In this video, Dan Hutcheson has a conversation with Jim Morgan about his book, Applied Wisdom: Bad News Is Good News and Other Insights That Can Help Anyone Be a Better Manager
by Jim Morgan with Joan O’C. Hamilton. No CEO from the semiconductor equipment industry has ever written a real book on management and the unique set of skills required to succeed in it. Jim’s book is more than a how-to guide. It takes you through his life, the problems he encountered, how he resolved them, what he learned. I’ve known Jim to be extremely profound on this topic for more than thirty years and have written many maxims about him. Yet I still learned far more than I knew before picking up the book. Moreover, he is someone who took Applied Materials from a start-up about to go bankrupt to the world’s largest semiconductor equipment company. In the book he tells you how he did it. I would definitely put this book up there with Andy Grove’s ‘Only the Paranoid Survive’ … especially if you are in the semiconductor equipment industry.
Dan: Applied Wisdom: Bad News Is Good News and Other Insights That Can Help Anyone
Be a Better Manager. That’s the title of Jim Morgan’s new book. Jim is a former CEO of Applied Materials and one of the longest-serving CEOs of a major Silicon Valley company.
We’re going to have a conversation with Jim about how to run and to effectively make decisions in a high-tech company. There are plenty of management books out there, more than you could ever read, but few come from individuals who are actually in a top leadership position. Plus no CEO from a semiconductor equipment company has ever written a book on what it takes and the unique set of skills required to succeed in what is the extreme sport of business high-technology. One could only hope to come close to matching Jim’s track record. Jim took Applied from an about-to-go-bankrupt startup, turned it around, and turned it into the world’s largest semiconductor equipment company. In the book he tells you how he did it, which is a how-to guide that takes you through his life, the problems he encountered, how he resolved them and what he learned along the way.
I’ve known Jim for more than 30 years and in that time he’s always been profound when it comes to the art of decision-making, and I still learned far more than I knew when I picked up the book. I would definitely put this book on the shelf next to Andy Grove’s Only the Paranoid Survive, particularly if you’re in the semiconductor equipment industry.
I’m Dan Hutcheson and this is weVISION. Welcome to the program, Jim.
Jim: Thank you. Good to be here.
Dan: So where do we start?
Jim: We should probably start at the beginning, because that’s where I got some of my early ideas about management, working on a farm and in the family canning factory. The idea that bad news is good news if you do something about it — I didn’t realize it until maybe 20 years later — the idea probably came from there because I used to be responsible for the canning line and if you heard a bad sound, that was the quickest signal that you might have a problem developing. With a one-line cannery, if you shut down one machine you shut down the whole factory and everybody would be unable to work until you got it fixed. So you looked for trouble and you got it fixed in advance, and we were able to run it for many years. In fact my granddad had it for 50 years.
Dan: It’s really fascinating because the principle of good news is no news and bad news is good news is just so fundamental. I had never heard that before anywhere.
Jim: You know one of the things is we did a lot of work in Japan so if you’ve gone to Nikko in Japan there are the three monkeys, see no evil, hear no evil, speak no evil. A lot of CEOs and decision-makers and politicians tend to practice that and it usually leads to their downfall. Bad news is good news is a real counter to that, psychologically.
Dan: What’s fascinating is that you had to create a culture in the organization so that the people felt safe to bring up bad news.
Jim: That’s true. It takes time, but we encouraged that and when I’d walk around they started joking that I really always wanted the bad news first, where the natural tendency was to give me the good news. So over time the rest of the team practiced that.
Dan Maydan, the president of Applied for many years, and I were having lunch last year and we thought back and we couldn’t think of a time when there was a serious issue in the company that we didn’t know before either the board, or Wall Street, or the press, and in almost all cases we were able to do something about it. So that gave people the confidence to speak up, that was a payoff for Applied. It was honored.
Dan: I remember a story of how Dan Maydan came to Applied and he was always getting offers to go somewhere else and he never did and I asked him why and he said it was your unique approach to partnering.
Jim: I think that’s true. I felt that it was really important that your partner knew as much as you did and your partner was rewarded as you were, or maybe even better, and you had to have a belief that your partner could be successful, without the partnership, without you. Therefore you were to maintain the partnership and encourage it.
