Intel Case Study Avimanyu (Avi) Datta, Doctoral Candidate, College of

Intel Case Study Avimanyu (Avi) Datta, Doctoral Candidate, College of Business, Washington State University

Overview The Intel Case: Fading Memories (Burgelman, 1991, 1994) Leadership & Capabilities Model (LCM) Reconsidering the Intel case Observations and Conclusions

The Intel Case: observations Successful 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 microprocessors

Intel Memory Market Share and Sales (Adapted from Burgelman, 1994; Grosvennor, 1993) 800 80% 75% 70% 65% 60% 600 55% 50% 500 45% 40% 400 35% 30% 300 25% 20% 200 15% 10% 100 5% 0% 0 -5% 1974 1975 1976 1977 1978 1979 Year 1980 1981 1982 1983 1984 Market Share millions 700

Estimated memory Sales and Estimated Microprocessor Sales (Adapted from Burgelman, 1994; Grosvennor, 1993) 1,400 1,200 1,000 800 600 400 200 0 1974 1975 1976 1977 1978 Estimated Memory Sales 1979 1980 1981 Estimated Microprocessor Sales 1982 1983 1984

Brief Conclusion Strategic decision in 1984 to exit memory was “sensemaking” after-the-fact Intel’s internal selection environment, i.e., “the production rule”that 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 leadership

Intel Corp Three Key Questions › What could explain Intel’s initial Dominance of and subsequent decline in DRAM? › Why has Intel been more successful in Microprocessors

Intel Corp: Cost and price curves What was Intel’s Strategy for DRAM?

Intel’s Strategy with DRAM Innovative Design: Intel was the first to develop DRAM. Moor’s Law was the brain child of Gordon Moore who was the founder. The law was based on the demand of memory . Intel also produced World’s 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 Market › Access 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 products More 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 Strategy › Closer 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 Factors › Japanese 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 longterm investment horizons. › Continuous investment despite economic downturns.

Why was Intel unsuccessful in the DRAM Market? Increased complexity › Each 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 capital Wrong Strategy

Why was Intel unsuccessful in the DRAM Market? Wrong Strategy › Intel though that pushing product design through new features › Lack 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) strategy Protect 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 Microprocessor Market 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 Microprocessor Intel’s 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 market

Creating and sustaining competitive advantage in microprocessors Value Creation Creating Value by becoming Standard Value Capture Capturing value by becoming a proprietar y Standard Sustaining Value Sustaining value by countering threats

Creating and sustaining competitive advantage in microprocessors Value Creation › Fragmented Standards › Perfect 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 Standard › One can earn rents from a standard by making it proprietary. › Enforcing Proprietary standard Suing companies that attempt to copy its microcode Cutting 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 manufacturer Becoming the sole manufacturer for 386 for IBM and subsequently Compaq.

Creating and sustaining competitive advantage in microprocessors Sustaining Competitive Advantage › Threats to sustaining competitive advantage Imitation Saturation Supplier Power Substitution Threats Buyer power Complementors Power

Creating and sustaining competitive advantage in microprocessors Imitation THREATS Intel’s Response AMD and Cyrix imitated Intel’s microprocessor Intellectual property Protection Intel Inside Campaign: Created Brand Awareness. Program also included software vendors with the line “ Runs even better on a Intel Microprocessor” With increase in market size, there was a shift towards to Cyrix and AMD Higher Capacity and Cheaper Microprocessor

Creating and sustaining competitive advantage in microprocessors Substitution THREATS Intel’s Response Alternative architecture, especially RISC Hedged against adoption of RISC by releasing i-860 Introduced Pentium (improved version of x86) Microsoft moved OS that were not tied to x86 architecture (eg NT) Intel backed OS other than Windows like Linux Sun Microsystems Motto “ The network is the Computer” Partnered 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.

Creating and sustaining competitive advantage in microprocessors Saturation THREATS Growth in PC tapered off Intel’s Response Concentration on Mobile computing and Internet

Creating and sustaining competitive advantage in microprocessors Buyer Power THREATS Buyers wanted RICS architecture Recalling Pentium Processors Intel’s Response Hedged against adoption of RISC by releasing i-860 Intel inside campaign made industry more dependent on CISC Architecture Introduced Pentium (improved version of x86) Building of Motherboard through forward integration Replaced all the microprocessors

Creating and sustaining competitive advantage in microprocessors Supplier Power THREATS Intel’s Response Made Long term contacts necessary for Custom solutions Intel never asked for custom solutions, rather focused on standard solutions. Accused three times by FTC Cases were dropped by virtue of Intel’s goodwill in replacing chips Intel showed that suppliers appropriate value from Intel as well

Creating and sustaining competitive advantage in microprocessors Complement Power THREATS Microsoft ‘ bargaining Power Intel’s Response CREATE market ecosystem by investing in complementors Partnerships with Apple (later in 2006), Linux-Red hat

DRAM vs Microprocessors Disadvantages with DRAM Easier to Imitate Difficult to patent There is no microcode that can be protected There was little opportunity for a proprietary Standard What Intel did right with Microprocessors? Intel Branded the Microprocessor Kept the No. of Competitors down Changed Industry structure and dynamics Successful at counteracting threats to sustainability

Intel and Internet Factors led to Intel’s interest in Internet › Market Saturation: Growth in PCs matured › Demand in networked Computing and PDAs › Imitation: 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.

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