Strategy at Nvidia: Diagnosis

Faced with the failure of the company's first product and sudden rise of 3dfx, Nvidia reformulated the company strategy. 

Nvidia was formed in 1993 at the time when the industry was alive with the talk about the coming multimedia revolution.  However, at that moment existing audio adds worked with some software and not others.  There was no standard way to compress or display video.   Nvidia's original dream was to be the Sound Blaster of multimedia.  The company's first product, the NV1 was intended to establish a new multimedia standard.  but its considerable audio capabilities were not better than the fast-moving competition's, and its quirky 3-D graphics approach did not catch on.  The NV1 was a commercial flop.

Faced with the failure of the company's first product and sudden rise of 3dfx, Nvidia reformulated the company strategy.  Key inputs came from a temporary technical advisory board made up of both insiders and expert outsiders.  The new strategy was a shape change in direction.  Instead of multimedia, the company would focus on 3-D graphics for desktop PCs.  Instead of the initial proprietary approach to graphics, the company would embrace the SGI-based triangle method.  About the only thing that stayed unchanged was Nvidia's commitment to being a "fabless" chip company, focusing on design and outsourcing fabrication.

ACTION POINT: Identify any "flops", seek counsel inside and out and make changes when necessary.

Putting it Together

You will also glimpse almost every building block of good strategy: intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, unsung advantage, riding a dynamic wave of change, and the important role played by inertia an disarray of rivals.

Nvidia, a designer of 3-D graphics chips, had a very rapid rise, shooting in a few short years past apparently stronger firms, including Intel, to dominate the high performance 3-D graphics chip market.  In 2007 Forbes named Nvidia, the "Company of the Year," explaining that "Since Huang [CEO and founder] took the company public in 1999, Nvidia's shares have risen 21-fold, edging out even the might Apple over the same time period."

Nvidia jumped from nowhere to dominance almost purely with good strategy.  Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action.  You will also glimpse almost every building block of good strategy: intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, unsung advantage, riding a dynamic wave of change, and the important role played by inertia an disarray of rivals.

ACTION POINT: Diagnose, establish guiding policy and follow with coherent action.

Entropy

the bread and butter of every consultant's business is undoing entropy

It is not hard to see entropy at work.  With the passage of time, great works of art blur and crumble, the original intent fading unless skillful restorers do their work.  Drive down a suburban street and it is easy to spot the untended home.  Weeds grow in the garden, paint peels from a door.  Similarly, one can sense a business firm that has not been carefully managed.  Its product line grows less focused; prices are set low to please the sales department, and shipping schedules are too long, please only the factory.  Profits are taken home as bonuses to executives whose only accomplishment is outdoing the executive next door in internal competition over the bounty of luck and history. 

Entropy is a great boon to management and strategy consultants.  Despite all the high-level concepts consultants advertise, the bread and butter of every consultant's business is undoing entropy--cleaning up the debris and weeds that grow in every organizational garden.

ACTION POINT: Clean up the debris and weeds of  your organization.  

Managing for the Future

Prediction of future events is futile.

The starting point to know the future is the realization that there are two different, though complementary, approaches:

• Finding and exploiting the time lag between the appearance of a discontinuity in the economy and society and its full impact-one might call this anticipation of a future that has already happened.

• Imposing on the yet unborn future a new idea that tries to give direction and shape to what is to come. This one might making the future happen.

The future that has already happened is not within the present business; it is outside: a change in society, knowledge, culture, industry, or economic variation within it.  Looking for the future that has already happened and anticipating its impacts introduces new perception in the beholder.  The need is to make oneself see it.  What then could or should be done is usually not to difficult to discover.  The opportunities are neither remote nor obscure.  The pattern has to be recognized first.

Predicting the future can only get you in trouble.  The task is to manage what is there and to work to create what could and should be.

ACTION POINT:  Spot a discontinuity in the economy or society that has appeared and presents an opportunity for your enterprise. Determine how long it will take for this change to impact the business.  Develop a business plan to cash in on this insight.  

