Book Summary

This is my book summary of In the Company of Giants: Candid Conversations With the Visionaries of the Digital World by Rama Dev Jager and Rafael Ortiz. It contains some of my favorite interviews and is my favorite book of interviews of all-time. This summary also includes key lessons and important passages from the book.

• The Book in Three Sentences
• From Sand to Gold: A Brief and Relevant History of the High-Tech Industry
  
• About In the Company of Giants
• Steve Jobs of Apple, NeXT, and Pixar: Only the Best - People, Product, Purpose
• Microsoft’s Bill Gates: Running the Panzer Division
  
• Andy Grove of Intel: An Immigrant in the Trenches
• Trip Hawkins of EA (Electronic Arts): Creativity, The Ultimate Game
• Ken Olsen of Digital Equipment Corporation: Reflections on the Revolution
• More Books Like This
• Buy the Book
  

The Book in Three Sentences

Pull up a chair and listen in on the most honest and unrestrained interviews ever published of the titans of the digital world — including Steve Jobs, Bills Gates, Andy Grove, and Bill Hewlett. Here's tough, straight, sometimes controversial, sometimes profound but always instructive talk about how they did it … what they think … and where it's all going. It's my favorite book of interviews ever written.

From Sand to Gold: A Brief and Relevant History of the High-Tech Industry

On January 22, 1985, 100 million people were watching the Los Angeles Raiders as they crushed Washington 38-9 in Super Bowl XXVIII. The halftime show, a made-for-TV extravaganza, proved but a sidelight to the production value of the television advertisements that elbowed their way into viewers' living rooms.

One such commercial, never aired again, stood above the rest and branded the nation's collective consciousness.

In it, gray brainwashed automatons marched toward a gigantic screen of sinister Big Brother (a thinly veiled IBM) rhapsodizing about "everybody using one standard." Out of the shadows, a lone woman, clearly not indoctrinated like those around her, charges and hurls a sledgehammer at his projected image. The result: a shattered false oracle and newfound freedom for the oppressed masses. The somewhat surreal Orwellian ad ends with a voice proclaiming, "On January 24th, Apple Computer will introduce Macintosh. And you'l see why 1984 won't be like '1984.'

Literally a smashing success, this ad promoted the alternative to an IBM-centric vision of computing and launched Apple Computer's next generation of personal computing, the Apple Macintosh.

Part of that commercial's and eventually, the Macintosh's, success was because of Apple's chairman, Steve Jobs. That year, Jobs formally unveiled the Macintosh at the company's annual shareholder meeting in Cupertino, California. With showman's style, he unveiled the Macintosh computer - capable of accepting user commands using a graphical, desktop interface and manipulated by the user with menu-based commands. No more obscure keyboard commands. No more rat's nest of wires and cables. It was a hit.

As one attendee of that emotive shareholder's meeting told us, "You can't begin to understand the emotional intensity in the auditorium that day. Remember that the place was crowded with hundreds of disgruntled Apple employees still reeling from the failure of the Lisa [Apple's first attempt at graphics-based computing] and dozens of cynical analysts from New York who'd seen and heard it all. I can tell you this: at the end of the meeting, everybody was on their feet wildly cheering. There wasn't a dry eye in the house."

Jobs and others like him in this book have created companies that have skyrocketed to glory. What are their secrets? Is it just luck? Though fortune undeniably plays a role in all ven-tures, the ability to start and grow one or more companies in the tumultuous, rollicking computer industry takes some talent. Indeed, considering that as many as 90 percent of new firms fail within five years, it's more appropriate to recognize that the Giants profiled in this book were both beneficiaries and creators of luck. Collectively, their companies command almost $100 billion in yearly revenues.

As the industrial age had its magnates, the information age boasts its own pantheon of self-made barons. This chapter provides a brief history of the contemporary American computer industry and the businesspeople who shaped it. By orienting you, the reader, with the story behind the computers we work and play with, we hope to contextualize this industry's amazing growth and the people who led it.

By the mid-1970s, California's Santa Clara orchards gave to an onslaught of commercial construction. New companies and newly minted millionaires crowded Silicon Valley and the Route 128 area outside of Boston. It was the dawn of a new era in American capitalism, a new gold rush.

But this was a gold rush of a different sort: Instead of racing to extract precious metals from the ground, young opportunists converted sand's base substance, silicon, into microchip components, pound-for-pound worth more than gold. Others with Midas-like insight crafted lengthy, cryptic messages using these very microchips, to automate heretofore time-consuming, manual administrative work.

It is difficult to meaningfully convey the extent to which computers have evolved and shaped our daily march through life. Intel co-founder Gordon Moore put it in perspective by describing the phenomenon commonly known as "Moore's Law." This principle states that the number of transistors-and therefore the computing power-per microprocessor will double every 18 months.

To illustrate this point, consider that the raw computational power of IBM's powerful, million-dollar mainframes in the '70s today fits into the diminutive package of a handheld calculator. It is this incredible development that has fueled the unprecedented change in business processes the world-over. Moore's Law is in full effect.

Ironically, many of the stories of successful entrepreneurs were not born from master plans for world domination but of sheer frustration with the ineptitude, politics and mediocrity of the companies they abandoned.

Case in point: Thomas Watson, Sr., IBM's spiritual father, was fired earlier in his career by his previous firm's jealous and arbitrary executive. Undaunted, he founded a promising card tabulating company and in his disciplined, autocratic manner, led the company to incredible heights. His company's early domination of the computer industry created tremendous wealth for IBM shareholders. At a 1954 shareholder meeting, Watson remarked:

A purchase of 100 shares in 1914 would have cost $2,750... This would now amount to 3,114 shares, with a market value of $1,029,177, which with cash dividends of $117,356 paid during this period, totals $1,206,533...

In perfect irony, IBM's success generated its competition: a young MIT graduate student working on a joint computer development project with IBM for the Department of Defense. His frustration with IBM's stuffy hierarchy and approach to computing drove him to realize his own vision of computing—he fundamentally believed that individuals wanted their own access to the computer, with a keyboard and monitor, rather than ceding control to computer systems operators. This young man, Ken Olsen, created the basis for the next generation in computing, minicomputers. Named that because of their relatively small physical size and ability to work without special air conditioning, minicomputers also happened to be very low cost—DEC's sub-$100,000 system price was a relative bargain compared with IBM's million-dollar hardware. Digital's runaway success earned Olsen, his venture capitalists, and lucky investors millions.

Digital's ascent inspired dozens of imitators and competitors and, only 22 years after the company's founding, sparked the imagination of a 12-year-old boy at Seattle's Lakeside School—Bill Gates. His introduction to computing: Digital's PDP-8 computer.

Despite the apparently boundless opportunity that awaited promising computer industry startups, roadkill littered the road to dominance in the nascent industry. William Shockley, the Nobel Prize-winning co-inventor of the transistor (a miniaturized vacuum tube set in a single solid piece of germanium-later silicon) was among the most notable business failures.

Previously, all computers used vacuum tube technology as processors of information. One of the first computers ever developed, ENIAC, was a 30 ton, 1,500 square foot, unreliable monstrosity. With Shockley Semiconductor's (as the firm was called) technology, more compact and powerful computers could be built using thousands and thousands of microscopic circuits.

Shockley's skills as a physicist didn't necessarily translate into management talent, however. After only a couple of years in business, his firm suffered defections from bright young engineers. Among the defectors were Robert Noyce and Gordon Moore, who with a handful of other engineers founded Fairchild Semiconductor.

Fairchild's role as the standard-bearer of semiconductor technology paradoxically proved to be its own undoing. Dozens of other starry-eyed developers left to start their own companies. Again Noyce and Moore departed, and with a young Hungarian-born physicist named Andy Grove in tow, created Intel (INTegrated ELectronics). Many Silicon Valley startups of that era trace their lineage back to Fairchild.

Intel's first products were advanced memory chips. Later, it devised a way to put all of the circuits that worked as the main processors for a computer onto a single chip. The company was slow to recognize the importance of its achievement, but it eventually focused its business solely on this technology and grew to amass industry dominance by selling its successive generations of "microprocessors" to the world's largest personal computer manufacturers.

Unnoticed by most, the January 1975 issue of Popular Electronics heralded the arrival of the next, albeit primitive, generation of computing: a computer kit priced affordably enough for hobbyists to assemble their very own machine and use it to perform modest calculations. The cowboy entrepreneur behind this computer, the Altair, was Ed Roberts. His company, MITS, cleverly leveraged Intel's microprocessor developments by incorporating the Intel 8080 as the brains for its low-cost machine.

To all outward appearances, the little Altair was a black box. Adorned only with flashing red lights to inform the user that it was working on something and lacking a keyboard and monitor, Altair riveted imaginative young minds on the east and west coasts to the potential of personal computing. It was not long after the machine's launch that college undergrad Bill Gates and his partner, Paul Allen, were furiously writing code that would serve as Altair's base operating system, thereby giving users the ability to perform more useful functions with the machine than just flipping toggle switches that made lights blink on and off.

Meanwhile, in the suburbs of the San Francisco Bay Area, young engineers, hackers and assorted minstrels circulated in a subculture of computer tinkering, assembly and idea-sharing. The Homebrew Computer Club was among the most recognized organizations in this milieu. It was there that several enthusiasts studied the Altair and Gates' software, and in fits of technical one-upmanship, developed their own computers.

Dozens and dozens of machines were created-some with their own software, others pirated from Gates' work. Few among them viewed these developments as money-making opportunities.

In the early 1970s, Xerox was the paragon of corporate success. Company management rightly concluded that industry leadership would require technical superiority and development leadership. The company set out to create the world's leading corporate research center in the backyard of Stanford University. Its Palo Alto Research Center was known and venerated by all associated with it as Xerox PARC.

Despite PARC's preeminence as a center of leading-edge work in computing, it proved to be the antithesis of entrepreneurial activity as innovation after innovation walked out of PARC's doors to be capitalized on by others. PARC's leadership in graphically-based computer operating systems directly influenced Apple's development of the Macintosh and Microsoft's development of the Windows operating system-both considered among the most influential and lucrative technologies to emerge from the modern computing era.

So, what's in store for the future? The 90s have brought promise of a new era in computing. Simply put, the new paradigm for entrepreneurs to grapple with is the notion that computers connected to others-communicating and sharing information amongst them-increases their value tremendously to users. Steve Case, founder of America Online, saw this in 1985 when he created a proprietary service designed to allow users with modem-equipped computers to communicate with others in a private community setting or to retrieve information from the equivalent of town hall bulletin boards.

Case's venture, America Online, grew several years before the rapid popularization of the internet took place. Originally a network of networks, the internet was designed by the military to allow researchers to communicate with other researchers.

As the Net's commercialization continued, companies recognized the value of low cost communication by computers over great distances. America Online and now hundreds of others aim to cash in on what promises to be a whole new industry.

As startup ventures sprout like mushrooms in venture capital-backed fecundity, it remains to be seen whether the advent of the internet strengthens the Giants' hold over computing or undermines it to create an entirely new generation of successful entrepreneurs and leaders. Regardless, we think you'll find these candid conversations with some of America's greatest entrepreneurs as informative and entertaining as we did.

About In the Company of Giants

The professor asked, with a wide grin, "So you want to write Ta book on high-tech CEOs? Well, gentlemen, it's a long shot. A huge long shot. And, besides... no CEO knows why he is successful. It's all just luck."

On a balmy day in mid-spring, we were two Stanford MBA students trying hard to conceal our disappointment. Coming from a well-known strategic management professor, a comment such as this seemed somewhat ridiculous—for if successful management were all luck, then why were we taking his class? Why, for that matter, were we in business school? Surely, successful management was not entirely due to luck—there had to be some successful strategy and ideas at play too.

Louis Pasteur once said that chance favors the prepared mind. If "chance" is a major factor in a company's success, as our professor believed, then we really wanted to know what successful entrepreneurs do to "prepare" their minds.

What are the crucial skills needed to run a successful company? To hire great people? To ship a great product? What skills should a potential manager try to develop? Why was one manager successful where another wasn't? Answers to these questions, in the words of the very people who have started successful technology companies, comprise this book.

Who we chose to speak with and why we chose them.

Bill Gates. Andy Grove. Bill Hewlett. Steve Jobs. Why them? Why not others?

Hundreds of entrepreneurs have had great ideas and have started great companies. What differentiates the vast majority of entrepreneurs profiled in this book is that they not only have started their respective companies, but also have had an active role in the company's growth. These entrepreneurs weren't booted out of the company after starting it—they weren't people who had one great original idea, implemented it, and left because they weren't good managers. Instead, they had a great idea, managed the team that implemented the idea, and then had another great idea and managed the team that implemented that idea. They transformed the company from a "one-great-product" company to a "two-or-more-great-products" company; they made the company grow-they not only planted the seed, they watered the plant.

We chose to focus on the computer industry for two reasons. First and foremost, computers are dynamically changing the way people exist. They are causing generational change. Compared to our parents-who use computers for word processing or technical applications at best—many of us use the power of computers for surfing the internet, communicating with friends and colleagues, and balancing a checkbook.

Second, going to Stanford's business school put us in the heart of Silicon Valley. Steve Jobs candidly told us one night, "Well, if you're at heaven's gate, you might as well walk inside and take a peek."

What the book attempts to do.

Reading this book is not an instant path to guaranteed wealth. Notice that this book is not entitled How to Start a Billion-Dollar Computer Company, or How to Get Rich Quick Off Chips. Such titles do not genuinely help us convey the messages of this book.

What we do want to convey are stories of some of the greatest entrepreneurs in history. Their companies directly influence the way we live, what we do, and even what we can't do. Instead of focusing on these companies, In the Company of Giants focuses on leaders-we attempted to discern who the person was behind the company, what his or her style of management was, and whether this conflicted with, or conformed to, conventional startup wisdom. Looking at the people behind these companies is one small way of interpreting the revolutionary technological change that the world is experiencing today.

Steve Jobs of Apple, NeXT, and Pixar: Only the Best - People, Product, Purpose

The story of Steve Jobs is the story of a young college drop-out who sojourned to India in search of purity and enlightenment, returned to the U.S., and founded Apple Computer.

Was dabbling with Hinduism the key to success for a 20-year-old with little money and a modest technical background?

Perhaps. High school buddy Steve Wozniak-by all accounts a brilliant tinkerer and engineer-and Jobs collaborated on several "projects" during their adolescence, including hacking into phone company networks and making video games. Yet, over time, their individual responsibilities remained well-defined: Wozniak mainly designed and built the product, and Jobs scrambled to find customers, coworkers, and components. Eventually the projects became of value to others and Jobs persuaded Wozniak in 1976 to devote his energy to a partnership—Apple Computer.

Many would-be entrepreneurs, lacking money or strong business experience, become stymied by the challenges of obtaining financing and recruiting people to join in working for what is essentially an idea. Yet Jobs doggedly cajoled suppliers and retail outlets to provide Apple with low pricing and extended credit. His apathy for maintaining his outward appearance—he often showed up to meetings barefoot and bearded—didn't appear to lessen his zeal. Instead, his aggressiveness netted the help of several engineers, marketing firms, and venture capitalists.

The product of Wozniak's astounding engineering feats and Jobs' relentless ambition, Apple's mainstream computer, the Apple II, began selling like wildfire. The company mush-roomed, with the Apple Il bringing in huge profits. Media attention turned toward Silicon Valley, and Jobs, the master salesman, graced the cover of Time in 1982.

Jobs, however, is best known in the computer industry for leading the team that developed the boldly-designed computer used by millions today: the Apple Macintosh. During a demonstration of a prototype computer at the famed Xerox PARC, Jobs and other Apple employees were astounded by a computer that displayed graphical icons and pull-down menus in its operating system. The computer even allowed the user to issue commands from a small, wheeled device (a mouse). The demonstration's impact on the Apple team cannot be over-estimated—Jobs scrambled to rewrite Apple's plan for its next computer, the Lisa, in order to accommodate the revolutionary ideas and logic of the Xerox PARC prototype. In its most basic description, the Lisa was the mother of the Macintosh.

Targeted at corporate America, Lisa was a powerful computer destined to leapfrog its competition, but instead floundered in the marketplace mainly due to its hefty $10,000 price tag.

During this time, Jobs recruited Pepsi marketing executive John Sculley to join Apple as CEO. Jobs' management responsibility shifted to leading product development for a pint-sized version of Lisa, code-named Macintosh. Jobs zealousness and management style drove the Macintosh team to sustained levels of intense work: seventy-plus hour weeks for months at a stretch became the norm. When later asked to explain their incredible work ethic, Macintosh team developers spoke of a sense of importance to their work, a messianic belief that the Macintosh would not only change computing, it would change the world.

