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%

700

65%

$ millions
600

60%
55%
50%

500

45%
40%

400

35%
30%

300

25%
20%

200

15%
10%

100

5%
0%

-5%
1974

1975

1976

1977

1978

1979

Year

1980

1981

1982

1983

1984

Market Share

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

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
leadership

Intel Corp

Three Key Questions

What 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 DRAM

Innovative 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 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

Intels 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

Intels Response

AMD and Cyrix

imitated Intels
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

Intels 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

Intels Response

Concentration on Mobile computing

and Internet

Creating and sustaining competitive

advantage in microprocessors

Buyer Power
THREATS

Buyers wanted
RICS architecture

Recalling Pentium
Processors

Intels 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

Intels 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

Intels 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

Intels 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 Intels 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?