Thursday, November 20, 2008

Clean slate enquiry & strategic insight: Story of Intel’s exit from memory business

Intel’s exit from memory biz: In 1985, Intel decided to exit memory business and focus on microprocessor business. According to Andrew Grove, former CEO of Intel, this decision was equivalent to Coca Cola exiting soft drinks business. How did Intel come to take such a bold step? Let’s look at this story from Andy Grove’s eyes.

Clean slate enquiry: Andy narrates the incident in Only the paranoid survive when the moment of truth hit him and Intel’s chairman & CEO Gordon Moore. We just went on losing more and more money. It was a grim and frustrating year. During that time we worked hard without a clear notion of how things were ever going to get better. I remember a time in the middle of 1985, I was in my office with Intel’s chairman & CEO Gordon Moore and we were discussing our quandary. 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 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?” Post this insight, Intel identified microprocessors as their future. They had been supplying microprocessors to IBM-compatible PCs for nearly five years already. And the rest is history.

2 good things & 1 bad thing: In an interview with innovate, Andy talks about two things that were good and one thing that was bad about this decision. First good thing was that Intel management had allowed microprocessors to grow spontaneously, not because management realized microprocessors were going to be very important. In 1985 the business had grown enough to become a viable alternative to memory business. Second good thing was that management had the ability to look at the sick business (memories), look at alternatives (microprocessors) and had the courage to take a decision and act on it. The bad thing, according to Andy, was that the management wasn’t conscious of “why microprocessors?” in spite of the messages they received. In fact, Andy narrates an exit interview where Steve, a young employee said, “Andy, if I were you, I would take microprocessors seriously. We should learn how to use microprocessors and become an expert.” Andy said, “Sure” and never paid any further attention.

Role of clean slate enquiry: It is good to do a “clean slate” enquiry once in a while and ask, “If a new guy comes in my place, what is the first thing he would do?” Perhaps this will open doors to new alternatives. However, what is much more difficult to do is to decide when to take “Steve” (the guy in the exit interview) seriously and when not to.

Sunday, November 16, 2008

Prototyping: A foundational competency of every innovator

Guy Kawasaki on prototyping: Economic Times interviewed Guy Kawasaki when he visited Mumbai a couple of months back. He was asked, “What are the few steps that an entrepreneur should get right?” To which Guy answered, “Prototyping is the first thing. That’s the first, second, third, fourth, and fifth thing. The sixth thing is to write a business plan.” I couldn’t agree with him more. Guy answered this question from an entrepreneur’s point of view, but I feel it is equally relevant from innovator’s point of view. Let’s explore this concept called “prototyping” with the help of two examples, one for a product and the other for a banking service.

Prototyping is less expensive & less complex: Ideo, a leading design firm from Silicon Valley, helped a group of surgeons develop a new device for sinus surgery. As the surgeons described the ideal physical characteristics of the instrument, one of the designers grabbed a whiteboard marker, a film canister, and a clothespin and taped them together (see picture on the left). “Do you mean like this?” he asked. With his rudimentary prototype in hand, the surgeons were able to be much more precise about what the ultimate design should accomplish (see picture on the right).

Prototyping is not restricted to products
: In the summer of 2004, Ray Chinn, Bank of America’s Senior VP for New Products Innovation and his team held twenty brainstorming sessions. These sessions generated 80 ideas from which the team narrowed down to the concept of rounding up consumer’s financial transactions and transferring the difference to savings. To prototype the concept, the team created a web-based cartoon that a showed a woman buying a cup of coffee in a store for $1.50, and then displayed rounding the purchase up to $2.00 and placing the 50 cents into a savings account. They tested the conceptual cartoon in an online survey of 1,600 consumers, and the concept won phenomenal reviews for its uniqueness. Eventually the bank launched the new service “Keep The Change” based on this idea in October 2005 and the program has been smash hit.

Why is prototyping important? Prototyping provides two key benefits (1) It reduces uncertainty associated with realization of an idea – addressing the typical question to a new idea – “Show me it works” (2) It provides a learning opportunity by getting an early feedback on the idea from customers. Ideo innovation principle says, “If a picture is worth a thousand words, a prototype is worth ten thousand”. If I were to modify IBM's innovation mantra, I would say, "Stop talking, start prototyping"

Wednesday, November 12, 2008

Lego: story of an innovative company that forgot cost of innovation

How can an innovative company do badly? I am a loyal and satisfied customer of Lego for the past seven years. After all, our son literally grew up playing with Lego bricks since he was four year old. Initial small kits for making cars slowly gave way to Hogwarts Express (from Harry Potter) and Dr. Ock’s house (from Spiderman-2). And today he makes and programs NXT robots and writes a blog My Legos: Guns & Robots. Naturally, with all these innovative products and the value they brought us, whenever I think of innovative companies, Lego’s name comes to mind. So, it came to me as a surprise to learn that Lego was going through its worst patch in its 87 year old history as I was buying more kits in 2003 (see Rebuilding Lego, Brick by Brick). I decided to find out, why?

Brief history of Lego: Lego is a Danish firm founded by Ole Kirk Christiansen in 1916 (it got named Lego in 30s). Godtfred Kirk Christiansen (called Christiansen), the third of four sons, started working in father’s shop when he was 12. In 1947 father and son came across the building bricks from a British firm Kiddicraft. They bought the rights to the patent and started production in 1949. In 1951 Christiansen marketed the Lego bricks as a platform – something that becomes more valuable the more you buy. They were compatible with each other, letting children build elaborate constructions.