Yet, after an initial spurt of sales to early adopters and yuppies, Macintosh sales lagged behind forecasts. Dissension in the nine-year-old company grew. Jobs and Sculley, once partners, became bitter enemies and attempted various power plays to remove each other. Politically more astute and agile than Jobs, Sculley won the showdown and Jobs was forced to retreat.

Jobs soon left the company with several key Apple employees in tow and started NeXT, his bid to revolutionize computing a second time. After a string of disappointing hardware product initiatives, NeXT boasted an estimated $60 million in yearly revenues in 1996—very respectable for a software company, but disappointing perhaps to those who expected nothing less than another rabbit hat trick and billion dollar revenues.

However, Steve Jobs still does magic. In an ironic twist to this Silicon Valley soap opera, Apple Computer decided to purchase NeXT for $400 million at the end of 1996. Why?

Apple, by the end of 1996, was desperately struggling to revamp its own operating system and boost lagging sales. It needed a new vision, and chose NeXT—among several other potential companies—to fulfill that vision. Apple's reasons behind the purchase were widely speculated upon in the press, and many journalists had critical comments about Apple's strategy behind the acquisition-after all, NeXT only posted an annual profit once in the past four years, and was a market share laggard. Will NeXT—and Steve Jobs—be able to help save Apple? Only time will tell.

Fate rarely presents entrepreneurs more than one golden opportunity for commercial success. But Steve Jobs manages to defy the odds. Longing to enter computer animation, Jobs acquired the computer graphics division of Lucasfilm, renamed it Pixar, and helped shepherd it to a successful launch of a computer-generated feature film (Toy Story) and a public stock offering that pushed Jobs' estimated wealth well over the $500 million mark.

Yet, in the final analysis, Steve Jobs built a team of tremendously motivated and talented people who were able to truly change the world. All from a small company that started out of a suburban California garage.

We met with Steve Jobs at NeXT's corporate headquarters in Redwood City, California.

"You've got to be passionate about something!"

What talent do you think you consistently brought to Apple and bring to NeXT and Pixar?

I think that I've consistently figured out who really smart people were to hang around with. No major work that I have been involved with has been work that can be done by a single person, or two people, or even three or four people. Some people can do one thing magnificently, like Michaelangelo, and others make things like semiconductors or build 747 airplanes—that type of work requires legions of people. In order to do things well that can't be done by one person, you must find extraordinary people.

The key observation is that, in most things in life, the dynamic range between average quality and the best quality is, at most, two-to-one. For example, if you were in New York and compared the best taxi to an average taxi, you might get there 20 percent faster. In terms of computers, the best PC is perhaps 30 percent better than the average PC. There is not much difference in magnitude. Rarely you find a difference of 2 to 1. Pick anything.

But, in the field that I was interested in-originally, hardware design—I noticed that the dynamic range between what an average person could accomplish and what the best person could accomplish was 50 or 100 to 1. Given that, you're well advised to go after the cream of the cream. That's what we've done. You can then build a team that pursues the A + players. A small team of A + players can run circles around a giant team of B and C players. That’s what I’ve tried to do.

So you think your talent is in recruiting?

It's not just recruiting. After recruiting, it's then building an environment that makes people feel they are surrounded by equally talented people and that their work is bigger than they are. The feeling that the work will have tremendous influence and is part of a strong, clear vision—all of those things. Recruiting usually requires more than you alone can do, so I've found that collaborative recruiting and having a culture that recruits the A players is the best way. Any interviewee will speak with at least a dozen people in several areas of this company, not just those in the area that he would work in. That way a lot of your A employees get broad exposure to the company, and—by having a company culture that supports them if they feel strongly enough—the current employees can veto a candidate.

That seems very time-consuming.

Yes, it is. We've interviewed people where nine out of ten employees thought the candidate was terrific, one employee really had a problem with the candidate, and therefore we didn't hire him. The process is hard, very time-consuming, and can lead to real problems if not managed right. But it's a very good way, all in all.

Yet, in a typical startup, a manager may not always have time to spend recruiting other people.

I disagree totally. I think it's the most important job. Assume you're by yourself in a startup and you want a partner. You'd take a lot of time finding the partner, right? He would be half of your company. Why should you take any less time finding a third of your company or a fourth of your company or a fifth of your company? When you're in a startup, the first ten people will determine whether the company succeeds or not. Each is ten percent of the company. So why wouldn't you take as much time as necessary to find all A players? If three were not so great why would you want a company where thirty percent of your people are not so great? A small company depends on great people much more than a big company does.

But, what about the need for speed when taking your product to market? Wouldn't recruiting in this manner take away time from getting your product to market quickly?

You'd better have great people or you won't get your product to market as fast as possible. Or, you might get a product to market really fast but it will be really clunky and nobody will buy it. There are no shortcuts around quality, and quality starts with people. Maybe shortcuts exist, but I'm not smart enough to have ever found any.

I spend 20 percent of my time recruiting even now. I spend a day a week helping people recruit. It's one of the most important things you can do.

If finding the A players is so important, how can you tell who is an A player and who isn't?

That's a very hard question. Ultimately there are two paths. If a candidate has been in the workplace for a while, you have to look at the results. There are people who look so good on paper and talk such a good story but have no results behind them. They can't point to breakthroughs or successful products that they shipped and played an integral part in. Ultimately the results should lead you to the people. As a matter of fact that's how I find great people. I look at great results and I find out who was responsible for them.

However, sometimes young people haven't had the opportunity yet to be in a position of influence to create such results. So here you must evaluate potential. It's certainly more difficult, but the primary attributes of potential are intelligence and the ability to learn quickly.

Much of it is also drive and passion-hard work makes up for a lot.

When you recruit you're rolling the dice. No matter what, you're rolling the dice because you've only got an hour to assess the candidate. The most time I spend with somebody is an hour and I must then recommend whether we hire the person or not. Others will recommend, too, so I won't be the only one but I'll still have to throw my vote in the hat. Ultimately it comes down to your gut feeling. Your gut feeling gets refined as you hire more people and see how they do. Some you thought would do well don't and you can sense why. If you study it a bit you might say, "I thought this person was going to do well but I overlooked this aspect," or "I didn't think this person would do well but they did and here's why." As you hire people over time your gut instinct gets better and more precise.

Over time, my digging in during an interview gets more precise. For example, many times in an interview I will purposely upset some-one: I'll criticize their prior work. I'll do my homework, find out what they worked on and say, "God, that really turned out to be a bomb.

That really turned out to be a bozo product. Why did you work on that?" I shouldn't say this in your book, but the worse thing that someone can do in an interview is to agree with me and knuckle under.

What I look for is for someone to come right back and say, "You're dead wrong and here's why." I want to see what people are like under pressure. I want to see if they just fold or if they have firm conviction, belief, and pride in what they did. It's also good every once in a while to really piss somebody off in an interview to see how they react because, if your company is a meritocracy of ideas, with passionate people, you have a company with a lot of arguments. If people can't stand up and argue well under pressure they may not do well in such an environment.

You mentioned how important it is to find good people, regardless of the time to market issue. Yet, when you first started Apple it seemed as if you were just hiring people as fast as you could.

In the early days of Apple we were just trying to hire people that knew more than we did about anything and that wasn't hard because we didn't know a lot. The problem was not that we could find people who knew more than we did. That was easy. The problem was that we were pretty quick studies and before too long, we knew more than they did and we'd ask questions that they couldn't answer because they never really thought about it.

That was tough because we'd sometimes hire good people and they didn't have the ability to grow as fast as we needed them to grow, because in any young company your perspectives are changing monthly as you learn more. People have to be able to change and adapt and really be able to see things from new points of view. If they get stuck in their own points of view, it gets very difficult.

What do you mean by getting stuck in their own points of view?

I'll give you an example. One of the reasons why Apple was successful was because we built the [computer] dealer channel. The dealer channel did not exist before Apple built it. And, one of the things Apple did to build the dealer channel was to finance it by extending dealers credit when they were really not creditworthy.

So, we were extending credit, and when dealers were going broke, we ate the cost of goods—that's part of the cost of building the channel. We quickly realized that we would have a lot less credit exposure if we could get our product to the dealer very fast because then they would not have to stock a lot of inventory. So, we created big distribution centers in several places around the country and dealers could get product shipped to them within twenty-four hours. This way, the dealer wouldn't have to stock much inventory, and we wouldn't have to extend them much credit.

After this system was established, I once asked Fred Smith [the CEO of Federal Express] how much would it cost to ship a Mac anywhere in the country directly from Apple to the customer within two days. He thought about it, did his calculations, and said about $27.10 went back to Apple and analyzed our current distribution system which by this time took about three weeks from the factory to the customer. And, even worse, we found out that it cost us $57.

So, I proposed to our people that we completely eliminate the distribution warehouses, have FedEx just pick up Macs at the back of our factories, and have our computers link into Federal Express' tracking systems in order to eliminate paperwork and get the product from the factory to the customer within 48 hours. This way we would eliminate several hundred jobs and tons of computer systems, tons of bricks and mortar, while still getting the product to the customer three weeks sooner. But, I got my head shot off because people couldn't change their perspective.

Explain that a little more. What do you mean by "people couldn't change their perspective?"

Well, generally it's because people never know or forget what they're really doing—that is, what the benefit is to what they're really doing.

Our distribution centers forgot that what they were really all about was getting product from Apple to its customers really fast. They thought they were about a whole lot of other things like personal relationships with the customer. They had taken over some sales functions, and it became a real mess. Eventually, the industry went the way of mail-order. Dell Computer was built on that model. Apple could have done what Dell did much sooner.

But, usually, people never think that much about what they re doing or why they do it. They just do it because that's the way it has been done and it works. That type of thinking doesn't work if you're growing fast and if you're up against some larger companies. You really have to out-think them and you have to be able to make those paradigm shifts in your points of view.

In addition to finding the right people, you also stated that building the environment of the company is important. What things can management do to create the right environment and culture of a young company?

Hewlett and Packard, of course, set the tone for the modern intellectual property-based company. They did such a good job of it that the rest of us have only built on their foundation. I'll explain this in a different way than they did. Most of the companies here create intellectual property. They are pure intellectual property companies. Some are different: Intel, for example, has billions of dollars in factories, but most companies don't.

Most of the companies in Silicon Valley succeed or fail based on their ability to have breakthrough ideas and implement those ideas. The implementation is primarily intellectual property—writing software and figuring out designs of one type or another. When your primary product is essentially bits on a disk or on a wire, your primary assets are human capital, not financial capital. And, since demand for people is greater than the supply, you must offer those people something more than a paycheck and stock options. You must offer them the ability to make larger decisions and to be a part of the core company. That involvement is what drives much of this fun.

For example, you want people to make key company decisions without you even knowing it. They'd better have access to most of the company's information, so you'd better have an open communication policy so that people can know just about everything, otherwise they will make important decisions without the right information. That would be really stupid. Generally technology companies are very open. Generally they are driven by the meritocracy of ideas, not by hierarchy.

If there is someone really good four levels down—and you don't listen to them—they'll go somewhere else that will listen to them.

Hierarchy takes on a different meaning when people you work for are your coaches, not your bosses. If you're in Silicon Valley, you're your own boss because you don't have a contract. Silicon Valley does not work on contracts the way some industries do. If you don't like the way things are at one company, and if you're good, then you can leave anytime and go anywhere else. In fact, headhunters are calling you every week. All you have to do is take one of those calls and you're out of there. The whole power structure of an intellectual property-driven enterprise of good people is turned upside down. The CEO has the least power and the people with the most power are the hotshot individual contributors. They work as pure individual contributors and have more power than anybody because they come up with product.

Now, I'm exaggerating a little because middle managers are extraordinarily important—they hire and nurture these talented hotshots.

Fundamentally, though, it would not be too distorted to say that the traditional corporate pyramid is completely inverted. That's the way it ought to be. Silicon Valley has pioneered the way that many businesses will need to be run as we enter the next century, where more and more companies are pure intellectual property interests.

That's nice from a theoretical standpoint. But from a practical stand-point, what does that mean? Does having access to information and "knowing just about everything" mean that a talented programmer can walk in your office and open your file cabinet whenever he wishes?

No. That wouldn't be appropriate because that's not showing respect for individuals and I'm an individual too. What it means is that employees can know things. We get the whole company together once a month and tell everybody everything that's going on. More companies are doing that but many don't.

And you also ask for suggestions and inputs.

Sure. That happens constantly. We'll stand up and say, "We just lost this order and here's why." Or, "We just won three orders and this is how the new product's coming, and this is how another product is slipping."

Whatever it might be: good news or bad news. And we talk about strategies. Once a year we go offsite for two days and bring the whole company, even the receptionists—we figure they might as well know what's going on too. We discuss company strategy: where we're going, where we're screwing up, and our plan for the coming year. We refocus and resynchronize everything once a year. We have heated discussions at those meetings, too. It costs a lot of money, but is incredibly valuable.

We've talked about the talent that you bring to companies. What do you think your weaknesses are when it comes to management?

I don't know. People are package deals; you take the good with the confused.

In most cases, strengths and weaknesses are two sides of the same coin. A strength in one situation is a weakness in another, yet often the person can't switch gears. It's a very subtle thing to talk about strengths and weaknesses because almost always they're the same thing.

My strength probably is that I've always viewed technology from a liberal arts perspective, from a human culture perspective. As such, I've always pushed for things that pulled technology in those directions by bringing insights from other fields. An example of that would be—with the Macintosh-desktop publishing: its proportionately spaced fonts, its ease of use. All of the desktop publishing stuff on the Mac comes from books: the typography, that rich feel that nobody in computers knew anything about. I think that my other strength is that I'm a pretty good judge of people and have the ability to bring people together around a common vision.

Well then, when are your strengths-judgment of character and liberal arts perspective-your weaknesses?

In certain cases my weaknesses are that I'm too idealistic. Realize that sometimes best is the enemy of better. Sometimes I go for "best" when I should go for "better," and end up going nowhere or backwards. I'm not always wise enough to know when to go for the best and when to just go for better. Sometimes I'm blinded by "what could be" versus "what is possible," doing things incrementally versus doing them in one fell swoop. Balancing the ideal and the practical is something I still must pay attention to.

In terms of going for the best, you have a widely held reputation of being extremely charismatic-someone who is always able to draw out the best in other people. How have you been able to motivate your employees?

Well, I think that-ultimately, it's the work that motivates people. I sometimes wish it were me, but it's not. It's the work. My job is to stretch beyond their best. But it's ultimately the work that motivates people. That's what binds them together.

Yet, in the case of the Macintosh you got tremendous output from people. Regardless of the type of work, not everybody can elicit that type of commitment.

Well, I'm not sure I'd chalk that up to charisma. Part of the CEO's job is to cajole and beg and plead and threaten, at times-to do whatever is necessary to get people to see things in a bigger and more profound way than they have, and to do better work than they thought they could do.

When they do their best and you don't think it's enough, you tell them straight: "This isn't good enough. I know you can do better. You need to do better. Now go do better."

You must play those cards carefully. You must be right a lot of the time, because you're messing with people's lives. But that's part of the job. In the end, it's the environment you create, the coworkers, and the work that binds. The Macintosh team, if you talk to most of them—a dozen years since we shipped the product—most will still say that working on the Mac was the most meaningful experience of their lives. If we'd never shipped a product they wouldn't say that. If the product hadn't been so good they wouldn't say that. The Macintosh experience wasn't just about going to camp with a bunch of fun people. It wasn't just a motivational speaker. It was the product that everybody put their heart and soul into and it was the product that expressed their deep appreciation, somehow, for the world to see.

So, in the end it's the work that binds. That's why it's so important to pick very important things to do because it's very hard to get people motivated to make a breakfast cereal. It takes something that's worth doing.

Let's shift gears here. What should be the role of venture capitalists in starting new businesses?

In the old days venture capitalists helped a company a lot. They were mentors.

More so than today?

Yes. The reason is very simple. In the old days venture capitalists were people who had run businesses or major parts of businesses. Don Valentine was the vice-president of marketing at National Semiconductor when he became a venture capitalist. Venture capitalists were people that had done substantial work in successful startup companies and were bringing their expertise and experience as much as their money.

But the industry grew so fast that it outstripped the ability to grow people of that caliber. Many VCs [venture capitalists) don't have that experience. They just bring money. Not that there's anything wrong with money, but it's unfortunate because things are very different now. I hear VCs sitting around arguing about whether to change CEOs or not. That's not what they ought to be talking about. They ought to be helping the companies make it.

So, if you were a young entrepreneur without money today, would you still go to them?

If you want to start a company and you're young, the best thing in the world is to find someone who's done it-who has experience and expertise and is looking to invest a little money. If that person happens to be a venture capitalist, so be it. If that person happens to be a private investor, so be it. If that person happens to be someone from a successful company that cashed in their stock options and is willing to invest a little bit, so be it. It doesn't matter what they call themselves. It matters who they are. It matters that they've had the experience.

