CEO OF THE YEAR 1997

You have chosen. Chief Executive readers have nominated and a panel of readers have confirmed Intel’s Andrew S. Grove as [...]

July 1 1997 by JP Donlon


You have chosen. Chief Executive readers have nominated and a panel of readers have confirmed Intel’s Andrew S. Grove as the 1997 Chief Executive of the Year.

With a number of formidable contenders for the honor, several factors influenced the selection committee’s choice. Significant among them was long-term performance sustained over difficult conditions, which many judges regard as far and away one of the most important measures of a CEO. “Andy Grove has excelled on every conceivable measure one could apply to a CEO,” says Transamerica CEO Frank Herringer. “More importantly, he has delivered shareholder returns far in excess of any benchmark for more than a decade.”

“Andy has provided personal leadership, over an extended period of time that has created a national asset,” adds Unisys CEO Jim Unruh. “He’s a true visionary of the digital age,” says Rockwell’s Don Beall. “Arguably the computer industry’s most effective strategist and manager, Andy successfully sacrificed existing products for more effective and innovation microprocessor solution, a practice that has served Intel’s shareholders and customers very well indeed.

Intel’s total annual average return to shareholders since Grove became CEO in 1987 is 44 percent. Its compound annual growth rate in net revenues over the same period is 30 percent; its CAGR percent increase in book value per share – reflecting reinvestment of profits and new infusions of capital – is also 30 percent. Selection committee members were particularly impressed with Grove’s relentless vision which changed fundamentally the future course of computing. “On the rare occasions that he’s faced a stumble, he’s turned it into a €˜strategic inflection point’ and bounced back with a vengeance,” says Comsat CEO Betty Alewine. “Imagination and innovation are great cures for paranoia!”

Outgoing 1996 Chief Executive of the Year Roberto Goizueta of Coca-Cola perhaps summed it up best: “Andy has provided leadership over many years not only to his company but his industry as a whole – not to mention increasing the market value of Intel which today ranks among the top five most valuable companies in the U.S. If all this were not enough, Andy has demonstrated exemplary integrity and strength of character.”

Chief Executive salutes Andy Grove, 1997 Chief Executive of the Year

Nearly everyone is familiar with Moore’s Law, named after Intel co-founder Gordon Moore, which holds that the power of microchip technology relative to its price doubles roughly every 18 months. It explains, among other things, why last year’s Cadillac STS has more onboard computing power than NASA’s Apollo 13. It also explains why that spiffy new PC on your desktop that you reckoned to be your Ferrari Pinin Farina for vrooming along the information superhighway will in two years seem like a Ford Pinto. Moore’s law has held up pretty well in that microprocess­ing power is about 500 times faster today than when IBM first launched the PC in 1981. Intel’s own performance is also a marvel. A $1,000investment then would he worth about $33,000 now. Since Andy Grove, 60, became CEO in 1987, its revenues have increased more than tenfold to $20.8 billion. Its average annual return to share­holders during the same period is 44 percent. For the last five years its average annual return to investors has been an astounding 61 percent. Stern Stewart ranks Intel 12th among the top 1,000 U.S. public companies for total market value added-the difference between a company’s total market value, debt, and equity, and its economic book value, or the amount that investors have contributed to produce that value. (Coca-Cola, GE, and Merck lead the list)

One might think that going from 10th place to the No. 1 microprocessor maker, whose chips power over 90 percent of all PCs sold in the world, would permit the wiry, Hungarian-born émigré to pop the champagne corks. But Grove’s edginess doesn’t permit much more than 10 seconds of gloat. Unlike Moore’s elegant law, Grove’s theorem manifest in the title of his recent book “Only the Paranoid Survive” crackles like an exposed wire. To him the wolf is always at the door. Born Andras Grof, he left his native Hungary following the 1956 uprising and found passage on a recommisioned troop ship bound for New York. He moved in with an uncle living in the Bronx, entered City College, and earned a degree in chemical engineering. He also earned a graduate degree at the University of California at Berkeley in 1963 and spurned a career in academia in favor of a Silicon Valley startup called Fairchild Semiconductor. It was there that he came across Moore and Robert Noyce, one of the two people who invented the inte­grated circuit. When Moore and Noyce left to start Intel, Grove tagged along. Having little taste for administration themselves, the two recognized Grove’s managerial talents and made him director of operations.

