OT...Intel article via NY Times, sorry if posted.
September 12, 2004
Can Mr. Chips Transform Intel?
By GARY RIVLIN and JOHN MARKOFF
anta Clara, Calif.
PAUL S. OTELLINI was 41 and a rising star at Intel when, in 1992, his boss informed him that the company would choose him as its new chief of sales and marketing.
Though it was a promotion, Mr. Otellini was not pleased. He was happy running the microprocessor product group, a crucial job inside Intel, then as now the world's biggest computer chip maker. Besides, he had a newborn at home, and his acceptance of the top sales post would demand that he spend much of his time overseas.
"He wrote me an eight-page memo telling me why it was the dumbest idea he had ever heard," said Craig R. Barrett, who was his boss at the time and is now the chief executive. "He didn't seem to appreciate this was a one-way discussion," Mr. Barrett recalled recently. "He was in denial."
Mr. Otellini also failed to grasp that Intel's most senior leaders were giving him their highest compliment. "This wasn't a promotion because we thought Paul would be perfect for the job," said Andrew S. Grove, the chief executive at the time. "Clearly, sales and marketing was not his background. It was more, 'Here's an important job that will require certain skills; let's see how he does.' "
That was the Intel way: orderly, calculated and cold. Top management was putting him and others through the paces to simultaneously groom them for bigger things. "This could be understood as Paul's first big test," said Mr. Grove, a company founder who is now Intel's chairman.
Apparently, Mr. Otellini performed well in this and later trials. In January 2002, he was named the company's president and chief operating officer. That move all but guarantees that when Mr. Barrett - a former C.O.O. himself - steps down in May, the board will choose Mr. Otellini, now 54, as the fifth chief in Intel's 34-year history.
Now, however, Mr. Otellini may be wondering if he didn't have the right instincts when he asked to remain in his product management job.
Over the past year, Intel has suffered through any number of missteps: a product recall, the cancellation of major new chip releases, delays in the distribution of faster Pentium processors and, perhaps most important, slips in the release dates of new consumer products that the company casts as crucial to its future earnings.
These and other miscues prompted Mr. Barrett to send a memorandum in July to all 80,000 Intel employees, promising that top executives were "revisiting the meaning of Intel culture and talking about management expectations."
But a handful of missed deadlines and scrapped designs are hardly Intel's only worries. Assuming that the board promotes Mr. Otellini to the top spot, he will face the daunting task of reinventing Intel - a challenge that calls to mind the 1980's, when Mr. Grove turned the company, then an embattled memory chip pioneer under assault by aggressive Japanese competitors, into the world's dominant maker of microprocessors. Its chips run 80 percent of all PC's.
This time, though, Intel's main foe is not an external enemy, but a saturated PC market. The company has had plenty of warning: an Intel co-founder, Gordon E. Moore, anticipated decades ago that the power of computers would accelerate at an exponential pace. So each new generation of technological advance is a threat to the previous one, and no computer maker is safe from the trend.
Intel has overcome other market shifts in the past, and under Mr. Barrett, it has taken steps toward surviving in a post-PC world in which computing power has jumped into a myriad of hand-held gadgets for consumers, like cellphones, cameras and music players.
In other words, no longer is Intel's success assured so long as it efficiently stamps out ever faster processors. If it is to continue to prosper, Mr. Otellini must find a way to translate its power in the world of PC's into that of the high-end machines that run corporate data centers, while making deeper inroads into the new consumer markets.
Last week, at a conference for Intel developers, Mr. Otellini announced a new chip designed for a wireless standard, WiMax, which some people in the industry cast as a possible replacement for Internet access via digital subscriber line and cable. WiMax is intended as a technology to extend the range of WiFi: where WiFi is a wireless standard that works over shorter ranges, like a cordless phone, WiMax would allow for wireless Internet access over a wider range, like a cellphone.
Yet, like its longtime partner Microsoft, Intel has found it difficult to break out of its basic business and to diversify, now that the PC is no longer such a huge growth engine. This month, Intel cut its revenue and profit-margin forecasts for the third quarter, citing a weakening demand for its chips. Its said it expected revenue possibly as low as $8.3 billion, down from a mid-July forecast of as much as $9.2 billion.
The choice of Mr. Otellini goes a long way toward explaining Intel's effort to re-engineer itself.
Just as Mr. Grove was "the perfect C.E.O. for when we were smaller but wouldn't be the right C.E.O. for the current period," said Andy D. Bryant, Intel's chief financial officer and one of those who was passed over when the company chose Mr. Otellini, "to my mind Paul is coming to the job at just the perfect time for us."
UNTIL a few years ago, Paul Otellini was easy to overlook by insiders trying to handicap the race for the next heir apparent. For starters, he is an M.B.A. in a company that has always been run by engineering Ph.D's.
But it was also easy to underestimate Mr. Otellini because of his personal style. Intel insiders pride themselves on the raucous way they thrash out disagreements, a legacy shaped by the personalities of the company's top managers. Mr. Barrett, for instance, is cantankerous and prickly, a blunt-talking leader who wears his moxie on his sleeve and confesses to chewing out underlings. And as Mr. Barrett sees it, he is nothing but a pussycat when compared to Mr. Grove, whose management style "was to hit you over the head with a two-by-four."
On that scale, Mr. Otellini may best be cast as an altar boy in style; indeed, he was an altar boy as he grew up. Where Mr. Barrett tends to growl and snarl when talking to reporters, Mr. Otellini peppers his conversation with martini-dry wisecracks and friendly asides.
"The thing about Otellini that is so remarkable is that he is so unremarkable," said Steven D. McGeady, a former vice president. "I saw him in meetings where any other Intel manager would be ripping people's throats out, but his brow furrows and his throat gets a pinch in it."