What advice would you give someone interested in starting their own company?

A lot of people ask me, "I want to start a company. What should I do?" My first question is always, "What is your passion? What is it you want to do in your company?" Most of them say, "I don't know." My advice is go get a job as a busboy until you figure it out. You've got to be passionate about something. You shouldn't start a company because you want to start a company. Almost every company I know of got started because nobody else believed in the idea and the last resort was to start the company. That's how Apple got started. That's how Pixar got started. It's how Intel got started. You need to have passion about your idea and you need to feel so strongly about it that you're willing to risk a lot. Starting a company is so hard that if you're not passionate about it, you will give up. If you're simply doing it because you want to have a small company, forget it.

It's so much work and at times is so mentally draining. The hardest thing I've ever done is to start a company. It's the funnest thing, but it's the hardest thing, and if you're not passionate about your goal or your reason for doing it, you will give up. You will not see it through. So, you must have a very strong sense of what you want.

Whether it's baking bread or—

It doesn't matter what industry it is. There are very successful bakeries. There are very successful semiconductor companies. You name it, it doesn't really matter. What matters is that you feel very, very strongly about it. You have to need to run such a business and know you can do it better than anyone else. You have to really want it because it's going to take a lot of work, especially in the early stages.

What keeps you doing it? You could spend more time with family.

I come to Pixar and I come to NeXT every day. I come to them for two reasons: one, because what each company does is really great; and, two, because of the extraordinary people. I get to hang around many incredible people all day. That's why I do what I do.

I am, however, trying to lead a more balanced life. Since I have two kids, I certainly work much fewer hours and I've reduced my travel. If you don't find the balance, you won't have a family or you will miss it. Keeping things balanced is always a challenge.

Speaking of Pixar, how do you think the two industries—software and motion pictures—are similar? And how do they differ?

Well, the product life cycle is different.

Other than Pixar, almost everything else I've worked on in my life—an Apple II, for example—you can hardly find anymore. You won't be able to boot up a Macintosh in ten more years. Everything I've worked on in technology becomes the sediment layer for other things to build on top of. The Macintosh, for example, just advanced the culture at that time. Now, Windows has grabbed the baton and is running its leg of the relay. Later something else will.

In contrast, Pixar is putting something into culture that will renew itself with each generation of children. Snow White was rereleased on video two years ago and sold over 20 million copies. It's sixty years old. I think people will be watching Toy Story in sixty years just the way they're watching Snow White now. The fact that the same movie will be watched 60 or 100 years from now is intriguing.

Speaking of the Mac, I wanted to talk a little bit about John Sculley. You've expressed, both privately and publicly, your dissatisfaction with him, and have even gone so far as to state that he destroyed Apple.

He did, yes.

If so, then what would have Steve Jobs done differently? What would Steve Jobs have done differently from John Sculley? Are we talking about not licensing its operating system, or allowing others to make compatibles?

No. It was much more profound than that.

For many years, Apple was about bringing a computer to everybody. It was about the personal computer revolution. It was about the products and the user's experience with those products. I was taught by some wise people that if you manage the top line of your company—your customers, your products, your strategy—then the bottom line will follow. But if you manage the bottom line of the company and forget about the rest, you'll eventually hit the wall because you'll take your eyes off the prize.

At Apple, the top management basically got very corrupt—starting with John—in several ways. They got corrupt about their purpose and became very financially driven instead of product- and customer-driven. They became financially corrupt and started self-dealing: there were a lot of company Mercedes, company planes, and company houses. Who am I to say, but my guess is that if somebody plowed through that stuff it would border on criminal. Previous to that, Apple had been a very democratic, egalitarian place. No one had palatial offices. There weren't fat cats at the top.

The most important part of this corruption was that the values of the company changed. They changed from the conviction of making the best computers in the world to the conviction of making money—a very subtle thing, really. This, and the fact that most of the people who made the breakthrough products soon left the company, was what destroyed Apple.

Many new people joined Apple. But, it was as if they boarded a rocket ship as it was leaving the launch pad and they thought they made the rocket ship rather than having just been passengers, which is all they really were. All these passengers were convinced that they made the rocket ship. That was fine until the company needed a new rocket ship. Yet, Apple has, up to this point, not been able to make one. They tried with Newton. That was a fiasco and they're still on the same rocket ship. They needed a new one years ago, but the culture doesn't exist to know how to build rocket ships.

I'll try to muster it in one sentence. Apple had a wonderful set of values that was based on, in many ways, what Hewlett-Packard did.

We copied a lot and tried to build upon it. Our values were about building the best computers in the world and when those values changed to the value of "the reason we make computers is to make a lot of money," many things started to change, subtly and not so subtly. The kind of people that flourished in the old value system didn't flourish in the new one. A different set of people flourished The biggest manifestation of these changed values was that before we wanted as many people as possible to use our products. We didn't call it market share in those days, but it was.

Apple's greatest mistake, in my opinion, is not that it did or didn't license their technology in the late '80s. Apple's biggest mistake was that it got immensely greedy. Apple priced the product so high that it didn't go for market share and left a giant umbrella for the PC industry. We originally weren't on that trajectory. The reason we built the Mac factory was to get the Mac down to $1,000 someday, but instead they sold it for much, much more. I think Apple could now have a 35 percent market share had management cared about people using Apple computers instead of making $400 million a year in profits.

It's what you care about. An organization with talented people will definitely adjust itself to the value structure expressed at the top.

People who were better for one value structure, when it changes, will leave. And other people will come in. You can change an organization in a big way in five years. That's part of what happened at Apple. They hired a stream of mediocre people, just one after another after another.

Speaking of great products, what do you think the next great products of this industry are going to be? What's its future?

To be honest, I have no idea.

All you can see are the plate tectonic trends. The trend is that computers will move from primarily being a computational device to primarily a communications device. We've known that was coming. The internet is certainly doing it on a larger scale than some people had imagined. But what this all means yet I don't know. The internet was around for a long time before the World Wide Web made it more approachable, and yet the World Wide Web is still a very simplistic thing. I think there's room for a lot more breakthroughs. I think when they happen they might spread very quickly, much like the World Wide Web did, meaning that in a period of five years things could be very different. But it's hard to say exactly what they're going to be. It's very hard.

For more, order a copy of In the Company of Giants: Candid Conversations with the Visionaries of the Digital World.

Microsoft’s Bill Gates: Running the Panzer Division

"My job is the best job there is." — Bill Gates

When Microsoft started, the conventional wisdom was to create both the computer and the software that ran on it. How did you choose to focus strictly on software?

Bill Gates: The PC industry is about disaggregation between building hardware and building software. But there's another level in that disaggregation that's key: the hardware system versus the chips. The miracle of microprocessor technology is really what transformed computing. When Microsoft started, a computer company designed the computer, laid out the circuits, and designed the instruction sets. The chip industry today does that better than anyone else. It wasn't destined to happen, actually—DEC could have put their architecture onto a chip, and they almost did.

Today, in retrospect, things were very simple. But there were many microprocessor companies in the early days and we wrote BASIC for seven different chips. We didn't even cover all of the chips out there. It was clear that the chip companies were going to build the best chips and deliver the needed performance. If the chips were used by multiple hardware companies, then what about sofiware? Paul and I knew how to write software. That's what we loved to do and that's what we thought we could make a contribution in: operating systems, languages, applications.

DEC didn't buy outside software. They wouldn't buy an operating system or a compiler from somebody else; it was all developed inside. So we couldn't start a company selling software to DEC orIBM. Our opportunity was a vision of a completely restructured industry where Intel did its part and we provided software to the many systems companies. Initially, we had an immense variety of customers and the taxonomy of the computer industry was much richer than it is today. The different types of computers were amazing. There were 30 word processor manufacturers and we licensed ourBASIC Interpreter to 27 or 30. Now those guys are gone. The "general-purpose PC" has taken that over.

You're absolutely right, though. The insight to do a dedicated software company was key, because companies like Wang or DEC or IBM—who had lots of software expertise—didn't have that vision. They didn't treat their software skill as a key business. Of course it took a long time for the business to develop and we had many competitors, but they were all startup companies like ourselves.

So the decision to create a software-only company was based on your personal preference for software?

Bill Gates: It's not that simple. Paul was very good with hardware and he understood it much better than I did. In fact, Paul wanted to do a hardware company. It was a great debate between us. In my senior year in high school, Paul and I both worked at TRW and the big question was whether we should start a company. Apple didn't exist at the time and MITS was still making model rockets and measurement systems. I told Paul that Intel's 8008 processor wasn't powerful enough and that we shouldn't start a company. Then the 8080 came along and it was clearly powerful. It was more powerful than DEC's PDP8 mini-computer. An amazing number of things could be done with Intel's 8080. Paul tried again: "Let's take the 8080 and make a computer with it."

Since I didn't know that much about hardware, I pushed for software. Paul eventually came around, but he went to work for MITS.

Paul and I wrote BASIC-our first product. It was almost a year-and-a-half later that we worked full-time, but the number of our early customers was just unbelievable. A lot of them went bankrupt, but most of them were companies doing a variety of different kinds of computers. For a couple of years almost half of our revenues came from Japan. Our sales approach was to say, "If you had to write the software in-house, your fixed engineering budget would be X and Microsoft's price is less than half what you dreamed you could do it for, and far better than what you could do." We competed against in-house engineering budgets. When Radio Shack made their first computer that was the question: what would the in-house costs be?

Your sales pitch was to outsource.

Bill Gates: Yes. What Radio Shack got from us was more powerful than if they had done it themselves. But there was no notion of it as a standard. We started to promote the standard. We got people like Bob Albrecht of People's Computer Company and Adam Osborne [of Osborne Computer] to create programs on our BASIC and publish those programs. These people were famous at one time.

A variety of companies came out with applications. That's when people said, "Hey, I want Microsoft BASIC. My applications need Microsoft BASIC." That's the point when you're in a position to start commanding royalties as opposed to a fixed fee. Eventually, we knew we had enough of a brand position to use a pure royalty approach.

Let's talk about when you firmly established your market presence. Microsoft was unusual in that it waited until it had over $100 million in revenues before going public. Would you do it differently now?

Bill Gates: Software is a very unusual business. The development work is not that capital-intensive. The first year we generated cash like mad even though we had many customers who went bankrupt—in other words, we had a wide margin for error. I always wanted to have enough money in the bank, so that if nobody paid us for a year, we'd be okay. After 1978 I was able to do that.

In 1981 we decided to do a stock option program to a very broad set of employees. In 1983 I thought, 'I’ll use a board of directors to get some experienced business people in here and get their advice." I created a board of directors comprised of local business leaders and one venture capitalist. The capitalists of course were very interested in Microsoft. So we spent a lot of time with them and got to know TBI [la local venture capital firm]—Dave Marquardt, in particular. It was very hands-on. We told Marquardt, "Pretend you are a board member for six months and we'll see if you really help us to hire people who can make business trade-offs." We liked that quite a bit.Dave joined the board and bought 5% of the company for a million dollars. That was their incentive to help us, but it was really business experience that they brought. The local business people didn't buy in since they weren't into venture capitalism.

We had enough stock options outstanding such that we had to start registering information. If you have a thin market for the stock, you get incredible volatility, outrageous prices. So we had to sell some shares to create some liquidity. We only went public because of the stock option plan. The money we got from going public is in the bank. That and the $23 million along with the other $5 billion currently in the bank. If I had to do it all again, I might have done a deal like UPS has done where you use a buy/sell formula and you avoid a need to go public; you keep it as a purely internal market and drive the pricing through a formula. It avoids some of the volatility and overhead that you get in the public market. Our experience hasn't been bad or anything, but in retrospect, I would choose the other route.

What are some of the pitfalls you could have avoided in the beginning?

Bill Gates: I used to have this memo that I updated every year called The Ten Great Mistakes of Microsoft, and I would try to make them very stimulating for people to talk about lessons for the company's future. Many of our mistakes relate to markets we didn't get into as early as we should have, but the constraint was always the number of people we could hire, managing everything, and ensuring that we met all our delivery commitments—we were always on the edge. We really pushed the limits of how fast we hired people. The only real disagreement Steve Ballmer [VP of Sales and Marketing] and I ever had was when he joined the company—we had 25 people. He said, "We have to hire about 50 more people to deal with all this opportunity." I said, "No way, we can't afford it." And he said, "But that's what we've got to do." I said, "I just disagree. I'm not going to agree to that." I thought about it for a day and said, "Okay, you just hire as fast as you can, and only good people, and Ill tell you when you get ahead of the sanity picture." Here we are at 18,000 people now and still the key constraint is bringing in great people.

A couple of times we really didn't accurately assess the complexity of a project. We had a few cases where we compromised in terms of the quality of the people we hired. It doesn't really matter now, but we had some cases where we grossly underpriced our stuff; we'd bid X [for a sale] and later found out that we would have won the bid with 2X. Anyway, it's not that critical.

When Microsoft was starting to come into its own you decided to bring in some professional management by hiring Jim Towne as Microsoft's first president. Why did you let him go only several months later?

Bill Gates: Until the day he retired, Paul Allen and I ran the company in partnership with regard to all product and technology decisions. Paul is an incredible visionary. There would never be a Microsoft without Paul, but as soon as Steve Ballmer came on Steve was my primary business partner. Paul was involved in all major decisions, but in terms of organizing and developing management, Steve and I drove that. It was a real challenge because the demand for our capabilities exceeded what we could do. How do you decide which things to do? The key was to never view ourselves as a service company. We had to be a product company. We started what was called Consumer Products Division to sell software direct to end-users. The retail channel meant global distribution, support, manufacturing—things like that. It was all complicated and we thought that other people must have done it before and knew how to manage it.

We naively thought that there were guys who could tell us we weren't doing things the best way. Jim Towne managed 12,000 people at Tektronix, which made 500 different products and was 50 times our size. We took it for granted that it was mostly a matter of convincing somebody to join our small little company. But Jim was not a match for our environment. It was tricky because Steve and I are also very, very close friends. Jim was in between Steve and I, so I could never criticize Jim to Steve because I wanted things to work out. Eight months later Jim wasn't even using his PC—it just wasn't a match at all. We then hired Jon Shirley, who was exactly what we had in mind.

Exactly. Jon knew a lot of things and was very helpful as we grew. He loved the business. He was very hands-on. He was part of the team.You can say Jon and Steve and I ran the business and all three of us loved working together.

Your company has a reputation for aggressively pursuing opportunity. One Microsoft employee we spoke with said that the driving force here is to win, win, win. Now that the company has grown so large, how do you maintain the intensity?

Bill Gates: I think win, win, win is bad. I wouldn't use that phrase. I never used that phrase with the employees. You don't ever win, you do better products. At Microsoft we hold up competitors as an example of what we need to do. We do that well because we think of ourselves as underdogs and take a very long-term approach. We bring in great people. Those are our keys to success. lou never win. We know that we have to deliver enterprise solutions better than IBM can, databases better than Oracle, machines more powerful than the one Sun ships. You don't get there overnight. That's a long quest. Our people can think about that. Are we making progress? How would you measure that progress? We never talk about the things we've been successful at. We always talk about the challenges ahead, but there is no finish line. We define the challenges so that the finish line recedes far into the future. You will never go to a Microsoft meeting and hear somebody say, "Let's win" or "We won" because that's got a finite scale to it.

Is that how you manage a company with 20,000 people?

Bill Gates: Large companies are never as easy to maintain at a high level of excellence. It becomes the daily task. It's mostly about hiring great people. It's mostly about making sure you have a vision that's important. Microsoft is just designed to write great software. We are not designed to be good at other things. We only know about how to hire, how to manage, and how to globalize software products. Our approach may not apply to any other business. This is a business where you can find people who have enthusiasm for doing things well. You can create incredible feedback loops that guide what you do. We have many users who love to tell us how they do things.

You can design things such that even the developer gets a lot of user input. lou can review what we weren't the best at, talk about it, and recognize what other companies, large or small, are doing well. We've created an organization that loves to write great software and has many great people who maintain those values. If we were a company trying to do other things, I don't think we would hold together. Microsoft's just designed for a very particular vision.

What could Microsoft be better in?

Bill Gates: It’s a matter of how quickly we are moving. Our success has allowed us to grow and get some incredible people for database and graphics, speech, vision—all the things that we think will be big in the future. In terms of enterprise computing, people are willing to use PC technology with our software to run their most demanding systems. We still have a ways to go on that. There is a huge business out there.I'm pretty pleased with the rate of progress, but there is just so much more to be done. You can look at the company lots of different ways:

• Innovation across the product lines;
• How we are developing and hiring people;
• Our financial results;
• Our market shares.

