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Andy Grove: Intels First Employee

Andy Grove was born Andras Istvan Grof in Hungary, where he lived under both Nazi and later Communist occupation. He arrived in the United States in January 1957 and shortly after changed his name to Andrew Stephen Grove. He acquired a Ph.D. in chemical engineering at the University of California at Berkeley before joining Fairchild Semiconductor. In 1968, Gordon Moore, along with another executive, Robert Noyce, left Fairchild Semiconductor to found Intel. When Andy Grove heard they were leaving, he decided to go with them. As Grove recalls, I never got an invitation; he just went. At this time, there were many companies already making chips to help companies manage their payroll and accounting. What Moore envisaged was an opportunity in a relatively new area; Intel could put memory or data storage on microchips. These chips would allow computers to be faster. By 1970, through innovation, hard work, and sheer determination Intel produced the industrys first blockbuster: a low cost memory on a chip.

The Memory Chip Market

By 1993, Andy Grove was president of Intel, a high-growth corporation with revenues in excess of $1 billion a year. The CEO was co-founder, Gordon Moore, who developed Moores Law. This stated that the number of transistors you could place onto a memory chip tended to double every eighteen months. In reality, Intel had come to expect that Moores Law applied only to them. In the early 1980s, there were competitors in the memory chip market, but as far as the executives at Intel were concerned this was a market they had created. The market was booming and Intel was defined by memory chips. Unfortunately, someone had forgotten to tell this to their Japanese competitors. The company began to get undercut by Japanese manufacturers capable of mass-producing high-quality, low-priced chips. Between 1978 and 1988 the market share held by Japanese companies doubled from thirty per cent to sixty per cent.

An Intel microprocessor chip, alongside the widely recognized logo Intel inside. Source: 4kodiak/iStockphoto

Initially, because the company was so successful, it simply continued as before. Its success in memory chips brought with it a belief that it could innovate itself out of the situation by developing a better chip. This would reassert its dominance and it could again charge a premium price. In the Icarus Paradox, Danny Miller states the very capabilities that create a companys success can also be its downfall. Unless the executives at Intel were able to correctly diagnose the situation the company was facing and take action, Intels success would be short-lived. Intels microprocessors were in many of the products of the new emerging market for personal computers, but this was in its infancy. There was still a stalwart belief that memory chips had a viable future.

Although there was some research being undertaken on microprocessors, the companys resources and capabilities remained primarily focused on memory chips. Most people at Intel had so much emotional capital invested in memory chips, it was difficult to accept the reality that Japanese firms had turned their specialty into a commodity product. The quality attributed to the Japanese memory chips was higher than Grove and others had thought were possible. Not surprisingly, their first reaction was one of denial, before they came to the realization that they were behind. There was a great deal of debate and discussion at Intel about what to do, but no real discussion about their core product, memory chips. Intel was desperately trying to earn a premium price for its product. They began to think if they could earn 2X (twice) the price of Japanese memories they would be fine, but began to realize that there was no point in this if X got smaller and smaller. This was despite the company losing more and more money on its memory business.

At the time, R&D was spread between different technologies. The majority was spent on memory chips. A smaller team worked on another technology Intel had invented: microprocessors. Microprocessors are the brains of the computer; they calculate, while memory chips merely store. However, because business had been so good, Intel just kept on doing the same thing. As Andy Grove was to say, later, we persevered because we could afford to. In 1985, their denial came face-to-face with reality. Profits fell from $198 million in 1984 to less than $2 million in 1985.

Time for a Change

Months of meetings, bickering, and arguments had produced nothing but conflicting proposals. In the middle of 1985, Grove was discussing the problem in his office with Intel Chairman and CEO, Gordon Moore. In his book, Only the Paranoid Survive, Grove said Intel equals memories in all 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. Nonetheless, he looked out of the window at the Ferris wheel of the Great American amusement park revolving in the distance, turned to Moore and asked this question.

If we got kicked out and the board brought in a new CEO, what do you think he would do? Without hesitating, Moore answer, he would get us out of memories. Grove stared at his CEO, numb, before suggesting, Why shouldnt you and I walk out the door, come back and do it ourselves?

