Tag: Business

Batesian Mimicry: Why Copycats are Successful

One of our first interview guests for The Knowledge Project was the former NFL executive Michael Lombardi. In our interview, we discussed topics ranging from the nature of leadership to decision making in a football context. Mike is one of the wisest thinkers associated with the game.

We heard Mike on an NFL podcast recently, and in a brief clip you can listen to here, Mike makes a fascinating comment on differentiating between a Mimic and the Real Thing:

“There's two kinds of snakes you comes across. There's the Texas Coral Snake, and the Mexican Milk Snake, and they both look exactly alike. The Texas Coral Snake is dangerous, it's venomous, it can kill you in a minute. The Mexican Milk Snake can't do anything to you; it's an impostor.”

Mike got the idea from my friend and CEO of Glenair, Peter Kaufman. Following Mike's lead, we chose to dig in a little further.

***

Turns out there are a host of Coral Snake Mimics, all designed to look exactly as fierce as the true bad guys. Besides the Mexican Milk Snake, there is the Scarlet King Snake, the Florida Scarlet Snake, and the California Mountain Kingsnake. (At least.)

For an example, here are the Texas Coral Snake on the left and the Mexican Milk Snake on the right. Pretty damn close!

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According to Wikipedia, the Texas Coral Snake's venom is a “powerful neurotoxin, causing neuromuscular dysfunction“, and terrifyingly describes its bite as coming from “a pair of hollow, small, fixed fangs in the front of its upper jaw, through which the venom is injected and encouraged via a chewing motion. Due to this method of venom delivery, a coral snake must bite and hold on for a brief time to deliver a significant amount of venom…

The Milk Snake, on the other hand, is described as a pretty ideal pet, “The Mexican Milk Snake adapts well to captive care, and its smaller size and striking colorations can make it an attractive choice for a pet snake. They are normally docile, and not typically apt to bite or expel musk.

So, how is it that these two look alike? It's due to a phenomenon called Batesian Mimicry.

In the 1850's, the naturalist Henry Walter Bates found a certain set of butterflies who were clearly not of the same species but whose wings looked almost the same to the naked eye. After thinking it over, Bates eventually figured out what was going on: While the butterflies which were toxic to potential predators (the “models”) were able to operate freely and relatively unmolested, there had also developed a “mimic” population of butterflies which wasn't toxic at all, yet still went untouched!

In fact, biologists eventually figured out that the more toxic and dangerous the “model” was and the more frequently they appeared in the local population, the easier it was for its “mimics” to get by! Predators simply wouldn't take the risk of mixing up the two. If there aren't as many “models” around or they aren't that dangerous, the mimics have a harder time.

This is a wonderful model, and in the practical world we live in, a similar phenomenon abounds: Copycats or “pretenders to the throne” are often very effective, very convincing “mimics” of the true champions. They dress the part, they talk the talk, and they know what buttons to push. But in the end, they are merely chauffeurs.

We see a very Batesian effect at work: The more impressive the “model,” the more effective its mimics can be in convincing people they too are impressive, and in all the same ways. But for every Warren Buffett (just one by our count), there has been many “future” Warren Buffett's. For every Steve Jobs, there have been many “next” Steve Jobs'.

In fact, sometimes even just appearances can be quite convincing: now-disgraced Theranos founder Elizabeth Holmes was very fond of wearing a very Steve Jobsian black turtleneck outfit.

It seems almost a law of nature that success will be copied, sometimes in a very disgraceful way. (Charlie Munger thinks that the fundamental algorithm of life is “Repeat what works.”)

Because they can be very convincing,  we must be wise enough to watch out for Batesian mimicry — even in ourselves.

This brings up an interesting, at times paradoxical, question: Who can best tell the difference between a Coral Snake and its Mimics? The Coral Snake itself.

The real thing knows a fake. Charlie Munger once commented on this in relation to the field of money management:

“It’s very hard to tell the difference between a good money manager and someone who just has the patter down. If you aren’t a good money manager yourself, rather than trying to pick one, you’re probably better off with a low cost index fund. ‘It takes one to know one’.”