For any group I meet with at Microsoft, the whole meeting is about what I think they ought to be doing better—a little bit about some of the things that went well—but you just can't spend too much time on that. Take PC ownership cost as an example. It's too high today. A PC is too hard to install. We must work a lot to make sure that PC cost of ownership is low and that the PC is a great appliance.  We have an immense amount to do in graphics and video and bringing a unified object approach to browsing and storing data. It's a deep problem in computer science. A deep, deep problem. We have too many stores of data today. We have file systems, message systems, directory systems, database systems, and all sorts of different software that optimizes all those things. That just isn't going to cut it. When you say to a small business, "Hey, get a server," they're not going to pick a database, a mail package, a communications package, read about them, install them, and learn about them independently. They are going to need one integrated thing that hides all those differences. In terms of getting to the market potential, it's all in front of us. The PC will be dramatically better. There will be a wallet-type device that you carry around. The way that you input into the machine will be far better. Just to achieve the vision of having a computer on every desk and in every home, there is a lot of great software yet to be written.

What could you personally be better at?

Bill Gates: All successful companies are run by a team of people, and I've been very lucky with the other people who have come in and helped out. I like to focus on working with the product groups. That involves about a third of my time going out and meeting with customers, the majority of time meeting with product groups, and the remaining one-sixth for various things that don't fit either of those two categories. How do you manage the sales force and make sure that those measurement systems are really tracked down to the individual level and encourage the right behavior? I'll sit in meetings where Steve Ballmer talks about how he wants to do it, but that's not my expertise. How do we advertise to get these messages across? I sort of know where we are going long-term. I've got to make sure people are coming up with the messages consistent with that future. But I'm not expert in those things. Even in technology areas it's fun to learn new things; when I'm trying to find out where we are going with asynchronous transfer mode [an emerging standard for high-speed networking] we have experts who come in and talk to me about those things. I spend two weeks here just doing "think weeks" where I read all the stuff smart people have sent me. I get up to date to see how those pieces fit together. I'm a very product-oriented executive. That's how I spend my time, which means that in top management you've got people who look at it from a management point of view, a sales and marketing point of view, a financial point of view, and they become a key part of the team.

Can we move to Microsoft's next big challenge, building products for the internet? Some think that the rise of the internet minimizes the need for an operating system, like Microsoft's.

Bill Gates: We're a software company and we think software will continue to be valuable. Anybody who says there is not an operating system is playing a word game with you. There is something inside the machine that you are working with. You can turn a browser li.e., Netscape Navigator or Microsoft internet Explorer] into an operating system. lou can turn a language run-time into an operating system, but the things that applications run on top of, the way they get their security authorization and do storage management, that's an operating system. So there will be an operating system. If you've met people who've said that Microsoft won't sell operating systems in the future, if you believe them, you should short Microsoft stock. There's an opportunity to make about $55 billion out there and you ought to put that on the front of the book. [If the publisher agrees to it, we will.]

It's a competitive market and I'm glad these guys like their products. Maybe they wanted to sell two copies of software to get you to buy them. I'm not here to talk about our products. If you think nobody is going to be doing word processing, I think that's another reason to short Microsoft stock—seriously. Maybe nobody is ever going to do any more word processing. Maybe this whole electronic mail thing just isn't that interesting. We will have to find out. I'm much more of an optimist than whoever it was you were talking about.

Okay, it seems that these competitors obviously have you in their sights. It doesn't help you that Microsoft has developed a reputation among Silicon Valley companies for a lack of integrity in its business dealings. Why does that perception exist?

Bill Gates: I've never heard that. Maybe there is some Silicon Valley thing that you guys are involved in. I don't know. I've never heard any attack on our integrity.

Gordon Eubanks (CEO of Symantec) said that many of these companies are trying to do Microsoft in and would be better off focusing on improving their own products. Perhaps it's Microsof's aggressiveness that causes them to say this.

Bill Gates: We've done a lot of things with Gordon. Successful companies succeed because they have a long-term approach in dealing with employees and dealing with customers. People buy products because of their relationship with the company that makes them. They will only buy a piece of software if they know there are going to be new versions, customer support will come through, and the product takes you in the direction you want to go. It's all about the reputation that company has.

In terms of hiring great people, how do we hire all these people? It's by word of mouth. People say it's great to work here. The stock value has a huge impact on employees, customers, stock holders, everybody, and reflects the long-term approach and strength in the company. We've never had any dispute about anything because we just move forward. The question takes me aback, really.

What's aggressive? Shipping a good product. That's aggressive. Lowering the price of the product so more people can get it. That's aggressive. Those are good things. We're here making good products, taking all the phone calls, meeting with the users, hiring smart people. That's all our business is.

With IBM, we both benefited immensely from that relationship, and we still have a lot of positive relationships. They're our second biggest customer after Compaq. They decided not to work with us on operating systems and to go down their own path. That certainly wasn't our choice. They even got to keep the old name of the product we produced jointly.

You've certainly shipped a lot of product. When do you think Microsoft's incredible growth will plateau?

Bill Gates: We've always said that, given our long-term approach, this business will definitely go through cycles. There will be ups and downs. There haven't been yet, but we are still sincere about saying that. We say our profitability, percentage-wise, has grown at an unsustainable rate. We are clear about that. However, if you take the right perspective, there is a lot of value in lower cost communications and lower cost computing. It simply means that great software will be more valuable. The only question is how we maintain leadership in delivering software. We certainly feel very good about our ability to do that. We will never grow at the percentages that we did in our early years. That's just not possible. Ask any analyst about our company, we take the most conservative perspective of any company that you'll find. We are always telling analysts, "Don't recommend our stock. We sell software, not stock. Lower your earnings estimate, be more conservative." It's not a long-term approach to promote the stock in any way.

You'll soon see that we have major upgrade cycles. Our revenue will be less consistent than it was. Windows 95 is a big upgrade cycle and it will be two to three years before we get an equivalently huge upgrade cycle. We are a company with an incredible future. We are one of the most valuable companies in America and I think it reflects people's optimism about the people here and what software can be.

Microsoft's stock appreciation has been lucrative for Microsoft employees. Will you have employee retention and recruitment problems if earnings growth slips?

Bill Gates: People who have worked at companies that failed have a lot of good experience in thinking through the trade-offs. Many of the managers we hire have that background. I've talked about how success is a lousy teacher. We set up big challenges and we set high goals. People don't always meet those goals. It's an environment where we discuss the mistakes we've made and this company has had a chance to make lots and lots of mistakes. Our people have learned from many projects. They've seen both the positive and negative aspects. Sure, as companies go through tough times you find out who has the wherewithal to solve problems and take the right approach. It's a good thing for companies. I look forward to it. There is nothing imminent for us, though.

In the beginning you worked a tremendous amount. Is it less now?

Bill Gates: I work long hours, but not as long as I used to and certainly haven't expected other people to work as hard as I did. My job is the best job there is and I get a lot of variety. I travel around and see customers. I see such a variety of the product groups that it's very stimulating. I work long hours.

Twelve to fifteen hours a day?

Bill Gates: No. It's a rare day when I'll work more. There are days that I work fourteen hours, but most days I don't work more than twelve hours.On weekends I rarely work more than eight hours. There are weekends I take off and I take vacations.

In the beginning the company totally depended on you. Even now it seems like it's dependent on you.

Not really. The company has five billion dollars in the bank.

But that alone is not enough.

Bill Gates: Enough for what?

Enough to sustain growth and momentum. Is the structure in place to compensate if you left Microsoft today?

Bill Gates: We'd have to see. They'd have to pick somebody else to run the company. Who knows? The guy could do a better job. A CEO transition is probably a very risky transition for a company. I'm a younger CEO than you'll find in most companies and more committed to my job than most. Nobody is going to get me interested in some other job or activity, so it's very unlikely that we'd face that challenge, but it would be a challenge to the company in terms of picking new leadership. Who knows how the new CEO would do?

There are an immense number of good people here. The whole notion in the press of personifying a company through one person or very few people is a gross simplification, and it totally misstates the picture.

Think of whatever your favorite Microsoft product is. The people Who created that product did it without too much coding or design work on my part. I helped create a system that allows people to manage their own products. They understand how to manage those products very, very well. That's the company's real asset.

How is your role as CEO different today from your role in Microsoft's early days?

Bill Gates: The key to starting out was having the right code, but eventually I had to sell the software, write contracts, and learn how to hire people and make sure their code was pretty good. It's quite a contrast to what I do today. Today I don't write code. None of the people who work directly for me write code, though there are few who have. If you go from the beginning to the end, it's quite a change, but it's been gradual and I enjoy it. It's something to learn and figure out how to do well. That's a big difference between myself and a lot of people who fade away. They just aren't as interested in what the next stage requires and fitting into the role it requires. In terms of starting a company and running it 21 years later, it's surprising that it's not more common. I think it has to do either with people's adjustment to success—there are always distractions there—or their enjoyment with the new imperative tasks of a CEO.

What would you tell entrepreneurs starting companies today?

Bill Gates: We didn't start Microsoft with any notion of it becoming a large company. Our vision implied it would be a large company, but we were pretty humble about taking it one step at a time. We picked the field to go into because we enjoyed it and were excited to contribute. In the world of technology there is room not only for a few big, big successes, but for thousands of wonderful companies that are successful along all the appropriate matrices: innovation, developing great people, having good common sense, and economics that make it all work.

I've always rejected the term "entrepreneur" because it implies that you're an entrepreneur first and a software creator second. I didn't say, "Oh, I'll start a company. What will it be? Cookies? Bread? Software?" No. I'm a software engineer and I decided to gather a team together. The team grew over time, built more and more software products, and did whatever was needed to drive that forward. Entrepreneurship to me is an abstract notion. I don't think that most people who are really into their entrepreneurship aren't going very far. Seriously. Maybe I could be wrong. I wonder if the people in this book think of themselves as entrepreneurs. I don't think they do.

Those who have been in the business for a long time seem to dislike the term.

Bill Gates: Yes. There may be some reason for that. If "entrepreneur" means people who love businesses, this group fits. But if it means people who said, "I'm going to be excited every day because I'm going to be like one of these big businesses," it just doesn't work. You've got to enjoy what you do each day for itself and for its excellence. Sure, you can take a long-term perspective to how you manage technology, employees, and customers and if your vision is sound, those long-term approaches will pay off. You'll achieve the appropriate size, whatever your vision is. Many people take a modest-sized vision and try to turn it into something larger than it can naturally be. That's very difficult. Or, they read books about how it's all about winning and they think about how tough they are going to be. But it's nice to just ship good products. I don't care how tough you are, it's kind of meaningless. Articles love to play on toughness or competitiveness, or slogans, or things like that. Software is about millions of details. You've got to have people that love dealing with those kinds of details and then taking feedback. That's what makes it a fun business.

What aspect of the computer industry would you recommend starting in today? It's hard to start a company today that develops PC operating systems.

Bill Gates: There are people who have done it. Netscape's basic view is to take a browser and turn it into an operating system. There are many people going after that. It's a swinging-for-the-fences kind of approach. At any one time there are a finite number of operating systems that are very successful. Some people will accomplish it and many people will take a more content-oriented or a vertical industry type of approach.

If you really want to write great software, the best thing is to go work with a group of people who are very good and work on a variety of different products. If you really want to be a great software developer, you need a lot of seasoning. Thinking that you will be one of the world' greatest software developers without working alongside someone with seniority... I doubt that's a very craft-oriented view.

So if you were starting out today you would take a scatter-shot approach to developing products?

Bill Gates: The notion of what to do at a different point of time is hard to say. I almost decided to go into mathematics. I thought I was going to go into physiological psychology. Economics? They haven't figured out much there, that would be cool. And yet my whole life I've played around with software. In math, I realized "Hey, this is not a field with a lot of virgin territory—a field with great psychic rewards for the progress you make," whereas with software it's "Wait a minute, we can do ten times better than the stuff that's been done." The opportunity and the vision that grew up around personal computing and being able to hire friends all came together. If you want to be a great software developer, go where the great software developers are. I had done a lot of work after the age of 13 studying microsoftware and I became a fantastic developer, but I kept asking great developers to look at my code and show me where it could be better, how it could be different. I'd move to a new level. When Microsoft started, there was a lot of camaraderie of challenging each other: "Can you tighten up this code? Can you make this better?" It was an era of great craftsmanship. It was a different world.

There were a lot of paths I could have taken and been pretty darn happy with.

Andy Grove of Intel: An Immigrant in the Trenches

On Tuesday morning at 8 A.M., roughly 120 glazed eyes were focused with laser-like concentration on a Stanford business school professor as he entered our classroom. It was the beginning of my second year in business school, and, in this particular class, our professor was Andy Grove, the Chairman and CEO of Intel, a multi-billion-dollar organization and one of the largest companies in the world. The B-school rumor mill diligently had spread gossip about Grove—about his tenacity, distaste for tardiness, his spartan discipline-and many of us were both excited and intimidated by the prospect of being taught by him.

While I must admit that I am still slightly daunted by him—perhaps because of his remarkable achievements-Andy Grove is really a down-to-earth person and very approachable. He and Bill Hewlett were indeed this book's "bell cows"—once other CEOs knew that Grove and Hewlett were participating in Giants, it suddenly became surprisingly easy to land interviews with them.

The immigrant son of a Hungarian dairyman, Andras Grof was born in Budapest, Hungary, in 1936. In school he dabbled in opera and journalism. After the 1956 Soviet invasion of Hungary and subsequent "nationalization" of his father's business, Grove escaped on a boat filled with refugees, and landed in New York with only $20 in his pocket. Three years after landing on U.S. soil, Grove graduated first in his class from the City College of New York with a degree in chemical engineering, paying his way through college by being a waiter.

Three years later, he obtained a Ph.D. from UC Berkeley and used his writing skills to craft Physics and Technology of Semiconductor Devices-considered even today to be the seminal introduction to semiconductor engineering for students.

Grove left Berkeley to work for Gordon Moore and Robert Noyce, founders of one of the world's first semiconductor companies—Fairchild Camera and Instrument, later named Fairchild Semiconductor. After being dissatisfied with Fairchild's progress, Noyce and Moore went on to found Intel (INTegrated ELectronics) and brought Grove with them to head the R&D department. After a stint in R&D at Intel, Grove became COO in 1976. In 1979, he launched Operation Crush, a campaign to capture 2,000 new customers away from Motorola within one year. Intel beat that goal by 500 customers, one of which was IBM.

In 1982, IBM approached Intel to provide its 8088 microprocessor chip as the brain of IBM's entry into the microcomputer industry—the IBM PC. Ironically, Intel had already developed and patented the microprocessor in 1971, but did not expect significant demand for it.

However, in 1985 personal computers weren't shipping in enough volume. Intel had defined itself as "the memory company," yet its memory business evaporated. The Japanese chipmakers had driven prices so low that they crushed their U.S. rivals in the huge market Intel had invented. Intel, the industry leader, lost money for six straight quarters from the withering attack of Japanese firms, and many in the industry doubted Intel's ability to survive. Over the objection of several executives, Grove axed the DRAM business and thousands of employees. Unwilling to let the company come to such a pass again, Grove focused Intel on microprocessors with a paranoia and manic competitiveness that set the culture for the company today. Indeed, Intel's overarching theme of "Only the Paranoid Survive" (also the title of one of Grove's books) epitomizes the current Intel culture.

Intel's revenues grew as the personal computer industry mushroomed. Its microprocessor design quickly became the de facto industry standard for the bevy of new computer and software developers just starting up. Nowadays, the words "Intel Inside" are the words by which many Americans judge the quality of the computers they buy, resulting in about a whopping 80 percent market share for Intel.

Yet, despite the fact that the company's stranglehold on the microprocessor market shows no sign of loosening, Grove has not rested on his laurels. Intel spends a significant amount of its revenue on R&D, and consistent with his paranoia, Grove still considers the industry and his competitors to be brutal.

Intel and its competitors—most notably Advanced Micro Devices, or AMD-often take their battles to court using hardball legal tactics. Grove has referred to AMD as "the Milli Vanilli of semiconductors. Their last original idea was to copy Intel. Since they can't win in the marketplace, they try to defeat us in the courts and press." Yet, polemics aside, Intel has managed to keep its smaller competitors from undercutting the company's business. AMD has always hovered around 10 percent of the microprocessor market.

Despite the furious competition, Grove manages to teach high-tech strategic management at Stanford's business school, and also is a prolific writer. He is the author of three management books: High Output Management, One-on-One with Andy Grove, and Only the Paranoid Survive.

We had breakfast with Andy Grove at Hobee's, a popular restaurant in Mountain View, California.

"The important things of tomorrow are probably going to be things that are overlooked today."

