Robert Burgelman on Strategy Making Intel and Resource Allocation

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Today's episode is from chapter three of From Resource Allocation to Strategy, and presents a groundbreaking evolutionary perspective on corporate strategy using Intel Corporation's transformation over multiple decades. Our guest reframe strategy, not as top-down planning alone, but as an emergent organizational capability that co-evolve with external environments and internal dynamics.

He describes how resource commitments by the managers of Intel's fabrication facilities shifted the focus of Intel's corporate strategy from drams to microprocessors. He also discusses his efforts to work with Joe Bower's model and indeed expand upon it. A few years after  Bower's work, he initiated his 20 year stream of contributions to the understanding of resource allocation.

He is the author of several influential books, including Inside Corporate Innovation Strategy is Destiny, strategic Dynamics becoming Hewlett Parkard and more recently strategic making and organizational evolution. He was the executive director of the Stanford Executive Program for nearly two decades and has worked with top companies around the world teaching, advising, and shaping how senior leaders think about innovation, evolution, and long-term strategy.

It is a great pleasure to have him as 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 with your relationship with Joe. He mentioned you in part one and I'd love you to tip your hat to him and give him some credit for his influence on your career and indeed how you guys got together and worked together over the years.

Goes back a very long time, actually, to 1970 itself because I had finished my undergraduate studies at the University of Antwerp. And I had done my undergraduate thesis on optimal firm size in which I had combined the work of Alfred Chandler on strategy and structure and integrated. Into that, the work by Edith Penrose on the theory of the growth of the firm.

And I had combined that also with Igor SFU's book on corporate strategy, which was really the first treatment of corporate strategy in 1965. And so I was hired by my school as a junior faculty member in 1970. That was the year that Joe's book was published. And so the editor of the Journal of my School, which was called The Economics and Social in Dutch, so the Social and Economic Journal, he asked me to review this book.

And so I had never heard about Joe Bower not yet because he was a young professor then too, and so I actually reviewed that book. For that journal, right? And then the journal wanted to bring out an issue on what they call active finance. In other words, you would not only look at the theory of finance, but how it as being used in large corporations. And so I thought I was then working with a more senior professor.

Of course I was a junior one, I convinced this senior professor that we should write an article about active finance, but focused on the capital budgeting 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 data in that, in these models.

The question is where does that data come from and who gets involved in the actual decision making? And so Hay had to the Insight, I think at the time when I revised this book by Bower, actually something that I don't think 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.

It allows you to show simultaneity and sequentiality at the same time because each level dustings in a sequence, but they are happening simultaneously at different levels. I thought that was a methodologically, a very powerful tool to try to understand the strategic decision making process in large, complex organizations. I had also read Ackerman's paper in the A SQ in 1970, Bob Ackerman.

He was mentioned by Joe and some of the people who had written about commitment actually and some others that had informed Joe too. So I knew that literature fairly well. I had looked it all up so I ended up writing a paper together with this senior professor. was published in 1971 and that basically showed Bower's model and used it as a tool to show what does it really mean to use finance in a managerial agency type of perspective. 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 went from the FORD foundation to study in the United States in 1973 at Columbia. I did my dissertation, about internal corporate venturing. So. Was I studied the activities of these different levels of management involved in new business development, right? Within this large company. So then I had needed a framework to conceptualize this process.

And one of the, the members of my dissertation committee told me, you know, your description is too descriptive. You should use more of a framework. So then I thought, oh, maybe I could use Bower's framework. So I went back to Bower's framework and I 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 I was drawing these these loops and then it suddenly, I realized Joe's model is about resource allocation to manufacturing capacity within the existing strategy of the company. In fact, as he said, he had one project that didn't quite fit because it forced, it was going to lead to competition with one of their best customers.

In fact, that was the sort of thing that I was observing with the new ventures. These were things that were different from the company. so I, could not map all these activities on there. And then it struck me that, yes, the reason is that my study is about , innovation activities that will change the corporate strategy. It will require an amendment of the corporate strategy as opposed to it fits with the corporate strategy, and therefore, what I have observed.