***

An insight this good is only possible through continued study across the largest and most relevant fields of study. Peter got this idea by studying biology, a field full of incredible insight but, strangely underappreciated by most “non-biologists”. It's not just ideas about predators and prey, but niches, competition, co-evolutionary arms races and a whole host of others which give us massive insight into the human world.

Peter realized that studying across fields like biology and physics is something like buying an index fund: It works because you captures all the important companies traded on the public exchange, not just a select few. That means you capture the massive winners, which tend to greatly outweigh the failures.

Studying across all of the important fields gives you the same advantage, except it's even better: If an index fund buys a new position, it must sell something to do so; consequently, the “big winners” can only impact your portfolio in a limited way. But if you come to understand a new Great Idea, you don't have to give up the ones you already know! This is a great advantage.

And so it's worth taking the time to work on learning all the big ideas you can find, not just the ones you want to learn. In that search, you'll find a host of big winners you didn't even know existed.

If you liked this post, you'll probably also love:

The Need for Biological Thinking to Solve Complex Problems — How should we think about complexity? Should we use a biological or physics system? The answer, of course, is that it depends. It’s important to have both tools available at your disposal.

The Founder Principle: A Wonderful Idea from Biology — In his brilliant The Song of the Dodo, David Quammen gives us not only the stories of many brilliant biological naturalists including Mayr, but we also get a deep dive into the core concepts of evolution and extinction, including the Founder Effect.

Biology Enables. Culture Forbids. — From a biological perspective, nothing is unnatural. Whatever is possible is by definition also natural.

Carol Dweck on Creating a Growth Mindset in the Workplace

Carol Dweck‘s concept of Mindset permeates through every aspect of our lives.

One area particularity affected is in the workplace. We spend half of our day at work (some of you likely spend more than half) and both your mindset and the mindset of those around you will have a significant impact on your life, especially the mindset of your boss. Dweck comments:

Fixed-mindset leaders, like fixed-mindset people in general, live in a world where some people are superior and some are inferior. They must repeatedly affirm that they are superior, and the company is simply a platform for this.

These leaders tend to have a strong focus on personal reputation, generally at the expense of the company. Lee Iacocca, during his time at Chrysler, is a good example of this. Iacocca had his ego severely bruised when he was forced out of Ford. Fixed-mindset leaders tend to respond to failure with anger instead of viewing it as an opportunity to learn or get better.

So the king who had defined him as competent and worthy now rejected him as flawed. With ferocious energy, Iacocca applied himself to the monumental task of saving face and, in the process, Chrysler Motors. Chrysler, the once thriving Ford rival, was on the brink of death, but Iacocca as its new CEO acted quickly to hire the right people, bring out new models, and lobby the government for bailout loans. Just a few years after his humiliating exit from Ford, he was able to write a triumphant autobiography and in it declare, ‘Today, I’m a hero.’

He showed Ford that they made a mistake when they let him go, and he reveled in his triumph. But in his glory-basking, Iacocca forgot that the race wasn't over yet.

This was a hard time for the American automotive industry, the Japanese were challenging the market like no one ever had before. Chrysler needed to respond to the competition or they would be in trouble again. Meanwhile, Iacocca was still focused on his reputation and legacy.

He also looked to history, to how he would be judged and remembered. But he did not address this concern by building the company. Quite the contrary. According to one of his biographers, he worried that his underlings might get credit for successful new designs, so he balked at approving them. He worried, as Chrysler faltered, that his underlings might be seen as the new saviors, so he tried to get rid of them.

Instead of listening to the advice of his designers and engineers, Iacocca dug his feet into the ground.

See, a fixed-mindset doesn’t easily allow you to change course. You believe that someone either has ‘it’ or they don’t: it’s a very binary frame of mind. You don’t believe in growth, you believe in right and wrong and any suggestion of change or adaptation is considered a criticism. You don't know how to adopt grey thinking. Challenges or obstacles tend to make you angry and defensive. 

Iacocca was no different.

But rather than taking up the challenge and delivering better cars, Iacocca, mired in his fixed mindset, delivered blame and excuses. He went on the rampage, spewing angry diatribes against the Japanese and demanding that the American government impose tariffs and quotas that would stop them.