What do you think your talents are as an entrepreneur and as a manager of a large company?

One thing is important for me to correct: I never looked at myself as an entrepreneur, and even today I don't look at myself as an entrepre-neur. In Intel's case, the entrepreneurs were Bob Noyce and Gordon Moore. Gordon himself is a little uncomfortable with the word "entrepreneur." In speeches he'd describe himself as the accidental entrepreneur.

Now, that's not the case for Bob. Bob's really more of an entrepreneur. But, I just tagged along for the ride. That changed later.

Much later. But in the early stages my expectations were that I'd be head of R&D for this new company. R&D is what I did at Fairchild. I never pictured myself doing anything substantially different. But, I rapidly veered away from that ambition when I became the operations guy inside Intel. That's what I did for almost twenty years. I helped make Intel's transition from an entrepreneurial outfit, none of which was my doing, to the manager of a medium-sized company, which was actually a very difficult transition to make.

Why was it difficult?

Well, everybody can start a startup and come out with one product— you see that all over. But, making the company into something of a self-sustaining institution, with its own methods and organization—that's tough. Transitioning people from a completely task-oriented mentality to more of a process-oriented mentality, particularly since those people were attracted to a startup, was very hard.

So, I wasn't comfortable with the role of the entrepreneur as you define it—somebody who starts a business and sees a business opportunity. I was not even qualified for that. I was a researcher. But once I began to see the architecture for the company as an organization, I became more of a participant.

So if Robert Noyce hadn't left Fairchild then you wouldn't have gone?

The person I followed was Gordon. I worked with Gordon at Fairchild and actually, I wasn't that enamored by Bob [Noyce] at Fairchild. I knew him, he was two levels above me. I got to know him better later, ton and Bob was not comfortable, Fairchild was a troubled organization and Bob was not comfortable running a controversial, troubled company, so he became passive as the company was spinning out of control. So I didn't have high regard for him at that time. As Gordon was leaving, I immediately volunteered to go with him. Then, I found out that Bob was leaving, and I had momentary second thoughts. That's not the conventional wisdom because Bob was very highly regarded.

You've mentioned that Intel was a collection of strangers working together, and that made things difficult in the beginning. In retrospect, do you think there were pitfalls there that you could have avoided in that respect?

No. There are pitfalls there, but I don't know how you can avoid them. First of all, the fallout didn't depend on whether we were or weren't strangers. That attitude went away after a while. What made it difficult was not that we didn't know each other—what made it difficult was that we didn't have any rules. Nobody quite knew what to do. Then, a lot of the people—including quite possibly myself— started developing a pecking order. Influencing and elbowing gets so illogical, and so inappropriate for a group of people who are trying to get something going. In fact, I think that there was more politicking and game playing at Intel in its first year—at least in senior management—than since its history afterwards. It's not what you would think.

How, then, does one turn political shenanigans into cohesiveness? Is it something that just happens as a matter of course or do you try to mold the culture?

(Long pause] It's hard to answer that without getting awfully person-al. I don't have a big theoretical model or some five-forces diagram here. What I can say is that in the fortunate companies, certain operating methods emerge. And, at Intel, some methods of influence emerged.

For example, I didn't have an easy time with our first marketing manager and I couldn't spend a lot of energy marketing. I was the operations guy at Intel. And so, what happened was that we were second guessing each other and fighting, and then we got a new marketing manager three years later. That was a major breakthrough because we got along right from the get-go. I'd have to say that there was a personality conflict that did not exist with the second guy. But, who knows? Maybe by the time the second guy came in, some shape and order to the place had emerged. Had he been there from the beginning, we still might have been ridden with conflicts. I don't know.

The problem with a lot of these stories is that they are very personal and very self-centered. I'm telling you the story from my perspective and, on top of it all, filtered through 25 years of memories. Those stories make what I did seem wonderful and what other people did, less wonderful. But all our histories are like that, I suppose.

Anyway, that particular interpersonal conflict was the most important to me, but by no means the only one. We had productive people flip out or go through a kind of burnout process. When you're 30 years old and encounter that... It's not an ideal startup situation.

What was the first critical juncture at Intel-the fork in the road that could have made you or broken you? Was it when IBM decided to use your products?

The first critical juncture was the introduction of our first successful product, the 1103—the first DRAM. It was enormously difficult to get it into production. DRAMs were so difficult to make and test. We were learning totally new things—a new process, a new product, new testing, new customers. And, customers were seriously relying on these things for mainframe memory. We weren't playing with calculators here. We were playing with big time memory, a very difficult period.

So, that's probably what I'd put my finger on—this process and these events when we became a company. Up until then we were a new startup just coming out with our first products, none of which were that successful. Then we made the 1103 and it became very successful. That's when Intel's systems as we know them today emerged. Had we blown that [product] we probably would have followed a completely different trajectory. We might have survived, but with the introduction of the 1103 into market, the real Intel was born.

From the get-go, did you think that the 1103 was the way to go? Was it part of a master plan at Intel?

No. We found that the 1103 as going to be a sexy product. And, in the last year of production, we had to systematize it. It was the end result that dictated the style. There was no master plan whatsoever. We were running out of money and licensed the products and technology to another Canadian company. Things were much simpler and much more haphazard in the early '70s than they are today. In the midst of this the microprocessor was born. That was not a big event, though. It was an interesting thought and nobody paid a whole lot of attention to it.

It [the microprocessor], was done in response to a customer request, right?

Yes. We obviously didn't realize how important it was.

Do you think that's true of many important technologies that you don't realize their importance?

Probably. The important things of tomorrow are probably going to be things that are overlooked today.

The important thing to realize is that a lot of major business decisions, such as Intel's shift to microprocessors, are not that obvious. In retrospect, they might be, but not when you're looking for-ward. If you read the newspapers about Apple, what they are going through is very similar. Nothing is obvious about Apple-other than the fact that they are in trouble. That's very obvious, but what to do about it is not obvious. If you lined up three or four of the people in your book and gave them a blank sheet of paper that said, "If I were CEO of Apple I would...," each would have a different answer.

It was like that at Intel in 1985. You could have asked five people where the company should go and you probably would have gotten five different answers. In retrospect, we know what happened with the 386, but up until the 386, the microprocessor was really not that big. Our new product was very complex. When we threw ourselves into the microprocessor business, we didn't know if we could make it.

This was 1985-before we introduced the 386. And the microprocessor business was much much less than Intel's memory business at the time. So, everything was very murky, and it wasn't an obvious You asked about when IBM adopted our product. I didn't think it vas colossally important at that time. And, I maintain that nobody at Intel did.

But, here's the rewriting of history: We just had the ten-year anniversary of the PC a few years ago, and the Intel newspaper want ed to interview a bunch of people about it. All of a sudden everybody remembered what a big celebration our microprocessor was at the time it was introduced. Well, I must have been on vacation. I don't remember any celebrations. I don't remember anything like that. It was good, but keep in mind that IBM thought the lifetime production of PCs was 200,000! IBM thought that the projections were too optimistic in the first place. Why would we have been more knowledgeable about how successful IBM was going be with the PC than IBM?

So, it was not a big deal at the time. What was a big deal was then they came around a year later, unrelated to the PC, and wanted to buy into Intel.

And they actually did take an ownership stake.

We struggled with that, whether we should let them or not. For some reason, we turned it into an existential debate: Should we or should we not? Finally we did, and the whole thing turned out to be a non-event. They never did anything related to that investment with us and they sold our stock. It was a joke—"a long-term investment" that a few years later they sold because the stock went up and they wanted to bail-out their earnings. So it turned out to be nothing. But at the time it was, "Oh, my God!" All of a sudden I was flying to New York and was meeting with the Chairman of IBM for a big announcement. It was a big deal at the time, and yet turned out to be nothing. That was in '82.

But, the big milestone was the DRAM case [shifting from DRAMs to microprocessors]. That was the crisis that shaped the Intel of today. Just about everybody in management thought it was the end. That's where the paranoia and all that stuff came from. You can't go very far at Intel without running into people who went through it.

My father worked at Intel during that time, at the Santa Cruz plant, which was shut down.

What did he do?

I don't know. When you're young, you never know what your dad does.

I had no idea.

So, when you decided to lay off a third of the workforce, obviously that must have been difficult. How does such a decision get made?

Well, we never laid off a third of the workforce in one fell swoop. We wanted to do. I have this saying: you never cut enough soon enough.

At the time, Gordon said, "Let's make sure we cut enough so we can take care of all of this in one layoff.” And, I said sure.

We tried to do that. But, we had just barely finished the layoffs, and it became clear that our business had sunk some more. Nobody ever forecasts that revenues will go straight down. Everybody thinks the low point has been reached.

So, we went through excruciating detail figuring out who we needed to let go. It wasn't enough so we kept doing it until finally it was enough. The transitions that we talked about earlier made us a company: employees, organizations, doing things correctly, and doing things well. But when we had to cut people back—we did that very seriously too- from the standpoint of doing it right from the employees' standpoint. As right as you can do it. Did your father get laid off?

Yes.

Then this will be a weird conversation. The prevailing industry practice at that time was to cut back on seniority-where the most recently hired person goes first. The justification was that, unless you cut back that way, you gave unions an opportunity to come in and say, "We're going to make you guys do it right." I took a very strong exception to that. We had some layoffs in the '70s-also pretty big for a small firm—and the personnel people wanted it done in a very organized way. I really leaned towards us laying off on the basis of merit, which we didn't. We gave it lip service but it was too complicated. By the time this '85 situation came up, we went to the point where we took people's performance reviews and systematically tabulated the ratings of the performance reviews and all that stuff. We did it on the basis of measurable, documentable performance. That was the compromise. We were going to do it on the basis of performance, but it had to be objective enough, so that if somebody questioned it later, you knew you had a well-defined system. We used seniority to break the ties. We spent incredible time working on it. I remember the first layoff—it was in Oregon. I went through the list name by name by name to make sure. There were hundreds of names. Most of them I didn't know, but I wanted to make sure that we were really doing what we said we would do. We took layoffs pretty seriously.

In 1982 we had a bump in our business and everybody else was laying people off. Luckily we thought it was just going to be a blip. We turned out to be right. We decided to stop hiring and did all kinds of weird things like making people work an extra ten hours a week for the "125-percent solution." We really held expenses down and stretched our employees' days longer. Our people did that literally for six months. Then we gave them a big party. Then we had another blip and we cut pay by 10 percent. So, we tried a bunch of different means.

We were very anti-layoff, because in those days people laid off left and right. Management didn't give it a second thought. We were trying to build a solution—you can't treat your people like an expense item. We really tried [not to have layoffs), but in 1985, it got beyond that. Actually, I didn't agonize too much over the Santa Cruz plant.

What I really agonized over was Barbados, an assembly plant that largely built memories. There was nothing in Barbados but us. It was a resort. You would either go fold sheets at the resort or go work at Intel. It was a very stupid thing for us to put a plant there. It was very very difficult to run, but by 1985 it was a good plant. There was no history of any industrial undertaking on the entire island of Barbados, so we had to teach everybody. We went through plant manager after plant manager until we finally got it right and the plant was good. They were so proud. It was a high profile thing.

The layoffs were a major part of our maturation as a company.

So, given the choice between hiring people and laying them off in bad times versus not hiring enough people and making them work at greater expense to the company, which would you do?

The second. I have a very strong personal dictate that we as a company not lay people off again like we did before. The memory of the incident remains.

Perhaps you'll never have to make that type of decision again because of the industry you're in. It seems like you're in a pretty nice industry. Do you ever see a downturn in the semiconductor industry?

Well, it did go down in '85. There were all kinds of arguments about the semiconductor trade agreement. We were in bad shape as an industry then. There was no PC industry to keep us up. I don't think semiconductors is a nice industry. I don't think it's a cushy industry. It's a very tough industry. Look at the people that we compete against. You don't know the meaning of competition until you've dealt with a Samsung. We have had incredibly dedicated competitors.

So, which one of your competitors in particular concerns you the most?

Nobody in particular because competition is not the issue in our case. It's in navigating change from the fairly well-defined PC industry into the network computing industry and it's very, very complex. I think probably my biggest fear is the process of navigating into the next stage of computing. Whenever microprocessor power becomes less important than before, that means a loss of business for us, much more so than a loss of business to a competitor. Competitors are much easier, this threat is just kind of ambiguous. There exists a rising tide that controls the industry. Competitors either matter or don't matter depending on that tide.

Speaking of this tide, then, do you envision the idea of just an empty set-top box with a network connection?

No, I don't see that, but what I do see is the need to develop the type of application that uses the hidden, latent microprocessor power. At home, which is where all the talk about appliances are, the benchmark set by television, the visualization of television is what people expect in terms of processing power. So we're going to need processing power, but that's only half of our business. The other half is with businesses. So we have to take the initiative on stimulating applications, visually compelling applications, business applications. That's our job, but it's not about competitors.

Or, increase demand.

Right. We have to generate our own demand.

Let's switch gears a little here. Why do you teach at Stanford?

Because I enjoy it. It's very simple. I've always liked teaching. I taught both during my engineering days and then during the period of time when Intel made the transition into more systematic management. I started teaching management practices at Intel, out of which came High Output Management.

I like exchanges. Harvard did a case on Intel. I became aware of it, and I talked to the class. I liked that. I wasn't going to go back and forth to Harvard each year to teach the case so I approached Stanford and really liked it. It's a laboratory to try new ideas. Cases allow you to think through a particular industry much more. The process ended up being very helpful to me in understanding the interaction of the internet, the World Wide Web and the like. I didn't really learn any new facts about it, but preparing the case and going to class really helped. That's a secondary reason.

Given all of your extra-Intel activities, such as writing a management column, and teaching a course at Stanford, what kind of hours does the CEO of Intel put in? Do you work less or more than before?

It hasn't really changed over time. I spend a lot of time thinking about the industry. Our industry has an impact on every other industry. Telecommunications—I used to pay no attention whatsoever to the telecommunications industry. It has now become vitally significant. International events have become vitally significant. Now the media industry is where the telecommunications industry was a few years ago—on the fringes—it gets increasingly significant. We capture people who are in the media and going into digital technology.

We capture their efforts on PCs. That's our business.

So, I have to read a third of the newspaper, even though it doesn't mention Intel or the article doesn't have anything directly to do with Intel. In that context I think a lot about the world. Not so much about Intel, per se. So what are my days like? I start at 8 o'clock, end at 7. I've got another hour of work that I do at home.

Seven days a week?

No, five days a week. And over the weekend, I have maybe three to five hours of work. Not administrative things, but really the longer things that I didn't do during the week. I don't do a lot of administrative work anymore. Craig Barrett [President of Intel] does that. I figured I'd written all the performance reviews that I needed to write and I washed my hands of all of that some years ago. I really do what I want to do, but what I want to do adds up to be more than I would like it to be. This is a problem. I will be sixty years old this year and soon l'll probably have to stop. Ten years ago, I said I would retire at age 55, and I don't want to hang on too long.

Today the semiconductor industry is not one that a young Ph.D. can get into and start a company on a hope and a dime.

Not on a dime.

Many dimes. If you were starting over today, what industry would you recommend to young people trying to start a company? Would it be in semiconductors?

First a point about startups. I can't look at a startup as an end result. A startup to me is a means to achieve an end. A lot of your business school friends come up to me and say, "Hey, Andy, I want to do a startup. I want to do an Intel. So, what should it be?"

It just doesn't work that way. Instead, you should first figure out that you want to do, say, semiconductor memory. You want to do semiconductor memory so bad that it hurts, and you can't do it where you are. So you do it within a startup. Otherwise, it's such an ass-backwards way. People who did it exactly like that saw a mountain of opportunities that weren't there.

If the question is what field would I go into as a young person today I would probably get into genetics or biotechnology. I know very little about it, but it fascinates me from the following standpoint: it is the new frontier that can use computing power and increasingly even semiconductor technology in terms of preparing and building genes. It is in converging technologies which I always liked.

I see the possibility of cross-fertilization of genetics or biotech with information technology, which is very advanced and very powerful. Computational tools are very powerful. The concepts are very powerful. Software designs are very advanced. Semiconductor technology is very advanced. I'd apply it to a field like genetics which is still very, very raw. It's kind of like the semiconductor industry was in the 1950s. So I would prefer to go there. If I had to go back to school again, I would get a double degree in computer science and genetics. I don't exactly know what I would do with that, but it would be a combination of those two subjects.

You wrote an article for the Wall Street Journal about the importance of immigrants to this country's future. How do you think immigrants have helped Intel?

Fifty percent of our Santa Clara technical staff is Asian. There's no question about it. The degree is not as high in the other locations, in Oregon it is probably 20 percent. Our company is interwoven. The man who discovered EPROMs is Israeli.

