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Grove not practicing what he preached

In the end, Andy Grove may have decided to hang up his boots because he failed to practice what he preached.

In the end, Andy Grove may have decided to hang up his boots because he failed to practice what he preached.

In his oft-cited book, Only the Paranoid Survive, Grove talked endlessly about "strategic inflection points"--spotting major industry trends early and getting there before anyone else. Simply put, these are the key moments that can result in either dramatic failure or incredible success for a company.

Grove took pride in being paranoid enough to have kept honing in on these critical points during his 11-year tenure as Intel's chief executive. Obviously, he exploited these trends to make the chipmaker a technological and financial force.

Yet there was a chink in his paranoid armor, because he certainly missed perhaps the biggest inflection point of this decade: the phenomenon of the sub-$1,000 PC. This movement toward full-featured, low-cost computers took off so fast last year that it now accounts for more than 40 percent of the personal computer business.

Not only did Grove miss this particular inflection point, but he also badly miscalculated the company's efforts to address it. It's one thing to have failed to be first in this space and totally another to swallow your pride and pile on. Instead of letting his famous paranoia take over, Grove tried to wish these cheaper PCs away.

According to some reports, Compaq, which fueled this sub-$1,000 craze, approached Intel seeking a low-cost chip solution--only to be rebuffed. Intel's thinking was to let the Cyrixes of the world wallow in the low-cost, low-profit chip business as the industry's "bottom-feeders."

Grove and company instead would continue down their "gold-plated business model based on exclusive chips sold at high margins," as one analyst put it. After all, Intel could not afford to build expensive fabs, cannibalize its good old Pentium, or turn over whole new lines within months (instead of years) at 10 to 20 percent profit margins. The executive was too caught up maintaining astronomical levels of 50 to 60 percent.

Achieving these latter margins quarter after quarter can be a heady experience. But for Grove, it worked. It worked because he had come up with a winning game plan: Intel would provide the motherboard and practically all the other innards of a computer to the Dells and the Gateways. All they really needed to do was put the casing around these components. Once IBM and Compaq caved in and accepted Intel's prebuilt goodies, it was easy for Grove to make them all jump through his hoop.

This strategy worked so well that when Grove said it was time to dump the Pentium for the Pentium II, PC makers didn't even ask why. And when Intel declared that its 233-MHz Pentium II was the mainstream chip, they simply went along. It was the hardware makers' headache to figure out the inventory and shrinking-margin problems. For Grove's Intel, it was time to collect on the costlier 333-MHz Pentium II chip. In the future, it would ride on its 350-MHz and 400-MHz processors.

Enter the inflection point. Despite Grove's best-laid plans, he could not put the sub-$1,000 genie back in the bottle. Only now is the chip giant coming up with a product line--oddly named Celeron--to tackle this cheap PC beast. While it might seem unthinkable that missing this inflection point will be Intel's Achilles heel, it could logically be one reason that Grove decided to step aside.

Carrying on probably would have meant reading assessments like this one from Forrester Research analyst Carl Howe: "Intel's late arrival with chips targeted at sub-$1,000 PCs and its attempt to migrate computer builders to its proprietary architectures echo IBM's failed attempt to move PC users to its patented Microchannel."

Ouch! IBM, Microchannel, and Intel in the same breath--that certainly would be too much for even the most paranoid to handle.

Jai Singh is editor of NEWS.COM.