Blame is a big part of the fixed-mindset; when something goes wrong you don’t want to take responsibility because that would be akin to accepting inferiority. This can push some bosses to become abusive and controlling. They feel superior by making others feel inferior. Colleagues may feel this way too, but management has power. This is when you will notice the effect of mindset on your corporate culture. Everything starts to revolve around pleasing upper management. 

When bosses become controlling and abusive, they put everyone into a fixed mindset. This means that instead of learning, growing, and moving the company forward, everyone starts worrying about being judged. It starts with the bosses’ worry about being judged, but it winds up being everybody’s fear about being judged. It’s hard for courage and innovation to survive a companywide fixed mindset.

In these circumstances, the fear of punishment leads to groupthink. No one wants to dissent or put their hand up because it’s likely to get slapped. 

So what can you do if you’re new to a company and working against a fixed-mindset? This will be a difficult road but there are definitely ways of nudging your company towards a growth mindset.

Dweck outlines the main attributes that create a growth-mindset environment:

  • Presenting skills as learnable
  • Conveying that the organization values learning and perseverance, not just ready-made genius or talent
  • Giving feedback in a way that promotes learning and future success
  • Presenting managers as resources for learning.

At the end of each chapter of Dweck’s book, she has a brilliant section entitled ‘Grow Your Mindset.’ She reviews the chapter's contents and asks the reader probing questions to help them evaluate their situation and suggests concrete ways to move forward. Here are a few pertinent examples to explore:

What kind of workplace are you in?

Are you in a fixed-mindset or growth-mindset workplace? Do you feel people are just judging you or are they helping you develop? Maybe you could try making it a more growth-mindset place, starting with yourself. 

Is it possible that you're the problem?

Are there ways you could be less defensive about your mistakes? Could you profit more from the feedback you get? Are there ways you can create more learning experiences for yourself? How do you act toward others in your workplace? Are you a fixed-mindset boss, focused on your power more than on your employees’ well-being? Do you ever reaffirm your status by demeaning others? Do you ever try to hold back high-performing employees because they threaten you?

Can you foster a better environment?

Consider ways to help your employees develop on the job: Apprenticeships? Workshops? Coaching sessions? Think about how you can start seeing and treating your employees as your collaborators, as a team. Make a list of strategies and try them out. Do this even if you already think of yourself as a growth-mindset boss. Well-placed support and growth-promoting feedback never hurt.

Do you have procedures to overcome groupthink?

Is your workplace set up to promote groupthink? If so, the whole decision-making process is in trouble. Create ways to foster alternative views and constructive criticism. Assign people to play the devil’s advocate, taking opposing viewpoints so you can see the holes in your position. Get people to wage debates that argue different sides of the issue. Have an anonymous suggestion box that employees must contribute to as part of the decision-making process. Remember, people can be independent thinkers and team players at the same time. Help them fill both roles.

Mindset is filled with practical advice that will change the way in which you think and interact with the world. Through examples from her rigorous research Dweck eloquently explains the nature of the two mindsets and their influence on sports, business and relationships. Since culture eats strategy, it's important to understand her main points. Understanding her core concepts will also add depth to your comprehension of metal models like confirmation bias and bias from overconfidence.

If you’d like a bit more on Mindset we suggest taking a look at Dweck’s Google talk or perhaps revisit a more detailed explanation of the two mindsets.

Simple Rules for Business Strategy

The book Simple Rules by Donald Sull and Kathleen Eisenhardt has a very interesting chapter on strategy, which tries to answer the following question: How do you translate your broad objectives into a strategy that can provide guidelines for your employees from day to day?

It’s the last bit there which is particularly important — getting everyone on the same page. 

Companies don’t seem to have a problem creating broad objectives (which isn't really a strategy). Your company might not call them that, they might call them “mission statements” or simply “corporate goals.”  They sound all well and good, but very little thought is given to how we will actually implement these lofty goals.

As Sull and Eisenhardt put it: 

Developing a strategy and implementing it are often viewed as two distinct activities — first you come up with the perfect plan and then you worry about how to make it happen. This approach, common through it is, creates a disconnect between what a company is trying to accomplish and what employees do on a day-to-day basis.

