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.

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"

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.

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.

Impossible problems and successful approaches: Story of Fermat’s Last Theorem

Fermat’s Last Theorem: When do people commit themselves to solving seemingly impossible problems? And how do some of the successful ones approach such problems? Let’s explore these 2 questions with the example of how Prof. Andrew Wiles of Princeton solved Fermat’s Last Theorem (called FLT henceforth) 14 years ago on 25th October 1994. When Andrew released a manuscript presenting the proof of FLT, it was a significant event in the history of mathematics. It put to rest a problem which remained unsolved for 357 years in spite of various attempts by top mathematicians of each century. (Source for all the information is a classic book from Simon Singh: Fermat's Enigma.)

Moment of commitment: Andrew’s affair with FLT began at the age of 10 when he found the problem in a book in a library. By the time he entered graduate school in Cambridge, he had studied all the past attempts to solve the problem. However, FLT wasn’t an acceptable topic of study towards PhD. As Andrew says, “The risk of working with FLT was that you could spend years getting nowhere”. Andrew’s PhD supervisor, Prof. John Coats, suggested that he should work in an area called elliptical curves. A turning point came in summer of 1986 when Ken Ribet of Berkley proved a strong linkage between a conjecture called Taniyama-Shimura (TS) conjecture and FLT. This effectively meant, to prove FLT all you need to do is to prove TS conjecture. TS dealt with two disjoint areas of mathematics elliptical curves and modular forms, one of which Andrew was already a known expert. When Andrew heard this news at a friend’s place, he knew, “At that moment that course of my life was changing … It meant that my childhood dream was a respectable thing to work on. I just knew that I could never let that go.”

Andrew weighs affordable loss: Andrew says, “Of course the TS conjecture had been open for many years. No one had any idea how to approach it but at least it was a mainstream mathematics. I could try and prove results, which, even if they didn’t get the whole thing, would be worthwhile mathematics. I didn’t think I’d be wasting my time. So the romance of Fermat which had held me all my life was now combined with a problem that was professionally acceptable”.

Andrew’s approach: Andrew knew that any serious attempt on the proof could easily require ten years of single-minded effort. For the next 18 months Andrew spent time familiarizing himself with every bit of mathematics that had ever been applied to, or had been derived from, elliptical equations or modular forms. He also knew that anything to do with FLT generates too much interest and that could distract him. He made a remarkable decision to work in complete isolation and secrecy in his attic. For the next seven years Andrew was to make a series of extraordinary discoveries, none of which would be discussed or published until his proof was complete.

Andrew on moment of insights: “Often you write something down to clarify your thoughts. In particular when you’ve reached a real impasse, when there’s a real problem that you want to overcome, then the routine kind of (mathematical) thinking is of no use to you. Leading up to that kind of new idea there has to be a long period of tremendous focus on the problem without any distraction. You have to think about nothing but that problem – just concentrate on it. Then you stop. Afterwards there seems to be a kind of period of relaxation during which the subconscious appears to take over, and it’s during that time that some new insight comes.”

To summarize: People commit to seemingly impossible problems when two things happen: (1) The problem is close to their heart (e.g. childhood dream in case of Andrew) and (2) Affordable loss doesn't look intimidating anymore. Serious players are in the game for a long haul (e.g. Andrew committed 10 years for the problem) and spend significant time in sharpening the tools (18 months in case of Andrew). Do check out the striking similarity between Andrew's view of how insight occurs and what we presented in Innovation trigger: idea vs insight.

Insight, entrepreneurial mindset and principle of affordable loss

Separating insights from non-insights: Let’s say your organization has this tool where employees, customers, partners log ideas. And you are part of this committee that selects ideas from this pool of ideas to be taken to the next stage. Now, you have read somewhere (perhaps in Innovation trigger: idea vs insight) that ideas with insights are better candidates for selection than ideas without insights. So you ask the question: How do I know which of these ideas came with insights from the authors? Let’s see if understanding of a species called “entrepreneurs” known for its commitment to one or more insights helps us here.

