Over the next few weeks, I will study each chapter of the book "Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company" written by the legendary CEO of Intel, Andy Grove. Grove was Intel's first employee in 1968, and he was the company's CEO from 1987-1998. His book teaches leaders how to steer their companies through major business and industry changes.
Andy Grove is considered an elite manager, and his protege, Pat Gelsinger, the current CEO of Intel, is also considered one of the top CEOs in the tech industry. I decided to buy his book so I can better understand what leaders in the semiconductor industry need to do in order to succeed in a world that has rapidly changed over the last few years.
Since COVID, there has been a global push to shift power in the semiconductor industry from the east back to the west; China is no longer a reliable country for America to do business in; artificial intelligence (AI) is changing the way companies do business; governments are cracking down on companies monopoly powers; and America has become morally depraved. Companies without effective, visionary leaders will not survive these trying times. Investors will also suffer if they focus exclusively on companies' financials instead of the adaptiveness of company leaders.
I am studying Andy Grove's book chapter by chapter because it forces us to slow down, digest the information, and find ways to apply the lessons learned to what's going on today.
Today I will focus on the book's prelude.
Strategic Inflections
The concept Grove drives home in the Prelude is "strategic inflections." According to Grove, a strategic inflection is, "A time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end."
Strategic inflections are major, things will never be the same again, type of changes. This type of transformation impacts the topic of conversations. For example, prior to the release of ChatGPT on November 30, 2022, companies and investors discussed routine revenues, routine profits, routine supply chains, and routine product launches. After ChatGPT was released, every word out of people's mouth has been about AI.
Strategic inflections can be created by a company, like OpenAI did with ChatGPT, or they can be forced on companies, like when the Japanese took over the DRAM memory chip market in the 1980's, and Intel had to leave the DRAM market they created.
Intel's Recent Inflection Points
As an Intel investor, it is good to see them lead the push to rebalance the world's semiconductor supply chain. It is also good to see their response to AI. They might have stumbled at the onset of the race, but they're running full speed now. Against the odds and "experts" advice, Pat Gelsinger doubled down on building chip factories around the world, and the plan is working. Intel has received billions of dollars from governments around the world to build factories.
Intel is also making competitive products again. Although NVIDIA dominates the market for chips that train and generate results from AI models, Intel's Gaudi 2 ranks 2nd in inferencing (generating results from AI models), and Intel's Xeon CPU processors are in NVIDIA's top products.
Tech is a fast-moving industry, so tech CEOs need to be capable of responding to change. NVIDIA's CEO, Jensen Huang, is a perfect example of how important it is for tech CEO's to create and adapt to new circumstances. In an interview he did at Stanford University, Jensen described his company as always creating technology and creating markets. NVIDIA's flexibility made them arrive early to deep learning, autonomous driving, and computational drug design. As a result, their revenues and market value have skyrocketed.
Tech investors should ask two important questions when reviewing a tech investment. Can the leaders of the company run the business today, and can they lead the company into the unknown future that will look different from today? If they are incapable of leading the innovation charge or arriving on time to the party, then investors' capital is at serious risk. Permanent capital loss is on the horizon. Even if the company is printing money today, it is still in the danger zone. According to Grove, "Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left." In NVIDIA's latest financial report, their net profit margin was 49%. New and old competitors are salivating at these margins, and they want a piece of it. NVIDIA's customers are dying for someone to come and break up their dominance so they can pay less for the chips they need to build their AI models.
The Visionary CEO Test
One practical way to see if a CEO can steer their company into the future is to analyze the quality of their investments. If they are running a tech company, and their main priority is to buy back their stock at high prices, then that should be a red flag. They should be like Jensen, always investing in the future. They should be like Pat, always pushing his company to move at a torrid pace.
Picture of Intel's CEO Pat Gelsinger
Microsoft's CFO, Amy Hood, said it best on her company's 2nd quarter earnings call, ""And we still need to be investing. And so, the important part, invest towards the thing that's going to shape the next decade and continue to stay focused on being able to deliver your day-to-day commitments."
Sounds like she read Only The Paranoid Survive.
Strategic Inflections In News Media
I read an article this week about the Atlantic Magazine's revival. Three years ago, the company laid off 17% of their workforce and had a $20M deficit. The new CEO, Nick Thompson, also came in three years ago and turned things around by changing the company's business model. His pivot helped the company avoid the fate of Vice Media and Buzzfeed, which suffered irreparable harm when Facebook and Google changed their algorithms and diverted the companies' audience away from the news platforms. Buzzfeed is now shrinking their company, and Vice Media is bankrupt.
The Atlantic avoided this fate by not relying on advertising revenue from search engines and social media platforms. Instead, they generated advertising revenues by creating direct relationships with brands, and they developed an events business. They also moved away from covering daily news stories and started writing deep research stories. They hired high quality writers. They reduced the number of articles that can be read for free, and they raised their subscription fees by 50%. Over the last three years, the Atlantic has won three Pulitzer Prizes, and their revenues increased 10% from 2022 to 2023.
The Atlantic survived multiple inflection points because of their visionary CEO's leadership.
Strategic Inflections Impact on Workers
Grove mentions in the Prelude that employees cannot expect their company to provide them with lifetime employment because the company itself might not be around long enough to provide employment. According to Grove, "As these companies struggle to adapt, the methods of doing business that worked very well for them for decades are becoming history. Companies that have had generations of employees growing up under a no-layoff policy are now dumping 10,000 people into the street at a crack."
It's interesting to read this statement because rapid changes in an industry can be exciting for consumers because they get to enjoy new products, experiences, and sometimes lower prices, but the changes can be stressful for employees who work at companies that need to suddenly pivot.
During COVID, tech companies went on a hiring spree because people stuck at home increased the demand for products and entertainment. Now that things have gotten back to normal, tech companies are laying off enormous amounts of people, to the point where tech employees are having a difficult time finding work. According to CNBC, 50,000 people were laid off in 2024, and 260,000 people in 2023. Last year had the second highest layoffs behind the 2001 dot-com crash.
Job seekers say there is so much competition in the job market right now, and some companies are asking for AI related skills. There is also a slowdown in the amount of money venture capitalists are throwing at startup companies, so startups have to be disciplined with their hiring. All these changes point to a strategic inflection in the tech industry, and people will need to find new, innovative ways to get hired.
The video below shows a job seeker who adapted to the new landscape. She must have read Only the Paranoid Survive.
Next week, I will review chapter 1 of Andy Grove's legendary book.
Stay strong, stay blessed, and God willing, I will see you next week.
”Stay sober, stay alert! Your enemy, the Adversary, stalks about like a roaring lion looking for someone to devour.“
1 Kefa (1 Peter) 5:8 CJB
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