Only the Paranoid Survive

by Andrew S. Grove

  We had been losing money on memories for quite some time while trying to compete with the Japanese producers’ high-quality, low-priced, mass-produced parts. But because business had been so good, we just kept at it, looking for the magical answer that would give us a premium price. We persevered because we could afford to. However, once business slowed down across the board and our other products couldn’t take up the slack, the losses really started to hurt. The need for a different memory strategy, one that would stop the hemorrhage, was growing urgent.

  We had meetings and more meetings, bickering and arguments, resulting in nothing but conflicting proposals. There were those who proposed what they called a “go for it” strategy: “Let’s build a gigantic factory dedicated to producing memories and nothing but memories, and let’s take on the Japanese.” Others proposed that we should get really clever and use an avant-garde technology, “go for it” but in a technological rather than a manufacturing sense and build something the Japanese producers couldn’t build. Others were still clinging to the idea that we could come up with special-purpose memories, an increasingly unlikely possibility as memories became a uniform worldwide commodity. Meanwhile, as the debates raged, we just went on losing more and more money. It was a grim and frustrating year. During that time we worked hard without a clear notion of how things were ever going to get better. We had lost our bearings. We were wandering in the valley of death.

  I remember a time in the middle of 1985, after this aimless wandering had been going on for almost a year. I was in my office with Intel’s chairman and CEO, Gordon Moore, and we were discussing our quandary. Our mood was downbeat. I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.” I stared at him, numb, then said, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”

  The Route to Survival

  With that comment and with Gordon’s encouragement, we started on a very difficult journey. To be completely honest about it, as I started to discuss the possibility of getting out of the memory chip business with some of my associates, I had a hard time getting the words out of my mouth without equivocation. It was just too difficult a thing to say. Intel equaled memories in all of our minds. How could we give up our identity? How could we exist as a company that was not in the memory business? It was close to being inconceivable. Saying it to Gordon was one thing; talking to other people and implementing it in earnest was another.

  Not only was I too tentative as I started discussing this course of action with colleagues, I was also talking to people who didn’t want to hear what I meant. As I got more and more frustrated that people didn’t want to hear what I couldn’t get myself to say, I grew more blunt and more specific in my language. The more blunt and specific I got, the more resistance, both overt and covert, I ran into.

  So we debated endlessly. I remember at the end of a discussion asking one of our senior managers to write down what he understood our position to be on the subject; he was waffling as he struggled with the decision and I figured I could trap him with his own written memo. I failed. Months went by as we played these weird games.

  In the course of one of my visits to a remote Intel location, I had dinner with the local senior managers, as I usually do. What they wanted to talk about was my attitude toward memories. I wasn’t ready to announce that we were getting out of the business yet because we were still in the early stages of wrestling with the implications of what getting out would mean—among them, what work would we have for this very group of people afterward? Yet I couldn’t get myself to pretend that nothing like this could ever happen. So I gave an ambivalent-to-negative answer, which this group immediately picked up on. One of them attacked me aggressively, asking, “Does it mean that you can conceive of Intel without being in the memory business?” I swallowed hard and said, “Yes, I guess I can.” All hell broke loose.

  The company had a couple of beliefs that were as strong as religious dogmas. Both of them had to do with the importance of memories as the backbone of our manufacturing and sales activities. One was that memories were our “technology drivers.” What this phrase meant was that we always developed and refined our technologies on our memory products first because they were easier to test. Once the technology had been debugged on memories, we would apply it to microprocessors and other products. The other belief was the “full-product-line” dogma. According to this, our salesmen needed a full product line to do a good job in front of our customers; if they didn’t have a full product line, the customer would prefer to do business with our competitors who did.

  Given the strength of these two beliefs, an open-minded, rational discussion about getting out of memories was practically impossible. What were we going to use for technology drivers? How were our salespeople going to do their jobs when they had an incomplete product family?

  So it was on that night at this Intel dinner I described above. The rest of the evening was spent going in circles around these two issues, the management group and I getting increasingly frustrated with each other.

  This was typical of discussions on the subject. In fact, the senior manager in charge of our memory business couldn’t get with the program even after months of discussions. Eventually he was offered a different job and accepted it, and I started with his replacement by spelling out exactly what I wanted him to do: Get us out of memories! By this time, having had months of frustrating discussions under my belt, I no longer had any difficulty making myself clear. Still, after the new person got acquainted with the situation, he took only half a step. He announced that we would do no further R&D on new products. However, he convinced me to finish what his group had in the works. In other words, he convinced me to continue to do R&D for a product that he and I both knew we had no plans to sell. I suppose that even though our minds were made up about where we were going our emotions were still holding both of us back from full commitment to the new direction.

