapted."
Part of Dauvin's job is communicating with securities analysts and he has added a special course for them at ST University so that they understand the company's methods and metrics. Nevertheless, analysts pose a special challenge to this company that has grown so fast from a small regional player to a global leader.
"I'm not sure U.S. investors understand us very well," Dauvin says. "They continue to think we are the biggest of the pygmies. But No. 3 is not a pygmy."
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Reprinted with permission from strategy+business, a quarterly management magazine published by Booz Allen Hamilton.