“If you need a machine and don’t buy it,
then you will find that you have paid for it but don’t have it.”

- Henry Ford

:)

Building something from scratch is hard. For many businesses, there is an easier option to easily leverage what exists by adding some marginal costs. A marginal cost is defined as the cost added by producing one additional unit of a product or service.

Let's say you have a factory that manufactures gasoline-powered engines and you have had a successful business over the last 100 years. It can be tempting to look at that success and invest in more people and machines in order to sell traditional engines. However, the arrival of electric vehicles means the very ground you are standing on this starting to shift. Because of this, building the expertise and equipment to start a new business line is a huge risk and will likely incur losses initially. Resting in the risk of adverse behavior of the short term predictability can hide the long term losses of not investing in what could have been the future.  

In his seminal lecture on Strategic Inflection Points (SIP), ex-chairman of Intel, Andrew Grove shared a story from the 1980's when his Japanese sales team reported to him that their customers were not as respectful as they once were. The underlying reason was that Intel's Japanese competitors were flooding the market with cheaper memory chips. He talked about how this moment almost caused the demise of the whole company. More on this story later. 

When creating a fresh product, customer orientation is natural. Working with and listening to specific needs allows value to be created and delivered. This forms the initial basis of revenue for the organization once product market fit is achieved. However, as time goes on and systems are built, there becomes a natural comfort in straying away from the voices of the users; and with that, a gradual loss in understanding from what is happening on the front line. 

Those signals are early indicators of a movement from from a world that is understood, to one that is changing into something unrecognizable. He uses the metaphor of an image of a face morphing into another face. The faces at the beginning and at the end are clear, but the state in the middle is amorphous. This strategic inflection point is exceptionally murky, and it is tempting to fall back on marginal cost thinking of what worked before as a safe harbor. 

When I was running a manufacturing and sales company, almost all decisions were taken based on data from past performance. I did not spend enough time with customers and sales teams to try and get a sense of how the landscape underneath the company was changing. Andrew calls these voices Cassandras - after a mythological figure whose accurate prophecies of impending disasters are often not believed. He explains how usually companies cannot articulate what is happening around them, but these do serve as important indicators of impending change. 

Blockbuster cornered the video rental market in the mid-90’s. But they failed to realize the fundamental distribution changes that were underpinned by high speed internet and streaming. Blockbuster's desire to protect their existing business pushed them to decline the purchase of Netflix. This decision ended up costing them an early lead in the streaming wars that continue to this day. Netflix is now under threat from streaming platforms that have more content libraries and the cycle of disruption continues. 

At the heart of the challenge of meeting an unpredictable world is a fear of loss and change. There is a Tibetan Buddhist tradition of creating sand mandalas. Sand mandalas are intricate patterns created through deep concentration by monks. These emphasize non-attachment as they contemplate their spiritual journey through ritualistic art. After weeks of work, the sand mandala is ritualistically dismantled. This exercise underscores the importance of non-attachment and the acceptance of constant change. Letting go is hard, but it can be learned. 

Andrew Grove shares a framework to navigate the unclear waters of a strategic inflection point. Once the canaries in the coalmine start to die, in what he terms the "death valley" of extreme ambiguity, the first step is to allow chaos to reign. Experimentation should become the order of the day, including experiments that contradict each other. While this is very difficult for a leader to manage and can undermine his or her perceived credibility, there cannot be a strong attachment to a legacy of success. Nor should there be an attachment to the predetermination of the future, in order to allow the ideas to fully germinate. Letting go is one of the hardest things to do, but it is necessary in this process. After the process of experimentation comes the hard task of choosing which direction to go. The difficulty there is that in the early days of choosing the new strategic direction, there is always a seed of doubt that remains. This, despite how confident people seem in picking it. It is a gamble, but then again, it is more of a gamble to do nothing.

Going back to the story of Intel's memory business in the 1980's, the losses of market share spread from Japan to the world. At the same time, since only senior directors were allowed to allocate development resources in the company, Intel's R&D labs developed advanced memory components. Said components were technically superior but in the end, useless as the market was moving towards the cheaper products. Fortunately, the production planners - who noticed that the sales were declining for the memory business, were quietly shifting production capacity to their microprocessor business. This proved to be a saving grace. The company then reoriented its business with a laser focus in this industry.

Strategic inflection points are evolutionary crossroads that either strengthen an existing species or allows a whole new animal to arise into dominance. Being aware of marginal cost thinking and bias while living in the death valley of transition allows for a deeper exploration of the nature of change. Accepting and working with impermanence may allow us to see the nature of our decisions more clearly.

Periodically, a powerful question to ask is as follows: if the organizations we are leading did not exist, what would be the best way to serve our customers today?

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Sources:
Tibetan Sand Mandalas
Habits in Stoicism
Andrew Grove 1996 MIT Lecture 
Dane, Ayu and Klaus