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More Creative Destruction on Tap

I am an unabashed capitalist. It's not that I believe that free markets make perfect decisions on the allocation and use of resources, but rather that on average they make better decisions than individuals. People have a collection of biases that influence economic decisions and often cause them to make poor choices concerning careers, spending, and life in general. The free market is not always efficient, but it has fewer biases.

It was with that thought I read that Intel was laying off around ten percent of its workforce, or about 10,500 people over the next nine months. As layoffs go, it is not the biggest we've seen in the industry by any means, but it is significant. And it is especially significant given that Intel has been a model of both technical innovation and good management for the last two decades. Has there been a slip?

I'm nowhere near close enough to the operation of Intel to make even an educated guess on that question. But it seems like every time a technology company gains an advantage in its industry, hiring and spending decisions seem to be made with just a bit less focused. In economic terms, when capital becomes less scarce, it is often used for things that do not provide for a good return.

But ultimately, it is not a reflection on Intel's management, but rather the consequences of our fast-paced industry. Competitive advantage can be measured in weeks, with every high-level decision having consequences that begin immediately and continue for years. In Intel's case, for example, Itanium was not the logical successor to the X86 architecture, though for years after that became apparent, the company continued to spend as though it were.

Compare it to, say, theUS automotive industry, which is undergoing a significant transformation. While arguably the two industries are at a similar level of complexity, the strategic decisions make in automobiles tend to play out much more slowly. Decades may pass before the consequences of poor decisions are felt.

All of that is in retrospect, of course. The decisions are much more clear when you are able to make them in the rearview mirror. That's why management, especially that part of management responsible for allocating capital for strategic uses, gets paid the big bucks.

None of the economic speculation makes it easier on the employees affected, however. Intel will likely provide a reasonable severance package, but anything offered will be pale in comparison to the severance offered by the automotive industry. Part of that is no doubt driven by the power of unions, but it is probably mostly driven by the speed of change in technology.

We need less, because we know (or at least hope) that we can turn our fortunes around more quickly than the industrial workers of the last generation. Our attitudes are also more flexible; few of us believe that the job we currently hold will be the same one from which we will retire. While that doesn't make a transition any easier, at least we can look to the future with some optimism.

Posted by Peter Varhol on 09/07/2006

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