Executive Summary: In creating the top microprocessor company in the world, Andy Grove has made competitive paranoia and organizational renewal the driving forces behind success at the Intel Corporation. This article details Intel’s rapid rise from a small-time memory producer to the top of the multibillion-dollar microchip industry.

When he realized there were no worlds left to conquer, Alexander the Great fell to his knees and wept. Unlike Alexander, unquestionable dominance has had the exact opposite effect on Intel Corporation CEO Andy Grove. Today, by any measure, Intel ranks among the most successful companies in history. In 1994, for the third year in a row, Intel was the world’s largest semiconductor company and the first ever to sell more than $8.7 billion in products. Intel processors run on eight of every ten personal computers sold around the globe. The nearest competitor, Motorola, supplies fewer than one in ten. If anything, despite Intel’s success, today Grove is more intense, more concerned about the future and more eager to find new worlds to conquer. Hardly prepared to concede victory, his attitude about competition in the ’90s is summed up by one oft-repeated motto: “Only the paranoid survive.”

A glimpse through both Grove’s personal and Intel’s corporate histories helps explain why the man some have called the “Sultan of Silicon Valley” keeps a vigilant eye over his shoulder on any competitors who might be gaining on Intel.

From Hungary To Silicon Valley

In 1956, to escape Soviet expansion and communist oppression, the then 20-year-old Andres Grof emigrated from his native Hungary to New York City. After legally changing his name, the determined Grove worked his way through City College of New York, later earning a Ph.D. in chemical engineering from Berkeley. In 1968 Grove and technological wunderkinds Gordon Moore and Robert Noyce formed Intel to sell the dynamic random access memory chip, or DRAM, a minuscule piece of silicon that forms a computer’s memory.

Throughout the 1970s the company achieved a modicum of early success producing semiconductors, mainly for cheap calculators. After Grove was made president in 1979, however, Intel took a more aggressive stance. Grove launched Operation Crush, a campaign intended to grab 2,000 customers away from the Motorola fold.

Not only did Intel beat that goal by 500, but among those new customers Intel managed to net the industry’s choicest plum – IBM. For its first line of personal computers, Big Blue chose the Intel 8088 chip. This meant that Intel chips would power not only all the IBM PCs, but also all PC clones produced by IBM competitors.

Reversal Of Fortune

The IBM business buffeted Intel through the early 1980s, but by the middle of the decade Japanese competition had encroached dramatically on Intel’s DRAM market share. By 1986 the firm racked up losses totaling more than $200 million. After closing half a dozen factories and eliminating 7,000 employees, the company faced what Grove has called the most important crossroads of Intel’s 27 years.

“There is at least one point in the history of any company,” Grove explains, “when you have to change dramatically to rise to the next performance level. Miss the moment and you start to decline. For us the moment was somewhere around 1985, when we decided to get completely out of DRAMs, the product our company was created to make. Our rate of change got accelerated by the fact that we were losing a lot of money. It’s easier to change when you’re hemorrhaging.

“We came to realize that the formulation and articulation of strategy is the job of top management. Back then we had the very ridiculous system, common in American business at the time, of delegating strategic planning to strategic planners. The strategies these middle managers prepared had no bearing on anything we actually did. While they were writing reports and making presentations, our production planners were already doing what the business required: shifting our capacity from the DRAM business that the Japanese were taking away from us to this new business of microprocessors, 286s at that time.

“But until top management recognized that change and articulated it as a strategy, Intel suffered from what I call strategic dissonance. While we were shifting capacity to microprocessors, we still had our best development people working on memory projects. That made no sense. So a major change in strategy can only happen when management reconciles action and speech.

“Denial can blind people. We found it very, very hard to face up to the DRAM decision. Financially, it should have been easy. In retrospect, it should have been easy strategically too. Yet we, Intel management, were at each other’s throats over this.”

Intel’s Open Architecture

Words like “intense,” “relentless” and “disciplined” are often used to describe Intel’s corporate culture. Much has been made of the open office structure at Intel headquarters – all employees, from the chairman down, work out of cubicles. Because the emphasis is on eliminating barriers to improved communication, closed offices are strictly verboten. This environment contributes to a process Grove calls “intellectual honesty.” Grove wants to hear what co-workers think, and he encourages them to open up to him, even if it’s to say that he’s made a mistake.

