Rogue Missives - Decision Time, by Jim Surowiecki

Rogue Missives

ROGUE ARCHIVES

Monday, January 06, 1997

Decision Time
by Jim Surowiecki (Surowiecki)
Andrew Grove, CEO of Intel, takes the epigraph for his new book from Joseph Schumpeter's classic Capitalism, Socialism, and Democracy. It's a fitting selection, since Grove, like Schumpeter, is fascinated by the way in which capitalism is a perpetual-motion machine, a machine that puts ceaseless pressure on those who are caught up in it and especially those who seek to reap benefits from it.
For Schumpeter, the essence of the system was the process of what he called "creative destruction." Capitalism works by constantly shattering the old and replacing it with the new. Innovation replaces tradition. The present -- or perhaps the future -- replaces the past. Nothing matters so much as what will come next, and what will come next can only arrive if what is here now gets overturned.
While this makes the system a terrific place for innovation, it makes it a difficult place to live, since most people prefer some measure of security about the future to a life lived in almost constant uncertainty. And it sets the values that the economic sphere emphasizes in opposition to the values that the social sphere, for the most part, emphasizes. To take only the simplest example, the idea of family depends, to an enormous degree, on the idea of continuity. We are not forced to re-create our relationships with those closest to us on a regular basis. And yet that's precisely what Schumpeter, and Grove after him, suggest is necessary to prosper.
Now, to a certain extent this picture overestimates the lack of continuity in a working capitalist system. As the persistent success of the Beating the Dow investment strategy over time suggests, large companies in particular are well-equipped to manage risk, dominate markets, and take a longer time to change. The three largest American car companies in 1936 are the three largest American car companies in 1996, even if the business conditions they face are fundamentally different. And even if IBM did not maintain its hegemonic status over the computer industry, precisely because it refused to adapt quickly enough, it remains *the* player in the world of computers. Schumpeter's idea of creative destruction, then, works best as a description of the transformations undergone by the economy as a whole, and as an analysis of the imperative that drive the best companies to continue innovating instead of resting on their laurels.
That imperative, of course, is stronger nowhere more than in the computer industry. The industry, at least from the perspective of consumers, is for all practical purposes only a little more than a decade old, and in that time span a surprising number of companies have risen to and subsequently fallen. Some companies that stumbled during the early 1990's were Wang, Digital, Apple, NCR, IBM -- all failed to adapt quickly enough to new technologies or new possibilities and found themselves running in quicksand. For someone like Andy Grove, then, looking over your shoulder is simply a necessary condition of existence.
This seems especially true for a company like Intel, which has in a sense built its entire business around one product: the chip. Although Intel has become the industry standard -- thanks in no small part to its "Intel Inside" campaign -- it is not the only semiconductor manufacturer around. And every other company in the business has labs doing their best to turn out a faster chip, a more powerful chip. Unlike Microsoft, which has expanded into so many different markets that a competitor's improvement in one product would hardly shake Microsoft's future prospects, Intel needs to maintain technological superiority in order to maintain market share.
Grove's book emerges, then, out of his experience in this most technologically aggressive of industries, an industry in which failure is a real possibility and possible missteps loom at every moment. Remember, for instance, that less than a year before Microsoft invested heavily in the Internet, Bill Gates was assuring people that the Net was not the future of computing. A less powerful or less well-managed company might not have recovered from that misjudgment.
At the same time, the fact that Microsoft was, in fact, able to recover with amazing speed and is now challenging Netscape for dominance in the browser market, as well as introducing an entire Web-based proprietary service, suggests that the rules in the computer industry are not as different as we might imagine. Size -- at least in the form of resources -- still confers an advantage. Existing market positions give companies certain leeway in adapting. And name recognition is a hard thing to destroy or, from the other end, to overcome, particularly in the American context, where the value of branding is hard to overestimate.
All of these factors are relevant to Grove's work because much of it is devoted to diagnosing what he calls "strategic inflection points." For Grove, these are the points where "the old strategic picture dissolves and gives way to the new," where "the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the old." Once a strategic inflection point has been reached, companies have to adapt or die, since eventually the entire framework in which business had been conducted will be replaced.
The examples Grove offers of strategic inflection points are familiar enough, but it's useful to think about how dramatic some of these changes really were. The introduction of superstores into suburbia, the dominance of stand-alone PCs running Windows, the introduction of containers in the shipping industry, and the use of sound in film: each of these altered the conditions both under which goods were consumed and produced and the kinds of strategies that could shape those conditions. New possibilities -- in the case of Wal-Mart, for example, niche stores -- arose and old ones faded.