Inertia by Proxy

Those streams of profit persist because of their customers' inertia-a form of inertia by proxy.

A lack of response is not always an indication of sticky routines or a force culture.  A business my choose to not respond to change or attack because responding would undermine still valuable streams of profit.  Those streams of profit persist because of their customers' inertia-a form of inertia by proxy.

In an example from telecommunications, the regional Bell operating companies varied in the number of business customers they served.  With the advent of the Internet, which were the first to offer digital subscriber line services?  The telephone companies primary data offering to business had been T1 lines, priced at about four thousand dollars per month and offering 1.56 mbps.  In 1998, DSL speeds were about one third of T1 speeds,  but DSL prices were one-thirtieth.  That is, a customer could replicate a T1 line with three DSLs for one-tenth the cost.  Rather than cannibalize their very profitable T1 business, telephone companies serving New York, Chicago, and San Francisco just punted --they didn't offer DSL.  Those telephone companies lost about 10 percent of their corporate data business each year to the new-wave carriers, digital competitive local exchange carriers, or CLECs), but the very high profits in the T1 business more than made up for the decline.

Again, the apparent inertia of the telephone companies was actually inertia by proxy, induced because their customers were so slow to switch suppliers, even in the face of dramatic price differences.  This inertia by proxy fooled hundreds of companies and investors.  The fantastic rate of expansion of the "new network" carriers was taken as evidence of  competitive superiority, unleashing a frenzy of investment and stock appreciation.  When the telephone companies finally began to respond in 2000, the bubble popped.  Once real competition began it was a rout.  Not a single CLEC survived.

ACTION POINT: Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams.

Simplification II

you cannot afford to have a high-performing unit with a terrible culture infect the others. 

After the first round of simplification, it may be necessary to fragment the operating units.  This will be the case when units do not need to work in close coordination--when they are basically separable.  Such fragmentation breaks political coalitions, cuts the comfort of cross-subsidies, and exposes a larger number of smaller units to leadership's scrutiny of their operations and performance.

After this round of fragmentation, and more simplification, it is necessary to perform a triage.  Some units will be closed, some will be repaired, and some will form the nuclei of a new structure.  The triage must be based on both performance and culture--you cannot afford to have a high-performing unit with a terrible culture infect the others.  The "repair" third of the triaged units must then be put through individual transformation and renewal maneuvers.

ACTION POINT: Base simplification and triage on both performance and culture.

Simplification

The simpler structure will begin to illuminate obsolete units, inefficiency and simple bad behavior 

The first step in breaking organizational culture inertia is simplification.  This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency.

Strip out excess layers of administration and halt nonessential operations--sell them off, close them down, spinet them off, or outsource the services.  Coordinating committees and a myriad of complex initiatives need to be disbanded.  The simpler structure will begin to illuminate obsolete units, inefficiency and simple bad behavior that was hidden from sight by complex overlays of administration and self-interest.

ACTION POINT: Simplify processes, routines and structure to identify what is really essential.

Test of Innovation

Measure innovations by what they contribute to market and customer.

The test of an innovation is whether it creates value.  Innovation means the creation of new value and new satisfaction for the customer.  A novelty only creates amusement.  Yet, again and again, managements decide to innovate for no other reason than that they are bored with doing the sure thing or make the same thing day in and day out.  The test of an innovation, as well as the test of “quality,” is not “Do we like it?’  It is “Do customers want it and will they pay for it?”

Organizations measure innovations not by their scientific or technological importance but by what they contribute to market and customer. They consider social innovation to be as important as technological innovation.  Installment selling may have had a great impact on economics and markets than most of the great scientific advances in this century.

ACTION POINT: Identify innovations in your organization that are novelties versus those that are creating value. 

The Inertia of Culture

...it is dangerous to think that organizational culture can be changed quickly or easily.

