June 20, 2025 • 65 mins
In this episode of the 'Hours of Bower' series, sponsored by Kyndryl, we delve into Chapter 3 of 'From Resource Allocation to Strategy' with Professor Robert Burgelman.
The discussion centers around a revolutionary view of corporate strategy using Intel Corporation’s transformation over several decades. Professor Burgelman reframes strategy as an emergent and evolving organizational capability, influenced by Intel’s shift from focusing on DRAMs to microprocessors. Key topics include the intricate relationship between top-down planning and emergent strategies, the role of internal and external selection environments, and the concept of strategic dissonance explained through examples from Intel’s history. Join host Aidan and Professor Burgelman as they explore how strategic leadership and innovation can coalesce to drive corporate success in a competitive business landscape.
00:00 Introduction and Sponsor Message
00:30 Overview of Today's Episode
01:50 Guest Introduction: Professor Robert Burgelman
02:21 Early Career and Influences
04:07 Collaboration with Joe Bower
07:11 Intel's Strategic Shift
09:27 Andy Grove and Strategic Dissonance
19:35 Framework for Strategic Leadership
33:32 The Importance of Aligning Actions with Strategy
34:25 Intel's Strategic Shifts and Missed Opportunities
35:35 The Dangers of Dominance in an Industry
37:47 Disruptive Innovation and Strategic Inertia
51:04 Balancing Induced and Autonomous Strategy Processes
52:51 Organizational Ecology and Internal Selection
59:22 HP's Strategic Evolution and Corporate Splits
01:04:12 Conclusion and Final Thoughts
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to part three ofthe hours of Bower series.
(00:03):
With thanks to our sponsor, KyndrylKyndryl runs and reimagines the
technology systems that drive advantagefor the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
managed service capability.
Kyndryl helps leaders harness thepower of technology for smarter
decisions, faster innovation,and a lasting competitive edge.
(00:24):
You can find Kyndryl atKYND R YL Kyndryl.com.
Today's episode is from chapterthree of From Resource Allocation to
Strategy, and presents a groundbreakingevolutionary perspective on corporate
strategy using Intel Corporation'stransformation over multiple decades.
Our guest reframe strategy, not astop-down planning alone, but as an
(00:48):
emergent organizational capabilitythat co-evolve with external
environments and internal dynamics.
He describes how resource commitmentsby the managers of Intel's
fabrication facilities shifted thefocus of Intel's corporate strategy
from drams to microprocessors.
He also discusses his effortsto work with Joe Bower's model
(01:09):
and indeed expand upon it.
A few years after Bower'swork, he initiated his 20 year
stream of contributions to theunderstanding of resource allocation.
He is the author of several influentialbooks, including Inside Corporate
Innovation Strategy is Destiny,strategic Dynamics becoming Hewlett
(01:29):
Parkard and more recently strategicmaking and organizational evolution.
He was the executive director ofthe Stanford Executive Program for
nearly two decades and has workedwith top companies around the world
teaching, advising, and shaping howsenior leaders think about innovation,
evolution, and long-term strategy.
(01:50):
It is a great pleasure to have himas part of the hours of Bower series.
Professor Robert Burgelman,welcome to the show.
Thank you very much Aidan,it's great to be here
it's great to have you.
That was a mouthful for me, man.
Maybe we'll start withyour relationship with Joe.
He mentioned you in part one andI'd love you to tip your hat to
(02:13):
him and give him some credit forhis influence on your career and
indeed how you guys got togetherand worked together over the years.
Goes back a very long time,actually, to 1970 itself because
I had finished my undergraduatestudies at the University of Antwerp.
And I had done my undergraduate thesison optimal firm size in which I had
(02:41):
combined the work of Alfred Chandler onstrategy and structure and integrated.
Into that, the work by Edith Penrose onthe theory of the growth of the firm.
And I had combined that also withIgor SFU's book on corporate strategy,
which was really the first treatmentof corporate strategy in 1965.
(03:06):
And so I was hired by my school asa junior faculty member in 1970.
That was the year thatJoe's book was published.
And so the editor of the Journalof my School, which was called The
Economics and Social in Dutch, sothe Social and Economic Journal,
(03:28):
he asked me to review this book.
And so I had never heard aboutJoe Bower not yet because he was
a young professor then too, andso I actually reviewed that book.
For that journal, right?
And then the journal wanted to bring outan issue on what they call active finance.
(03:53):
In other words, you would not only lookat the theory of finance, but how it
as being used in large corporations.
And so I thought I was then workingwith a more senior professor.
Of course I was a junior one, I convincedthis senior professor that we should
write an article about active finance,but focused on the capital budgeting
(04:19):
process, just like Joe Bower had done.
Because what he had done was say,wait, is all, you know, there's this
discounted cashflow and net present value.
And in those days, not the,but real options stay related.
he had shown how this.
And of course you need datain that, in these models.
The question is where does thatdata come from and who gets involved
(04:42):
in the actual decision making?
And so Hay had to the Insight, I thinkat the time when I revised this book by
Bower, actually something that I don'tthink he actually said in his, in the book
himself, but that what his model does.
The three, the matrix really,it's a three by three matrix.
(05:03):
It allows you to show simultaneityand sequentiality at the same time
because each level dustings in asequence, but they are happening
simultaneously at different levels.
I thought that was a methodologically, avery powerful tool to try to understand
(05:27):
the strategic decision making processin large, complex organizations.
I had also read Ackerman's paperin the A SQ in 1970, Bob Ackerman.
He was mentioned by Joe and someof the people who had written
about commitment actually and someothers that had informed Joe too.
So I knew that literature fairly well.
(05:48):
I had looked it all up so Iended up writing a paper together
with this senior professor.
was published in 1971 and thatbasically showed Bower's model and
used it as a tool to show what doesit really mean to use finance in a
managerial agency type of perspective.
(06:12):
So that was 1971.
That is how I got to know Joe Bower.
Then I got a fellowship to Stu.
I got actually two fellows who wentfrom the FORD foundation to study in
the United States in 1973 at Columbia.
I did my dissertation, aboutinternal corporate venturing.
So.
Was I studied the activities of thesedifferent levels of management involved
(06:37):
in new business development, right?
Within this large company.
So then I had needed a frameworkto conceptualize this process.
And one of the, the members of mydissertation committee told me, you know,
your description is too descriptive.
You should use more of a framework.
So then I thought, oh, maybeI could use Bower's framework.
(06:58):
So I went back to Bower's framework andI tried to map this active activities
that I had observed onto the model.
I could put many of them, but not all.
So then I was struggling, you know,and I remember the night in, I was
still in New York in 1979 when Iwas drawing these these loops and
(07:21):
then it suddenly, I realized Joe'smodel is about resource allocation
to manufacturing capacity within theexisting strategy of the company.
In fact, as he said, he had one projectthat didn't quite fit because it forced,
it was going to lead to competitionwith one of their best customers.
(07:44):
In fact, that was the sort of thing thatI was observing with the new ventures.
These were things that weredifferent from the company.
so I, could not map allthese activities on there.
And then it struck me that, yes,the reason is that my study is
about , innovation activities thatwill change the corporate strategy.
(08:09):
It will require an amendment of thecorporate strategy as opposed to it
fits with the corporate strategy,and therefore, what I have observed.
One of the senior leaders, the one in themiddle, was a person who understood that
they had to top management understandhow the strategy should, be changed
(08:33):
in order to accommodate and embracethis new venture area going forward.
So that led me to actually add thiscolumn in the model that's called
strategic context determination,is not a criticism of Joe because
if you are looking at projects are.
resort allocation for a project that areconsistent with the existing strategy.
(08:58):
You don't need a strategic context.
But the moment you are trying toget into strategic change at the
corporate level, got this process.
And then I learned that thatprocess, actually, , there is
similarity across scale, right.
It applies to your own personal life.
Right.
(09:19):
. So that process I stumbled ontoit and it led me to then make
that change in the Bower, model.
And Robert, you were great friendsalso with the late Andy Grove,
and we'll talk about that again.
And Robert and I are gonna be back.
We're gonna go cover Robert's booksin depth and also talk about that
(09:39):
relationship he had with Andy Grove.
But I was so serendipitous when I wasreading this book, I was also, I was
in Canada last week and I had loads ofspare time traveling and I downloaded.
A load of lectures by Andy Grove.
And I was listening to one and then Iread your book and I was like going,
that sounds to me like what AndyGrove was talking about, that lecture.
(10:00):
So I took an excerpt of that and I'mgonna play it now for our audience.
And I'd love you then to talk aboutthis, what he is actually talking about,
because he and you lectured together.
You were great friends.
You also had some tough conversationsas we'll talk about in the future.
But you were probably at this lectureand it was so relevant to the work that
(10:22):
you've identified and the problem ofstrategy being decided from somewhere
in the middle versus what they think ishappening at the top of the organization.
So I'm gonna share this for ouraudience and we'll unpack it afterwards.
Intel was a semiconductor memory company.
We pioneered semiconductor memories.
We were the leaders insemiconductor memories.
In the mid eighties, the Japanesecame and became a 10 x force for us in
(10:46):
semiconductor memories, and one of thefirst signs, as I look back, I didn't
look at it at that time as a sign, Ilooked at it as a whining sales force.
But one of the first signs that I lookback that should have tipped off, off.
Was our sales force in Japan sayingthat the customers are not as
(11:08):
respectful of them as they used to be,
and that was such a tellingstory in retrospect, if I look
back on the curve, that's whenthe curve was beginning to enter
in the inflection point.
They weren't because they knewthat their internal capability,
the customer's internal capability,the semiconductor sister division,
(11:28):
was going to run circles around us.
They knew that and their attitudechanged to our Salesforce.
Our Salesforce told us, usbeing management, we ignored it.
We ignored it when they showed up here,we ignored it as we were starting to
lose market share, and the people in ourcompany who realized what was going on
(11:51):
was our group of production planners whostarted adjusting our factory loading.
Away from memories toward microprocessors.
Why?
'cause we had better businessopportunities in microprocessors.
We made more money in microprocessors.
So without making a big fanfare, ahundred wafer lots and by a hundred wafer
lots, they just moved the productionlots from memories to microprocessors.
(12:14):
So by the time those of us whoran the company started facing up
to that, that our core business,which are memories, was going away.
Because of these incremental aactions of the, our finance people
and production planners and lowerlevel management, we were much less
exposed to the memory business.
We have gradually rationalizedour factory infrastructure,
(12:36):
so we still had to cut back.
We still have to shut down factories,but much less than had these Cassandras
not taking matters in their own hands.
So spontaneous actions through frontlineor lower level employees who are much
closer to the action is a very key.
Element in causing adjustment inthe business structure of a company.
(12:57):
What tends to happen at times like this,there's a growing divergence, a dissonance
between the actions of people who areclose to the actions and the comprehension
and statements of senior management.
Like myself, I call that strategicdissonance because a corporation in
its daily action is beginning to dosomething deviant from the stated mission
(13:24):
values competencies that continuesto get articulated in management.
So one of the big telltale signs in abusiness that it is struggling with a
strategic inflection point is this growingand seemingly irreconcilable difference
between what the company does and what thecompany says it's supposed to be doing.
(13:47):
It's not because people involved are dumbor phony or hypocritical or anything like
that, but because senior management whois responsible for the articulation, who's
giving the interviews that the employeesread in the newspaper doesn't know it
yet, the employees know it's not real.
The senior management doesn't knowis that's a terribly strong sign
(14:08):
.There we go.
