The Intel Case: Fading Memories (Burgelman, 1991, 1994) Leadership & Capabilities Model (LCM) Reconsidering the

he 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%

700

70% 65%

$ millions

600

60% 55%

500

50% 45%

400

40% 35%

300

30% 25%

200

20% 15%

100

10% 5%

0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

0%

Year

Market Share

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Estimated Memory Sales

Estimated Microprocessor Sales

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 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 Intels initial Dominance

of and subsequent decline in DRAM?

Why has Intel been more successful in

Microprocessors

What was Intels Strategy for 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 .

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!

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

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 x Suing companies that attempt to copy its microcode x Cutting no of licenses from 12 to 4 thereby increasing profits 30% to 75%. x Building sufficient production capacity so that there is no need to license to other manufacturer x Becoming the sole manufacturer for 386 for IBM and subsequently Compaq.

Sustaining Competitive Advantage

Threats to sustaining competitive advantage
Imitation Substitution

Saturation

Threats

Buyer power

Supplier Power

Complementors Power

Imitation
THREATS

Intels Response Intellectual property Protection Intel Inside Campaign: Created Brand Awareness. Program also included software vendors with the line Runs even better on a Intel Microprocessor

AMD and Cyrix imitated Intels microprocessor

With increase in market size, there was a shift towards to Cyrix and AMD

Higher Capacity and Cheaper Microprocessor

Substitution
THREATS

Intels Response Hedged against adoption of RISC by releasing i-860 Introduced Pentium (improved version of x86) Intel backed OS other than Windows like Linux 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.

Alternative architecture, especially RISC Microsoft moved OS that were not tied to x86 architecture (eg NT) Sun Microsystems Motto The network is the Computer

Saturation
THREATS

Intels Response

Growth in PC tapered off

Concentration on Mobile computing and Internet

Buyer Power
THREATS

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

Buyers wanted RICS architecture

Recalling Pentium Processors

Replaced all the 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. Cases were dropped by virtue of Intels goodwill in replacing chips Intel showed that suppliers appropriate value from Intel as well

Accused three times by FTC

Complement Power
THREATS

Intels Response

Microsoft bargaining Power

CREATE market ecosystem by investing in complementors Partnerships with Apple (later in 2006), Linux-Red hat

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

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.