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Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company Paperback – March 16, 1999
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From Publishers Weekly
Copyright 1996 Reed Business Information, Inc. --This text refers to an alternate Paperback edition.
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If you haven't read this book, now is as good a time to do so as any. Today's readers have the benefit of knowing how technology and business have evolved since "Only the Paranoid Survive" was published in 1996. The seven years that have since elapsed reveal that Grove really knows what he's talking about. His understanding of how the Internet would affect Intel underscores his management prescience. And his skepticism regarding gee-whiz technological innovations like "Internet appliances" provides an interesting example of how Intel maintained its strategic focus, and emerged from the bubble as strong as ever.
"Only the Paranoid Survive" breaks no new ground in the business-management genre. But the book is well written, well organized, and well worth the read for those who want a glimpse inside the mind of an incomparable American success story.
The information-economy industry, unlike the giant manufacturers such as GM that faced more stable markets, was singularly brutal and fast-changing. Roughly every eighteen months, newly minted microprocessor chips arrived with double the circuit density of the preceding generation, increasing both their capacity and speed. For decades, Intel had been an exemplar of success, assessed in 1998 as the third most valuable company in the world by market capitalization. Known for their loyalty and hard work, virtually all Intel employees shared in the ownership of the company via stock options.
Nonetheless, the company's success was constantly portrayed internally as tenuous and hard-won: in the mid-1980s, facing ferocious Japanese competition in the memory chip market segment, Intel re-engineered itself, focusing instead on the emerging microprocessor market segment. This is the core of Grove's book, and is a remarkable achievement - I vividly still recall how, in the late 1980s, we thought Japan was going to take over the PC industry - and it was Grove and his team that did it.
To do so, Grove engineered Intel's corporate culture so that it melded "control-freak management" with creative chaos: anyone could compete in an open, yet authoritarian "culture of innovation." As a symbol of this, Intel Chairman Grove continued to work in a cubicle alongside everyone else, but he reveled in challenging employees down to the smallest detail, which included the correction of grammar in the memos sent to him. To promote equality of access as well as economies of scale, Intel's offices and chip-manufacturing facilities ("fabs" in the industry jargon) were virtually indistinguishable world-wide; all the walls were one color, cubicles identical in size, even the same vocabulary permeated company meetings from Taiwan to the U.S. This "copy exact" uniformity provided security for customers and helped in problem solving; should the defect rate appear high at one facility, it allowed the engineers to call any of the other facilities for advice; in effect, they could discuss identical processes with great precision, which was a key to the quality and reliability of Intel chips. Another aspect of the company's culture was its "paranoia," that is, its obsessive attention to the demands of the market and to the actions of competitors.
If this sounds like a tough place to work, it certainly was. I interviewed several employees there, who emphasized the "sink or swim" nature of the place: you either found a way to create value, or soon you were out. One of them described it like his stint in the Green Berets, when they are "plunked down in the middle of the chaos of war...You have an overall strategic goal...with near-complete freedom to find whatever works best to push towards that goal. It's like we accept the rules of the game and the parameters within which we communicate and compete. But inside the circle, virtually anything goes." It was a competitive meritocracy per excellence.
Not only can this culture (paranoid, chaotic yet authoritarian, and ultra-competitive) serve as a paradigm - I know, that word is over-used - for other industries, but it is a key to the astounding creativitiy that has emerged in some American companies since the days of the "Japanese challenge". And Grove's company not only symbolized many of these innovations but drove them.
Warmly recommended as a must for all students of business.
The main concept of this book is on strategic inflection point, which is a time in the life of the business when its fundamentals are about to change. This change can either infer an opportunity to rise to new heights or signal the beginning of the end. Hence, this book is about the impact of changing rules, guidelines to assist in identifying those situations and about finding your way through those uncharted territories. This book serves to raise our awareness of going through cataclysmic changes and to provide a framework in which to deal with them.