So you were involved in thecoining of that term strategic
dissonance as well, Robert.
But I thought that would helpour audience get their head
around what it means in business.
And then you can give usthe framework around exactly
what Andy talked about there.
But you both identifiedand put a language around.
(14:29):
Yes, I'd be happy to do that.
Whereby telling youthe following anecdote.
So when Andy Grove came to see me in1988, in August, 1988 and I was very
impressed by his level of preparation,but I thought, you know, I was, by the
way then doing a lot of research at thePalo Alto Research Center for Xerox,
(14:49):
which I won't talk about right now.
But so I thought, you know, probablythis is not going to be very interesting
because Intel is run by Gordon Mooreand was the CEO and then by Andy Grove.
This is going to be a textbookin strategic planning.
But Andy invited me to come and seehim and so I went to see him because
(15:12):
I thought maybe we do a case study.
But I was not quite convinced yet.
But I did actually recruit oneof my students who was then
in my class, an MBA student.
He had, he had actually, and I knewhe had studied physics at Harvard
actually, and he had worked for thedean of the engineering school on solar
technology and in relationship to semi.
(15:33):
So I thought if I need a case writer,this would be the right person.
and so I took him with me.
And so here I am in Bowers meetingwith Andy Grove and Dennis Carter,
who was then his TAs, the technicalassistant, and I was there with
George Cogan, who was my assistant.
And as I said, I wasn't quite convincedyet, am I really going to do this?
(15:56):
This is Andy said the follow,he made the following statement.
I will never forget this.
He said, well, some middlelevel managers had already made
technical decisions limited thedecision space of top management.
I stopped, I said, Andy did,you just said limited the
(16:19):
decision space of top management.
He said, yes.
And I said, who were those people?
He said, Ken Fine and Ron Smith.
And I said, am I going to beallowed to talk to those people?
And he said, you cantalk to anybody you want.
(16:39):
That's how it got going.
So I'll tell one more story on thisbecause, so I developed a case study and
I set it it starts, the first versionstarts in October, 1985 when Grove
went to Oregon and told the people inOregon, these are the words he used,
(16:59):
welcome to the mainstream of Intel.
we're no longer a DRAM company,we're now a microprocessor company.
He did, he taught the case.
It went very well in the class.
And then he said, well, I'dlike to come back next year.
He said, well, then we need asecond case, , which we did.
And for the second case, I thought,you know, I'd like to examine the
(17:20):
implementation of that decision.
So I told Andy I'd like to speak tosome people deeper in the organization.
So these people, theyhad not read the case.
They didn't know that I had put thisin October 95, but they told me, senior
guys, but not top level, that Intelalready had decided in November of
1984 to not bring the next generationDRAM in production and to the markets.
(17:50):
But they had let people still work on it.
So I changed the case.
I said in November 9th, 1984, TopManagement decided not to continue with
production of the next generation diam.
So now a week before Andy isgoing to come back the next year.
(18:10):
Right?
So he said, yeah.
I said, I have a new caseand I sent him to him.
He came to see me, , and, I gave him thecase, he read it he said, November, 1984?
Why did you change this?
I said, well, Andy, we talked toseveral people who told us this it.
(18:33):
And he told me, well, who told you that?
I said, Andy, that I can't tellyou because we always speak
with people in confidence.
So I can't tell you that.
But I told my case writer, I said,look, and Bruce was his first name.
I said, Bruce, look, the CEOtells us that this is wrong.
We're going to have to revisit.
(18:53):
Andy, he was a bit miffed.
So he left.
Two days later I got a phone callfrom Andy, and in his usual Laconic
style, he said, well, I did my ownresearch and you guys are right.
I had forgotten howdifficult this decision was.
(19:15):
And we left it on that.
Ah, that's powerful for the CEOto admit on such a big decision.
So now I developed then that framework,the first one that you showed me.
And actually then if you showme that again, I'll tell you a
little story about that becauseit helps us explain what happened.
(19:36):
Alright, so these are what I call theforces that drive the evolution of a firm.
So on the top you have the basis ofcompetitive advantage in the industry.
That is basically, in a way, MichaelPorter's forces, Actually, Andy
and I, we extended that today.
They call it the ecosystem, right?
(19:57):
And you position yourself inthat ecosystem in a certain way.
That's what you do.
And therefore , the basis of competitiveadvantage that you can have in that space
is not just a function of you, it's afunction of all these other forces, right?
What the government does, whatpotentially what other competitors do.
(20:19):
So you must be able, because when Iteach executives, I replace this then
with what I call natural language.
'cause this is business school language.
you must be clear about whatit takes to win as the CEO.
You must be very clearwhat it takes to win.
That's the top box.
The bottom box is thedistinctive competence.
(20:40):
These are the things that youhave that allow you to occupy that
position, to defend it to leverage it.
Right.
So that is in, in natural language.
I call that this is whatwe have, is what we've got.
That's in the vertical axis,in the horizontal axis on the
(21:03):
left side, corporate strategy.
That's what we say toourselves and to others.
And strategic action we do, what I callthe consequential actions that we take
now in the happy days of a company.
(21:23):
So you ask these questions,do we have what it takes?
That's the vertical, and are wedoing what we're saying, right?
we have what it takes to win?
And are we doing what we'resaying in the happy days?
Those things are, the answer is yes.
We do what we say and wehave what it takes to win.
(21:44):
Those are the happy days.
for a while at the happy days.
Then the world starts changing.
And so Grove, you know, brilliant as hewas when I showed him the first time, this
framework, you know what he called it?
He said, this is the rubber bandtheory of strategic management.
(22:07):
Why?
Because he looked at thesearrows he said, these are, these
arrows are like rubber bands.
everything together.
And when everything is, when theanswers to the two questions are
right, everything is in balance.
looks nice like this, but when theworld changes internal and external,
these rubber bands starts stretching.
(22:30):
And now the question, and thatcreates the dissonance, right?
And so the dissonance issignaling to you that you no
longer have what it takes to win.
And that you may no longer dowhat you say, and that is why Andy
was referring to a salespeople.
Because the salespeople now, evento the customers and the customers
(22:52):
go, you know, you guys are notdoing what you're saying, and the
competition is better than you guys,
so the bands will stretch.
What you don't want isthe rubber bands to snap.
And that brings me to , the boxin the middle, which I call the
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internal selection environment.
Actually, when I, when I speak toexecutives, I replace that box with
what I call the strategic leadershipculture of the organization.
And so that the capacity, if you want,or the ability to bring, to prevent
(23:36):
these rubber bands from snapping.
And in fact, to bringthem line in a new way.
the role of strategic leadership.
And so I identified four elementsof strategic leadership that I think
are characteristic of an internalselection environment, a strategic
(23:59):
leadership culture that is capableto deal with strategic change.
Now, we might say one more thing on thisfor the audience, if they, why did I call
it the internal selection environment?
Because in one of the key things ofthe internal selection environment,
okay, if I want to know theculture of a company, right?
I say I need only reallyto do to know two things.
(24:24):
The first one is who gets the money?
That's the resource allocation process.
And who gets promoted?
If I know those two things, I know whatkind of culture you basically have.
now the internal selection environmentis really the only thing you have to cope
with the external selection environment.
(24:46):
In my article that I wrote, what I'msaying is the strategy making process,
basically it uses your internalselection environment to cope with
the external selection environment.
that is the key, the ability to preventthe rubber pants from snapping, and
eventually in time bring them back.
(25:09):
And the four things that I highlightthen associated with that internal
selection environment, the firstone is as resource allocation.
And I say, does your resourceallocation reflect competitive reality?
This is actually not easy because in, inthe larger the company, the more difficult
(25:32):
it really is to allocate resources.
That reflect competitive reality,in other words, to the winners
and away from the losers.
Why is that?
Well, because there are transfer prices,there are al, there are allocation rules,
the respect projects of, of executives.
It's very difficult to maintain theresource allocation that is really very
(25:56):
disciplined in allocating resources towinners and away from losers in time.
But if you do that, that's not enough.
Because if I only allocate resourcesto the winners today, at some
point there will be no tomorrow allopportunity sets eventually are not
(26:16):
big enough given your growth rate.
Or in fact, they may even decline.
So therefore you need a secondelement, which I call that you must
have a strategic planning process thatallows debating new opportunities.
But that's not enough either, becausethese debates will always be between
(26:41):
those who make money today and thosewho promise to make money tomorrow.
So who on average is going to winthe debate is going to be today.
And that's actually rationalbecause suppose we always allocated
resources to those who promised towin so that's not enough either.
So what do we need in addition?
(27:01):
So in addition, the that I highlight, I call it strategic recognition.
That is the capacity to seethe implications of things
that are already in play.
We may have started them, like ourguys at the bottom, that Andy Grove was
talking about, or competitors or both.
(27:24):
But, I can see what the potentialimplications of these changes are and
I bring them into conversation with therest of leadership so that we can at
least get clear on what is going on.
But that's not enough either, becauseif I stop there, have some very
(27:45):
clever, very intelligent executiveswho will later tell me, well, I told
you so, or I could have told you so.
So strategic recognition isimportant, but it's not enough.
You must be able to go from recognition toaction, and that's what I call strategic
leadership in a, in a, in a dynamic.
(28:06):
Andy Grove was good at that.
, He respected strategic recognition ifit was data based and then he would
be able to do something about it.
So that is my little framework here,
it's important, I think, Robert, as well,to give a little bit of just context
(28:27):
that the, the idea of selection, becauseyou compare it really to nature here,
that , there's external pressure from thebusiness environment, just like in nature.
And then there's internal pressurewithin the tribe or the animal species
which in this case is the organization.
So.
This idea , of selection andhow selection works through the,
(28:49):
administrative and cultural mechanismsin the organization is important.
But also then like what Andy in that clipcalled the strategic inflection point was
there's some change in the environmentthat then changes a need for the pressure.
Maybe we'll give a little bit ofcontext of that before I share the
next diagram, which is tool two.
Yes, actually this is a very importantpoint because it gets me to speak
(29:13):
about the importance of the internalselection environment in some more depth.
So one of the things that Intelhad done, the top management.
Remember I said if I want tounderstand the culture of a company,
I need to look at two things.
Who gets the money and who gets promoted?
So the first one is really importantbecause what Intel had done,
(29:37):
they had actually establisheda resource allocation, the rule
for manufacturing capacity alongthe lines of Bower in a way.
And that, and the rule that they usedto at the margin allocate capacity,
So they had the duram business,which was the memory business,
and they had to logic business.
(29:57):
That was before the PCat the logic business.
So now is going, we have to allocateresources because there is more growth
opportunities than we have capacity.
How are we going to allocate this?
The rule they had established wasmaximize margin per way for start.
(30:20):
What does that mean?
That meant, well, , the product thathas the highest margin, which means
the difference between the price in themarket and the cost gets the capacity.
So the dram is commoditizing, thereforeits margins gets lower and lower.
(30:44):
The logic products are allspecialty projects, they're
all niche products at a time.
Their margins are higher.
So what do the product plannersand the, finance people, which were
always very important within Intel,do they go, well this year allocate
the capacity to the logic products.
(31:04):
The DRAM guys are not happy,but they think, okay, well, you
know, we're going to, next yearwe'll bend up the curve again.
Next year comes the same happens.
They go, we'll do it.
We'll come up with another innovationand we'll bend up the curve.
