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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

Intel 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 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

W h a t w a s In t e l’ s St r a t e g y f or D RAM ?
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
long-term 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
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
I m it a t 
ion Su b st it u t ion


Sa›t u r a t ion Th r e a t s Bu ye r p ow e r

Su p p lie r Pow e r Com p le m e n t or s Pow e r


Creating and sustaining competitive
advantage in microprocessors
 Imitation

THREATS Intel’s Response



Protection
Cy r ix im it a t e d In t e l’ s m icr op r oce ssor
n: Created Brand Awareness. Program › also included software vendors with t

t size , t h e r e w a s a sh if tHigher
t ow a r dCapacity
s t o Cy r ixand
a n dCheaper
AM D Microprocessor
Creating and sustaining competitive
advantage in microprocessors
 Substitution

THREATS Intel’s Response

 
Hedged against adoption of RISC by releasing
iv e a r ch it e ct u r e , e sp e cia lly RISC 
Introduced Pentium (improved version of x86)
 ›

OS that were not tied to x86 architecture›(eg
Intel backed
NT) OS other than Windows like Lin



Partnered with OEMs to promote Processors as well as PCs through
ems Motto “ The network is the Computer”
Hedged by getting into servers with 32-bit Xeon Processor in 1998.

Creating and sustaining competitive
advantage in microprocessors
 Saturation

THREATS Intel’s Response



Gr ow t h in PC t a p e r e d of f Concentration on Mobile computing and Intern


Creating and sustaining competitive
advantage in microprocessors
 Buyer Power

TH REATS Intel’s Response


 
Hedged against adoption of RISC by releasing i-860
uyers wanted RICS architecture
› made industry more dependent on C
Intel inside campaign
Introduced Pentium (improved version of x86)

Building of Motherboard through forward integration
 ›



ecalling Pentium Processors Replaced all the microprocessors


Creating and sustaining competitive
advantage in microprocessors
 Supplier Power

THREATS Intel’s Response



Intel
con t a ct s n e ce ssa r y never
f or Cuasked for
st om solu

custom
t ion s solutions, rather focused on st



Cases were dropped by virtue of Intel’s goodwill in rep
Accused three times by FTC › suppliers appropriate value from Inte
Intel showed that
Creating and sustaining competitive
advantage in microprocessors
 Complement Power

THREATS Intel’s Response




cr osoft ‘ b a r g a in in g Pow e r ›
CREATE market ecosystem by investing in comple
Partnerships with Apple (later in 2006), Linux-Red h
 ›

DRAM vs Microprocessors

Disadvantages withWhat
DRAMIntel did right with Microprocessor

Easier to Imitate Intel Branded the Microprocessor

Difficult to patent Kept the No. of Competitors down

s no microcode that can be


Changed
protected
Industry structure and dynam

ittle opportunity for aSuccessful


proprietaryatStandard
counteracting threats to sust
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.
Questions? Comments?