It's very interesting that you mentioned the article. I wrote a regular management column. I never got responses to any of my columns. But the response to this one article was incredible e-mail after e-mail. I had a lot of feedback. In one message I got a one liner, and in another, three pages of philosophizing.

Why?

I don't even know. Are you asking a larger question?

The political thinking in the air today. The Gingrich approach to things. Proposition 187. It has become an atmosphere of intolerance and, although it may be just a minority standpoint, this attitude seems to be more prevalent than before.

It's incredible to me that with the monumental problems that we have financially as a country, there are people who target welfare mothers. It rubs me the wrong way. It really does. I had a very positive experience as an immigrant here. Nobody has ever given me a hard time. Nobody has begrudged me anything. It's never been an issue. I've become a rabid American as a result of it. I haven't gone back to Hungary at all. I have no love lost for my origins. But I hate seeing this kind of thing developing. You know every trend in this country starts in California. I can't say that it's a major trend yet, but it's enough of a trend that California has Proposition 187. Think about it.

Is there anything you can do to change that?

Probably the most important thing I can do is to run Intel in a good way. Intel's a big community, you know. There's very little I can do outside that's going to affect a community of forty-five thousand people. You can take that number and multiply it by four for the number of people that are affected in terms of employees, families, and customers. What I do at work, in some ways, affects hundreds of thousands of people. That's pretty big.

For more, order a copy of In the Company of Giants: Candid Conversations with the Visionaries of the Digital World.

Trip Hawkins of EA (Electronic Arts): Creativity, The Ultimate Game

By 1985 Atari was in financial ruin. ActiVision’s once popular game system was passé and hundreds of developers worked in a flea market environment desperately trying to sell their games to a customer, and market, that didn't exist. Prudence would judge it a dumb place to start a video game cartridge company. Trip Hawkins did just that and clawed his way past 135 other competitors to make Electronic Arts the undisputed leader in video game software development.

By all accounts, Hawkins has for many years been both an entrepreneur and game aficionado. As a Harvard undergraduate he created a fantasy football game that nonetheless folded, and with it his father's seed capital of $5,000. Apparently unfazed, Hawkins immersed himself in the study of games, graduating with a custom degree in strategy and applied game theory. His thesis: a computer model for World War III.

Hawkins came across Mike Markkula while researching the video game market as a Stanford MBA student. Markkula, looking to build a solid team for his startup venture, Apple Computer, persuaded Hawkins to join after graduating from business school. As employee number 68, his charter was to gain entry for Apple products in the business market.

Despite Apple's commercial success, Hawkins chafed and left the company in 1982 to start up his own as soon as his $7.5 million worth of stock options vested.

Taking good measure of the imploding game industry, Hawkins set out to create a company different from the one-hit wonders that pervaded the marketplace. His company, Electronic Arts, borrowed from the Hollywood studio model of media production: project managers were called producers and software game programmers were called artists and given the tools, respect, and freedom to work as the talented, creative people they were.

A stream of successful products spewed forth. Though the market was cluttered with dozens of different hardware standards, two emerged to dominate the industry: Nintendo and Sega. Hawkins bet heavily on the latter and reaped the bene-fits. Electronic Arts boasts yearly revenues in excess of $600 million—a behemoth in the software game industry. Hawkins' own personal fortune has swelled to the neighborhood of $200 million.

A successful entrepreneur, a captain of industry before age 40, Hawkins might have felt content to ride his company toward comfortable revenue growth, new markets, and industry respect. But in 1993, Hawkins took the highly unusual move of appointing a successor at EA and promptly leaving to start his next venture in home computer gaming, The 3DO Company. The firm's ambitious charter was to develop its own game-playing machine and leverage the technology by licensing it to companies around the world.

Hawkins' try at a veritable double dip is complicated by the presence of several large companies including Nintendo, Sega, Sony, and Philips, not all of whom care to see Hawkins promulgate a hardware standard for the industry and capture the profits from doing so.

An excellent dealmaker, Hawkins initially enlisted support from companies like AT&T, Matsushita, Goldstar, MCA, and Time-Warner. Nonetheless, young 3DO's success is far from assured.

In the months prior to our interview, Hawkins' notoriety had extended to the popular press; Billboard magazine anointed him "the guru of interactivity" and, in a less scientific study, People magazine judged him to be one of the 50 most beautiful people in the world.

Perhaps as a backlash to the adulation, business reporters' coverage of 3DO became more aggressive, criticizing 3DO's nonexistent profits despite the company having already gone public. Some predicted imminent doom for the company.

It was at this time that we met with Hawkins at his corporate headquarters, just a stone's throw from Steve Jobs' company, NeXT, to understand the creative drive behind the biggest name in games.

"A true entrepreneur is a creative person, who doesn't do things to make money—he does them because he has no alternative."

How important is it to have a completely original idea in order to start a business?

I guess there are two ways to look at businesses: you can start one that is based on a big, new idea or you simply start one that works on an established idea. But even if it is something like starting a restaurant—obviously, there are other restaurants—the big idea may be why your restaurant is different from the rest. Yours may have a comPletely different approach to some common aspect of the business.

But there is nothing novel about starting a restaurant.

Exactly. One unseen aspect of business is that we all know about the success stories but never hear about the failures. I know what the batting averages look like in my industry because l've seen the turnover of companies for a long period of time. These batting averages are pretty poor. Some of them get lucky—there's a one-in-a-hundred chance. Sounders will get lucky and bootstrap there way to success. Perhaps one in one hundred times the product happens to be really good and original. But if you look at the failures—the 99 out of 100 that fail—many also have original product ideas. With entertainment media it's hard to tell in advance what's a hit and what isn't. This is generally believed to be true about all entertainment media.

The bootstrap approach to starting a business has never appealed to me. I wouldn't want to start a company unless the idea was a big one and then I'd ensure that everything was first class-first-class money, first-class advisers, and a first-class management team.

There's no reason to take a lot of risk in those areas. Creating a startup in a first-class way dramatically improves your chances.

Okay. Let's talk about your big idea for Electronic Arts (EA). The idea was to treat computer game programmers like artists.

Actually, EA was about three big ideas. That was one of them. The business was more than simply treating programmers as artists—as creative people. It would be more accurate to say that we brought a methodology for managing a creative process to what had traditionally been an engineering methodology. This translated into a certain style of recruiting, managing, and rewarding creative people. It also translated into a production process methodology that more consistently, like a cookie cutter, cranked out good titles and products. In the music profession you can't buy a record and hear a single chord played out of tune. In the software business almost everything you buy has mediocre product value. What we did was to say, "Why not treat the talent like they're treated in other professional entertainment fields?" That was the first idea. The second idea was direct distribution. Until then nobody had ever done direct distribution—it was all done through distributors. Frankly, nobody who is anybody in entertainment doesn't do their own distribution. This way we could get shelf space for every product and therefore minimize our dependency on having a hit product.

So the trick was to leverage the retail channel by providing a broad assortment of products?

Yes. Our third big idea was technology leverage. At that time nobody had a planned approach to technology development. We were the first to invest in building a system—almost like a studio. Try to imagine what life in the music business would be like if you had no recording equipment, no professional studio gear, no synthesizers, no nothing. We built what we called the artist's workstation, which was the system we used for creating products for multiple formats. Doing so made us efficient in dealing with the lack of standardization.

So, EA was really a combination of three things—a creative process methodology, direct distribution, and technology leverage. If you think about that combination as a strategy youll realize that you must apply more capital and commit to achieving a certain market share. Otherwise the whole model fails. It's like getting a 747 off the ground; with enough thrust and enough lift you can fly. Once off the ground the plane is passenger-mile efficient. Most of our competitors hadn't incorporated any of our three aspects of strategy—much less two or three of them. Had we done only one part of our three-pronged strategy we might have failed from simply being out of balance.

It is an interesting approach. Did you understand all these points of leverage at the outset? You already had 135 competitors and were relatively late in the game.

We clearly laid it out in our business plan. What I'm saying is that the key to risk reduction is to figure out the right strategy. The right strategy for us was combining those three elements and determining the amount of money we needed to implement that strategy. We raised more money than our competitors raised. Most of our competitors were bootstrapped companies. Broderbund was one of the few that raised any venture capital—a couple of million dollars by 1982—but they sat on the money. We were the first company to use capital as a strategy. What's interesting is that people frequently say that the way to manage risk is to spend less money, to take on fewer initiatives, to do less.

So, the fact that there were so many competitors demonstrated to you that there existed real opportunity for a well-funded company?

Yes. Now we're coming back to entrepreneurship. Here's a key thing to remember about being an entrepreneur: a true entrepreneur is a creative person. Creative people don't do things to make money. They do them because they have no alternative. They have to do it. They have to get it out. So, as an entrepreneur, you don't sit there looking at the number of competitors and think about whether you can beat them or not. You don't have an objective, rational process. You need a certain amount of confidence in your invention. To an extent you're insulated because there are many things that you don't know will go wrong. If you knew in advance of all the things that could go wrong, as a rational person you wouldn't go into business in the first place.

Did you do any market research before starting EA?

I did enough. I had the idea for Electronic Arts when I was in college. I worked at Apple as a means to an end. I knew I wasn't going to stay at Apple forever, but I knew that before I could start a software company there first needed to exist hardware to run it on. So I helped build the market for this equipment and learned from others about running a business. I'm surprised that I stayed at Apple as long as I did-four years. It was such a rocket ship ride. In 1975 I told myself that I would start my own company in 1982. When 1982 rolled around, I felt like I was a bit late because there were other compa-nies, like Broderbund, already out there. They weren't doing very much, but I was definitely behind. Fortunately, I was able to meet anybody in the industry I wanted to meet. I helped start another little game company called SSI with a young game fanatic. I went to game industry trade shows, like the West Coast Computer Fair. That's when I was able to test the hypothesis for Electronic Arts. It was clear to me that many creative people didn't have a clue about how to handle the business side of things—I knew I could offer that to them.

What things, in retrospect, would you have done differently?

A paradigm shift occurred in the industry. Atari was collapsing, this was pre-Nintendo. It was a very tough time because many people wrote off the game business due to Atari's collapse.

Atari was synonymous with games.

Yes. It's unusual for a consumer product company's economic struggles to be so well known. It poisoned the well for many consumers because games suddenly became unfashionable. It wiped out the industry for a couple of years. We should have started the company two years earlier when the tide was in. We built a boat and launched it just as the tide had gone out. It would have been easier if we had launched two years earlier or two years later, but that kind of thing is hard to anticipate.

Let's focus on this. The market is drying up, you've just launched a company and you're sitting there in your office. What do you do?

This is the difference between an entrepreneur and an operating executive: most entrepreneurs don't understand how to operate a business. There is a huge amount of common sense and courage involved in operating a business. You don't need too much more than those qualities.

Most entrepreneurs lack common sense. They may be courageous about their inventions but they're not courageous about things like layoffs because most entrepreneurs are optimists. What you're really looking for in a management team is the right balance between optimism and pessimism. You've got to conserve resources very carefully. Generally, the typical entrepreneur is optimistic to a fault and always has forecasts with hockey stick projections—"We're about to take off....hang in there another couple of months and we'll take off”—it's bullshit. No entrepreneur ever even comes close to the forecast. Once you've been through this a few times you know it, the venture capitalists know it, and pretty much everybody knows how to deal with it.

I'm very satisfied knowing that I'm a good operating executive because of what I did in a series of crisis situations. I'm not interested in being labeled as an entrepreneur in the classic sense. Most of these new companies either come out of the chute and fail or they start growing and the entrepreneur gets the ax because he doesn't manage the growth. Or the company may grow nicely for a while, but the entrepreneur doesn't know how to build the management team. Often when these young companies start to go fast it feels like a World War I biplane trying to go Mach II: the canvas peels off the wings.

Do you think having an M.B.A. gave you the necessary skills?

Probably the most valuable course I took as an M.B.A. was Interpersonal Dynamics. The second most valuable was finance, which explained net present value. I'm not sure there was anything else. I certainly learned technical details about cost accounting and how the accounting system works, but I could have learned that in college. In retrospect, had I not gone to Stanford, I could have gotten started in the industry two years sooner and wouldn't have been any worse off, because those were two pretty interesting years. As it was, I practically worked full time my second year in business school—I just couldn't wait. Everything was happening and I wanted to be there. I did market research and consulting projects pretty much from the spring quarter of my first year.

So the M.B.A. didn't help?

Like I said, entrepreneurship is about being creative. You must be able to think big. You must be able to see things differently and come up with big ideas—not just the product and company concepts, but creative ways of managing the business. If you're going to run a business successfully there are many general skills you need, but much of it comes down to common sense and courage. You've got to face reality.

If you took a hundred middle managers, you would find that the majority of them wouldn't be able to tell a subordinate he or she wasn't performing. Another thing very few managers can figure out is when a workforce reduction is needed. People are generally unable to deal with confrontation or bad news, but frankly, if you're not dealing with the bad news, you're going to fail. I don't mean to say that you should have a culture based around criticism, per se, but if you don't know what's going on, you won't learn very much. These are not things that you must, or can, be taught in school.

Business schools are incredibly arrogant. At Stanford I took a course in sales force management that tried to teach me how to manage a sales force of 400 people, but I could not take a course in how to sell. I had to go to an outside school, like the American Management Association, to get a course in selling. The same applies to public speaking. There are basic skills that are fundamental to doing almost anything in life that a place like Stanford Business School won't teach you.

Then what are business schools' value?

They'll teach you esoteric things. I would never hire a Stanford or Harvard M.B.A. from a consulting firm like McKinsey or Bain & Company. It's just total bullshit. It's absolute, total bullshit. They can't help me. Maybe they can help a Fortune 500 company that is completely clueless about its business. But you can't tell me that some kid fresh out of school is going to teach me something about my business that I haven't observed myself. If that's the case, boy, I've really screwed up. If that's the kind of help I really need, how screwed up must I be?

Some say it's the hand-holding and reassurance they provide management.

Right. Sometimes it's just politics. Sometimes big companies have to line up outside credentialed resources to justify what they want to do.

You mentioned the need for courage to survive a difficult business climate. Can you give us an example of a serious threat that almost put EA under?

It happened continuously. The first seven years were like that.

And how did you handle it?

For example, we had three layoffs on three different occasions in that seven-year period. A couple of times we reorganized and shut down a couple of companies we started. Managing these crises is the most important skill I, as a business person, have. It's probably the most important one for many people. You've got to be resourceful.

Common sense and courage, combined with creativity, is resourcefulness. It's the ability to recognize what is really happening. The first step is: collect the data. You'd better have your finger on the pulse. The second step is: analyze and figure out what's wrong and why it's wrong. Then you'd better have the courage to fix it, and fix it now. Some companies fail because they don't study what's going on, and don't have a reasonable picture of what's happening. Others have a reasonable picture of what's happening but don't want to believe it—they're in disbelief. At others, people may understand what's happening, but are afraid to deal with it.

To me, that is what resourcefulness is all about—collecting information, analyzing it, figuring out what's wrong, and coming up with creative ways to fix problems right away—and pulling the trigger. It's incredibly scary and incredibly stressful. It's not much fun having a layoff. It's not much fun shutting down a business that you started. We shut down our first business in Japan after a year. It was almost like Dunkirk. It was something like, "Whoa man, we don't have a clue here. Let's get the hell off this island. Let's get out of here. Pull up stakes! Get out! Get out! And let's not come back until we figure things out."

If your executives are not doing the job, you must be able to pull the trigger. We brought in someone to be our lead marketing guy. I thought he was great. He thought he was great. He had great credentials, yet we had to fire him three months later. Again, you must have the ability to figure out what is really going on.

So, given EA's poor start, how did you turn it around?

Like I said, the tide had gone out. We hit our forecast the first month. The second month we were off. The third month we were off by more. The fourth month we had a layoff. We cut back spending, hunkered down, and tried to conserve cash. That improved things quite a bit. We looked at the executives who weren't really cutting it and got rid of them. We regrouped. We fired sales reps who didn't produce. CEOs in companies like this one will spend a certain amount of time running every department. You probably can't afford a full team at any one time anyway. So, at any given point in time, the CEO is running more than one department anyway.

You can't afford a full team?

That's the way I look at it because you can't afford to spend the money. I would say that EA is pretty typical; I usually did three jobs aside from what I was supposed to do. When you're small and grow-ing, that's the way it is. Later, when the company gets big and there is an asset to protect, you can afford to keep the CEO in a purely strategic role figuring out how to grow and defend the asset. In the beginning, you're just paddling as fast as you can. There is a benefit to doing the job yourself because you learn how things get done. It makes it much easier to hire people for those jobs because you really understand the different requirements and it's easier to manage them. One of the more valuable aspects to a startup situation is that you've had your hands in every part of the business. I'm not talking about being autocratic or looking over people's shoulders. It's a matter of not being disconnected and out of touch.

