The First Crisis: Intel Gets Beaten at its Own Game

In the early 1980s, Intel's three-legged stool almost came crashing down. When the company first started, it had nearly a 100 percent share of the memory market. New competitors appeared in the 1970s, but it was not until the 1980s that the Japanese broke Intel's rock-solid hold on this market. They did so by producing chips that were not only superior in quality, but also lower in cost. Intel tried everything it could think of to battle the Japanese, but nothing worked. Grove later identified several factors that had contributed to Intel's misfortunes: The company had been late to market with several generations of products, and it hadn't invested in new factories early enough. Ultimately, though, the cause of the problem came down to the wrong strategy and poor execution:

You execute on the wrong strategy, you sink. You don't execute on the right strategy, you sink.... Actually, there's a perfect example of this: our performance in memory in the early '80s. Our execution and our strategy were faulty.

Intel had to do something to stop the bleeding. The company was losing money hand over fist, as demand for Intel's memory chips was in free fall. Grove felt the pressure: "The need for a different memory strategy, one that would stop the hemorrhage, was growing urgent."

Then one day in 1985, after Intel's problems had been raging for nearly a year, Grove found himself discussing the company's woes with Gordon Moore, then Intel's CEO. In that conversation, which was detailed in Grove's leadership memoir Only the Paranoid Survive, Grove asked Moore a question:

"If we got kicked out and the board brought in a new CEO, what do you think he would do?" Gordon answered without hesitation, "He would get us out of memories." I stared at him, numb, then said, "Why shouldn't you and I walk out the door, come back and do it ourselves?"

This story has become an industry legend, and it is vintage Grove. He recognized that the Japanese competition was no ordinary threat. In fact, it was potent enough to put his company out of business. Even though Intel was built on a foundation of memory chips, the company really had no choice but to get out of this market. It simply could not continue on its current path. But Grove knew that abandoning the company's legacy would mean a long and difficult change process, almost certainly filled with pain, plant closings, and layoffs.

We had become marginalized by our Japanese competitors. There really was no viable option for us to work our way out....The defining business of the company had not hit a pothole but an ultimate wall, and we had to make a very desperate move.

The reality was that bad, and worse. (Grove later said that when it was all over, about one-third of the company had been shut down or laid off.) The process took three terrible years. As the company got out of the memory market, however, it put much of its resources into a new technology: microprocessors. While memory chips only stored memory, microprocessors were the thinking part of a computer—the part that actually performed calculations. Certainly, this new realm looked promising. But Grove admits that departing from his company's chipmaking past was one of the hardest decisions his management team ever made:

For us senior managers, it took the crisis of an economic cycle and the sight of unrelenting red ink before we could summon up the gumption needed to execute a dramatic departure from our past.

By getting out of the memory business and focusing the company on the riskier microprocessor business, Grove was planting the seeds that would help the company grow into the mightiest in its new industry. A decade later, Grove would face a very different crisis that shared some elements with this first crisis. But before we turn to that other episode, let's sum up what can be learned from Grove's early experiences at Intel:

• DEVELOP AN OUTSIDER'S PERSPECTIVE. To truly study your organization—warts and all—look at your company as an outsider might. This is the perspective you need in order to make critical decisions. When Grove asked Moore what an outside CEO would do to deal with their crisis, he was applying this tenet to Intel— a kind of dispassion and detachment that ultimately saved the company and led it to even greater heights.

• NEVER INSULATE THE COMPANY SO MUCH THAT IT CANNOT BELIEVE IN ITS OWN UNDOING. Grove believes that a certain amount of paranoia is good for a company. Guard against incursions by competitors by keeping managers and employees on their toes. This does not mean paralyzing them with fear; rather, it means instilling a healthy amount of skepticism into the organization, so that everyone is focused on keeping the company on track.