Business & Leadership Lessons From Andy S. Grove & Intel’s Exit From Memories(DRAMs) To Microprocessors.
In 1968, Intel began its business journey as a memory chip manufacturer. Being a first mover, Intel was soon supplying DRAMs to large computer companies and established a near monopoly in a relatively short time. Many other small companies entered the memory chip business but could not sustain and lost out. Intel ruled memories and memories meant Intel.
The Jolt -But within a decade, Intel was on the verge of being thrown out of DRAM business as they rapidly lost the market share in memories. The Japanese manufacturers wreaked havoc in the market by selling low-cost DRAMs. Intel’s then CEO Andrew S. Grove was shocked and couldn’t believe that they failed to value the Japanese manufacturers until they became a giant competitor.
The Hurdles -As Japanese manufacturers turned the DRAMs into a commodity product, Intel was losing money drastically. It was frustrating for the senior team and the employees. Employees morale was also on the wane and some of them were against any new changes. Experts, executives floated too many ideas. But Andy and his team struggled to finalise a solution. The indecision dragged on for more than three years.
The Dilemma -Should Intel invest more in protecting the memory business and fight Japanese manufacturers or should the company flee from memories market and create a new growth market? It was a business growth dilemma.
But Andy and his team overcame every challenge and transitioned the company successfully to microprocessor business.
How Andy and his team transitioned the company? How Intel got out of the business it was founded on? How it refocused its efforts? What leadership, business and management lessons could we learn?
BEING OBSERVANT
“In happier times, we just go with the flow. We do not step back and take a hard look at our business or our customers. If we do not observe carefully, we would be oblivious to the signs of failures”.
In happier times, generally, most of the businesses lower their guards. Intel’s top management failed to observe the change in market conditions, user needs, user behaviours and shifts in user’s attitudes. Most of the time, a disruptive competitor enters a market because the existing businesses failed to meet the unmet needs of their customers or ignored their needs.
Change Of Consumers, Circumstances and Their Jobs To Be Done -The earlier personal computers were so complex and meant for hobbyists, gadget lovers, engineers and scientists. During the late 1970s and the early 1980s, the computer companies had slowly begun to target Common Individuals who had very limited technical knowledge. The potential market suddenly became a bigger pool. These new users were looking for affordable computers and the PC companies had begun working to bring down the cost of the product. New customers with different needs. Intel was late in spotting those changes.
OBSERVE COMPETITORS BUT FORGET COMPETITION
Competition is always a good thing, that it always brings out the best in people, but that’s only true of people who can forget the competition-Phil Knight.
It is important to identify disruptive competitive companies in the emerging stages and follow how they are innovating in response to changes in the environment and user’s attitudes.
The Slow Disruptors -The Japanese memory producers originally entered the PC market to fill the product shortages as Intel struggled to meet the demands. Initially, their quality levels were below Intel’s products but the new cost-conscious customers were willing to buy computers made from those memory chips. Intel was also happy to exit the low-cost memory chips market as the profit margins were very low.
As the volumes increased, Japanese manufacturers began to invest heavily on new technologies and their quality levels continued to rise and became better than Intel. Before Intel realised the problem, the Japanese had become a major competitor. Intel was forced to react rather than drive the market. Intel was late in observing the competitor signals of business disruption.
There’s also a problem in observing the competitors -We would be picking wrong signals from them. We should know what is important and what is noise.
FRAMING BIAS
Cognitive and Social psychologists have noted that if you frame a phenomenon to an individual or a group as a threat, it elicits a fear that would result in more intense and energetic response than if you frame the same phenomenon as an opportunity. If they encounter a threat, a response called ‘threat rigidity’ sets in and they cease being flexible and become focussed on countering the threat in order to survive. -From ‘The Innovator’s Solution’.