Third year happens.
the beginning I drew a curve where Ishow resource allocation over time,
(31:27):
and I have two types of resources.
One is manufacturing capacity,and the other one is r and
d, research and developer.
The curve of manufacturing capacitygoes down and more and more.
The curve of r and d applicationsstays flat because top management still
(31:50):
says, Hey, we are a memory company.
So now you can see in the beginningthe difference between the horizontal
curve and the decline is actually small.
And next each they go.
Next year we'll bring this back in line.
But by 1984, the gap is huge becauseonly one plant left that does drams.
(32:12):
Suddenly the top man, , wecannot continue to do that.
So now this, why does this happen?
So this took me a while to figure out.
So that rule of resource allocationis reflecting of the deepest,
if you want identity of intel.
(32:34):
Intel is a diff, Michael Porterwould say a differentiator.
It's different.
It is a leading edge technology company.
They differentiate themselvesfrom everybody else.
They want to get high margins.
a signal that they actually hire.
The leading edge.
The DRAM is become a commodity with low.
(32:57):
So this is no dust anymore.
So without anybody having even said that,that rule was the, one of the biggest
manifestations of how really at the toplevel and maybe most of the people thought
about who we are and what do we do, andtherefore who gets the resources you can.
(33:19):
So you can have, you know, I canwrite five pages about what the
culture of a company and all thisbuzzword I go, how are you allocating
resources will tell me a lot moreabout culture than all these Elements.
So now here is anincredibly important point.
So in the case of Intel, I askedthis, your actions aligned with
(33:46):
the strategy Versus your internalselection environment, reflective of
the real external selection pressures.
What is most important?
It's the latter.
Because if your actions are veryaligned with the strategy, but the
strategy is losing, one, you'llbe out of business really fast.
(34:09):
Whereas if your actions are no longerassociated really aligned with the
strategy, but because your internalselection environment does things
that are consistent with wherethe external, environment you can
still later change your strategy.
This is what Intel did.
I'm gonna share in amoment, Robert, tool two.
And I'd love you to explain that again,with the same empathy you did for
(34:31):
people who are just listening to us.
But you talked about the threeepochs of intel in this chapter.
And it's really important thatthat epoch one where , the resource
allocation was decided from below andthen post rationalized by strategic
leadership by Andy Grove, for example.
(34:52):
But then he reassigns everybodytowards semiconductors.
And in a way they become hostage of thatbecause they put more and more resources
there because of the IBM and PC evolution.
And they benefited a lot from that rise.
And because of that benefit,they invested more and more.
And then it was difficult to beton those new emerging options.
(35:14):
One of the really interesting ones, you,and you just mentioned this in passing.
Was the opportunity of videoteleconferencing, which Cisco
seized, but Intel actually hadan opportunity to seize as well.
There's a little bit of a storythere that, that I just touched
on, and I said, that'd be reallyinteresting to shine a light on.
these are excellent questions.
You might say so because they get real.
(35:35):
So this raises a very important question.
Do you like to be dominant?
What must be your answer?
But do you realize how dangerousdominant dominance really is?
You don't.
Why is it so dangerous?
(35:55):
Because if you are dominant inan industry, you end up making
all the money or most of it.
That means all the other playerscan't really do much r and d, and so
you have to start doing it for them.
Intel did that.
They called it Intel Architecturalapps because they were creating
Ferrari engines and the OEMswere putting it in Volkswagens.
(36:16):
They cannot last forever.
So now Intel has to do moreand more and more and more to
stay dominant in that space.
And Andy knew it because he toldme once, he said, you know, we have
learned to do something extremely well,but it's the only thing we can do.
I call it strategic inertia,and it's driven by what I
(36:41):
call co-evolutionary lock-in.
You become locked in with a space inwhich you are so successful that you
have to do everything, all resources.
And by the way, all themanagement attention is there.
One guy once told me, you know,this was a senior executive from
Oregon, he said, yeah, with Andy.
(37:02):
And that's true.
He said, you can at Intel, if you wannado something on the side, you can do it.
Andy will let you do that, butdon't get in front of the train.
that's a huge problem, , and, itlinks to something that just to
explain for our audience as well.
Robert has heard the episode one,with Joe Bower, which was great timing
because in there we mentioned thatthat threat that strategic inertia.
(37:26):
Also then was what Clay Christensennoticed as disruptive innovation.
That actually, that's the opportunity.
And you co-authored one of youradditions of one of your books was
what Clay was involved in as well.
May, maybe we'll mention that to connectthe dots between your concept of strategic
inertia and then disruptive innovation andhow one leads to the other in some way.
(37:47):
Yes.
This is actually anotherfundamental insight.
So think about what disruptiveinnovation really does for a moment.
Right?
So Joe actually spoke about it too.
It means that someone comesup with a product that So here
(38:07):
is to, to visualize it, right?
So you have performance on the verticalaxis, and that's really a vector.
And that performance reels is the, theelements of perceived value on the part
of customers, That's the vertical axis.
Horizontal axis is time.
Now, there is over time,, a demandthat's a curve that slows upward
(38:31):
for average performance because,you know, the, the company makes
its products better over time.
It does that, the engineerstry to put more features.
So the average performancecurve goes like this up.
There is a distributionof customers around it.
I do it like a normal distribution.
That means there are peoplewho would like even much more.
(38:53):
And then there are others whogo, well, you know, I'm using
Microsoft operating system and Ithink I use 5% of the whole thing.
Why the hell do I have to pay?
So they are, there is a group of customersthat would be willing to buy a product
that is not, that is good enough.
Good enough, but a lot lowerprice than what you can charge.
(39:16):
That is what thedisruptive guys try to do.
Now, I am the incumbent Aiden comes upwith this particular type of new product.
I go, wait a moment, why would I do that?
Low end products they,reduce my average margin.
So if I no longer did that,average margin would go up.
(39:37):
Also, I am allocatingsome resources to this.
So there is a assets thatare associated with it.
If I stop this, I don't nolonger need these assets, so
my asset turnover will go up.
now if my margin goes up and myasset turnover goes up, my return
on assets is going to go up.
So I give up on that, let them have it.
(40:01):
But of course these guys whothen start at the low end, they
have a new way of doing things.
Over time, their curve ofaverage performance goes up too.
And it begins to intersect with onmy distribution, higher and higher.
You know, Silicon Graphics is an example.
They eventually got pushed to the ceilingbecause they got higher and higher because
(40:26):
Intel is taking more and more and more, of the, of their workstation business.
So that is, and you see, this is whyactually I told actually Clay once,
I said, clay, you have publishedthis book, which is great insight,
Any intelligent CEO is no longer goingto do what you describing the market.
(40:50):
So it may be the end of disruptive,you know, just simply because you have
educated the, intelligent CEO if you giveup on the low end, it creates an opening
for a new competitor that may actuallythreaten you at the higher end later too.
That's the connection.
So , yes, there is a resource allocationissue because why would I continue to
(41:12):
allocate the resources to somethingthat's low margin and it uses assets
if I can just let somebody else do it.
.The way I vision.
Utilized.
It was you, you have strategicinertia, disruptive innovation,
strategic dissonance, andthen you need some cognitive
dissonance to say, be quiet brain.
I know we're giving away a low end of themarket here, but all the profits here.
(41:35):
And I think this is where , thereal leadership piece comes in.
If it's a family business, forexample, I actually care about
the future of the company.
I'm not just a steward of a role.
I actually care about that future,so I'm going to make sure that
I'm not disrupted from below.
Yes.
I think that that's one of thebiggest things I've learned from
(41:56):
doing this show over the years.
Robert, and I'd love you to shareyour views on, on the people who
manage these challenges properly.
If you think about all these plateson sticks, there's strategic inertia,
there's strategic dissonance,there's disruptive innovation, and
there's resource allocation process.
You know what?
So I don't wanna sound pessimistic, right,but I think once you start to understand
(42:21):
these challenges, and Andy Grove actuallywas one of those who knew that he himself
was subject to these forces, right?
I said, yeah, I'll give you an example.
So Intel went into the, been goinginto the networking business.
It's also an example.
I think I, and so, you know, CEOsdon't usually look, they want to spend
(42:43):
too much time looking back on the,in the past, they always look to the.
One time I had a conversationwith Andy Grove after class for
an hour and a half or so, and he'sasked, he said, you know, why?
He said, why did I spend $750million on video conferencing
that in those days, nobody wanted,and not enough on networking.
(43:09):
We could have, I said, someonewe buy Cisco and I could have
bought 'em for 150 million bucks.
didn't I not do that?
And I said, yes, Andy, that's really true.
I said, I asked myself, Isaid, wasn't Frank Gil, I'm
not using these names now here?
Wasn't Frank running thatbusiness and the network?
And he said, yeah.
(43:30):
And I said, you know, Frankwas a pretty good guy.
I, I understood.
Yeah.
He was the second best salesman we ever.
And I said, so why didn'tyou not support him?
When he came up with a network,he a three, $400 million business.
And here is, that's anexample of Grove's brilliance.
(43:52):
He said, well, I don't like statements.
When they had a meeting with themanagement review committee meeting
and know some of the top executives,and you are, you are prepare,
you're presenting your projectand , you want more money And okay.
And he said, when we had one ofthese management review committees,
he could never convince me.
And I said, why not?
And he said, well, I don't like statementsthat are somewhat right, but mostly wrong.
(44:20):
And so I told them, Andy, that'sthe logic of the core business.
Yes.
If I'm a senior executive in the corebusiness, we have done this for forever.
We, most of what I say shouldbe right, but in a new space.
Where we are learning new things,how could everything be Right.
Right.
(44:40):
And Don Room, Eddie, I agreed with that.
So I asked him, I said, could I,could I go to Frank and, and, and, and
can I ask him questions about that?
He said, yeah, you can do.
So I went to Frank, and so Frank this isin my book, but in strategy is Destiny.
So I'm not telling, saying things thatI shouldn't because Andy let all of
this be published in my other book.
(45:00):
So otherwise I would not say this.
So I called Frank and I said, Frank, didthis go, the networking business, and he
said this, he said, well, had taken meout of my other role and put me in charge
of developing new businesses for Intel.
this, this, I forget the exactname, maybe 93 or whatever it was.
You know, Intel at that time was 6billion and 1 billion to 6 billion.
(45:24):
You know, that's still 15% or so.
That's significant.
Three years later, Intel is20 billion or 16 billion.
What is 1 billion to 16 billion, right?
So when I met Grove, then it would,it told me this, it's, it said, Frank,
you make $1 billion a year at 10%.
(45:45):
That's 10.
That's, a hundred million, right?
10% of a billion.
That's per quarter, 25 million of profit.
I make 1 billion of profit every,
this is all distraction.
Why don't you focus on job one?
(46:06):
Right.
That's the, you know, andyou go, if I had been the CEO
might have done the same thing.
Probably, yes, probably yes.
So there is, but he knew that, he knewAndy was, and that's why he allowed me
to publish this because, you know, thisis a lesson for, even if Andy Grove, you
(46:28):
know, was such an incredibly insightful,he was subject to these forces.
what I'm trying to do, what I've alwaystrying to do is not say it's good or bad.
not a strategic question,is it good or bad?
The first answer, thefirst question, what is it?
What are the forces that I face and howI am going to try to manage these forces
(46:54):
as opposed to have the forces manage me?
what I love about that is that eventhough he wrote about it, even though he
thought about it, even though he had youas a friend in his ear all the time, he
still knew he was subject to these forces.