Entrepreneurial mindset: Let’s say our friend Seema realizes one day that it would be great if there is someone who home delivers simple meal on a need basis in the evening in her neighborhood. There may be enough number of working women who might use such a service. Seema might take any of the following approaches:

• Approach-1: Analyze the market (go around in the neighborhood with a questionnaire), do the cost benefit analysis for various demand points (50 meals a day, 100 meals a day etc), rent from the place where she needs to operate, employment cost etc. And eventually see what all she needs to start the business. Seema might say I need at least Rs. 5 Lakh to start this business considering all the rainy day scenarios.

• Approach-2: Talk to a few friends and see if any of them would use such a service. A couple of friends actually show interest and Seema starts supplying them the evening meals. She operates from home. After a couple of months the number grows to 10 meals a day. Her menu slowly stabilizes, she gets a hang of negotiating with suppliers etc. After a year and 70 customers Seema rents a small place to operate this business.

Well, according to Prof. Saras Sarasvathy of Darden School of Business, Univ of Virginia, most of the entrepreneurs go with approach-2 (see What makes entrepreneurs entrepreneurial?) and she calls the principle behind this approach as “Principle of affordable loss”. Unlike approach-1, where you ask “What all do I need before I jump into this?”, principle of affordable loss asks, “What can I afford to lose before I get further clarity?” Note that in approach-2 your destination can keep changing. For example, Seema may find out that instead of ready meals, her customers value packets of fresh cut vegetables more and she may focus on that service rather than meals.

How does Principle of affordable loss help? Let’s go back to our original question: How do I separate ideas with insights from those without insights? You say to the idea owners: Well, we don’t have the luxury to allocate separate time for ideas. Only ideas with prototypes qualify for selection. Now, only those people with insights (and deep conviction) are likely to spend time say over the weekend (or afford to lose something) to come up with a prototype. Or if you are a Google, you will say: Take 20% of your time off to show me a prototype but make sure you meet your current project commitments. We know what that means.

Innovation trigger: Idea vs insight

Where do I start? One question that invariably comes up during my innovation workshops is: “Where do I begin?” And when I throw the question back at the participants, one typical reply comes, “Start with an idea”. Let’s do a simple thought exercise. Ask yourself “How many ideas did I come across last week?” These ideas could be your own or you saw them on TV ads or in meetings or a friend told you etc. I am sure the number will be in 10s if not more. Now ask yourself, “How many ideas did I pursue?” We know what the answer is. A couple of months back I co-moderated a strategy planning exercise along with a colleague. A number of seemingly good ideas came up during the day. However, when it came to taking ownership for execution, people starting looking at each other. So here is a fundamental question: What is it that makes some people pursue some ideas some times and not do anything other times? Is it possible that this thing called “idea” is, after all, not the starting point of innovation?

Insights about “insight”: Let’s turn to a distant cousin of “idea” called “insight”. An insight is that “Aha!” or “Eureka” moment when you are convinced the problem is solved. What does science say about insights? Psychologists and neuroscientists have found out following essential features of “insight experience” (see Eureka Hunt):

• Phase-1: First phase is called “preparatory phase” where brain devotes considerable power to the problem. Many times we call this “focusing on the problem”.

• Phase-2: What happens next is “search phase” as brain starts looking for answers in all the relevant places.

• Phase-3: The next phase is when the brain “gives-up” or reaches an “impasse”. While solving word puzzles, this happens in a few seconds.

• Phase-4: This phase is what scientists call the most important phase and it is the phase of relaxation. During this phase the cortex seeks out more distant associations in the right hemisphere. As Jung-Beeman says, “That is why so many insights happen during warm showers”.

• Phase-5: This is the last phase where the brain connects and restructures existing information (dots) and sees the same old thing in a completely new way. Miller, a neuroscientist from Princeton says, “Once that restructuring occurs, you never go back”.

So what? You are a lot more likely to pursue “insights” rather than “ideas” because they come with strong convictions. And the best place to start is with those problems which are pain in the neck today. Because, only for such problems you are likely to give undivided attention (or focus). And finally, don’t forget phase-4: the relaxation phase. Now, I am not surprised that most of my moments of insights have come when I am jogging.