Dan came out and we started talking over a few months and the partnership really worked out for us and it kind of set the tone for a lot of other partnerships we had with customers and other companies and Wall Street. We always got good tough questions on Wall Street. There are times when things are really tough out there for our industry but the investors would stay with us. We always had support.
Dan: It’s interesting too because you did that all the way down in the organization. You were one of the first people I ever met who would preach to me about the importance of HR and having a good HR organization and how that created your culture.
Jim: We also developed the executives as an extension of the idea. You had to walk the talk, that was a clear message throughout the company. And because you focused on HR and you dealt with HR issues quickly, then people would highlight issues.
You know we always had this rule, each of us had three people we were trying to bring in. After we got one of them would add another one of them. You keep looking for people who had that culture who would fit who had that culture of openness and communication and collaboration. By the mid-80s, a lot of stuff happened all over the world. We were going global very fast. We really needed people like Tetsuo Iwasaki in Japan and Y.I. Lee in Korea to be able to make decisions and know what the strategy was and the vision. To have the trust that they would make the right decision. And they did.
Dan: And that’s really how you brought scale, which has always been a weakness of tech companies. They reach some level and they can’t go further because they can’t delegate.
Jim: We called it decentralization and I actually picked that up when I was in the Army working for Materiel Command. The ideas that are in the book, the practical management ideas, people in our company started joking about them, calling them Morganisms. That’s how they got that name.
We did a study on decentralization when I was in the military and what you saw is that there were ways to get decisions decentralized, which is different than just delegating. The differences are when you delegate to somebody they always have to come back to you. With decentralization you make decisions consistently at the lowest possible level. It made a big difference.
Dan: Back in the early 80s when you went through a really deep downturn I remember you making this comment about cash being king. Cash is king. It was the first time I ever heard it. In fact I think it was the first time it was ever said. When I look back and think about your accomplishments I think about how tech companies, most tech companies, start off as not for profit (laughing).
Jim: Not intentionally, but… (laughing).
Dan: But that’s sort of the history of tech, it’s not-for-profit, but you took the idea that now it had to be for profit and then you went in and afterwards you went to working for not-for-profit organizations. The full spectrum.
You did bring a business sense to high-tech. How is that really different, in terms of when you get into high-tech, it’s all about product and getting to market in the next generation and the next generation after that and yet you still have to have these business principles, you have to make money, you can’t lose money forever.
Jim: Being in a small family company you had to have more income than you had expenses or you were dead — so that was an early insight. But I think more importantly that during when I worked at Textron, they were one of the early conglomerates, and they had these different divisions that were totally separate, about 35 of them at the time, and they monitored more by plans, cash flow and profits. They made sure they had the cash to operate at the right time. So when I came to Applied we were going bankrupt pretty fast if B of A hadn’t extended our line. Fortunately they did.
Dan: The story is very similar to Jobs going to Apple the second time.
Jim: Right. And so they did and we were able then to get cash out of it and I always just made sure we had the cash. Because in a downturn where we beat everybody was if we accelerated R&D, even for lots of money. Everybody knew it, and so the employees felt safe, even though it was really tough out there, and they really pushed the new products. And so we always gained marketshare every time we went through a downturn because we had the cash and people knew it was going to be okay on the other side. But they had to get products out that had gross margins.
Dan, who was a great technologist, also really pushed that we had to have good gross margins and high-quality products. It wasn’t just technology, it was commercialization.
Dan: Yes, that was one of the big breakthroughs. And especially I think you really started focusing on how do you apply the compensation, the reward, which hadn’t been done. Up until that point if you got a patent, you got a $50 check, enough to take your wife to dinner. It wasn’t much and you actually made it possible for the people who are creating the products to share.
Jim: They had to meet the goals. They set the goals. But they had to meet the goals including the gross margins, and the sales, so that they were part of the commercialization effort as well as the technical mindset. They had to make sure that they could make both things happen for the product to be successful. And then they could get some pretty good bonuses out of that.
Dan: It’s funny, I remember one day I read in the Mercury News and I came to you about it. Dan Maydan actually made four times as much as you did that year.