And that challenge, I've heard thatreferred to as the value network
problem where you have, I thinkit was even Clay, actually reading
(47:16):
Clay, the value network problem.
My company makes Billions.
You're bringing me something that's brandnew that's made me a hundred million,
which if I was a startup, I'd be like,oh my God, we've made a hundred million.
Or if I was that, that disruptorthat I made a million, I'd
be jumping up and down.
But because I'm a billiondollar company, it doesn't, it's
(47:37):
not even table stakes for me.
So that, that challenge, but I wantedto just pull up one thing there, because
when I read this, this chapter and Iread about that margin per wafer rule.
I, I wondered, had you any more examples?
So the thing I first thought ofwhen I read that was, was Henry
Ford, and you can have it inany color as long as it's black.
(47:59):
So this guiding principle for meto drive down cost to deliver this
car for the cheapest possible pricethat I can, and how, even if that's
unspoken, but it's be, it's drilledinto the mindset of an organization.
It can keep them hostage to thatthing, but in this case it saved them.
But in other cases it actuallycan keep them hostage to the past.
(48:22):
And I'd love you to maybeshare some concepts on that.
yes.
So I'll give an example of one time I was,in Arizona actually speaking for Intel,
you know, and then in the morning or soI had, I, I met with Craig Barrett, who
was then the successor to Andy Grove.
And think I can tell this story,although it's not in my book, so
(48:44):
I'm not going to go in great detail,but what he was basically saying was
that he had gotten a message from themicroprocessor guys who had complained
that by allocating fab capacity to thena, they were then still doing nand memory
products, flash type products, right?
(49:07):
That they had GI given up a,I won't mention the number,
but a large amount of money.
And Craig told me, he said, well,I know that's true, but doing
that type of manufacturing in acommoditized business keeps us honest.
(49:27):
So he said, I decided to do this becauseit keeps us honest, because in the other
space we don't really have competition.
and how do we know how good we really are?
So now, okay, so Barrettwas still doing this, right?
(49:48):
In other words, trying tounderstand how do I maintain
into competitive reality, right?
By playing also in a space where Imay make less money than I do, but
at least I know how good I am in morecompetitive, in more competitive basis.
(50:11):
I won't speak about what happenedafter that after Craig Barrett left.
So but for myself, I always thoughtthat's an example of where the CEO is
willing to actually incur not a loss,but less favorable results, just to
(50:33):
maintain insight in how competitive wereally are by having to compete in an
environment where it's we're not dominant.
And it makes sense from,
you know, even a investing in astartup to have a toe in the water of
an emerging trend at the same time.
(50:54):
So I know we'll probably cover thiswhen we cover your book on corporate
innovation because that idea of howdo you keep, in touch with the edges?
Like Andy talked about snowmelting from the edges . I
thought we'd shared tool two.
Tool two really links togetherthe framework of induced and
autonomous strategy processes.
I don't think we actually calledout those two terms, which
(51:16):
is quite an important term.
So induced coming from down on topand autonomy coming from the middle,
as we saw with Andy Grove case study.
This is an evolutionary frameworkof the strategy making process that
Robert talks about and it zooms in onIntel strategy making process here.
I'd love you to share a little biton this, Robert, and it'd be a real
treat to share this with our organfor with our listeners, and again,
(51:39):
we'll have empathy for people.
Some people are only listeningto us, and you did a great job of
describing that on the first one.
S.
Yes, sure I will do that.
So I'll take a few minutes if that'sokay to, explain why I think it's more
important than just what we show here, so.
When I was doing my work on strategymaking in relation to innovation.
(52:01):
And I discovered the, that within thelarge cooperation that I was studying,
these new ventures really were kindof things that were not top driven.
They came from the bottom.
I developed this model and Ipublished it in 1983 as a, it's
called of the interaction ofstrategic behavior, corporate
(52:22):
context and the concept of strategy.
, So it has this top down, cross part,which is the induce strategic action.
And then the bottom up, more, bottomup, autonomous strategic action.
You can see the concept of strategy herethat we have is in relationship to the fa,
the environment that we are familiar with.
(52:42):
And that's of course dynamic andthe E is to emerging environments.
These are new areas.
Now why does this matter?
So while I was this in the late seventiesand early eighties organizational
sociology developed a totally newtheory, a very interesting and powerful
theory called Organizational Ecology.
(53:07):
1977, an article in which Michael Hannonand John Freeman explained that if you
wanted to understand organizationalchange, you had to study populations
of organizations, populations.
And if you did that, then youwould find out that actually real
(53:28):
organizational change is not because theincumbent organizations have changed.
No, it is because they have beenselected out and replaced with new ones.
That's a very powerful argument,and there is a lot of truth to it.
And the reason why that happened, theysaid was there is organizational inertia.
(53:53):
I call it strategic inertia.
Alright?
Now what they didn't explain why wasthere inertia in the first place.
So in 1984, they published anotherarticle in the American Sociological
Review in which they explainedthat the inertia really comes from
(54:17):
being selected in the first place.
Because why are you selected?
Because you do certain things.
You do them in the reliable fashion,you are accountable and so forth.
So you keep doing the things thatgot you selected in the first
place, which is pretty rational.
But I told to myself, this isreally bad news for strategy.
(54:38):
So then I realized that the framework thatI had developed here, which tomorrow I
can go into more detail if you want, oneach of the processes that actually that
suggested that large, complex corporationsare ecologies in their own right.
(55:01):
They themselves are ecologies ofinitiatives that spring up and that
compete for the resources of the company.
And so therefore, whereas you hadthe org, the the population level
the organization level selection,you also had to look at the intra
organizational level of selection.
(55:22):
That became the foundation for my ideaof internal selection environment.
And that's why I was sayingthe, the internal selection
environment is the only thing.
You really have to cope with theexternal selection environment, which has
brilliantly conceptualized and shown bythe organizational ecology guys, right?
(55:42):
I said there, so therefore this frameworkin a way is one attempt to alright,
so how are you going to try to, ifyou want, lead, manage, and lead that
internal ecological strategy makingprocess, which I say has two parts.
(56:04):
is the.
In part that is, we must continueto be successful in the environment
in which we are already operating.
Because if we are not, we don'thave any resources, do anything
different, but we must also always,not in the same proportion, but we
must always allocate resources tothings that are going to be new.
(56:27):
Some of them are endogenin, in internally generated.
Others might be because, youknow, we track what Cisco did
very well during the nineties.
We track the external entrepreneurialguys and we buy the ones that, you know,
that we think are going to be successful.
And then of course we, our strategiccontext process still has to make
it possible to integrate that.
But these, we always need both.
(56:51):
I say it's like a linear combination.
Of actually in my in now a longtime, I call the autonomous process,
the green process the inducedprocess, I call it the blue process.
So it, the model is by many knownas the blue and green process.
And so what you need to do isyou need to have a sort of a
(57:15):
linear combination of both.
You know, you have yourtotal resource allocation.
How much are you going to likeallocate to your induced strategy?
Versus how much are you going toallocate , to your autonomous?
In fact, companies like Google,I saw they have a rule for that.
basically say we do, 70% of our r andd is going to go to the, they don't use
(57:36):
my words, but this going to go to thetop down one, know, 20% to adjacencies
things that are, and then maybe 10%to things that are really now is,
should it always be that fixed ratios?
I don't think so, but it's oneway to thinking , about how do
you do both order to stay ahead ofthe external environment, right?
(57:57):
Either we are ahead of the externalenvironment or external environment
gets ahead of us, and if the latterhappens, we probably are on our way out.
That's, does that make sense here forsetting the stage maybe for tomorrow?
Is that that's okay for you?
beautiful, Robert and in themornings when I drop my son to
school, we listen to an audiobook.
(58:17):
And I was listening to one thismorning I was talking about
competition amidst redwood trees.
And it was like, you know, you can'tput a guiding rule on redwood trees and
go, no, nobody drove beyond 30 meters.
Okay.
'cause they're all competing for sunlight.
Yes,
But , what the guy said in thebook was, but actually as a human
species, we can collaborate andgo, okay, these are the rules.
(58:40):
We're not gonna go beyond 30 meters.
Right.
yes,
And I thought about that in the contextof the internal ecosystem of a company
that when the company's small, sayit's a startup, and you select people
into that team and they agree and theycollaborate and they communicate, and
the communication levels are tight.
You can guide principles andtherefore it can move better
(59:04):
than a bigger organization.
But as it becomes bigger andthen becomes multi-company or
multi framework or multinational,it becomes so, so difficult.
And all these challenges we talked about,multiply in ways that are so difficult
to manage that I have so much empathyfor people who run these companies.
It relates also to the following,you may recall that, I started saying
(59:28):
that when I was an undergraduate,I wrote my thesis on firm science.
This helped me with, when I did my book onhp, because I had for 16 years studied hp
and then in November of 2014, Meg Whitmandecides she goes to split HP in two.
(59:48):
And I go, how am I going to write mybook now about becoming Hewlett Packard?
It's two Hewlett Packards.
Then I realized, I said,well, this how this happens.
And I, one morning, and actually I hadjust recovered from a little illness.
I said, well, my undergraduatethesis helps with this because
(01:00:12):
what did I come up with?
I said, size is a static concept.
It's like a picture, like a photograph.
But the world is dynamic.
And so what I learned fromintegrating Penrose and.
Chandler was that thereare external opportunities.
That's Chandler internaldrive to grow that is Penrose.
(01:00:38):
And so if you bring them together, the keything, and, and, and Chandler had proposed
that strategy structure follows strategy.
So therefore, it's the growth curvethat is really the critical thing.
And at any point in time along that growthcurve, there must be a strong, potentially
(01:01:01):
very good relationship between thestructure and the strategy of the company.
And that determines what thegrowth is for that moment in time.
I thought, you know, for a 22-year-old,that was not a, a bad insight.
But then I realized that Ihad failed the next step.
Because if it is true, that strategyand structure together, internal
(01:01:27):
impulse and the external opportunitiestogether determine the growth curve
as captured in the strategy, then thatdoes not mean that growth trajectory
as to always go uniformly up.
It could be that the environmentchanges, like the tectonic plates
(01:01:49):
split and actually in you, the companyin order to continue to grow must
get out of some of the things thatis currently doing, get onto a new
growth trajectory, which means firstreduce in size, then get back to size.
And I said, well, that's maybewhat happened at HP because you
had the consumer businesses.
(01:02:11):
And you had the enterprise businessesthat were together under, mark Hur
still, and even Apotheker, Apothekeralready wanted to split something.
And I said, well, what has happenedis that there is now this the, because
of the split of the, of the, of theecosystems of the consumer oriented,
(01:02:35):
businesses and the enterprise, theright thing to do is actually split.
So Whitman was able to get, but she didthat after first making sure that both
entities would be able to survive intheir new, ecosystems and, and grow.
And I went, so that, so therefore,actually I wrote an article about that
(01:02:59):
it was published a few years ago calledWhy Do Multi-Business Corporations Split?
More homework.
More homework for me man.
that is a way I like to think abouthow, ecosystems evolve and how
understanding, the logic of theseecosystem developments also determines-
(01:03:22):
if you want -the strategies that thecompanies that are going to operate in
these ecosystems, how they must change.
And so if you now did an analysisof hp consumer versus enterprise, it
would be quite different strategies.
Also, they had different shareholdersbecause the shareholders of
the PC and printers, they like.
(01:03:42):
Dividends.
Right.
