Beginners Sex, the Slippery Slope, the Winner’s Bias, and the Principle of Doubt
Adaptation, it turns out, is the key to survival and so the key to success. In this chapter, we’ll explore the concept of adaptation and the misconceptions behind it. I’m going to begin by telling you two stories. The first is that of Jack Harris and his attempt to climb Mount Hood. Jack is a fictional character, his story the compilation of several different real-life climbing accidents. (I chose to use a fictional character out of respect for the real climbers.) The second story is that of Mark Smiley, a friend of mine and a climbing guide who has led me on several expeditions in Alaska, Yosemite, and the High Sierras. He is very real and so is his story.
Before sunrise, in the parking lot of Timberline Lodge, Jack Harris and two friends from his local church sorted their climbing gear in preparation for ascending Mount Hood. Harris promised his wife that he’d be back before nightfall so he could attend his daughter’s school play. They’d go light, packing just essential climbing gear, no tents or sleeping bags. He had a clear goal, the summit, and a well-defined objective, making his daughter’s play.
An ancient volcano, Mount Hood frames the skyline of Portland and lures thousands of climbers each year who hope to make the summit. Some refer to it as a “beginner’s” mountain, a characterization that makes it more dangerous than it is. As the survival expert Lawrence Gonzales says, climbing a beginner’s mountain is like having beginner’s sex: they’re dangerously seductive, seemingly kind and comfortable, but often cruel and punishing.
Some of the worst climbing accidents in the history of the sport have taken place on Hood. Most of the victims die of hypothermia or exposure. The weather patterns in the Cascade Range are deceiving; storms are often cloaked by blue skies and can swallow a climber with little or no warning. A warm summer day can turn, suddenly, into a ferocious winter blizzard with winds of sixty miles an hour and temperature drops of 40 to 60 degrees. One minute you can see Timberline Lodge and your car safe in the parking lot below you, the next you’re in a whiteout and can’t see your climbing partner a few feet ahead, as the wind taunts and buffets you, trying to knock you off your feet as you stumble blindly along. The most popular route up the mountain is over the Hogsback and the eastern escarpment of the volcano. Since the storms blow in from the west, you never see them coming; the mountain conceals them from you. In 1986, seven teenagers and two schoolteachers froze to death while trying to retreat from those bitter winds.
Jack and his friends made the summit an hour ahead of schedule and had time to sit and watch the sunrise over the Cascades from the east. If he’d looked west, he would have seen the massive cold front bearing down on them, already engulfing Portland and less than an hour away from the mountain. It was a beautiful morning and going to be a great day, so they spent precious time admiring the view. When the storm hit the mountain, they were less than a thousand feet from the summit. One minute they could see the parking lot; the next they were in the jaws of a killer blizzard and couldn’t see five feet in front of themselves. The rescuers found the first body at the bottom of the Hogsback, a thousand feet below the other bodies. Evidently, Jack had blindly walked right off a cliff and taken a 2,000-foot fall. He was dead by the time his body stopped tumbling, for sure. How long his friends stumbled through the storm no one knows, for the bodies were found several hundred feet apart. Dead of exposure. Jack never made it home or to the school play.
Three years earlier, Mark Smiley and two of his friends set out to climb Washington’s Mount Rainier in a similar one-day push. Another ancient volcano, part of the same range, at over 14,000 feet, Mount Rainier dominates the Seattle skyline and, like Hood, draws thousands to its slopes. Mark and his friends made the summit before sunrise but were hit by a fierce storm that blew in from the west.
