What Happens When Only the Paranoid Survive?
From Value Creation to Value Capture and the Risk of Focusing Too Much on Getting our Fair Share of the Pie
Is Intel History?
On February 15th, the Wall Street Journal broke a story about Intel, one of the most storied companies in American history. Rumor had it that Intel may be split into two. Broadcom could acquire its design business, and Taiwan Semiconductor Manufacturing Company Limited (TSMC) could acquire Intel’s manufacturing capabilities.
Intel, the great-grandchild of Bell Labs and its research into transistors (through Shockley Semiconductor → Fairchild Semiconductor → Intel), was the archetype of the Silicon Valley startup. Its founders, Bob Noyce and Gordon Moore (Moore’s Law), were PhDs in Physics (MIT) and Chemistry (CalTech). They founded the firm with Arthur Rock, the storied financier who kicked off the venture capital revolution with his bet on Fairchild Semiconductor. Not only was Intel what we would call “deep tech” today, but it was also a genuinely modern startup.
However, Intel ascended to new heights under its third CEO, Andy Grove (who earned a PhD in Chemical Engineering from Berkeley). Grove was a brilliant scientist (his first book focused on semiconductors), but he was also known for his innovative management ideas (e.g., OKRs). He turned Intel into a global technological powerhouse, fending off competition from Japanese rivals and shifting from memory chips to microprocessors, which solidified Intel’s dominant position in the computing industry. Grove’s guiding principle—Only the Paranoid Survive—fueled an alert, creative, forward-looking, and experimental culture constantly seeking ways to innovate and thrive.
However, Intel’s paranoia gradually shifted from a relentless drive to invent the future to an anxious fixation on protecting its share of the present. It receded into an ordinary kind of paranoia, defined by suspicion, defensive overreaction, and a tendency to see threats where none existed. By the time Paul Otellini became Intel’s fifth CEO (the first with a business degree)1, the company seemed to focus more on slicing the pie than making it bigger.
In fact, in 2005, Apple approached Intel with an opportunity that could have kept the company at the forefront of computing in the mobile era: supplying the processor for the first iPhone. Yet, Otellini chose to pass on the deal:
“At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn't see it,” Otellini told Madrigal. “It wasn't one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”
-Paul Otellini (The Atlantic; Business Insider)
This decision cost Intel not only a deal but also its future. Locked out of the mobile revolution (never mind AI), Intel ceded the next era of computing before it even began.2
What didn’t Otellini see?
The Shifting Forces of Value Creation to Value Capture
To see why firms prioritize capturing value over creating it, we need to look at how strategy itself is taught.
While there are many academic definitions of strategy, the syncretic one that I find most helpful is this: strategy is the framework a firm uses to create and capture value.
From a customer’s perspective, value creation is easy to define: a company creates value when it offers something that makes you better off. This could be because it’s vastly superior to the alternatives (e.g., the light bulb) or significantly cheaper, allowing you to keep more of your money for other things. But from the firm’s perspective, it’s much harder. You need to innovate. Either to make something new, something better, or cheaper. Creation is easy to see but hard to do.
From a firm’s perspective, value capture is easy to define: given the value a firm creates (e.g., measured by willingness to pay), how much does it get to keep (e.g., profits = price – cost)? For customers, value capture is often invisible at first—you may not realize what share a company keeps until after you’ve bought and used the product.3 However, for firms, once a product is already selling in the market, value capture becomes the easier lever to pull. A restaurant can buy cheaper produce, pay workers less, shrink portion sizes, or swap fresh ingredients for frozen ones without necessarily creating any new value.
Herein lies an asymmetry, especially for incumbents: Value creation is easy for consumers to see but difficult for firms to achieve. Value capture, on the other hand, is easy for firms to implement but harder for consumers to detect.
This tension between value creation and value capture is at the heart of strategic thinking. To understand why some firms lean toward value capture, we need to revisit one of the most influential strategy frameworks ever developed: Michael Porter’s Five Forces.
The Five Forces that Will Eat Your Lunch
Often, the first framework students encounter in introductory strategy is the “Five Forces Framework,” rooted in Michael Porter's foundational research on Competitive Strategy from the early 1980s. Porter's genius lay in flipping the classical model of perfect competition (where, in equilibrium, no firm makes a sustainable profit) on its head. He asked: What would it take for a firm to generate profit in a competitive market?
He outlined five forces that quietly but relentlessly chip away at a firm’s ability to hold onto the value it creates. Your rivals are scheming to undercut you; new entrants are always at the gate, looking for a way in; your suppliers are angling for a bigger slice of the pie; your customers are always on the lookout for a better deal; and even firms in entirely different industries are figuring out how to make your category irrelevant with their substitutes.