One of the senior leaders, the one in the middle, was a person who understood that they had to top management understand how the strategy should, be changed in order to accommodate and embrace this new venture area going forward. So that led me to actually add this column 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 are consistent with the existing strategy.

You don't need a strategic context. But the moment you are trying to get into strategic change at the corporate level, got this process. And then I learned that that process, actually, , there is similarity across scale, right. It applies to your own personal life. Right. . So that process I stumbled onto it and it led me to then make that change in the Bower, model.

And Robert, you were great friends also 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 books in depth and also talk about that relationship he had with Andy Grove. But I was so serendipitous when I was reading this book, I was also, I was in Canada last week and I had loads of spare time traveling and I downloaded. A load of lectures by Andy Grove.

And I was listening to one and then I read your book and I was like going, that sounds to me like what Andy Grove was talking about, that lecture. So I took an excerpt of that and I'm gonna play it now for our audience. And I'd love you then to talk about this, what he is actually talking about, because he and you lectured together. You were great friends. You also had some tough conversations as we'll talk about in the future.

But you were probably at this lecture and it was so relevant to the work that you've identified and the problem of strategy being decided from somewhere in the middle versus what they think is happening at the top of the organization. So I'm gonna share this for our audience and we'll unpack it afterwards. Intel was a semiconductor memory company. We pioneered semiconductor memories. We were the leaders in semiconductor memories.

In the mid eighties, the Japanese came and became a 10 x force for us in semiconductor memories, and one of the first signs, as I look back, I didn't look at it at that time as a sign, I looked at it as a whining sales force. But one of the first signs that I look back that should have tipped off, off.

Was our sales force in Japan saying that the customers are not as respectful of them as they used to be, and that was such a telling story in retrospect, if I look back on the curve, that's when the curve was beginning to enter in the inflection point. They weren't because they knew that their internal capability, the customer's internal capability, the semiconductor sister division, was going to run circles around us. They knew that and their attitude changed to our Salesforce.

Our Salesforce told us, us being 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 our company who realized what was going on was our group of production planners who started adjusting our factory loading. Away from memories toward microprocessors. Why? 'cause we had better business opportunities in microprocessors. We made more money in microprocessors.

So without making a big fanfare, a hundred wafer lots and by a hundred wafer lots, they just moved the production lots from memories to microprocessors. So by the time those of us who ran the company started facing up to that, that our core business, which are memories, was going away. Because of these incremental a actions of the, our finance people and production planners and lower level management, we were much less exposed to the memory business.

We have gradually rationalized our factory infrastructure, 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 frontline or lower level employees who are much closer to the action is a very key. Element in causing adjustment in the business structure of a company.

What tends to happen at times like this, there's a growing divergence, a dissonance between the actions of people who are close to the actions and the comprehension and statements of senior management. Like myself, I call that strategic dissonance because a corporation in its daily action is beginning to do something deviant from the stated mission values competencies that continues to get articulated in management.

So one of the big telltale signs in a business that it is struggling with a strategic inflection point is this growing and seemingly irreconcilable difference between what the company does and what the company says it's supposed to be doing.

It's not because people involved are dumb or phony or hypocritical or anything like that, but because senior management who is responsible for the articulation, who's giving the interviews that the employees read in the newspaper doesn't know it yet, the employees know it's not real. The senior management doesn't know is that's a terribly strong sign . There we go. So you were involved in the coining of that term strategic dissonance as well, Robert.

But I thought that would help our audience get their head around what it means in business. And then you can give us the framework around exactly what Andy talked about there. But you both identified and put a language around. Yes, I'd be happy to do that. Whereby telling you the following anecdote.

So when Andy Grove came to see me in 1988, 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 the Palo Alto Research Center for Xerox, which I won't talk about right now. But so I thought, you know, probably this is not going to be very interesting because Intel is run by Gordon Moore and was the CEO and then by Andy Grove. This is going to be a textbook in strategic planning.

