Intel Walks Out the Door and Comes Back In

The story

Intel was started in 1968, and its first big success was memory chips, the tiny parts that let computers store information. For years, memory was what Intel was known for. Its leaders liked to say, in effect, that memories were who they were.

By the early 1980s, that was becoming a problem. Japanese manufacturers had learned to make memory chips very well and very cheaply. Memory chips were turning into a commodity, a product where buyers mostly care about price because one company's version is nearly the same as another's. Prices fell and fell. According to Fortune magazine, Intel's profits dropped from about $198 million in 1984 to less than $2 million in 1985. Intel's own annual report called 1985 "a miserable year" for the company and the industry, with losses in three of its four quarters.

Intel's managers argued for months about what to do. There was no easy answer, and every month of delay meant more money lost while competitors kept cutting prices. Many had spent their careers on memory, and walking away felt like giving up the company's identity. Andy Grove, Intel's president, later described a conversation in his office with Gordon Moore, the chairman and CEO, in 1985. Grove asked Moore: "If we got kicked out and the board brought in a new CEO, what do you think he would do?" Moore answered right away: "He would get us out of memories." Grove then asked, "Why shouldn't you and I walk out the door, come back and do it ourselves?"

That question changed everything. It let two leaders who loved the memory business look at it the way an outsider would, without pride or habit getting in the way. Intel phased out of the main kind of memory chip, called DRAM, in 1985. Instead, it bet its future on microprocessors, the "brains" of personal computers. IBM had already chosen an Intel processor for its PC, and in October 1985 Intel launched the powerful 386 chip.

The change was painful. Intel's 1986 annual report called that year "without question, the toughest year in Intel's history, filled with plant closings, layoffs and deep losses." Over two years, Intel cut about 7,200 jobs and closed eight older factories. In 1986 it lost more than $180 million, its only yearly loss since its earliest days.

But the bet paid off. As personal computers spread into offices, schools and homes in the late 1980s and 1990s, nearly all of them needed a processor, and Intel's chips were inside most of them. Intel grew into one of the most important technology companies in the world. Grove later wrote about this period in his book Only the Paranoid Survive, where he called such moments "strategic inflection points," times when the basic rules of a business change.

The lesson is not that memory chips were bad or that change is always right. It is that the people closest to a business can be the last to see that it has changed. Grove's trick of imagining a new boss gave him a fresh pair of eyes without having to wait to be replaced.