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Andy Grove and the Value of Facing Reality

“People who have no emotional stake in a decision
can see what needs to be done sooner.”
— Andy Grove

***

What do you do when you wake up one day and realize that reality has changed, and you will either change with it or perish? Here’s one story of someone who did it successfully: Andy Grove, the former CEO of Intel Corp.

Here’s the long and short: As late as 1981, Intel Corp had massive dominance of the worldwide semiconductor business. They made memory chips (RAM), owning about 60% of the global trade in a business that was growing in leaps and bounds. The personal computer revolution was taking off and the world was going digital slowly, year by year. It was the right business to be in, and Intel owned it. They got designed into the IBM PC, one of the first popular personal computers, in 1981. Life was good.

The problem was that everyone else wanted into the same business. New companies were popping up every day in the United States, and in the late ’70s and throughout the ’80s, Japanese semiconductor manufacturers started nipping at Intel’s heels. They were competing on price and fast availability. Slowly, Intel realized its products were becoming commodities. By 1988, Japanese manufacturers had over 50% of the global market.

What did Intel do in response?

At first, as most all of us do, they tried to cope with the old reality. They tried running faster on a treadmill to nowhere. This is the first true difficulty of facing a new reality: Seeing the world as it truly is. The temptation is always to stick to the old paradigm.

What Intel really wanted was to be able to stay in the old business and make money at it. Andy Grove describes some of the tactics they tried to this end in his great book Only the Paranoid Survive, written in 1996:

We tried a lot of things. We tried to focus on a niche of the memory market segment, we tried to invent special-purpose memories called valued-added designs, we introduced more advanced technologies and built memories with them. What we were desperately trying to do was earn a premium for our product in the marketplace as we couldn’t match the Japanese downward pricing spiral. There was a saying at Intel at that time: “If we do well we get ‘2x’ [twice] the price of Japanese memories, but what good does it do if ‘X’ gets smaller and smaller?

[…]

We had meetings and more meetings, bickering and arguments, resulting in nothing but conflicting proposals. There were those who proposed what they called a “go for it” strategy: “Let’s build a gigantic factory dedicated to producing memories and nothing but memories, and let’s take on the Japanese.” Others proposed that we should get really clever and use an avant-garde technology, “go for it” but in a technological rather than a manufacturing sense and build something the Japanese producers couldn’t build. Others were still clinging to the idea that we could come up with special-purpose memories, an increasingly unlikely possibility as memories became a uniform worldwide commodity. Meanwhile, as the debates raged, we just went on losing more and more money.

As Grove started waking up to the reality that the old way of doing business wasn’t going to work anymore, he allowed himself the thought that Intel would leave the business that had buttered its bread for so long.

And with this came the second difficulty of facing a new reality: Being the first to see it means you’ll face tremendous resistance from those who are not there yet. 

Of course, Grove faced this in spades at Intel. Notice how he describes the ties to the old reality: Religious conviction.

The company had a couple of beliefs that were as strong as religious dogmas. Both of them had to do with the importance of memories as the backbone of our manufacturing and sales activities. One was that memories were our “technology drivers.” What this phrase meant was that we always developed and refined our technologies on our memory products first because they were easier to test. Once the technology had been debugged on memories, we would apply it to microprocessors and other products. The other belief was the “full product-line” dogma. According to this, our salesmen needed a full product line to do a good job in front of our customers; if they didn’t have a full product line, the customer would prefer to do business with our competitors who did.

Given the strength of these beliefs, an open-minded, rational discussion about getting out of memories was practically impossible. What were we going to use for technology drivers? How were our salespeople going to do their jobs when they had an incomplete product family?

Eventually, after taking half-measures and facing all kinds of resistance from the homeostatic system that is a large organization, Grove was able to convince the executive team it was time to move on from the memory business and go whole-hog into microprocessors, a business where Intel could truly differentiate themselves and build a formidable competitive position.

It’s here that Grove hits on a very humbling point about facing reality: We’re often the last ones to see things the way they truly are! We’re sitting on a train oblivious to the fact that it’s moving at 80 miles per hour, but anyone sitting outside the train watches it whiz right by! This is the value of learning to see the world through the eyes of others.

After all manner of gnashing of teeth, we told our sales force to notify our memory customers. This was one of the great bugaboos: How would our customers react? Would they stop doing business with us altogether now that we were letting them down? In fact, the reaction was, for all practical purposes, a big yawn. Our customers knew that we were not a very large factor in the market and they had half figured that we would get out; most of them had already made arrangements with other suppliers.

In fact, when we informed them of the decision, some of them reacted with the comment, “It sure took you a long time.” People who have no emotional stake in a decision can see what needs to be done sooner. 

This is where the rubber hits on the road. As Grove mentions regarding Intel, you must train yourself to see your situation from the perspective of an outsider.

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This is why companies often bring outside management or consulting organizations in to help them — they feel only someone sitting outside the train can see how fast it’s moving! But what if you could have for yourself that kind of objectivity? It takes a passionate interest in reality and a commitment to being open to change. In business especially, the Red Queen effect means that change is a constant, not a variable.

And the story of Andy Grove shows that it can be done. Despite the myriad of problems discussed above, not only did Grove realize how fast the train was moving, but he got all of his people off, and onto a new and better train! By the late ’80s Intel pushed into microprocessing and out of memories, and became one of the great growth companies of the 1990s in a brand new business. (And he did it without bringing in outside help.)

What it took was the courage to face facts and act on them: As hard as it must have been, the alternative was death.

Here’s what Grove took from the experience:

Change is pain

I learned how small and helpless you feel when facing a force that’s “10X” larger than what you are accustomed to. I experienced the confusion that engulfs you when something fundamental changes in the business, and I felt the frustration that comes when the things that worked for you in the past no longer do any good. I learned how desperately you want to run from dealing with even describing a new reality to close associates. And I experienced the exhilaration that comes from a set-jawed commitment to a new direction, unsure as that may be.

A new reality doesn’t happen overnight

In this case, the Japanese started beating us in the memory business in the early eighties. Intel’s performance started to slump when the entire industry weakened in mid-1984. The conversation with Gordon Moore that I described occurred in mid-1985. It took until mid-1986 to implement our exit from memories. Then it took another year before we returned to profitability. Going through the whole strategic inflection point took us a total of three years.

The new reality may be preferable to the old one

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.

So here is your opportunity: When a new reality awaits, don’t go at it timidly. Take it head on and make it not only as good, but better than the old reality. Don’t be the boy in the well, looking up and seeing only the sides of the well. Take the time to see the world around you as it truly is.

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Still Interested? Check out Grove’s classic book on strategic inflection points, Only the Paranoid Survive. For another interesting business case study, read the interesting story of how IBM first built its monster 20th century competitive advantage.

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