We use the word "culture" to mark the elements of social behavior and meaning that are stable and strongly resist change.  As a blunt and vivid example, Khmer Rouge leader Pol Pot killed one-fifth of the Cambodian population, executed almost every intellectual, burned almost all books, and outlawed religion, banks, currency and private property, but still did not much alter Cambodian culture. 

The cultures of organizations are more lightly held than those of nationality, religion or ethnicity.  Still, it is dangerous to think that organizational culture can be changed quickly or easily.

ACTION POINT: Don't underestimate the resistance to change based on organizational cultural norms.

The Inertia of Culture

The hard won lesson was that a good product-market strategy is useless if important competencies, assumed present, are absent and their development  is blocked by long established culture. 

AT&T provides a close up look at corporate cultural inertia.  As the inventor of Unix, which today underlies the open source Linux and Apple's Mac OS X operating systems, AT&T should have been a major player, especially with regard to computer communications.  They retained a strategy consultant to work on new products and strategies in computing communications.  Plans included key software packages, a simpler version of Unix for the PC that would allow for a graphical user interface and add on modules that could be sold electronically over telephone lines. 

In working with some of the high-level managers at AT&T the consultant was let in on an embarrassing secret.  AT&T wasn't competent at product development.   They were the proud owner of Bell Labs; the inventor of the transistor, the C programming language, and Unix.  But there was no competence with AT&T at making working consumer products.  The problem at AT&T was not the competence of individuals but the culture--the work norms and mindsets.  Bell Labs did fundamental research, not product development.  Just as in a large university, the breakthroughs of a tiny number of very talented individuals had been used to justify a contemplative life for thousands of others.  Through many decades during which AT&T had been a regulated monopoly, this culture grew and flourished.   With deregulation, competition and the soaring opportunities in mass-market computing and data communications, this way of doing things was a huge impediment to actions.   With no real understanding of technology, most senior managers at AT&T did not comprehend or appreciate the problem.

The hard won lesson was that a good product-market strategy is useless if important competencies, assumed present, are absent and their development  is blocked by long established culture.  The seemingly clever objectives crafted by the consultants were infeasible.  It would be at least a decade before AT&T slimmed down and gained enough engineering agility to support work on competitive strategy.

ACTION POINT: Understand your cultural competencies and work within them.

The Inertia of Routine

The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firms routines.  

Inertia due to obsolete or inappropriate routines can be fixed.  The barriers are the perceptions of top management.  If senior leaders become convinced that new routines are essential, change can be quick.

The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firms routines.  In any of these cases, it will probably be necessary to replace people who have invested many years developing and using obsolete methods as well as to reorganize business units around new patterns of information flow.

ACTION POINT: Look for better methods and routines to prevent inertia from setting in.

Inertia

The inertia created by standard routines can be revealed by sudden outside shocks: a tripling of the price of oil, the invention of the microprocessor, telecommunications deregulation, solid state lighting...

Organizational inertia generally falls into one of three categories: the routine, cultural inertia, and inertia by proxy.  Each has different implications for those who wish to reduce inertia or those who seek to gain by attacking a less responsive rival.

The heartbeat of any sizable business is the rhythmic pulse of standard procedures for buying, processing, and marketing goods.  Its more conscious actions are guided by less rhythmic but still well-marked paths.  Even the breathless chase after an important new client, the sizing of a new facility, and the formulation of plans are familiar moves in a game that has been played before.  An organization of some size and age rests on layer upon layer of impacted knowledge and experience, encapsulated in routines--the "way things are done."  These routines not only limit action to the familiar, they also filter and shape managers' perceptions of issues.  An organization's standard routines and methods act to preserve old ways of categorizing and processing information.

The inertia created by standard routines can be revealed by sudden outside shocks: a tripling of the price of oil, the invention of the microprocessor, telecommunications deregulation, solid state lighting and so on and so on.  The shock changes the basis of competition in the industry, creating a significant gap between the old routines and the needs of the new regime.