But Andy invited me to come and see him and so I went to see him because I thought maybe we do a case study. But I was not quite convinced yet. But I did actually recruit one of my students who was then in my class, an MBA student. He had, he had actually, and I knew he had studied physics at Harvard actually, and he had worked for the dean of the engineering school on solar technology and in relationship to semi. 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 meeting with Andy Grove and Dennis Carter, who was then his TAs, the technical assistant, and I was there with George Cogan, who was my assistant. And as I said, I wasn't quite convinced yet, am I really going to do this? This is Andy said the follow, he made the following statement. I will never forget this. He said, well, some middle level managers had already made technical decisions limited the decision space of top management.

I stopped, I said, Andy did, you just said limited the 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 be allowed to talk to those people? And he said, you can talk to anybody you want. That's how it got going.

So I'll tell one more story on this because, so I developed a case study and I set it it starts, the first version starts in October, 1985 when Grove went to Oregon and told the people in Oregon, these are the words he used, 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'd like to come back next year.

He said, well, then we need a second case, , which we did. And for the second case, I thought, you know, I'd like to examine the implementation of that decision. So I told Andy I'd like to speak to some people deeper in the organization. So these people, they had not read the case.

They didn't know that I had put this in October 95, but they told me, senior guys, but not top level, that Intel already had decided in November of 1984 to not bring the next generation DRAM in production and to the markets. But they had let people still work on it. So I changed the case. I said in November 9th, 1984, Top Management decided not to continue with production of the next generation diam. So now a week before Andy is going to come back the next year. Right? So he said, yeah.

I said, I have a new case and I sent him to him. He came to see me, , and, I gave him the case, he read it he said, November, 1984? Why did you change this? I said, well, Andy, we talked to several people who told us this it. And he told me, well, who told you that? I said, Andy, that I can't tell you 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 CEO tells us that this is wrong. We're going to have to revisit. Andy, he was a bit miffed. So he left. Two days later I got a phone call from Andy, and in his usual Laconic style, he said, well, I did my own research and you guys are right. I had forgotten how difficult this decision was. And we left it on that. Ah, that's powerful for the CEO to 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 show me that again, I'll tell you a little story about that because it helps us explain what happened.

Alright, so these are what I call the forces that drive the evolution of a firm. So on the top you have the basis of competitive advantage in the industry. That is basically, in a way, Michael Porter's forces, Actually, Andy and I, we extended that today. They call it the ecosystem, right? And you position yourself in that ecosystem in a certain way. That's what you do.

And therefore , the basis of competitive advantage that you can have in that space is not just a function of you, it's a function of all these other forces, right? What the government does, what potentially what other competitors do. So you must be able, because when I teach executives, I replace this then with what I call natural language. 'cause this is business school language. you must be clear about what it takes to win as the CEO. You must be very clear what it takes to win.

That's the top box. The bottom box is the distinctive competence. These are the things that you have 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 what we have, is what we've got. That's in the vertical axis, in the horizontal axis on the left side, corporate strategy. That's what we say to ourselves and to others.

And strategic action we do, what I call the consequential actions that we take now in the happy days of a company. So you ask these questions, do we have what it takes? That's the vertical, and are we doing what we're saying, right? we have what it takes to win? And are we doing what we're saying in the happy days? Those things are, the answer is yes. We do what we say and we have what it takes to win. Those are the happy days. for a while at the happy days. Then the world starts changing.

And so Grove, you know, brilliant as he was when I showed him the first time, this framework, you know what he called it? He said, this is the rubber band theory of strategic management. Why? Because he looked at these arrows he said, these are, these arrows are like rubber bands. everything together. And when everything is, when the answers to the two questions are right, everything is in balance.

looks nice like this, but when the world changes internal and external, these rubber bands starts stretching. And now the question, and that creates the dissonance, right? And so the dissonance is signaling to you that you no longer have what it takes to win. And that you may no longer do what you say, and that is why Andy was referring to a salespeople.

Because the salespeople now, even to the customers and the customers go, you know, you guys are not doing what you're saying, and the competition is better than you guys, so the bands will stretch. What you don't want is the rubber bands to snap. And that brings me to , the box in the middle, which I call the internal selection environment. Actually, when I, when I speak to executives, I replace that box with what I call the strategic leadership culture of the organization.