On a smaller scale, one might look at the history of The Motley Fool in similar terms. The development of the Internet created space for a new kind of community, based on a new model of information exchange. While areas like Worth Online kept to a more traditional model of top-down content provision, The Fool realized the possibilities inherent in the real-time presence of thousands of readers, each of whom might know something important about some company and could share it with others. In breaking down the information monopoly held by the offline press and brokerage houses, The Fool has worked both to push the online medium in a certain direction and to effect changes in the system of investing itself.
The question, of course, is whether these changes were, in fact, inevitable, or whether The Fool played a necessary role in bringing them about. In other words, if The Fool hadn't done it, would someone else have, or would the "it" instead have been something quite different? Grove argues, in Only the Paranoid Survive as well as in a recent article in FORBES ASAP, that change is inevitable. "In technology," he writes, "whatever can be done will be done."
But while this is a useful platitude, it's hard to see what it really means, since the array of things that can be done at any moment is so immense. Take Apple's Newton, the computerized notepad. No doubt Microsoft could invest in that kind of technology and build a computer that could take people's handwriting and translate it into text with a much higher degree of accuracy than Newton does. It's far from clear, though, that it would make sense to do so. And in a different sense, while it was possible to use the Internet to empower individual investors, it's not obvious that it would have happened on the scale it did had it not been for the peculiar conflation of circumstances that brought the Gardners to America Online.
Inevitability, in other words, is a difficult concept really to accept, since it makes no place for the contingency that shapes so much of life, in business and elsewhere. It's probably right to say that everything that can be tried, will be tried. But it would be a mistake to assume that there is a discernible pattern to the future and that if you just look hard enough you'll be able to find it.
In part, this is because your attempts at discerning that pattern will necessarily alter it, whatever "it" is. As George Soros has said time and again, you can't really see the market because you yourself are part of it, and in your attempts to read it you change it. Similarly, the decisions Grove has taken when he's perceived a strategic inflection point in the offing have had a huge impact on the direction in which his industry has gone. One might go so far as to say that they've in fact made strategic inflection points reality when they might otherwise not have been.
The "Intel Inside" ad campaign, for instance, is now recognized as a stroke of genius. Before this campaign, consumers did not for the most part care about what company made the microprocessors in their computers. In fact, while consumers obviously wanted as powerful a computer as they could afford, few of them worried too much about the exact speed of the chips inside their PCs. The "Intel Inside" ads changed all that, and made the words "Pentium" and "200 MHz" standard lingo for ordinary Americans.
Ironically, as Grove points out, this ad campaign also magnified the impact of the Pentium processor fiasco, when a math professor discovered that the Pentium chip in his computer caused a rounding error in division every nine billionth time it did the calculation. Grove discusses in depth the way Intel dealt with the crisis, because the fact that such a minor design flaw could cause a crisis illuminates so well how different the computer industry had become. It took Intel time to handle this, and it cost them $500 million in six weeks, but by the time it was over the company was, in a curious sense, stronger than ever, and even more firmly fixed in the public mind.
The point, though, is that the "Intel Inside" campaign was not inevitable. Had Intel chosen to take a different direction and not adopt what at the time was a relatively untried strategy of marketing to consumers without actually selling them any goods, the public's understanding of the importance of processors would be significantly different. And so too, one imagines, would be the market for processors. In reacting to new developments, Grove shaped what was to come. Observing and altering are, in that sense, inseparable.
Grove suggests that Only the Paranoid Survive can be used as a kind of handbook to, as the subtitle says, "exploit the crisis points that challenge every company and career." But what is most striking about the book is how ambiguous these crisis points are, and how difficult it is to figure out when they're occurring. Grove describes the process in terms of a group of people walking in the desert and suddenly realizing that they're lost. They became lost, presumably, some time back, and the point at which they wandered off the track was the strategic inflection point. But they don't actually realize it until much later. And if, by some accident, they had actually stayed on the right path, then there would have been no strategic inflection point at all.
In a sense, then, what Grove ends up saying is something analogous to, "You have to be brave enough to make a decision and you have to hope you're right, because if you're not you're going to get crushed." And one of the lessons Intel's experience teaches is that size and market position do help, at least most of the time. It was easier for Intel to make their processor the industry standard because in 1994 they were already the largest chip manufacturer in the world. It was easier for Microsoft to move onto the Net because they were, well, Microsoft. Success was not guaranteed, but it was made more likely.
Only the Paranoid Survive is most important, then, for the idea of strategic inflection points, for its analysis of the way, in retrospect, dramatic industry-shaking changes can be seen. And it's interesting to discover that Grove thinks that the Internet represents another one of these points, and that he has pushed Intel into R&D on the Net in a major way.
On the simplest level, Intel's genius has been simply to implement Moore's Law, which is to say that every 18 months they build a computer that goes twice as fast as previous ones. But calling it Moore's Law underestimates just how much work and insight it takes to make it reality. And when you think about the foresight Andy Grove has shown throughout his career, it's hard not to imagine that if we are in a strategic inflection right now, he'll figure out a way to make it work for Intel.

