In 1981, the major buyer in the value chain structure of x86

microcomputer industry was IBM and Apple. The major suppliers were
multiple semiconductor companies and multiple clean room instrument
suppliers. Motorola was another major player in the microprocessor industry.
In addition, as semiconductor industry required second-source manufacturing
partners during that time, AMD and other couple of companies such as
Fujitsu, Siemens, etc. entered the market as new entrants. Overall, from a
value chain perspective, this could be categorized as a multiple buyer,
multiple firm and multiple supplier structure. The spread of the value chain
is relatively large as buyers of IBM PCs were relatively unsophisticated and
willing to pay a premium for the IBM branded product, which also increased
IBMs willingness to pay when they purchase the microprocessor. Winning
IBM contract means winning the whole industry design (Andy Grove, 1980)
was a felicitous summary indicating the strong buyers power during that
period. IBM was able to force Intel to license its microprocessors to other
companies to ensure adequate supply, which resulted in a reduced captured
value for Intel with the sales margin stagnant around 3% between 1981 and
1982. As Intel management realized that it was giving away its technology
but not getting fair value return by adopting the second-source strategy, in
1985 they made a bold decision to be the sole-source manufacturer for the
new 386 CPU, which was well received by Compaq. It was an instant success
due to the fact computer users were willing to pay a premium for the
enhanced performance which boosted the selling price to be $150 compared
to $40 of the 286 chip. Therefore, Intel captured an increased value. On the
flip side, the FTC investigation on antitrust violations during 1990s was a
drag on Intels captured value since it deprived of certain advantages
previously possessed when negotiating with customers and could adversely
affected the pricing.
In 1998, there was more competition in the PC industry. Hence, from a value
chain perspective, the major buyers were the OEMs, which marketed
finished computer systems. In terms of suppliers, Intel adopted a dual
supplier strategy when possible in order to secure quality and timeliness of
the equipment. In addition, Intel also formed a consortium that included
several other major chip markets to fund the technical work and to reach the
critical mass needed to gain industry acceptance. AMD was still a player in
the semiconductor market. However, it does not create major threat to
Intels market share due to the Intels successful Intel Inside campaign and
AMDs limited breakthrough of its own technology. Initially, Intel Inside as a
brand identity involved setting up a co-op fund that made a concession on its
price to reimburse up to half of the participating OEMs advertising costs,
which effectively increased the value spread by increasing the opportunity
cost of suppliers when doing businesses with others. In the meantime,
Microsoft and other software companies have become complementors in
the value chain to help boost the Intels success. Intel also aggressively
courted independent software vendors to work with their leading-edge

processors. Microsoft and Intel had incentives to promote two shared goals:
growth in the overall PC market and improvement in the PC performance. In
addition to the increased value spread, the cooperation between the two
companies also raised barriers to imitation and made it even more difficult
for competitors to grab a piece of the pie. This commonality of interests
yielded much fruitful captured value for Intel as shown in its steadily growing
margin between 1998 and 2000. In summary, this is a multiple buyer, one
firm and multiple supplier structure. The spread of the value chain has
increased due to the introduction of the complementors.
In 2003, the major buyers and suppliers remained similar as those in 1998.
However, PC market did significantly shrink because of there were more
competitions from outside of the PC market such as personal digital
assistants (PDAs), network computers, smart phones and other wireless
devices. These can be categorized as substitutes to the PC industry and
hence created threat to the microprocessor market. Also, the PC industry life
cycle was undergoing significant change, which set a friction on Intel when
negotiating with both buyers and suppliers. During the period of 2000 and
2003, average prices for microprocessors continued to fall and Intel captured
less value as the margin went down below 20%. In the meantime, AMD has
couple of technology breakthroughs. In 2003, AMD signed joint
manufacturing technology development agreement to develop future
generation manufacturing technologies. Hence, AMD has become another
major player in addition to Intel in the microprocessor market and stirred up
a fierce competition which could significantly reduce Intels added value.
However, it was noticeable that Intels sales and margin bumped up from
2003 onwards due to its capability to change the rules of the game in the
mobile PC domain where Intel had roughly 89% market share. The mobile
market primarily targeted the corporate buyers which were more technically
literate and less price-sensitive. To stimulate demand and create a higher
willingness-to-pay, in 2003 Intel introduced an entire system (CPU, chipsets,
and other functions) with better performance including longer battery life,
seamless wireless networking, etc.). In summary, this is a multiple buyer,
multiple firms and multiple supplier structure. The spread of the value
chain was squeezed due to the introduction of substitutes.
While we would perceive it is true that PC sales have slowed for several
years with the advent of tablets and smartphones, we find it hard to fully
agree that it is the most recommended solution to reinvigorating Intels
business by shifting the focus to tablets and smartphone. We believe Intel
should still count on the development and release of new microprocessors
which are more compatible with the exciting features catering to users
needs. On top of the technological advancement, there needs to be a new
platform or product to really drive additional PC sales, like Microsoft's new
Surface Book laptop, which serves to increase the consumers willingness-topay. Meanwhile, Intel should seek to work extensively with strategic

complementors in launching the desired features like improved battery life,

wireless charging, instant touch-screen power to boost the willingness-to-pay.
Although it is inevitably true that Intels communications and networking
segments may perform well and gain certain share of the market, we are
predicting that microprocessors will remain its core business and continue to
grow organically.

Appendix