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  The Baby Bells themselves now face a similar upheaval, as changes in technology prompt further regulatory moves. The evolution of cellular telephony and a cable network that reaches 60 percent of U.S. houses provides alternative ways of connecting to the individual customers. Even as I write this, Congress labors to catch up with the impact of these changes in technology. No matter which way the telecommunications act will be rewritten, no matter how much the Charlie Chaplins and Seymour Crays of telephony fight the changes, they are coming. On the other side of this inflection point there will be a far more competitive business landscape for all aspects of the telecommunications business.

  Of course, in retrospect it is easy to see that the creation of pharmaceutical regulations ninety years ago and the events that shaped the current telecommunications industry a decade ago clearly represented strategic inflection points for those industries. It is harder to decide whether the crosscurrents you are experiencing right now represent one.

  Privatization

  Much of the world is embroiled in what I want to call the “mother of all regulatory changes,” privatization. Companies that have had a long history of operating as state-owned monopolies, from China to the former Soviet Union to the United Kingdom, at the stroke of a pen are being placed in a competitive environment. They have no experience of how to deal with competition. They never had to market to consumers; after all, why would a monopoly have to court customers?

  AT&T, for example, had no experience dealing with competition, so they never had to market their products or services. They had all the customers that there were. Their management grew up in a regulatory environment where their core competencies revolved around their ability to work with the regulators; their work force was accustomed to a paternalistic work environment.

  In the ten years of the free-for-all that followed the Modified Final Judgment, AT&T lost 40 percent of the long-distance market. However, they also mastered consumer marketing skills. Now AT&T advertises on television for new customers, makes a point of thanking you for using AT&T every time you connect with them and has even developed a distinctive sound to signal their presence—a sort of warm and fuzzy bong—all examples of world-class consumer marketing by a company where marketing used to be seen as a foreign art.

  Deutsche Bundespost Telekom, Germany’s state-owned telecommunications company, is slated to be liberalized by the end of 1997. To steer the renamed Deutsche Telekom through the troubled waters, the company’s supervisory board recently appointed a forty-five-year-old consumer marketing manager from Sony to be its next CEO. This action suggests that the board understands that the future will be very, very different from the past.

  When most companies of a previously regulated economy are suddenly thrust into a competitive environment, the changes multiply. Management now has to excel at marketing their services in the midst of a global cacophony of competing products, and every person on the labor force suddenly must compete for his or her job with employees of similar companies on the other side of the globe. This is the greatest strategic inflection point of all. When such fundamental changes hit a whole economy simultaneously, their impact is cataclysmic. They affect an entire country’s political system, its social norms and its way of life. This is what we see in the former Soviet Union and, in a more controlled fashion, in China.

  In this chapter I have tried to show that strategic inflection points are common; that they are not just a contemporary phenomenon, that they are not limited to the high-tech industry, nor are they something that only happens to the other guy. They are all different yet all share similar characteristics. The table provides a snapshot of what the examples in this chapter illustrate. As I scan it, I can’t help but be impressed by the variety and pervasiveness of strategic inflection points.

  Note that everywhere there are winners and losers. And note also that, to a large extent, whether a company became a winner or a loser was related to its degree of adaptability. Strategic inflection points offer promises as well as threats. It is at such times of fundamental change that the cliché “adapt or die” takes on its true meaning.

  Strategic Inflection Points:

  Changes and Results

  “Why Not Do It Ourselves?”

  “The memory business

  crisis—and how we

  dealt with it—is how

  I learned the meaning

  of a strategic

  inflection point.”

  Managing, especially managing through a crisis, is an extremely personal affair.

  Many years ago, in a management class I attended, the instructor played a scene from the World War II movie Twelve o’Clock High. In this movie, a new commander is called in to straighten out an unruly squadron of fliers who had become undisciplined to the point of self-destruction. On his way to take charge, the new commander stops his car, steps out and smokes a cigarette, while gazing off into the distance. Then he draws one last puff, throws the cigarette down, grinds it out with his heel and turns to his driver and says, “Okay, Sergeant, let’s go.” Our instructor played this scene over and over to illustrate a superbly enacted instance of building up the determination necessary to undertake the hard, unpleasant and treacherous task of leading a group of people through an excruciatingly tough set of changes—the moment when a leader decides to go forward, no matter what.

  I always related to this scene and empathized with that officer. Little did I know when I watched that movie that I would have to go through something similar in a few years’ time. But beyond experiencing this crisis personally, the incident that I’m about to describe is how I learned with every fiber of my being what a strategic inflection point is about and what it takes to claw your way through one, inch by excruciating inch. It takes objectivity, the willingness to act on your convictions and the passion to mobilize people into supporting those convictions. This sounds like a tall order, and it is.

