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Inflection Points: How to Be Paranoid

Change is constant in business. But not all change is equal. There is change, and there is cataclysmic change. You know you’re dealing with the latter when the old rules of conducting business suddenly don’t apply, and you haven’t figured out the new ones yet. In the classic “Only the Paranoid Survive,” Andy Grove refers to this high-magnitude change as a strategic inflection point. Having lived through several inflection points as CEO of Intel, Grove shares timeless lessons on leadership, culture and strategy in times of change.

Photo Credit: NEOM/ Unsplash

In the early 1980s, Intel found itself in the middle of an inflection point. Its memory chips started losing ground to Japanese producers, who were conquering the semiconductor world. Up until then, Intel held a nearly 100 percent share of the memory chip market. But Japanese firms, who had near-bottomless access to government subsidies and cheap credit, produced quality levels “beyond what Intel thought was possible.” Despite improving quality and bringing costs down, Intel couldn't keep up. Japanese memory chips kept offering better quality at a lower price. After fighting back with no success, Intel tried to win a premium for their products by inventing special-purpose memories and introducing more advanced technologies. But in 1984, the business slowed down drastically, and Intel started building up inventory. Despite losing money for a while, the company still hoped its premium strategy would somehow produce a magical solution. It didn’t. The need for a different strategy was growing urgent.


After a long period of aimless wandering, in the middle of 1985, Grove and then CEO Gordon Moore had an illuminating conversation in which they decided to get out of the memory business. But with their identity tied up in memory chips, they didn’t know how to exist as a company that was not in the memory business. And if not memory chips, what then? Microprocessors seemed the obvious choice. Throughout the crisis, Intel invested heavily in R&D. Most of it was spent on memory chips, but a smaller team worked on microprocessors, a technology Intel invented in 1970. Because they represented a slower-growing, smaller-volume market than memory chips, Intel paid less attention to their technological development. However, by 1985, they had been supplying the key microprocessors for IBM-compatible PCs and were the largest producer on the market. Furthermore, their next mainline microprocessor was ready to go into production. As Grove recalls, “even though our minds were made up about where we were going, our emotions were still holding both of us back from full commitment to the new direction.” The transition from memory chips to microprocessors was a very difficult and painful journey, but after which Intel emerged as the world’s largest semiconductor manufacturer. It even surpassed Japanese producers, who only a few years ago threatened to put Intel out of business.


When Intel became a microprocessor business, only few anticipated the role microprocessors would play in disrupting the computing industry. Their subsequent proliferation led to the computer industry's transition from a horizontal to a vertical structure. This major reshuffling catapulted niche players like Dell, Compaq, and Novell into new heights, seriously challenged IBM, and erased the once-leading Digital Equipment Corporation. While Intel was both driver and beneficiary of this disruption, its next crisis struck soon enough. A small design flaw in Intel's Pentium chips caused major public backlash and customer revolt. Intel averted disaster by replacing the product at a cost of $475 million. Based on these diverse experiences, Grove derived instructive lessons and guiding principles for navigating through strategic inflection points.


But first, what is a strategic inflection point? According to Grove,


“A strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end.”

Inflection points have three key characteristics:


  • They are inevitable: “We can’t stop these changes. We can’t hide from them. Instead, we must focus on getting ready for them.”

  • They are both a destructive and constructive force: “Eventually, a new equilibrium in the industry will be reached. Some businesses will be stronger, other will be weaker.”

  • They are amorphous in nature: “It’s hard to pinpoint when exactly a strategic inflection point takes place, even in retrospect. In fact, participants who live through one develop a sense of being in an inflection point at different times.”


There are three stages of progressing through an inflection point (which I have paraphrased for clarity and simplicity):

  • Debate: Recognising a strategic inflection point

  • Chaos: Resolution through experimentation

  • Focus: Clarity of direction


Debate: Recognising a strategic inflection point

How do we know that a set of circumstances is a strategic inflection point? Asked about how he ended up bankrupt, Hemingway responded, “Two ways. Gradually, then suddenly.” Because change happens in much the same way, recognition tends to take place in stages. As if "approaching on little cat feet", strategic inflection points are often not clear until you look at the events in retrospect. However, there are ways to detect change while it’s unfolding.


Peripheral perspectives. Listening to different perspectives, though time-consuming, is an investment in learning. People at the periphery, inside and outside the organisation, can help sort out signal from noise and offer a different way of looking at things. Inside the organisation, it’s people in the trenches who tend to be in touch with impending changes early. Salespeople understand shifting customer needs before management does; financial analysts know first when business fundamentals change. Outside the organisation, customers and suppliers often bring intellectual objectivity and can shed light on a changing situation. “People who have no emotional stake in a decision can see what needs to be done sooner,” says Grove. He also encourages inviting comments from people whose job it is to constantly evaluate and critique businesses, such as journalists and analysts. “Turn the table around,” he recommends, “and ask them some questions about competitors, trends in the industry, and what they think we should be most concerned about."