  I rationalized to myself that such a major change had to be accomplished in a number of smaller steps. But in a few months we came to the inevitable conclusion that this halfway decision was untenable and we finally worked up our determination and clearly decided—not just in the management ranks but throughout the whole organization—that we were getting out of the memory business, once and for all.

  After all manner of gnashing of teeth, we told our sales force to notify our memory customers. This was one of the great bugaboos: How would our customers react? Would they stop doing business with us altogether now that we were letting them down? In fact, the reaction was, for all practical purposes, a big yawn. Our customers knew that we were not a very large factor in the market and they had half figured that we would get out; most of them had already made arrangements with other suppliers.

  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.

  I believe this has a great deal to do with why there is such a high turnover in the ranks of CEOs today. Every day, it seems, leaders who have been with the company for most of their working lives announce their departure, usually as the company is struggling through a period that has the looks of a strategic inflection point. More often than not, these CEOs are replaced by someone from the outside.

  I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. They have only one advantage, but it may be crucial: unlike the person who has devoted his entire life to the company and therefore has a history of deep involvement in the sequence of events that led to the present mess, the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the s
ituation. They can see things much more objectively than their predecessors did.

  If existing management want to keep their jobs when the basics of the business are undergoing profound change, they must adopt an outsider’s intellectual objectivity. They must do what they need to do to get through the strategic inflection point unfettered by any emotional attachment to the past. That’s what Gordon and I had to do when we figuratively went out the door, stomped out our cigarettes and returned to do the job.

  As we came back in that door, the main question we faced was this: if we are not doing memories, what should our future focus be? Microprocessors were the obvious candidate. We had now been supplying the key microprocessors for IBM-compatible PCs for nearly five years; we were the largest factor in the market. Furthermore, our next mainline microprocessor, the “386,” was ready to go into production. As I mentioned, its development was based on a technology developed in the corner of an old production plant. It would really have done much better in our most modern plant in Oregon but until now that place had been busy doing memory development. Getting out of the memory business gave us the opportunity to assign the group of developers in Oregon, who were arguably the best at Intel at this time, to the task of adapting their manufacturing process to build faster, cheaper, better 386s.

  So I went up to Oregon. On the one hand, these developers were worried about their future. On the other hand, they were memory developers whose interest in and attachment to microprocessors was not very strong. I gathered them all in an auditorium and made a speech. The theme of the speech was, “Welcome to the mainstream.” I said that Intel’s mainstream was going to be microprocessors. By signing up to do microprocessor development, they would be bearing the flag for Intel’s mainline business.

  It actually went a lot better than I had expected. These people, like our customers, had known what was inevitable before we in senior management faced up to it. There was a measure of relief that they no longer had to work on something that the company wasn’t fully committed to. This group, in fact, threw itself into microprocessor development and they have done a bang-up job ever since.

  Elsewhere, however, the story was not so positive. These were very hard times and we were losing a lot of money. We had to lay off thousands of employees. We had no immediate use for the silicon fabrication plant where memories were made and had to shut it down. We also shut down assembly plants and testing plants that were involved with the production of memories. These also happened to be our oldest factories, situated in odd locations and too small for our business at this point anyway, so shutting them down gave us the opportunity to modernize our factory network. But that didn’t make it any less painful.

  Looking Back

  It was through the memory business crisis—and how we dealt with it—that I learned the meaning of a strategic inflection point. It’s a very personal experience. I learned how small and helpless you feel when facing a force that’s “10X” larger than what you are accustomed to. I experienced the confusion that engulfs you when something fundamental changes in the business, and I felt the frustration that comes when the things that worked for you in the past no longer do any good. I learned how desperately you want to run from dealing with even describing a new reality to close associates. And I experienced the exhilaration that comes from a set-jawed commitment to a new direction, unsure as that may be. Painful as it has all been, it turned me into a better manager. I learned some basic principles, too.

  I learned that the word “point” in strategic inflection point is something of a misnomer. It’s not a point; it’s a long, torturous struggle.