ACTION POINT: Examine your routines in light of seismic shocks that may affect your business.

The Change Leader

The most effective way to manage change successfully is to create it.

One cannot manage change.  One can only be ahead of it.  In a period of upheavals, such as the one we are living in, change is the norm.  To be sure, it is painful and risky, and above all it requires a great deal of very hard work. But unless it is seen as the task of the organization to lead change, the organization will not survive.  

In a period of rapid structural change, the only ones who survive are the change leaders.  A change leader sees change as an opportunity.  A change leader looks for change, knows how to find the right changes, and knows how to make them effective both outside the organization and inside it.  To make the future is highly risky.  It is less risky, however, than not to try to make it.  A goodly proportion of those attempts to will surely not succeed.  But predictably, no one else will.

ACTION POINT:  Anticipate the future and be a change leader.

Inertia and Entropy III

Transforming a complex organization is an intensely strategic challenge. 

An organizations greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.  In such a situation, organizational renewal becomes a priority.  Transforming a complex organization is an intensely strategic challenge. 

Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

ACTION POINT: Use strategy to overcome inertia and entropy and renew your organization.

Inertia and Entropy II

...bankrupt Blockbuster because the latter could not, or would not, abandon its focus on retail stores.  

Successful strategies often owe a great deal to the inertia and inefficiency of rivals.  For example, Netflix pushed past the now bankrupt Blockbuster because the latter could not, or would not, abandon its focus on retail stores.  

Despite having a large early lead in mobile phone operating systems, Microsoft's slowness in improving this software provided a huge opening for competitors, an opening through which Apple and Google quickly moved.

ACTION POINT: Understanding the inertia of rivals may be just as vital as understanding your own strengths.

Inertia and Entropy

Entropy makes it necessary for leaders  to constantly work on maintaining an organization's purpose, form, and methods even if there are not changes in strategy or competition.

Even with its engines on hard reverse, a supertanker can take one mile to come to a stop.  This property of mass-resistance to a change in motion--is inertia.  In business, inertia is an organization's unwillingness or inability to adapt to changing circumstances.  Even with change programs running at full throttle, it can take many years to alter a large company's basic functioning.

Were organizational inertia the whole story, a well-adapted corporation would remain healthy and efficient as long as the outside world remained unchanged.  But, another force, entropy, is also at work.  In science, entropy measures a physical system's degree of disorder, and the second law of thermodynamics states that entropy always increases in an isolated physical system.  Similarly, weakly managed organizations tend to become less organized and focused.  Entropy makes it necessary for leaders  to constantly work on maintaining an organization's purpose, form, and methods even if there are not changes in strategy or competition.

ACTION POINT: Stay focused on your organizations purpose, form and methods to avoid entropy and inertia. 

Attractor States

 One type of accelerant is what is called a demonstration effect--the impact of in-your-face evidence on buyer perceptions and behavior.

Two complements to attractor-state analysis are the identification of accelerants and impediments to movements toward an attractor state.  One type of accelerant is what is called a demonstration effect--the impact of in-your-face evidence on buyer perceptions and behavior.  For example, the idea that songs and videos were simply data was, for most people, an intellectual fine point until Napster.  Then suddenly, millions became quickly aware that a three-minute song was a 2.5 megabyte file that could be copied, moved, and even e-mailed at will.

As an example of an impediment, consider the problems of the electric power industry.  Given the limited carrying capacity of the atmosphere for burned carbon compounds, the obvious attractor state for the power industry is nuclear power.  The simplest path would be to replace coal and oil fired boilers with modern third or fourth generation nuclear boilers.  The major impediment to the U.S. power industry moving in this direction is the convoluted and highly uncertain licensing process--at each stage, local, state, and federal authorities are involved as well as the courts.  Whereas it takes France five years to license and build an entire nuclear plant, it would probably take ten years or more for a U.S. utility to just carry out a boiler changeover.

