Monday, July 8, 2002

Stanford Business School Professor Examines Strategies for Building New Business Inside Large Companies

STANFORD GRADUATE SCHOOL OF BUSINESS—He heads one of the most successful high-tech companies ever, but CEO Craig Barrett of Intel sometimes thinks of his company's core microprocessor business as a creosote bush—the desert plant that poisons the ground under and around it so no new seeds can sprout.

Strategy is Destiny book coverBarrett's frustration with some of the spoils of success is told by Robert Burgelman, the Edmund W. Littlefield Professor of Management at the Stanford Graduate School of Business, in a new book about how Intel has built business strategies, sometimes from the bottom up, sometimes from the top down, or from all parts of the hierarchy simultaneously. Which methods work best depends on a company's situation and may have to change with success, argues Burgelman in Strategy is Destiny: How Strategy-Making Shapes a Company's Future (Free Press, 2002).

Since its founding in 1968, Intel has weathered major changes in the semiconductor and computer industries, transforming itself twice. The company's CEOs have chosen very different methods of formulating and implementing business strategy, says Burgelman, who directs the six-week Stanford Executive Program for top executives. He also has co-taught since 1992 a course on strategy for the information processing industry with former Intel CEO Andy Grove.

After Barrett took the Intel reigns in 1998, Burgelman participated in teaching a seminar for Intel's top 400 managers that was designed to free up their thinking and help them respond faster to new ideas. As a result, Intel's executives divide Intel's businesses into "blue" products—its chips business where strategy is developed in what Burgelman calls an "induced" process—and "green" products—everything new where the company encourages more autonomous thinking and decision-making.

Barrett's challenge, asserts Burgelman, "is to combine the discipline of the induced strategy process in the core microprocessor business, created by Andy Grove, with the strategic renewal capability of the autonomous strategy process in which multiple initiatives can be pursued, as existed during Gordon Moore's earlier tenure as CEO."

In his book, Burgelman first documents the key role played by middle-level managers in transforming Intel from a memory company into a microprocessor company during the late 1970s and early 1980s. This change led to the heart-breaking decision to abandon the business on which the company was founded. During this period under Moore, Intel's strategy making resembled what Burgelman calls an "internal ecology" model in which strategy was induced by top executives while autonomous, bottoms-up strategy processes were also in play. Strategic decision-making was somewhat distributed throughout the organization.

Beginning in the late '80s, Grove orchestrated a complex set of strategic thrusts that allowed Intel to capitalize on the opportunities associated with the phenomenal growth of the PC industry. In this period, Intel's strategy making resembled the "rational actor" model in which the induced strategy process dominated and strategic decision making was highly concentrated at the top. Burgelman shows how, paradoxically, Intel's superbly run strategy-making process in the core business, made it difficult for internal entrepreneurs to extend the company's strategic reach.

For many years Burgelman has studied the processes whereby new business development springs up within large, technology-based companies. What interests him is how a company can "reinvent" itself through internal development. "Knowing how to nurture new businesses is vital for the long-term survival of large companies," he says. However, as they become very large, it becomes difficult for new businesses, which typically start small, to be viewed as relevant. This is a simple, quantitative relationship, he says.

All major companies also go through predictable "focus" and "reinvention" cycles, he contends. When the prospects of the core business are sufficient to sustain corporate growth objectives, top management decides where to focus. When the core business is not sufficient to sustain new growth, it decides to pursue new businesses. "This is a predictable cycle-now we need to be entrepreneurial, now we don't-that most senior executives know about," says Burgelman.

Intel's extraordinary success as a microprocessor company during the 10 years of Grove's tenure made it difficult to continue to nurture the process of starting and building new businesses outside the core microprocessor business. "The gravitational pull of the successful core business was so strong that though he knew about it, Grove and Intel were still subject to those forces."

Burgelman's work on induced and autonomous strategy processes relates nicely to that of his Business School colleague Garth Saloner, Jeffrey S. Skoll Professor of Electronic Commerce, Strategic Management, and Economics, who has recently published a paper that demonstrates mathematically that if a company can develop these two processes simultaneously, it can potentially achieve greater profit maximization. Such rigorous theoretical research, says Burgelman, increases one's confidence in further pursuing the implications of this perspective on strategy making.

Burgelman views strategy as "a mentality that helps leaders apprehend evolving reality and act upon it. In dynamic environments it is especially difficult to maintain a close link between one's beliefs and reality. Strategy helps leaders to be more alert to such disconnects and then to ask why and how they happened. Strategy helps leaders maintain control over their own destiny as well as contribute to that of their company in a world of ever increasing interdependence and ambiguity."

A second lesson from Intel, he says, is that in dynamic environments, strategy and strategic action, as well as the basis of competition and distinctive competencies, are likely to eventually get out of alignment. This creates strategic dissonance in the organization. "Strong leaders do not fear such dissonance," Burgelman says. "They appreciate it as a positive force that serves as a signaling device to keep them alert to threats and opportunities."

Related Links

Strategy is Destiny: How Strategy-Making Shapes a Company's Future, Robert Burgelman and Andy Grove, Free Press, 2002