Smiley was a part-time guide for Rainier Mountaineering and an emergency medical technician. His training had taught him that there’s a priority of goals and that survival is always the primary objective, the summit a secondary one. So his strategy included the tactical equipment he needed to spend a night out on the mountain, such as food, fuel, water, and a bivy sack. He understood the three things that kill a mountaineer: three minutes without air, three days without water, and three weeks without food. He also knew that accidents happen when you climb in bad weather, when you can’t see. Climbing a peak like Rainier requires good visibility; it’s the most basic environmental requirement. Without a clear line of sight, even rudimentary climbing can become extremely dangerous. Knowing this, Mark was smart enough to abandon his plans when the storm clouds swallowed the mountain. At first he stopped and simply waited, but as the storm raged on and visibility worsened, he realized he was going to have to spend the night on the mountain and change his strategy to Plan B. He had a new problem to solve. So he and his friends dug a snow cave and got out of the weather and subzero temperatures that came with it. Even at 20 below zero, a properly constructed snow cave with three healthy guys inside will warm to the upper thirties—very tolerable, especially when you have a bivy sack to crawl into. Mark and his friends waited out a four-day storm, one of the worst to hit the mountain in decades. Using Mark’s propane burner and fuel, they were able to melt snow for drinking water. Snacks helped their morale. Four days later Mark would walk off the mountain, cold and tired but very much alive.
What was the difference here? Why did Mark walk off the mountain while Jack had to be dragged off in a body bag? The answer is simple: adaptation. Jack stubbornly stuck to his plan even when it clearly stopped working, while Mark was able to adjust his plan to fit the changing situation. Mark was tactically focused, and when his tactics stopped working he realized he needed to modify his plan and was prepared to do so (he had enough food and fuel to last a few days).
Changing Situations
In business, as in mountaineering, the environment is constantly changing. One minute it’s clear and sunny, the next you’re trapped in a blizzard. Your business plan, though, was constructed at a specific moment, and by the time you start implementing it the situation has changed. We do our best to anticipate changes, but our forecasting is far from exact. Random things happen that make forecasting more a lesson in statistics than an exact science.
Your strategy is based on solving an important customer problem, but competitors can come along and solve it better or the problem itself can disappear. For example, PalmPilot had an excellent business model focused on solving a personal organization problem, but the iPhone and other smartphones destroyed that business model because they solved the same problem at a fraction of the price (actually, for free). And at one time there was a multimillion-dollar buggy whip industry that solved the problem of motivating a horse to pull your carriage. When automobiles made carriages obsolete, the problem of equestrian motivation vanished and so, too, did the industry. It wasn’t about solving a problem better; the problem itself ceased to exist. Put simply, things change.
Business environments are incredibly complex. Trying to predict them is like trying to predict the weather in San Francisco three years from today. We can try. And we should. But sadly, we’re never going to get it right. It’s more a game of probability, not one that’s deterministic. Odds are that it’s going to be foggy, but I wouldn’t bet my life on it. Hell, it was sunny yesterday.
If we could make accurate predictions, there’d be no reason for us to make adjustments to our plans. We could construct a plan and then stick to it come Hell or high water. Ironically, this is exactly what most businesses do. They put a plan together and then begin implementing, forgetting that it’s based on a forecast and that forecast is based on something that’s a crapshoot at best. It’s not unlike the Mount Hood climbers, who valiantly stuck to their original plan, even though the environment had changed and their tactics had stopped working.
Most business leaders strive to be better and stronger than their competitors in order to survive and think that following a well-conceived plan is what makes them strong. Instead we have to learn how to adapt our plan to the environment as it changes. Darwin once said, “It is not the strongest of the species that suvives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” So adaptation becomes paramount and we have to understand and apply it to our business model.
Organic Versus Intentional Adaptation
First, let’s define two types of adaptation and the difference between them. One is a bottom-up process called “organic adaptation.” The other is a top-down process called “intentional adaptation.” It’s the difference between how nature designs and how man designs. Both do the same thing, adapting to the environment, but they do it in very different ways.
Organic creation is a bottom-up process with no intentionality; it has no goals or objectives, and it’s not directed from above. In biology, the design of organisms results from random mutations, caused by the environment and how they play out in the fight for survival. In a previous book, I described it like this. Once upon a time, due to a biological error (pure chance), a horse was born with a longer neck than usual. This longer neck, it turned out, helped it to find food because it could reach leaves higher up on the tree and so didn’t have to compete with the other horses for the lower-level leaves. When food became scarce, it successfully survived because of its longer neck, so it passed this “long-neck gene” to its offspring. Over time, additional mutations accumulated and caused longer and longer necks, and the animal evolved into a giraffe. The giraffe wasn’t created with a long neck so that it could eat leaves higher up on trees. It first acquired the longer neck and then used it to survive. Organic design happens at the bottom, at the tactical level. It is a solution looking for a problem. Now that I have a long neck, the giraffe thinks, what can I do with it?