  In this case, the Japanese started beating us in the memory business in the early eighties. Intel’s performance started to slump when the entire industry weakened in mid-1984. The conversation with Gordon Moore that I described occurred in mid-1985. It took until mid-1986 to implement our exit from memories. Then it took another year before we returned to profitability. Going through the whole strategic inflection point took us a total of three years. And while today, ten years later, they now seem compressed to one short and intense period, at the time, those three years were long and arduous—and wasteful. While we were fighting the inevitable, trying out all sorts of clever marketing approaches, looking for a niche that couldn’t possibly exist in a commodity market, we were wasting time, getting deeper into red ink and ultimately forcing ourselves to take harsher actions to right things when we finally got around to taking action at all. While the realization of what we were facing was a flash of insight that took place in a single conversation, the work of implementing the consequences of that conversation went on for years.

  I also learned that strategic inflection points, painful as they are for all participants, provide an opportunity to break out of a plateau and catapult to a higher level of achievement. Had we not changed our business strategy, we would have been relegated to an immensely tough economic existence and, for sure, a relatively insignificant role in our industry. By making a forceful move, things turned out far better for us.

  What happened subsequently? The 386 became very, very successful, by far our most successful microprocessor to that point. Its success was greatly enhanced by the work of the former memory group in Oregon.

  We were no longer a semiconductor memory company. As we started to search for a new identity for the corporation, we realized that all of our efforts now were devoted to the microprocessor business. We decided to characterize ourselves as a “microcomputer company.” This started first in our public statements, literature and advertising but over the years, as the 386 became a phenomenal success, it took hold of the hearts and minds of our management and most of our employees. Eventually the outside world started to look at us that way too.

  By 1992, mostly owing to our success with microprocessors, we became the largest semiconductor company in the world, larger even than the Japanese companies that had beaten us in memories. And by now our identification with microprocessors is so strong that it’s difficult for us to get noticed for our nonmicroprocessor products.

  Yet had we dithered longer, we could have missed our chance at all this. We might have vacillated between a heroic effort to hang on to our dwindling share of the memory business and an effort that might have been too weak to project us into the exploding microprocessor market. Had we stayed indecisive, we might have lost both.

  One last lesson, and this is a key one: while Intel’s business changed and management was looking for clever memory strategies and arguing among themselves, trying to figure out how to fight an unwinnable war, men and women lower in the organization, unbeknownst to us, got us ready to execute the strategic turn that saved our necks and gave us a great future.

  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 managers 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.

  This is not unusual. People in the trenches are usually in touch with impending changes early. Salespeople understand shifting customer demands before management does; financial analysts are the earliest to know when the fundamentals of a business change.

  While management was kept from responding by beliefs that were shaped by our earlier successes, our production planners and financial analysts dealt with allocations and numbers in an objective world. For us senior
managers, it took the crisis of an economic cycle and the sight of unrelenting red ink before we could summon up the gumption needed to execute a dramatic departure from our past.

  Were we unusual? I don’t think so. I think Intel was a well-managed company with a strong corporate culture, outstanding employees and a good track record. After all, we weren’t quite seventeen years old, and in those seventeen years we had created several major business areas. We were good. But when we were caught up in a strategic inflection point, we almost missed it; we nearly became another Unisem, another Mostek, another Advanced Memory Systems.

  “Signal” or “Noise”?

  “How do we know

  whether a change

  signals a strategic

  inflection point? The

  only way is through

  the process of

  clarification that

  comes from broad and

  intensive debate.”

  When is a change really a strategic inflection point? Changes take place in business all the time. Some are minor, some are major. Some are transitory, some represent the beginning of a new era. They all need to be dealt with but they don’t all represent strategic inflection points.

  How do you know what a certain set of changes represents? Put in another way, how can you tell the “signal” from the “noise”?

  Is X-ray Technology a “10X” Force?

  Some years ago, key technologists at IBM told their counterparts at Intel and other companies that the Japanese semiconductor manufacturers were investing in gigantic and extremely expensive facilities for manufacturing semiconductors with even finer features than could be accomplished by ordinary techniques. These facilities would use x-rays instead of ordinary light to define the features of a chip. According to the IBM people, the Japanese had more than a dozen of these plants under construction. They feared that the Japanese investment in x-ray technology represented a fundamental change in the way semiconductors were built, a change by which the American producers could be left behind once and for all. If they were right, the x-ray approach would represent a “10X” technology factor and lead to an inflection point that we might never recover from.