This book uses Porter's competitive analysis strategy in terms of the 6 forces as a base. The 6 forces are
1. Power, vigor and competence of existing competitors
2. Power, vigor and competence of complementors
3. Power, vigor and competence of customers
4. Power, vigor and competence of suppliers
5. Power, vigor and competence of potential competitors
6. Power, vigor and competence of substitutes
Once a very large change happens in one or several of these 6 forces, a "10X" force is in effect. Very often the transition from a normal business environment to that of a "10X" business environment is very gradual and thus, it is difficult to pinpoint the exact time in which the "10X" force came about. Strategic inflection point comes about when this balance of forces shifts from the normal environment to that of the new "10X" environment and it is difficult to pinpoint its exact occurrence.
The circumstances that help to identify this strategic inflection point are
1. Presence of troubling sense that something is different such as changes in customers' attitudes, entrant of new competitors, etc.
2. Growing dissonance or misalignment between corporate statements and operation actions.
3. Emergence of new framework or actions.
4. New set of corporate statements is generated.
Andrew gave an analogy of working your way though a strategic inflection point to be just like venturing into the valley of death, the perilous transition between the old and the new environments. It is difficult to know the right moment to execute the appropriate actions. Since timing is everything, it is attractive to undertake these changes when the company is in a healthy financial state. This means "acting when not everything is known, when the data aren't in.", merely relying on "instinct and personal judgments" (Chapt 2). Hence it is a matter of training your instincts to pick up a different set of signals.
The only way we know whether a change signals a strategic inflection point is through the process of clarification that comes from broad and intensive debate. This debate should involve technical discussions, marketing discussions and considerations of strategic repercussions (how will it affect our business if we make a dramatic move; how will it affect if we don't?). The more complex the issues are, the more levels of management should be involved because people from different levels of management bring completely different points of view and expertise. The debate should involve people from outside the company, customers and partners with different areas of expertise and interests. When dealing with emerging trends, you may very well have to go against rational extrapolation of data and rely instead on anecdotal observations and your instincts. (chapter 6). Constructively debating tough issues and getting somewhere is only possible when people can speak their minds without fear of punishment.
Andrew offers a few guidelines to discern "signal" from "noise"
1. Is your key competitor about to change? Suggested using the "silver bullet test": If you had just one bullet, whom among your many competitors would you save it for? When the answer to this question stops being as crystal clear, it is time to sit up and pay special attention.
2. Is your key complementor about to change? Does the company that in the past years mattered the most to your business seem less important today? Does it look like another company is about to eclipse them? If so, it may be a sign of shifting industry dynamics.
3. Does it seem that people who for years had been very competent have suddenly gotten decoupled from what really matters? If key aspects of the business shift around us, the very process that got us where we were might retard your ability to recognize the new trends.
Generally you cannot judge the significance of the strategic inflection point by the quality of the first version or release of the product. You will need to draw on your experiences to discern its possible impacts.
Strategic dissonance is the divergence between actions and statements; saying one thing and doing another. Strategic dissonance is an automatic reaction to a strategic inflection point that probing for it is perhaps the best test of one.
Clarity of direction, which includes describing what we are going after, as well as, describing what we will not be going after, is exceedingly important at the late stage of a strategic transformation. This book defines strategic plans as statements of what we intend to do, whereas strategic actions as steps we have already taken or are taking. Strategic plans are abstract and are usually couched in language meant for the company's management. Strategic actions matter because they immediately affect people's lives. The most effective way to transform a company is through a series of incremental changes that are consistent with a clearly articulated end result.
This book mentions the "Taillight" approach - some companies may profitably wait for others to test the limits of technological possibilities or market acceptance and then commit to following, catching up and passing them.
A question that often comes up at times of strategic transformation is whether you should pursue a highly focused approach, betting everything on one strategic goal or should you hedge. It takes every erg of energy in your organization to do a good job pursuing one strategic aim, especially in the face of aggressive and competent competition. It is hard to lead the organization out of the valley of death without a clear and simple strategic direction. Demoralized organizations are unlikely to be able to deal with multiple objectives. Thus, hedging is expensive and dilutes commitment, and is not recommended.
"Most companies don't die because they are wrong; most die because they don't commit themselves... The greatest danger is in standing still" (Chapter 8).
The leader needs to show interest in the elements leading to the strategic direction, by getting involved in details that are appropriate to the new direction and by withdrawing attention, energy and involvement from those things that do not fit. At times like this, the calendar is the most important strategic tools in communication. Andrew emphasizes that communicating strategic change in an interactive exposed fashion is important and necessary such as corporate email announcements and meetings, etc.
