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.