Wednesday, February 11, 2004

Remarks by Andy Grove on Receiving the Arbuckle Award

2004 Arbuckle Award Recipient

I could have sat there and listened to you go on. For one thing, it was amusing; for another, it was pleasant; and for a third, it delayed the time I had to come up here and talk. Unfortunately, I will not respond in kind. I will tell a serious story.

Last Saturday, Eva and I went to listen to Bette Midler at the Compaq-HP-DEC Arena, soon to be renamed Itanium. I was working my way to my seat and, since the rows are close together, a lady had to get up to let me by. She looked at me and asked, "Are you Andy Grove?" She added, "You probably don't remember me. I used to work at Intel in '68, '69, and '70. I was a diffusing technician." She told me her name—it was Polly—and it so happened I remembered her name. She said, "I want you to meet my daughter," and indicated the woman next to her. "She's a school counselor and has a PhD in psychology, "Polly said. "Intel put her through school." I congratulated her. Before I could go on, she said, "Intel also put her son through school. He's an engineer."

After I sat down, I had this image of the American Dream, with the American Dream being a ladder—a ladder where Polly starts as a diffusion technician at Intel and two generations of accomplished, professional people are the result of her work and her opportunity to do fairly significant job for a startup company.

The problem is that a rung or two are being taken out of the ladder. Without those rungs, the generational climb up the ladder is going to be disrupted. Here are a few observations of what's happening.

At a WalMart in Philadelphia, 40 percent of the goods are imported from China. Software jobs are being moved to India. At this point, what is less well known is that the types of jobs and positions being moved to India are more varied and more numerous: consultants, financial analysts, medical transcribers, news analysts (Reuters news analysts following in India), and the ultimate outsourcing—lawyers. I'm not sure that what the world needs is a large number of export lawyers, but Thompson Publishing, publisher of First Call, has put a number of legal analysts in India who are publishing summaries of legal decisions.

All of this is a direct result of the incredible explosion of capabilities of international communication that works. Throughout history, whenever transportation technology kicked in, the optimal location of productive assets got redefined. Last century, you saw it in canals that impacted where you put mines relative to ore-processing plants, and in highways that redefined cities and suburbs. It's happening this time with intellectual work and the assets of intellectual work—people—as the result of a transportation mechanism—the global network.

When you add the significance ascribed to this change, it is monumental and lasting. It probably is not even proper to refer to this as an inflection point. It is the mother of all strategic inflection points. And in this country we have to answer the questions: What should we do about it? What will soften the blow? What will lead us to a more competitive position where the rungs will not disappear, or if they disappear in short order we can put them back?

There are three major buckets of answers. One is education, and the second is the general infrastructure of the country. I'm afraid in neither one do we do a bang-up job. Today in the New York Times an op-ed piece lists U.S. math and science education as 19th in the world,following Latvia. And India and China are not even participants in the test. When it comes to infrastructure, we are 10th in the world in broadband connections to homes, behind Korea, Canada, Japan, and a number of other countries. The previous study was done in 2000, when we were third, so we're heading in the wrong direction. Whenever I talk about this issue, people point to the particular ruggedness of the U.S. economy to adjust to creative destruction and to recover from the creative destruction that our economy is capable of doing. To quote Schumpeter, "competition from new technology, new sources of supply, new types of organizations strikes at the foundation and the very lives of existing firms"—and, by extrapolation—societies.

It is true that American businesses have been extremely capable of recovering and bouncing back from creative destruction, very Schumpeterian in nature. The problem is today institutions are under attack from within. For a business organization to be capable of dealing with creative destruction, it cannot at the same time struggle with internal problem sand the threat of implosion. That is a brief description of how I see our business institutions being threatened—threatened from outside by high expectations, high demand, and struggling inside with the workings of the institution.

These are, I must admit, problems of our own making. I can parse them into three categories. First, and most obvious, criminal conduct. This is not new. Criminal conduct in business has existed in every century and every decade, but we've reached a state where, by my calculation, one-third of the items in the Wall Street Journal front-page "What's News" column are devoted to investigations or trials of alleged criminal activities in business. And this continues three years after Enron. That's one category.

