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Articles Case Analysis

Matters of Size -CSV Ratna MD, 1/9th the size of the chip goliath Intel, has always tried to outsmart it. Every now and then, it comes out with products that are better than Intel's offerings, but yet are priced lower. Since 1999, when AMD unveiled its Athlon series of chips (independently proven to offer better performance), it has been increasing its global market share for PC processors at Intel's expense. During 1999-2001 for instance, AMD increased its market share from 13% to 21%, even as Intel's share shrunk from 84% to 79%.
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AMD's popularity was built on the three planks of performance, design and price. All of its chips were priced almost 15-20% less than Intel's competing chips. But pricing its chips higher gave Intel higher margins as well; it also enjoyed economies of scale and a hugely bankable brand name (the tagline `Intel inside,' happens to be one of the most recalled ones ever). The reason why AMD still languishes behind Intel is that the former has more weaknesses than the latter has strengths. Though AMD is very good at designing better performing chips, it is weak in marketing and manufacturing. It is also weak in the server chip market and gets most of its revenues from the slumping PC market. As mentioned in the case, AMD was unable to cash in on popularity of K6 as it could not keep up with the demand due to lack of adequate manufacturing facilities. It faced similar problems with K6III, which was launched against P3. On top of that, AMD has been losing money for quite some time now and its estimates were quite bleak for the year 2003, mostly because the PC market has been flat. During 2002-03, the company's financial health has suffered due to losses from existing products while its debt burden has been rising. According to the company's filings, it has around $2.31 bn in debt (half of which is long-term). And with PC sales still sluggish in early-2004, the financial obligations are likely to augment further than decrease. Whatever a company does should boost its bottom line. If a strategy of aggression directed against a much bigger rival is adversely affecting one's bottom line, it is an indication that there is something wrong. To be able to win against a larger rival is not just about being smart, but about pooling in the right resources that complement's one's smartness and let one stay alive. Size does matter in the business arena since with size comes many advantages. Just consider how well Intel is faring even in a slump! Though Intel is also affected by the PC slowdown, unlike AMD, it is profitable and has $11.6 bn in cash and equivalents. It has put money in new production processes in the past year. That coupled with greater economies of scale, would make its products cheaper to make. Intel's strategy has always been to keep up its high margins by frequently introducing new, costlier chips while slashing the prices of older products to reduce their inventory. Also, its brand name enables it

to command a 30-40% premium over AMD's chips. So, if at all there were a price war, Intel would but naturally emerge the winner. AMD would not be able to sustain price cuts with its weak financial position. Already there is a lot of pressure on its bottom line. Intel's margins are around 47%, while AMD's gross margins dropped from 35% in the first quarter of 2003 to an all-time low of 7% in the second quarter. Intel is well entrenched in the market. It has been rolling out new products aggressively and with its size to back it up, it can afford to play the price game. though AMD products were cheaper than comparable Intel products, it had to resort to price cuts to retain its share of the market. But all is not sour on AMD's side. It has successfully eroded Intel's market share. It now has a 20% slice of the global computer microprocessor business pie. More importantly, Microsoft is supporting AMD. For Microsoft, Intel's dominance is a threatit would any day prefer to keep the rivalry between the chip players alive, so that PC processor prices are lower. This is because higher processor sales would in turn augment Microsoft's revenues. With Linux on its tail, Microsoft cannot afford to increase licensing fee and has to depend on the processor prices being low. In fact, one can expect Microsoft to associate itself equally well with both the companies to prevent a monopoly situation and to continue the price war. And as we know, price wars are harmful for all the players involved. If, instead of competing with AMD, Intel had conceded some market share to it, margins of both the players would have been good and AMD would not have become so aggressive. Who knows, it might even have worked with Intel on some turf. This way, the market would have moved into a well-functioning duopoly, with both the players being on a strong footing. But Intel was not ready to give away its `monopoly' and in the process, (much to its own detriment and the delight of the customers), permanently reduced the prices of the processors. As a result, third parties like Microsoft, OEMs and even those who have found niches like Sun and IBM have been benefiting. AMD, on its part, should not be carried away either by the popularity of its better performing chips or by the backing of Microsoft. It should, instead, focus on getting its manufacturing right, broadening its product lines, moving away from the volatile PC market and preventing the prices in the processor market from eroding further. The author is Faculty Associate at The ICFAI University Press and Consulting Editor for The Icfai Journal of Services Marketing. Reference # 14-04-01-