Companies that successfully navigate through strategic inflection points tend to have a good dialectic between bottom-up and top-down actions. Bottom-up actions come from the ranks of middle managers, who by the nature of their jobs are exposed to the first whiffs of the winds of change, who are located at the peripheral of the action where change is first perceived and who catch on early. But by the nature of their work, they can only affect things locally. Their actions must meet halfway the actions generated by senior management. While those managers are isolated from the winds of change, but once they commit themselves to a new direction, they can affect the strategy of the entire organization. The best results seem to prevail when bottom-up and top-down actions are equally strong. When the top management lets go a little, the bottom-up actions will drive towards chaos by experimenting, by pursuing different product strategies, by generally pulling the company in a multiplicity of directions. After such creative chaos reigns and a direction becomes clear, it is up to senior management to reign in chaos. A pendulum-like swing between the 2 types of actions is the best way to work your way through a strategic transformation. What is needed is a balanced interaction between the middle managers, with their deep knowledge but narrow focus and senior management, whose larger perspective could set a context.
An organization that has a culture that can deal with these 2 phases - debate (chaos reign) and a determined march (chaos reined in) is a powerful, adaptive organization. Such an organization has 2 important attributes:
1. It tolerates and even encourages debates. These debates are vigorous, devoted to exploring issues, indifferent to rank and include individuals of varied backgrounds.
2. It is capable of making and accepting clear decisions, with the entire organization then supporting the decision.
This book emphasizes on the concepts by reliving a few of Intel's crisis; the mid-80s shift from memory to microprocessors business, RISC vs CISC architecture and during the fall of 1994 the floating point bug associated with Intel's flagship device; the Pentium processor. The magnitude of this crisis is so significant in that a tiny flaw in the microprocessor's floating point unit could mushroom into half a billion dollars' worth of damage in less than 6 weeks. This was later narrowed down to 2 key factors. First the success of Intel's merchandising "Intel Inside" program, which has projected a strong Intel image right to the end-user, became a double-edge sword in that end users directly contact Intel for a replacement microprocessor. In a normal incidence, it is likely to be the computer manufacturers who will perform the recall and replacement. But Intel's identity is so strong with the end-users that they became the ones asking for a recall and replacement. Second, the other factor is attributed to Intel's sheer size. Intel had become gigantic in the eyes of the computer buyers. And thus the huge cost in replacement.
This book also relates the transition of the computer industry in the 80s vertical alignment to that in the 90s; the horizontal alignment. This came about with the appearance of the microprocessor and then the personal computer. The "10X" force came about when the technology permitted the integration of several chips into one single chip and this same microprocessor enabled the production of all kinds of personal computers. As the microprocessor became the basic building block, economics of mass production worked its charm giving extremely cost-effective PCs. Over time, this changed the entire structure of the industry and a new horizontal industry emerged. As a result of this trend, companies previously successful in the vertical alignment, but who failed to adapt or recognize this "10X" force failed and no longer existed today. Examples are Wang and Cray. At the same time, this change also spelled opportunities for new entrants such as Dell and Compaq. Thus when an industry goes through a strategic inflection point, the practitioners of the old industry may have trouble, while on the other hand, this new environment provides opportunities for new entrants into this industry.
The key characteristics of horizontal industries is that they live and die by mass production and mass marketing, bringing cost-effective solutions and more specialization, i.e the best in class for that particular market segment such as TV monitors, memory, storage devices, etc.
The new rules of the horizontal industry are
1. Do not differentiate without a difference. Do not introduce improvements whose only purpose is to give you an advantage over your competitor without giving your customer a substantial advantage. Example is a "better PC" departed from the mainstream standard and hence giving rise to software incompatibility.
2. Grab opportunity when there is a technology break or change coming along.
3. Price for what the market will bear. Price for volume. Work like the devil on your costs so that it becomes profitable. This leads to economies of scale whereby by being a large-volume supplier, you can spread and recoup those costs. In contrast, cost-based pricing will often lead you into a niche position.
To be a leader or survivor in a horizontal and commoditized industry, this book provides some food for thought. A prime example is Intel exiting the commoditized memory industry in which they were once in the lead, until the entrance of the Japanese manufacturers.