AMERICA'S FASTEST-GROWING COMPANY On the verge of becoming a billion-dollar baby, disk drive maker Conner Peripherals uses nonstop innovation to keep rivals -- including the Japanese -- at bay.
By Andrew Kupfer REPORTER ASSOCIATE Patricia A. Langan

(FORTUNE Magazine) – THE PLAIN black shell of a compact hard disk drive conceals what is perhaps the most beautiful gem in industry. Pry it open and the eye is drawn to a shining metallic disk and a delicately tapered arm resting a hairbreadth above its surface. A closer look will reveal a second arm hugging the underside, and as many as three more disks tightly stacked below the first. The disks are coated with magnetic film; the arms hold recording heads that read and write coded information as the disks spin at a rate of more than 50 times a second. An arched brown plastic and wire strip links the arms to a brain that controls their movements, revealed on the underside of the drive as a printed circuitboard, crammed with chips. Smaller than a paperback book, the drive is meant to nest within a personal computer, endowing the machine with elephantine memory: It can store 1 1/2 billion bits of information and retrieve any of them, on average, in 25 one-thousandths of a second. Conner Peripherals, the maker of this device, is currently the fastest- growing major manufacturer in America. Barring, say, an earthquake at its headquarters in San Jose, California, the company will surpass $1 billion in revenues in 1990, after just four years of operations, without acquisitions. No other publicly reporting startup has reached that milestone so quickly. The company has leaped into the vanguard of the $8.9-billion-a-year compact disk drive industry, along with other hot companies such as Seagate Technology and Quantum Corp. Conner's products, often technologically ahead of its rivals', have helped spur a boom in notebook-size portable computers that pack as much power as bulky desktop PCs. With $42 million in earnings on $539 million in sales in this year's first half, Conner has showered its shareholders with wealth. The stock, which went public in April 1988 at $8 a share, traded in mid-July at $29.75 a share. Champions of U.S. competitiveness point to this company as evidence that American business still knows how to succeed. (Other exemplars of high growth appear in the following story.) Japan is No. 1 in the market for most other key components of personal computers, from memory chips to display screens to transformers. Even floppy disk drives, the low-end cousins of the devices Conner makes, fell under the dominance of Sony and Matsushita in the mid- 1980s. But U.S. producers of hard disk drives have held Japan at bay. Conner, in particular, has refined techniques for ear-to-the-ground marketing, smart manufacturing, and rapid product development. The ways it deals with that big issue of the Nineties -- innovation -- could be instructive to businesses growing at mere single-digit rates. MANAGING GROWTH as steep as that of Conner Peripherals is like walking a tightrope strung between two airplanes, during takeoff, in a storm. There is enormous built-in danger -- of ballooning costs, confusion in the ranks, supply and distribution snafus, new products that don't make the grade. Conner strives to minimize its risks by doing ordinary things extraordinarily well. The company improves its products frequently, in small steps. When it expands factories, it does so by cloning production processes that have already proved efficient. It relentlessly simplifies everyday operations as a safeguard against excess bureaucracy. Conner has learned to win by turning conventional wisdom upside down. ''Sell, design, build'' is the company's business formula -- in that order. To marry itself to customers and justify R&D expense, Conner won't engineer a new product unless a major buyer has already spoken for it. The unorthodox motto has the advantage of crystalline clarity. Its meaning is immediately grasped by both customers and new employees, no small consideration for a business expanding at Conner's rate. The company's approach to product development is equally offbeat. Conner bucks current fashion and keeps its development lab and its U.S. factory 1,000 miles apart. The evangelical leader of this enterprise is Finis F. Conner, 48, whose first name rhymes with highness. He is an intriguing and paradoxical figure, an amalgam of courtliness and terror. He looks and sounds a little like George Steinbrenner, and through much of his career he has behaved, by his own account, like ''a screaming banshee'' -- haranguing peers and subordinates, storming out of meetings, out of buildings, out of jobs. A classic entrepreneur, he has struggled to triumph over humble beginnings, troubled ventures, ruined business friendships, and -- perhaps his greatest struggle -- his own mercurial temperament. The fifth son of an Alabama carpenter, Conner was a slow starter. ''I barely got out of high school,'' he says. ''I never in my wildest dreams thought I'd go to college. I didn't have the discipline to know how to study. One of my brothers had enough sense and care for me to encourage me to get out of the South. I probably would have married and had 12 kids and worked in a lumberyard if I'd stayed.'' He migrated to California in 1961 at age 19, and then cast about for eight years before