Only the Paranoid Survive by Andy Grove

These are my personal notes that I have taken while reading Only the Paranoid Survive by Andy Grove that I wanted to remember for future reference. This isn’t meant to be a Cliff Notes version or a substitute for reading the book.

Additional notes I’ve taken while reading other books can be found here.

Only the Paranoid Survive

Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left. I believe that the prime responsibility of a manager is to guard constantly against other people’s attacks and to include this guardian attitude in people under his or her management.

What is a strategic inflection point?

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.

Strategic inflection points don’t always lead to disaster. They create opportunities for players (both incumbents and newcomers) who are adept at operating in this new way.

Your career is literally your business. You own it as its sole proprietor. You have one employee - yourself. You are in competition with millions of similar businesses: millions of other employees all over the world. You need to accept ownership of your career, your skills and the timing of your moves. It is your responsibility to protect this personal business of yours from harm and to position it to benefit from the changes in the environment.

Something Changed

A minor design error in a Pentium processor would lead to a rounding error in division once every 9 billion computations. All of a sudden consumers were asking Intel for a refund. Something had changed. For the previous twenty six years, Intel had decided what was good and what wasn’t when it came to their product. Intel set their own quality levels and specifications and only shipped a product that met that criteria.

Intel had designed these chips and thus felt they had the obligation and right to decide when the product was good and when it wasn’t.

Historically Intel had sold to computer makers and not computer users. Suddenly, Intel was dealing with people who had bought nothing from them but were really mad.

By 1994, Intel’s brand logo was one of the most well recognized in consumer merchandising - up there with Coca-Cola and Nike. When there were issues with the chip, the branding pointed users back directly to Intel.

The rules had changed, Intel no longer knew which rules to abide by.

The lesson is, we need to expose ourselves to to the winds of change. We need to expose ourselves to our customers, both the ones who are staying with us as well as the ones we may lose by sticking to the past. We need to expose ourselves to lower-level employees, who, when encouraged, will tell us a lot that we need to know. We must invite comments even from people whose job it is to constantly evaluate and critique us, such as journalists and members of the financial community. Turn the tables and ask them some questions: about competitors, trends in the industry and what they think we should be most concerned with.

A “10X” Change

Porter’s five forces that determine the competitive well being of a business

1. The power, vigor and competence of a company’s existing competitors.
2. The power, vigor and competence of a company’s suppliers - are there lots of them (so choices exist)? Are they aggressive and greedy or guided by the long view toward their customers?
3. The power, vigor and competence of a company’s customers - are there lots of them? Or is the business dependent on only a few key customers?
4. The power, vigor and competence of a company’s potential competitors: the players not in the business today but could decide to come in.
5. The possibility your product or service can be built or delivered in a different way (e.g. substitution). Grove finds this most deadly - new techniques, new approaches, new technologies can all create a new set of rules and business climate. This is what trucking and air transportation did to railroads, container shipping did to traditional ports and super stores have done to small stores.

There’s also a sixth force, the force of complementors: other businesses customers buy complementary products that each company’s product works better with or only works with. Examples: cars need gasoline, gasoline needs cars. Computers need software, software needs computers.

With a strategic inflection point, a business either declines or ascends to new heights. When does this inflection point happen? Even in retrospect, it’s tough to pinpoint an exact moment - it happens in stages.

There is a troubling sense something is different.

Things don’t work the way they used to. Customers have different attitudes towards you. The development groups that had a history of successes no longer seem to be able to come up with the right product. The competition that you wrote off or hardly knew existed is now stealing business from you.

There is a growing dissonance between what your company thinks it is doing and what is actually happening inside the organization.

The morphing of the computer industry

The computer industry used to be vertically aligned. A company would have its own semiconductor chip implementation, build its own computer around those chips according to its own design and in its own factories, develop its own operating system and market its own applications software. In this example, “own” = “proprietary”.