The company’s recent track record is due in no small measure to Grove’s relent­lessness, but its performance wasn’t assured. Intel experienced a series of upheavals and reverses that have capsized other semiconductor firms. In 1985, a year in which the company earned a modest penny a share, Grove took Intel out of memory chips-its original business-and concentrated on microprocessors. The next two years were marked by layoffs, plant closings, and unpaid leave. By undercutting Intel and other American producers’ prices by 10 percent, Japanese chipmakers were eating U.S. memory chip makers’ lunch. This was one of Grove’s “strategic inflection points,” a critical chal­lenge that to Grove’s way of thinking rep­resents a 10x change. The decision to com­mit to microprocessors wasn’t the obvious choice it appears today. But it reinforced Grove’s managerial “paranoia” about ques­tioning one’s assumptions, as he was forced to do when Intel confronted unfavorable publicity in the face of Grove’s ini­tial dismissal of public concerns about technical flaws in the Pentium chip.

By branding the guts of the PC with its “Intel Inside” insignia, Intel did for PCs what DuPont did with Teflon. The core technology becomes the brand of choice; the assembly or manufacture of the prod­uct becomes almost incidental. But Grove understood that the company had to be more than a supplier of microprocessors if it was to grow. In the future, Intel would seek to build demand by making comput­ers and other devices more friendly and useful. Its dominant share would ensure continued growth. This is what he means in the following discussion about making the PC a central appliance in everyone’s life. It is also why the company is investing in technologies such as Internet telephony and digital photography. Networking will become increasingly important for growth. Thus, the company is working with MCI to provide greater bandwidth for networks. To drive its technology forward, Intel is spending $4 billion on new plants and $2.5 billion-more than what Microsoft earned in net income last year on R&D. Few companies come close to this market power, a fact that has not gone unnoticed by competitors whose paranoia rivals Grove’s at times. (If Microsoft is dubbed “the evil empire” in Internet chat lines, Intel is tagged as a “dark force” by those who fear its ubiquitousness.)

If further proof is needed to underscore Intel’s market dominance, it came on the May 30 announcement of a 5 percent to 10 percent fall-off in second quarter earnings. It triggered fears of a PC slump on Wall Street, panicking investors into a 50 point drop in the technology-laden Nasdaq com­posite index. Intel says the sales slowdown is a short-term blip due to slow demand in Europe, which will be offset by rising demand for its newly launched Pentium II and Pentium MMX products. The announcement came at a routine analysts’ meeting and was not dramatic in itself, but the reaction indicates just how deep a blue chip Intel has become. (It now accounts for 2 percent of the S&P 500.) Every move it makes is seen as a signal for the wider economy, which is now so dependent on the technology it provides.

“Intel won’t hold the market near monopoly for much longer,” says VP of Equities Research Krishna Shankar. “It will continue to grow earnings at 17 per­cent or better for the next five years, but the price competitiveness of AMD and Cyrix will take some share away. When PC prices start to fall below S1000, makers can’t afford to have a 5400 chip in it.” Oth­ers on Wall Street believe that beating back the competition is necessary but insuffi­cient. ‘Intel is seeking to enable the new standards that will allow for the transition of the PC into a communications/ entertainment device,” says Lehman Broth­ers’ Mike Gumport. “The 185 million PCs sold in 1994 to 1996 will all have to be replaced by 1999, and that alone should provide a healthy base for demand.”

As with GM of the 1950s and IBM of thee 1960s, Wintel, the complementary forces of Microsoft and Intel, have inherited the mantle of business icon of their age. It is difficult to point to any business today that isn’t directly affected by operating systems and microprocessor technology. -J.P. Donlon

INTEL NOW AND THEN

How much of Intel’s future is tied to Microsoft’s future?

We look at Microsoft as our most impor­tant complementer. We don’t buy a whole lot from each other and we don’t have any contractual relationships with each other, but their software needs our microproces­sors. Our microprocessors need their soft­ware. They are the largest software provider. We are the largest microproces­sor provider. And the built-in complemen­tarity of our relative market positions kind of “destines” us to work with each other. Over time, each of us could live without the other, but it would not be easy.

Long-term, they are probably just as tied to the growth of the PC business as we are. So, that’s one thing that keeps us together. But suppose we were different. What real­istic chance does either of us have to encroach on the other’s core business? Around the periphery we can screw around and do things to each other, but the notion that we or anybody else is going to go in and take on the Microsoft operating system or that Microsoft is going to go in and start designing microproces­sors-I mean, there’s nothing theoretically impossible about it. But is that a proper use of your shareholders’ resources? I don’t think so. To us, Microsoft is part of the environment, and I hope, to them, we are part of their environment. The environ­ment isn’t always what you want it to be. When it’s pour­ing rain out there, 1 need an umbrella, not an attitude that takes on Mother Nature.

So far, Microsoft gains when Intel gains, but that isn’t necessarily the way it will work in the future, is it?

