Intel Case Study

Report
The Intel Case: Fading Memories
(Burgelman, 1991, 1994)
 Leadership & Capabilities Model (LCM)
 Reconsidering the Intel case
 Observations and Conclusions


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
800
80%
75%
70%
65%
600
60%
55%
500
50%
45%
400
40%
35%
300
30%
25%
200
20%
15%
100
10%
5%
0
0%
1974
1975
1976
1977
1978
1979
Year
1980
1981
1982
1983
1984
Market Share
$ millions
700
$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

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 toplevel official strategy in line with bottom-up strategic
action
• Such realignment does not necessarily involve a
change in leadership

Three Key Questions
› What could explain Intel’s initial Dominance
of and subsequent decline in DRAM?
› Why has Intel been more successful in
Microprocessors
What was Intel’s Strategy for 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 .

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%.

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.

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.

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

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
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.


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’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
Value
Creation
• Creating
Value by
becoming
Standard
Value
Capture
• Capturing
value by
becoming
a
proprietary
Standard
Sustaining
Value
• Sustaining
value by
countering
threats

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.

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.

Sustaining Competitive Advantage
› Threats to sustaining competitive advantage
Imitation
Saturation
Supplier Power
Substitution
Threats
Buyer power
Complementors
Power

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

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.

Saturation
THREATS
Growth in PC
tapered off
Intel’s Response
•Concentration on Mobile computing and
Internet

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

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

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
Disadvantages with
DRAM
What Intel did right
with Microprocessors?
Easier to Imitate
Intel Branded the
Microprocessor
Difficult to patent
Kept the No. of
Competitors down
There is no microcode that
can be protected
Changed Industry
structure and dynamics
There was little opportunity
for a proprietary Standard
Successful at
counteracting threats to
sustainability

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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