Microprocessors appear

Microprocessors appear. A “10x” force follows as technology now permitted putting what had been many chips onto one single chip that could be used to produce all kinds of personal computers.

Microprocessors became the basic building block of the industry. The economics of mass production started to kick in manufacturing computers became extremely cost effective. The PC became an enormously attractive tool in both home and business settings.

A new horizontal industry had emerged.

IBM’s growth slows

IBM’s growth slowed as computing went from mainframes to microprocessor based PC’s.

IBM was composed of people who had won time and time again, decade after decade, in the battle amongst the 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 process and instincts that led to winning in the vertical industry.

Dell emerges

Dell was born of this new order and unfettered by the old concepts or rules.

Dell build on his experience and started a company based on the premise that people other than his college friends would also be interested in purchasing computers customized to their specific needs and supplied through direct means - in this case, through orders taken over the phone, with computers delivered by parcel post. No member of the old computer industry would have given a chance to a proposition that said that people would buy computers through the mail.

Novell gets out of hardware

Novell didn’t have enough money to continue to pay their hardware suppliers, so they abandoned the hardware business and concentrated on software, where they didn’t have supplier bills. Novell then moved their software onto inexpensive standard PC’s and became a “first mover” in networking in the new horizontal industry.

Additional lessons

1. When a strategic inflection point sweeps through the industry, the more successful a participant was in the old industry structure, the more threatened it is by change and more reluctant to adapt to it.
2. When an industry that was traditionally very high to enter has its structure break and cost to enter becomes trivially small, this gave rise to the Compaq’s, Dell’s and Novell’s who grew from practically nothing to major corporations.

New Rules of the Horizontal Industry

1. Don’t differentiate without a difference. Don’t introduce improvements whose only purpose is to give you an advantage over your competitor without giving your customer a substantial advantage.
2. Opportunity knocks when a technology break or other fundamental change comes your way. Grab it. The first mover and only the first mover, the company that acts while the others dither has a true opportunity to gain time over its competitors - and time advantage, in this business, is the surest way to gain market share.
3. Price for what the market will bear, price for volume, then work like the devil on your costs os 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. Cost-based pricing often leads you to a niche position, which in a mass production based industry is not very lucrative.

Importance of Focus

In our example, as the industry went horizontal, a computer company now only supplied one product (as opposed to many - chip, OS, software, etc.). By virtue of the functional specialization that prevailed, horizontal industries tend to be more cost-effective than their vertical equivalents. It’s harder to be best in class in several fields than just one.

Strategic Inflection Points: They’re Everywhere

By learning from the painful experiences of others, we can improve our ability to recognize a strategic inflection point that’s about to affect us.

Wal-Mart

For a small town general store, once Wal-Mart moves to town, things have changed in a big way. How does one compete against Wal-Mart? Specialization, in depth stocking, serving a particular market segment (e.g. Home Depot, Office Depot, Toys R Us), customized service (e.g. Staples with their in-depth computerized customer database), or refining the business to provide an environment as opposed to a product (e.g. an independent bookstore that became a coffeehouse with books to compete with the chain bookstores).

Next: The Software Company

While Steve Jobs and the Next team were heads down working, mass produced, broadly available graphical user interface, Microsoft Windows had come to the market. Windows wasn’t as good as Mac, let alone the Next interface. It wasn’t seamlessly integrated with computers or applications.

However, it was cheap, it worked and most importantly, it worked on the inexpensive and increasingly powerful personal computers in the late eighties from hundreds of manufacturers.

When Jobs started developing Next, he envisioned his competition as Mac. PC’s weren’t a blip on his competitive radar. By the time Next launched, the competition had turned out to be something completely different and much more powerful.

Jobs thought PC’s were a mess. This messiness of the PC industry was the result of its power: many companies competing to offer better value to ever larger numbers of customers.

“10x” Changes

Every once in a while technology changes in a dramatic way. Something that could not be done before, can now be done “10x” better, faster or cheaper than before.