Might not. But then again, it’s more likely that it would. Both of us are strong benefi­ciaries of a healthy PC busi­ness. We both need new peo­ple in the PC business, new customers. We need to sell those new customers richer and richer experiences which require higher performance hardware and software. I don’t see a break in that. We have survived the disappear­ance of the umbrella between the two of us, which is IBM. We have survived a lot of technological changes. We are adjusting to the Internet and moving both of our product strategies, business strategies, to be based on the Internet. And all along, the complementarity of our core businesses remains. So, what would change that? Can people want operating systems without needing microprocessors? Can people need microprocessors without needing operating systems?

Ten years ago, you were a chips com­pany, but you’re not that anymore. And it’s not just a question of your being X-times bigger. You’re different. How?

Probably a simple explanation is we do a lot of technology work to develop markets for our chips. At an event we had today, we brought companies together who use our technology for their purposes, and we brought them together with a technology company that builds on our technology to service a wide variety of customer contact businesses. Now, in the old days, we would’ve worked with a Lotus on a spreadsheet or we would have worked with Word Perfect or somebody on a word processor, and you would have under­stood it very simply: that’s a PC applica­tion, this is a PC, while we worked with them to make sure that that application runs well on a processor. Structurally, that’s exactly what we’re still doing. But now, the applications are far more varied and less obviously PC applications. Buying a ticket through Ticket Master is less obvi­ously a PC application than a word proces­sor. But what we are doing is very similar to what we did with word processors. We’re making sure that those applications get optimized on our architecture, that they get designed knowing what our technol­ogy is going to do, knowing what our plans are. We had a handful of PC soft­ware applications, now we have 100 Inter­net companies that we have to do the same kind of stuff. So, the nature of the work didn’t change. What changed is the scope. But that scope parallels the scope of personal computing. Personal computing used to be an office tool. It’s now way beyond that. We supply the personal computing industry as the per­sonal computing industry grows into places that it hasn’t been, and we grow with it. So yes, we are very different than we were 10 years ago hut so is the industry that we supply. 

Are Intel’s current chips too powerful for their own good? Given the power of the Pentium, and most people’s rather modest comput­ing needs, why should anyone upgrade?

Provided you keep the price at a reasonable level, there’s no such thing as too much pro-computing power. No software devel­oper ever complained about too much memory or too much computing power. They always have to make compromises in what they present to die user in terms of ease of use, richness, performance, features, because they’re bound by the confines of hardware. We are moving the confined hardware boundary up.

But as a practical matter, MMX to some degree cannibalizes Pentium. And doesn’t Pentium II add to the confusion of the average person who is not a technology expert?

This year we’re going to go through two very major technological transitions: We introduced MMX technology and Pentium IL They are two different microprocessors, two very major steps in performance. If we could introduce two big waves of technol­ogy in one year and not confuse the world with that, we would deserve a Nobel Prize. The fact is, it is a very rapid transition. In a perfect world, what we should have done is introduced MMX technology a year ago and Pentium II this year. But it is not a per­fect world and they both ended up in the same year.

In some parts of the world, particularly in Europe, not everyone seems to be concerned with having the latest tech nology. Considering that you’ve got 58 percent of your revenue coming from outside the U.S., how does this affect an important stream of future profits?

Approximately a quarter of our revenue is from Europe. We are aware of the sluggishness of the European market in adopt­ing new technology and new microproces­sor technology. And we see the difference between how rapidly Asia picks up new technology and, by comparison, how slowly Europe does so. These people have fallen further and further behind in an age in which business competitiveness is very heavily linked to technological savvy. Wal-Mart would not be Wal-Mart without tech­nology. FedEx would not be FedEx with­out technology. These are companies that are not technology companies, but they live and die by technology. If their coun­terparts are technologically less Savvy, they’re going to lose. So, either Europe will become more competitive or it won’t. If it won’t, their long-term position in the world of commerce and manufacturing is going to erode. And now that they have compe­tition, not just from the United States, but from very hungry and very commercially aggressive countries, who are also aggres­sive in technology adoption, this situation is going to be worse. So, you watch the German economy in the doldrums, you watch the French going from strike to strike as a response to any attempt at improving their global competitiveness; what’s going to happen? They either change their ways or retreat behind the protectionist curtain. A curtain never worked too well but it works less well today than ever. 

In a way, that problem is now your problem, isn’t it? How do you get that to reverse itself?