Intentional creation is a top-down process with specific goals and objectives in mind. Take, for example, the way a high school marching band forms the word FIGHT on the football field by the leader’s designating a place to stand for each band member. The drummer is told to stand on the forty-yard line, next to the right hash mark, making part of the F, while the trumpet player is directed to the fifty-yard line, on the left hash mark, so he becomes part of the H. The pattern the band members make is intentional. In contrast, consider how a flock of birds forms a V-shaped pattern. It’s the interaction of the individual birds, each one flying behind and off center with regard to the one in front, that forms the V shape, not the result of a leader bird with a desire to create a giant V. The shape of the birds is organic, the result of bottom-up processes, while the shape of the band is intentional, the result of a top-down process.
The power of organic design is that it naturally adapts to the environment. The problem with it is that designs tend to go extinct. In biology, only animals that can adapt to the changing environment survive. It turns out that more than 97 percent of the species that have ever lived have gone extinct. In business, we don’t just let things go and stand back and hope that they turn out okay. We step in and make adjustments. We play God. This means a process of intentional design. It mimics organic design, but it isn’t; it has goals and purpose built into it. We must constantly evaluate our business model, the effectiveness of our tactics, and the validity of our underlying hypothesis.
Adaptation begins at the tactical level. The day-to-day operation of our business is the execution of tactics. We are constantly striving to improve them, making them more effective, and using metrics to evaluate the process. There are two types of adjustments we can make: strategic and tactical. Strategic adjustments involve changing direction and goals, while tactical adjustments involve improving existing tactics or creating new ones while keeping the goal the same. Strategic adaptation involves finding a new problem to solve. Tactical adaptation involves solving the same problem in a new way. The key to making these adjustments, whether they be strategic or tactical, comes from monitoring the fight at the tactical level.
Reinforce Success and Abandon Failure
As the giraffe evolved, it naturally adapted to the changing environment through a process of successful reinforcement. The long neck began as a neck only a little bit longer, and natural selection over time made it longer and longer. When food got scarce, the long neck came in handy, so those with the long neck survived while those without it starved and died. The design was driven by reinforcing success and abandoning failure. The same is true in business.
As obvious as it sounds, it’s often an issue at some businesses. As a consultant, I’ve never been brought into a business and been asked to reinforce success; more commonly, I’m asked to help out with a failed project, not a successful one. As a Fortune 500 executive, it’s more common for a business leader to focus on failure and try to fix it than to have long strategic discussions about the things that are working. Don’t get me wrong, most businesses understand and work with success. They like success. But they still waste precious resources on the things that aren’t working, especially when those things are consistent with their strategy. The squeaky wheel gets the grease. Al Ries, the business consultant who coined the term “positioning,” once said, “Let’s say a company has five product lines. Three are winners; two are losers. Guess who management spends most of its time and attention with. That’s right, the losers.”
The military tends to do a much better job at reinforcing success, with field commanders in a constant search for any signs of advancement. Once a line is breached, a weak point determined, the idea is to pour on additional troops, not to send them into a strong enemy position. But even in the military, leaders can fail dramatically to distinguish successful approaches from ones that lead to failure. The Battle of the Somme, in World War I, is a horrifying example of reinforcing failure. Fought in France, the battle raged for five months with more than 1.5 million casualties. British historians call it the worst-managed battle in history, for the Allies gained only two miles of ground at a loss of about 420,000 soldiers. That’s a cost of forty men per foot. Wave after wave of advancing British and French troops were mowed down by German machine-gun fire. General Douglas Haig, the British commander, was intent on driving the Germans back to their border and so ordered a massive offensive on the heavily fortified German line. First he bombarded the enemy for more than a week with a million shells. Thinking that he had softened the line, he ordered the first wave of attack by twenty-two divisions. He quickly learned that the lines were not softened, that his bombardment had had little or no effect on the enemy. The first day, he lost more than sixty thousand soldiers, a huge failure. Instead of retreating and devising a new strategy, solving a different problem, he and the Allies continued their onslaught for another four months. Suicide and murder ensued. One out of every two British soldiers who fought on the Somme never fought again.
