Book Review 57: Only the Paranoid Survive

I'll describe what a strategic inflection point is a bit later in this book. For now, let me just say that a strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end.

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Andrew Grove’s well known book, “Only the Paranoid Survive” was quite different from what I expected. It was more narrowly focused than I anticipated. I’m not disappointed though. I learned some new things about my industry, and it made me think more about the challenges a corporation will face. While Grove does not discuss this part of it, it’s clear to me these challenges can affect smaller organizations within a corporation. That, however, goes to my thoughts on how managers need to think strategically about their role in the organization, and is a topic for another blog post.

The book is all about corporate Strategic Inflection Points. Those are points in a corporations life when suddenly the wold is a very different place. Grove’s discussion is detailed and frank.

Clearly, the old world was no more. Something had changed. And the more successful the players were in the earlier industry, the harder a time they had to change with it.

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As Grove discusses these changes in the business environment, he often uses the phrase, “Something has changed.” Of course, whenever I see that phrase I think of Elphaba from Wicked. While Grove isn’t discussing good versus evil, he is still talking about similar things. Something happens and you can never go back to the way things were before. When it happens to a company, either the company makes major changes and grows, or it slowly contracts and dies.

The trick is to spot these Strategic Inflections Points while they are happening, recognize their potential impact, and act accordingly.

For Intel, Grove says that point occurred with shift to a PC compatible computer market and Intel’s decision to get out of its primary business -- making memory chips and focus on a new business -- making processors.

He also discusses the Pentium flaw from 1994 and its impact on the company. Since the he wrote the book at the birth of the consumer Internet in 1995 (it was published in the middle of the Dot Com boom) he disccussed the web only briefly. Even then, though, it was obvious it would be a Strategic Inflection point, perhaps not for Intel, but definitely for the computer business in general.

All this suggests that the Internet is not a strategic inflection point for Intel. But while the classic signs suggest it isn't, the totality of all the changes is so overwhelming that deep down I think it is.

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I have only a basic knowledge of the computer business prior to the advent of the PC compatible. I’d heard the names Wang and DEC, but besides some vague commercial memories, I couldn’t tell you much about them. Grove sketched out how the computer business worked in that era.

The computer industry used to be vertically aligned... this means that an old-style computer company would have its own semiconductor chip implementation, build its own computer around these chips according to its own design and in its own factories, develop its own operating system software (the software that is fundamental to the workings of all computers) and market its own applications software (the software that does things like accounts payable or airline ticketing or department store inventory control). This combination of a company's own chips, own computers, own operating systems and own applications software would then be sold as a package by the company's own salespeople. This is what we mean by a vertical alignment. Note how often the word "own" occurs in this description. In fact, we might as well say "proprietary," which, in fact, was the byword of the old computer industry.

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As the industry shifted from horizontal to vertical orientations, and memory chips became a more commoditized business, Intel faced the prospect of dwindling profits and revenue. Intel ultimately made the decision to abandon its core business to focus on new opportunities in the CPU business. That decisions in the 80s made Intel the company it is today.

In retrospect, its clear Intel made the right choice, but it wasn’t obvious at the time. As Grove tells the story, it was a heart-wrenching decision and a risky one at that.

Grove goes on about how challenging this was to Intel’s identity. He also explains just how out of touch with the issue his executive team was. While they were struggling with the decisions, it was already happening on the ground.

Over time, more and more of our production resources were directed to the emerging microprocessor business, not as a result of any specific strategic direction by senior management but as a result of daily decisions by middle managers: the production planners and the finance people who sat around the table at endless production allocation meetings. Bit by bit, they allocated more and more of our silicon wafer production capacities to those lines which were more profitable, like microprocessors, by taking production capacity away from the money-losing memory business. Simply by doing their daily work, these middle manners were adjusting Intel's strategic posture. By the time we made the decision to exit the memory business, only one out of eight silicon fabrication plants was producing memories. The exit decision had less drastic consequences as a result of the actions of our middle managers.

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In the case of Intel's exit from the memory business, how did Intel, the memory company, get to where only one factory out of eight was producing memory chips by the mid-1980s, making our exit from memories less cataclysmic? It got there by the autonomous actions of the finance and production planning people who sat around painstakingly allocating wafer production capacity month by month, moving silicon wafers from products where they seemed wasteful—memories were the prime example of this—to other products which seemed to generate better margins, such as microprocessors. These people didn't have the authority to get us out of memories but they had the authority to fine-tune the production allocation process by lots of little steps. Over the course of many months, their actions made it easier to eventually pull the plug on our memory participation.

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The executives at Intel made the decision to exit the memory business after the rest of the company was already implementing the decisions based simply on day-to-day resource allocation. When Intel finally announced the decisions to its customers, they had a similar response.

In fact, when we informed them of the decision, some of them reacted with the comment, "It sure took you a long time." People who have no emotional stake in a decision can see what needs to be done sooner.

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Fear of making the decision delayed it for sometime. And Grove realizes that delay was probably a mistake. Echoing a sentiment I’ve heard other executives express, Grove says:

Looking back over my own career, I have never made a tough change, whether it involved resource shifts or personnel moves, that I haven't wished I had made a year or so earlier.

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(Come to think of it, Wil Wheaton expressed that same sentiment in his book, “Just a Geek.”)