Broad debate. The most effective tool for identifying a particular development as a strategic inflection point is a broad and intensive debate. This debate should include technical discussions, marketing discussions, and considerations of strategic repercussions. Strategic inflection points are rarely clear. Well-informed and well-intentioned people will look at the same picture and assign dramatically different interpretations to it. So, it is crucial to bring all relevant parties' intellectual power to this sharpening process.


Psychological safety. Constructively debating tough issues and getting somewhere is only possible when people can speak their minds without fear of punishment. “Fear that might keep you from voicing your real thoughts is poison. Almost nothing could be more detrimental to the well-being of the company,” says Grove.


Second order thinking. In 1984, when Apple introduced the Macintosh, Grove thought it was a ridiculous toy. Among other weaknesses, it didn’t have a hard disk (at that time, all PCs already had one), and it was excruciatingly slow. Because of these two factors, the Mac’s graphical interface struck him more as a nuisance than a significant advantage. Grove was blinded to the far more significant features that came with graphical interfaces, like the fact that they brought uniformity for all the applications based on them: you learned one, you learned them all. Grove didn’t see through the problem of the first version to perceive the beauty of the technology beneath them.


Arguing with the data. When dealing with emerging trends, you may have to go against rational extrapolation of data and rely instead on anecdotal observations and your instincts.


Avoiding complacency. Fear can be the opposite of complacency. Complacency often afflicts those who have been the most successful. A healthy dose of fear of losing may sharpen their survival instincts and serve as a powerful motivator.


These principles, although remarkably accurate, only present one side of the coin. As important as it is to perceive threats, no matter how minor they may seem at first, it is equally critical to do the same with opportunities. It’s possible that Intel might not have pivoted to microprocessors, a “slow-growing and small-volume" niche, if it hadn't suffered through an existential crisis. Chip War author Chris Miller suggests that "more than innovation or expertise, it was paranoia that saved Intel."


That is not to say that Grove didn’t become obsessed with the next future-defining opportunity. In his last years as CEO, when reviewing reports on potential areas of opportunity for the company, Grove's constant complaint was that they were not radical enough. In his 1997 “TIME’s Man of the Year” profile of Grove, Daniel Eisenberg writes:


“As Von Clausewitz craved the decisive battle, Grove hungers for the decisive risk, the bet that will guarantee Intel's future. ‘Are we missing something?’ Grove mused one day this spring over a lunch of tofu and ketchup, settling his silverware into a moment of quiet. ‘Sometimes,’ he says in a rolling baritone, ‘the risk of omission is greater than the risk of commission.’”

And indeed, when Paul Otellini took over from Craig Barrett as Intel CEO in 2005, his failures of omission paved the way for Intel’s decline. Already in his previous role as Vice President, he turned down Steve Jobs' offer to design a chip for Apple's new computerised phone because he didn’t see how mobile devices could revolutionise computing. At that time, selling PC processors was far more lucrative and Intel’s strategy was to prioritise products with the highest profit margin. Unwilling to take a margin hit, Intel decided not to enter the mobile business until it was too late. Within a few years of Intel declining the iPhone contract, Apple made more money from smartphones than Intel did from PC processors.


As Miller notes, “Intel followed a rational strategy—no one wants products with low profit margins—but it made it impossible to try anything new and exploit bigger opportunities.” Along with failing to anticipate the rise of mobile devices, Intel also failed to grasp the relevance of artificial intelligence and develop chips capable of "parallel processing." Intel's omission enabled the rise of Nvidia, which became America's most valuable semiconductor company.


Chaos: Resolution through experimentation

How do you handle the process of getting through a strategic inflection point? Going through a crisis is like dealing with a serious loss. How well management responds to and handles the crisis depends on their self-awareness and emotional maturity. Most companies move through a sequence of emotions, from denial and escape or diversion to acceptance. Denial is prevalent in the early stages. It’s difficult to face reality, as Grove attests. Instead, many companies blame stagnation or decline on temporary turbulence outside their control. One sign of denial is overconfidence in approaching the challenge. It shows when managers keep implementing the same strategic and tactical moves that worked for them during their careers, especially during their “championship season." Another sign is what Grove refers to as “strategic dissonance,” which happens when managers “fail to admit to themselves consciously and explicitly the magnitude of the problem they are struggling with.” It manifests as a divergence between what they do and what they say they do.


