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What Do You Do When Industry Dynamics Fundamentally Change?

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What Do You Do When Industry Dynamics Fundamentally Change?

The way firms recognize and negotiate "strategic inflection points" determines their fate.

When an "insignificant" flaw was found on Intel's Pentium chip in late 1994, Intel didn't take it overly seriously —small flaws are considered routine with the release of a new microprocessor. What a mistake! As professor of management Robert Burgelman and lecturer and Intel CEO Andy Grove write in their paper "Strategic Dissonance": "Intel's initial reluctance to replace the flawed chips...created an uproar and escalated the event into a full-blown 'Pentium processor crisis.'"

Intel had hit upon what Burgelman and Grove call a "strategic inflection point," the point where industry dynamics fundamentally change. The two, who have been collaborating on research work since 1989 and teaching a course together since 1992, are describing the crucial turning points that companies in the turbulent high-tech industry will almost inevitably face. How firms recognize and negotiate these strategic inflection points determines how long and how profitably they will live.

Intel, as it happens, negotiated the Pentium processor situation fairly well. The crisis itself was an example of what Burgelman and Grove call "strategic dissonance," conflicting voices that emerge within the organization when a firm's competencies suddenly diverge from the basis of competition or when its stated strategy differs dramatically from what it actually does. With its famous Intel Inside campaign, the company had been marketing its semiconductors as consumer products for several years. Consequently, the market had come to expect Intel to behave like a consumer products company. But by refusing to exchange flawed processors, Intel was behaving like an original equipment manufacturer, selling to OEM customers rather than to end users. Hence the uproar. Hence the intense internal debate.

Strategic dissonance is common in the fast-paced technology industry, says Burgelman. And Intel had been through it all before. In the 1970s the company had introduced dynamic random access memory (DRAM) products with great success. But by the end of the decade, Japanese competition had eaten away at Intel's business. For several years, there was tremendous debate within Intel about the wisdom of continuing to produce DRAMs. Many members of the top management team still thought of Intel as a DRAM company, although its market share had dwindled to a measly 2 to 3 percent.

"Companies tend to develop strategies which lead them to rely on certain kinds of competencies and to engage in certain kinds of product-market areas," says Burgelman. "They learn what they can do well and find it difficult to deal with new possibilities that come along unplanned." But in the mid-1980s, Intel dealt with new possibilities and new realities associated with the emergence of microprocessors as key components of the PC and exited the DRAM market.

It required much less time for Intel to decide what to do about the Pentium situation. Several weeks after the crisis erupted, Intel announced it would exchange all flawed Pentium processors, no questions asked. "By that time," Burgelman and Grove write, "Intel's top management had come to grips with the fact that Intel's prominence in end-user space, in part as the result of the Intel Inside campaign started in April 1991, had dramatically changed the rules of the game for Intel, and probably for all high-technology companies marketing to end users."

Burgelman and Grove call this realization that a strategic inflection point has been reached "strategic recognition." And it is crucial to the survival of a technology company today. Top managers who want to run a long-lived and robust company, they say, must create an environment where debate is encouraged and dissenting views are listened to.

"You must deal with signals that are not yet quite clear," says Burgelman. The earliest hints that Intel should leave the DRAM market came from managers returning from Japan who reported feeling as if they were objects of derision. "The voices usually rise from the middle-management ranks or from the sales organization: from people who know more because they spend time outdoors where the storm clouds of creative destruction gather force and —unaffected by company beliefs, dogmas, and rhetoric —start blowing into their face," Burgelman and Grove write. "Some will flag their concern to top management —and it's wise to pay heed."

Managers must encourage debate —but they must also know when to bring it to an end, says Burgelman. They must eventually make clear decisions about a future course of action. "There are two traps," he says. "The first trap is that they don't have any debate, so everyone does their own thing and no one challenges the other. The second is they keep arguing; there is no action."

Burgelman and Grove emphasize the role of a strong internal selection environment which (1) channels resources away from areas that are becoming less profitable and toward those that are thriving; (2) puts the burden of proof on those managers who want to forgo immediate profits for "strategic reasons"; and (3) depends on the strategic recognition of top managers to support initiatives before external feedback is complete.

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