Intel Case Study | Intel | Dynamic Random Access Memory

Avimanyu (Avi) Datta, Doctoral Candidate, College of Business, Washington State University

Intel Case Study

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

1994. 1993) .Intel Memory Market Share and Sales (Adapted from Burgelman. Grosvennor.

Grosvennor. 1993) . 1994.Estimated memory Sales and Estimated Microprocessor Sales (Adapted from Burgelman.

i. “the production rule”that favored microprocessors. or autonomous.Brief Conclusion   Strategic decision in 1984 to exit memory was “sensemaking” after-the-fact Intel’s internal selection environment. 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       . was more adaptively robust that top-down strategy Combination of top-down strategy and bottom-up.e..

Intel Corp  Three Key Questions Dominance of and subsequent decline in DRAM? › What could explain Intel’s initial › › › Why has Intel been more successful in Microprocessors  .

Intel Corp: Cost and price curves W h a t w a s In t e l’ s St r a t e g y f or D RAM ? .

      .Intel’s Strategy with DRAM  Innovative Design: Intel was the first to develop DRAM. Move Quickly to New generations: As competitors offered substitute products and overall market price decreased. Thus. Intel emphasis was on product design. Moor’s Law was the brain child of Gordon Moore who was the founder. Intel also produced World’s first 1Kb DRAM. Intel moved to new generations. The law was based on the demand of memory . not so much on process development or realizing efficiencies through manufacturing . Price High in early life-cycle: make money and reinvest in subsequent generations.

› › › › Japanese investors had a more long term view than US investors. Strength in manufacturing: Yields were high as 80%. .Why was Intel unsuccessful in the DRAM Market?  Japanese Entered the Market › Access to Capital with lower interest rates. 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. where in US it was around 60%. which increased their access to get trained labor.

› . › › The strategy was build on building capabilities and working to improve process development.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.

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 long-term 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.  Competitive advantage is temporary. When a novel technology becomes a commodity.   . the company(s) with higher manufacturing capability wins.  Use current profits to develop complimentary capabilities. Life span of strategies are getting shorter.

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 Market share in memory chips (DRAM) was in steep decline  • Existing capabilities.

Intel Corporation: Entry to Microprocessor  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       .

Creating and sustaining competitive advantage in microprocessors .

.g. › HOW DO YOU MAKE MONEY FROM A STANDARD? E. which will become a de-facto standard. › Wintel become a standard industry architecture. Intel won the contract.Creating and sustaining competitive advantage in microprocessors  Value Creation › Fragmented Standards › Perfect Storm: IBM was looking for a microprocessor for its PC. 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 I m it a t  ion Su b st it u t ion › › Sa t u r a t ion › Th r e a t s Bu ye r p ow e r Su p p lie r Pow e r Com p le m e n t or s Pow e r .

t h e r e w a s a sh if tHigherd s t o Cy r ixanddCheaper t ow a r Capacity a n AM D Microprocessor . Program also included software vendors with t › › › t size .Creating and sustaining competitive advantage in microprocessors  Imitation THREATS     Intel’s Response Protectiona t e d In t e l’ s m icr op r oce ssor Cy r ix im it n: Created Brand Awareness.

e sp e cia lly RISC  Introduced Pentium (improved version of x86)  ›   Intel’s Response › Intel NT) OS that were not tied to x86 architecture› backed OS other than Windows like Lin (eg   Partnered with OEMs to promote Processors as well as PCs through ems Motto “ The network is the Computer” Hedged by getting into servers with 32-bit Xeon Processor in 1998.Creating and sustaining competitive advantage in microprocessors  Substitution THREATS   Hedged against adoption of RISC by releasing iv e a r ch it e ct u r e .  .

Creating and sustaining competitive advantage in microprocessors  Saturation THREATS     Intel’s Response Gr ow t h in PC t a p e r e d of f Concentration on Mobile computing and Intern  › .

Creating and sustaining competitive advantage in microprocessors  Buyer Power TH REATS    Intel’s Response   Hedged against adoption of RISC by releasing i-860 uyers wanted RICS architecture campaign made industry more dependent on C Intel inside › Introduced Pentium (improved version of x86) › Building of Motherboard through forward integration  ›   Replaced all the microprocessors   ecalling Pentium Processors .

rather focused on st    Intel’s Response .Creating and sustaining competitive advantage in microprocessors  Supplier Power THREATS  › › Cases were dropped by virtue of Intel’s goodwill in rep Accused three times by FTC › Intel showed that suppliers appropriate value from Inte   Intel f or Cu st om for custom con t a ct s n e ce ssa r y never asked solu t ion s solutions.

Linux-Red h ›  › .Creating and sustaining competitive advantage in microprocessors  Complement Power THREATS     Intel’s Response  CREATE market ecosystem by investing in comple › cr osoft ‘ b a r g a in in g Pow e r Partnerships with Apple (later in 2006).

DRAM vs Microprocessors Disadvantages with DRAM did right with Microprocessor What Intel Easier to Imitate Difficult to patent Intel Branded the Microprocessor Kept the No. of Competitors down s no microcode that can be protected Changed Industry structure and dynam ittle opportunity for a proprietary Standard Successful at counteracting threats to sust .

Intel and Internet  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. PDAs would flatten the curve when the competitors enter. . › Dominance: Intel wanted to to stay ahead of competition so early entry to Internet.

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