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ROGUE ARCHIVES

Monday, January 06, 1997
Decision Time by Jim Surowiecki (Surowiecki) Andrew Grove, CEO of Intel, takes the epigraph for his new book from Joseph Schumpeter's classic Capitalism, Socialism, and Democracy. It's a fitting selection, since Grove, like Schumpeter, is fascinated by the way in which capitalism is a perpetual-motion machine, a machine that puts ceaseless pressure on those who are caught up in it and especially those who seek to reap benefits from it. For Schumpeter, the essence of the system was the process of what he called "creative destruction." Capitalism works by constantly shattering the old and replacing it with the new. Innovation replaces tradition. The present -- or perhaps the future -- replaces the past. Nothing matters so much as what will come next, and what will come next can only arrive if what is here now gets overturned. While this makes the system a terrific place for innovation, it makes it a difficult place to live, since most people prefer some measure of security about the future to a life lived in almost constant uncertainty. And it sets the values that the economic sphere emphasizes in opposition to the values that the social sphere, for the most part, emphasizes. To take only the simplest example, the idea of family depends, to an enormous degree, on the idea of continuity. We are not forced to re-create our relationships with those closest to us on a regular basis. And yet that's precisely what Schumpeter, and Grove after him, suggest is necessary to prosper. Now, to a certain extent this picture overestimates the lack of continuity in a working capitalist system. As the persistent success of the Beating the Dow investment strategy over time suggests, large companies in particular are well-equipped to manage risk, dominate markets, and take a longer time to change. The three largest American car companies in 1936 are the three largest American car companies in 1996, even if the business conditions they face are fundamentally different. And even if IBM did not maintain its hegemonic status over the computer industry, precisely because it refused to adapt quickly enough, it remains the player in the world of computers. Schumpeter's idea of creative destruction, then, works best as a description of the transformations undergone by the economy as a whole, and as an analysis of the imperative that drive the best companies to continue innovating instead of resting on their laurels. That imperative, of course, is stronger nowhere more than in the computer industry. The industry, at least from the perspective of consumers, is for all practical purposes only a little more than a decade old, and in that time span a surprising number of companies have risen to and subsequently fallen. Some companies that stumbled during the early 1990's were Wang, Digital, Apple, NCR, IBM -- all failed to adapt quickly enough to new technologies or new possibilities and found themselves running in quicksand. For someone like Andy Grove, then, looking over your shoulder is simply a necessary condition of existence. This seems especially true for a company like Intel, which has in a sense built its entire business around one product: the chip. Although Intel has become the industry standard -- thanks in no small part to its "Intel Inside" campaign -- it is not the only semiconductor manufacturer around. And every other company in the business has labs doing their best to turn out a faster chip, a more powerful chip. Unlike Microsoft, which has expanded into so many different markets that a competitor's improvement in one product would hardly shake Microsoft's future prospects, Intel needs to maintain technological superiority in order to maintain market share. Grove's book emerges, then, out of his experience in this most technologically aggressive of industries, an industry in which failure is a real possibility and possible missteps loom at every moment. Remember, for instance, that less than a year before Microsoft invested heavily in the Internet, Bill Gates was assuring people that the Net was not the future of computing. A less powerful or less well-managed company might not have recovered from that misjudgment. At the same time, the fact that Microsoft was, in fact, able to recover with amazing speed and is now challenging Netscape for dominance in the browser market, as well as introducing an entire Web-based proprietary service, suggests that the rules in the computer industry are not as different as we might imagine. Size -- at least in the form of resources -- still confers an advantage. Existing market positions give companies certain leeway in adapting. And name recognition is a hard thing to destroy or, from the other end, to overcome, particularly in the American context, where the value of branding is hard to overestimate. All of these factors are relevant to Grove's work because much of it is devoted to diagnosing what he calls "strategic inflection points." For Grove, these are the points where "the old strategic picture dissolves and gives way to the new," where "the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the old." Once a strategic inflection point has been reached, companies have to adapt or die, since eventually the entire framework in which business had been conducted will be replaced. The examples Grove offers of strategic inflection points are familiar enough, but it's useful to think about how dramatic some of these changes really were. The introduction of superstores into suburbia, the dominance of stand-alone PCs running Windows, the introduction of containers in the shipping industry, and the use of sound in film: each of these altered the conditions both under which goods were consumed and produced and the kinds of strategies that could shape those conditions. New possibilities -- in the case of Wal-Mart, for example, niche stores -- arose and old ones faded. On a smaller scale, one might look at the history of The Motley Fool in similar terms. The development of the Internet created space for a new kind of community, based on a new model of information exchange. While areas like Worth Online kept to a more traditional model of top-down content provision, The Fool realized the possibilities inherent in the real-time presence of thousands of readers, each of whom might