Intel Case Study

Intel Case StudyAvimanyu (Avi) Datta, Doctoral Candidate, College of Business, Washington State UniversityOverviewThe Intel Case: Fading Memories (Burgelman, 1991, 1994)Leadership & Capabilities Model (LCM)Reconsidering the Intel caseObservations and ConclusionsThe Intel Case: observationsSuccessful shift from memory to processors - 1974 to 1984 (Burgelman, 1991; 1994)

Top-management continued to consider Intel a memory company even though market share in memory (DRAM) was in steep decline

Innovation enabled Intel to lead the market with new products Manufacturing scale came to dominate process technology design as basis for competitive advantage

Innovation culture empowered middle management to invest in innovative products w/o explicit executive consent

Competences in circuit design (CD) and process technology design (TD) were transferable to microprocessorsIntel Memory Market Share and Sales(Adapted from Burgelman, 1994; Grosvennor, 1993)

Estimated memory Sales and Estimated Microprocessor Sales (Adapted from Burgelman, 1994; Grosvennor, 1993)Brief ConclusionStrategic decision in 1984 to exit memory was sensemaking after-the-fact

Intels internal selection environment, i.e., the production rulethat favored microprocessors, was more adaptively robust that top-down strategy

Combination of top-down strategy and bottom-up, or autonomous, strategy is enacted at firms Importance of knowing how and when to bring top-level official strategy in line with bottom-up strategic action Such realignment does not necessarily involve a change in leadershipIntel CorpThree Key QuestionsWhat could explain Intels initial Dominance of and subsequent decline in DRAM?

Why has Intel been more successful in Microprocessors

Intel Corp: Cost and price curves

What was Intels Strategy for DRAM?Intels Strategy with DRAMInnovative Design: Intel was the first to develop DRAM. Moors Law was the brain child of Gordon Moore who was the founder. The law was based on the demand of memory . Intel also produced Worlds first 1Kb DRAM.

Price High in early life-cycle: make money and reinvest in subsequent generations.

Move Quickly to New generations: As competitors offered substitute products and overall market price decreased, Intel moved to new generations.

Thus, Intel emphasis was on product design, not so much on process development or realizing efficiencies through manufacturing . Why was Intel unsuccessful in the DRAM Market?Japanese Entered the MarketAccess to Capital with lower interest rates. Japanese investors had a more long term view than US investors. Related industries helped advance DRAMS (eg Nikon)Sophisticated Demand: DRAMS were used across different productsMore competitive industry: with greater competition Japanese firms had greater need to be efficient, which increased their access to get trained labor. Strength in manufacturing: Yields were high as 80%, where in US it was around 60%. Why was Intel unsuccessful in the DRAM Market?Japanese StrategyCloser relationships with equipment suppliers, enabling them to develop manufacturing machinery that produced higher results.

The strategy was build on building capabilities and working to improve process development.

Why was Intel unsuccessful in the DRAM Market?Japanese Institutional FactorsJapanese banking Systems provided lower cost of capital by channeling funds through loans. What is the implication of having lower interest rates in silicon industry? And how it relates to pricing strategy?Japanese Stock market revolved around long-term investment horizons. Continuous investment despite economic downturns.

Why was Intel unsuccessful in the DRAM Market?Increased complexityEach subsequent generation was more complex in terms of design and manufacturing. Firms with better manufacturing process had more competitive advantages. US firms failed due to overreliance on product strategy and lack of access to capitalWrong Strategy

Why was Intel unsuccessful in the DRAM Market?Wrong StrategyIntel though that pushing product design through new featuresLack of process capabilities and efficient manufacturing capabilities resisted putting new features to market. Japanese also entered the EPROM market

What did Intel learn? Be careful with unidimensional (one product) strategyProtect your technological innovations or avoid commodity business. When a novel technology becomes a commodity, the company(s) with higher manufacturing capability wins. Competitive advantage is temporary. Life span of strategies are getting shorter. Use current profits to develop complimentary capabilities.

Intel Corporation: Entry to MicroprocessorMarket share in memory chips (DRAM) was in steep decline Existing capabilities, Circuit Design (CD )& Technology Design (TD) did not match competitive dynamics Exploration did not focus on manufacturing scale (& large market)

Middle management empowered to invest in innovative products Exploration led to microprocessors without a top-down initiative an example of sustained investment

Competences CD and TD were transferable to microprocessors Avoiding timing delay associated with absorptive capacity build-up priming investment in exploration came through investment in DRAM

Internal selection environment favored microprocessors Did production rule save the day? No, the market saved the day -microprocessor market provided higher margins in self-reinforcing cycle Production rule reflected transactional leadership efficiency: go for the highest return on incremental assets!Intel Corporation: Entry to MicroprocessorIntels successful transition had more to do with unique circumstances (luck) than strategy (brains)

Loss of market share in memory (precipitating ultimate exit) predated successful transition to microprocessors no transforming strategy was articulated.