Threat Rigidity -When signs of Japanese Manufacturer’s rise was visible in the initial sales data, Intel did not believe and denied that they could pose a threat. But as they grabbed more market, Intel’s management team realised its mistake and began to see them as a threat to its established market and it elicited a fear. It put them unconsciously in a narrow frame of mind blocking the view from multiple perspectives which would have helped in reframing the problem and generate other alternative solutions. The only solution the Intel management thought was to find a way to defend its position and protect its business & customers.
Widen Our Strengths -Framing Bias also poses another problem -It makes a business to focus on competitor’s strength rather than our own strengths which in turn masquerade as our own business weaknesses. This perception would then force us to work on matching competitor strengths rather than improving our own strengths.
In the battle between David and Goliath, nobody considered the shepherd’s sling as a strength.
Do Not Focus On The Product -Once threat rigidity sets in because of ‘framing bias’, businesses tend to focus on getting better than the competitor and invariably, unconsciously they would be following the directions set by their competitor. After observing that the Japanese were making better quality products and selling at a lower price, Intel began to work on improving the quality of its products with the aim of making it better than the competitor.
Intel spent heavily on new R&D technologies but they could not match the price of Japanese memories in the market. Intel received proposals from its executives to invest in the gigantic factory, advanced technology, special purpose machines, employee training and so on. Japanese too fought back by improving their quality. It was a rat race to the bottom of the pit. Intel then explored a way to earn a premium for their products in the marketplace citing the higher quality levels. A classic case of a competitor forcing an incumbent to follow its footsteps -Framing bias in action.
If you are trying to build every feature competition is doing, then you won’t be building things, what competition is not doing.
As Intel was striving to make and sell better products than the competitors in order to gain higher profit margins, it failed to see that its memory chips overshot customers’ current needs. The company failed to understand what the customers would need. They struggled to sell. The inventories began to pile and posed a major problem for Intel.
While seeking signals from competitors, do not try to copy the product features or benefits from your competitors. Observe how your competitor’s consumer segment is changing, type of technology they are exploring, the changes in their business models and understand the reasons behind those changes.
EXPERIMENTATION
Though Intel made many mistakes, they had some positives which helped the company in the transition. One of the major driving factors for business transformation was ‘Experimentation’.
One of the ways to escape competitive disruption is to keep innovating. Innovation is possible through an integrated process of experimentation. Andy Grove had encouraged his executives, shop-floor employees to experiment on their own. He gave them maximum authority and freedom so that they could experiment and be creative. He empowered them to make their own decisions. Mistakes were not condemned but critiqued by way of advice and learnings.
Because of this type of encouragement, many small teams within Intel kept experimenting on new technologies. One of them was working on microprocessors from the late 1970s. Being new, the microprocessors’ growth was slow. It was a smaller market. So, the department had no separate manufacturing or production facility to meet their demands. They had to manage everything whenever the facilities were available after supporting memory business. The priority was memory chips.
Opportunity Or Threat -When memory chips were in the doldrums, Andy and Gordon Moore looked at their available options. By that time, IBM PC was using Intel’s microprocessor and their sales had suddenly exploded. Nobody else manufactured microprocessors at that time. IBM looked up to Intel to ramp up the microprocessor production. Soon IBM PC’s competitors were also behind Intel for microprocessors.
Andy saw a potential opportunity in the demand for microprocessors. If he had framed the microprocessors as a threat to his memory business, then slowly it would have been killed. But Andy had framed the microprocessor business as an opportunity which helped others to allocate resources progressively and experiment. By 1990s, Intel became a giant in microprocessors and tasted a massive success. It’s identity changed from memories to microprocessors within a decade.
Intel would have missed the chance if it had not encouraged experimentation as an organisational culture.
Businesses are operating in an uncertain environment. Unless we experiment on a small scale and figure out what works, what doesn’t work, we may not make progress.
FREEDOM IN DECISION-MAKING
Most of the time, changing the course of business in big companies is an insurmountable task. Intel was lucky that another one of its internal cultural elements played a major role in this transition. The cultural element is ‘Freedom and Responsibility’.