Jim: (laughter) That was one of the early years when the products weren’t doing much else.
Dan: That’s when I learned why you’d done that, you made him very successful and I remember you telling me you didn’t have a problem with it because you were going to laugh all the way to the bank. Maydan was gonna take you there.
Jim: He did a good job and everybody in the company had options at various levels with different amounts. They had to be there for several years, it wasn’t quick, they had to be committed, to be in the game.
Dan: One of the biggest challenges people are facing today is how to crack China. You are famous for cracking Japan. You wrote the book about it… a long time ago.
Jim: 1991, Cracking the Japanese Market.
Dan: I remember those days. There were so many different approaches to trying to get into the Japanese market. You were unique in how you did it. What are some of the lessons you learned then and how they could apply to getting into China today?
Jim: We used the same strategy to get into all the different countries in Asia. It was clear to me — I had never been outside of North America — in 1977 I went to the first semiconductor equipment and materials industry association conference in Japan. I talked to a lot of people and it became clear to me that for us to be successful we had to go direct to the customer. Not work through trading companies. Everybody told you that that wouldn’t work because you wouldn’t have enough of a Japanese face on it.
But with Iwasaki and Seitaro Ishii and the team, they just did a great job and we stuck it out in tough times in Japan and so we ended up with the highest market share of all the companies in Japan at the time. It was because we got in and we really learned what it was all about. Just have to be there, not have preconceived ideas. That’s probably the biggest thing for China, for any of those countries. Lots of things happen that you never would’ve imagined, both good and bad, but in balance it was better than you could imagine.
Dan: I remember talking to one of the heads of NEC’s semiconductor organization. This is when NEC was the world’s largest. And he was complaining about the companies that they had that were making semiconductor equipment and what not. And he couldn’t get his guys to buy his tools. They wanted your tools. And I asked, why is that? He said because they’re more Japanese than our own company is. (Laughter) But your point about you really did morph into, and you actually got them to fund your…
Jim: Liquid crystal display business. Sharp and Toshiba really helped us get into that business. We had a Japanese board member and he suggested we try, because the technology was right, and he helped us interface with them. We had good relationships with them anyway. And so they agreed to share what they knew about production. It was the first time that they had ever worked together at that level. A lot of interesting things happened. It was just amazing.
Dan: Speaking of boards: today people face a lot of problems because you have to have truly independent boards, that’s the idea, and so the board doesn’t know anything about your business. (Laughter)
Jim: (Laughter) That’s kind of stupid, but anyway.
Dan: So you spend all this time educating the board. But you were always bringing customers to your board meetings. You brought a Japanese executive from Toshiba to your board. Gordon Moore would be at your board meetings in the early days. How important do think it is as you face these ethical issues? Your supply to them but you get the guidance.
Jim: I’ve always believed that you should develop a trust in the people that you work with in the companies that you work with and part of the trust is that you have to be ethical and if you’re ethical you are able to have two pieces of information in different places and what shouldn’t be shared isn’t shared. I was okay with that as were my board members. I never had a problem.
So we always picked people who were really competent in their field. They’d retired. Like Paul Low (??) from IBM. He was head of technology. He was great. He had scale, globalization, technology and wasn’t afraid to speak out and so that was the kind of board we always had. We had some from overseas, from Holland and Japan. We had that group and they worked really well together.
There’s a big discussion that you had to have a chairman separate from the president. One of my board members said, well, Jim, I think that’s kind of a waste of time thinking about that. If things don’t seem to be going right we’ll probably just get on the phone and talk it over and we’ll get a new CEO. But that’s how we thought about it. My job was to make sure that they understood well enough what we were doing, the good and the bad. We spend a lot of time in the board meetings talking about the bad. They can help you with that. There’s not much they can do except give you accolades for the stuff that’s good.
Dan: But your point on ethics is really important. For all of the companies that I’ve worked with over the years, Applied is one of the most ethical companies I ever dealt with.
Jim: Thank you.