Whereas the other side likes growth.
so in a way, Whitman was, clever enough toget support for this split because there
were groups , of shareholders actuallyin a way we're supporting on that, which
they were not at the time of Apotheker,because he had not explained exactly
it's a tough task, man.
(01:04:03):
It's tough being a leader ofan organization, especially
if it's successful.
And then on top of that, you havethe identity problem that you
identified with Intel as well.
Robert, I know you're,you're need to head off.
It's been an absolute pleasureand I look forward to, to
doing more and sharing more.
Thank you for joining us in this tributeto the work of Joe Bower and for sharing
some massive insights into your workas well, and your relationship with
(01:04:26):
Intel and Andy Grove, Robert Burgelman.
Talk to you soon.
Thanks for joining us,
thanks once again to our sponsors.
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(01:04:50):
smarter decisions, faster innovation,and a lasting competitive edge.
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Welcome to part three ofthe hours of Bower series.
(00:03):
With thanks to our sponsor, KyndrylKyndryl runs and reimagines the
technology systems that drive advantagefor the world's leading businesses.
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(00:24):
You can find Kyndryl atKYND R YL Kyndryl.com.
Today's episode is from chapterthree of From Resource Allocation to
Strategy, and presents a groundbreakingevolutionary perspective on corporate
strategy using Intel Corporation'stransformation over multiple decades.
Our guest reframe strategy, not astop-down planning alone, but as an
(00:48):
emergent organizational capabilitythat co-evolve with external
environments and internal dynamics.
He describes how resource commitmentsby the managers of Intel's
fabrication facilities shifted thefocus of Intel's corporate strategy
from drams to microprocessors.
He also discusses his effortsto work with Joe Bower's model
(01:09):
and indeed expand upon it.
A few years after Bower'swork, he initiated his 20 year
stream of contributions to theunderstanding of resource allocation.
He is the author of several influentialbooks, including Inside Corporate
Innovation Strategy is Destiny,strategic Dynamics becoming Hewlett
(01:29):
Parkard and more recently strategicmaking and organizational evolution.
He was the executive director ofthe Stanford Executive Program for
nearly two decades and has workedwith top companies around the world
teaching, advising, and shaping howsenior leaders think about innovation,
evolution, and long-term strategy.
(01:50):
It is a great pleasure to have himas part of the hours of Bower series.
Professor Robert Burgelman,welcome to the show.
Thank you very much Aidan,it's great to be here
it's great to have you.
That was a mouthful for me, man.
Maybe we'll start withyour relationship with Joe.
He mentioned you in part one andI'd love you to tip your hat to
(02:13):
him and give him some credit forhis influence on your career and
indeed how you guys got togetherand worked together over the years.
Goes back a very long time,actually, to 1970 itself because
I had finished my undergraduatestudies at the University of Antwerp.
And I had done my undergraduate thesison optimal firm size in which I had
(02:41):
combined the work of Alfred Chandler onstrategy and structure and integrated.
Into that, the work by Edith Penrose onthe theory of the growth of the firm.
And I had combined that also withIgor SFU's book on corporate strategy,
which was really the first treatmentof corporate strategy in 1965.
(03:06):
And so I was hired by my school asa junior faculty member in 1970.
That was the year thatJoe's book was published.
And so the editor of the Journalof my School, which was called The
Economics and Social in Dutch, sothe Social and Economic Journal,
(03:28):
he asked me to review this book.
And so I had never heard aboutJoe Bower not yet because he was
a young professor then too, andso I actually reviewed that book.
For that journal, right?
And then the journal wanted to bring outan issue on what they call active finance.
(03:53):
In other words, you would not only lookat the theory of finance, but how it
as being used in large corporations.
And so I thought I was then workingwith a more senior professor.
Of course I was a junior one, I convincedthis senior professor that we should
write an article about active finance,but focused on the capital budgeting
(04:19):
process, just like Joe Bower had done.
Because what he had done was say,wait, is all, you know, there's this
discounted cashflow and net present value.
And in those days, not the,but real options stay related.
he had shown how this.
And of course you need datain that, in these models.
The question is where does thatdata come from and who gets involved
(04:42):
in the actual decision making?
And so Hay had to the Insight, I thinkat the time when I revised this book by
Bower, actually something that I don'tthink he actually said in his, in the book
himself, but that what his model does.
The three, the matrix really,it's a three by three matrix.
(05:03):
It allows you to show simultaneityand sequentiality at the same time
because each level dustings in asequence, but they are happening
simultaneously at different levels.
I thought that was a methodologically, avery powerful tool to try to understand
(05:27):
the strategic decision making processin large, complex organizations.
I had also read Ackerman's paperin the A SQ in 1970, Bob Ackerman.
He was mentioned by Joe and someof the people who had written
about commitment actually and someothers that had informed Joe too.
So I knew that literature fairly well.
(05:48):
I had looked it all up so Iended up writing a paper together
with this senior professor.
was published in 1971 and thatbasically showed Bower's model and
used it as a tool to show what doesit really mean to use finance in a
managerial agency type of perspective.
(06:12):
So that was 1971.
That is how I got to know Joe Bower.
Then I got a fellowship to Stu.
I got actually two fellows who wentfrom the FORD foundation to study in
the United States in 1973 at Columbia.
I did my dissertation, aboutinternal corporate venturing.
So.
Was I studied the activities of thesedifferent levels of management involved
(06:37):
in new business development, right?
Within this large company.
So then I had needed a frameworkto conceptualize this process.
And one of the, the members of mydissertation committee told me, you know,
your description is too descriptive.
You should use more of a framework.
So then I thought, oh, maybeI could use Bower's framework.
(06:58):
So I went back to Bower's framework andI tried to map this active activities
that I had observed onto the model.
I could put many of them, but not all.
So then I was struggling, you know,and I remember the night in, I was
still in New York in 1979 when Iwas drawing these these loops and
(07:21):
then it suddenly, I realized Joe'smodel is about resource allocation
to manufacturing capacity within theexisting strategy of the company.
In fact, as he said, he had one projectthat didn't quite fit because it forced,
it was going to lead to competitionwith one of their best customers.
(07:44):
In fact, that was the sort of thing thatI was observing with the new ventures.
These were things that weredifferent from the company.
so I, could not map allthese activities on there.
And then it struck me that, yes,the reason is that my study is
about , innovation activities thatwill change the corporate strategy.
(08:09):
It will require an amendment of thecorporate strategy as opposed to it
fits with the corporate strategy,and therefore, what I have observed.
One of the senior leaders, the one in themiddle, was a person who understood that
they had to top management understandhow the strategy should, be changed
(08:33):
in order to accommodate and embracethis new venture area going forward.
So that led me to actually add thiscolumn in the model that's called
strategic context determination,is not a criticism of Joe because
if you are looking at projects are.
resort allocation for a project that areconsistent with the existing strategy.
(08:58):
You don't need a strategic context.
But the moment you are trying toget into strategic change at the
corporate level, got this process.
And then I learned that thatprocess, actually, , there is
similarity across scale, right.
It applies to your own personal life.
Right.
(09:19):
. So that process I stumbled ontoit and it led me to then make
that change in the Bower, model.
And Robert, you were great friendsalso with the late Andy Grove,
and we'll talk about that again.
And Robert and I are gonna be back.
We're gonna go cover Robert's booksin depth and also talk about that
(09:39):
relationship he had with Andy Grove.
But I was so serendipitous when I wasreading this book, I was also, I was
in Canada last week and I had loads ofspare time traveling and I downloaded.
A load of lectures by Andy Grove.
And I was listening to one and then Iread your book and I was like going,
that sounds to me like what AndyGrove was talking about, that lecture.
(10:00):
So I took an excerpt of that and I'mgonna play it now for our audience.
And I'd love you then to talk aboutthis, what he is actually talking about,
because he and you lectured together.
You were great friends.
You also had some tough conversationsas we'll talk about in the future.
But you were probably at this lectureand it was so relevant to the work that
(10:22):
you've identified and the problem ofstrategy being decided from somewhere
in the middle versus what they think ishappening at the top of the organization.
So I'm gonna share this for ouraudience and we'll unpack it afterwards.
Intel was a semiconductor memory company.
We pioneered semiconductor memories.
We were the leaders insemiconductor memories.
In the mid eighties, the Japanesecame and became a 10 x force for us in
(10:46):
semiconductor memories, and one of thefirst signs, as I look back, I didn't
look at it at that time as a sign, Ilooked at it as a whining sales force.
But one of the first signs that I lookback that should have tipped off, off.
Was our sales force in Japan sayingthat the customers are not as
(11:08):
respectful of them as they used to be,
and that was such a tellingstory in retrospect, if I look
back on the curve, that's whenthe curve was beginning to enter
in the inflection point.
They weren't because they knewthat their internal capability,
the customer's internal capability,the semiconductor sister division,
(11:28):
was going to run circles around us.
They knew that and their attitudechanged to our Salesforce.
Our Salesforce told us, usbeing management, we ignored it.
We ignored it when they showed up here,we ignored it as we were starting to
lose market share, and the people in ourcompany who realized what was going on
(11:51):
was our group of production planners whostarted adjusting our factory loading.
Away from memories toward microprocessors.
Why?
'cause we had better businessopportunities in microprocessors.
We made more money in microprocessors.
So without making a big fanfare, ahundred wafer lots and by a hundred wafer
lots, they just moved the productionlots from memories to microprocessors.
(12:14):
So by the time those of us whoran the company started facing up
to that, that our core business,which are memories, was going away.
Because of these incremental aactions of the, our finance people
and production planners and lowerlevel management, we were much less
exposed to the memory business.
We have gradually rationalizedour factory infrastructure,
(12:36):
so we still had to cut back.
We still have to shut down factories,but much less than had these Cassandras
not taking matters in their own hands.
So spontaneous actions through frontlineor lower level employees who are much
closer to the action is a very key.
Element in causing adjustment inthe business structure of a company.
(12:57):
What tends to happen at times like this,there's a growing divergence, a dissonance
between the actions of people who areclose to the actions and the comprehension
and statements of senior management.
Like myself, I call that strategicdissonance because a corporation in
its daily action is beginning to dosomething deviant from the stated mission
(13:24):
values competencies that continuesto get articulated in management.
So one of the big telltale signs in abusiness that it is struggling with a
strategic inflection point is this growingand seemingly irreconcilable difference
between what the company does and what thecompany says it's supposed to be doing.
(13:47):
It's not because people involved are dumbor phony or hypocritical or anything like
that, but because senior management whois responsible for the articulation, who's
giving the interviews that the employeesread in the newspaper doesn't know it
yet, the employees know it's not real.
The senior management doesn't knowis that's a terribly strong sign
(14:08):
.There we go.
So you were involved in thecoining of that term strategic
dissonance as well, Robert.
But I thought that would helpour audience get their head
around what it means in business.
And then you can give usthe framework around exactly
what Andy talked about there.
But you both identifiedand put a language around.
(14:29):
Yes, I'd be happy to do that.
Whereby telling youthe following anecdote.
So when Andy Grove came to see me in1988, in August, 1988 and I was very
impressed by his level of preparation,but I thought, you know, I was, by the
way then doing a lot of research at thePalo Alto Research Center for Xerox,
(14:49):
which I won't talk about right now.
But so I thought, you know, probablythis is not going to be very interesting
because Intel is run by Gordon Mooreand was the CEO and then by Andy Grove.
This is going to be a textbookin strategic planning.