Denial is often followed by the need to escape or divert attention. Grove observes that when companies face major changes in their core business, they plunge into what seem to be totally unrelated acquisitions and mergers. As Grove explains, “these activities are motivated by the need of senior management to occupy themselves respectably with something that clearly and legitimately requires their attention day in and day out, something that they can justify spending their time on and making progress in instead of figuring out how to cope with an impending strategically destructive force.”


The only way to resolve the crisis is through experimentation. Chaos and messiness should be embraced as “the old order won’t give way to the new without a phase of experimentation and chaos in between.” The problem is that companies can’t suddenly start exploring when they are in trouble. Once things change in the core of the business, it’s too late. Companies must experiment with new products, technologies, channels, and markets before the need arises. Intel was already experimenting with microprocessors when its core business of memory chips was threatened by cutthroat competition from Japan.


Exploration doesn't just ensure survival. "It is essential if we are to sow the seed of opportunity for the future," writes Matt Watkinson in "Mastering Uncertainty." The iPhone is a case in point. According to Brain Marchant in “The One Device”, iPhone’s inception began before Steve Jobs approved the project in 2004:


“There were as many as five different phone or phone-related projects – from tiny research endeavours to full-blown corporate partnerships – bubbling up at Apple by the middle of the 2000s. But if there’s anything I’ve learnt in my efforts to pull the iPhone apart, literally and figuratively, it’s that there are rarely concrete beginnings of any particular products or technologies – they evolve from varying previous ideas and concepts and inventions and are prodded and iterated into newness by restless minds and profit motives.”

Jeff Bezos refers to those acts of experimentation as wandering. In his 2018 letter to shareholders, he explained:


„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 counterbalance to efficiency. You need to employ both. The outsized discoveries – the “non-linear” ones – are highly likely to require wandering.

How do you know the right moment to shift from experimentation to action, and make the changes that will save your company or your career? “Unfortunately, you don’t”, writes Grove.


“But you can’t wait until you know: Timing is everything. If you undertake these changes while your company is still healthy, while your ongoing business forms a protective bubble in which you can experiment with the new ways of doing business, you can save much more of your company’s strength, your employees, and your strategic position. But that means acting when not everything is known, when the data aren’t in yet”.

The reality is that companies tend to do the opposite. Due to the emotional factors mentioned earlier, most management will act too late and do too little. This will result in them losing the protective bubble the existing business would have otherwise provided them with. “It’s easy to see why,” writes Grove. “There’s no panic in the early stages of an inflection point.”


While companies explore different directions, they must simultaneously work on a future map of their industry. Sharing a common picture of the industry and its dynamics is a key tool in making an organisation more adaptive. Likewise, engaging in discussion about the future will help organisations prepare for change. By improving their map, they will increasingly be able to make better decisions and feel more confident that their decisions will be the right ones. Until his retirement in 1998, Grove refined Intel's strategy twice a year with a half-day "state of the industry" report to Intel's directors and top executives.


Focus: Clarity of direction

Getting through an inflection point is about winning back lost confidence. At this point, the company is likely discouraged and tired. With a vague idea of the new direction, it has to prepare for crossing what Grove calls “the valley of death.”


The first task is to form a mental image of what the company should look like when it gets to the other side. As well as being clear enough for management to visualise, it must also be crisp enough for their tired and confused employees to understand. The goal is to be meaningful rather than exhaustive, even at the risk of upsetting those who may feel excluded from the brief description. What’s now required is leadership. As Grove writes,


“I can’t help but wonder why leaders are so often hesitant to lead. I guess it takes a lot of conviction and trusting your gut to get ahead of your peers, your staff, and employees while they are still squabbling about which path to take, and set an unhesitating, unequivocal course whose rightness or wrongness will not be known for years. Such a decision really tests the mettle of the leader.

Passing through a strategic inflection point represents a fundamental transformation of the company from what it was to what it will be. The reason such a transformation is so challenging is that all aspects of the company were shaped by what it was in the past. Not surprisingly, the transformation implicit in surviving a strategic inflection point involves changing management members in one way or another. Either the people in the room need to change their areas of knowledge and expertise, or the people themselves need to be changed. In Intel’s case, about half the management transformed themselves and were able to move in the new direction. Others ended up leaving the company.


The next step involves redistributing resources. What sounds simple in theory is challenging in practice. Changing the direction of an organisation doesn't just mean putting more energy and attention into a new initiative. It also means subtracting from somewhere else by redeploying production resources, managerial resources, or management's time. Grove also stresses the importance of discipline. "A strategic transformation requires discipline and the redeployment of all resources; without them, it turns out to be nothing but an empty cliché.”