The authors argue that companies can bridge this gap between strategic intent and actual implementation by following three steps:

  1. Figure out what will move the needles.
  2. Choose a bottleneck.
  3. Craft the rules.

1. Moving the Needles

The authors use a dual needle metaphor to visualize corporate profits. They see it as two parallel needles: an upper needle which represents revenues and a lower needle which represents costs. The first critical step is to identify which actions will drive a wedge between the needles causing an increase in profits, a decrease in costs, and sustain this over time.

In other words, as simple as it sounds, we need an actual set of steps to get from figure a. to figure b.

screen-shot-2016-10-17-at-1-36-10-pm

What action will become the wedge that will move the needles?

The authors believe the best way to answer this is to sit down with your management team and ask them to work as a group to answer the following three questions:

  1. Who will we target as customers?
  2. What product or service will we offer?
  3. How will we provide this product at a profit?

When you are trying to massage out these answers remember to use inversion as well. 

Equally important are the choices on who not to serve and what not to offer.

Steve Jobs once pointed out that Apple was defined as much by what it didn't do as by what it did.

2. Bottlenecks

Speaking of inversion, in order to complete our goal we must also figure out what's holding us back from moving the needles — the bottlenecks standing in our way.

When it comes to implementing a strategy of simple rules, pinpointing the precise decision or activity where rules will have the most impact is half the battle. We use the term bottleneck to describe a specific activity or decision that hinders a company from moving the needles.

You may be surprised at the amount of bottlenecks you come across, so you'll have to practice some “triage” of your issues, sorting what's important from what's really important.

The authors believe that the best bottlenecks to focus your attention on share three characteristics:

  1. They have a direct and significant impact on value creation.
  2. They should represent recurrent decisions (as opposed to ‘one off’ choices).
  3. They should be obstacles that arise when opportunities exceed available resources.

Once we’ve established what the bottlenecks are, it’s time to craft the rules which will provide you a framework in which to remove them.

3. Craft the Rules

Developing rules from the top down is a big mistake. When leaders rely on their gut instincts, they overemphasize recent events, build in their personal biases, and ignore data that doesn’t fit with their preconceived notions. It is much better to involve a team, typically ranging in size from four to eight members, and use a structured process to harness members’ diverse insights and points of view. When drafting the dream team to develop simple rules, it is critical to include some of the people who will be using them on a day-to-day basis.

This probably seems like common sense but we’re guessing you have worked at least one place where all information and new initiatives came from above, and much of it seemingly came out of nowhere because you weren’t likely involved.

In these situations it's very hard to get buy-in from the employees — yet they are the ones doing the work, implementing the rules. So we need to think about their involvement from the beginning.

Having users make the rules confers several advantages. First, they are closest to the facts on the ground and best positioned to codify experience into usable rules. Because they will make decisions based on the rules, they can strike the right balance between guidance and discretion, avoiding rules that are overly vague or restrictive. User can also phrase the rules in language that resonates for them, rather than relying on business jargon. By actively participating in the process, users are more likely to buy into the final rules and therefore apply them in practice. Firsthand knowledge also makes it easier to explain the rules, and their underlying rationale, to colleagues who did not participate in the process.

It’s important to note here that this is a process, a process in which you are never done – there is no real finish line. You must always plan to learn and to iterate as you learn — keep changing the plan as new information comes in. Rigidity to a plan is not a virtue; learning and adapting are virtues

***

There's nothing wrong with strategy. In fact, without a strategy, it's hard to figure out what to do; some strategy or another must guide your actions as an organization. But it's simply not enough: Detailed execution, at the employee level, is what gets things done. That's what the Simple Rules are all about.

Strategy, in our view, lives in the simple rules that guide an organization’s most important activities. They allow employees to make on-the-spot decisions and seize unexpected opportunities without losing sight of the big picture.

The process you use to develop simple rules matters as much as the rules themselves. Involving a broad cross-section of employees, for example, injects more points of view into the discussion, produces a shared understanding of what matters for value creation, and increases buy-in to the simple rules. Investing the time up front to clarify what will move the needles dramatically increases the odds that simple rules will be applied where they can have the greatest impact.