Sound takes over silent movies

“The Jazz Singer” debuted on October 6, 1927. Up until then, movies didn’t have sound. Now they did. Some actors adjusted with great agility, others didn’t.

Animation replaces actions

Pixar’s “Toy Story” was the first full feature length movie to use replace actors with life like looking, live sounding digital creations.

Shipping Containers

The standardization of shipbuilding designs, the creation of refrigerated transport ships and most importantly, the evolution of containerization (a technology that allowed for easier transfer of cargo on/off ships) introduced a “10x” change to the productivity of shipping.

Changing Tastes in Cars

Henry Ford’s slogan was “it takes you there and back” which epitomized the original attraction of a car as a mode of basic transportation.

Post WW1, style and leisure became important considerations in people’s lives and GM saw a market for a varied product line and annual model changes.

Travel Agencies

The principal supplier to travel agencies are airlines, which used to pay travel agents a ten percent commission on every ticket sold. These agencies used to be the industry’s third largest cost (after labor and fuel).

With rising prices and industry cutbacks, airlines placed a cap on commissions.

Complementors

The PC industry and Intel have a mutual dependence on personal computing software companies. A change to software businesses might affect Intel as well.s

Patent Medicines

At the start of the 20th century, patent medicines made up of alcohol and narcotics were peedled freely without labels to warn consumers of the dangerous and addictive nature of their contents.

In 1906, the Food and Drugs Act was passed that started regulating what was put in bottles.

Reordering telecommunications

Prior to 1968, the US telecom industry was practically a nationwide monopoly. AT&T designed and manufactured its own equipment and provided all connections between phone calls.

In 1968, the FCC rules the phone company could not require the use of its own equipent at the customer’s location.

This opened the business up to foreign equipment manufacturers, including major Japanese telecom companies.

Telephone handsets that customers used to receive as part of their AT&T services became commodities purchased at the corner electronics store.

Privitization

Privitization is the “mother of all regulatory changes.” Incumbents have no experience how to deal with competition. They never had to market to consumers - why would a monopoly have to court customers?

Their core competencies revolved around their ability to work with regulators.

Businesses fail either because they leave their customers, i.e., they arbitrarily change a strategy that worked for them in teh past (the obvious change), or becuase their customers leave them (the subtle one). -HBS Professor Richard Tedlow

Intel exists the memory business

Andy Grove:

If we got kicked out and the board brought in a new CEO, what do you think he would do?

Gordon Moore (Intel Chairman & CEO):

He would get us out of memories.

Grove:

Intel equaled memories in all of our minds. How could we give up our identity? How could we exist as a company that was not in the memory business? It was close to being inconceivable.

People who have no emotional stake in a decision can see what needs to be done sooner.

When CEO’s are replaced by someone from the outside:

I suspect that the people coming in are probably no better managers or leaders than the people they are replacing... The new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation. They can see things much more objectively than their predecessors did.

Signal or Noise?

There is no surefire formula by which you can decide if something is signal or noise. But because there is no surefire formula, every decision you make should be carefully scrutinized and re-examined as time passes. Ten years ago, we decided that x-ray technology was not a “10x” factor. However, we continued to watch it, looking to see if the threat grew, waned or stayed the same.

Questions to ask to attempt to distinguish signal from noise

1. Is your key competitor about to change? Use the "silver bullet" test to find your key competitor. If you had just one bullet in a figurative pistol, whom among your many competitors would you save it for? When the answer to this question stops being as clear as it used to be and some of your people direct the silver bullet to competitors who didn’t merit this kind of attention previously, it’s time to sit up and pay attention.
2. Is your key complementor about to change? Does the company that in the past ten years mattered most to you and your business seem less important today? Does it look like another company is about to eclipse them?
3. Do people seem to be “losing it” around you? Does it seem that people who for years had been very competent have suddenly gotten decoupled from what really matters?