Mr. Otellini was 24 when he arrived at Intel in 1974, just out of business school at the University of California at Berkeley. His first break came when he was put in charge of the I.B.M. account in 1980, just before I.B.M.'s PC became a global standard for computing. The alliance with I.B.M. proved crucial to Intel's rise.
When he was made the head of sales, the position he took only reluctantly, he opened scores of sales offices in emerging markets, helping Intel to establish a global footprint. But Mr. Barrett and Mr. Grove said it was in his next posting, running the chip-making division then responsible for 80 percent of Intel's sales, that Mr. Otellini proved himself.
There he championed what Intel insiders refer to as the "right-hand turn" - breaks with the cherished belief that nothing matters more than ever faster, more powerful computer chips. "That's when Paul arrived," Mr. Grove said.
Mr. Barrett agreed, acknowledging that Mr. Otellini, more than any other individual, deserves credit for convincing people inside the company that producing a chip that could process data at, say, 3.6 megahertz rather than 3.4, was not nearly as important to their success as making chips with built-in WiFi, thereby saving consumers from having to add hardware to their PC's. This was the "right-hand turn" started in 2001.
Through most of Intel's history, every new product followed a simple pattern: the engineers figured out what was possible and then told the marketing department what to sell. The company understood the importance of consumer focus groups, and employed ethnographers to study how people use computers, but their influence was minimal before Mr. Otellini took charge of the chip-making division. "We turned the process on its head," he said.
MR. OTELLINI'S user studies led him to make a heretical pronouncement in 2000 at a strategy meeting with Mr. Grove, Mr. Barrett and other top executives. Engineering's focus on incrementally faster and more powerful computer chips, he said, was no longer the kind of innovation users wanted most.
"The history of the industry was the better-mousetrap syndrome: You build a faster thing and the world will beat a path to your doorstep," Mr. Otellini said in an interview. "But as the industry matured, that no longer became the best way to look at the problem." People want built-in security features, wireless connectivity to the Internet and better graphics and audio, he told them.
"I laughed at him," Mr. Bryant, the chief financial officer, said. "I told him: 'Paul, no one is going to pay more for this stuff. It's just going to cost more to build it.' He told me I was wrong, that I needed to understand what customers value. If we can bring something of more value, they'll pay for it."
The main opposition, though, came from engineers in his division. "We gave him a list of a thousand reasons why he was wrong," said Louis J. Burns, the executive in charge of Intel's desktop computer unit. "And he asked each of us to give five reasons why it might work. It wasn't, 'O.K., that's interesting, guys, but now get to work, we're going to do it my way.' It was more of a collaborative discussion."
Today, both Mr. Burns and Mr. Bryant say they are loyal converts. "That takes a lot of guts and courage to push an entire company from where it's most comfortable," Mr. Burns said.
Intel employees tend to wear the Silicon Valley uniform of khaki trousers and a neatly pressed dress shirt. By contrast, Mr. Otellini tends toward items like black turtlenecks, said Kathy Garchow, a 10-year Intel veteran who is now a marketing manager. She worked as his technical assistant from 1998 through 2001.
For more than a decade, Mr. Otellini has belonged to a men's book group that he said is "deliberately made up of non-Intel types." He is in his office by 6:30 most every morning he is in town, and he has joked with underlings that "a waking hour is a working hour." But he is also that rare Intel executive who, when he takes a business trip abroad, tries to carve out time to explore a museum or a hidden corner of a city.
He is also a private man. When asked, he acknowledged that he has been married more than once, but he declined to say when his first marriage began or ended. ("The past is the past," he said.) He has two children, a boy and a girl, but he would not reveal their ages.
"There's probably no one person Paul pours his heart out to except his wife, Sandy," said Mr. Bryant, a close confidant of Mr. Otellini's.
"I'm not sure I pour out my heart to anybody," Mr. Otellini said.
Yet he can be strikingly candid about both himself and his work. Sure, he said, when asked if it was true that he would occasionally grouse to Mr. Bryant when Mr. Barrett ran the company for five years without naming a No. 2. Mr. Bryant, he said, was worried that the company was suffering because of it, but he was thinking mainly of himself. "My view was more parochial," he said. "Am I going to have a shot at the brass ring at Intel or not?"
Assuming that he grabs that ring next spring, he would start running Intel just as it needed to cross over from a pure technology business to a company with a much broader vision. Can this kinder, gentler chief executive meet the challenges?
Intel covets an array of new consumer markets, but in each of them it still trails rivals like Texas Instruments and ARM Ltd. of Britain.
Perhaps the biggest blow has come in the battle for the high-end corporate market, where Intel has ceded strategic leadership to Advanced Micro Devices. Intel's high-end Itanium microprocessor has suffered from disappointing sales, while A.M.D.'s Opteron has proved a runaway success.
That is not to say that Intel is in an untenable position. The performance of its chips has fallen behind A.M.D. in the past - as recently as 1999. And, in 2000, the Silicon Valley start-up, the Transmeta Corporation, seemed poised to trump Intel with a power-saving mobile microprocessor ideal for a laptop computer.
Each time, however, Intel has proved the skeptics wrong - in no small part because of its vast manufacturing capabilities and imposing research and development budget, which exceeded $4 billion last year.
For Mr. Otellini, these and other problems are both challenges and opportunities. "Craig has tried to find the next play without a lot of success, and that creates an opportunity for Paul," said Dave House, a former top Intel executive who was Mr. Otellini's boss at Intel in the 1980's and 90's. "It's always better to take over when things are messed up for lots of reasons."
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