And so that the capacity, if you want, or the ability to bring, to prevent these rubber bands from snapping. And in fact, to bring them line in a new way. the role of strategic leadership. And so I identified four elements of strategic leadership that I think are characteristic of an internal selection environment, a strategic leadership culture that is capable to deal with strategic change.

Now, we might say one more thing on this for the audience, if they, why did I call it the internal selection environment? Because in one of the key things of the internal selection environment, okay, if I want to know the culture of a company, right? I say I need only really to do to know two things. 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 what kind of culture you basically have.

now the internal selection environment is really the only thing you have to cope with the external selection environment. In my article that I wrote, what I'm saying is the strategy making process, basically it uses your internal selection environment to cope with the external selection environment. that is the key, the ability to prevent the rubber pants from snapping, and eventually in time bring them back.

And the four things that I highlight then associated with that internal selection environment, the first one is as resource allocation. And I say, does your resource allocation reflect competitive reality? This is actually not easy because in, in the larger the company, the more difficult 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 the resource allocation that is really very disciplined in allocating resources to winners and away from losers in time. But if you do that, that's not enough. Because if I only allocate resources to the winners today, at some point there will be no tomorrow all opportunity sets eventually are not big enough given your growth rate.

Or in fact, they may even decline. So therefore you need a second element, which I call that you must have a strategic planning process that allows debating new opportunities. But that's not enough either, because these debates will always be between those who make money today and those who promise to make money tomorrow. So who on average is going to win the debate is going to be today.

And that's actually rational because suppose we always allocated resources to those who promised to win so that's not enough either. So what do we need in addition? So in addition, the that I highlight , I call it strategic recognition. That is the capacity to see the implications of things that are already in play. We may have started them, like our guys at the bottom, that Andy Grove was talking about, or competitors or both.

But, I can see what the potential implications of these changes are and I bring them into conversation with the rest of leadership so that we can at least get clear on what is going on. But that's not enough either, because if I stop there, have some very clever, very intelligent executives who will later tell me, well, I told you so, or I could have told you so. So strategic recognition is important, but it's not enough.

You must be able to go from recognition to action, and that's what I call strategic leadership in a, in a, in a dynamic. Andy Grove was good at that. , He respected strategic recognition if it 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 that the, the idea of selection, because you compare it really to nature here, that , there's external pressure from the business environment, just like in nature. And then there's internal pressure within the tribe or the animal species which in this case is the organization.

So. This idea , of selection and how selection works through the, administrative and cultural mechanisms in the organization is important. But also then like what Andy in that clip called the strategic inflection point was there's some change in the environment that then changes a need for the pressure. Maybe we'll give a little bit of context of that before I share the next diagram, which is tool two.

Yes, actually this is a very important point because it gets me to speak about the importance of the internal selection environment in some more depth. So one of the things that Intel had done, the top management. Remember I said if I want to understand 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 important because what Intel had done, they had actually established a resource allocation, the rule for manufacturing capacity along the lines of Bower in a way. And that, and the rule that they used to at the margin allocate capacity, So they had the duram business, which was the memory business, and they had to logic business. That was before the PC at the logic business.

So now is going, we have to allocate resources because there is more growth opportunities than we have capacity. How are we going to allocate this? The rule they had established was maximize margin per way for start. What does that mean? That meant, well, , the product that has the highest margin, which means the difference between the price in the market and the cost gets the capacity. So the dram is commoditizing, therefore its margins gets lower and lower.

The logic products are all specialty projects, they're all niche products at a time. Their margins are higher. So what do the product planners and the, finance people, which were always very important within Intel, do they go, well this year allocate the capacity to the logic products. The DRAM guys are not happy, but they think, okay, well, you know, we're going to, next year we'll bend up the curve again. Next year comes the same happens. They go, we'll do it.

We'll come up with another innovation and we'll bend up the curve. Third year happens. the beginning I drew a curve where I show resource allocation over time, 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 capacity goes down and more and more. The curve of r and d applications stays flat because top management still says, Hey, we are a memory company.