Grove explains that an executive must listen to the Cassandras in the organization. They’re in a better position to anticipate Strategic Inflection Points than management is.

Although they can come from anywhere in the company, Cassandras are usually in middle management; often they work in the sales organization. They usually know more about upcoming change than the senior management because they spend so much time "outdoors" where the winds of the real world blow in their faces. In other words, their genes have not been selected to achieve perfection in the old way.

Because they are on the front lines of the company, the Cassandras also feel more vulnerable to danger than do senior managers in their more or less bolstered corporate headquarters. Bad news has a much more immediate impact on them personally. Lost sales affect a salesperson's commission, technology that never makes it to the marketplace disrupts an engineer's career. Therefore, they take the warning signs more seriously,

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In Greek mythology, Apollo gave Cassandra the gift of prophecy, but when she angered him, he cursed her so that no one would ever believer her prophecies. I’ve know some salespeople in my life who can relate to that.

While everything in the book comes back to Strategic Inflection Points, Grove does offer other key business insights. Here’s how he describes the new rules of the horizontal economy. The seem like fairly basic business precepts to me. Did the world use to operate differently?

One, don't differentiate without a difference.

Two, in this hypercompetitive horizontal world, opportunity knocks when a technology break or other fundamental change comes your way. Grab it.

Three, price for what the market will bear, price for volume, then work like the devil on your costs so that you can make money at that price. This will lead you to achieve economies of scale in which the large investments that are necessary can be effective and productive and will make sense because, by being a large-volume supplier, you can spread and recoup those costs. By contrast, cost-based pricing will often lead you into a niche position, which in a mass-production-based industry is not very lucrative.

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To be successful, a company has to be focused and take calculated risks. Trying to preserve as many options as possible and spreading its efforts thin will not work, according to Grove. An organization needs to choose a direction and go for it. That may limit options later on, but it is the key to success.

If competition is chasing you (and they always are—this is why "only the paranoid survive"), you only get out of the valley of death by outrunning the people who are after you. And you can only outrun them if you commit yourself to a particular direction and go as fast as you can. You could argue that, since they are chasing you, you should give yourself all sorts of alternative directions—in other words, hedge. I say, "No." Hedging is expensive and dilutes commitment. Without exquisite focus, the resources and energy of the organization will be spread a mile wide -- and they will be an inch deep.

Second, while you're going through the valley of death, you may think you see the other side, but you can't be sure whether it's truly the other side or just a mirage. Yet you have to commit yourself to a certain course and a certain pace, otherwise you will run out of water and energy before long.

If you're wrong, you will die. But most companies don't die because they are wrong; most die because they don't commit themselves. They fritter away their momentum and their valuable resources while attempting to make a decision. The greatest danger is in standing still.

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When a company is meandering, its management staff is demoralized. When the management staff is demoralized, nothing works: Every employee feels paralyzed. This is exactly when you need to have a strong leader setting a direction. And it doesn't even have to be the best direction—just a strong, clear one.

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Mark Twain is often credited with saying something similar and more succinctly.

Put all your eggs in the one basket and --- WATCH THAT BASKET.

Pudd'nhead Wilson, Pudd'nhead Wilson's Calendar, Chap. 15

In another note he explains that the telling others in the company what they CEO’s priorities are doesn’t matter nearly as much as showing what they are. How an executive spends their time demonstrates their priorities.

One more word about your own time: if you're in a leadership position, how you spend your time has enormous symbolic value. It will communicate what's important or what isn't far more powerfully than all the speeches you can give.

Strategic change doesn't just start at the top. It starts with your calendar.

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In theory, if you look at your calendar, the things that dominate that calendar should also match up with your job priorities. If they don't, it’s likely time to ask serious questions about calendar management or job descriptions.

The book may be 10-15 years old, but the key precepts still matter. If you’re looking for a general business book, you can probably skip this one. If Strategic Inflection Points intrigues you, or you are a fan of Grove’s, definitely check it out. It’s a fairly quick read (I got through 90% of it flying from Greensboro, NC to Seattle, WA). The writing style is entertaining, if not tightly organized.

I’ll leave you with a few of Grove’s thought about the Internet, right when it was starting it’s world-transforming growth.

Netscape went public as I was working on this book. I knew of the company, and I thought that they had a lot of promise. But the way the stock skyrocketed on the first day it was available for public purchase and its continuing growth just blew me away. I could find no obvious rational explanation for this incredibly rapid stock appreciation. Something was going on, beyond merely a promising new company being discovered by a growing number of investors.

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The second thing is that, when you explore these developments first hand, you'll discover that mostly they aren't what they're cracked up to be. In the early days, getting from one place to another on the Internet took forever and when you got there, more often than not, you found a stale marketing brochure. Electronic banking is still a clumsy way to replace a stamp. And interactive television seems to have vanished even before the ink dried on the mega-announcements.

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It is likely that the Internet appliance is a case of turning the clock backward, given that the trend over the last twenty to thirty years has consisted of pulling down intelligence from big computers to little ones. I don't believe that the Internet is about to reverse this trend. But then again, my genes were formed by those same twenty or thirty years. And I'm likely to be the last one to know.

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If you’d like to see more of my book reviews, you can find them here.

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