Book Number 5 - Only The Paranoid Survive by Andrew S. Grove (Revised May 18)

Long before the term disruption was popularised by Silicon Valley, high quality business managers have been alert to the existence of change. In fact, Joseph A. Schumpeter, in Capitalism, Socialism and Democracy noted;

“But in capitalist reality…it is not competition which counts but the competition from the new commodity, the new technology, the source of supply, the new type of competition which…strikes not at the margins…of the existing firms but at their foundations and their very lives.”

You may be surprised to know that this quote was penned in 1942. Disruption has been occurring since the dawn of time. It is a subject that has more recently invoked the ire of academics who debate the notion of disruptive innovation against the broader concept of innovation. This high-level debate is beyond the reach of this book review. However, I believe we can all learn from the teachings of Mr Andrew Grove.

Grove served as the CEO of Intel Corporation from 1987 to 1998. He is widely credited for transitioning Intel from a manufacturer of memory chips to the world’s largest producer of microprocessors. During his tenure, Intel’s market capitalisation surged from $4B to $197B. A remarkable 4,825% increase in value.

Grove experienced several ‘strategic inflection points’ whilst at Intel. The title of his book, ‘Only the Paranoid Survive’, provides deep insight into the mindset required to pilot a business through stratospheric growth whilst addressing several strategic inflection points. Grove begins his analysis by establishing the six forces affecting a business which may lead to a strategic inflection point. This framework is essential when analysing any business.

What are the Six Forces Affecting a Business?

Grove summarises Porter’s classical competitive strategy analysis with one modification. Grove adds a sixth force, the force of complementors. Complementors are other businesses from whom customers buy complementary products. Complementors have the same interest. Each product supports the other. For example, Starbucks coffee pods to be used with Nespresso coffee machines.

Each of these six forces do not apply equal pressure on a business. Some forces will be larger, whilst others will be smaller. This is where Grove introduces the concept of a “10x” force.

What is a 10x Force?

A 10x force is a rapid and significant increase to one of the six forces. A 10x force may be many orders of magnitude larger than what has been experienced before. For example, a 10x force may be the possibility that your business can be done another way. Consider the rise of REA Group. REA Group is Australia’s largest digital real estate business with 4.4 million unique browsers each month. The real estate advertising market was hit by a 10x Force as online classifieds replaced print classifieds. There are countless examples through time of this force disrupting an entire industry e.g. Car Classifieds, Cloud Accounting, Online retail etc.

What is a Strategic Inflection Point?

Groves defines a strategic inflection point as:

“…when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new.”

An inflection point occurs where the old strategic direction dissipates and yields to the new way, allowing a business to ascend to new heights. Grove notes that it is hard to pinpoint the exact moment a business changes, even in retrospect. It is a gradual and fluid process.

How to Identify a Strategic Inflection Point?

The identification of a strategic inflection point is challenging. Grove believes the following circumstances may give rise to a strategic inflection point. The recognition generally takes place in stages.

1. Firstly, a troubling sense that something isn’t right e.g. competitors you hardly knew are taking market share;
2. Secondly, a growing dissonance between what the company thinks it is doing and what is happening inside the company e.g. misalignment between corporate statements and operational actions;
3. Thirdly, a new framework, a new set of understandings. A new set of actions emerges; and
4. Finally, a new set of corporate statements is generated, often by a new set of managers.

Grove advocates for management to act early, before everything is known. He recommends management use instinct and personal judgement. Steve Jobs knew the importance of action, noting, “You must learn about Strategic Inflection Points, because sooner or later you are going to live through one”.

A strategic inflection point presents an opportunity for management to adapt or fall. Grove delves into the multiple strategic inflection points he encountered at Intel. One example of an inflection point at Intel occurred when the computer industry transitioned from being vertically aligned to being horizontally aligned. The vertically integrated stack was upended as application software, operating system, computer and chip fragmented. In the new world, each part of the stack was dominated by a few companies.  

There have been countless strategic inflection points over the years in many diverse industries and there will be many more to come. Grove provides advice for managers. He cautions against looking back and encourages management to pour their energy into adapting to the new world, learning the skills required to prosper.

This book highlights the importance of owning companies with high quality management teams. Management are critical as they control a company’s ability to assess and adapt to change. A reluctance to adapt quickly, may transform the very essence of a company and cloud its future prosperity.

Conclusion

As investors, Grove teaches us to be aware of the potential for a 10x change in each investment. Are any of your investments likely to experience a 10x change? Are they experiencing a structural or cyclical slow down? Has management considered or addressed this possibility? These are important questions to consider for all investors. As Grove says, “when it comes to business, I believe in the value of paranoia”.

Book Reviews.

Book Number 6 – The Little Book of Value Investing by Christopher H. Browne

Book Number 7 – The Great Crash 1929 by John K. Galbraith.

Book Number 8 – Common Stocks & Uncommon Profits by Philip A. Fisher.

Book Number 9 – The Art of Short Selling by Kathryn Staley.