So now you can see in the beginning the 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 because only one plant left that does drams. Suddenly the top man, , we cannot 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 allocation is reflecting of the deepest, if you want identity of intel.

Intel is a diff, Michael Porter would say a differentiator. It's different. It is a leading edge technology company. They differentiate themselves from 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. 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 top level and maybe most of the people thought about who we are and what do we do, and therefore who gets the resources you can. So you can have, you know, I can write five pages about what the culture of a company and all this buzzword I go, how are you allocating resources will tell me a lot more about culture than all these Elements.

So now here is an incredibly important point. So in the case of Intel, I asked this, your actions aligned with the strategy Versus your internal selection environment, reflective of the real external selection pressures. What is most important? It's the latter. Because if your actions are very aligned with the strategy, but the strategy is losing, one, you'll be out of business really fast.

Whereas if your actions are no longer associated really aligned with the strategy, but because your internal selection environment does things that are consistent with where the external, environment you can still later change your strategy. This is what Intel did.

I'm gonna share in a moment, Robert, tool two. And I'd love you to explain that again, with the same empathy you did for people who are just listening to us. But you talked about the three epochs of intel in this chapter. And it's really important that that epoch one where , the resource allocation was decided from below and then post rationalized by strategic leadership by Andy Grove, for example. But then he reassigns everybody towards semiconductors.

And in a way they become hostage of that because 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 bet on those new emerging options. One of the really interesting ones, you, and you just mentioned this in passing. Was the opportunity of video teleconferencing, which Cisco seized, but Intel actually had an opportunity to seize as well.

There's a little bit of a story there that, that I just touched on, and I said, that'd be really interesting to shine a light on. these are excellent questions. You might say so because they get real.

So this raises a very important question. Do you like to be dominant? What must be your answer? But do you realize how dangerous dominant dominance really is? You don't. Why is it so dangerous? Because if you are dominant in an industry, you end up making all the money or most of it. That means all the other players can't really do much r and d, and so you have to start doing it for them. Intel did that.

They called it Intel Architectural apps because they were creating Ferrari engines and the OEMs were putting it in Volkswagens. They cannot last forever. So now Intel has to do more and more and more and more to stay dominant in that space. And Andy knew it because he told me 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 call co-evolutionary lock-in.

You become locked in with a space in which you are so successful that you have to do everything, all resources. And by the way, all the management attention is there. One guy once told me, you know, this was a senior executive from Oregon, he said, yeah, with Andy. And that's true. He said, you can at Intel, if you wanna do something on the side, you can do it. Andy will let you do that, but don't get in front of the train.

that's a huge problem, , and, it links 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 that that threat that strategic inertia. Also then was what Clay Christensen noticed as disruptive innovation. That actually, that's the opportunity. And you co-authored one of your additions of one of your books was what Clay was involved in as well.

May, maybe we'll mention that to connect the dots between your concept of strategic inertia and then disruptive innovation and how one leads to the other in some way.

Yes. This is actually another fundamental insight. So think about what disruptive innovation really does for a moment. Right? So Joe actually spoke about it too. It means that someone comes up with a product that So here is to, to visualize it, right? So you have performance on the vertical axis, and that's really a vector. And that performance reels is the, the elements of perceived value on the part of customers, That's the vertical axis. Horizontal axis is time.

Now, there is over time,, a demand that's a curve that slows upward for average performance because, you know, the, the company makes its products better over time. It does that, the engineers try to put more features. So the average performance curve goes like this up. There is a distribution of customers around it. I do it like a normal distribution. That means there are people who would like even much more.

And then there are others who go, well, you know, I'm using Microsoft operating system and I think I use 5% of the whole thing. Why the hell do I have to pay? So they are, there is a group of customers that would be willing to buy a product that is not, that is good enough. Good enough, but a lot lower price than what you can charge. That is what the disruptive guys try to do. Now, I am the incumbent Aiden comes up with 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. Also, I am allocating some resources to this. So there is a assets that are associated with it. If I stop this, I don't no longer need these assets, so my asset turnover will go up. now if my margin goes up and my asset turnover goes up, my return on assets is going to go up. So I give up on that, let them have it.