“Management is about organized common sense,” he says. “We communicate and communicate and communicate, at every level, in every form. Anyone can ask anybody any question. We have probably shaken loose a lot of bad ideas that way. I don’t see a lot of companies carry it to the degree we do.”

According to Intel Executive Vice President Craig Barrett, there’s nothing like a discussion with the chairman to draw out the flaws in an argument or an idea. “He uses the technique of successive whys,” Barrett explains. “He just keeps asking ‘why’ until your reasoning breaks down. On the fourth ‘why,’ a weak argument will break down.”

While some might consider Grove’s tactics more appropriate to an interrogation room than the workplace, when you’re building the engines to drive the information age into the 21st century, there’s no time or place for dawdling.

“The best thing is to make the right decision,” Grove says. “Making a wrong decision is OK too. The worst thing to do is to hedge. To hedge is to fail.”

Planting The Silicon Seeds

Grove’s cardinal objective – that Intel produce processors that allow PC manufacturers to double their machines’ performance every year – has translated into unheard-of investment dollars. In 1994 alone Intel spent $1.1 billion on research and development and $2.4 billion on new plants and equipment, far surpassing the investment of competitive chip makers. This major spending also reflects a new approach to production. Until 1990 Intel’s engineers would wait to complete work on one chip before beginning on the next; today as many as five future generations of chips are in some stage of development.

As a result of this almost religious zeal for investment, Intel has continued to maintain a healthy lead in development, production and sales of each progressive chip. Analysts estimate that by next year clonemakers may have captured as much as 25 percent of the Pentium-class chip market. But by then Intel will have moved on to the as-yet-unreleased P6 chip.

Bang The Drum Loudly

Despite Intel’s current fervor to satisfy the end users of the company’s microprocessors, this zeal is of recent vintage. Not too long ago most PC users had neither the slightest clue nor interest in who produced the chip running their IBMs, Compaqs and Toshibas. In 1987, Intel spent next to nothing on advertising and promotion. But in the late 1980s, company executives began to realize the potential for building consumer demand for their chips.

In 1989, Intel spent $5 million on its first advertising campaign. By 1994 that figure had ballooned into more than $100 million. As a result, today Intel studies show that the ubiquitous “Intel Inside” logo has greater consumer recognition than the Nutrasweet swirl.

This shift from addressing marketing efforts solely to computer manufacturers into the consumer arena represents a different wave of thinking at Intel. By bypassing immediate customers and going straight to the end users, Intel has created such strong consumer interest in Intel microprocessors that manufacturers have little option but to arm their machines with the latest Intel chips.

Grove’s sentiments echo this relatively recent development in the computer industry. “The microprocessor has become a consumer product,” he says. “Its role in contemporary society is not a passing phenomenon.”

The Down Side Of Fame

But advertising your presence to customers and end users also carries potential pitfalls. In late 1994, Intel initiated an advertising campaign around the hot-off-the-production-line Pentium chip. At the same time Intel’s number one client, Compaq, was pushing its less expensive line of 486-based machines through the Christmas selling season. Manufacturers had long grumbled that Intel cared more about itself than its customers and this instance almost caused an irreparable rift between the two companies.

For major public relations gaffes, however, nothing in Intel’s history compares with the debacle that arose surrounding the so-called Pentium flap late last year.

Soon after its release the much-ballyhooed Pentium chip was found to make errors in performing division operations in specific instances. Reflecting the nature of a company driven by an engineering bent, and not a PR-savvy consumer electronics firm, Intel initially clammed up. Intel planned to fix the problem, which by company investigations would occur in only the most demanding scientific calculations, on a regularly scheduled update timetable.

Consumers were not mollified by Intel’s perfunctory attitude. Angry e-mail flamed across the Internet. IBM temporarily stopped shipping Pentium-based machines. Caught in the crossfire, Andy Grove stepped forward with an unconditional offer to replace any chip for free.