Why does this happen? Why do we refuse to discard failure? The answer is simple.
The Winner’s Bias
There exists a psychological and cognitive bias when it comes to abandoning failure. We don’t want to admit defeat, we don’t want to admit that we were wrong, we don’t want to quit, and so we keep plugging away. “Never give up” is the mantra of champions. So, instead of embracing reality and learning from failure, we’ve created a thinking bias that tells that success comes through optimism: the “winner’s bias.” General Haig believed that if he kept sending in wave after wave of soldiers, eventually he’d win the battle. Winners never quit, after all.
But, you see, we’re all naturally paranoid. It’s part of our evolutionary makeup. Our ancestors survived on the ancient savanna because we perceived the rustling of the grass as an approaching saber-toothed tiger and not just the wind—whether it was or not. They passed their paranoia on to us. But over the years we’ve tried to compensate for it through positive thinking. In 1952, Norman Vincent Peale published a book called The Power of Positive Thinking that sold more than five million copies and has been translated into fifteen different languages, creating a cottage industry in positive thinking that’s still going strong today. It permeates both our personal lives and our professional ones. Recently, the publishing phenomenon The Secret has perpetuated this idea with the Law of Attraction (if you think about becoming rich, smart, and beautiful, you will become rich, smart, and beautiful). The success of these books is due, in part, to the fact that positive thinking “feels good.” Paranoia, on the other hand, creates stress and angst and “feels bad.” But positive thinking is like a drug, and though, like a drug, a little bit of it won’t hurt you, a lot of it can cripple you, making you out of touch with reality and therefore completely ineffective.
Of course, perseverance and positive thinking are good traits and even critical to success. But they’re only half the equation. We need to be open to abandoning the things that aren’t working and reinforcing those that are. Plans are made to be adjusted, and once we believe in this, understand it, we can overcome the winner’s bias that resolution and perseverance create.
This means that the leader of a business model has to be monitoring the battle at the tactical level. As our plan unfolds and we begin implementing, we have to stay on top of how our business model is playing out, always keeping in mind the scenarios we’ve developed and watching for signs of the worst-case scenario, so that we will be alert when cracks in the dam start to develop. Our goal is to keep a careful eye on our metrics, so that when they start to deteriorate we can ring the alarm and make adjustments on the fly. When the storm hit Mount Hood, Jack should have realized that his plan of making his daughter’s recital was in jeopardy, and he should have changed strategic direction. Instead he persevered, kept descending, even though his tactics had stopped working, even though he couldn’t see where he was going. He simply walked off a huge drop because he was blind to where he was going, focused on a strategic goal without any consideration of the alignment between his tactics and strategy.
In business, as in mountaineering, we call this the slippery slope.
The Slippery Slope
Half Dome is a granite peak that rises more than 5,000 feet off the floor of Yosemite Valley. It’s a popular hiking destination in the summer. Its northwestern flank has a set of steel cables drilled into the rock that hikers can use to pull themselves up the last five hundred feet of sheer granite. It’s essentially a ladder up the rock face. Almost every year someone slips and falls to his or her death from the cables. However, just as dangerous and deadly is the approach to the cables on a slope called the Subdome. The Subdome, as its name implies, is a huge rock dome made of smooth granite, below its more famous neighbor, that falls off on three sides. As you climb it, it becomes difficult to stay on the trail, which is merely a granite rock face with no pathway or discernable features that give a hint as to the right direction. There are no cables on the subdome and few cairns to mark the route. The key is to climb straight up the fall line (the path a ball would follow if it was rolled from the top of the slope). As you stray from the fall line, the slope gets a little bit steeper with every step. It falls off toward the valley below, but it’s hard to perceive the change in incline because the small change of each step is imperceptible. However, after a few hundred feet, you realize you’re on a precarious slope, one that’s pulling you toward the valley, thousands of feet below. You reach down to grab on to the rock, but that changes the angle of how your feet meet the slick granite, reducing the coefficient of friction of your hiking shoes and you begin sliding, slowly at first. But once you start sliding, there’s no stopping; you pick up speed, begin tumbling, and your fate is sealed. You’re headed for the abyss.