But Andy invited me to come and seehim and so I went to see him because
(15:12):
I thought maybe we do a case study.
But I was not quite convinced yet.
But I did actually recruit oneof my students who was then
in my class, an MBA student.
He had, he had actually, and I knewhe had studied physics at Harvard
actually, and he had worked for thedean of the engineering school on solar
technology and in relationship to semi.
(15:33):
So I thought if I need a case writer,this would be the right person.
and so I took him with me.
And so here I am in Bowers meetingwith Andy Grove and Dennis Carter,
who was then his TAs, the technicalassistant, and I was there with
George Cogan, who was my assistant.
And as I said, I wasn't quite convincedyet, am I really going to do this?
(15:56):
This is Andy said the follow,he made the following statement.
I will never forget this.
He said, well, some middlelevel managers had already made
technical decisions limited thedecision space of top management.
I stopped, I said, Andy did,you just said limited the
(16:19):
decision space of top management.
He said, yes.
And I said, who were those people?
He said, Ken Fine and Ron Smith.
And I said, am I going to beallowed to talk to those people?
And he said, you cantalk to anybody you want.
(16:39):
That's how it got going.
So I'll tell one more story on thisbecause, so I developed a case study and
I set it it starts, the first versionstarts in October, 1985 when Grove
went to Oregon and told the people inOregon, these are the words he used,
(16:59):
welcome to the mainstream of Intel.
we're no longer a DRAM company,we're now a microprocessor company.
He did, he taught the case.
It went very well in the class.
And then he said, well, I'dlike to come back next year.
He said, well, then we need asecond case, , which we did.
And for the second case, I thought,you know, I'd like to examine the
(17:20):
implementation of that decision.
So I told Andy I'd like to speak tosome people deeper in the organization.
So these people, theyhad not read the case.
They didn't know that I had put thisin October 95, but they told me, senior
guys, but not top level, that Intelalready had decided in November of
1984 to not bring the next generationDRAM in production and to the markets.
(17:50):
But they had let people still work on it.
So I changed the case.
I said in November 9th, 1984, TopManagement decided not to continue with
production of the next generation diam.
So now a week before Andy isgoing to come back the next year.
(18:10):
Right?
So he said, yeah.
I said, I have a new caseand I sent him to him.
He came to see me, , and, I gave him thecase, he read it he said, November, 1984?
Why did you change this?
I said, well, Andy, we talked toseveral people who told us this it.
(18:33):
And he told me, well, who told you that?
I said, Andy, that I can't tellyou because we always speak
with people in confidence.
So I can't tell you that.
But I told my case writer, I said,look, and Bruce was his first name.
I said, Bruce, look, the CEOtells us that this is wrong.
We're going to have to revisit.
(18:53):
Andy, he was a bit miffed.
So he left.
Two days later I got a phone callfrom Andy, and in his usual Laconic
style, he said, well, I did my ownresearch and you guys are right.
I had forgotten howdifficult this decision was.
(19:15):
And we left it on that.
Ah, that's powerful for the CEOto admit on such a big decision.
So now I developed then that framework,the first one that you showed me.
And actually then if you showme that again, I'll tell you a
little story about that becauseit helps us explain what happened.
(19:36):
Alright, so these are what I call theforces that drive the evolution of a firm.
So on the top you have the basis ofcompetitive advantage in the industry.
That is basically, in a way, MichaelPorter's forces, Actually, Andy
and I, we extended that today.
They call it the ecosystem, right?
(19:57):
And you position yourself inthat ecosystem in a certain way.
That's what you do.
And therefore , the basis of competitiveadvantage that you can have in that space
is not just a function of you, it's afunction of all these other forces, right?
What the government does, whatpotentially what other competitors do.
(20:19):
So you must be able, because when Iteach executives, I replace this then
with what I call natural language.
'cause this is business school language.
you must be clear about whatit takes to win as the CEO.
You must be very clearwhat it takes to win.
That's the top box.
The bottom box is thedistinctive competence.
(20:40):
These are the things that youhave that allow you to occupy that
position, to defend it to leverage it.
Right.
So that is in, in natural language.
I call that this is whatwe have, is what we've got.
That's in the vertical axis,in the horizontal axis on the
(21:03):
left side, corporate strategy.
That's what we say toourselves and to others.
And strategic action we do, what I callthe consequential actions that we take
now in the happy days of a company.
(21:23):
So you ask these questions,do we have what it takes?
That's the vertical, and are wedoing what we're saying, right?
we have what it takes to win?
And are we doing what we'resaying in the happy days?
Those things are, the answer is yes.
We do what we say and wehave what it takes to win.
(21:44):
Those are the happy days.
for a while at the happy days.
Then the world starts changing.
And so Grove, you know, brilliant as hewas when I showed him the first time, this
framework, you know what he called it?
He said, this is the rubber bandtheory of strategic management.
(22:07):
Why?
Because he looked at thesearrows he said, these are, these
arrows are like rubber bands.
everything together.
And when everything is, when theanswers to the two questions are
right, everything is in balance.
looks nice like this, but when theworld changes internal and external,
these rubber bands starts stretching.
(22:30):
And now the question, and thatcreates the dissonance, right?
And so the dissonance issignaling to you that you no
longer have what it takes to win.
And that you may no longer dowhat you say, and that is why Andy
was referring to a salespeople.
Because the salespeople now, evento the customers and the customers
(22:52):
go, you know, you guys are notdoing what you're saying, and the
competition is better than you guys,
so the bands will stretch.
What you don't want isthe rubber bands to snap.
And that brings me to , the boxin the middle, which I call the
(23:14):
internal selection environment.
Actually, when I, when I speak toexecutives, I replace that box with
what I call the strategic leadershipculture of the organization.
And so that the capacity, if you want,or the ability to bring, to prevent
(23:36):
these rubber bands from snapping.
And in fact, to bringthem line in a new way.
the role of strategic leadership.
And so I identified four elementsof strategic leadership that I think
are characteristic of an internalselection environment, a strategic
(23:59):
leadership culture that is capableto deal with strategic change.
Now, we might say one more thing on thisfor the audience, if they, why did I call
it the internal selection environment?
Because in one of the key things ofthe internal selection environment,
okay, if I want to know theculture of a company, right?
I say I need only reallyto do to know two things.
(24:24):
The first one is who gets the money?
That's the resource allocation process.
And who gets promoted?
If I know those two things, I know whatkind of culture you basically have.
now the internal selection environmentis really the only thing you have to cope
with the external selection environment.
(24:46):
In my article that I wrote, what I'msaying is the strategy making process,
basically it uses your internalselection environment to cope with
the external selection environment.
that is the key, the ability to preventthe rubber pants from snapping, and
eventually in time bring them back.
(25:09):
And the four things that I highlightthen associated with that internal
selection environment, the firstone is as resource allocation.
And I say, does your resourceallocation reflect competitive reality?
This is actually not easy because in, inthe larger the company, the more difficult
(25:32):
it really is to allocate resources.
That reflect competitive reality,in other words, to the winners
and away from the losers.
Why is that?
Well, because there are transfer prices,there are al, there are allocation rules,
the respect projects of, of executives.
It's very difficult to maintain theresource allocation that is really very
(25:56):
disciplined in allocating resources towinners and away from losers in time.
But if you do that, that's not enough.
Because if I only allocate resourcesto the winners today, at some
point there will be no tomorrow allopportunity sets eventually are not
(26:16):
big enough given your growth rate.
Or in fact, they may even decline.
So therefore you need a secondelement, which I call that you must
have a strategic planning process thatallows debating new opportunities.
But that's not enough either, becausethese debates will always be between
(26:41):
those who make money today and thosewho promise to make money tomorrow.
So who on average is going to winthe debate is going to be today.
And that's actually rationalbecause suppose we always allocated
resources to those who promised towin so that's not enough either.
So what do we need in addition?
(27:01):
So in addition, the that I highlight, I call it strategic recognition.
That is the capacity to seethe implications of things
that are already in play.
We may have started them, like ourguys at the bottom, that Andy Grove was
talking about, or competitors or both.
(27:24):
But, I can see what the potentialimplications of these changes are and
I bring them into conversation with therest of leadership so that we can at
least get clear on what is going on.
But that's not enough either, becauseif I stop there, have some very
(27:45):
clever, very intelligent executiveswho will later tell me, well, I told
you so, or I could have told you so.
So strategic recognition isimportant, but it's not enough.
You must be able to go from recognition toaction, and that's what I call strategic
leadership in a, in a, in a dynamic.
(28:06):
Andy Grove was good at that.
, He respected strategic recognition ifit was data based and then he would
be able to do something about it.
So that is my little framework here,
it's important, I think, Robert, as well,to give a little bit of just context
(28:27):
that the, the idea of selection, becauseyou compare it really to nature here,
that , there's external pressure from thebusiness environment, just like in nature.
And then there's internal pressurewithin the tribe or the animal species
which in this case is the organization.
So.
This idea , of selection andhow selection works through the,
(28:49):
administrative and cultural mechanismsin the organization is important.
But also then like what Andy in that clipcalled the strategic inflection point was
there's some change in the environmentthat then changes a need for the pressure.
Maybe we'll give a little bit ofcontext of that before I share the
next diagram, which is tool two.
Yes, actually this is a very importantpoint because it gets me to speak
(29:13):
about the importance of the internalselection environment in some more depth.
So one of the things that Intelhad done, the top management.
Remember I said if I want tounderstand the culture of a company,
I need to look at two things.
Who gets the money and who gets promoted?
So the first one is really importantbecause what Intel had done,
(29:37):
they had actually establisheda resource allocation, the rule
for manufacturing capacity alongthe lines of Bower in a way.
And that, and the rule that they usedto at the margin allocate capacity,
So they had the duram business,which was the memory business,
and they had to logic business.
(29:57):
That was before the PCat the logic business.
So now is going, we have to allocateresources because there is more growth
opportunities than we have capacity.
How are we going to allocate this?
The rule they had established wasmaximize margin per way for start.
(30:20):
What does that mean?
That meant, well, , the product thathas the highest margin, which means
the difference between the price in themarket and the cost gets the capacity.
So the dram is commoditizing, thereforeits margins gets lower and lower.
(30:44):
The logic products are allspecialty projects, they're
all niche products at a time.
Their margins are higher.
So what do the product plannersand the, finance people, which were
always very important within Intel,do they go, well this year allocate
the capacity to the logic products.
(31:04):
The DRAM guys are not happy,but they think, okay, well, you
know, we're going to, next yearwe'll bend up the curve again.
Next year comes the same happens.
They go, we'll do it.
We'll come up with another innovationand we'll bend up the curve.
Third year happens.
the beginning I drew a curve where Ishow resource allocation over time,
(31:27):
and I have two types of resources.
One is manufacturing capacity,and the other one is r and
d, research and developer.
The curve of manufacturing capacitygoes down and more and more.
The curve of r and d applicationsstays flat because top management still
(31:50):
says, Hey, we are a memory company.
So now you can see in the beginningthe difference between the horizontal
curve and the decline is actually small.
And next each they go.
Next year we'll bring this back in line.
But by 1984, the gap is huge becauseonly one plant left that does drams.
(32:12):
Suddenly the top man, , wecannot continue to do that.
So now this, why does this happen?
So this took me a while to figure out.
So that rule of resource allocationis reflecting of the deepest,
if you want identity of intel.
(32:34):
Intel is a diff, Michael Porterwould say a differentiator.
It's different.
It is a leading edge technology company.