Dan: You can also look at the history of the news. There are a lot of companies caught up today in all of these scandals and you don’t read about that with Applied. I remember at one point the Mercury News reportedly asked you about the stock market scandal at the time that was going on, where people were backdating. You made the comment that it wasn’t about what was legal, you said that we always asked the question, what was right. That’s the next level where you really get your answers.
So how do you create an ethical organization? Does it start at the top and work its way down through HR?
Jim: A company will never be better than what your leaders are so we tried to encourage everyone in a leadership position within the whole company, worldwide, that one of their first priorities was to walk the talk and provide leadership in ethical behavior. You need that as part of the trust you require with your customers, in the business we’re in, because we have knowledge about different customers that’s important to each customer but improper to share. You really have to develop trust between your customers that you are trustworthy. And so we worked very hard on that and it paid off because we got more business, with good products, and good service, and they could trust us to work with them in a proper way.
Dan: I think that’s the important message to, that it is still profitable to be ethical, if not more profitable.
Jim: If they trust you then they’ll collaborate with you. Just like in the display business where two of the customers really shared their intimate technology to help us get started.
Dan: You’ve won a lot of awards. You’ve worked in for-profit companies, not-for-profit companies. You got the Noyce award from the SIA. You also got the Noyce medal from the IEEE. You got the Global Humanitarian Award, the National Medal of Technology award from the president. You’ve served three presidents. When you look back what are you most proud of?
Jim: Well it’s Applied, the team that was there, and what they accomplished. There’s nothing close to that. Because I really got those awards based on the work that the whole company did, worldwide. I just represented them and I was glad to do that. We were able to attract and keep just an unbelievable group of people for a long period of time, 15 or 20 years.
We have a little get together. The criteria is that you had to be part of management for at least 15 years. We had about 45 people, key people that were around last year. We were really fortunate that that crew worked so well together. They had a lot of different cultures and different personalities but they got it done.
Dan: That’s an interesting question, where you had to choose between your success and their success. What was driving you? Was it their success, the success of your people?
Jim: Getting them to work together. That was probably the bigger challenge for me, to get all these different cultures and talents and egos to work effectively together. You could trust they’d get stuff done. I remember one time I had an analyst tell me I understand that this product is in trouble, or this development, and I said, I don’t know whether it’s going to be on time or work as well as we hope but I would never bet against them, never bet against them. (Laughs)
Dan: What’s different between a for-profit and a not-for-profit? You transitioned to helping some of these other organizations.
Jim: Well it’s interesting because one of the things, as I was writing the book, and I had the experience before but I didn’t really get it, it didn’t gel quite as much until I really began to think about it as far as management issues relative to the book. I always did some nonprofit work, like the tech awards, different things. But the major one was The Nature Conservancy. They were going through a real transition. They wanted me to come and help and when I retired my goal was not to go to any meetings east of the Sierras.
Dan: You’d had enough travel (laughs)?
Jim: (laughs) Yeah I’d had enough travel. I agreed to come for a year. And I got back there and started working with them and I realized that they were a lot like Applied was in the 80s. They were really committed people, they were really smart, they’d go to the furthest capability that you could possibly exert to get done what needed to be done. But they really had no management experience. That was kind of like our technical people. Really great people but they had never had any management experience.
And that’s kind of true around the venture capital market today. A lot of these young startups, they just haven’t had much management experience. I just felt that was an important part of the process and so I began coaching them about managing, using these tips. I began to collect them and I’d asked them which ones are helpful to them and we kind of made a list of them, the ones that would work in their field and a nonprofit, even a small one. You have some really key capable people, but not much experience in managing things and they, if they haven’t, then they don’t realize that’s important and yet that’s probably what paces them. You know they have to raise money and they have to do a lot of things.
Running a nonprofit is one of the tougher jobs in the country. It’s tough because you got so many constituencies and you have so many passions. You just have to figure out how to manage that well. And I found that the tips, in fact if you put an early stage company, and a smaller nonprofit, and wrote the problems down and didn’t say who it was, they’d be about the same. Probably 75 or 80% of them. So the tips were helpful to them, very useful.
Dan: Thanks for taking the time today.
Jim: You bet. Glad to be here.
Dan: The title of the book is Applied Wisdom. Thank you for coming to the program.
Jim: Thank you very much.