collecting an industrial engineering degree at San Jose State and starting work as an electronics salesman. His first glimpse of success came in the 1970s at Shugart Associates, a short-lived but influential maker of disk drives. It was the creation of Al Shugart, a witty, charismatic engineer who helped pave the way for the personal computer by developing the first small floppy disk drives. Eleven years Conner's senior, Shugart liked the young man, who charmed customers with his soft drawl. He took Conner under his wing. According to Conner, Shugart Associates was a crash course in the pitfalls of freewheeling enterprise. ''At first we spent a lot of money developing products nobody wanted,'' he recalls. That went on for a year and a half, until funds ran low and the company's financial backers forced Shugart to resign. Next the company produced a hit product -- a highly compact floppy disk drive -- but bungled it. Says Conner, who was a regional sales manager: ''We couldn't increase production fast enough to fill the orders we took. I had to go out and decide which of my customers we couldn't serve.'' He quit in 1978, after Xerox Corp. bought the firm. CONNER STRUCK IT RICH with his second foray into disk drives. Anticipating that personal computers would play a crucial role in office automation, he foresaw that the machines would need to hold more data than could squeeze onto a floppy disk. Until then, the smallest hard disk drives were eight-inch models used with minicomputers; Conner proposed to build a 5 1/4-inch version for desktop machines. In 1979 he brought the idea to Al Shugart, who was biding time in Aptos, California, running a bar. They founded Seagate Technology and pioneered a line of compact hard disk drives that computer makers flocked to buy. Says Conner: ''We owned the marketplace. We had all the customers and the best products.'' Conner was in charge of strategy and marketing, and ran the company with Shugart and three partners. By 1984, Seagate achieved revenues of $344 million, but Conner found himself at odds with his partners. Intent on building sales of their main product, they refused to develop innovative new disk drives that Conner had brashly promised to customers. ''All of a sudden everybody got a lot smarter than me,'' he recalls. While Conner railed about what he saw as his partners' inflexibility, they grew increasingly irritated with his maverick behavior. After months of infighting, Conner quit. ''It was gut-wrenching,'' he says. ''It was my baby, my customers. They were family to me. I was so possessive of them, but I had to do it.'' He started looking for fulfillment in other realms. With his wife of 13 years he started a family; meanwhile he took some of the $15 million he had made at Seagate and invested unsuccessfully in real estate. In December 1985 he got a phone call from John Squires, a disk drive engineer in Colorado. ''He said he had formed a company,'' recalls Conner, ''and he had a neat little product that he wanted me to see.'' DESIGNING a disk drive that works, that stands up to wear, and that can be manufactured in quantity requires mastery of many sciences -- physics and chemistry, electronics and mechanics, the esoterics of semiconductor coding. Squires, son of an Australian scientist who pioneered the seeding of clouds to make rain, is just the sort of industrial wizard the task requires. When Conner arrived in Denver, Squires handed him a prototype drive that to the entrepreneur's experienced eye was a winner. It was far more compact than Seagate's drives, with a disk only 3 1/2 inches in diameter, and it promised to be much faster at retrieving data. Squires wanted money and the use of Conner's name, which had cachet in the industry after Seagate's success. But Conner says he had no wish to be a mere spectator: ''I told Squires I wouldn't go along unless I could set the strategy and have control over the rate at which we grew.'' The engineer readily agreed. The market for small disk drives was in the midst of a shakeout; more than 70 companies were clawing for $1.2 billion of business. Those that survived followed one of two strategies. Some, like Maxtor (annual revenues: $491 million) and Quantum ($446 million) stayed on the leading edge. They raced to build the smallest, fastest drives, selling them to computer makers at premium prices. The risk they faced was wasting money on R&D -- a company bringing out an advanced product often can't be sure of finding a buyer. Meanwhile, other companies set out to become commodity producers -- supplying high volumes of standard disk drives at low margins. Seagate followed this approach after Conner's departure and has become the largest independent disk drive maker (estimated sales for the fiscal year ended in June: $2.4 billion). The risk for a commodity supplier is that much money must be sunk into factories, an investment that fast-changing technology or more efficient competition can render worthless. With his ''sell, design, build'' principle, Conner opened a new path to growth. It enables his company to market leading-edge products, like Maxtor and Quantum, while avoiding some of the development risks such companies face. The strategy took shape during a trip Conner made two months after his meeting with Squires. Disk drive prototype in hand, he set out in quest of both investors and customers. He