Every few years, this is exactly what happens to some unsuspecting hiker. He’s tired, not paying attention, and by the time he realizes what’s happening, he’s on the slippery slope of the Subdome and unable to recover. It’s also what happens to many businesses. They stray off course, not focused on the strategic direction, and suddenly find themselves on a steep strategic slope, falling, with little or no hope of stopping themselves. It typically happens when you start managing to profits and not to your strategic metrics. In other words, you start solving a different problem, which leads you out onto the slope without your realizing it and you wander into dangerous territory. Once you start sliding, it’s a hell of a lot harder to stop than before you started sliding. It’s a matter of momentum. It’s those two things that make the slippery slope so dangerous to both hikers and business strategists.
The story of Enron, one of the largest bankruptcies and corporate frauds in the history of business, is the story of lost focus, the story of a company and its executives wandering out onto the smooth incline of short-term financial gain. Put simply, Enron got into trouble because it started solving the wrong problem.
Though the company could trace its roots back to the 1930s, it wasn’t until the 1985 merger of Houston Natural Gas and InterNorth that the resulting company was first called Enron (it was actually called “EnterOn,” but someone pointed out that this resembled the Greek word for “intestines” and so the name was shortened). For the next fifteen years, the growth of the company was staggering. The original strategy was based on generating electricity through natural gas. However, with the deregulation of the energy industry in the 1980s it became more involved in the buying and selling (trading) of electrical power. In the latter half of the 1990s, Enron’s stock price closely tracked the profits from its wholesale trading business, which accounted for almost 90 percent of the company’s revenues. Kenneth Lay (the CEO), Jeffrey Skilling (the president) and Andrew Fastow (the CFO) made tens of millions of dollars from lucrative stock options. Fortune magazine named the company “America’s Most Innovative Company” and one of the 100 best to work for. Enron bought cheap power in one part of the country and then sold it in another part of the country for a tidy profit. It was in a lucrative, high-volume, high-price trading business with little or no competition. The tens of millions of dollars in stock options grew and by the end of the 1990s were worth hundreds of millions of dollars. But Lay and his executives had stepped out onto the slippery slope and become addicted to short-term profits. Instead of backing away from unrealistic expectations, Lay continued to predict expansion in his trading business. Unable to make the numbers, he innocently began to sell off assets (generating stations and power plants), reporting the income from those small transactions as trading sales, thus meeting, and often exceeding the expectations of the Street. Over the next few years, the innocent misappropriations had become steeper and steeper. Now, unable to even sell assets to make the numbers, company management began to “cook the books.” They had to; they had no choice; if they’d fessed up at that point it would have been revealed that they’d misappropriated accounting items. So they set up shell companies, limited partnerships, that were used to hide losses and realize phantom revenues. They were like a mountaineer who’s unable to arrest his fall and is tumbling out of control, the momentum of the fall so fast and dramatic as it’s unable to stop the descent. The company hit bottom, so to speak, in October 2001, as it began to run out of cash and was forced to restate some of its financial statements. The jig was up.
Of course, Enron is a dramatic example, one with a big crash landing. Other firms take a long, slow decline down the hill and find themselves at the bottom, wondering why they’re there. Once you’ve smoked the heroin of profits, it begins to become your strategy; you’ve become addicted, the heroin becomes the focus, and you begin the long slide downhill. Your primary strategy becomes the bottom line, and only tactics that deliver in the short term are accepted. You are solving the profit problem, not your customer problem.
In a recent McKinsey & Company survey, more than 80 percent of the executives who responded said they would cut expenditures in R&D and marketing to ensure that they hit their quarterly earnings target, even if they believed that the cuts were destroying the company’s value over the long term. This isn’t surprising, since the compensation of high-level managers is based on short-term results and not long term.