Even though Grove was now able to say to his senior manager in charge of the memory business, Get us out of memories! he still allowed R&D expenditure on a product he and the manager knew they had no plans to sell. Grove rationalized that such a major change had to take place via a number of smaller steps. However, after a few months, he realized that this half-way decision was untenable and found the determination to make a painful choice. They were getting out of the memory business once and for all. This meant firing more than 7,000 people; one-third of the workforce, and closing seven factories. Grove was to take away an important lesson from this; people who do not have an emotional stake in a decision can see what needs to be done sooner.

Grove came to realize that when faced with difficult choices you have to make painful decisions and you cant hedge your commitments to them. If you do, individuals in the company will be confused and not only will you lose direction, you will sap the energy of your organization as well. Intel faced what Grove calls a strategic inflection points. This is a time in the life of the business when its fundamentals are about to change. They are major changes in the way a company competes, such that simply adopting a new technology or competing in the same old way will be insufficient. It does not have to lead to disaster, since it creates opportunities for those who can compete in the new way. This includes both incumbents and newcomers.

While Grove and Moore made their historic decision to exit memory chips, unbeknown to them, their middle managers were directing their manufacturing resources to the emerging microprocessor business. In performing their roles as managers, they were simply allocating resources from less profitable to more profitable lines of production; microprocessors. The decision to exit memory chips was less drastic as a result of the actions of Intels middle managers. The problem for Grove was neither a lack of strategic choice or information on which to base decisions; his emotional commitment to memory chips was allowed to cloud his judgement and obscured the urgent need to take a difficult decision.

When Intel decided to manufacture only microprocessors in 1985, its biggest customer and also its biggest shareholder was IBM. It had bought shares in Intel in order to protect its supplies of microprocessors. IBM was sixty times the size of Intel. It wanted Intel to license its 386 microprocessor designs to other manufacturers in order for IBM to be assured of its supply of processors. This meant Intel would be relegated to the uncertain role of a parts supplier to a giant corporation. When Intel launched the 386, Grove made it clear that the technology would not be licensed to other producers. Grove was simply not prepared to give away Intels advantage to IBM.

Back to Growth

The growth of the personal computer market was to drive Intels massive success. If an individual had invested $1,000 in Intel in 1985, by 2012 the investment would be worth $47,000. During the same period, the S&P 500 would have returned $7,600. During Groves eleven years as CEO, Intel grew at a compound annual growth rate of nearly thirty per cent. Grove relinquished his role as CEO in 1998 and became Intels chairman.

In 1990, the marketing director launched a marketing campaign with the slogan Intel inside. The successful marketing campaign turned Intel into a globally recognized brand. In 1994, a mathematician found inconsistencies in the way that Intels Pentium chip performed complex, scientific calculations. Intel engineers worked out that a spreadsheet user would only encounter a problem once every 27,000 years of spreadsheet use. When the mathematicians findings were posted on the Internet there was a public outcry; IBM announced it was suspending sales of its Pentium chip-based computers. Grove should have recognized a strategic inflection point, but instead could only see the issue from an engineers perspective and not the consumers. In the end, he had to recall the product (which cost Intel $475 million) and apologize to consumers. He had failed to realize that a brand is developed with the customer and, as such, a customers subjective reality becomes the companys objective reality. Or, to put this more simply, the customer is king.

More Change?

Grove remained as Intels chairman until 2005. The culture he engendered at Intel was that knowledge power overrules position power. In other words, anyones ideas can be challenged as long as you are prepared to make your point using data. His notion of constructive confrontation meant that decisions were debated loudly and fiercely. He relied upon what he called helpful Cassandras. These are people who are quick to recognize impending change and cry out an early warning. Grove was to learn early on that 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. As CEO, Grove saw that his primary responsibility was to guard against competitor attacks and develop this attitude throughout the organization.

By 2016, Intel CEO Brian Krzanich, had entered into a technology alliance with ARM holdings, as the company sought to move away from the personal computer as a core computing platform, and embraced the Internet of things; the spread of smart and connected devices. Krzanichs view is to offer Intels core strength of making chips to other chip companies working with ARM designs. This allows it to hedge against the Internet of things, in which Intels own chip architecture is barely making an impression. In a major change for Intel, outright competition is giving way to collaboration.

Questions

1. How would you describe Intels theory of the business?

2. Given that Intels culture was one of open discussion based on data and not opinion, why did it take so long for Gordon Moore and Andy Grove to change direction?

3. What does this case study tell you about strategy?