“One of the important factors for a business’ success is to build an internal culture around the freedom and responsibility of every individual “— Jim Collins
The core of a business’ success is dependent on the incredible people who are working in the organisation. It is a well-known fact that incredible people do not want to be micromanaged. They need freedom and they would happily take responsibility for their actions.
Being aware of this, Andy Grove and Gordon Moore let their executives, middle managers to make all the daily decisions on their own. This had already led to a lot of improvements in manufacturing, production and inventory management.
The resource allocation processes at Intel were designed and perfected to support memory chips manufacturing. As the demand for memory chips began to fall, little by little, the middle-level production managers embarked on allocating more and more of the resources, production facilities to manufacture microprocessors so that the unit could remain profitable and not remain idle. As part of their daily work, those middle managers slowly took away the production capacity from the money-losing memory business to profitable microprocessor business.
Andy writes that those managers didn’t have the authority to get Intel out of memories but they had the authority to fine tune the production allocation process by lots of little steps. They didn’t wait for approval from the top management.
By the time, Andy and Gordon took the decision of moving away from memory business to microprocessors, only one out of eight silicon fabrication plants was producing memories. Those middle managers helped Intel in transitioning quickly to microprocessor business without any drastic consequences.
CHALLENGES IN DECISION-MAKING
Intel took almost five years to decide to shift from memory business to microprocessors. Even after the decision was made, there was resistance to change. Why it took so long for Intel to decide? Why was the resistance? How Intel overcome those challenges?
SUNK COST BIAS
Intel was founded and built on memories. The people of Intel grew along with the company. Memory Chips had become their identity. They had invested a lot of their time, mental energy and money in learning, training and developing skills related to memories. People in the manufacturing and production sector had developed and refined their technologies on memory products. Even the top management’s indecision at the beginning was partly due to the money and time they poured in improving employee performance, training, technology and the investments in the infrastructure. Some of Intel’s senior management people had spent a major portion of their lives in the business and their emotions were tied up with the welfare of the company. Their personal identity had become inseparable from the professional life. They did not want to leave the ‘memory chips’ identity they had built over the years. They did not want to forego the investments, learnings and knowledge. So they resisted the change.
Past Emotional Investments Wreck Havoc -Unconsciously, Intel’s management team was also looking for a solution that would justify their old investments and the past choices -The Sunk Cost Fallacy in control. It affected decision making -It was one of the reasons why the transition to microprocessor business was delayed.
The more you invest in something the harder it becomes to abandon it.
The sunk cost bias preyed on the minds of Andrew Grove and other executives. To save the investments, they were adding additional funds to build infrastructure, buy special purpose machinery, provide additional training to employees to improve the quality of memory chips. A classic case of making choices to justify past choices, unconsciously protecting their earlier flawed decisions.
Once the situation got worse, it became difficult to publicly accept that their earlier judgements were wrong. The Intel team further invested funds with the hope that business would recover rather than admitting the mistake. For some time, Intel continued to throw good money after money that had gone bad. Sunk Cost bias in action.
Overcoming Sunk Cost Bias
How did they overcome Sunk Cost Bias?
Think From An Outsider’s Perspective -One of the ways Andy Grove and Gordon Moore solved the problem of Sunk Cost bias was to think from an outsider’s perspective.
In 1985, Gordon Moore and Andy Grove were restless as the company was losing huge money in the memory business for more than three years and they could not decide on anything. It was frustrating for both of them. Indecision was also affecting the morale of employees. They were afraid of the future.
One day, Andy asked Moore, “If we got kicked out of this company and the board brought in a new CEO, what do you think he would do?”
Gordon immediately replied, “He would get us out of memories”.
Andy with a surprised look, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”
Thus, Andy and Gordon changed the identity of Intel.
Outsider Has No Past Investments -In any company, new CEOs recruited from outside sources or new department heads recruited from other departments hold one advantage -They do not have an emotional stake or emotional attachment in the earlier decisions -They are capable of applying an impersonal logic to the situation unlike the person who devoted entire lives to the company and therefore has a history of deep involvement in the earlier decisions.