So first we have to deal with the problems of short-term focus and making those minute steps toward the slippery slope without realizing it. The second problem has to do with momentum. Once you start sliding, it’s really difficult to stop. In physics, this is because the static coefficient of friction is always greater than the kinetic coefficient of friction. In other words, it takes more force to make an object start sliding than it does to keep it sliding. Put another way, the corollary says that it takes a much smaller force to get an object sliding than it does to stop the object from sliding. Once a hiker on the Subdome face begins sliding, it’s virtually impossible to stop. Momentum is working against him. Imagine yourself at the top of a water slide. It takes a little push to get going and a monumental, if not impossible, effort to stop. Mountaineers know this problem. When we climb we carry an ice ax, and if we slip and fall we have just a second or two to dig the blade of the ax into the snow to “self-arrest” or stop the slide. Once you get going too fast, it becomes impossible to stop yourself. You have to stop quickly, before you build up too much momentum, or you’re in for the long slide and a crash landing. You have to be aware of your surroundings and the possibility that you could be stepping out onto the slippery slope. You need to be afraid.
The Principle of Doubt
Big-wall rock climbers appear to be fearless. They climb on tiny undulations, little ledges, thousands of feet above the valley floor; a single slip could send them crashing down to the bottom. I started climbing about ten years ago to try to overcome my fear of heights. As I immersed myself into the sport, though, I came to realize that fear is my friend. One of my guides once told me that he doesn’t like to climb with people who are not afraid of heights. They are careless, he says. Fear keeps you focused, it forces you to evaluate your position, and it allows you to make adjustments to your climbing route. There are few veteran climbers who are not afraid of heights. The fearless are the ones who forget to tie a rope correctly, unrope at a critical spot, or just stumble off the edge because they didn’t realize it was there. Fear and doubt give you awareness, and, as Andy Grove once said—well, let’s let him tell us . . .
In 1979, Grove became the president of Intel, the computer parts maker. In 1987, he became its CEO, and in 1997 he was named chairman of the board. Under his strategic plan, Intel evolved from a manufacturer of memory chips into the premier maker of microprocessors, the brains of a personal computer. It was an evolution that made it the most valuable company in the world. While Grove was CEO, Intel’s market capitalization grew from $4 billion to $197 billion (a 4,500 percent increase). Grove, a Hungarian refugee and survivor of Nazi war atrocities, is incredibly driven, highly intelligent, and excessively competitive. In 1997, he was named Man of the Year by Time magazine.
The story of how Grove was able to develop a new business strategy, a Plan B, out of his existing business is a thing of corporate legend. In 1980, Intel was a billion-dollar company with a profit of a hundred million dollars. Annual sales were growing at nearly 65 percent per year. The vast majority of those sales, more than 90 percent, was of memory chips like RAM (random access memory) and DRAM (dynamic random access memory). Intel owned the memory chip market. As the electronics industry took off, so did Intel, riding the wave on the backs of manufacturers like IBM and Sony. But the success didn’t last. It never does. As Grove said, “Success breeds complacency. Complacency breeds failure.”
After years of record-making profits, by 1985, the company was in a dire financial situation. The Japanese were using a Pearl Harbor strategy against the company. Memory chips were no longer cutting-edge technology; they had evolved into a commodity. In the 1980s, the Japanese were at the height of their manufacturing prowess, able to manufacture at incredibly low cost in state-of-the-art factories while maintaining and even exceeding product quality measures. This, combined with fierce marketing strategies in which they would undercut their competitors, spelled certain defeat for Intel. Customers could solve their memory problems with Japanese chips that were better and cheaper. Ouch.
To make matters worse, Grove had correctly predicted a boom in PC sales but didn’t consider the great influx of competitors who’d also predicted the boom. Intel, anticipating a huge increase in sales, had overbuilt and now had factories, machines, and workers sitting idle. Profits were gone and Intel was in a free fall, barely breaking even, and being bombarded on all sides. The annual report called it “a miserable year.” Grove predicted worse things for 1986, and he was right; the company lost $200 million. In the annual report, Grove wrote, “We’re pleased to report that 1986 is over.” Suddenly, selling memory chips wasn’t a very glamorous business; it was like selling wool blankets on the streets of Tijuana. Competition was fierce, and everyone had the same product.
The company was in need of a new strategy. A new goal. A new identity. A new problem to solve. Grove recalls the breakthrough moment in his book like this:
I remember a time in the middle of 1985 after this aimless wandering had been going on for almost a year.