Despite all the furor, Pentium sales dipped only temporarily, and the company seems to have emerged stronger than ever. Most important, Intel has learned its lesson. According to one Intel manager, in the future the company will be much more responsive and communicative with both manufacturers and end users. While Grove concedes that Intel handled the whole affair poorly, he does not feel that the Pentium flap points to the need for a total overhaul of Intel’s vaunted corporate culture.

“We’re going to have tentacles into the PC-buying community,” Grove says, “that are going to get us closer and closer to the right answers. Whatever transformation this entails, it is going to require different skills, not a different culture.” Then the tireless pitchman adds, in case anyone has forgotten, “This is the best microprocessor ever.”

Into The Crystal Ball

From the decision to stop producing DRAMs to opening up communication lines to end users, Intel’s entire history reverberates with the theme of constant renewal. Ever vigilant of the need to produce for tomorrow’s marketplace, today the company no more resembles the Intel of five, 10 or 20 years ago than a butterfly resembles a caterpillar. True to Grove’s dictum about paranoia and survival, Intel hopes to couple its lead in microprocessors with expanded chip capabilities, eventually growing to dominate the electronics world.

For now Grove has boiled his goals down to a two-line message included inside fortune cookies he frequently hands out at Intel headquarters. Just like Grove, the message is brief and to the point. It reads:

1: Job 1

2: Make the PC “it”

The first line serves as a reminder that Intel must constantly strengthen its position as the premier microprocessor manufacturer. Line two represents Grove’s long-range plan to remake the PC as the 21st-century medium through which consumers will access any and all information sources. In the short term Grove hopes to achieve Job 1 through both technological innovation and lowball pricing. Volume sales have become the driving force, even if margins shrink in the process.

“I don’t give a hoot what percentage margin I have,” he states, rather unequivocally. “I want to increase dollar profits, and they are a product of margin times unit volume.”

As for making the PC “it,” by producing more and more powerful microprocessors, Intel is better able to incorporate chips that surround microprocessors, such as graphics, math and short-term memory chips, onto a single Intel chip. As a result, future microprocessors will subsume video, sound and telecommunications functions now performed by non-Intel chips onto Intel’s all-powerful silicon fragment. If he achieves his goal, the PC will become an all-purpose TV, VCR, answering machine, cable box, videogame player and Internet window – all powered by one Intel chip.

But even as the microprocessor monster ventures further into the consumer electronics market, substantial competitors are rising to question Intel’s claim to this lucrative kingdom. In addition to IBM, Motorola and Apple, such home electronics behemoths as Sony and Sega also hope to shape consumers’ high-tech future. But Grove says he welcomes the competition, as it prepares Intel for what he calls the “Megabattle,” when he will challenge the world’s top electronics providers.

“We needed a little threat, a little target,” he says. “The juice is flowing. What I’m after is televisions and telephones and every single-purpose appliance. The best way for us to go for the 250-million-unit market is to move video telephony and conferencing and entertainment and information access onto the PC and render those other things less and less relevant. We are making gutsier moves investment-wise, pricing-wise, every way, because we’ve got a competitive threat. The net result is we’ll get to advance to the next level of competition.”

If recent history provides any indication, Intel appears stronger than ever, and eminently prepared for this epic struggle. More likely than not, Intel chips will provide the engines helping 21st-century consumers motor their way down the information superhighway. When that happens, will Andy Grove finally take a well-deserved break from looking over his shoulder to bask in the success he’s created? Yeah, right…Intel By The Numbers

Founded:

1968 by Robert Noyce and

Gordon Moore, co-inventors

of the integrated circuit

1994 sales:

$8.782 billion, 25% worldwide

Number of employees: 25,800

Pentium Power:

The Intel Pentium processor is

five times more powerful than

the Intel 486 DX microprocessor which preceded it and is capable of executing more than 100 million instructions per second.

Nine Management Tips From Chairman Andy

1. To gather information about a corporate division or department, go for an unplanned visit and observe what’s going on.

2. Time is your one finite resource; remember that when you say yes to one thing you are inevitably saying no to something else.

3. Schedule one hour every day to deal with inevitable interruptions in a planned, organized manner.

4. Rather than focusing on fixing today’s problems, think about what you have to do today to solve – and avoid – tomorrow’s problems.