But of course these guys who then start at the low end, they have a new way of doing things. Over time, their curve of average performance goes up too. And it begins to intersect with on my distribution, higher and higher. You know, Silicon Graphics is an example. They eventually got pushed to the ceiling because they got higher and higher because Intel is taking more and more and more , of the, of their workstation business.

So that is, and you see, this is why actually I told actually Clay once, I said, clay, you have published this book, which is great insight, Any intelligent CEO is no longer going to do what you describing the market. So it may be the end of disruptive, you know, just simply because you have educated the, intelligent CEO if you give up on the low end, it creates an opening for a new competitor that may actually threaten you at the higher end later too. That's the connection.

So , yes, there is a resource allocation issue because why would I continue to allocate the resources to something that'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 strategic inertia, disruptive innovation, strategic dissonance, and then you need some cognitive dissonance to say, be quiet brain. I know we're giving away a low end of the market here, but all the profits here.

And I think this is where , the real leadership piece comes in. If it's a family business, for example, 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 the biggest things I've learned from doing this show over the years. Robert, and I'd love you to share your views on, on the people who manage these challenges properly.

If you think about all these plates on 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 these challenges, and Andy Grove actually was 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 going into the networking business.

It's also an example. I think I, and so, you know, CEOs don't usually look, they want to spend too much time looking back on the, in the past, they always look to the. One time I had a conversation with Andy Grove after class for an hour and a half or so, and he's asked, he said, you know, why? He said, why did I spend $750 million on video conferencing that in those days, nobody wanted, and not enough on networking.

We could have, I said, someone we 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, I said, wasn't Frank Gil, I'm not using these names now here? Wasn't Frank running that business and the network? And he said, yeah. And I said, you know, Frank was a pretty good guy. I, I understood. Yeah. He was the second best salesman we ever. And I said, so why didn't you not support him?

When he came up with a network, he a three, $400 million business. And here is, that's an example of Grove's brilliance. He said, well, I don't like statements. When they had a meeting with the management review committee meeting and know some of the top executives, and you are, you are prepare, you're presenting your project and , you want more money And okay. And he said, when we had one of these management review committees, he could never convince me. And I said, why not?

And he said, well, I don't like statements that are somewhat right, but mostly wrong. And so I told them, Andy, that's the logic of the core business. Yes. If I'm a senior executive in the core business, we have done this for forever. We, most of what I say should be right, but in a new space. Where we are learning new things, how could everything be Right. Right. 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 is in my book, but in strategy is Destiny. So I'm not telling, saying things that I shouldn't because Andy let all of this be published in my other book. So otherwise I would not say this.

So I called Frank and I said, Frank, did this go, the networking business, and he said this, he said, well, had taken me out of my other role and put me in charge of developing new businesses for Intel. this, this, I forget the exact name, maybe 93 or whatever it was. You know, Intel at that time was 6 billion and 1 billion to 6 billion. You know, that's still 15% or so. That's significant. Three years later, Intel is 20 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%. 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? Right. That's the, you know, and you 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 knew Andy was, and that's why he allowed me to publish this because, you know, this is a lesson for, even if Andy Grove, you know, was such an incredibly insightful, he was subject to these forces. what I'm trying to do, what I've always trying to do is not say it's good or bad. not a strategic question, is it good or bad? The first answer, the first question, what is it?

What are the forces that I face and how I am going to try to manage these forces as opposed to have the forces manage me? what I love about that is that even though he wrote about it, even though he thought about it, even though he had you as a friend in his ear all the time, he still knew he was subject to these forces. And that challenge, I've heard that referred to as the value network problem where you have, I think it was even Clay, actually reading Clay, the value network problem.

My company makes Billions. You're bringing me something that's brand new 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 disruptor that I made a million, I'd be jumping up and down. But because I'm a billion dollar company, it doesn't, it's not even table stakes for me.

So that, that challenge, but I wanted to just pull up one thing there, because when I read this, this chapter and I read about that margin per wafer rule. I, I wondered, had you any more examples? So the thing I first thought of when I read that was, was Henry Ford, and you can have it in any color as long as it's black.