A strategic decision: In 1960 Lego faced one of its biggest challenges when a fire wrecked Lego’s wooden toy warehouse, wiping the inventory. Building all those toys would be costly. At this point, Christiansen made a strategic decision. Bricks, which made up a minority of the company’s sales, was made the firm’s sole product. By the turn of the century, Lego became a national treasure and grew into one of the strongest brand in toy industry. Its colorful bricks are sold in 130 countries: everyone on earth has, on average, 52 of them.

Trouble in Lego-land: After six years of slowing sales and falling profits, Lego’s crisis peaked in 2003, when it made a whopping DKr1.6 billion ($240m) operating loss on sales of DKr6.8 billion and was sitting on DKr6.8 billion debt. Rumors abounded that America’s Mattel, the biggest toymaker, would take over its long-coveted European rival. PE companies found a perfect prey: a mismanaged, medium-sized firm in the hands of a single owner. Christiansen family injected DKr800m of its own money and appointed Jorgen VIg Knudstorp as CEO.

The “Kitchen” and supply chain woes: Knudstorp narrowed down the root-cause to three possible issues: (1) Over-diversification (2) unwieldy costs and (3) lost market window in video game market. They decided to scrutinize every aspect of operations closely: product development, sourcing, manufacturing and distribution. Soon they realized that recipes coming out from company’s “Kitchen”: product development lab, were increasingly intricate. A pirate kit includes eight pirates with 10 types of legs in different attire and positions. This reflected a culture of craftsmanship, but also its disregard for the costs of innovation. The company designers were dreaming up new toys without factoring in the price of materials or the costs of production. Lego group had 11,000 suppliers, nearly twice as many suppliers as Boeing uses to build its aircrafts. “We had a supply chain that was 10 to 15 years behind the times”, says Knudstorp.

Looks like the supply chain transformation is working for Lego. In Aug 2008, it announced that its sales were up 20 percent and its pre-tax profits were more than doubled in 2008’s first half. This is how an innovative company learnt to manage its cost of innovation.

Sunday, November 2, 2008

Executing a contrarian view: story of two investors

Being a contrarian: It isn’t difficult to take a contrarian view. After all, what does it take to start saying, “From tomorrow, sun will rise from the west”? However, it is much more difficult to execute a contrarian view as it involves getting a buy-in from the very people whose beliefs you are contradicting. Let’s see this phenomenon with the example of two contrarians, one who executed his views successfully and the other who didn’t. Let’s start with the latter.

Dr. Doom is doomed: Numbered among the UK’s most powerful people in the 1990s, Tony Dye managed more than £50 billion as the Chief Investment Officer of Phillips & Drew Funds Management (PDFM), one of the biggest UK pension funds. In 1995, believing that share prices were too high, he moved £10 billion of his clients’ money out of stocks and into cash and bonds. His decision made front-page news, and TV crews camped outside his home to film the man who was portrayed as gambling with people’s pension funds by placing it in cash. By the start of 2000 the markets were still booming, and the media started to ridicule Dye’s warnings and nicknamed him “Dr. Doom”. Under pressure, because of PDFM’s increasing underperformance in a bull market, he stepped down in March of that year. Sure enough days after Dye’s exit and before the management had time to change the strategy, market crashed. By June 2000 PDFM soared to the top of pension fund performance tables earning its clients 6.4 percent in three months. Hundreds of fund managers who were proved disastrously wrong kept their jobs because they were all wrong in a big herd. In the hindsight, Tony was right but he still lost his job.

Warren, what’s wrong? Across the Atlantic in the Midwestern city of Omaha, Nebraska there lives another contrarian who carried views similar to Tony’s. In July 1999, Warren Buffett addressed corporate bigwigs at Allen & Co.’s annual bash in Sun Valley, Idaho (source: The Snowball: Warren Buffett and the business of life). The audience included Media moguls like Eisner of Disney, Hefner of Playboy and technology moguls like his friend Bill Gates and Michael Dell. By looking at two 17 year periods that American investors experienced from 1964 to 1981 and then from 1981 to 1998, Warren forecasted that returns from stocks were due to fall dramatically. Warren’s Berkshire Hathaway (BRK) had not invested in technology stocks. By December 1999, BRK share was down to $56,100 from its June 1998 peak of $80,900. On the eve of the millennium, Barron’s, a weekly must-read on Wall Street put Buffett on its cover and asked, “Warren, what’s wrong?” Buffett did not respond. Not only did Buffett & BRK survive the dot-com bubble and bust, he rose more than anyone else and is back with a bang with his “Time to be greedy” view during the current downturn. BRK has invested more than $10 billion in just one month (Sept 2008) in GE, Goldman Sachs, and Constellation Energy!

Role of credibility: What makes Warren execute his contrarian view while people like Tony can’t? In my opinion, what differentiates Warren from the rest is the credibility he has built over 50+ years since he started his hedge fund in 1956. In fact, 1999 bubble wasn’t the first bubble where Warren held a significant contrarian position. Exactly 30 years earlier, in 1969, when Warren felt that the market was overvalued, he closed his firm, Buffett Pertnership and returned moneys (over $100 million) back to his clients. He wrote in his 1969 letter to partners, “I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

But then you may ask, “Sure enough Warren didn’t have the credibility when he started out. How did he carry out his contrarian view then?” Ah! There lies the beauty of Warren’s foresight. When he started his hedge fund, Warren was extremely cautious of choosing from whom he is taking the money. In fact the first seven partners he invited were his family and friends, people he was sure trusted him. And even to them he laid out his ground rules at a dinner party at Omaha Club and he told them, “If you don’t feel this way you shouldn’t join, because I don’t want you unhappy while I’m happy and vice versa.” (source: The Snowball: Warren Buffett and the business of life).

Moral of the story: To execute a contrarian view, credibility plays a big role. Position (like Chief Investment Officer) does not guarantee credibility; it needs careful nurturing over long enough period with or without a position.