Only the Paranoid Survive

by Andrew S. Grove

He might have trouble making them work but he put up with that trouble and worked a bit harder because for $2,000 he had just bought a computer system that the old way couldn’t deliver for less than ten times the cost. This was such a compelling proposition that he put up with the weaknesses in order to avail himself of the power of this new way of doing business.

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. The managers who ran IBM grew up in this world. They got selected for their excellence in developing products and competing in the marketplace within this framework. Their long reign of success deeply reinforced and ingrained the thought processes and instincts that led to winning in the vertical industry. 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.

price for what the market will bear, price for volume, then work like the devil on your costs so that you can make money at that price. This will lead you to achieve economies of scale in which the large investments that are necessary can be effective and productive and will make sense because, by being a large-volume supplier, you can spread and recoup those costs. By contrast, cost-based pricing will often lead you into a niche position, which in a mass-production-based industry is not very lucrative.

What would work against a Wal-Mart? Specialization has a good chance. In-depth stocking, serving a particular market segment, as Home Depot, Office Depot, Toys “я” Us and similar “category killers” are doing, can work to offset the overall imbalance of scale. So can customized service, as Staples is implementing through an in-depth computerized customer database. Alternatively, so might redefining your business to provide an environment, rather than a product, that people value, like the example of an independent bookstore that became a coffeehouse with books to compete with the chain bookstores that brought Wal-Mart-style competitive advantages to their business.

some ports made the change, others tried but couldn’t, and many resolutely fought this trend. Consequently, the new technologies led to a worldwide reordering of shipping ports. As of the time of this writing, Singapore, its skyline filled with the silhouettes of modern port equipment, has emerged as a major shipping center in Southeast Asia and Seattle has become one of the foremost ports for containerized cargo ships on the West Coast. Without the room to accommodate modern equipment, New York City, once a major magnet for shipping, has been steadily losing money. Ports that didn’t adopt the new technologies have become candidates for redevelopment into shopping malls, recreation areas and waterfront apartment complexes.

businesses fail either because they leave their customers, i.e., they arbitrarily change a strategy that worked for them in the past (the obvious change), or because their customers leave them (the subtle one).

the person who is the star of a previous era is often the last one to adapt to change, the last one to yield to the logic of a strategic inflection point and tends to fall harder than most.

Our competitors were reluctant to pay for technology that we used to give away practically for free. Consequently, in the transition to the next microprocessor generation, we ended up with no second source and became the only source of microprocessors to our customers. Eventually our competition stopped waiting for our largesse and developed similar products on their own, but this took a number of years. The impact this relatively minor change had on the entire PC industry was enormous. A key commodity, the standard microprocessor on which most personal computers were built, became available only from its developer—us. This, in turn, had two consequences. First, our influence on our customers increased. From their standpoint, this might have appeared as a “10X” force. Second, since most PCs increasingly were built on microprocessors from one supplier, they became more alike. This, in turn, had an impact on software developers, who could now concentrate their efforts on developing software for fundamentally similar computers built by many manufacturers.

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.

Best resources should be working on most important not most difficult products

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.

Peter Drucker quotes a definition of an entrepreneur as someone who moves resources from areas of lower productivity and yield to areas of higher productivity and yield.

My point is that you can’t judge the significance of strategic inflection points by the quality of the first version. You need to draw on your experience. Perhaps you remember your reaction to the first PC you ever saw. It probably didn’t strike you as a revolutionary device. So it is with the Internet. Now, as you stare at your computer screen that’s connected to the Internet, waiting for a World Wide Web page to slowly materialize, let your imagination flow a bit. What might this experience be like if transmission speed doubled? Or better yet, if it were improved by “10X”? What might the content look like if professional editors rather than amateurs created it, not as a sideline but as their main occupation? You might extrapolate the evolution of this phenomenon by remembering how rapidly PCs evolved and improved.

But let’s go back to acquisitions, my favorite example. If I undertake a multibillion-dollar acquisition, every decision associated with it will require my attention. I will have to work so very hard and very quickly that the acquisition will take on far more importance than anything else that I have to deal with in the ordinary line of my business. So I will have created an infinite sink for my attention. I can justify looking in the mirror every morning and saying, “I don’t have time to deal with such mundane issues as why we are gradually losing sales at the smaller accounts. I’ve got a very important midnight meeting with my investment advisers coming up.” Under the circumstances, my inattention to daily details is understandable, even respectable; the acquisition has taken on a life of its own that takes me away from something that I don’t know how to handle. I wonder to what extent all the acquisitions of movie studios by the major Japanese consumer electronics companies were motivated by the need of senior management to engage in diversions from the far more intractable and mundane problems of a secular slowdown of their core businesses.

Your best people—their knowledge, skills and expertise—are an equally important resource. When we recently assigned a key manager from overseeing our next generation of microprocessors to a brand-new communications product line which is not likely to make us money for several years, we were shifting an extremely valuable resource. While he was very productive in his former area, there were others equally good to take his place there, while the new area badly needed the turbocharging his presence would give it.

If you’re wrong, you will die. But most companies don’t die because they are wrong; most die because they don’t commit themselves. They fritter away their momentum and their valuable resources while attempting to make a decision. The greatest danger is in standing still.

You may want to hide from exposing the holes in your strategic thinking—after all, having them on display in front of a group of your own employees would be embarrassing, wouldn’t it? Yet I think it would be far better to let your employees find them when there’s still time to make corrections than to allow the marketplace to find them later.

Sometimes management may see the need for a dramatically different new direction but not be able to bring the rest of the company along with them. I have seen a videotape of John Sculley, CEO of Apple Computer from 1983 to 1993, telling a Harvard Business School gathering that two of the biggest mistakes of his career were not adapting Apple’s software to Intel’s microprocessors and not modifying Apple’s then revolutionary laser printer so that it would work with PCs other than those made by Apple. I was stunned when I heard this. Listening to Sculley gave me the impression that he understood the implications of the horizontal industry structure. It appeared that he just wasn’t strong enough to overpower Apple’s inertia of success that existed because of its fifteen-year history as a fully vertical computer company.