So this guiding principle for me to drive down cost to deliver this car for the cheapest possible price that I can, and how, even if that's unspoken, but it's be, it's drilled into the mindset of an organization. It can keep them hostage to that thing, but in this case it saved them. But in other cases it actually can keep them hostage to the past. And I'd love you to maybe share 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 so I 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 I'm not going to go in great detail, but what he was basically saying was that he had gotten a message from the microprocessor guys who had complained that by allocating fab capacity to the na, they were then still doing nand memory products, flash type products, right? 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 a commoditized business keeps us honest. So he said, I decided to do this because it 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 Barrett was still doing this, right? In other words, trying to understand how do I maintain into competitive reality, right?

By playing also in a space where I may make less money than I do, but at least I know how good I am in more competitive, in more competitive basis. I won't speak about what happened after that after Craig Barrett left. So but for myself, I always thought that's an example of where the CEO is willing to actually incur not a loss, but less favorable results, just to maintain insight in how competitive we really 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 a startup to have a toe in the water of an emerging trend at the same time. So I know we'll probably cover this when we cover your book on corporate innovation because that idea of how do you keep, in touch with the edges? Like Andy talked about snow melting from the edges . I

thought we'd shared tool two. Tool two really links together the framework of induced and autonomous strategy processes. I don't think we actually called out those two terms, which is quite an important term. So induced coming from down on top and autonomy coming from the middle, as we saw with Andy Grove case study. This is an evolutionary framework of the strategy making process that Robert talks about and it zooms in on Intel strategy making process here.

I'd love you to share a little bit on this, Robert, and it'd be a real treat to share this with our organ for with our listeners, and again, we'll have empathy for people. Some people are only listening to 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's okay to, explain why I think it's more important than just what we show here, so. When I was doing my work on strategy making in relation to innovation.

And I discovered the, that within the large cooperation that I was studying, these new ventures really were kind of things that were not top driven. They came from the bottom. I developed this model and I published it in 1983 as a, it's called of the interaction of strategic behavior, corporate 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, bottom up, autonomous strategic action.

You can see the concept of strategy here that we have is in relationship to the fa, the environment that we are familiar with. And that's of course dynamic and the E is to emerging environments. These are new areas. Now why does this matter?

So while I was this in the late seventies and early eighties organizational sociology developed a totally new theory, a very interesting and powerful theory called Organizational Ecology. 1977, an article in which Michael Hannon and John Freeman explained that if you wanted to understand organizational change, you had to study populations of organizations, populations.

And if you did that, then you would find out that actually real organizational change is not because the incumbent organizations have changed. No, it is because they have been selected 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, they said was there is organizational inertia. I call it strategic inertia. Alright? Now what they didn't explain why was there inertia in the first place.

So in 1984, they published another article in the American Sociological Review in which they explained that the inertia really comes from 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 that got you selected in the first place, which is pretty rational. But I told to myself, this is really bad news for strategy.

So then I realized that the framework that I had developed here, which tomorrow I can go into more detail if you want, on each of the processes that actually that suggested that large, complex corporations are ecologies in their own right. They themselves are ecologies of initiatives that spring up and that compete for the resources of the company.

And so therefore, whereas you had the org, the the population level the organization level selection, you also had to look at the intra organizational level of selection. That became the foundation for my idea of internal selection environment. And that's why I was saying the, the internal selection environment is the only thing. You really have to cope with the external selection environment, which has brilliantly conceptualized and shown by the organizational ecology guys, right?

I said there, so therefore this framework in a way is one attempt to alright, so how are you going to try to, if you want, lead, manage, and lead that internal ecological strategy making process, which I say has two parts. is the. In part that is, we must continue to be successful in the environment in which we are already operating.

Because if we are not, we don't have any resources, do anything different, but we must also always, not in the same proportion, but we must always allocate resources to things that are going to be new. Some of them are endogen in, in internally generated. Others might be because, you know, we track what Cisco did very well during the nineties. We track the external entrepreneurial guys and we buy the ones that, you know, that we think are going to be successful.