They differentiate themselvesfrom everybody else.
They want to get high margins.
a signal that they actually hire.
The leading edge.
The DRAM is become a commodity with low.
(32:57):
So this is no dust anymore.
So without anybody having even said that,that rule was the, one of the biggest
manifestations of how really at the toplevel and maybe most of the people thought
about who we are and what do we do, andtherefore who gets the resources you can.
(33:19):
So you can have, you know, I canwrite five pages about what the
culture of a company and all thisbuzzword I go, how are you allocating
resources will tell me a lot moreabout culture than all these Elements.
So now here is anincredibly important point.
So in the case of Intel, I askedthis, your actions aligned with
(33:46):
the strategy Versus your internalselection environment, reflective of
the real external selection pressures.
What is most important?
It's the latter.
Because if your actions are veryaligned with the strategy, but the
strategy is losing, one, you'llbe out of business really fast.
(34:09):
Whereas if your actions are no longerassociated really aligned with the
strategy, but because your internalselection environment does things
that are consistent with wherethe external, environment you can
still later change your strategy.
This is what Intel did.
I'm gonna share in amoment, Robert, tool two.
And I'd love you to explain that again,with the same empathy you did for
(34:31):
people who are just listening to us.
But you talked about the threeepochs of intel in this chapter.
And it's really important thatthat epoch one where , the resource
allocation was decided from below andthen post rationalized by strategic
leadership by Andy Grove, for example.
(34:52):
But then he reassigns everybodytowards semiconductors.
And in a way they become hostage of thatbecause they put more and more resources
there because of the IBM and PC evolution.
And they benefited a lot from that rise.
And because of that benefit,they invested more and more.
And then it was difficult to beton those new emerging options.
(35:14):
One of the really interesting ones, you,and you just mentioned this in passing.
Was the opportunity of videoteleconferencing, which Cisco
seized, but Intel actually hadan opportunity to seize as well.
There's a little bit of a storythere that, that I just touched
on, and I said, that'd be reallyinteresting to shine a light on.
these are excellent questions.
You might say so because they get real.
(35:35):
So this raises a very important question.
Do you like to be dominant?
What must be your answer?
But do you realize how dangerousdominant dominance really is?
You don't.
Why is it so dangerous?
(35:55):
Because if you are dominant inan industry, you end up making
all the money or most of it.
That means all the other playerscan't really do much r and d, and so
you have to start doing it for them.
Intel did that.
They called it Intel Architecturalapps because they were creating
Ferrari engines and the OEMswere putting it in Volkswagens.
(36:16):
They cannot last forever.
So now Intel has to do moreand more and more and more to
stay dominant in that space.
And Andy knew it because he toldme once, he said, you know, we have
learned to do something extremely well,but it's the only thing we can do.
I call it strategic inertia,and it's driven by what I
(36:41):
call co-evolutionary lock-in.
You become locked in with a space inwhich you are so successful that you
have to do everything, all resources.
And by the way, all themanagement attention is there.
One guy once told me, you know,this was a senior executive from
Oregon, he said, yeah, with Andy.
(37:02):
And that's true.
He said, you can at Intel, if you wannado something on the side, you can do it.
Andy will let you do that, butdon't get in front of the train.
that's a huge problem, , and, itlinks to something that just to
explain for our audience as well.
Robert has heard the episode one,with Joe Bower, which was great timing
because in there we mentioned thatthat threat that strategic inertia.
(37:26):
Also then was what Clay Christensennoticed as disruptive innovation.
That actually, that's the opportunity.
And you co-authored one of youradditions of one of your books was
what Clay was involved in as well.
May, maybe we'll mention that to connectthe dots between your concept of strategic
inertia and then disruptive innovation andhow one leads to the other in some way.
(37:47):
Yes.
This is actually anotherfundamental insight.
So think about what disruptiveinnovation really does for a moment.
Right?
So Joe actually spoke about it too.
It means that someone comesup with a product that So here
(38:07):
is to, to visualize it, right?
So you have performance on the verticalaxis, and that's really a vector.
And that performance reels is the, theelements of perceived value on the part
of customers, That's the vertical axis.
Horizontal axis is time.
Now, there is over time,, a demandthat's a curve that slows upward
(38:31):
for average performance because,you know, the, the company makes
its products better over time.
It does that, the engineerstry to put more features.
So the average performancecurve goes like this up.
There is a distributionof customers around it.
I do it like a normal distribution.
That means there are peoplewho would like even much more.
(38:53):
And then there are others whogo, well, you know, I'm using
Microsoft operating system and Ithink I use 5% of the whole thing.
Why the hell do I have to pay?
So they are, there is a group of customersthat would be willing to buy a product
that is not, that is good enough.
Good enough, but a lot lowerprice than what you can charge.
(39:16):
That is what thedisruptive guys try to do.
Now, I am the incumbent Aiden comes upwith this particular type of new product.
I go, wait a moment, why would I do that?
Low end products they,reduce my average margin.
So if I no longer did that,average margin would go up.
(39:37):
Also, I am allocatingsome resources to this.
So there is a assets thatare associated with it.
If I stop this, I don't nolonger need these assets, so
my asset turnover will go up.
now if my margin goes up and myasset turnover goes up, my return
on assets is going to go up.
So I give up on that, let them have it.
(40:01):
But of course these guys whothen start at the low end, they
have a new way of doing things.
Over time, their curve ofaverage performance goes up too.
And it begins to intersect with onmy distribution, higher and higher.
You know, Silicon Graphics is an example.
They eventually got pushed to the ceilingbecause they got higher and higher because
(40:26):
Intel is taking more and more and more, of the, of their workstation business.
So that is, and you see, this is whyactually I told actually Clay once,
I said, clay, you have publishedthis book, which is great insight,
Any intelligent CEO is no longer goingto do what you describing the market.
(40:50):
So it may be the end of disruptive,you know, just simply because you have
educated the, intelligent CEO if you giveup on the low end, it creates an opening
for a new competitor that may actuallythreaten you at the higher end later too.
That's the connection.
So , yes, there is a resource allocationissue because why would I continue to
(41:12):
allocate the resources to somethingthat's low margin and it uses assets
if I can just let somebody else do it.
.The way I vision.
Utilized.
It was you, you have strategicinertia, disruptive innovation,
strategic dissonance, andthen you need some cognitive
dissonance to say, be quiet brain.
I know we're giving away a low end of themarket here, but all the profits here.
(41:35):
And I think this is where , thereal leadership piece comes in.
If it's a family business, forexample, I actually care about
the future of the company.
I'm not just a steward of a role.
I actually care about that future,so I'm going to make sure that
I'm not disrupted from below.
Yes.
I think that that's one of thebiggest things I've learned from
(41:56):
doing this show over the years.
Robert, and I'd love you to shareyour views on, on the people who
manage these challenges properly.
If you think about all these plateson sticks, there's strategic inertia,
there's strategic dissonance,there's disruptive innovation, and
there's resource allocation process.
You know what?
So I don't wanna sound pessimistic, right,but I think once you start to understand
(42:21):
these challenges, and Andy Grove actuallywas one of those who knew that he himself
was subject to these forces, right?
I said, yeah, I'll give you an example.
So Intel went into the, been goinginto the networking business.
It's also an example.
I think I, and so, you know, CEOsdon't usually look, they want to spend
(42:43):
too much time looking back on the,in the past, they always look to the.
One time I had a conversationwith Andy Grove after class for
an hour and a half or so, and he'sasked, he said, you know, why?
He said, why did I spend $750million on video conferencing
that in those days, nobody wanted,and not enough on networking.
(43:09):
We could have, I said, someonewe buy Cisco and I could have
bought 'em for 150 million bucks.
didn't I not do that?
And I said, yes, Andy, that's really true.
I said, I asked myself, Isaid, wasn't Frank Gil, I'm
not using these names now here?
Wasn't Frank running thatbusiness and the network?
And he said, yeah.
(43:30):
And I said, you know, Frankwas a pretty good guy.
I, I understood.
Yeah.
He was the second best salesman we ever.
And I said, so why didn'tyou not support him?
When he came up with a network,he a three, $400 million business.
And here is, that's anexample of Grove's brilliance.
(43:52):
He said, well, I don't like statements.
When they had a meeting with themanagement review committee meeting
and know some of the top executives,and you are, you are prepare,
you're presenting your projectand , you want more money And okay.
And he said, when we had one ofthese management review committees,
he could never convince me.
And I said, why not?
And he said, well, I don't like statementsthat are somewhat right, but mostly wrong.
(44:20):
And so I told them, Andy, that'sthe logic of the core business.
Yes.
If I'm a senior executive in the corebusiness, we have done this for forever.
We, most of what I say shouldbe right, but in a new space.
Where we are learning new things,how could everything be Right.
Right.
(44:40):
And Don Room, Eddie, I agreed with that.
So I asked him, I said, could I,could I go to Frank and, and, and, and
can I ask him questions about that?
He said, yeah, you can do.
So I went to Frank, and so Frank this isin my book, but in strategy is Destiny.
So I'm not telling, saying things thatI shouldn't because Andy let all of
this be published in my other book.
(45:00):
So otherwise I would not say this.
So I called Frank and I said, Frank, didthis go, the networking business, and he
said this, he said, well, had taken meout of my other role and put me in charge
of developing new businesses for Intel.
this, this, I forget the exactname, maybe 93 or whatever it was.
You know, Intel at that time was 6billion and 1 billion to 6 billion.
(45:24):
You know, that's still 15% or so.
That's significant.
Three years later, Intel is20 billion or 16 billion.
What is 1 billion to 16 billion, right?
So when I met Grove, then it would,it told me this, it's, it said, Frank,
you make $1 billion a year at 10%.
(45:45):
That's 10.
That's, a hundred million, right?
10% of a billion.
That's per quarter, 25 million of profit.
I make 1 billion of profit every,
this is all distraction.
Why don't you focus on job one?
(46:06):
Right.
That's the, you know, andyou go, if I had been the CEO
might have done the same thing.
Probably, yes, probably yes.
So there is, but he knew that, he knewAndy was, and that's why he allowed me
to publish this because, you know, thisis a lesson for, even if Andy Grove, you
(46:28):
know, was such an incredibly insightful,he was subject to these forces.
what I'm trying to do, what I've alwaystrying to do is not say it's good or bad.
not a strategic question,is it good or bad?
The first answer, thefirst question, what is it?
What are the forces that I face and howI am going to try to manage these forces
(46:54):
as opposed to have the forces manage me?
what I love about that is that eventhough he wrote about it, even though he
thought about it, even though he had youas a friend in his ear all the time, he
still knew he was subject to these forces.
And that challenge, I've heard thatreferred to as the value network
problem where you have, I thinkit was even Clay, actually reading
(47:16):
Clay, the value network problem.
My company makes Billions.
You're bringing me something that's brandnew that's made me a hundred million,
which if I was a startup, I'd be like,oh my God, we've made a hundred million.
Or if I was that, that disruptorthat I made a million, I'd
be jumping up and down.
But because I'm a billiondollar company, it doesn't, it's
(47:37):
not even table stakes for me.
So that, that challenge, but I wantedto just pull up one thing there, because
when I read this, this chapter and Iread about that margin per wafer rule.
I, I wondered, had you any more examples?
So the thing I first thought ofwhen I read that was, was Henry
Ford, and you can have it inany color as long as it's black.
(47:59):
So this guiding principle for meto drive down cost to deliver this
car for the cheapest possible pricethat I can, and how, even if that's
unspoken, but it's be, it's drilledinto the mindset of an organization.