There’s a limitation to what we can do about it. In Europe, you notice how few people carry notebook computers. It’s a night and day phenomena. You get on a flight from New York to Chicago and everybody plops out a PC. You go from Frankfurt to Munich and nobody does. And this in the face of having the best cel­lular digital phone system anywhere in the world. So a couple of years ago, we said we have an opportunity to do something to mobile computing in Europe by marry­ing GSM technology, notebook technol­ogy, and we undertook something called a mobile data initiative with people like Eric­sson, Nokia, Siemens, and various other people. And we have managed to stimu­late the creation of GSM cellular modems. Now, that’s a constructive initiative that we undertook to marry a Europe-based infra­structure technology with an Intel-based personal computing technology for improving both our business in Europe and Europe business in doing that. Will it amount to a significant change? I don’t know. But wherever we see an opportu­nity like this, we will take it.

THE NEW PC AGE

What’s your plan for transforming the PC into a communication and entertain­ment appliance?

What I see unfolding is a world of a billion interconnected computers. What we have today is probably 100 million intercon­nected computers. And that gives us this Internet phenomenon and electronic com­puters and all of the buzz and the excite­ment and the high evaluations of things that didn’t exist two years ago and all of that. I don’t know whether it’s going to take us five years, or seven years, or 10 years, but in some reasonable time, you’re going to have a world of a billion inter­connected computers that will have the characteristics that every computer can communicate with any number of other computers. Any computer with proper authorization can get. Information from any one of those computers, and some of those computers are servers, some are clients, some have Web pages, some have Ticket Master-like information, some of those computers have virus protection agents that you buy or banking accounts, and they are libraries, they are your medical report that is accessible to any medical provider from anywhere in the world. It is going to change how life is lived. It’s a much better way.

Will the PC replace the television set or the telephone or add to them?

It’s not going to replace the telephone but I think it’s going to cut into telephoning. The best way to predict something is when you observe something that’s happening. The amount of time I spent on the phone at work, as compared to the amount of time I spend on the computer at work, crossed over about three or four years ago. I barely spend much time on the phone. I get outside calls, that’s a minority. Internal to the company, almost all of our commu­nications are through electronic mail. So it is not going to replace the telephone. I still have a telephone. But in terms of where I do most of my work time, or how much of my work time, there’s been a shift taking place that can continue.

It is not going to be a replacement of the television as a device as much as a replacement of viewing pattern, viewing time spent. And I’ll give you again a pre­sent-day example of this. Broadcast televi­sion viewership is in a major decline. Those viewers are not going to the com­puters. They’re going to more numerous, more fragmented cable television. I see this as a continuum-big time broadcast to narrowcast to niche-cast, and the niche-cast is the Internet. ‘IV usage is down by something like one-third in households with computers.

It’s not a replacement, it’s a displace­ment. Displacement in terms of time. And that’s a very significant phenomenon. So, it’s a symptom of how dependent we’re going to be on those interconnected com­puters. And that trend has accelerated since computer usage has become a con­nected usage. 

On that theme, what is your view of the so-called network PC, or so-called sim­plified Internet appliance?

The interconnected computers will not be uniform computers. They will he powerful ones and older ones, thin ones and thick ones, muscular ones, and big disks and lit­tle disks-but they will all have to be com­patible, at least in terms of this web oper­ation. The limitation of the kind of devices you can hang on that thing depends on the usage pattern of those billion computers. If you think the usage pattern is going to be very simple, character-based, very low­brow, basically like dumb terminals, then a significant portion of those billion comput­ers could become very simple-minded devices. But I don’t think so. If I thought so, I couldn’t have given you that answer about television. I couldn’t have given you an answer about telephones either, for that matter, because Internet telephony probably couldn’t take place on those sim­ple-minded devices. I think the usage pat­tern is going to be rich. It is going to be human-friendly in characteristics: visual, 3-D images with points of view, video rich sound, possibly voice recognition.

But couldn’t the server handle all of that or most of it?

A server could handle those but at the expense of much more load on the server, and at the expense of bandwidth require­ments that are beyond what is likely to be available, certainly in the consumer space.

Java software, long term: friend or foe?

Java software is friend, absolute friend-because it brings network richness for the applications designable for networks much more effectively than many other lan­guages.

It has been written that the cost of sup­porting and maintaining a PC is many multiple times those of its replace­ments and that this is going to be an issue when companies choose to replace PCs or think about network computing. What role will Intel play in this?

We are playing a major role in building in management network management, which is the most important asset. These computers, when they’re wired, they get more expensive. But the very act of wiring them also gives you the escape in allowing a remote help desk, a remote administra­tor, or a remote machine to fix those prob­lems that require human intervention today, which is where most of the cost is. So the problem contains the seeds of the solution and it’s up to us to engineer solu­tions that come built-in to every computer. It’s a major thrust for us.

Gartner and others say that the total cost of maintaining and servicing com­puter PCs are around 540,000 per desktop. What do you think of that estimate?

I think it’s going to come down over time to about half of that in five years. Most of