  The story I’m going to tell you is about how Intel got out of the business it was founded on and how it refocused its efforts on and built a new identity in a totally different business—all in the midst of a crisis of mammoth proportions. I learned an enormous amount about managing through strategic inflection points as a result of this experience, and throughout the rest of this book, I will refer back to these events to illustrate what I learned. I’m afraid I have to drag you through some details. Bear with me. While the story is unique to Intel, the lessons, I believe, are universal.

  Some history: Intel started in 1968. Every start-up has some kind of a core idea. Ours was simple. Semiconductor technology had grown capable of being able to put an ever larger number of transistors on a single silicon chip. We saw this as having some promising implications. An increasing transistor count readily translates into two enormous benefits for the customer: lower cost and higher performance. At the risk of some oversimplification, these come about as follows. Roughly speaking, it costs the same to produce a silicon chip with a larger number of transistors as a chip with a smaller number of transistors, so if we put more transistors on a chip, the cost per transistor would be lower. Not only that, smaller transistors are in closer proximity to each other and therefore handle electronic signals faster, which translates into higher performance in whatever finished gadget—calculator, VCR or computer—our chip should be placed into.

  When we pondered the question of what we could do with this growing number of transistors, the answer seemed obvious: build chips that would perform the function of memory in computers. In other words, put more and more transistors on a chip and use them to increase the capacity of the computer’s memory. This approach would inevitably be more cost-effective than any other method, we reasoned, and the world would be ours.

  We started modestly. Our first product was a 64-bit memory. No, this is not a typo. It could store 64 digits—numbers. Today people are working on chips that can store 64 million digits but this is today and that was then.

  It turns out that, around the time Intel
started, one of the then major computer companies had called for proposals to build exactly such a device. Six companies, all established in the business, had already bid on the project. We muscled our way in as the seventh bidder. We worked day and night to design the chip and, in parallel, develop the manufacturing process. We worked as if our life depended on it, as in a way it did. From that project emerged the first functional 64-bit memory. As the first to produce a working chip, we won the race. This was a big win for a start-up!

  Next we poured our efforts into developing another chip, a 256-bit memory. Again, we worked day and night, and this was an even harder job. Thanks to a great deal of effort, we introduced our second product a short while after the first.

  These products were marvels of 1969 technology and it seemed that every engineer in every organization of every computer maker as well as every semiconductor maker bought one of each to marvel over. Very few people, however, bought production volumes of either. Semiconductor memories were not much more than curiosity items at that time. So we continued to burn cash and went on to develop the next chip.

  In the tradition of the industry, this chip would contain more transistors than the previous chip. We aimed at a memory chip that was four times more complex, containing 1,024 digits. This required taking some big technological gambles. But we plugged on, memory engineers, technologists, test engineers and others, a hard-working, if not always harmonious, team. As a result of the pressure we felt, we often spent as much time bickering with one another as working on the problems. But work went on. And this time we hit the jackpot.

  This device became a big hit. Our new challenge became how to satisfy demand for it. To put this in perspective, we were a company composed of a handful of people with a new type of design and a fragile technology, housed in a little rented building, and we were trying to supply the seemingly insatiable appetite of large computer companies for memory chips. The incredibly tough task of development segued into the nightmare of producing a device that was held together with the silicon equivalent of baling wire and chewing gum. The name of this device was the 1103. To this day, when a digital watch shows that number, I and other survivors of that era still take note.

  Through our struggle with the first two technological curiosities that didn’t sell and with the third one that sold but that we had such a hard time producing, Intel became a business and memory chips became an industry. As I think back, it’s clear to me that struggling with this tough technology and the accompanying manufacturing problems left an indelible imprint on Intel’s psyche. We became good at solving problems. We became highly focused on tangible results (our word for it is “output”). And from all the early bickering, we developed a style of ferociously arguing with one another while remaining friends (we call this “constructive confrontation”).

  As the first mover, we had practically 100 percent share of the memory chip market segment. Then, in the early seventies, other companies entered and they won some business. They were small American companies, similar to us in size and makeup. They had names like Unisem, Advanced Memory Systems and Mostek. If you don’t recognize the names, it’s because these companies are long gone.