I was in my office with Intel’s chairman and CEO, Gordon Moore, and we were discussing our quandary. Our mood was downbeat.
I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?”
Gordon answered without hesitation, “He would get us out of memories.”
I stared at him, numb, then said, “Why shouldn’t you and I walk out the door, come back, and do it ourselves.”
That’s just what they decided to do. They would solve a new problem. Richard Tedlow in his book Denial says that it was in that moment, during that conversation, that Grove and Moore ceased their denial about the business, that memory chips were dead business and that they’d have to reinvent themselves. It was time for Plan B. Tedlow also says that denial isn’t a matter of intelligence; “It is a matter of point of view.”
In hindsight, it seems like an obvious change in plans. But in the thick of battle, the fog of war tends to shroud things in a misty haze. It’s hard to see the forest for the trees. Some at the company wanted the company to retool, to build a state-of-the-art factory like the Japanese had and go head-to-head with them on price and quality. Others wanted the company to develop “special-purpose” memory chips designed for specific uses. Still others wanted to develop a product that the Japanese could not. “We lost our bearings,” Grove said. “We were wandering in the valley of death.”
But like any good evolutionary plan, the seed of the strategy was already budding. The company, which had been in the microprocessor business for nearly fifteen years, first asked to build one for a Japanese calculator company that was buying memory chips from it. Microprocessors, in contrast to memory chips, were not a high-volume commodity business. The key to memory chips was manufacturing, and Intel considered itself a manufacturing company. High volume and low margins were the business model it was familiar with and had grown the business upon. The key to microprocessors, on the other hand, was design, customization, and sales and marketing: low volume and high margins. In hindsight, it was an obvious choice, but at the time it seemed like (and was) a very risky decision. Grove was predicting a boom in personal computers, but a personal computer could have a dozen different memory chips in it—but only a single microprocessor.
So Intel decided to get out of the memory business and into the microprocessor business. This was the result of a careful audit of its tactical inventory. The question became: If memory chips aren’t working, what is? The answer was microprocessors, which accounted for almost half of Intel’s revenues. It wasn’t a very profitable business, and Intel was in it only so it could offer a full product line to its memory chip customers. But this was due, in part, to the focus of the company, how the business was organized and managed. Once Grove and Moore made the strategic decision to focus on processors, they developed the tactics (manufacturing, management, and marketing) to make it profitable. The IBM PC was just taking off, and over the next few years the personal computer market would also take off, and it was all built around a series of Intel processors. IBMs and IBM clones dominated the market, in fierce competition that would destroy IBM’s margins but in which everyone was using Intel processors and building their architecture around the chips that Grove and company were churning out. Every year Intel developed a new processor—four bit, eight bit, sixteen bit, and so on—driving demand by giving computer manufacturers more computing power, allowing for more complex software applications and obsolescing products that were only a year or two old. Intel owned the brains of the computer, and its stock price soared under this new strategy. The rest, as they say, is history.
As we learned, it’s hard to make these big decisions, although in hindsight they seem obvious. Richard Tedlow calls it denial; people tend to deny that their Plan A is failing and use the confirmation bias to support the failing strategy (Intel’s sales of memory chips were good, it just needed to retool). As Grove said, it took a different point of view in order to see the problem more clearly. Your mind gets trapped in thinking one way. You want to believe in your plan. You’ve been taught to stick to your guns. And this causes you to deny. In order to make changes you have to develop the ability to see more clearly, to see a different viewpoint.
The Principle of Doubt says that suspicion is the critical driver in the evolution of a plan and how we make intelligent adjustments to our business model. Adaptive managers survive in part because they’re paranoid. Ike wrote the failure note before the troops left for Normandy because he wasn’t sure his plan was going to work. Ironically, it was this paranoia that allowed him to create such a well-thought-out, highly integrated, adaptable plan in the first place. Don’t be fooled by Norman Vincent Peale; positive thinking needs to be tempered with negative. Adaptive managers, like Andy Grove, can see the rocks on the horizon and steer the craft around them by periodically questioning their own decisions. Thankfully, we’ve developed a process for doing this. It’s called “managing by metrics,” and it’s the process we use to identify those rocks and implement our plans. It’s the subject of the next chapter.