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After CEO, Staff Cuts, What's Next for Seagate?

After a week that saw Seagate lose its two top executives, announce plans to cut nearly 3,000 employees and slashing salaries throughout its organization, it's clear to industry observers that the hard drive maker is suffering from more than just a down economy: It needs a whole new strategy, they say.

On Monday, Seagate (NASDAQ: STX) announced the resignations of its CEO, Bill Watkins, and its chief operating officer, David Wickersham. It said Stephen Luczo, its chairman, would step in to re-assume his former position of CEO, while CTO Robert Whitmore is taking over Wickersham's duties.

Just days later, the Scotts Valley, California-based storage vendor compounded the bad news, announcing that it would cut 6 percent of its 53,000-employee workforce. The 2,950-person layoffs, which are company-wide, will save it about $130 million annually, it said.

"It's a tough environment," Woody Monroy, a Seagate corporate spokesperson, told InternetNews.com. "Our customers have been feeling it, and when they feel it, you feel it."

In addition, Seagate said this week that it's slashing salaries, with pay cuts ranging from 10 percent for sales staff to 25 percent for C-level executives. The reductions will save a further $80 million this year.

While Seagate said its hand had been forced by the recessionary climate and shrinking tech budgets' impact on product demand, industry watchers believe Seagate wouldn't be hurting so badly if it had taken action sooner.

"Other companies were announcing they were cutting back due to economic challenges early last year and were ready for what's happening," Charles King, principal analyst at Pund-IT, told InternetNews.com.

Not only didn't Seagate react in time, it also didn't seem to foresee the impact of decreasing PC sales growth, King added.

A report yesterday noted that worldwide computer sales showed only minute growth during the fourth quarter of 2008, up just 1.1 percent over the same period in 2007.

"That last quarter was a big hit to component vendors like Seagate," King said.

More changes ahead?

While King acknowledged that the breadth of Seagate's product portfolio -- which has both consumer and enterprise offerings -- has helped it navigate rocky economic waters in the past, it lacked a set strategy for dealing with major changes in the market.

"This is the time where a long-term strategy management comes into play for a company," King said. "If a company gets in a defensive and conservative mode beforehand to prepare for times like this, you can manage and be in good shape," he explained. "But if a company didn't, they are now scrambling."

That's why Brian Babineau, a senior analyst at Enterprise Strategy Group, expects Seagate to reveal a revamped strategy in the near future.

[cob:Special_Report]Babineau said he imagines that Luczo, who held the post of CEO from 1998 to 2004, would remain in that spot only during the transitional layoff period, and will be aiming to hire a replacement for Watkins after a few short months.

The layoffs "have everything to do a lack of strategy on several fronts, and I am sure he will hire someone to lead strategy very soon," Babineau said.

Seagate's Monroy, however, defended the company's record, saying that economic conditions had been worse than the company could predict.

"The technology industry is hurting," said Monroy. "While our broad portfolio has, in the past, insulated us to economic bumps and dips, today's economics present a challenging business environment."

He also denied that Luczo's return to the CEO position is a temporary action.

"He is not an interim, he is the CEO," Monroy said.

Seagate is scheduled to report its second fiscal quarter's financial results on Wednesday, Jan. 21. Previous guidance for the quarter totaled $2.85 billion to $3.05 billion in revenue, and net income of $34 million, or 12 cents to 16 cents per share.

Last quarter, the company reported revenue of $3.03 billion and net income of $60 million, or 12 cents per share. In a press statement at the time, Watkins said Seagate had strong prospects despite the economic conditions plaguing the industry.

"Looking forward, in the face of a challenging macroeconomic environment, we will focus on cost controls and inventory management while continuing to invest in the key technologies that will solidify product leadership," Watkins said.