Churning Things Up

Innovations with the power to transform entire industries are the Holy Grail of business strategy. Unfortunately, the innovators don't always survive.

By Andy Grove

July 21, 2003

[Continued, page 2]

During the same period, we made another strategic change. At the time it was customary in the semiconductor business to license your technology to your competitors so that those second-source suppliers could also make your product. Why, you might wonder, would a company create its own competition? Theoretically, this unnatural act worked out as a win for all parties: The developer of the product benefited by wider customer acceptance due to a broader supplier base; the second-source supplier benefited by getting valuable technology for little or nothing; and the customer benefited by having suppliers compete for his business. In any case, that's how it was done.

In the harsh business climate of the time, we realized that if we gave away our designs and turned our proprietary work into a commodity, betting our future on the microprocessor business wouldn't work any better than staying in the memory business and slugging it out with the Japanese.

Hard times give you the courage to think the unthinkable. We decided to charge our competitors more for our designs. They balked. They assumed the customers would browbeat us into giving our designs away.

The customers did browbeat us, but we couldn't afford to buckle. Starting with the next generation of microprocessors, we had no licensed second source. In time this decision changed the environment that we operated in. It significantly reshaped the customer-supplier relationship. The balance of power between us and our customers shifted in our favor.

This strategic action was less dramatic than completely abandoning the memory business. Yet its impact on our business environment was profound and lasting. By stirring the power balance between supplier and customer, we performed the industry equivalent of turning cream into butter.

What is especially interesting about nonlinear strategic actions is that more often than not the companies initiating them are unaware of their potential impact. In the case of our decision on second sourcing, all we wanted to do was to make a little more money on microprocessors. If anyone had suggested that this decision had the power to transform the computer industry, turning it into a multibillion-dollar horizontal industry, we would have said, "Huh?" Only many years later did we realize what we had done.

I suspect it was not much different at IBM.

Conversely, even decisions that are consciously meant to transform an industry to a company's advantage may achieve transformation without benefiting the company itself. Napster, a pipsqueak startup, demonstrated the feasibility of unleashing a 10X change in the efficiency of distributing music. Judging by the feverish defensive actions it provoked in the huge music industry, Napster's business concept qualifies as a nonlinear strategic action. Yet Napster was not able to capitalize on it.

Or consider this: In 1966, Boeing introduced the 747, the result of an enormous and very expensive development effort. One might speculate that Boeing's managers intentionally upped the ante on their domestic competitors like McDonnell-Douglas. In that, they succeeded. But four years later Airbus Industrie was formed by a consortium of European governments. Thanks to their ample state funding, Airbus became world-class competition to Boeing – much more significant than the domestic competitors it had left behind. Could the European countries have been motivated by the high-profile challenge of the 747's mega-development? It seems plausible. Creating the 747 was nonlinear, yes. To the long-term benefit of Boeing? I'm not so sure.

Nonlinear strategic actions would seem to have immense appeal for the ambitious strategist. Not only can they improve the position of the company within the environment, but they hold the promise of shaping the environment so that it is favorable to the company's new strategy. They are the Holy Grail of strategic actions. Unfortunately, they often don't work out as intended.

What industry is the next candidate for nonlinear strategic actions? My favorite choice is the health-care industry.

The signs are suggestive. First, it is huge – it represents some 15% of the gross domestic product of the U.S. Second, its existing customers are, to put it mildly, restless and, thanks to the Internet, better informed than ever. Third, the economic pressures on it are becoming worse: The aging of the population is increasing demand for services without a corresponding ability to pay for them.

Last, there is a confluence of technologies that may create the potential for a 10X change in how things are done. I'm referring to genomics and proteomics, the study of the genetic and protein structure of human beings, combined with the ability to access and manipulate very large databases, as well as the trend toward basing drug development on molecular modeling using modern computational technologies. Interestingly, the computational technologies used in both database deployment and drug development are based on mass-produced, low-cost technology developed for commercial information processing, an example of how the success of one category of applications may become the enabler of another.

A hint of what could happen on a broad scale is illustrated by the fight against the SARS epidemic. Using computers on three continents employing technologies developed over 50 years of commercial computing, some dozen institutions collaborated via the Internet to identify the SARS virus in a matter of weeks. They were aided by increasingly complex gene arrays used in the analysis – Moore's law applies to gene array technology too. By comparison, the identification of the AIDS virus took 2 1/2 years. This is a 10X change if ever there was one.

Does the jockeying by participants in the health-care industry correspond to stirring water or cream? And what might agitate this mix of technologies to the point of transformation?

AT&T's history suggests a deal between a large incumbent and the government as one source of nonlinear strategic action. The Napster example suggests another, the power of a disruptive force coming from a small outsider. Will there be a Theodore Vail of health care? Will a biotech company struggling for financing today emerge and stand the industry on its head? Will the present players even recognize such an action as it is happening, or will they realize only in retrospect that the environment has evolved – and that they have not?

Andy Grove is the chairman of Intel Corp. and sometime professor of Business Strategy at Stanford University.

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