  By the end of the seventies there were maybe a dozen players in the business, each of us competing to beat the others with the latest technological innovations. With each succeeding generation of memory chips, somebody, not necessarily the same company, got it right and it certainly wasn’t always us. A prominent financial analyst of the day used to report his observations of the memory business using boxing-match analogies: “Round Two goes to Intel, Round Three goes to Mostek, Round Four to Texas Instruments, we’re gearing up to fight Round Five” … and so on. We won our share. Even ten years into this business, we were one of the key participants. Intel still stood for memories; conversely, memories meant (usually) Intel.

  Entering Our Strategic Inflection Point

  Then, in the early eighties, the Japanese memory producers appeared on the scene. Actually, they had first shown up in the late seventies to fill the product shortages we had created when during a recession we pulled back our investments in production capacity. The Japanese were helpful then. They took the pressure off us. But in the early eighties they appeared in force—in overwhelming force.

  Things started to feel different now. People who came back from visits to Japan told scary stories. At one big Japanese company, for instance, it was said that memory development activities occupied a whole huge building. Each floor housed designers working on a different memory generation, all at the same time: On one floor were the 16K people (where “K” stands for 1,024 bits), on the floor above were the 64K people and on the floor above that people were working on 256K-bit memories. There were even rumors that in secret projects people were working on a million-bit memory. All this was very scary from the point of view of what we still thought of as a little company in Santa Clara, California.

  Then we were hit by the quality issue. Managers from Hewlett-Packard reported that quality levels of Japanese memories were consistently and substantially better than those produced by the American companies. In fact, the quality levels attributed to Japanese memories were beyond what we thought were possible. Our first reaction was denial. This had to be wrong. As people often do in this kind of situation, we vigorously attacked the ominous data. Only when we confirmed for ourselves that the claims were roughly right did we start to go to work on the quality of our product. But we were clearly behind.

  As if this weren’t enough, the Japanese companies had capital advantages. They had (or were said to have) limitless access to funds—from the government? from the parent company through cross subsidies? or through the mysterious workings of the Japanese capital markets that provided nearly infinite low-cost capital to export-oriented producers? We didn’t know exactly how it all worked but the facts were incontrovertible: As the eighties went on, the Japanese producers were building large and modern factories, amassing a capacity base that was awesome from our perspective.

  Riding the memory wave, the Japanese producers were taking over the world semiconductor market in front of our eyes. This penetration into the world markets didn’t happen overnight; as shown in the figure below, it took place over a decade.

  Worldwide Semiconductor Market Share

  We fought hard. We improved our quality and brought costs down but the Japanese producers fought back. Their principal weapon was the availability of high-quality product priced astonishingly low. In one instance, we got hold of a memo sent to the sales force of a large Japanese company. The key portion of the memo said, “Win with the 10% rule.… Find AMD [another American company] and Intel sockets.… Quote 10% below their price … If they requote, go 10% AGAIN.… Don’t quit till you WIN!”

  This kind of thing was clearly discouraging but we fought on. 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 value-added designs, we introduced more advanced technologies and built memories with them. What we were desperately trying to do was to 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 may get ‘2X’ [twice] the price of Japanese memories, but what good does it do if ‘X’ gets smaller and smaller?”

  Most importantly, we continued to spend heavily on R&D. After all, we were a company based on technology and we thought that every problem should have a technological solution. Our R&D was spread among three different technologies. Most of it was spent on memory chips. But at the same time a smaller team worked on technology for another device we had invented in 1970 or so: microprocessors. Microprocessors are the brains of the computer; they calculate while memory chips merely store. Microprocessors and memories are built with a similar silicon chip technology but microprocessors are designed differently than memories. And because they represented a slower-growing, smaller-volume market than memory chi
ps, we didn’t stress their technological development as heavily.

  The bulk of the memory chip development took place in a spanking new facility in Oregon. The microprocessor technology developers had to share a production facility—not even a new one at that—with the manufacturing folks at a remote site. Our priorities were formed by our identity; after all, memories were us.

  While the situation on the memory front was tough, life was still good. In 1981, our then leading microprocessor was designed into the original IBM PC, and demand for it exploded far ahead of IBM’s expectation. IBM, in turn, looked to us to help them ramp up production of the IBM PC. So did all of IBM’s PC competitors. In 1983 and the early part of 1984 we had a heated-up market. Everything we made was in short supply. People were pleading with us for more parts and we were booking orders further and further out in time to guarantee a supply. We were scrambling to build more capacity, starting factory construction at different locations and hiring people to ramp up our production volumes.

  Then in the fall of 1984 all of that changed. Business slowed down. It seemed that nobody wanted to buy chips anymore. Our order backlog evaporated like spring snow. After a period of disbelief, we started cutting back production. But after the long period of buildup, we couldn’t wind down fast enough to match the market slide. We were still building inventory even as our business headed south.