The second is governance. The key task of governance is to apportion the responsibility and management of the company; to distinguish the corporation as an entity distinct from the personal fiefdom or the personal piggy bank of its managers. It must establish that managers,including CEO's, are employees of the corporation. The picture—perhaps on the proper side of the criminal line—is pretty disturbing:loans, parties, retirement perks. And something closer to us here—spinning,which has been described by Judge Chandler of the Delaware Court of Chancery as "a gratuity improperly converted to management."

The list goes on and on. You cannot help but add the question, "Where was the board that was supposed to look after these things?" And the hint of where the board was comes from the story of the New York Stock Exchange, where the board was made up of people who were beholden to the working of the exchange itself. That's not an exception. Maybe it is the highest profile example. To quote a WallStreet Journal survey: 300 of the top 400 companies had reportable conflicts for their directors, as defined by regulations. So the result is that as a matter of routine, every director of ours, myself included, has to deal with a 66-item questionnaire to ferret out reportable conflicts. Hour after hour after hour of filling out paperwork.

But that's not the real problem either. The real problem is more subtle and more pervasive. It has to do with the value system of business as we practice it. I would like to draw an analogy to corporate cultures. Corporate cultures are well established control mechanisms; and the stronger the control mechanism, the stronger the corporate culture in organization. There is less need to supervise and specify every action and to have procedures and policies for everything. It is similar in business at large. The stronger the value system, the stronger the control mechanism that invisibly influences our actions—we don't see it, but we know it's there—the less need there is for criminal prosecution and 66-item questionnaires.

There is an assumption, an almost automatic assumption, that our business culture and our value system got worse because of the Internet bubble. I really wonder if that's true. What has happened, to pick up Robert [Burgelman]'s phrase, society's expectations of business have gotten tougher and more discriminating. Perhaps this is the result of some of the criminal doings, but the expectations are higher and we are not responding to them particularly well. A leading business figure in this country recently was talking about having to return some perks to his company. He said, "I never would have given it back in normal times." I'm happy to say that normal times are no more.

Schumpeter and Schumpeterian phenomena teach a mechanism that assumes avery basic factor—that the business of business is business. That's what business does; that's why it deals with creative destruction and why it bounces back out of disaster stronger than it was going in. That's why it is able to provide ladder rungs in a capital of democracy like America for a Polly to climb on.

To preserve those rungs is hard work. It requires a Schumpeterian mechanism to work full time, unrestrained by factors we've been talking about, not prone to looking over its shoulder. We all know that in the absence of strong corporate cultures, companies turn bureaucratic. In similar fashion, in the absence of a strong business culture, our business mechanisms, roles, and infrastructure become ossified, bureaucratic, less competent. This happens at the very time when we as a business society face the strongest competition from lean, hungry, well-educated workforce swell served by modern infrastructure.

The coincidence of these two phenomena makes something that I can only describe in terms of the analogy to the perfect storm. Coping with the storm requires doing what is necessary for the rungs to be there and for the American Dream to continue. Two days after I met Polly and heard her story, I got an email from one of our employees: "My son has his bachelor's degree in computer science from ASU. He lost his job and his home three years ago. After searching for another computer science job for over a year he's given up and started a burrito stand and is living wi thus." We urgently need to adjust to the higher demands of our time.

At Intel, we have a way of looking at the stages of dealing with a new problem. There are five stages: First, you ignore the existence of the problem; second is denial; third, you blame others for it; fourth, you assume responsibility for it; fifth, a solution is coming.

I think it is safe to say we are past the ignore stage and are straddling the deny and blame others stage, and it is mandatory for us to figure out ways to assume responsibility and look for solutions. I think it is fitting I should be talking about the subject at a business school dinner anchored and located in the most dynamic economic region of the United States. And I would like to leave a thought—I'm going to leave Bob [Joss] and everyone associated with this institution we love and cherish with this thought: What could be a better mission for Stanford Business School, in association with the law school, the engineering school, the Hoover Institution, etc., than a unifying mission to move us to stage five and to lead the way to an intellectual prescription to putting rungs back into the ladder of the American Dream?