know something important about some company and could share it with others. In breaking down the information monopoly held by the offline press and brokerage houses, The Fool has worked both to push the online medium in a certain direction and to effect changes in the system of investing itself. The question, of course, is whether these changes were, in fact, inevitable, or whether The Fool played a necessary role in bringing them about. In other words, if The Fool hadn't done it, would someone else have, or would the "it" instead have been something quite different? Grove argues, in Only the Paranoid Survive as well as in a recent article in FORBES ASAP, that change is inevitable. "In technology," he writes, "whatever can be done will be done." But while this is a useful platitude, it's hard to see what it really means, since the array of things that can be done at any moment is so immense. Take Apple's Newton, the computerized notepad. No doubt Microsoft could invest in that kind of technology and build a computer that could take people's handwriting and translate it into text with a much higher degree of accuracy than Newton does. It's far from clear, though, that it would make sense to do so. And in a different sense, while it was possible to use the Internet to empower individual investors, it's not obvious that it would have happened on the scale it did had it not been for the peculiar conflation of circumstances that brought the Gardners to America Online. Inevitability, in other words, is a difficult concept really to accept, since it makes no place for the contingency that shapes so much of life, in business and elsewhere. It's probably right to say that everything that can be tried, will be tried. But it would be a mistake to assume that there is a discernible pattern to the future and that if you just look hard enough you'll be able to find it. In part, this is because your attempts at discerning that pattern will necessarily alter it, whatever "it" is. As George Soros has said time and again, you can't really see the market because you yourself are part of it, and in your attempts to read it you change it. Similarly, the decisions Grove has taken when he's perceived a strategic inflection point in the offing have had a huge impact on the direction in which his industry has gone. One might go so far as to say that they've in fact made strategic inflection points reality when they might otherwise not have been. The "Intel Inside" ad campaign, for instance, is now recognized as a stroke of genius. Before this campaign, consumers did not for the most part care about what company made the microprocessors in their computers. In fact, while consumers obviously wanted as powerful a computer as they could afford, few of them worried too much about the exact speed of the chips inside their PCs. The "Intel Inside" ads changed all that, and made the words "Pentium" and "200 MHz" standard lingo for ordinary Americans. Ironically, as Grove points out, this ad campaign also magnified the impact of the Pentium processor fiasco, when a math professor discovered that the Pentium chip in his computer caused a rounding error in division every nine billionth time it did the calculation. Grove discusses in depth the way Intel dealt with the crisis, because the fact that such a minor design flaw could cause a crisis illuminates so well how different the computer industry had become. It took Intel time to handle this, and it cost them $500 million in six weeks, but by the time it was over the company was, in a curious sense, stronger than ever, and even more firmly fixed in the public mind. The point, though, is that the "Intel Inside" campaign was not inevitable. Had Intel chosen to take a different direction and not adopt what at the time was a relatively untried strategy of marketing to consumers without actually selling them any goods, the public's understanding of the importance of processors would be significantly different. And so too, one imagines, would be the market for processors. In reacting to new developments, Grove shaped what was to come. Observing and altering are, in that sense, inseparable. Grove suggests that Only the Paranoid Survive can be used as a kind of handbook to, as the subtitle says, "exploit the crisis points that challenge every company and career." But what is most striking about the book is how ambiguous these crisis points are, and how difficult it is to figure out when they're occurring. Grove describes the process in terms of a group of people walking in the desert and suddenly realizing that they're lost. They became lost, presumably, some time back, and the point at which they wandered off the track was the strategic inflection point. But they don't actually realize it until much later. And if, by some accident, they had actually stayed on the right path, then there would have been no strategic inflection point at all. In a sense, then, what Grove ends up saying is something analogous to, "You have to be brave enough to make a decision and you have to hope you're right, because if you're not you're going to get crushed." And one of the lessons Intel's experience teaches is that size and market position do help, at least most of the time. It was easier for Intel to make their processor the industry standard because in 1994 they were already the largest chip manufacturer in the world. It was easier for Microsoft to move onto the Net because they were, well, Microsoft. Success was not guaranteed, but it was made more likely. Only the Paranoid Survive is most important, then, for the idea of strategic inflection points, for its analysis of the way, in retrospect, dramatic industry-shaking changes can be seen. And it's interesting to discover that Grove thinks that the Internet represents another one of these points, and that he has pushed Intel into R&D on the Net in a major way. On the simplest level, Intel's genius has been simply to implement Moore's Law, which is to say that every 18 months they build a computer that goes twice as fast as previous ones. But calling it Moore's Law underestimates just how much work and insight it takes to make it reality. And when you think about the foresight Andy Grove has shown throughout his career, it's hard not to imagine that if we are in a strategic inflection right now, he'll figure out a way to make it work for Intel.