Andy and Gordon went on to interchange people and department heads, reassigned the roles, responsibilities and duties and put entirely new people in charge of some departments. This helped in avoiding the sunk cost bias to an extent as the new people were uninvolved and non-committed to the earlier decisions within the department. They had no problem in pointing out the earlier mistakes within the departments.
Listen -Another method Andy recommended is listening to people. He sought out and listened carefully to the views of his employees who were several levels below him and who were uninvolved with the earlier decisions. He also listened to people who interacted with customers and who worked in the production & manufacturing departments. It gave him different perspectives on the same problem.
STATUS QUO BIAS
A company became massively successful because their managers took risks. The same managers over a period of time became risk-averse and stalled the growth of the company.
Inertia Of Success -In Intel, the senior managers got to their position because they were good at what they did. As the environment changed, they failed to realise that the old skills and strengths became irrelevant. They refused to acknowledge that the circumstances had changed. They closed their eyes, worked harder and waited for situations or environment to change back. Would hard work alone get you the growth?
Challenges Of New Business Direction -It was true that creating a new growth business is risky and a little unpredictable. Another problem is that the exciting growth markets of tomorrow are small today. Investors have a tendency to compare the value of the new business to the existing business. They expect the same growth for the new business. The microprocessor market was so small at that time and some senior managers felt it was risky to bet on them. Moreover, they were comfortable in dealing with existing customers than a new set of customers. So they naturally submitted ideas that resembled old approved successful ideas targeting the existing customers. They did not want to jeopardize their promotion prospects by backing a set of new ideas. They were happy to perpetuate the status quo. Trying out new ideas means taking responsibility and opening themselves to criticism. Sticking with the status quo represents, in most cases, the safer path.
In business, Sins of commission(doing something) tend to be punished much more severely than sins of omission(doing nothing) -John S.Hammond in HBR article.
Overcoming Status Cost Bias
Core Values, Business Goals -Andy requested his executives to remind themselves of the overall objectives of the company and examine their present actions or inactions. He encouraged them to find elements of the current situation that would be affecting Intel’s core objectives. He constantly reminded them to understand the change in circumstances which was an indicator for the time to change the status quo. He requested them to avoid exaggerating the effort or cost involved in switching from the status quo.
Fearless Culture -One of the strong methods to fight against status quo bias and sunk cost bias in a company is to create an environment that would not cultivate fear among employees. Andy created an environment where people would not hesitate to talk freely and share their ideas -An environment which would encourage people to work passionately for winning -An environment where they could even question CEO’s ideas, plans and action.
John Doerr, who had worked with Andy writes that the way to get Andy’s respect was to disagree and stand your ground and, ideally, be shown to be right in the end.
Andy was particular that CEO, department heads, managers should not be afraid of anything as that would affect other employees which in turn would affect the business. Internal fear paralyses the organisation and it will not let ideas flow from bottom to top.
BE FAIR AND LISTEN
While transitioning the Intel to a new direction, Andy also faced other types of employee’s resistance to change.
In Intel, some employees were agitated as their solutions were rejected by Andy. A few other employees had other concerns regarding microprocessor business but they were overruled. Those employees showed grudges, frustration and unpleasant behaviour during the transition. It affected the morale of other employees too. How to avoid those kinds of situations? What did Andy say?
“Every big decision, I believe, should begin with a free discussion stage… an inherently egalitarian process.” — Andrew S Grove
Andy writes that a leader had to display a perception of fairness to avoid that situation. He or she should ensure that people participating in the process must believe that their views were considered and that they had a genuine opportunity to influence the final decision. This could be achieved only when the leader genuinely shows interest and listen to the ideas of subordinates. If the employees believe that the process was fair, then they would be far more willing to commit themselves to the implementation of resulting decision even if their views were not considered.
All sides cannot prevail in the debate, but all opinions have value in shaping the right answer -Andrew S. Grove.
