Avimanyu Avi Datta Doctoral Candidate College of Business Washington State University Overview The Intel Case Fading Memories Burgelman 1991 1994 Leadership amp Capabilities Model LCM ID: 339534
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Slide1
Intel Case Study
Avimanyu (Avi) Datta, Doctoral Candidate,
College of Business,
Washington State UniversitySlide2
Overview
The Intel Case: Fading Memories (Burgelman, 1991, 1994)
Leadership & Capabilities Model (LCM)
Reconsidering the Intel case
Observations and ConclusionsSlide3
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
Competences in circuit design (CD) and process technology design (TD) were transferable to microprocessorsSlide4
Intel Memory Market Share and Sales
(Adapted from Burgelman, 1994;
Grosvennor
, 1993)Slide5
Estimated memory Sales and Estimated Microprocessor Sales
(Adapted from Burgelman, 1994;
Grosvennor
, 1993)Slide6
Brief Conclusion
Strategic decision in 1984 to exit memory was “
sensemaking
” after-the-fact
Intel’s internal selection environment, i.e., “the production
rule”that
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 top-level official strategy in line with bottom-up strategic action
• Such realignment does not necessarily involve a change in leadershipSlide7
Intel Corp
Three Key Questions
What could explain Intel’s initial Dominance of and subsequent decline in DRAM?
Why has Intel been more successful in MicroprocessorsSlide8
Intel Corp: Cost and price curves
What was Intel’s Strategy for DRAM?Slide9
Intel’s Strategy with DRAM
Innovative Design: Intel was the first to develop DRAM. Moor’s Law was the brain child of Gordon Moore who was the founder. The law was based on the demand of memory . Intel also produced World’s 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
. Slide10
Why was Intel unsuccessful in the DRAM Market?
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%. Slide11
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.
The strategy was build on building capabilities and working to improve process development. Slide12
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. Slide13
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 StrategySlide14
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
Slide15
What did Intel learn?
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. Slide16
Intel Corporation: Entry to Microprocessor
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!Slide17
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 marketSlide18
Creating and sustaining competitive advantage in microprocessors Slide19
Creating and sustaining competitive advantage in microprocessors
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. Slide20
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.Slide21
Creating and sustaining competitive advantage in microprocessors
Threats
Imitation
Substitution
Saturation
Buyer power
Supplier Power
Complementors Power
Sustaining Competitive Advantage
Threats to sustaining competitive advantageSlide22
Creating and sustaining competitive advantage in microprocessors
Imitation
AMD and Cyrix imitated Intel’s microprocessor
With increase in market size, there was a shift towards to Cyrix and AMD
Intellectual property Protection
Intel Inside Campaign: Created Brand Awareness. Program also included software vendors with the line “ Runs even better on a Intel Microprocessor”
Higher Capacity and Cheaper Microprocessor
THREATS
Intel’s ResponseSlide23
Creating and sustaining competitive advantage in microprocessors
Substitution
Alternative architecture, especially RISC
Hedged against adoption of RISC by releasing i-860
Introduced Pentium (improved version of x86)
THREATS
Intel’s Response
Microsoft moved OS that were not tied to x86 architecture (
eg
NT)
Intel backed OS other than Windows like Linux
Sun Microsystems Motto “ The network is the Computer”
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. Slide24
Creating and sustaining competitive advantage in microprocessors
Saturation
Growth in PC tapered off
Concentration on Mobile computing and Internet
THREATS
Intel’s ResponseSlide25
Creating and sustaining competitive advantage in microprocessors
Buyer Power
THREATS
Intel’s Response
Buyers wanted RICS architecture
Recalling Pentium Processors
Replaced all the microprocessors
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 integrationSlide26
Creating and sustaining competitive advantage in microprocessors
Supplier Power
Made Long term contacts necessary for Custom solutions
Intel never asked for custom solutions, rather focused on standard solutions.
THREATS
Intel’s Response
Accused three times by FTC
Cases were dropped by virtue of Intel’s goodwill in replacing chips
Intel showed that suppliers appropriate value from Intel as wellSlide27
Creating and sustaining competitive advantage in microprocessors
Complement Power
Microsoft ‘ bargaining Power
CREATE market ecosystem by investing in complementors
Partnerships with Apple (later in 2006), Linux-Red hat
THREATS
Intel’s ResponseSlide28
DRAM
vs
Microprocessors
Disadvantages with DRAM
What Intel did right with Microprocessors?
Easier to Imitate
Difficult to patent
There is no microcode that can be protected
There was little opportunity for a proprietary Standard
Intel Branded the Microprocessor
Kept the No. of Competitors down
Changed Industry structure and dynamics
Successful at counteracting threats to sustainability Slide29
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.
Dominance: Intel wanted to
to
stay ahead of competition so early entry to Internet, PDAs would flatten the curve when the competitors enter. Slide30
Questions? Comments?