And then of course we, our strategic context process still has to make it possible to integrate that. But these, we always need both. I say it's like a linear combination. Of actually in my in now a long time, I call the autonomous process, the green process the induced process, I call it the blue process. So it, the model is by many known as the blue and green process. And so what you need to do is you need to have a sort of a linear combination of both.

You know, you have your total resource allocation. How much are you going to like allocate to your induced strategy? Versus how much are you going to allocate , to your autonomous? In fact, companies like Google, I saw they have a rule for that.

basically say we do, 70% of our r and d is going to go to the, they don't use my words, but this going to go to the top 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 one way to thinking , about how do you do both order to stay ahead of the external environment, right?

Either we are ahead of the external environment or external environment gets ahead of us, and if the latter happens, we probably are on our way out. That's, does that make sense here for setting the stage maybe for tomorrow? Is that that's okay for you? beautiful, Robert and in the mornings when I drop my son to school, we listen to an audiobook. And I was listening to one this morning I was talking about competition amidst redwood trees.

And it was like, you know, you can't put 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 the book was, but actually as a human species, we can collaborate and go, okay, these are the rules. We're not gonna go beyond 30 meters. Right.

yes, And I thought about that in the context of the internal ecosystem of a company that when the company's small, say it's a startup, and you select people into that team and they agree and they collaborate and they communicate, and the communication levels are tight. You can guide principles and therefore it can move better than a bigger organization. But as it becomes bigger and then 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 empathy for people who run these companies.

It relates also to the following, you may recall that, I started saying that when I was an undergraduate, I wrote my thesis on firm science. This helped me with, when I did my book on hp, because I had for 16 years studied hp and then in November of 2014, Meg Whitman decides she goes to split HP in two. And I go, how am I going to write my book 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 had just recovered from a little illness. I said, well, my undergraduate thesis helps with this because 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 from integrating Penrose and. Chandler was that there are external opportunities. That's Chandler internal drive to grow that is Penrose.

And so if you bring them together, the key thing, and, and, and Chandler had proposed that strategy structure follows strategy. So therefore, it's the growth curve that is really the critical thing. And at any point in time along that growth curve, there must be a strong, potentially very good relationship between the structure and the strategy of the company. And that determines what the growth 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 I had failed the next step. Because if it is true, that strategy and structure together, internal impulse and the external opportunities together determine the growth curve as captured in the strategy, then that does not mean that growth trajectory as to always go uniformly up.

It could be that the environment changes, like the tectonic plates split and actually in you, the company in order to continue to grow must get out of some of the things that is currently doing, get onto a new growth trajectory, which means first reduce in size, then get back to size. And I said, well, that's maybe what happened at HP because you had the consumer businesses.

And you had the enterprise businesses that were together under, mark Hur still, and even Apotheker, Apotheker already wanted to split something. And I said, well, what has happened is that there is now this the, because of the split of the, of the, of the ecosystems of the consumer oriented, businesses and the enterprise, the right thing to do is actually split.

So Whitman was able to get, but she did that after first making sure that both entities would be able to survive in their new, ecosystems and, and grow. And I went, so that, so therefore, actually I wrote an article about that it was published a few years ago called Why Do Multi-Business Corporations Split? More homework. More homework for me man.

that is a way I like to think about how, ecosystems evolve and how understanding, the logic of these ecosystem developments also determines- if you want -the strategies that the companies that are going to operate in these ecosystems, how they must change. And so if you now did an analysis of hp consumer versus enterprise, it would be quite different strategies. Also, they had different shareholders because the shareholders of the PC and printers, they like. Dividends. Right.

Whereas the other side likes growth. so in a way, Whitman was, clever enough to get support for this split because there were groups , of shareholders actually in 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. It's tough being a leader of an organization, especially if it's successful. And then on top of that, you have the 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 pleasure and I look forward to, to doing more and sharing more. Thank you for joining us in this tribute to the work of Joe Bower and for sharing some massive insights into your work as well, and your relationship with Intel and Andy Grove, Robert Burgelman. Talk to you soon. Thanks for joining us, thanks once again to our sponsors. KYNDRYL.

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