found Compaq, the Houston-based maker of IBM- compatible computers that was setting its own records for growth. (In 1986, Compaq became the first three-year-old startup ever to join the ranks of the FORTUNE 500; Conner Peripherals matched that feat this spring.) Compaq Chief Executive Rod Canion thought that by cementing Compaq's ties with makers of sophisticated components he could keep his computers a jump ahead of IBM's. He was so taken with Squires's prototype that Compaq ended up bankrolling Conner Peripherals. It paid $12 million for a 49% stake and bought up Conner's entire production during its first year. The arrangement paid huge benefits to Compaq shareholders. Compaq still owns 21% of Conner, with a recent market value of $367 million. Yet much as he enjoys the 3,100% return, Compaq Chairman Ben Rosen says, ''By far the biggest advantage of the relationship is our early access to the product and our influence over its development.'' Compaq currently absorbs only about one-fourth of the Conner company's output, but the connection jump-started Conner's growth and reinforced Finis Conner's belief in working closely with customers. Each new Conner disk drive is a premium-priced product engineered to specifications negotiated with Compaq or some other key customer. The buyer may want a drive to be thinner, or have more capacity, or retrieve data more quickly, or use less power -- the feature Compaq wanted recently in the drive for its hugely popular notebook computer, the LTE. The only customers Conner turns away are those looking for ; a cut-rate product. Satisfying computer makers' hunger for new disk drives puts heavy pressure on John Squires. To help the company's manufacturing experts roll them out quickly, Squires keeps his innovations simple, altering only one or two features at a time. According to Squires, piecemeal innovation is far less risky than building a completely new machine. ''Usually if an innovation is not simple, it won't work,'' he says. ''Or even if it does, it won't work in volume production.'' His adeptness at such innovation has enabled the company to forestall competition from Japan. Conner Peripherals launched four new products last year, including its first 2 1/2-inch high-capacity drive, which should help keep the company dominant in the notebook computer market. Four additional products are planned for this year. Says James Porter, president of Disk/ Trend, an industry research firm: ''The Japanese companies will have a hard time breaking in because of the difficulty of beating Conner to market.'' To keep the products flowing, Squires emphasizes the need for a smooth handoff from the company's designers to its manufacturing engineers. But that doesn't mean they have to be in the same building, or state. When the company was founded, Squires chose to stay in Colorado; he and his staff work in Longmont, 50 miles from Denver, while the manufacturing engineers are based in San Jose. When a prototype is ready at Squires's shop, a manufacturing team makes a pilgrimage there. After studying the new device and sometimes making changes in concert with the engineers, the manufacturing team takes the product home to California. This odd geographic separation seems to work. With the speed of innovation so important, Squires does not want his coterie distracted from their design work. ''It's nice when you can't get dragged into a production meeting to be asked why a screw is the wrong length,'' he says. Once the San Jose plant starts producing the new drive, a similar handoff is made to the company's vast assembly plant in Singapore, where 4,500 workers build disk drives round the clock. The Squires disk drive incorporates patented features that help the company get new products to market quickly. Conner drives are ''smart'': A microprocessor, mounted below-deck, directs the drive's operation. Unlike the electronic or mechanical control systems on some other disk drives, the Conner system can be reprogrammed to accommodate changes in disk size or drive thickness. The cornerstone of the Conner company's manufacturing strategy is flexibility. Forgoing the cost advantages of manufacturing its own components, the company buys nearly all its parts from others. It also leases the factory space it needs to assemble and test its drives. Keeping capital investment low is practically a religion with Finis Conner: For every dollar in plant and equipment, his company has $7.17 in sales, compared with $3.59 for Seagate. This approach gives Conner Peripherals the flexibility it needs to respond to shifts in demand. In 1988, for example, it was able to pounce on the fastest-growing market segment, disk drives for laptop and notebook computers. Seagate, meanwhile, had not anticipated how suddenly customers would switch from 5 1/4-inch drives, its standard, to the 3 1/2-inch size. Seagate had spent heavily the year before to expand its production lines for the larger units, and ended up taking a $53 million loss in September 1988 as it wrote off part of its investment. The Conner company, growing so fast, could easily have spun out of control had Finis Conner tried to run a one-man show. ''You've got to give Conner credit for putting together a group of seasoned managers,'' says Steven Ossad, a technology analyst for Montgomery Securities in San Francisco. Possibly Conner's