Monday, May 01, 2006

Intel's Insides

Friday's Wall Street Journal carried a piece concerning Intel's restructuring, amidst revenue declines. A good friend in the consulting sector had alerted me to it on Thursday night, when she read the story elsewhere. She assailed me, in a collegial manner, about the Intel situation and "corporate governance," knowing my stance on the general topic.

I am, frankly, of two minds about it. On one hand, I agree with my friend. Which is to say, 'how could the guys at Intel have messed up so totally?' They surely must track PC and laptop shipments and share. So they must have had earlier warnings of the weaknesses in those markets than just the past few months. My friend's overall attitude was, 'what are these guys being paid for, if not to manage around this type of knowable challenge?' I do agree, in part.

It's sort of inconceivable that as well-run a company as Intel has historically been could stumble so badly on demand assessment as to actually have to freeze hiring and terminate some employees. And I mean, with all the flourish and publicity of a "restructuring," to paraphrase Intel CEO Paul Otellini.

On the other hand, Intel is now long in the tooth. Its big break came from the space program. That's 40 years ago now, friends. They stomped all over the competition at the dawn of the PC era. That's roughly 25 years ago now.

At this point, I am having a serious Proustian moment. I actually recall gazing at a Business Week headline in the late '80s, featuring then-CEO John Opal, or perhaps his successor, John Akers, struggling with appalling losses. And wondering why IBM was so quickly and totally disparaged by the business press. This was very close to the time Bob Stempel got booted out for losing billions of dollars at GM. Recall, if you will, that Lou Gerstner and ex-P&G CEO John Smale stepped in at IBM and GM, respectively, to stem the losses.

What I thought then, as I do now, is that Americans simply have no sense of perspective with regard to business history. The two cases I mentioned, GM under Stempel, and IBM under Akers, literally launched the work that has resulted in this blog, a forthcoming book, and my portfolio strategy. I was shocked at how little understanding the business community, especially the media, had for prior performance. And I asked myself, "what is the mean time, in years, that a US company can sustain consistently superior total returns?" And, allied with that, what is the distribution of experiences surrounding that mean?

Suffice to say, what I subsequently learned is that it is a very, very rare firm that can sustain consistently superior performance, both in terms of total return, and the fundamental operating performances that drive the former. It's easy to sit and carp while a once-great firm, technological or not, dies. Or becomes seriously ill, aged, and never to rise again to its former dominance.

I think it's time to give Intel its due. It reigned supreme in its burgeoning sector for decades. It even managed, while doing that, to attain a time and measure of consistently superior returns for its shareholders. I have even held Intel stock in my portfolio, as a consistently superior firm.

So, while I think the current management is perhaps over-matched by circumstances, it's not, strictly speaking, their fault. If you've read much of the body of writing on this blog since the fall of last year, you may see a number of themes coming together in Intel's current travails. It is so very Schumpterian in nature, that I'm not sure even Bob Noyce could pull Intel out of the ditch this time. It very much matters whether a CEO follows a long line of consistent successes, or not.

Here, I think we have a rather traditional case of technological innovation and progress rendering Intel unable to extend its dominance anymore. Pressures of internal growth, slowing and declining internal competence and passion, coupled with commoditization pressures, and changes in their end-user market, have all combined to bring Intel to this impasse.

Within the next few days, some thoughts about AMD. Facing the same markets, why is it different, and what does that imply for both AMD and Intel?

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