ACTION POINT: Are there accelerants or impediments present in your industry?

Understanding What the Customer Buys

What does the customer consider value?

The final question needed in order to come to grips with business purpose and business mission is: “What is value to the customer?”  It may be the most important question.  Yet it is the one least often asked. One reason is that managers are quite sure that they know the answer.  Value is what they, in their business, define as quality.  But this is almost always the wrong definition.  The customer never buys a product.  By definition the customer buys the satisfaction of a want.  He buys value.

For the teenage girl, for instance, value in a shoe is high fashion.  It has to be “in.”  Price is a secondary consideration and durability is no value at all.  For the same girl as a young mother, a few years later, high fashion becomes a restraint.  She will not buy something that is quite unfashionable.  But what she looks for is durability, price, comfort and fit, and so on.  The same shoe that represents the best buy for the teenager is a very poor value for her slightly older sister.  What a company’s different customers consider value is so complicated that it can be answered only by the customers themselves.  Management should not even try to guess at the answers-it should always go to the customers in a systematic quest for them.

ACTION POINT:  What do your customers consider most valuable about the product or service you provide?  If you don’t know, find out.  If you do know, ask your customers if you are delivering.

Attractor States

Having a clear point of view about an industry's attractor state helps one ride the wave of change with more grace.

In thinking about change it can be very helpful to use the concept of an attractor state.  An industry attractor state describes how the industry "should" work in the light of technological forces and the structure of demand.  By saying "should," the emphasis is on an evolution in the direction of efficiency--meeting the needs and demands of buyers as efficiently as possible.

Having a clear point of view about an industry's attractor state helps one ride the wave of change with more grace.  At attractor state provides a sense of direction for the future evolution of an industry.  There is no guarantee that this state will come to be, but it does represent a gravity like pull.  The critical distinction between an attractor state and many corporate "visions" is that the attractor state is based on overall efficiency rather than a single company's desire to capture more of the pie.

ACTION POINT: How is your industry moving toward meeting the needs and demands of buyers as efficiently as possible?

 

Incumbent Response

They tend to fall in numerous patterns of incumbent inertia.

This guidepost points to the importance of understanding the structure of incumbent responses to a wave of change.  In general, we expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated per time.   They tend to fall in numerous patterns of incumbent inertia.

In business, inertia is an organization's unwillingness or inability to adapt to changing circumstances.  Even with change programs running at full throttle, it can take many years to alter a large company's basic functioning. 

ACTION POINT:  Avoid inertia and adopt a willingness and ability to change when circumstances do.

Predictable Bases III

...they predict that the future winners will be, or will look like, the current apparent winners.

A third common bias is that, in a time of transition, the standard advice offered by consultants and other analysts will be to adopt the strategies of those competitors that are currently the largest, the most profitable, or showing the largest rates of stock price appreciation.  Or, more simply, they predict that the future winners will be, or will look like, the current apparent winners.  Examples are:

• As aviation was deregulated, consultants advised airlines to copy Delta's Atlanta-based hub-and-spokes strategy.  But, unfortunately for the copycats, Delta's profits had come from subsidized prices on the short-haul routes to rural towns it served from Atlanta--subsidies that were disappearing with deregulation.
• While WorldCom's stock price was flying high, consultants urged clients to emulate the company and get into the game of putting fiber-optic rings around cities.  That advice had to be withdrawn when sleepy telephone companies awoke and began to cut prices.  WorldCom then crashed and burned.
• In 1999, the Web start-up advice was to create a "portal" such as Yahoo! or AOL--a website the acted as a guide to the internet and provided a protected "playground" or specialized Web pages that users were herded toward.  But although these companies were the stars of the moment, their initial strategies of capturing and channeling Web traffic were soon made obsolete by the sheer scale of the expanding Internet.

ACTION POINT: Recognize that times of transition may change the entire face of what future winners will look like.