Only the Paranoid Survive Read online

  “That Guy Is Always the Last to Know”

  In the three months following the Pentium floating point incident, Microsoft’s new operating system, Windows 95, was delayed; Apple delayed the release of their new software, Copland; long-standing bugs in both the Windows calculator and Word for Macintosh were highlighted with substantial publicity in trade newspapers; and difficulties associated with Disney’s Lion King CD-ROM game and Intuit’s tax programs all became subjects of daily newspaper coverage. Something changed, not just for Intel but for others in the high-tech business as well.

  I don’t think this kind of change is a high-tech phenomenon. Examples from industries of all different kinds stare at me from daily newspapers. All the turbulent actions of investments, takeovers and write-offs in the media and telecommunications companies, as well as in banking and healthcare, seem to point to industries in which “something has changed.” Technology has something to do with most of these changes only because technology gives companies in each of these industries the power to alter the order around them.

  If you work in one of these industries and you are in middle management, you may very well sense the shifting winds on your face before the company as a whole and sometimes before your senior management does. Middle managers—especially those who deal with the outside world, like people in sales—are often the first to realize that what worked before doesn’t quite work anymore; that the rules are changing. They usually don’t have an easy time explaining it to senior management, so the senior management in a company is sometimes late to realize that the world is changing on them—and the leader is often the last of all to know.

  Here’s an example: I recently listened to evaluations of a certain highly touted new software from a company whose other products we already use. Our head of Information Technology told of unanticipated obstacles we were running into by trying to adopt this new software and therefore said that she was inclined to wait until the following generation of software was ready. Our marketing manager had heard of the same situation at other companies as well.

  I called up the software company’s CEO to tell him what I was hearing and asked, “Are you considering changing your strategy and going directly to the new generation?” He said, “No way.” They were going to stay the course, they had heard of no one having any problems with their strategy.

  When I reported this to the individuals who brought me the news, our IT manager said, “Well, that guy is always the last to know.” He, like most CEOs, is in the center of a fortified palace, and news from the outside has to percolate through layers of people from the periphery where the action is. Our IT manager is the periphery. Our marketing manager also experiences the skirmishes there.

  I was one of the last to understand the implications of the Pentium crisis. It took a barrage of relentless criticism to make me realize that something had changed—and that we needed to adapt to the new environment. We could change our ways and embrace the fact that we had become a household name and a consumer giant, or we could keep our old ways and not only miss an opportunity to nurture new customer relationships but also suffer damage to our corporate reputation and well-being.

  The lesson is, we all need to expose ourselves to the winds of change. We need to expose ourselves to our customers, both the ones who are staying with us as well as those that 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. As we throw ourselves into raw action, our senses and instincts will rapidly be honed again.

  A “10X” Change

  “What such a

  transition does to a

  business is profound,

  and how the business

  manages this

  transition determines

  its future.”

  We managers like to talk about change, so much that embracing change has become a cliché of management. But a strategic inflection point is not just any change. It compares to change the way Class VI rapids on a river, the kind of deadly and turbulent rapids that even professional rafters approach gingerly, compare to ordinary waters.

  We just saw what it’s like to be in the middle of a strategic inflection point. Now I’d like to step back and analyze what might cause one.

  The Six Forces Affecting a Business

  Most analyses of the competitive well-being of businesses are static ones. They describe the relevant forces at any instant in time and help explain how they add up to favorable or unfavorable business positions. But they are of little help when a major change is taking place in the balance of these forces. For instance, traditional competitive analysis doesn’t much help us understand the workings of a business when one of these forces grows, say, tenfold in magnitude.

  Still, these analyses have provided a good way of describing the factors affecting businesses. Let me start by quickly paraphrasing classical competitive strategy analysis, largely based on the work of Professor Michael Porter of Harvard University, who identified the various forces that determine how competitive a company is. Generations of business people and business students have been trained to think in terms of these forces, so I’ll adopt them as our starting point. Porter describes five forces that determine the competitive well-being of a business. In my paraphrasing, they are:

  • The power, vigor and competence of a company’s existing competitors: Are there a lot of them? Are they well funded? Do they clearly focus on your business?

