Only the Paranoid Survive (Doubleday, 1996), by Andrew Grove, former CEO and Chairman of Intel Corporation, is a book about “inflection points” in businesses and careers. Inflection points require radical change, but our habits of mind and past investments can make change difficult at these points. Yet, without the requisite change, the ultimate cost is even higher. Grove peppers his insights with numerous anecdotes from Intel’s experience with inflection points in personal computing, and the book serves as a extended illustration of what a CEO’s mind must be to survive—paranoid.
For Grove, Intel’s primary inflection point confronted them in the middle of the 1980s, when they, a company known for their memory chips, were in an increasingly weak competitive position relative to Japanese chip manufacturers. As Grove observes, “when a strategic inflection point sweeps through the industry, the more successful a participant was in the old industry structure, the more threatened it is by change and the more reluctant it is to adapt to it” (50). Intel’s case confirms the point. They were consistently losing money on their memory chips while trying to compete; some recommended building a new, more efficient factory; others recommended more research and development in the hope that a better product would emerge.
The inflection point came in 1985, after Intel had been waffling about their chip problems for almost a year. Grove and then-chairman and CEO Gordon Moore were sullenly batting around ideas when Grove asked “if we got kicked out and the board brought in a new CEO, what do you think he would do?” “He would get us out of memories” was Moore’s response. And from that day, Moore and Grove began the long and difficult journey of persuading Intel to cast aside its accumulated identity and shift its attention solely to microprocessors.
Given the interests of this blog, we found Grove’s laundry list of inflection points to be most useful. In retail, Wal-mart’s efficiency in logistics and its corresponding low prices have required competitors to specialize (e.g., Home Depot, Office Depot) or fail. The introduction of sound into film-making compelled actors to transform their skills or dwindle into obscurity. Containerization enabled the rise in prominence of Singapore’s and Seattle’s ports (where there was sufficient room to expand), and the decline of New York’s. General Motors’ aim to offer “a car for every purse and purpose” resonated with customers more than Ford’s formulaic duplications—“it takes you there and brings you back.”
All these examples highlight an exceedingly important point. Today’s competitive advantages may subtly erode much faster than even the most astute and attentive observers recognize. Wide economic moats protect the castle, but very few endure across a lifetime. Inflection points are the norm, and investors and executives must constantly be looking for them; cultivating paranoia may be wise. To have an economic moat is not enough, for the moat must endure to provide the investor with significant safety.
Disclosure: I, or persons whose accounts I manage, own shares of Office Depot at the time of this writing.
Wide Moat Investing 