Strategic Management

Intel: Creating advantage through core

competencies (resources and capabilities)
 Intel: Creating Advantages in
Microprocessors
 Become the Standard
– License the technology at low cost to many suppliers to set up the
X86 architecture as the standard
– At this stage, low bargaining power vis-a-vis IBM, the major buyer;
Intel does not reap high profits from the standard
 Become a Proprietary Standard
– Intel eliminates licensing on the 386 once it has capacity to supply
the industry; IBM is only competitor
– IBM does not choose to incorporate 386 as the PC standard right
away, opening the door for Intel to negotiate with Compaq
– Speed to market capabilities allow Intel to be first to market with
next generation microprocessors

Professor Jeff Dyer

The Structure of the Microprocessor Market
Before and after the 386

Up Through 286 386 and Later

Com
Licensee
paq

Intel IBM
IBM Intel

PC AMD
Licensee Mfr. HP

PC
Mfr.

Licensee Dell

PC
Mfr.
Professor Jeff Dyer
 Intel: Creating and Sustaining its
Advantage
 Speed to market capabilities
– ability to develop next generation of microprocessors faster than
other players
 “Intel Inside” campaign
– creates brand equity and loyalty over time (in 2001 Intel brand
name valued at $35 billion)
– creates bargaining power over, and tension with, computer
manufacturers
 Skill and experience at high volume, low cost chip production
– “copy exactly” processes; high yield rates in fabs
 Cost and complexity of market entry
– cost of development and fab is approximately $1 billion
 Intel’s financial resources allow it to:
– buy options on a wide variety of new technologies
– vigorously defend its patents

Professor Jeff Dyer

 Intel’s Key Resources and Capabilities
(Core Competencies)
 Resources:
– “Intel Inside” Brand Name
– Financial resources
– Stock of engineers/
scientists
– Intellectual property
(patents) and lawyers to
enforce
– Relationship with Microsoft,
IBM, Compaq, etc.
 Capabilities:
– Speed to market in chip
design and mfg. ramp up.
– Yield rates in fabs (mfg.
expertise; “copy exactly”
processes).
– Ability to attract high quality
people (aided by location)
– Ability to create brand
names??? (“Intel Inside” &
Pentium).
Professor Jeff Dyer
Semiconductor Price Changes Over Time

Professor Jeff Dyer

 THE RELATIONSHIP BETWEEN
PRICE AND COST
Cost/Unit (Constant Dollars)*

Industry
A Price

B
C Cost
Accumulated Experience (units of experience)
Different companies within an industry will have similar prices but will have accumulated
different amounts of experience

Predictable Unit Cost Differences

* Location of deflator info:

www.jsc.nasa.gov/bu2/inflate
GDP.html
Predictable Profitability Differences Professor Jeff Dyer
 THE IMPORTANCE OF
RELATIVE MARKET SHARE

• Relative market share (RMS) is an excellent proxy for relative accumulated

experience:
- of leader relative to next largest follower
- of all followers relative to leader
• Therefore, there will be a relationship between RMS and profitability
High
Profitability

Low
Low High
Relative Accumulated Experience (Relative Market Share)

Relative market share is a key indicator of relative long-term profitability

Professor Jeff Dyer