  • The power, vigor and competence of a company’s suppliers: Are there a lot of them, so that the business has plenty of choices, or are there few of them, so that they have the business by the throat? Are they aggressive and greedy or are they conservative and guided by the long view toward their customers?

  • The power, vigor and competence of a company’s customers: Are there a lot of them or is the business dependent on just one or two major customers? Are the customers very demanding, perhaps because their business operates under cutthroat competition, or is their business more “gentlemanly”?

  • The power, vigor and competence of a company’s potential competitors: These players are not in the business today but circumstances could change and they might decide to come in; if so, they may be bigger, more competent, better funded and more aggressive than the existing competitors.

  • The possibility that your product or service can be built or delivered in a different way. This is often called “substitution,” and I’ve found that this last factor is the most deadly of all. New techniques, new approaches, new technologies can upset the old order, mandate a new set of rules and create an entirely new climate in which to do business. This is what trucking and air transportation have done to railroads, what container shipping has done to traditional ports, what superstores have done to small shops, what microprocessors continue to do to computing and what digital media might do to entertainment.

  Recent modifications of competitive theory call attention to a sixth force: the force of complementors. Complementors are other businesses from whom customers buy complementary products. Each company’s product works better or sometimes only works with the other company’s product. Cars need gasoline; gasoline needs cars. Computers need software; software needs computers.

  Complementors often have the same interests as your business and travel the same road. I think of them as “fellow travelers.” While your interests are aligned, your products support each other. However, new techniques, new approaches, new technologies can upset the old order and change the relative influence of the complementors or cause the path of fellow travelers to diverge from yours.

  These six forces are sketched out in the diagram below.

  Six Force
s Diagram

  A “10X” Force

  When a change in how some element of one’s business is conducted becomes an order of magnitude larger than what that business is accustomed to, then all bets are off. There’s wind and then there’s a typhoon, there are waves and then there’s a tsunami. There are competitive forces and then there are supercompetitive forces. I’ll call such a very large change in one of these six forces a “10X” change, suggesting that the force has become ten times what it was just recently. This is illustrated in the following diagram.

  Six Forces Diagram—With a “OX” Force

  When a business goes from the condition shown in the first figure to the second, the changes it faces are enormous. In the face of such “10X” forces, you can lose control of your destiny. Things happen to your business that didn’t before, your business no longer responds to your actions as it used to. It is at times like this that the telling phrase “Something has changed” is apt to come

  To manage a business in the face of a “10X” change is very, very difficult. The business responds differently to managerial actions than it did before. We have lost control and don’t know how to regain it. Eventually, a new equilibrium in the industry will be reached. Some businesses will be stronger, others will be weaker. However, the period of transition depicted in the diagram below is particularly confusing and treacherous.

  Transition Between Two States of a Business

  Now, nobody will ring a bell to call your attention to the fact that you are entering into such a transition. It’s a gradual process; the forces start to grow and, as they do, the characteristics of the business begin to change. Only the beginning and the end are clear; the transition in between is gradual and puzzling.

  What such a transition does to a business is profound, and how the business manages this transition determines its future. I like to describe this phenomenon as an inflection point.

  The Strategic Inflection Point

  What is an inflection point? Mathematically, we encounter an inflection point when the rate of change of the slope of the curve (referred to as its “second derivative”) changes sign, for instance, going from negative to positive. In physical terms, it’s where a curve changes from convex to concave, or vice versa. As shown in the diagram, it’s the point at which a curve stops curving one way and starts curving the other way.

  The Inflection Curve

  So it is with strategic business matters, too. An inflection point occurs where the old strategic picture dissolves and gives way to the new, allowing the business to ascend to new heights. However, if you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines. It is around such inflection points that managers puzzle and observe, “Things are different. Something has changed.”

  Put another way, a strategic inflection point is when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new. Before the strategic inflection point, the industry simply was more like the old. After it, it is more like the new. It is a point where the curve has subtly but profoundly changed, never to change back again.

  When exactly does a strategic inflection point take place? It’s hard to pinpoint, even in retrospect. Picture yourself going on a hike with a group of friends and getting lost. Some worrywart in the group will be the first one to ask the leader, “Are you sure you know where we’re going? Aren’t we lost?” The leader will wave him away and march on. But then the uneasiness over lack of trail markers or other familiar signs will grow and at some point the leader will reluctantly stop in his tracks, scratch his head and admit, not too happily, “Hey, guys, I think we are lost.” The business equivalent of that moment is the strategic inflection point.

