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Case # L-35 | Stanford Graduate School of Business
Murphy soon discovered that Marvell had a cultural and a business problem, both of which were deeply intertwined. On the cultural side, according to Murphy, the company had done a great job of hiring top-tier individuals. But because the founders had exercised a lot of control over the company and essentially made most of the decisions, the rest of the organization lacked experienced managers. On the business side, Murphy explained how there was a surprisingly limited understanding of how the business was doing.
"The company had been spending a billion dollars on research and development in the prior several years on an annual basis, yet revenues were declining significantly. The ratios of expenses to revenue didn't seem to make sense. The product line looked very fragmented in terms of where all the investments were being made."
— Matt Murphy
Source: Company data
Marvell's R&D Spend 2016
At this point, many executives might have considered major budget cuts and layoffs to get the company’s financials back on track. Instead, Murphy felt he first needed to answer the question “what do you have?” before he could make any major strategic decision.
"There is a pressure when you become a first-time CEO, or take on any new organization or group, to move quickly, pull the trigger, and to be candid. My view was very much that we needed to take this in a very methodical, data-driven, organized approach to how we think about the business.
The first thing I really did was first look at where was that $1 billion going? What had it been spent on? What was it projected to be spent on? And then if you actually sub-segmented all the little pieces of it, what did those look like? What were the IRR of those investments? What was the relative market share, the margins?"
— Matt Murphy
Murphy thus initiated an extensive strategic portfolio review (SPR) over the course of five weeks across each business unit, requiring managers to present their unit’s market, including growth rates and market shares; the unit’s performance over the previous five years; and ultimately argue a business case for the unit’s future. Murphy’s focus on data-driven decision making and transparency was highly divergent from the approach of the original founders, who for years had prioritized satisfying their customers’ demands over analyzing the actual viability of products and how they fit in with the business.
A Refresher: Internal Rate of Return (IRR)
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Internal Rate of Return is the discount rate where the net present value of the future cash flows of a project (Cash Flow 1 to Cash Flow n) is equal to the initial investment (Cash Flow 0).
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