At EA, we had issues in sales and marketing. We had to figure out how to generate more revenue. That's another phase you go through as a small company: learning to be really creative with revenue generation. You can come up with literally dozens of ideas for making money.

You've been able to create alliances with many large companies. Is being a dealmaker a talent of yours?

I don't think of myself as a dealmaker. I consider that more a means to an end.

You've given equity stakes to Matsushita and AT&T in your new venture, 3DO. Has this hurt you in terms of preserving autonomy?

No. Company control doesn't, in the end, have that much to do with ownership. Certainly, if you are a subsidiary and one company owns a controlling interest, then they'll feel like they own you and will cast a pretty long shadow. But if nobody has that kind of position, then the question is whether or not these corporate partners can gang up to disagree with management. This situation applies to any CEO at any company. If you're off your rocker they can get rid of you. That's the main thing the board is supposed to do. If you're doing a good job and you're managing an effective process, the board will support you. It's not really an issue.

So in 3DO's case it's not that big an issue?

That's right. Ironically, with the 3DO board, even though most of the board members have a corporate agenda, they've helped more in developing a company strategy than the EA board did.

The EA board was just a bunch of independent board members. It was more difficult to get them to support what the company needed to do. Perhaps it was harder for that particular group of people to understand the business and accept what needed to be done. A classic example: It took me a while to convince the EA board that we needed to move to the Sega platform. Again, conventional wisdom would say, "That sounds very risky, they're going to sue you." Where would EA be today if we hadn't moved to Sega? It would be a pretty small, insignificant company. To be honest, it wasn't that pleasant for me having to convince a lot of people what needed to be done.

If you feel very strongly about a strategy, you must figure out a way to convince people to support it. It's one of the things you don't realize until you've done it for a while. If you're any good as a CEO, part of your job is to be smarter and figure things out before everybody else. And if you can't, what the hell good are you? Why the hell should you be the CEO if you can't do that? This means that if I figure out a problem and a strategy for dealing with the problem, I've probably figured it out before other people have.

So you had to convince your EA board of directors that a layoff was necessary?

If you go to the board and tell them that you want a layoff, they'll be very supportive. Conventional wisdom says that management usually spends money and hires people. It implies that things must be serious if the CEO comes to the board saying that he's screwed up, should cut spending a no the board saying thall the board will say is, "You're not severing any major organs, are you? As long as it's only an arm or a leg or a hand." Pretty procedural things will happen at that point.

That brings up the question of why you were the best CEO for EA.

EA is an unusual combination because obviously, there's a big creative component to the business. I'm creative and I understand how to manage creative people and the creative process. I also got into the business because I really liked the product. Having a personal feel for the product helps a lot. Third, I'm a pretty good businessperson. Any business requires it, but when you look at the computer industry through the 1980's, you'll see that many companies were successes.

Many times the success was driven by market growth. For example, when I was at Apple, we all thought we were the cause of the success, but we weren't. We were just lucky to be at the right place at the right time. The whole industry just took off. That's the only time in my life I've had the opportunity to be in that kind of situation. It's only later on, when you realize that things don't always work that way, that you feel lucky. Many companies experience that kind of a growth and suddenly articles appear about what geniuses the managers are. Then the first thing goes wrong, the wheels come off, and they are suddenly losing money. Many times such market growth will hide real mediocrity in the management or in the strategy.

In games, it was really a tough business throughout the 1980's. There was no slack for anybody. The fatality rate was very high. In fact, out of the 135 companies at the start, only ten of them were still around five or six years later. There was incredible turnover of companies.

Tell us about the headaches you face as the manager of an established company. Is it difficult working with large corporate partners like AT&T?

Yes. AT&T has turned out to be our worst nightmare as a corporate partner. People usually think, "Big companies—solid, reliable." Well, they change direction more often and are completely ruthless about dropping things. In fact, EA and Matsushita were the real key investors in 3DO in the beginning. We assumed that by giving them equity, we would cement them as partners, but equity didn't really do it. The reason it didn't is that most companies are really driven by their operating P&L statement, so partners like EA really concentrate on quarterly revenues, profits, and license terms.

What about your VCs?

EA is a classically funded startup—we had three major venture firms who were involved and contributed well. My experience with venture capital money is that I only work with absolutely first-rate venture guys and only want first-rate thinkers if they are going to be on the board at all. Nonetheless, I didn't let them take over the company when they wanted to. We had a lot of problems in 1987. We had to deal with product transition issues and too much expansion. So we had a layoff, shut down some businesses, got refocused, and developed new growth strategies. The board and the venture guys, by Spring of 1988, were getting really, really nervous.

The funny thing was that EA was already half way through the solution at the time they were panicking. We had already done half of what we needed to fix things, but the results weren't going to show for six months. That was the only time when people on the board thought that they should cut my head off and try somebody else. Some people in that situation probably would have allowed it to happen but I didn't think that was the right thing for the company, so I hung in there tougher than others would have. At that time the VCs would liked to have changed the board in order be in a position where they could pull the trigger on me. I made sure they couldn't do that. Some of it was politics but some of it was ensuring I did the right thing and maintained the relationship the best way I could. The downside to venture guys is that they sometimes think they know more than they do about what's best for your company. They're accustomed to a certain level of performance in companies and in company management. Many times when they want to take over and make executive changes, it's probably the right thing to do. But they don't want to admit it when they make mistakes. If they fire the CEO and the guy they bring in screws things up, VCs say: The other guy was a disaster anyway. Well, maybe he wouldn't have been. Who knows? I'm not here to defend anybody else but I know that the VCs were definitely wrong to think that getting rid of me was the solution, and based on what happened since, they would certainly agree with that assessment now.

When I started 3DO, I just didn't want to go through that ordeal again. I wanted [venture capital firm] Kleiner Perkins in the deal for two reasons. First, [venture capitalist] Vinod Khosla is probably harder working, by a factor of ten, than any other venture capitalist.

There is so much more value having him involved because he's a talented operating thinker, a strategic thinker, a good negotiator, and he'll spend time helping you. Other guys just won't do that. A lot of venture guys are just bankers: show up for board meetings and that's it. Vinod had a good feeling for what we were trying to do; he had a strong personal interest in it. Second, I didn't want 3DO to be in a situation where everybody on the board had some vested corporate interest and therefore didn't necessarily care if the company made money. Venture capitalists, on the other hand, only make money if the company makes it. It's a nice influence to have. Although the corporate influences have never really been a problem with 3DO I think that's mainly because of the high level of class of the individuals involved.

What's the key to success in your business?

It's leverage. It's pure and simple.

What you must realize about capitalists is that capitalism is no longer like Economics 101. It's no longer about building a better product. It's no longer about being more efficient and offering a better product than your competition. Business is now a big Monopoly game. When you talk to venture capital guys about what they're trying to do, they're not trying to make a successful company or product anymore. They're trying to look for situations where they can have commanding market share and really drive it using, frankly, techniques that are supposed to be illegal, but the government doesn't seem to care about anymore. Everyone looks at it that way. In a business such as this one, companies are saying, "How do we achieve critical mass and control things that give me the leverage to squeeze more profit out of that critical mass?" Don't misunderstand me: I'm not willfully disobeying the law. That's not how I look at it. That's the way all these VCs look at it. They want Park Place and Boardwalk with a bunch of hotels on them.

If that is the case, what advice would you give to entrepreneurs who lack the access to huge sums of capital?

There are a couple of different ways to approach this issue. The first thing to note is that someone who's a real entrepreneur doesn't need anybody to tell them to start a company. They'll just do it. I once asked one of my venture capitalists, Don Valentine, if he was politically active in trying to get special tax treatment for capital gains and he said, "No, it wouldn't make any difference in my business." I said, "Gee, why is that?" He said, "First of all, my limited partners' money is municipal, tax-free, fun money. Second, the difference in capital gains profit wouldn't affect the behavior of entrepreneurs at all!" And he's absolutely right. Absolutely right.

So, a real entrepreneur is just going to do it. Nobody can talk them out of it. A real entrepreneur needs to get a good lawyer and become objective about having a good plan and a good team—ensuring the team has the skills to succeed. On the other hand, you can't tell most entrepreneurs anything. They're pretty opinionated about how to go about things. They must learn from their own mistakes, and the ones who do learn from their mistakes and adapt will be the successful ones.

There is a second approach for people who have a desire to start their own company, but don't have a specific product idea or vision. I think that's a lot more difficult. Perhaps it's possible for someone with the right training and the right business discipline. I remember a venture-funded company that was started around the same time as EA—Spinnaker. It was started by two Harvard Business School grads who had been working for Boston Consulting Group. Their approach was to look for a business to start by doing a study to determine which industry to start a company in. Right from the beginning I thought, forget it, they're history. They never figured out how to make any money. The company is still around in some form but they're long gone. The company just never really got anywhere. They were able to raise enough money from people who believed in that approach to starting a business.

On a personal note, what lessons have you learned about balancing your personal life with the demands of starting a company?

I've learned that it's very tough to manage a family life and a business. Many people try and don't succeed. I was married once before to a woman partially because she wanted to start her own company. The situation provided some intellectual attraction but it didn't necessarily make for a stable, long-term relationship. We never saw each other.

Today it's tough to balance, but when things are busy my wife and I make the time by scheduling dates in advance and sticking to them. My advice is to either find someone who's willing to support you and your career or to go it alone.

For more, order a copy of In the Company of Giants: Candid Conversations with the Visionaries of the Digital World.

Ken Olsen of Digital Equipment Corporation: Reflections on the Revolution

Fortune magazine hailed him as America's most successful entrepreneur. His unauthorized biographers call him "The Ultimate Entrepreneur." His company experienced 25-40 percent growth for seventeen straight years. At its peak, Digital Equipment Corporation-known as DEC by outsiders-em-ployed 120,000 and claimed annual revenues in excess of $14 billion. For 35 years Ken Olsen, founder, president, and pater familias piloted his company from a modest start in a small Massachusetts town in 1957 to a formidable, if bloated, leviathan at the time of his departure in 1992.

For all the attention that CEOs of companies one-fourth Digital's size manage to attract, Olsen should be as familiar to America as any of the great industrialists this nation has seen.

However, a certain modesty and aversion of publicity make it difficult for all but his closest colleagues to know him.

Olsen received his M.S. in electrical engineering from MIT in 1952. After working in MIT's Lincoln Laboratory on a joint development project with IBM, Olsen saw that an opportunity existed to create a computer radically different from the closed architecture Big Blue locked its customers into. In 1957 he and colleague Harlan Anderson approached Georges Doriot, the godfather of the venture capital industry, for $70,000 to start a company.

Digital's first computer was the PDP-1. Though it fueled the company enough to achieve critical mass, subsequent computers like the PDP 4 and 6 failed. It was a backbreaking effort to deliver the PDP 8, but Digital successfully ushered in the state-of-the-art in interactive computing the notion that users needed to access a computer using their own terminal and keyboard in order to perform their work, rather than submitting requests to lab-coated managers in imposing data processing centers packed with IBM equipment.

By the mid-seventies, over 70 competitors crowded the minicomputer market that DEC had spawned. The firm's technology lead had steadily withered and IBM had awakened to the minicomputer market opportunity and developed a system of its own. Even Data General, the company founded by the departed Digital lieutenant, Ed De Castro, had racked up some successes. Once again though, Digital reestablished dominance with a next generation computer, VAX. VAX carried the company for another decade and fulfilled prophesies of computer ubiquity-for companies, at least.

For most entrepreneurs, the calls to step aside and let professional management guide the startup venture come relatively early. Olsen survived these challenges even during the company crises of the mid-70s and 80s and propelled his company to greater heights. By 1992, however, DEC's financial outlook was bleak; the company had made several aborted attempts to enter the PC market. Olsen's disdain for this emergent industry was well documented by the press. More than once, when asked about the next wave in computers, Olsen responded with "There is no reason for any individuals to have a computer in their home." This assessment of the new market for years was held up as emblematic of corporate arrogance and ineptitude.

Nonetheless, Olsen's legacy of achievement marks him as a truly successful, if somewhat contrarian, entrepreneur of the modern computer industry—a giant to be reckoned with.

A company of firsts, DEC implemented various unorthodox business practices, including paying its sales people on the basis of a strict salary instead of leveraged incentive plans popularized by IBM. At the height of the company's success, DEC's unique approach to business was hailed as revolutionarily effective. As the company plunged, pundits and employees complained about overlapping tasks, committee-managed inefficiency, and chaos.

From a cultural perspective, DEC mirrored Olsen's temperament—unique and unpredictable. Digital was the countercultural antidote to IBM—a title Apple would inherit in the 80s—yet it was decidedly un-flashy and almost entirely avoided TV and radio advertising. In short, most important aspects of the DEC gestalt inevitably trace back to Olsen himself.

We met with this publicity-shy bear of a man at the offices of his newest venture, Advanced Modular Solutions, in bucolic Boxborough, Massachusetts.

"The best assumption to have is that any commonly held belief is wrong."

You are one of the most successful entrepreneurs of your era. What are some of your keys to success?

I was asked to give several speeches on entrepreneurship to various groups this Fall. One point I made is that business schools' goal today is to teach people to become entrepreneurs. I think this is a serious mistake because once someone becomes accustomed to being his own boss, it's very hard, maybe impossible, for him to later work as a team member. People who want to be boss right from b-school are skipping the beneficial activities of working for somebody else—not very likely the best thing to do.

My recommendation is to first work for somebody else and learn how to be a team member, which sounds kind of obvious, but in this modern world being a team member is very odd. Then go and learn to be a leader. If you never learn to be a leader don't try to run a business. Television business schools don't train people to lead. They teach that the boss must be decisive, even if he knows nothing.

Someone who teaches at West Point and Harvard compared the two educational systems in an article. He wrote that one is always questioning issues and never cooperates—Harvard. The other is disciplined and military. He didn't come to the obvious conclusion that Harvard's way is better. You really need both. Whether it's Harvard, or MIT, or Stanford. You're kind of useless in business with just an academic background. You're also useless if you spend too much time in the military. You really ought to have backgrounds in both. There is a lot to learn in the military about leadership that the academic world completely misses. The image of the military may be of top-down management, but that's not how it works.

I was a sailor. A ship is a good model for a business. A captain determines the direction of the ship, but the ship is made up of many divisions and groups. Each one is quite independent and knows what its particular task is. And the attitude is beautiful, shared, and universal. The attitude is that the ship may not accomplish its mission, and the group may get killed, but one thing is for sure: it isn't going to be our group's fault. People don't sit there worrying about the captain and the direction of the ship.

So it's a deep sense of accountability that maintains high performance?

It's more than accountability. The group members simply know how to do their task well even if nobody else on the ship knows what that particular task is. Business needs such a model, too. The manager who says, "I make all the decisions"—is a fool. He's a fool.

Can we take that model further? How do you instill such a sense of mission in sailors or employees?

I'll tell you a little story about Digital that illustrates this.

Digital Equipment started with $70,000. The nice thing about 70,000 dollars is that you can watch each one of them. We had a twenty-person committee and I was chairman, the only one with the P&L statement in mind since everybody else was full of ideas for spending money wonderful ideas like printing matchbook covers for marketing—really intelligent things. I kept saying no. They got very frustrated with me, went to the board of directors and said, "Ken is a dictator," which was true, because if we had enacted all the proposals to spend money, there wouldn't have been anything left.

Our other problem was that the employees weren't very smart. They couldn't understand anything. By the time we were a $14 million company we got into trouble. I went to Boston to speak with General Doriot [of the venture capital firm American Research] and told him something had to be done because we didn't have things under control. I thought that we could sell ourselves to Singer. He wasn't terribly sympathetic nor was the board terribly sympathetic because we were very profitable and growing fast. Then the profits deteriorated. I announced that we were a new company as of that day—we were now following [former CEO of General Motors] Al Sloan's model. Sloan broke his company into business units and said that management's job was to leave them alone. I declared that we were, as of then, organized into five business units. It went over like a lead balloon. Several people quit—no exaggeration. One very competent fellow said, "I'm 33 years old. I'm not going to take orders from a 30 year old." Not one person in the company liked it. They went home and told their wives that they had been demoted, which is impossible because mathematically not everyone could be demoted. The board of directors was dead set against it. One director, the one who introduced me to Al Sloan, said he would sue the company for fraud. General Doriot said, "Ken, I'll support you. Anything you do. But remember, no one ever succeeded at doing this."

I religiously followed Sloan. To this day I don't think Digital's board of directors understood the model. They'd say, "Ken's a little funny. Real managers make all the decisions."