Market for microprocessors developed quickly little time delay between investment in exploration & sustaining rents (feeding the positive feedback loop) thus limiting the need for sustained commitment to exploration investment

Intel was well positioned with respect to process technology design capabilities to successfully explore microprocessor marketCreating and sustaining competitive advantage in microprocessors Creating and sustaining competitive advantage in microprocessors Value CreationFragmented StandardsPerfect Storm: IBM was looking for a microprocessor for its PC, which will become a de-facto standard. Intel won the contract. Wintel become a standard industry architecture. HOW DO YOU MAKE MONEY FROM A STANDARD? E.g., Mattress Sizes, nuts and bolts etc.

Creating and sustaining competitive advantage in microprocessors Proprietary StandardOne can earn rents from a standard by making it proprietary. Enforcing Proprietary standardSuing companies that attempt to copy its microcodeCutting no of licenses from 12 to 4 thereby increasing profits 30% to 75%. Building sufficient production capacity so that there is no need to license to other manufacturerBecoming the sole manufacturer for 386 for IBM and subsequently Compaq.

20Creating and sustaining competitive advantage in microprocessors Threats ImitationSubstitutionSaturationBuyer powerSupplier PowerComplementors PowerSustaining Competitive AdvantageThreats to sustaining competitive advantage

21Creating and sustaining competitive advantage in microprocessors Imitation

AMD and Cyrix imitated Intels microprocessorWith increase in market size, there was a shift towards to Cyrix and AMDIntellectual property ProtectionIntel Inside Campaign: Created Brand Awareness. Program also included software vendors with the line Runs even better on a Intel MicroprocessorHigher Capacity and Cheaper Microprocessor THREATSIntels Response22Creating and sustaining competitive advantage in microprocessors Substitution

Alternative architecture, especially RISCHedged against adoption of RISC by releasing i-860Introduced Pentium (improved version of x86)

THREATSIntels ResponseMicrosoft moved OS that were not tied to x86 architecture (eg NT)Intel backed OS other than Windows like LinuxSun Microsystems Motto The network is the ComputerPartnered with OEMs to promote Processors as well as PCs through Intel Inside Campaign. Hedged by getting into servers with 32-bit Xeon Processor in 1998.

23Creating and sustaining competitive advantage in microprocessors Saturation

Growth in PC tapered off Concentration on Mobile computing and InternetTHREATSIntels Response24Creating and sustaining competitive advantage in microprocessors Buyer Power

THREATSIntels ResponseBuyers wanted RICS architectureRecalling Pentium Processors Replaced all the microprocessors

Hedged against adoption of RISC by releasing i-860Intel inside campaign made industry more dependent on CISC ArchitectureIntroduced Pentium (improved version of x86) Building of Motherboard through forward integration

25Creating and sustaining competitive advantage in microprocessors Supplier Power

Made Long term contacts necessary for Custom solutionsIntel never asked for custom solutions, rather focused on standard solutions.

THREATSIntels ResponseAccused three times by FTC Cases were dropped by virtue of Intels goodwill in replacing chips Intel showed that suppliers appropriate value from Intel as well26Creating and sustaining competitive advantage in microprocessors Complement Power

Microsoft bargaining PowerCREATE market ecosystem by investing in complementors Partnerships with Apple (later in 2006), Linux-Red hat

THREATSIntels Response27DRAM vs Microprocessors Disadvantages with DRAMWhat Intel did right with Microprocessors? Easier to Imitate

Difficult to patentThere is no microcode that can be protectedThere was little opportunity for a proprietary StandardIntel Branded the Microprocessor Kept the No. of Competitors downChanged Industry structure and dynamicsSuccessful at counteracting threats to sustainability 28Intel and InternetFactors led to Intels interest in InternetMarket Saturation: Growth in PCs maturedDemand in networked Computing and PDAsImitation: With imitation more players enter the market and the product becomes a commodity leading to perfect competition and eroding margins. Dominance: Intel wanted to to stay ahead of competition so early entry to Internet, PDAs would flatten the curve when the competitors enter.

29Questions? Comments?