Helpful Cassandras

Cassandra was the priestess who foretold the fall of Troy. Although they can come from anywhere in the company, Cassandras are often middle management, often from the sales organization. They usually know more about upcoming changes than senior management because they spend so much time “outdoors” where the winds of the real world blow in their faces.

Bad news has a much more immediate impact on them personally. Lost sales affect their commission. Thus, they take the warning signs more seriously.

Avoiding the Trap of the First Version

You can’t judge the significance of a strategic inflection point by the quality of the first version of a product.

Fear

The most important role of managers is to create an environment where people are passionately dedicated to winning in the marketplace. Fear plays a major role in creating and maintaining such passion. Fear of competition, fear of bankruptcy, fear of being wrong and fear of losing can all be powerful motivators.

How do we cultivate fear of losing in our employees? We can only do that if we feel it ourselves. If we fear that somebody, any day some development somewhere in our environment will change the rules of the game, our associates will sense and share that dread.

Keep in mind that the key role of Cassandras is to call to your attention strategic inflection points. Under no circumstances should you “shoot the messenger.”

Let Chaos Reign

The Inertia of Success

When the environment changes in such a way as to render the old skills and strengths less relevant, we almost instructively cling to our past. We refuse to acknowledge changes around us, almost like a child who doesn’t like what he’s seeing so he closes his eyes and counts to 100 and figures that what bothered him will go away. We too close our eyes and are willing to work harder, to dedicate ourselves to our traditional tasks or skills, in the hope that they and hard work will get us there by the count of 100. The phrase you’re likely to hear at such times is ‘just give us a bit more time.’

Strategic Dissonance

Strategic Dissonance: The divergence between actions and statements (e.g. saying one thing while doing another) in the midst of coping with a strategic inflection point.

Resolution of strategic dissonance does not come from a figurative lightbulb coming on. It comes from experimentation. Let people try different techniques, review different products, exploit different sales channels and go after different customers.

The dilemma is that you can’t start suddenly experimenting when you realize you’re in trouble unless you’ve been experimenting all along. It’s too late to do it once things have changed in your core business. Ideally, you should have experimented with new products, technologies, channels, promotions and new customers all along.

Intel experimented with microprocessors for ten years before the opportunity and imperative arose to make them the centerpiece of their strategy.

The Business Bubble

It’s best when management accepts the inevitability of a strategic inflection point early on and acts before the vitality of the business has been sapped by the “10x” forces affecting it.

There’s no panic in the early stages of the inflection point. Statements are often “we shouldn’t tinker with the golden goose” or “How could we possibly take our best people away from the business that pays all of our salaries and put them on some speculative new project?”

Rein in Chaos

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.

Traversing the Valley of Death

To make it through the valley of death successfully, your first task is to form a mental image of what the company should look like when you get to the other side. This image not only needs to be clear enough for you to visualize but it also has to be crisp enough so you can communicate it simply to your tired, demoralized and confused staff.

When discussing Intel’s new direction as a “microprocessor company,” Gordon Moore:

You know, if we’re really serious about this, half our executive staff had better become software types in five years’ time.

The implication was that either the people in the room needed to change their areas of knowledge/expertise or the people themselves had to be changed.

If you’re in a leadership position, how you spend your time has enormous symbolic value. It will communicate what’s important or what isn’t far more powerfully than all the speeches you can give.

The “Tail Light” Approach

When you drive in the fog, it is a lot easier to drive fast if you’re chasing the tail lights of the car ahead of you. The danger with a “tail light” strategy is that once you catch up and pass the car ahead of you you’ve been following, you no longer have a set of tail lights to follow and are without the confidence and competence to set your own course of direction.

Leading via Strategic Actions

Mark Twain - “Put all your eggs in one basket and WATCH THAT BASKET”

If 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 organization will be spread a mile wide - and they will be an inch deep.

If you’re wrong, you will die. But most companies don’t die because the 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 standing still.