Assigning or reassigning resources to pursue a strategic goal is an example of strategic action. Taking strategic action is how you lead. “Strategic plans sound like a political speech. Strategic actions are concrete steps,” says Grove. While the most effective way to transform a company is through a series of incremental changes consistent with a clearly articulated mental image of the future, inflection points call for more radical actions. Radical means they are seen, heard, and questioned by many people.


The timing of resource transfers from the old to the new requires careful consideration. Moving resources from the old business too early presents the risk of leaving it unfinished and not reaping the full benefit. On the other hand, hanging on to the old business for too long may risk the chance to seize a new business opportunity, boost sales in a new product category, or get aligned with a new way of doing things. There is a period in between that provides the right compromise, when companies have invested enough in the old business to maintain momentum through the transition period as they allocate resources to their new business. But management’s tendency is to hang on to the past, so strategic actions are more likely to happen later rather than earlier. The risk is that if they are late, they may already be in irreversible decline.


A question that often comes up at times of strategic transformation is: should companies pursue a highly focused approach, betting everything on one strategic goal, or should they hedge? Quoting Mark Twain, Grove states, “Put all of your eggs in one basket and WATCH THAT BASKET.” The focused approach is necessary because the company needs all its energy to pursue one objective, especially in the face of aggressive and competent competition. It’s difficult to lead an organisation out of the valley of death without a clear and simple strategic direction. Demoralised organisations are unlikely to deal with multiple objectives. Outcompeting others also requires clear direction:


“If the competition is chasing you (and they always are – this is why ‘only the paranoid survive’), you only get out of the valley of death by outrunning the people who are after you. And you can only outrun them if you commit yourself to a particular direction and go as fast as you can. You could argue that, since they are chasing you, you should give yourself all sorts of alternative directions – in other words, hedge. I say, ‘No’. Hedging is expensive and dilutes commitment. Without exquisite focus, the resources and energy of the organisation will be spread a mile wide – and they will be an inch deep.”

Netflix's biggest mistake, according to Reed Hastings in No Rules Rules, was being unfocused while transitioning from DVD mailing to streaming. In 2007, Netflix launched Qwikster to handle its DVD market. However, it was obvious that streaming would become the predominant way of accessing video content. With two different companies, they charged separately for each service, even though there was one price before launch. "The new arrangement would allow Netflix to focus on building the company of the future without being weighed down by the logistics of DVD mailing, which was our past," recalls Hastings. However, the announcement provoked a customer revolt. Not only was the new model more expensive, but it also meant customers had to manage two websites and two subscriptions instead of one. Over the next few quarters, Netflix lost millions of subscribers, and its stock dropped more than 75 percent in value. "Everything we built was crashing down because of my bad decision," writes Hastings.


Companies going through transformational change tend to drift back into confusion. Grove is adamant about the importance of a clear direction:


“Organisations in the valley of death are very sensitive to obscure and ambiguous signals form their management. 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. The time for listening to the Cassandras is over. The time for experimentation is over. The time to issue marching orders – exquisitely clear marching orders – to the organisation is here.”

While strategic action is paramount, Grove also emphasises the importance of culture, specifically the dialectic between bottom-up and top-down actions. He recalls that it was the bottom-up actions of middle management that “made the exit from memories less cataclysmic”. While top management was still debating the right strategy, middle management took autonomous action and gradually allocated resources away from declining memory chips to other products that generated better margins, such as microprocessors. While middle managers could only affect things locally, their actions met halfway with those generated by senior management.


Another key feature of a powerful and adaptive company moving through transformational change is its ability to deal with two subsequent phases: tolerating chaos and showing discipline. Grove says such an organisation has two attributes: it tolerates and even encourages debate and is capable of making and accepting clear directions, with the entire organisation supporting the decision. Organisations with these characteristics are far more change-ready than others.


Published over 25 years ago, Grove’s account reads like a prequel to Innovator’s Dilemma which came out a year later. In fact, Grove and Christensen knew each other well (they appeared together on the cover of Forbes magazine in 1999), and it could have been one of their conversations in which Grove wondered why “brilliant computer executives had such a hard time facing the reality of technologically driven strategic inflection points?” that inspired Christensen’s pursuit. Under Grove’s leadership, Intel proved that, as an incumbent, it could evade the Innovator's Dilemma by disrupting itself. However, Intel's post-Grove story shows how challenging it is even for former disruptors to navigate rapid change and for winners to stay paranoid.


 

Only the Paranoid Survive is a compulsory read covering the roles of strategy, culture, and leadership in navigating disruptive change. Andy Grove also introduced the concept of OKRs (Objectives and Key Results) to Intel in the 1970s, which he documented in his book High Output Management in 1983.

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