Case 3-5 Digital Equipment Corporation

Digital Semiconductor was a business unit of Digital Equipment Corporation. John Gavin, the DS group controller, wanted the finance department to find ways to add value and better support the division because the DS business strategy had many changes over the past five years and the division was still operating at a loss.

History:

The semiconductor division which was a part of Digital Equipment Corporation expanded rapidly in the 1970s. Digital was financially very successful in 1988. However, Digital faced huge losses in 1990 through 1994. In 1997 Digital returned to profitability because of the reorganization of Digital into business units and product lines.

Digital Semiconductor:

Chip designers start to consider cost along with pushing the envelope of science. In the new product line organization, Digital units needed from Both DS and outside suppliers.

Semiconductor Manufacturing:

Silicon Wafers Probe Assembly Test

It is important to note that the cost structure went from a cost per wafer to a cost per die during the probe process. Yield was very critical to the cost of the process.

Product lines:

A product line was defined as the integration of the activities of marketing, product development, and product engineering to manage a set of common products to achieve ROI. DS was divided into six product lines representing their major microprocessor.

Question

1. I think the new system is better than old one. First of all, each product line would be measured with specific goals for profit contribution. Furthermore, all the financial performance would be measured individually (i.e. revenues, sales, spending, etc…). Therefore, each product line would be more responsible and active for making profit. And the product line would be charged a competitive manufacturing product cost for each of its products. So each product line would control the cost. As a potential product line manager, I would explain the new system to my folks and let them know why we need to implement it. Because I think communication is the most important thing when a new system comes up to us. I will ensure everyone know the new system very well. Therefore, I need someone to teach me and tell me about the new system because I lack the knowledge about the area about making profit.

2. Given the organizational architecture of the product lines, the manufacturing facility (FAB) would be run as cost center, and measured on their ability to achieve this competitive activity-based cost standard.

3. The critical tasks of finance to support this new organization are to drive the business practice changes to make DS more competitive as a stand-along business and stimulate the division to drive for growth and eventual profitability. As John Gavin, making a huge profitability is my biggest concern because the division is still operating at a loss. I should find the way to solve the problem. Moreover, I should communicate with my managers to get their thought about the new product line organization.

4. In my opinion, the product line concept is appropriate for DS because the market is so huge and complicated plus DS has many kinds of the products. So, each product line can focus on its own task and easy to find the problem and solve it. The product line structure’s positive aspects include: 1) provide the training ground in general management. 2) The product and process development can work together to support both manufacturing and development. 3) Managers develop better understanding of finance practices and financial managers can work more closely with the line managers. 4) Permitted a much better understanding of the cost structure of the products. The negative aspects include: 1) Causing the competition between each product line. 2) May have disputes between business unit and headquarter. 3) easy to have a argument about the transfer price.

5. From the previously functional organization to business unit organization, people have to cope a lot. The new ways of dealing with things might take some time to take effect. Hopefully the product line concept can change the “spend and technology” mentality that exists in the division. Now, measurement of results and dispensing rewards are implemented, productivity will increase.

6. First of all, eliminate the central manufacturing and central services so balance sheets and statements of cash flows system can be developed. Secondly, since there are 7 product lines, everybody would tend to compete for the more budgeted product line. This competition can be eliminated by systematic rotating of each product line to be in charge of different series of semiconductors. Thirdly, I would like to stress again on the importance of communication clarity. eliminate the central manufacturing and central services so balance sheets and statements of cash flows system can be developed.