***

Still Interested? Read the book, or check out our other post where we cover the details of creating your simple rules.

Jared Diamond: How to Get Rich

We're constantly asked for examples of the “multiple mental models” approach in practice. Our standard response includes great books like Garrett Hardin's Filters Against Folly and Will Durant's The Lessons of History.

One of the well-known examples of this brand of thinking is Guns, Germs, and Steel, a book that opened thousands of eyes to the power of leaping across the walls of history, sociology, biology, geography and other fields to truly understand the world. (If you haven't read it yet, why are you still here? Go order it and read it!)

Jared Diamond, the book's author, is a great master of synthesis across many fields — works like The Third Chimpanzee and Collapse show great critical thinking prowess, even if you don't come to 100% agreement with him.

Lesser known than Guns, Germs, and Steel is a follow-up talk Diamond gave entitled How to Get Rich:

… probably most lectures one hears at the museum are on fascinating but impractical subjects: namely, they don't help you to get rich. This evening I plan to redress the balance and talk about the natural history of becoming rich.

The talk is a great, and short, introduction to “multiple mental models” thinking. Diamond, of course, does not literally answer the question of How to Get Rich. He's smart enough to know that this is charlatan territory if answered too literally. (Three steps to surefire wealth!)

But he does effectively answer an interesting part of the equation of getting rich: What conditions do we need to set up maximal productivity, learning, and cooperation among our groups? 

Diamond answers his question through the same use of inter-disciplinary synthesis his readers would be familiar with: As you read it, you'll see models from biology, military history, business/economics, and geography.

His answer has two main parts: Optimal group size/fragmentation, and optimal exposure to outside competition:

So what this suggests is that we can extract from human history a couple of principles. First, the principle that really isolated groups are at a disadvantage, because most groups get most of their ideas and innovations from the outside. Second, I also derive the principle of intermediate fragmentation: you don't want excessive unity and you don't want excessive fragmentation; instead, you want your human society or business to be broken up into a number of groups which compete with each other but which also maintain relatively free communication with each other. And those I see as the overall principles of how to organize a business and get rich.

Those are wonderful lessons, and you should read the piece to see how he arrives at them. But there's another important reason we bring the talk to your attention, one of methodology.

Diamond's talk offers us a powerful principle for our efforts to understand the world: Look for and study natural experiments, the more controlled, the better.

I propose to try to learn from human history. Human history over the last 13,000 years comprises tens of thousands of different experiments. Each human society represents a different natural experiment in organizing human groups. Human societies have been organized very differently, and the outcomes have been very different. Some societies have been much more productive and innovative than others. What can we learn from these natural experiments of history that will help us all get rich? I propose to go over two batches of natural experiments that will give you insights into how to get rich.

This wonderfully useful approach, reminiscent of Peter Kaufman's idea about the Three Buckets of Knowledge, is one we see used effectively all the time.

Judith Rich Harris used the naturally controlled experiment of identical twins separated at birth to solve the problem of human personality development. Michael Abrashoff had a naturally controlled experiment in leadership principles when he had to turn around the USS Benfold without hiring or firing, or changing ships or missions, or offering any financial incentive to his cadets. Ken Iverson had a naturally controlled experiment in business principles by succeeding dramatically in a business with massive headwinds and no tailwinds.

And so if we follow in the steps of Diamond, Peter Kaufman, Judith Rich Harris, Ken Iverson, and Michael Abrashoff, we might find natural experiments that help illuminate the solutions to our problems in unusual ways. As Diamond says in his talk, the world has already tried thousands of things: All we have to do is study them and then align with the way the world works.

Ken Iverson: The Cure for the Common MBA

We've written before about the legendary businessman Ken Iverson, the former CEO of Nucor Steel, who took it from a tiny steel operation to a true steel powerhouse in his own lifetime.

