Five rules to help weather the bad times

Tom Werner

We all learn from our mistakes. When business is good, a mistake may be only a bump in the road. When business is bad, it may be the end of the road.

During the current economic downturn, everyone is looking for ways to cut costs, safeguard profit margins, and at least survive until the market returns to health. Our company, Silicon Light Machines (Sunnyvale, CA), has been fortunate enough to remain profitable even in the slump. Five guiding principles have worked well for us over the years—focus on your core, work toward an early break-even point, strengthen core competencies, improve cycle times, and take advantage of new markets.

Focus on the core
Focus on core technologies, markets, and customers. In down times companies tend to focus internally and lose momentum on product roadmaps. When one market heads south, it's tempting to look for another that seems more promising. That would be a mistake if it meant straying from your core technologies and markets. Focus means efficiency. If you lose your focus, you risk losing your credibility—not to mention your profitability.

Focusing on your core competencies also means assessing them. Make sure you have customers who have validated your core competencies. Then service the hell out of those customers. Get more involved in their design processes and look for ways to customize your products to meet their needs. Find new products or services you can produce for them that leverage what you already do.

Focus also requires constant reevaluation of your plans and assumptions, particularly in light of the constituencies that matter most. Be prepared to react quickly to changes in the market, but not at the expense of wandering outside your core competency or alienating your core customers.

Build on relationships on both the supply and demand sides. Look at your supply chain, evaluate your value chain, and partner with those who do things better than you do. For example, for seven years we have been making fast, analog optical MEMS. We work on the front end and our parent company Cypress Semiconductor (San Jose, CA) handles the back end, including fabrication, assembly, and test. We leverage Cypress' world-class manufacturing capabilities, and they have the advantage of our optical expertise for developing advanced optical communications products. Each of us is doing what we do best.

Do what you do well and outsource the rest.

Break even sooner
Lower your break-even point. Take a hard look at what the future holds, then make your cuts with that in mind—not just your current pain points. Plan on being around for the long run. If you don't, you won't.

Cut variable costs and overhead—including marketing programs, extraneous travel, temporary staff, and so on. Anything non-core is fair game.

Hard times can make you a better company. After the semiconductor industry downturn in 1996, Cypress invested heavily in process R&D, greatly lowering its production costs; it also built strong internal processes, including quality control. These lower costs and strong controls have proven crucial now that times are tight again.

Strengthen the core
Maintain and, wherever possible, build core competencies. While you're lowering your breakeven point, you've got to keep your core competency alive. Innovative products are your future—no matter how hard the times, don't fire the innovators. Keep your design team intact, even if you have to put them on projects that may not have an immediate payoff.

Don't just keep your engineers busy, challenge them. We give the most interesting problems to our best people and encourage them to come up with equally interesting solutions. This approach has helped us to retain our best engineering talent over the years, through good times and bad.

Cycle faster
Improve cycle times in all areas. Economic down times are a great opportunity to sharpen your core competencies. One that is sure to pay off is shortened cycle times or improved cycles of learning. As the economy goes through rapid change, your company will need to adjust faster and learn to capitalize on change.

The huge inventory write-downs we've been seeing are the result of production cycles being out of sync with economic cycles. Production cycle time reduction shortens response time to economic cycles and results in less inventory exposure. Likewise, customers respond to industry changes often in abrupt ways. Improved cycles times increase the likelihood that your firm can respond, even capitalize on customer transitions.

Don't tunnel
Don't put all of your eggs in one basket. The surest way to handle a sudden downturn in your sole market is to avoid exposing your business plan to this sort of risk in the first place. For many caught up in the current reversal of the telecom market, it may be too late to suggest that it's a good idea to maintain awareness and engagement with other markets that could deploy your core technology or skills.

Once the pressures of a folding market are upon you, it's hard to fast-track the development of market understanding and customer relationships in an entirely new field. We've learned that it's essential to always maintain a small team that's developing new opportunities in diverse fields.

For instance, although we're known as primarily an optical-component supplier, Silicon Light Machines' first major customer was actually Sony Corp. (Tokyo, Japan), who licensed our Grating Light Valve technology for use in projection display systems. We've since used the same core technology to develop products for printing and other applications outside of optical components. While we remain focused and committed to our goals in optical communications, we're glad to have hedged our bets when the obvious thing to do a year ago would have been to abandon these solid, growing—and profitable—markets.

TOM WERNER is CEO of Silicon Light Machines, a subsidiary of Cypress Semiconductor, 385 Moffett Park Dr., Suite 115, Sunnyvale, CA 94089-1208; e-mail: [email protected].