  But if it’s hard to tell in retrospect exactly where a strategic inflection point occurred, how can you tell while going through one? In fact, participants who live through one develop a sense of it being an inflection point at different times, just as the group of hikers suspected they were lost at different moments.

  The arguments in the midst of an inflection point can be ferocious. “If our product worked a little better or it cost a little less, we would have no problems,” one person will say. And he’s probably partially right. “It’s just a downturn in the economy. Once capital spending rebounds, we’ll resume our growth,” another will say. And he’s probably partially right. Yet another person comes back from a trade show confused and perturbed, and says, “The industry has gone nuts. It’s crazy what people use computers for today.” He hardly gets a lot of serious attention.

  So how do we know that a set of circumstances is a strategic inflection point?

  Most of the time, recognition takes place in stages.

  First, there is a troubling sense that something is different. Things don’t work the way they used to. Customers’ attitudes toward you are different. The development groups that have had a history of successes no longer seem to be able to come up with the right product. Competitors that you wrote off or hardly knew existed are stealing business from you. The trade shows seem weird.

  Then there is a growing dissonance between what your company thinks it is doing and what is actually happening inside the bowels of the organization. Such misalignment between corporate statements and operational actions hints at more than the normal chaos that you have learned to live with.

  Eventually, a new framework, a new set of understandings, a new set of actions emerges. It’s as if the group that was lost finds its bearings again. (This could take a year—or a decade.) Last of all, a new set of corporate statements is generated, often by a new set of senior managers.

  Perhaps more than getting lost on a hike, working your way through a strategic inflection point is like venturing into what I call the valley of death, the perilous transition between the old and the new ways of doing business. You march in, knowing full well that some of your colleagues will not make it across to the other side. Yet the senior manager’s task is to force that march to a vaguely perceived goal in spite of the casualties, and the middle managers’ responsibility is to support that decision. There is no other choice.

  Ideas about the right direction will split people on the same team. After a while, everyone will understand that the stakes are enormously high. There will be a growing ferocity, determination and seriousness surrounding the views the various participants hold. People will dig in. These divergent views will be held equally strongly, almost like religious tenets. In a workplace that used to function collegially and constructively, holy wars will erupt, pitting coworkers against coworkers, long-term friends against long-term friends. Everything senior management is supposed to do—define direction, set strategies, encourage teamwork, motivate employees—all these things become harder, almost impossible. Everything middle management is supposed to do—implement policy, deal with customers, train employees—also becomes more difficult.

  Given the amorphous nature of an inflection point, how do you know the right moment to take appropriate action, to make the changes that will save your company or your career? Unfortunately, you don’t.

  But you can’t wait until you do 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 yet in. Even those who believe in a scientific approach to management will have to rely on instinct and personal judgment. When you’re caught in the turbulence of a strategic inflection point, the sad fact is that instinct and judgment are all you’ve got to guide you through.

  But the good news is that even though your judgment got you into this tough position, it can also get you out. It’s just a question of training your instincts to pick up a different set of signals.
These signals may have been out there all along but you may have ignored them. The strategic inflection point is the time to wake up and listen.

  The Morphing of the Computer Industry

  “Not only has the

  basis of computing

  changed, the basis of

  competition has

  Changed too.”

  Of all the changes in the forces of competition, the most difficult one to deal with is when one of the forces becomes so strong that it transforms the very essence of how business is conducted in an industry. There are plenty of historic examples, such as how railroads revolutionized transportation, and many contemporary ones, such as how small retailers are being wiped out by superstores. The lessons and the dynamics of what happens seem to be the same, no matter what the industry, no matter where it is located and no matter which era it operates in.

  I would like to describe how this all works by going in detail through an example that’s close to my heart. When computers could be built around a simple commonly available microprocessor and, consequently, the personal computer appeared on the scene, it brought with it a cost-effectiveness that was easily ten times greater than was available with the type of computing that preceded it. In a little over five years, the cost adjusted by performance decreased by 90 percent, an unprecedented rate of decline. Such an enormous change in the way computing could be done had profound consequences on the computing business.