Here is a brief excerpt from an interview of Ray Stata by Abhijit Mahindroo and Nick Santhanam for the McKinsey Quarterly, published by McKinsey & Company. To read the complete interview, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

To learn more about the McKinsey Quarterly, please click here.

* * *

The cofounder of Analog Devices looks back on his long career and assesses the state of semiconductors today.

Ray Stata, cofounder of Analog Devices, has always charted his own course. “Early on, I decided I wanted to start my own company and be my own boss. I had a serious aversion to authority,” he says. His independent streak and willingness to challenge conventional wisdom helped make Analog into a worldwide leader in data conversion and signal-processing technology. In this edited conversation with McKinsey’s Abhijit Mahindroo and Nick Santhanam, Stata looks back on the factors that contributed to Analog’s success. He also reviews the rapidly evolving semiconductor landscape, offering advice to executives who are trying to develop their own winning strategies.

The path to a start-up can be complicated. Can you tell us how Analog came to be?

After graduating from the Massachusetts Institute of Technology [MIT], I started working for Hewlett-Packard to learn about business, since I wanted to start my own company. Matt Lorber, a fellow student at MIT with whom I shared an apartment, also had the itch to start a business. We talked a lot about what to do and how to do it without any great ideas. So we took the plunge without a real business plan and little money and founded Solid State Instruments, based on our experience at MIT’s Instrumentation Labs. The company was a failure from most perspectives, except that it was acquired by Kollmorgen’s control division within a year. The sale provided a nest egg to fund Analog Devices later. More important, through our experience building instruments and controls for Kollmorgen, we learned about the emerging market for modular operational amplifiers. At Solid State, we decided to buy the op amps used in our instruments, rather than design and manufacture them. We later started Analog Devices to compete with our suppliers.

New companies might benefit from hearing how Analog Devices grew from a start-up to a mature enterprise. What helped you in this journey?

First, we had a tolerance for risk and readily adapted to changes in the environment. When we founded Analog Devices in 1965, there were no linear integrated circuits [ICs]. We designed op amps using discrete transistors, resistors, and capacitors. In 1967, the first IC op amps were introduced. The performance of these devices was no match for our hand-assembled modules, but they became better each year and were an order of magnitude cheaper. So I decided in 1969 to get into the semiconductor business and to design and manufacture IC op amps, targeted at high-performance applications in the instrumentation and military markets where our modular op amps were selling well.

It was a huge risk for a small company to shift from profitable modules, where the business was growing 80 percent annually, to ICs. We had no experience in IC design and manufacture, and the large semiconductor companies had a compelling head start. We had just gone public, and the board wouldn’t approve the shift, so I personally took the risk of funding a start-up and gave Analog the option of purchasing it later, if it succeeded, with no gain to myself. Well, the start-up succeeded, and Analog bought it to enter the semiconductor business.

We also had a capacity for unconventional thinking. Take our decision to set up our own international distribution system and sales organization. Most small companies used sales representatives and distributors, especially internationally. But we directly sold and delivered products to customers in the US and abroad. This allowed us to provide superior customer service and technical support compared with competitors.

* * *

Here is a direct link to the complete article.

To learn more about Ray Stata, please click here.

Abhijit Mahindroo is a principal in McKinsey’s Southern California office, and Nick Santhanam is a director in the Silicon Valley office.