It can keep them hostage to thatthing, but in this case it saved them.
But in other cases it actuallycan keep them hostage to the past.
(48:22):
And I'd love you to maybeshare some concepts on that.
yes.
So I'll give an example of one time I was,in Arizona actually speaking for Intel,
you know, and then in the morning or soI had, I, I met with Craig Barrett, who
was then the successor to Andy Grove.
And think I can tell this story,although it's not in my book, so
(48:44):
I'm not going to go in great detail,but what he was basically saying was
that he had gotten a message from themicroprocessor guys who had complained
that by allocating fab capacity to thena, they were then still doing nand memory
products, flash type products, right?
(49:07):
That they had GI given up a,I won't mention the number,
but a large amount of money.
And Craig told me, he said, well,I know that's true, but doing
that type of manufacturing in acommoditized business keeps us honest.
(49:27):
So he said, I decided to do this becauseit keeps us honest, because in the other
space we don't really have competition.
and how do we know how good we really are?
So now, okay, so Barrettwas still doing this, right?
(49:48):
In other words, trying tounderstand how do I maintain
into competitive reality, right?
By playing also in a space where Imay make less money than I do, but
at least I know how good I am in morecompetitive, in more competitive basis.
(50:11):
I won't speak about what happenedafter that after Craig Barrett left.
So but for myself, I always thoughtthat's an example of where the CEO is
willing to actually incur not a loss,but less favorable results, just to
(50:33):
maintain insight in how competitive wereally are by having to compete in an
environment where it's we're not dominant.
And it makes sense from,
you know, even a investing in astartup to have a toe in the water of
an emerging trend at the same time.
(50:54):
So I know we'll probably cover thiswhen we cover your book on corporate
innovation because that idea of howdo you keep, in touch with the edges?
Like Andy talked about snowmelting from the edges . I
thought we'd shared tool two.
Tool two really links togetherthe framework of induced and
autonomous strategy processes.
I don't think we actually calledout those two terms, which
(51:16):
is quite an important term.
So induced coming from down on topand autonomy coming from the middle,
as we saw with Andy Grove case study.
This is an evolutionary frameworkof the strategy making process that
Robert talks about and it zooms in onIntel strategy making process here.
I'd love you to share a little biton this, Robert, and it'd be a real
treat to share this with our organfor with our listeners, and again,
(51:39):
we'll have empathy for people.
Some people are only listeningto us, and you did a great job of
describing that on the first one.
S.
Yes, sure I will do that.
So I'll take a few minutes if that'sokay to, explain why I think it's more
important than just what we show here, so.
When I was doing my work on strategymaking in relation to innovation.
(52:01):
And I discovered the, that within thelarge cooperation that I was studying,
these new ventures really were kindof things that were not top driven.
They came from the bottom.
I developed this model and Ipublished it in 1983 as a, it's
called of the interaction ofstrategic behavior, corporate
(52:22):
context and the concept of strategy.
, So it has this top down, cross part,which is the induce strategic action.
And then the bottom up, more, bottomup, autonomous strategic action.
You can see the concept of strategy herethat we have is in relationship to the fa,
the environment that we are familiar with.
(52:42):
And that's of course dynamic andthe E is to emerging environments.
These are new areas.
Now why does this matter?
So while I was this in the late seventiesand early eighties organizational
sociology developed a totally newtheory, a very interesting and powerful
theory called Organizational Ecology.
(53:07):
1977, an article in which Michael Hannonand John Freeman explained that if you
wanted to understand organizationalchange, you had to study populations
of organizations, populations.
And if you did that, then youwould find out that actually real
(53:28):
organizational change is not because theincumbent organizations have changed.
No, it is because they have beenselected out and replaced with new ones.
That's a very powerful argument,and there is a lot of truth to it.
And the reason why that happened, theysaid was there is organizational inertia.
(53:53):
I call it strategic inertia.
Alright?
Now what they didn't explain why wasthere inertia in the first place.
So in 1984, they published anotherarticle in the American Sociological
Review in which they explainedthat the inertia really comes from
(54:17):
being selected in the first place.
Because why are you selected?
Because you do certain things.
You do them in the reliable fashion,you are accountable and so forth.
So you keep doing the things thatgot you selected in the first
place, which is pretty rational.
But I told to myself, this isreally bad news for strategy.
(54:38):
So then I realized that the framework thatI had developed here, which tomorrow I
can go into more detail if you want, oneach of the processes that actually that
suggested that large, complex corporationsare ecologies in their own right.
(55:01):
They themselves are ecologies ofinitiatives that spring up and that
compete for the resources of the company.
And so therefore, whereas you hadthe org, the the population level
the organization level selection,you also had to look at the intra
organizational level of selection.
(55:22):
That became the foundation for my ideaof internal selection environment.
And that's why I was sayingthe, the internal selection
environment is the only thing.
You really have to cope with theexternal selection environment, which has
brilliantly conceptualized and shown bythe organizational ecology guys, right?
(55:42):
I said there, so therefore this frameworkin a way is one attempt to alright,
so how are you going to try to, ifyou want, lead, manage, and lead that
internal ecological strategy makingprocess, which I say has two parts.
(56:04):
is the.
In part that is, we must continueto be successful in the environment
in which we are already operating.
Because if we are not, we don'thave any resources, do anything
different, but we must also always,not in the same proportion, but we
must always allocate resources tothings that are going to be new.
(56:27):
Some of them are endogenin, in internally generated.
Others might be because, youknow, we track what Cisco did
very well during the nineties.
We track the external entrepreneurialguys and we buy the ones that, you know,
that we think are going to be successful.
And then of course we, our strategiccontext process still has to make
it possible to integrate that.
But these, we always need both.
(56:51):
I say it's like a linear combination.
Of actually in my in now a longtime, I call the autonomous process,
the green process the inducedprocess, I call it the blue process.
So it, the model is by many knownas the blue and green process.
And so what you need to do isyou need to have a sort of a
(57:15):
linear combination of both.
You know, you have yourtotal resource allocation.
How much are you going to likeallocate to your induced strategy?
Versus how much are you going toallocate , to your autonomous?
In fact, companies like Google,I saw they have a rule for that.
basically say we do, 70% of our r andd is going to go to the, they don't use
(57:36):
my words, but this going to go to thetop down one, know, 20% to adjacencies
things that are, and then maybe 10%to things that are really now is,
should it always be that fixed ratios?
I don't think so, but it's oneway to thinking , about how do
you do both order to stay ahead ofthe external environment, right?
(57:57):
Either we are ahead of the externalenvironment or external environment
gets ahead of us, and if the latterhappens, we probably are on our way out.
That's, does that make sense here forsetting the stage maybe for tomorrow?
Is that that's okay for you?
beautiful, Robert and in themornings when I drop my son to
school, we listen to an audiobook.
(58:17):
And I was listening to one thismorning I was talking about
competition amidst redwood trees.
And it was like, you know, you can'tput a guiding rule on redwood trees and
go, no, nobody drove beyond 30 meters.
Okay.
'cause they're all competing for sunlight.
Yes,
But , what the guy said in thebook was, but actually as a human
species, we can collaborate andgo, okay, these are the rules.
(58:40):
We're not gonna go beyond 30 meters.
Right.
yes,
And I thought about that in the contextof the internal ecosystem of a company
that when the company's small, sayit's a startup, and you select people
into that team and they agree and theycollaborate and they communicate, and
the communication levels are tight.
You can guide principles andtherefore it can move better
(59:04):
than a bigger organization.
But as it becomes bigger andthen becomes multi-company or
multi framework or multinational,it becomes so, so difficult.
And all these challenges we talked about,multiply in ways that are so difficult
to manage that I have so much empathyfor people who run these companies.
It relates also to the following,you may recall that, I started saying
(59:28):
that when I was an undergraduate,I wrote my thesis on firm science.
This helped me with, when I did my book onhp, because I had for 16 years studied hp
and then in November of 2014, Meg Whitmandecides she goes to split HP in two.
(59:48):
And I go, how am I going to write mybook now about becoming Hewlett Packard?
It's two Hewlett Packards.
Then I realized, I said,well, this how this happens.
And I, one morning, and actually I hadjust recovered from a little illness.
I said, well, my undergraduatethesis helps with this because
(01:00:12):
what did I come up with?
I said, size is a static concept.
It's like a picture, like a photograph.
But the world is dynamic.
And so what I learned fromintegrating Penrose and.
Chandler was that thereare external opportunities.
That's Chandler internaldrive to grow that is Penrose.
(01:00:38):
And so if you bring them together, the keything, and, and, and Chandler had proposed
that strategy structure follows strategy.
So therefore, it's the growth curvethat is really the critical thing.
And at any point in time along that growthcurve, there must be a strong, potentially
(01:01:01):
very good relationship between thestructure and the strategy of the company.
And that determines what thegrowth is for that moment in time.
I thought, you know, for a 22-year-old,that was not a, a bad insight.
But then I realized that Ihad failed the next step.
Because if it is true, that strategyand structure together, internal
(01:01:27):
impulse and the external opportunitiestogether determine the growth curve
as captured in the strategy, then thatdoes not mean that growth trajectory
as to always go uniformly up.
It could be that the environmentchanges, like the tectonic plates
(01:01:49):
split and actually in you, the companyin order to continue to grow must
get out of some of the things thatis currently doing, get onto a new
growth trajectory, which means firstreduce in size, then get back to size.
And I said, well, that's maybewhat happened at HP because you
had the consumer businesses.
(01:02:11):
And you had the enterprise businessesthat were together under, mark Hur
still, and even Apotheker, Apothekeralready wanted to split something.
And I said, well, what has happenedis that there is now this the, because
of the split of the, of the, of theecosystems of the consumer oriented,
(01:02:35):
businesses and the enterprise, theright thing to do is actually split.
So Whitman was able to get, but she didthat after first making sure that both
entities would be able to survive intheir new, ecosystems and, and grow.
And I went, so that, so therefore,actually I wrote an article about that
(01:02:59):
it was published a few years ago calledWhy Do Multi-Business Corporations Split?
More homework.
More homework for me man.
that is a way I like to think abouthow, ecosystems evolve and how
understanding, the logic of theseecosystem developments also determines-
(01:03:22):
if you want -the strategies that thecompanies that are going to operate in
these ecosystems, how they must change.
And so if you now did an analysisof hp consumer versus enterprise, it
would be quite different strategies.
Also, they had different shareholdersbecause the shareholders of
the PC and printers, they like.
(01:03:42):
Dividends.
Right.
Whereas the other side likes growth.
so in a way, Whitman was, clever enough toget support for this split because there
were groups , of shareholders actuallyin a way we're supporting on that, which
they were not at the time of Apotheker,because he had not explained exactly
it's a tough task, man.
(01:04:03):
It's tough being a leader ofan organization, especially
if it's successful.
And then on top of that, you havethe identity problem that you
identified with Intel as well.
Robert, I know you're,you're need to head off.
It's been an absolute pleasureand I look forward to, to
doing more and sharing more.
Thank you for joining us in this tributeto the work of Joe Bower and for sharing
some massive insights into your workas well, and your relationship with
(01:04:26):
Intel and Andy Grove, Robert Burgelman.
Talk to you soon.
Thanks for joining us,
thanks once again to our sponsors.
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for the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched managed
service capability, NDL helps leadersharness the power of technology for
(01:04:50):
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