The loneliness of my position cannot be exaggerated. But miracles happen. If you look at Digital's growth and profitability after that decision there's a distinct discontinuity: our growth accelerated—an absolute miracle. All of a sudden I was no longer the terrible dictator because I was now in a position to criticize the managers. Those same people who had been so dumb became geniuses. The people who before were frustratingly dumb, made the basis of Digital's success. Do you see the secret there? The genius on my part—I have to tell you this because you wouldn't notice it—was to follow Al Sloan religiously: Leave People Alone. I'm sure that when General Doriot said past attempts at such a business model never worked, it was because top management couldn't leave people alone.

Nobody at the top is smart enough to know everything. Nobody is so competent they can do everything for everybody. The problem is that very few people realize they can't do everything and can't make all the decisions. Very few board members understand this because to them, the ideal manager dresses we, speaks well and makes decisive decisions. They love that. You see it on television all the time.

So your management secret was really just borrowed from Sloan?

Jack Welch of GE says he got the idea from one of my speeches. I'm not sure that's true. Hewlett-Packard is doing quite well following this model now. Some say they got the idea from me. Of course I say no. It was Al Sloan.

It's interesting that during this organizational change a critical juncture in Digital's history—your employees thought the company was a failure.

No. They weren't even conscious enough of the sum of it all.

But weren't they unhappy with the state of affairs?

They weren't that unhappy. They had a lot of freedom and had nothing to compare themselves to. It was just clear to me that we were in trouble. The strength of the new system was in making the P&L statement near and dear to the people making decisions.

The only word I can use to describe the budgeting process is "travail." We made money hand over fist because managers had power and responsibility for a budget and plan that worked. This is what made Digital. The one weakness was that the employees did very well and after a while the success went to their heads. That's when the whole system fell apart. The system depended on the struggle and the travail. General Doriot used to say, "When you say your prayers at night, pray for inventory."

Pray for inventory in what sense?

Just inventory, because it's a big deal if you have too much or too little. I said, "When you say your prayers at night, pray for your P&L statement." That's a secret of success. When you're making too much money, you get careless. That's when the business falls apart.

When do you think this took hold at Digital?

In the late seventies.

And prior to the seventies?

Prior to that, in general, things went very well. Our way of business worked because business unit managers had very close contact with their sales people—it was clear to the business unit managers how things were sold.

Something else emerged from running the company this way. Because of the pressure for economy, employees built a common set of products. Most companies have different products in different parts of the world even though they don't have different business units. Since our employees were all interested in economy there was a common set of products. This meant a lot of meetings and a lot of discussion. Critics thought that all the time Digital employees spent talking was a terrible waste. While talking was sometimes frustrating, the result was a common set of products.

When I tell people, "Say your prayers at night, pray for your P&L statement," I also say, "If you pray for your spreadsheet, it won't answer you." Spreadsheets just devastate people.

The introduction of spreadsheets was considered a great new tool for business management. Why are they harmful?

Because people started believing them. All the numbers in business are garbage.

Why is that?

People believe that the computer must be right. At Digital I never looked at the financial statements.

Let's get back to the comment you made about success getting to peoples' heads and destroying the company.

Athletes, actors, politicians, even preachers. They can't survive success.

How can you avoid the trap?

I failed at it, failed badly at it. I believe, however, that the solution lies in the accounting system. If we had the discipline of thoroughly maintaining our accounting, we would have known how well or how poorly we were doing. Even the board of directors got careless because there was so much profit. In the late 70s and early 80s the success had gone to peoples' heads and I couldn't straighten it out. We had no new products for five years. The company spent five years introducing controls and red tape to protect us from making defective products, and nothing came out. I'd ask, "Why don't you make a new product?" The response was, "It takes two years to get it all worked out. Why start today?" With no new products eventually things collapsed. The profits disappeared.

An interesting thing happened. All the vice-presidents quit. They say I fired them, but they quit. And the Boston Globe proclaimed that it was The End of Digital. Interestingly, not one of those vice-presidents succeeded on his own. They did very well at Digital because of the supportive environment.

Several of them did try to start their own companies.

A number of them did. They thought themselves the greatest managers on the earth. They thought that their presence at Digital made the company a success-and that their presence at their new companies would make them successes. Management at Digital had this attitude that the company was successful just because they were there. And I wasn't able to control that attitude.

The message is that part of doing things the business unit way is to not look for credit for yourself. When I was a little kid I learned the fable of a turtle who talked two ducks into holding a stick between their mouths while he held it in the middle—off they flew.

One bird said, "This is clever, I wonder who thought of it?" The turtle couldn't resist saying, "It was mine" and down he went. Part of the secret is to avoid showing the world how smart you are.

So your secret is to downplay your successes?

It's more than that. You've got to make sure that people take responsibility for their jobs. The accounting system helps them take that responsibility.

How did Digital's culture reinforce the sense of responsibility?

I can't describe it. I'll just talk about it. It was very much a team spirit, a family spirit, an overwhelmingly strong one. As far as I'm concerned it's very important that a company have a trusting spirit of teamwork—love is almost the word. For example, a hurricane once hit our Puerto Rico facility. A whole bunch of Digital people helped. We flew a DC-3 down there every day and people here sent baskets of apples.

Once somebody at Digital got seriously ill and died three months later of cancer. People wouldn't even ask—they would just take time off from work and visit him in the hospital. That's a family feeling. You just know it's the right thing to do.

Then when everybody [including Olsen] was fired, what fascinated The New York Times was that former Digital employees stayed in touch with each other. Today there are alumni groups all over the world.

How do you instill that sense of community?

I don't know, but it was all over the world. In Japan there were two thousand people. It was almost like a religious revival. They were that much of a family.

It's interesting. When we trusted people in the organization, we rarely had dishonesty. We had complete trust. It was a beautiful feeling that you took for granted—you just trusted everybody. That doesn't mean we didn't have some really miserable people at times.

How do you deal with the miserable people?

I never did figure that out either.

Balancing work and family pressures always seems to be a big issue for entrepreneurs. You've worked in the industry for over thirty years. How do you balance your home life with your work life?

You definitely have to work at it. One bit of advice I give people is, if you're going to learn to be a manager, take responsibility in your church or town activities. This actually relates to the story of how I got into business. I was an engineer at MIT and had all the things I ever wanted to do. I went to an old church in Boston, and in those days it seemed that only old people went there—I was thirty years old in a church full of old people. They asked me to run the Sunday school. Immediately I went to Dixon library and checked out all of the books on business management. It was my first exposure to the academic approach to management. That is what introduced me to business. What I did in Sunday school to make it a success, and what I did as a sailor, and what I did at MIT was to make the environment interesting for people.

How did you make business interesting?

Before MIT I spent a year at IBM. I designed the circuits for a computer we made but I never told anybody I did it. Just introducing them made everybody very excited. At Digital I would often do things without telling anybody and got people jazzed up. I didn't need the credit and it made things exciting. That aspect of leadership really helps a business. People who are successful usually have ways of exciting people.

Getting back to the question of balancing private life, how did you manage to spend enough time with your family?

I just made it a point to. I backed-off from a number of different activities. I was on a number of company boards and I backed-off on those. I've always made it a point to be with the family. I'd often get my work done by getting up early before anybody else. I still get up before anybody else. I hate to be cheated from that time. The secret is to do the work when it's quiet and you're alone, sometimes at three in the morning. That way no one thinks you're cheating on family time.

Could we talk about another interesting aspect of Digital—your decision to use non-commissioned sales people?

You could say that what is commonly believed is almost always wrong. No one on the board of directors ever understood the idea behind noncommissioned sales people. They didn't understand anything.

It all depends on how you think of a salesperson. If you think he's a professional and you want him to act like a professional, you treat him like a professional: "Your job is to sell. Your satisfaction comes from doing your professional job." The problem was that management couldn't leave the non-commissioned plan alone and snuck in a commission plan. It took a very thick manual to explain the plan. In effect, the message to the salesman was, "Memorize the manual and focus more on knowing the rules than on the products you're selling." You can see the harm in that. Management just couldn't leave their cotton-picking hands off the sales plan. Like the income tax system, it got more and more complicated.

People always approached me and said, "I've got a product that doesn't sell. Let's temporarily have a commission plan for it." I said no. "You'll always make dogs for products. By puting a commission on the dogs you end up selling the dogs and not the products customers really want."

Everything gets messed up by paying commissions on the dogs. The same thing is true with piecework. I have a friend who was a wood-cutter. He made a lot of money. I called him and said, "I'm giving a speech on commission plans and piecework. Piecework pay must really work in the woods because you simply get paid for the amount of wood you cut." He exploded. He told me that after getting paid for piecework, loggers at one company were running in the woods and driving machines faster in order to get paid more. Finally the logging company paying piece rates had to fire the whole crew because the accident rate was so high the company couldn't pay for the insurance.

People have this naïve, stupid idea that everybody is motivated by money—it's common knowledge. When I left Digital the company of course went whole-hog into commissions. They never figured it out. The sales manual, I understand, was real thick. It's too complicated.

The common belief about commission plans is, "Boy, what a chance we have to manipulate people!" Trying to manipulate people is the wrong attitude. The results are just terrible.

So when you created a noncommissioned plan, your objective was to motivate people by...

—Just saying, "You're a professional and we expect you to act like a professional."

And the means for instilling this motivation?

No, no, no. You're talking like a manipulator again.

But you did want people to be proud of their professional work.

Yes.

What do you think motivates employees?

There are always a certain number of people who are motivated by power, jealousy, and vindictiveness. In my last years at Digital I didn't do a good job of getting rid of that influence. Most people really want to be proud of their work. And if you encourage pride in one's work you will end up with people who are proud of their work. When you go to work every day it's terribly important to get the satisfaction that you're doing something useful or successful. In general, people are more satisfied if they're expected to be honest than if they're expected to be dishonest—you end up with a different class of people. Most people want to work for positive reasons, not for some arbitrary commission plan.

Could you talk about your later years at Digital and the difficulties you experienced?

I have to be careful because I don't want to publicly criticize the people there. Remember that our primary goal at Digital wasn't to have the fastest computer. We never had the fastest computer—almost never—because our commitment to customers was that future computers would run the same software the previous one did. This gave us an enormous customer following. But it also meant we couldn't use the latest fads.

The goal was to protect customers' investments.

Right. We also built a large service organization. Our training group was bigger than most universities—it was huge. If you think of that training group as a marketing tool can you imagine customers spending a week paying university-level prices to be lectured about your products for a week or two? You couldn't beat that as marketing. Customers swarmed in. To the stock market and the board of directors this just looked like a wasted effort on Digital's part. The analysts and the board said that the goal should be to have the fewest people per dollar of sales. Apple was probably the best in the industry on that basis. Apple did no manufacturing, no selling, no servicing, and had no customer contact.

We did an enormous amount of consulting at good rates; it was very profitable—there was no inventory or other costs. Customers loved it. And the sales people were there to be helpful to the customer. At almost every large customer account, we had an office right in the heart of the company and had access to everybody because we were a key part of their organization. We had an office at Ford Motor Company—we owned Ford Motor Company. The same was true of Bell Labs because they trusted us. To those with business school backgrounds, our business model was too complicated. A good business model was defined as selling a product, getting rid of it, and just focusing on making the next product. The whole industry was run that way. So you can see why the board of directors said, "Digital has 110,000 people for only a $14 billion business. Get rid of the people, about half of them."

That's what they told you to do?

Yes. Cut the workforce in half-outsource, get rid of them all. This fit in with the stockholder value that Wall Street wanted.

Let's switch gears and talk about your longevity as a CEO. What motivates you to continue working and to even start another company after such a long tenure at Digital?

It's a little complicated. The satisfaction comes not from others seeing or understanding one's work. It's in yourself. It's the satisfaction of seeing the results, even though no one else knows of your achievement.

It's commonly said that Ken Olsen lost it, that he didn't know the mainframe was dead and that the PC would take over the mainframe.

They still say that even though the world has now determined the mainframe will be here forever.

I'd like to answer the accusations, which are foolish. Aside from that, the big motivation is seeing something accomplished. I still spend a lot of time designing equipment. I can do things that almost nobody else can do. I have some background in toolmaking, a little in physics, a little in chemistry, and other things. I enjoy putting that all together. I can stay up all night working on it.

Why does that motivate you?

As you get older and you pass the normal retirement age, can you think of anything better than having an exciting job? Sitting down and watching television or playing golf rates much lower on the list of accomplishments.

You mentioned that the press said you had stayed too long as Digital's CEO. When should a manager or an entrepreneur leave his or her company or job?

That depends on a lot of things—when he gets tired, when the job is no fun, or when he really has lost it. I was on a mission then to show the world how business computing could be done. People within Digital were just too embarrassed to have an old man doing that. The greatest dishonesty was that they destroyed VAX. So few people understand the significance of business computing. Mainframe computing runs reliably every day—no one watches it. It is by far the least expensive form of computing. PCs are the most expensive.

The stupidity of computer science is such that if you go to any computer science school and ask, "What's the answer to the problem with computing today?" They say, "The answer is to have faster net-works, taster PCs, and big databases where you can mine all that information—and then make graphs."

It sounds beautiful. Many companies today are in trouble because of that kind of thinking. It was these kinds of ideas which five or six years ago tagged me as being too old for the business. Everybody knew that PCs were going to take over the world yet it's clearer than ever that the last thing you want is a PC running anything important. Five or six years ago PCs were much better than they are today.

Like other successful companies, Digital had defectors who left to start their own companies. One of the best known was Ed De Castro and his company, Data General. How do you minimize such defections?

I'm friends with De Castro now. It's been a long time—you don't hold hurts. This sort of thing will always happen. The miracle was that we decided not to sue them, to not make an issue out of it, and very rarely comment on them in public. In retrospect this was marvelous wisdom. Suing them would have dragged on for years. It destroys your heart. Jealousy does terrible things to people—the yellow-eyed monster that eats one's heart out. Vindictiveness and the pursuit of revenge, just because someone wronged you, is destructive. The wisdom was in not pursuing the issue and controlling the urge for vindication.

That takes incredible restraint.

And it's logical. Jealousy and vindictiveness are not the best inclinations to have because the task is to win business by doing a better job than anybody else. This is what you should spend your energy on.

Some people thought, "If that's Ken's attitude, let's take advantage of him." So once in a while we did nail somebody in court. It was usually people who sued for trivial things like a real estate activity and figured that Ken could be taken advantage of. But we didn't do that in the situation you mentioned. It would have dragged on forever.

So what you're saying is you can't keep people from taking company knowledge to start their own companies.

No, you can't. You must know that it's a part of business. Certain things can't be helped, and you live with them. You get mad for a while but it's not a very useful emotion.

Ed came to see me not long ago. There is no point in even remembering the incident anymore. He has a jet airplane and invited me to go flying with him. It's so much better that way. It's so much better not to hate people. Those who do often end up suffering quite a bit.

You've had a long career. Any regrets?

Oh yes. As you can guess, I think a lot about what I should have done at Digital during my last ten years there. It's been fun, satisfying, and exciting, but I'm usually more conscious of my weaknesses and mistakes than I am of my successes. In many ways that's healthy-if you're blind to your weaknesses you get in trouble. I don't think about any of the successes at Digital. I look forward to doing something new each day.

You only learn if you're conscious of the need to learn. If you conclude you're great, that's the end.

Did that sense ever take hold in you? Is that a regret?

No. I have a scientific and Christian background. The tradition of science is that you should think clearly enough such that you don't think you're great. Also, despite how things are presented today, traditional Christian background says that you really have no reason for pride. St. Paul said almost sarcastically, "What have you got that you weren't given? And if so, why are you so proud?"

Whatever you think you're good at is just at the surface of it all. There's nothing you're so good at that you really understand completely. When you get your degree in computer science or your degree in business they tell you, "Now you know it all. You don't ever need to open another book." I'm sure they do this because I've seen the results of people whose attitude is that they know it all. That attitude is so contrary to science and traditional Christian views it is obviously unwise.

Some people don't understand this: designing a financial system, designing an organization, designing a circuit or a computer diagram are almost the same thing—they generate the same satisfaction. The satisfaction is the same but there is much reason to be humble because there's so much one doesn't yet know.

Success in business is so fragile—human beings are involved, and the market is involved. People who follow somebody else's wisdom without thinking about it will miss these things. Being critical and analyzing issues ahead of time is satisfying. You must have humility if you're trying to figure things out differently from everybody else. But most people don't think at all. They fall in love with phrases. The best assumption to have is that any commonly held belief is wrong.

For more, order a copy of In the Company of Giants: Candid Conversations with the Visionaries of the Digital World.

For more, I highly encourage you to order In the Company of Giants: Candid Conversations with the Visionaries of the Digital World and read the entire book yourself.

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