shrewdest personnel move was to hire Bill Almon, a veteran of 29 years with IBM. Almon had run Big Blue's low-end disk drive manufacturing business, which in 1987 built some $3.5 billion in drives for IBM's own products. AT HIS NEW JOB as Conner Peripherals' president and chief of operations, Almon must plan for purchases, employment, and factory space while disk drive orders mount -- a logistical nightmare. One practice upon which he depends: reassessing his six-month business plan at least once a week to make sure that capacity is in balance with orders, that inventories are not too large, and that profits are growing faster than revenues. After decades in the IBM hierarchy, Almon is enthusiastic about Conner's lean structure, which abets speedy decision-making and lets executives pull off striking feats. Late last year, for example, he decided Conner needed a factory in Europe, where demand for personal computers, and thereby for disk drives, is expected to grow at double the U.S. rate in the 1990s. To get going quickly, Almon set out to clone the Singapore assembly operation. In January, with borrowed blueprints from the Singapore plant in hand, a ! team began searching in Scotland for a building big enough to hold the layout. Conner officials signed a deal with the Scottish Development Agency in March and gave specifications to a British plant outfitter for most of the work, shipping over missing pieces from the Far East. Once the plant was ready, Almon brought over a complete manufacturing team from Singapore. He then replaced them with Scots one by one, and the Singapore workers went home to their Asian jobs. The Scottish factory shipped its first disk drives late in May -- only 89 days after work began on the raw space. FINIS CONNER believes the company should be able to deliver as many disk drives as customers need -- even on short notice. (Another of his mottos: ''Never turn down an order.'') By that tough standard, the company failed last September, when demand for Compaq's new LTE took off at more than twice the expected rate and Conner wasn't able to supply enough of a new 3 1/2-inch drive. The result: empty shelves in computer stores and unfinished computers backed up in Compaq's factories. Compaq was mightily distressed. But Conner resolved the delay quickly by working on a crash schedule over weekends and holidays; Compaq was able to make up most of its missed sales. Trying to avoid similar problems, Almon has expanded the group in charge of product launches. Now that he is boss of a major disk drive business at long last, Conner has discovered he must curb his tendency to want everything his own way. The company's vice president of finance, Albert Pimentel, recalls a meeting in which a disagreement about cost allocation deteriorated into a shouting match, with Conner bullying Pimentel in front of subordinates. After the meeting Conner sought him out and said apologetically, ''Don't give in to me, because it's important that I do the right thing.'' Colleagues give Conner credit for being a more complete manager these days, but that's not the real reason people stay. ''Finis is the kind of guy who can put money in your pocket faster than anyone else in the world,'' says Pimentel. While the company's cash compensation is not extravagant by Silicon Valley standards (Conner earned about $700,000 last year, Almon $600,000), senior managers can grow very rich on the stock options Conner hands out. His stake in the business, 1.9 million shares, recently had a market value of $56 million; Squires's is worth $47 million. Conner still works 80-hour weeks, and finds no shortage of problems to worry about. For example, Sony and others are investing heavily in optical drives that store data on laser disks. Such drives have huge capacity but are much slower than the magnetic units Conner builds. Industry expert Porter thinks they may catch magnetic drives in speed and price in ten years; Conner's strategy for now is to keep pushing magnetic technology ahead. The immediate threat to Conner Peripherals is its own growth. As it crosses the billion-dollar threshold, the company must manage the transition from entrepreneurial startup to major corporation at hyperspeed. One executive says: ''At Conner we live dog-years. We have to do in six months what other companies do in years.'' Last May the company was jolted by a tragedy at its new Scottish factory. In the midst of frantic preparations, the plant's general manager collapsed and died of a heart attack. The man was newly hired, but his death made Finis Conner wonder if employees were working too hard. ''We can't allow another thing like this to happen,'' he says. He is urging his senior executives to take off a full month this year. (So far none have.) People like Conner rarely slow of their own volition, but the incident clearly affected him. The dead man was 47, Conner's age at the time. He says that to gain perspective on his work he has turned to his family: ''My two kids really don't care about disk drives. When we talk about Teenage Mutant Ninja Turtles or go out looking for dinosaurs behind the house, it puts me in the real world.'' The urge to spend time at home may be good business sense. Conner will need every bit of perspective he can muster to manage his brainchild into maturity.

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