Things I learned 40 years ago about strategy, layoffs, capital intensity

I was at Microsoft today for the first time in years for a Microsoft Alumni Network thing. Many good stories came up, and I will have to write about them at some point. But I want to look a little further back today at some of the things I learned before my Microsoft tenure.

My full-time working career started 40 years ago in Cleveland at what was then known as Booz-Allen & Hamilton. They were the smartest people I met during my job search, they had an office in Cleveland, and we were still committed to Ohio at that time. I learned a ton in that job. Some of my learnings I use every day; some are becoming newly relevant again.

Strategy

My title at Booz-Allen was "business strategy consultant."  Which is kind of hilarious, I was a newly minted MBA/MSEE, beyond a couple courses in grad school in competitive strategy and game theory, I knew nothing about strategy.   Over my 4 years, I got a crash course in strategy do's and don't's.

Paul Branstad ran the strategy practice.  Paul is a deep thinker and an analytical thinker.  I crunched so many numbers during those years, I was among the first to drag spreadsheets into the office and big hard drives and 80386-based machines and statistical analysis software.  We did a lot of intense microeconomic modeling and analysis.  A lesson I learned from Paul — strategy is not something that some staff person does, strategy happens every day in every decision and your line managers need to be your best strategists.  We saw a lot of companies that had separate strategy staff groups, that was not effective. And oftentimes our work as strategy consultants was ignored, we were just outsourced staff people. Ultimately I concluded that being a strategy consultant on the side of a business was unrewarding, and that I wanted to be an operator who thought strategically. That is a story for another day.

Right next to Paul’s office sat Tom Jones, who led the operations practice.  Tom was very grounded and practical and probably thought that strategy consulting was a bunch of hooey, especially strategy consulting done by snot-nosed brats fresh out of business school.  He liked to say “Your strategy is what you ship”, putting the emphasis on what you actually can get done repeatedly.   You can have all kinds of grand dreams and stratagems, but your customer sees what you actually ship, and they make their purchase and usage decisions based on that.  It is easy to fool yourself about your strategy; it is easy to lose sight of what your customer is actually experiencing.

Having a good strategy is necessary. I also used to work with a guy who would say "You can't get where you are going, if you can't say where you are going." It isn't sufficient, though; you need a culture and team that is implementing that strategy, and the marketplace has to actually see products that match that strategy.

Layoffs

Layoffs suck. They have become all too common now in the tech industry, with Intel being the latest. I have no great advice or wisdom for anyone in the midst of this; I hope people land on their feet.

Another Booz-Allen colleague of mine was Bert Jones. Bert had worked at GE, GE was constantly acquiring companies and laying off employees in the 80s, that is how Jack Welch got the nickname "Neutron Jack."  Many industrial companies were laying off people in the 80s, we lived in Pittsburgh as the US steel industry was contracting, there were layoffs in the newspaper every day. Those were some tough times.

Bert had seen a lot of layoffs and offered up two lessons. First, always work on a product that your employer really really cares about – i.e., the product that makes the most money for the employer. If you aren't sure what your employer cares most about, then read the annual and quarterly reports and analyst coverage and figure out what makes the money for the company. These core teams will be largely insulated from layoffs, reorgs, and other corporate randomness – nobody wants to mess with the goose that lays the golden eggs. If, however, you are working on some tertiary exploratory business that makes no money, your team may be subject to all kinds of randomness.

Second, there are only two job functions that are really safe.  You can make things, or you can sell things.  When times get tough, those jobs will be protected.  If you are working in any other staff role and not directly involved in making things or selling things, you may find your job at risk. 

Capital Intensity

My first year as a consultant was spent on pricing strategy for telephone companies.  The telephone companies (mostly the regional Bell operating companies that had been split out of ATT) had massive capex costs and nearly zero marginal costs for their networks.  And they had a complicated mix of users and products all running on the same network infrastructure — residential, small business, corporate customers, bulk resellers, etc. 

Costs provided no helpful signal for pricing – an incremental minute of phone calling cost absolutely nothing. We ended up building supply and demand curves for each product segment and developing pricing based on supply, demand, elasticity, and substitution alternatives. It was tedious work and the data tools and data quality sucked.

It is an interesting time for the tech industry. Capex intensity for software companies is exploding. 10 years ago, you could start a company with a couple of people, a couple of laptops, an AWS account, and no capex. Now the AI wave is driving capex through the roof. The industry increasingly resembles the old telco industry — massive capex, minuscule marginal costs, and a complex set of customers, all using the same infrastructure. Software pricing used to be (somewhat) easy, but it has suddenly become complicated.