These aren’t just competitive forces; they’re the Five Paranoias: the inescapable, ever-present anxieties that gnaw at even powerful firms.
Watch your back. Everyone is out to get you.
While Porter’s framework could also direct firms to identify areas for innovation, in practice, many firms may use it to justify defensive, value-capturing strategies. By framing strategy primarily as a battle for defending value against competitive pressures, business education may have emphasized strategic success in terms of securing a larger share of the pie rather than expanding it through innovation.
This is because value creation is riskier, and resources are scarce. Protecting the value already created often feels more prudent than chasing shiny objects with uncertain payoffs.
So the work begins: How do we minimize the impact of rivalry, fend off threats, create customer loyalty, and squeeze suppliers? That is, how do we build the infrastructure to capture value?
This is how we start the lesson.
But what happens when a generation prioritizes value capture over creation?
Frameworks like the Five Forces shape not only business strategy but also the mindset of future executives. They teach firms how to defend their positions rather than create new value. But how does this emphasis on competition affect students trained in these models?
The impact of strategy education on students
Two recent studies provide insight into how such lessons might impact students' mindsets.
A fascinating study by Yang et al. (2020) examines how 262 Harvard Business School CEO alumni approach strategy. The researchers leverage a quasi-exogenous shock—HBS’s 1983 shift in its core strategy curriculum to incorporate Michael Porter’s later influential ideas on competitive strategy (e.g., the five forces). On page 25, the authors describe this shift:
While the 1982 course pays little attention to a firm’s external context (“competition or adverse circumstances”), the overhauled 1983 course devotes substantial attention to analyzing and understanding a firm’s competitive environment as a determinant of its success and performance. While the 1982 course description places heavy emphasis on the importance of general management of the entire enterprise (i.e. “what needs to be done”), the 1983 course description clearly moves away from any deep focus on issues related to management, execution, and implementation. - Yang et al. (2020)
Their findings are striking. While the new curriculum fostered more “structured” strategic planning with a focus on the external environment of a business, it came at the expense of a reduced emphasis on internal affairs and implementation.
Another very important recent study echoes these findings. Heshmati et al. (2024) studied a sample of 2,269 MBA students at a major business school and examined how students analyzed case studies before and after taking their core strategy class. What they found parallels the Yang et al. study but with a much younger and more recent sample. They found that after taking strategy, students increased the attention “paid to broader industry and competitive concerns” and became “ more aware of the uncertainty pervading strategic decisions.” Like the CEOs in the Yang et al. study, those learning the new way of thinking about competitive strategy became more attuned to competitive pressures.
These studies suggest a shift in mindset. When strategy education emphasizes competitive positioning—framing strategy around the fear of rivals, new entrants, suppliers, buyers, and substitutes—so do the students.
Past research by Frank et al. (1996) suggests that “when people expect partners to defect, they are overwhelmingly likely to defect themselves.” Rubinstein (2006) also finds similar results.4
If business education has instilled an orientation toward value capture over value creation, we should see its effects not just in classrooms but inside firms. Indeed, a growing body of research suggests that this shift is already reshaping firm behavior—and not for the better.
The Consequences of a Value Capture Mindset
A growing body of economics and strategy research has begun to examine how introducing new professionalized business practices—often through the acquisition of firms by larger players—affects firm behavior, profitability, and product and service outcomes. Some of the most interesting research on this topic comes from the healthcare sector.
A study by Eliason et al. (2016) [including my colleague Ryan McDevitt] investigates the practice of “strategic patient discharge” among long-term acute-care hospitals (LTCHs). They find that these hospitals appear to maximize profits by exploiting a quirk in the Medicare payment system. Under this system, a hospital receives a small reimbursement at the start of a patient’s stay but a sizeable lump-sum payment after a predetermined number of days. To maximize profits, hospitals disproportionately discharge patients immediately after they cross this financial threshold—not because of medical necessity.
While this practice increases profits, it also leads to negative outcomes for patients, including higher mortality and readmission rates, and results in the loss of potentially billions in U.S. taxpayer money. It is particularly prevalent among for-profit hospitals and those acquired by corporate chains. This is value capture over value creation.
This is not the only study to identify this pattern: prioritizing value capture over value creation. In another study on the corporate acquisition of dialysis clinics, Eliason et al. (2020) examine how large-firm management practices reshape dialysis clinic behavior. After the acquisition, they find that these clinics overprescribe highly reimbursed drugs without medical necessity, exploit Medicare reimbursement structures, and replace higher-cost but more skilled nurses with lower-paid technicians. Once again, these practices maximize profits but lead to higher hospitalization rates and increased patient mortality. These actions exemplify the cost-cutting, revenue-maximizing strategy of value capture. Similarly, Wollman (2020), in a cleverly titled paper (“How to Get Away with Merger”), also studies the dialysis industry and finds similar results: the stealth consolidation of this sector reduced care quality, resulting in higher hospitalization rates and lower survival rates for patients.
