A brief interview with Steve Sanghi, President, CEO, and
Chairman of the Board of Microchip Technology Inc.
And Co-Author of
How the Aggregate System Turned Microchip Technology
From a Failing Company to a Market Leader
Q: Microchip Technology has enjoyed tremendous success over the past 12 years. In fact, its stock is considered to be the best performing stock in the semiconductor industry. What’s the driving force behind your success?
A. The key to the success of an enterprise is its ability to establish and maintain an optimum rate of continuous improvement. This is not a new revelation and competent CEOs know this truth. The question becomes, how does an enterprise establish and maintain its optimum rate of improvement? Enter “The Aggregate System.” The Aggregate System is a powerful blend of strategic formula, exceptional culture, and human systems combined into a self-perpetuating system to produce exceptional performance. The accelerated rate of improvement that we achieved at Microchip was a direct result of the application of The Aggregate System to our enterprise.
Q: This was not the case when you became CEO of the company. At the time, Microchip was struggling to survive. Paint a picture of what you faced during your early days at the helm?
A. When I took over as CEO of Microchip Technology in 1990, the Company was in dire straits. It was hemorrhaging money, its technology was outmoded, its factories were inefficient, and the employees lacked morale. So many things were wrong with the company, that I didn’t know where to start.
A parade of consultants marched through my office offering every kind of cure, from cycle-time reduction, to process controls, to outsourcing. All of the suggestions were valid, but there was no single cure for what ailed Microchip. I recognized that Microchip required an approach that would improve all aspects of the enterprise and involve every employee in the quest for improvement. But since no one could offer such an approach, it was up to us to develop our own model for reform.
I recruited the help of Michael Jones, who was Microchip’s Organizational Development Manager and later became VP of Human Resources. We designed, and with the help of Microchip’s outstanding management team, implemented The Aggregate System. The Aggregate System is designed to simultaneously improve all of a company’s business processes by aligning and uniting the processes and elements that lead to success. Rather than focusing solely on the manufacturing processes, business strategies, or workforce, The Aggregate System represents a comprehensive approach to consciously design the whole enterprise to optimize its rate of improvement.
Q: Of all that was “broken,” was there any one thing that you felt needed to be changed above all else to set the company on the right track?
A. This single question probably separates The Aggregate System from all other systems that could be used for either the crisis management or continuous improvement. Most other systems rely on that one thing that is most broken and bring the organizational energy and consultant power to fix it. The Aggregate System is a big-picture approach that creates an exceptional business culture and a management model that institutionalizes and perpetuates improvement across the entire enterprise.
Q: Describe The Aggregate System and why you felt this was the tool you needed to engineer Microchip’s turnaround.
A. For the past 50 years, educators, researchers, authors, and consultants have been marketing their specific piece of expertise as the panacea for improving businesses. However, these piecemeal approaches were insufficient to turn around Microchip’s performance and lead it into the top echelon of semiconductor companies.
People have a tendency to want to simplify complex systems or issues by targeting a few of the primary factors that are influencing the current outcome or results. Indeed, this makes it easy to get your hands around the issue, but you can only optimize your rate of improvement by chartering individuals to improve all the factors influencing the current outcome.
The Aggregate System establishes the company culture, unites employees through shared workplace values, and guides employees’ strategies, decisions, actions, and job performance. The goal of The Aggregate System is to consciously design the enterprise to achieve its strategic formula (i.e., the company’s vision, mission, strategies, business plans, and P&L/balance sheet models). This is accomplished by building the company around a set of core values that will lead the firm to attain its strategic formula. The company’s policies, management practices, and the human systems that influence employees are aligned and integrated to the values. These human systems encompass how the company organizes, staffs, communicates, assesses, recognizes, compensates, develops and advances individuals.
Probably a number of crisis management methods could have been used for the initial turnaround of Microchip. But what separated The Aggregate System is that it is self-perpetuating and its effects have lasted for over 16 years. Microchip continues to post record results and make “higher highs and higher lows” in operating results through the economic and business cycles. The Aggregate System provided the benefit of taking the organization smoothly from “Turnaround” phase, to “Continuous Improvement” phase, to “Industry Leadership,” without changing the fundamental system.
Q: As you and Michael Jones, your co-author, set out to implement The Aggregate System, did you encounter many roadblocks? After all, a company’s “culture” is often part of its DNA, and very difficult to change.
A. Yes, a company culture is often part of its DNA and it was no different in the case of Microchip. As we began to change its culture, we encountered many roadblocks. In fact, we wrote an entire chapter, Chapter 11, in the book about “The Human Change Process.” Unless the senior management models the company’s desired culture and values, you have no chance of being successful. So, we enlisted the help of the executive team early on. Several members of the executive team had to leave, because they had their own agenda. But once the success started showing, the confidence started to build. This united more and more of the organization behind the principles of The Aggregate System. Pretty soon, there was a huge momentum and the wheel started spinning with positive energy and results. Fast forward 15 years – the results go from a 10% loss to a 36% operating profit for Microchip, amongst the best in the semiconductor industry. We describe this “Aggregate Wheel” in Chapter 2 of the book.
Q: Why did you write this book?
A. Over the years, many people have asked me how we were able to turn Microchip from a failing spin-off of General Instrument into the success it is today. I am gratified to be able to share the methods we used, and am confident that many other businesses in many other industries will learn and apply The Aggregate System to optimize their own rate of improvement.
Q: Is The Aggregate System still being used at Microchip? Is it something ubiquitous that employees face daily, or is it something that blends in within the corporate structure?
A. The Aggregate System is still very much being used at Microchip. It is the foundation of our culture, methods, systems, practices, policies, strategies, decisions and actions working in unison to achieve our mission. It is ubiquitous within Microchip because it is our way of doing things. When we hire new employees from other companies, they often comment that Microchip is different -- for the better. After a while, they get integrated in the DNA of the company and it is not something that is obvious every day. It blends in within our corporate culture. But one thing does not blend in - our corporate financial and business results. They have remained the envy of the industry for over a decade.