CASSANDRAS
To have consistent growth in your business, the top management people have to be in constant touch with the Cassandras in their company. Cassandras are the people who are the earliest to be aware of the changes happening in the business environment.
- People in sales and marketing are in direct contact with their customers and they would be the first one to understand shifting customer demands, needs and attitudes.
- Similarly, financial analysts would be one of the earliest to know when the business fundamentals change.
- As we have seen earlier, when the demand for memory chips began to fall, little by little, the middle-level production managers allocated more and more of the resources to manufacture microprocessors. They were also one of the earliest to sense the change in the business environment before the company as a whole or even before senior management does.
In many companies, often the leader is the last one to know the changes. They are covered by many layers of people and the bad news takes a lot of time to reach him or her. Every business leader and his top management team has to remain closer to Cassandras so that they can spot the change as early as possible. Listening to them is an investment. Spend time with people who are far from you by multiple levels -Horizontal as well as vertical -particularly, levels below you -Listen, generate insights. It would help a leader to view the problems from different perspectives.
CLARITY IMPERATIVE
To transform the company, people’s behaviour has to change. Can you get people to start behaving in a new way?
For anything to change, someone has to start acting differently. That change has to start with the leader.
Be What You Preach -Andy writes that a leader has to set a clear direction, communicate and set an example by acting in the desired way. The direction might not be the best direction but the leader’s commitment should be strong and visible. The leader has to remove the ambiguity from his or her vision of change. The leader should devote his energy and time on the elements related to the chosen direction and at the same time, he or she has to withdraw efforts and involvement from all other irrelevant things thus setting an example of commitment and focus.
OBJECTIVES AND KEY RESULTS(OKRs)
Chip and Dan Heath in their book ‘Switch’ write “To change a person’s behaviour, a leader has to make it crystal clear of the required actions from each individual. The direction has to be made clear. He has to provide specific timelines”.
John Doerr writes in ‘Measure What Matters’ -Andy gave direction to his executives by means of two key phrases -Objectives and the Key results.
The objective is the direction -what we are going after. An example -“We want to dominate the mid-range microcomputer business” was one of the objectives.
Key results for that quarter for this particular objective: “Win ten designs for the 8085' is one of the key results”. The key result has to be measurable.
Key Results -Andy’s previous company, Fairchild went on to create a niche in Silicon Wafer Research. Fairchild set an industry benchmark but it had one problem -The company valued only expertise and people got hired or promoted because of that expertise. But the company failed in translating that knowledge into actual results. It was not given due importance. Andy learnt the lesson and implemented in Intel.
In Intel, it didn’t matter what an employee know but what he or she could do with whatever he or she knew. Intel values the only accomplishment. The output is important. That’s why the company slogan -“Intel Delivers”.
At Intel, Andy created an environment that valued output. He believed that emphasising on output is the way to increase productivity.
Andy showed how to set objectives and key results and let his employees create their own set of monthly objectives & key results which would match the company’s goals, core values and objectives.
OKR’s became a vital part of the organisation. It communicated the direction with clarity. People knew where they were going, how far they had gone, how far to go, how to go and at what pace. This was how Intel managed the transition.
CONCLUSION
Every business has to change its direction after a few years to sustain the growth. Otherwise, the business would soon grind to halt. Standing still is the greatest danger.
To sustain growth, the leadership team has to constantly observe the needs, desires of consumers. They also have to observe the signals from emerging competitors. At the same time, the leadership team has to build a strong internal organisational culture that would encourage people to take risks.
Let’s conclude with a quote from Andy Grove “Most companies do not die because they chose the wrong direction. They die because they did not commit themselves fully to the new direction”.
References: Content predominantly from ‘Only The Paranoid Survive’ by Andrew S. Grove and ‘The Hidden Traps of Decision-Making’ -HBR article by John S. Hammond, Ralph L.Keeney, and Howard Raiffa. Other references are The Innovator’s Dilemma by Clayton Christensen, Measure What Matters by John Doerr.