5. Look upon your co-workers as your little microcompany’s customers, and do everything within your power to provide them with the best possible service.

6. If performance matters in your operation, performance reviews are absolutely necessary.

7. If a subordinate is not doing his job, there can only be two possible explanations. Either the person can’t do it or won’t do it. To determine which, apply the following test: If the person’s life depended on doing the work, could he do it? If the answer is yes, the problem is motivational. If the answer is no, the problem involves ability.

8. All motivation comes from within. Therefore, the most a manager can hope to do is create an environment in which motivated people can flourish.

9. To be a good coach you must take no personal credit for the success of the team. You must be tough enough to get the very best performance your team can give. You have to have played the game yourself well enough to understand it completely.

intel’s State-Of-The-Art Selling

At Intel salespeople view technology as both a product and a competitive advantage.

Since taking over as the company’s top sales executive a little over a year ago, Intel’s senior vice president of worldwide sales and marketing, Paul Otellini, has already instituted a major sales force realignment.

“Under one worldwide sales management system we’ve created three virtual sales forces. One focuses on what we call the Intel architecture, which is primarily central processing units (CPUs) and motherboards, another on selling our branded products, such as network cards and video conferencing to end users, and then finally, one directed at our classic semiconductor business,” says Otellini.

The Intel Otellini describes stays steps ahead of most sales organizations in deploying the latest technological sales tools – but judiciously. “Although we very much want to demonstrate our technology, we’re pragmatists more than anything else. I wouldn’t deploy 2,000 Pentium notebooks just because we’re selling Pentiums. That’s just not cost effective. Our prime consideration is, ‘What does it take to do the job?'” Otellini says.

The right tool to do the job depends on the mission of Intel’s salespeople. In addition to the more traditional sales representatives who may call on PC manufacturers or other prospects who buy directly from Intel, the sales organization also includes salespeople the company refers to as “architecture managers.”

Intel’s Washington, DC-based architecture manager, David Sokolower, explains: “We call on the major users of computer technology. The first job is to find the right people to talk to. There are an infinite number of end users using computer technology. It takes just as long to talk to somebody who is going to buy 15 computers over the next year as it takes to talk to someone responsible for purchasing 300,000 computers. So we have to identify who is going to be buying large numbers of computers or, alternatively, who the strategic influencers, trendsetters and technology leaders are.

“With this customer base Intel’s mission for the architecture managers is twofold. One is to promote our architecture as a solution both on the desktop space and the server space. The second big mission is to understand what these organizations’ long-term needs are and take the information we collect from those sources and get it back into the product planning process within Intel.

“The architecture managers are all users of our own technology. In industry jargon, some might say we eat our own dog food. In addition to our Pentium notebooks we have the latest in technology demonstration systems. We don’t do presentations with black and white foils or color slides; they’re all computer generated and incorporate multimedia, including digitized video clips, sound and animation so that when we’re presenting concepts we’re using the latest technology both on the notebook and on the desktop.

“Another innovation that I use for probably two to three hours a week is ProShare, Intel’s videoconferencing product. With ProShare, in addition to seeing the person, we can also document share. In effect, this means that while we’re talking we can also be sharing a Word document, or a presentation package document that allows you to both work on it at either end and modify and improve it.

“So, for example, if I’m going to give a presentation to a senior-level government person, I can talk with the individual within Intel who knows the most about that subject, and the two of us can modify my presentation in real time and in the end I’ve got the modified version – I don’t have to wait for him to send it to me.”

While he uses the visual technology most often to communicate with Intel co-workers, Sokolower says that videoconferencing has also proven invaluable in bringing important customer contacts face-to-face with Intel executives.

“Salespeople need to see technology as a competitive weapon,” he says. “Today, being technologically literate is as important as being literate was in the old days. A salesperson who is not deploying any technology is competing with people who are. If you don’t have that competitive weapon, you’re going to be at a disadvantage. Rather than asking, ‘Can we afford this piece of hardware, software or what have you,’ managers need to ask, ‘Can we afford to sacrifice a significant competitive advantage in order to maintain the status quo?’ I think that for many organizations, increasingly the answer to that question will be a resounding ‘No.’ “