To recap, in Iverson's tenure, Nucor:

  • Compounded its per-share profits at 17% per annum for over 30 years, in a dying industry (steel production) even while foreign steelmakers competed hard and with lower per-hour labor costs, severely harming most U.S. steel producers.
  • Engineered the lowest per ton of steel labor cost despite paying the highest wages.
  • Did not lay off any employees or close any facilities in his long tenure. (In the steel business!)

And so on. He was incredible.

His short business memoir, Plain Talk, describes a much different kind of company than most; one where a culture of teamwork and group winning trumped personal fiefdom. He also got the incentives right. Boy did it ever work.

Turns out Iverson had some thoughts on business education as well.

What are we really missing?

In his recommended curriculum, Iverson highlights just how different his thoughts are: No classes on grand strategy (Henry Singleton would agree), or sales, or marketing, or financial structuring. (Not that those can't be useful. Just not enough.)

His idea? Teach aspiring managers how to truly interact with, understand, and lead the people who work for them by forcing young MBAs to take on an “internship” as a leader similar to the way doctors take up residence before being given the full leash. 

In the epilogue to Plain Talk, Iverson calls this the Cure for the Common MBA.

Here are some of the subjects that might form the core of first-year MBA curricula:

Earning Employees' Trust and Loyalty

Far too many managers have no clue how their employees feel or even what their people's work lives are like, day to day. Employees pick up on this lack of insight in a heartbeat, and that realization taints everything their managers say to them from that point forward. Conversely, employees clearly give the benefit of the doubt to managers whom they see as understanding “what's really going on” and “what we're really up against.” That's only natural.

I'd suggest, then, that every MBA candidate be required to spend at least a few weeks engaged in manual, clerical, and/or other forms of non-management labor.

Further, they should be required to keep a journal of their experiences—the kinds of problems they encounter, their frustrations, their successes, and so forth. They will find that what seems a small thing to them as managers often takes on great significance to them as employees.

Developing managers should also contemplate the implicit and explicit commitments they will make to the people who work for them. They should understand their obligations under those commitments as well as the limitations of those obligations. And they should grasp the consequences of failing to be consistently trustworthy.

Active Listening

Listening is among the scarcest of all human skills, in and out of management. Listening requires concentration, skill, patience, and a lot of practice. But such practice is a very sound investment of the developing manager's time.

Real listening enables managers not only to hear what people say to them, but to sense what may be behind what is said (i.e., employees' emotions, assumptions, biases).

Better still, their reputation for competent listening will encourage others to bring them information. Listening proficiency is an immense advantage to any manager. No MBA should be sent forth into the business world without it.

The Hazards of Hierarchical Power

Inexperienced managers tend to lean heavily on formal, hierarchical sources of authority. This is understandable. They have not yet had the opportunity to develop other forms of authority such as experience, expertise, and seniority.

The problem is, young managers don't often comprehend the hazards of hierarchical power. They do not understand that, by setting themselves above and apart from their employees, they may actually be digging themselves into a hole. I think it is only fair, then, that we warn inexperienced managers of the hazards of hierarchical power.

Principles of Equitable Treatment

Few managers receive much in the way of explicit instruction in the principles of equitable treatment of employees, either in business school or in the course of management development. All too often, managers fill that vacuum with their own self serving precepts of what is equitable. A few common- sense principles, clearly stated and strongly advocated in the business schools, could make the business world a better, more equitable place for employees and managers alike.

***

The notion of an internship for managers has a precedent in medical education, of course. Doctors intern for a number of years before they are turned loose on the world. There ought to be a comparable transitional step in completing the requirements for an MBA. Further, that transition should focus on providing the management candidate hands-on experience. Any MBA who ventures into business with the intent of managing people should first develop his or her skills under the watchful guidance of an experienced manager.

The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students. Medical school faculties, in contrast, are comprised of the best and most respected practicing physicians.

MBA candidates should preferably complete their internships within relatively small, self-contained operations, so they can perceive the operation in its entirety and grasp the overall dynamics of a business.

People throughout the corporate world lament that other parts of their company don't understand them or what they do. They're usually right. It takes an extraordinary individual to understand aspects of a business to which he or she has never been exposed. We are expecting far too many managers to be extraordinary.

Still Interested? Check out Plain Talk, and our post on some of its main themes.

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.

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.