Another recent study by Ambar La Forgia (2023) finds a similar pattern of results. She shows that physician practices acquired by “financially driven” management companies perform significantly more C-sections, “resulting in less clinically appropriate care and worse patient outcomes.” However, those acquired by clinically focused firms reduce unnecessary C-sections, improving care.
This finding is powerful: The firm's stated strategy has huge implications for how it balances value capture (maximizing profits) and value creation (patient outcomes).
Another excellent study by La Forgia and Bodner (2024) offers a more optimistic perspective. They demonstrate that chain ownership in IVF clinics can enhance patient outcomes by increasing treatment volume, improving success rates, and improving quality through resource sharing and diffusing standardized best practices. They explain why acquisitions in this sector may not produce the same negative effects seen elsewhere—greater price and quality transparency can incentivize management to prioritize the value they deliver to customers rather than the value they capture.
Business Education and Value Capture in the Economy
While the studies above provide compelling evidence that firm strategy and management practices influence the balance between value capture and value creation in healthcare, is there evidence of a systemic impact of this type of education on the economy?
A powerful paper by Nobel Prize-winning economist Daron Acemoglu, Alex He and Daniel le Maire, examines the impact of the rise of “business-educated” managers (MBAs or business undergraduates) on wages and labor share. It uses large-scale data from the U.S. and Denmark.
The findings are striking and align with the evidence we discussed earlier in the healthcare sector. Firms with business-educated managers experience a 6% to 3% wage cuts (U.S., Denmark) and an equally significant drop in labor share (fewer workers).
However, these managers do not increase their firms' productivity. Firms led by business majors are no more profitable and do not seize new market opportunities at a higher rate. Instead, they primarily capture a larger share of the value created by the firm.
Surprisingly, this pattern does not apply to non-business-educated managers. Non-business majors split the pie more fairly; business majors do not.
Why is this happening? The authors suggest that their findings reflect “the effects of practices and values acquired in business education—rather than the differential selection into business education of individuals unlikely to share rents with workers.”
I interpret this as: we may be teaching our students to become value-capture pirates; they didn’t start that way.
Value Capture and ‘Enshitification’
Prioritizing value capture over value creation is not just an academic concern. It manifests as declining quality, cost-cutting, and short-term thinking in the real world. Cory Doctorow has a name for this phenomenon: enshittification.
This is enshittification: Surpluses are first directed to users; then, once they're locked in, surpluses go to suppliers; then once they're locked in, the surplus is handed to shareholders and the platform becomes a useless pile of shit. From mobile app stores to Steam, from Facebook to Twitter, this is the enshittification lifecycle. - Cory Doctorow
Ouch.
This pattern closely mirrors the way companies eventually shift from prioritizing value creation to value capture. Enshittification and the overemphasis on value capture are business strategies that, over time, erode an organization’s value proposition. An obsession with value capture can lead to missed opportunities (e.g., Intel and mobile chips) and eventual decline. However, I would argue—and the evidence is beginning to support this—that enshittification is not inevitable nor uniform across the economy. As the Acemoglu et al. paper suggests, it is a consequence of the values instilled through specific types of education.
Given the findings of these studies, it is clear that what we teach matters. Students leave our classrooms with new frameworks that shape their perspectives and influence their behavior in real-world companies. Providing them with different frameworks could lead to better outcomes for businesses and those they serve.
And, to be fair, business education likely has many positive effects (I would love references to high-quality studies on these effects). We must double down on them.
Perhaps we can also learn from the ideas of another great thinker, Joseph Schumpeter.5 Schumpeter viewed economic progress as the result of entrepreneurship and innovation by small and large firms, which lead to creative destruction and the replacement of the old ways with new ones that are better and more efficient.
Make no mistake: value capture is essential. But if everyone is fixated on capturing value, who’s left to create it? What value will then remain to be captured?
Maybe this is what happens when only the paranoid survive.
Intel’s 4th CEO, Craig Barrett, also had a PhD in Materials Science from Stanford.
My colleague Wes Cohen has written about lockout with his co-author Dan Levinthal in Fortune Favors the Prepared Firm.
Or eaten at PF Changs recently.
A few other papers have similar findings. See Wang, Malhotra and Murnighan (2012), Carter and Irons (1991). However, a interesting paper by Frey and Meier (2005) finding that such selfish behavior may be driven by selection effects (a point addressed by Acemoglu et al. (2024) below.
More on Schumpeterian strategy in a future post.