This book details how to manage a company through complex industry change. It is incredibly prescient and a great management book.
Tech Themes
The decoupling of hardware and software. In the early days of personal computers (1980s) the hardware and software were both provided by the same company. This is complete vertical alignment, similar to what we’ve discussed before with Apple. The major providers of the day were IBM, Digital Equipment Corporation (DEC - Acquired by Compaq which was acquired by HP), Sperry Univac and Wang. When you bought a PC, the sales and distribution, application software, operating system, and chips were all handled by the same Company. This created extreme vendor lock-in because each PC had different and complicated ways of operating. Customers typically stayed with the same vendor for years to avoid the headache of learning the new system. Over time, driven by the increases in memory efficiency, and the rise of Intel (where Andy Grove was employee #3), the PC industry began to shift to a horizontal model. In this model, retail stores (Micro Center, Best Buy, etc.) provided sales and distribution, dedicated software companies provided applications (Apple at the time, Microsoft, Mosaic, etc.), Intel provided the chips, and Microsoft provided the operating system (MS-DOS, then Windows). This decoupling produced a more customized computer for significantly lower cost and became the dominant model for purchasing going forward. Dell computers were the first to really capitalize on this trend.
Microprocessors and memory chips. Intel started in 1968 and was the first to market with a microchip that could be used to store computer memory. Demand was strong because it was the first of its kind, and Intel significantly ramped up production to satisfy that demand. By the early eighties, it was a computer powerhouse and the name Intel was synonymous with computer memory. In the mid-eighties, Japanese memory producers began to appear on the scene and could produce higher-quality chips at a cheaper cost. At first, Intel saw these producers as a healthy backup plan when demand exceeded Intel’s supply, but over time it became clear they were losing market share. Intel saw this commoditization and decided to pivot out of the memory business and into the newer, less-competitive microprocessor business. The microprocessor (or CPU) handles the execution of tasks within the computer, while memories simply store the byproduct of that execution. As memory became easier to produce, the cost dropped dramatically and business became more competitive with producers consistently undercutting each other to win business. On the other hand, microprocessors became increasingly important as the internet grew, applications became more complex and computer speed became a top-selling point.
Mainframes to PCs. IBM had become the biggest technology company in the world on the backs of mainframes: massive, powerful, inflexible, and expensive mega-computers. As the computing industry began to shift to PCs and move away from a vertical alignment to a horizontal one, IBM was caught flat-footed. In 1981, IBM chose Intel to provide the microprocessor for their PC, which led to Intel becoming the most widely accepted supplier of microprocessors. The industry followed volume - manufacturers focused on producing on top of Intel architecture, developers focused on developing on the best operating system (Microsoft Windows) and over time Intel and Microsoft encroached on IBM’s turf. Grove’s reasoning for this is simple: “IBM was composed of a group of people who had won time and time again, decade after decade, in the battle among vertical computer players. So when the industry changed, they attempted to use the same type of thinking regarding product development and competitiveness that had worked so well in the past.” Just because the company has been successful before, it doesn’t mean it will be successful again when change occurs.
The six forces acting on a business at any time. When one becomes outsized, it can represent a strategic inflection point to the business.
Business Themes
Strategic Inflection Points and 10x forces. A strategic inflection point is a fundamental shift in a business, due to industry dynamics. Examples of well known shifts include: mainframes to PCs, vertical computer production to horizontal production, on-premise hardware to the cloud, shrink-wrapped software to SaaS, and physical retail to e-commerce. These strategic inflection points are caused by 10x forces, which represent the underlying shift in the technology or demand that has caused the inflection point. Deriving from the Porter five forces model, these forces can affect your current competitors, complementors, customers, suppliers, potential competitors and substitutes. For Intel, the 10x force came from their Japanese competitors which could produce better quality memories at a substantially lower cost. Recognizing these inflection points can be difficult, and takes place over time in stages. Grove describes it best: “First, there is a troubling sense that something is different. Things don’t work the way they used to. Customers’ attitudes toward you are different. The trade shows seem weird. Then there is a growing dissonance between what your company thinks it is doing and what is actually happening inside the bowels of the organization. Such misalignment between corporate statements and operational actions hints at more than the normal chaos that you have learned to live with. Eventually, a new framework, a new set of understandings, a new set of actions emerges…working your way through a strategic inflection point is like venturing into what i call the valley of death.”
The bottoms up, top-down way to “Let chaos reign.” The way to respond to a strategic inflection point comes through experimentation. As Grove says, “Loosen up the level of control that your organization normally is accustomed to. Let people try different techniques, review different products. Only stepping out of the old ruts will bring new insights.” This idea was also recently discussed by Jeff Bezos in his annual shareholder letter - he likened this idea to wandering: “Sometimes (often actually) in business, you do know where you’re going, and when you do, you can be efficient. Put in place a plan and execute. In contrast, wandering in business is not efficient … but it’s also not random. It’s guided – by hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find our way there. Wandering is an essential counter-balance to efficiency. You need to employ both. The outsized discoveries – the “non-linear” ones – are highly likely to require wandering.” When faced with mounting evidence that things are changing, begin the process of strategic wandering. This needs to be coupled with bottom-up actions from middle managers who are exposed to the underlying industry/technology change on a day to day basis. Strategic wandering reinforced with the buy-in and action of middle management can produce major advances as was the case with Amazon Web Services.
Traversing the valley of death. The first task in traversing through a strategic inflection point is to create a clear, explainable, mental image of what the business looks like on the other side. This becomes your new focus and the Company’s mantra. For Intel, in 1986, it was, “Intel, the microcomputer company.” This phrase did two things: it broke the previous synonymy of Intel with ‘memory’ and signaled internally a new focus on microprocessors. Next, the Company should redeploy its best resources to its biggest problems, including the CEO. Grove described this process as, “going back to school.” He met with managers and engineers and grilled them with questions to fully understand the state and potential of the inflection point. Once the new direction is decided, the company should focus all of its efforts in one direction without hedging. While it may feel comfortable to hedge, it signals an unclear direction and can be incredibly expensive.