Intel case

Group No. 2

Kulvinder Pathania (27)

Shubhangi Chouhan (61)

Prateek Chhabra (16)

Amit Rai (10)

Ashish Sonawane (29)

Gaurav Chouhan (57)

INTRODUCTION

Founded in 1968

Key persons- Robert Noyee, Gordon Moore & Andy Grove

1969- introduced 3101(64 bit bipolar SRAM)

1973- introduced 8080 (8 bit)microprocessor

INTEL IN DRAM BUSINESS

1971- introduced 1103 DRAM (1- Kilobit) Initial Strategy- Push the product design &

be first to market with newest devices After 1979 loss in market shares of DRAM

due to Japanese competitors introduced new products more rapidly invested heavily in manufacturing (40% of sales

revenue) Technological advantage (photolithography) More production capacity & improved yields

(70%)

EXIT FROM DRAMS

Reduced market shares (1974-82.9% to 1980-5.8%)

1/3 of Intel R&D generated only 5% of total revenue

Shift of middle level management towards microprocessor

1986 –exit from DRAM business

INTEL AND MICROPROCESSOR

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THE BIG IDEA

Technology Innovation Big idea, new technology/business area: (semiconductors, IC

chips)

Marketing Innovation Intel Inside

Company is more than its products “Platform”

Strategic Choices

Sustainable Competitive Advantage

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INTEL 1968-1977 CASE

“Trying to do things nobody else could” – Robert Noyce (co-inventor integrated circuit IC)

Andy Grove joined, took personal “risk”

First 2 DRAM products not successes

3rd product 1103 became world leader, 90% of Intel revenues (concentrated)

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INTEL DRAM STRATEGY

Strategy: push product design, be first to marketDesign & process technology leader Investment in plant & equipmentCosts drop over production volume (scale) growthPrices drop with competitive capacityDRAM generally not protectable with patents Japanese started introducing products more rapidly

Invested more heavily in production (44% vs. 22%)1986 Intel decided to exit DRAM business

1/3 of R&D, but only 5% of Revs, was small player in market Japanese beat Intel on process technology (of commodity)

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INTEL AND MICROPROCESSOR

1970 CPU chipset order for Busicom calculatorTechnology development “paid by customer”Bought rights for “non-calculator” use

Hard to see future even for Gordon Moore “…never gave it another thought” – Moore “We didn’t take it (PCs) seriously” – Grove

Exit: By 1984 mid-level managers shifting technology

Hard to leave business that began company Especially for long time senior managers Mid-level managers closer to daily business realities

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INTEL MICROPROCESSOR PROGRESSION

Chip(bits)

Transistors

Year Introduced

Initial Price

Licensees Intel-Chip Profit Share

8086(8-bit)

29,000

1978 $360 12 30%

80286(16-bit)

134,000

1982 $360 4 75%

80386(32-bit)

275,000

1985 $299 1 (IBM) 100%-IBM

80486(64-bit)

1,200,000

1989 $950 ? ?

THE BATTLE TO SET STANDARD

Intel & Motorola competing for desktop computer market

Apple computer choose Motorola & IBM choose Intel

Aggressive marketing • 1980- Intel launched “Project CRUSH” • 1983- Intel launched “Project CHECKMATE”

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APPLE/MOTOROLA VS. IBM/INTEL

First to Market Closed architecture Sole-provider

Exclusivity Proprietary

Big, famous name Standardized, open

architecture Components Software Scale economies

Intel gets benefit of IBM marketing and strategy (derived demand)

INTERDEPENDENCE OF COMPANIES (p.30, 22)

“Value Chain”

1994 Apple/IBM-Motorola PowerPC chip2006 Apple/Intel

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386 CHANGES EVERYTHING (1985)

Intel 386 Investments $200 million for design $800 million for production facilities Decides not to license, except IBM

IBM choice allows Compaq entry and Win IBM delays selling, to create more closed

architecture Compaq enters Desktop market with Intel 386

THE RISC THREAT

Regarded as having speed & cost advantage over CISC

Used UNIX operating system

Improved price/performance ratio

THE DILEMMA…

CISC X86 line Compatible with all

the PC’s software Intel Policy to

develop products compatible only with X86 line

Encouraged by Compaq

RISC

i860 line Very fast but

compatible with nothing

Intel engineers & technical mangers favored RISC

Encouraged by Microsoft & IBM

CONT..

Grove refocused efforts on 486 & its successors

Intel minimized the difference between there & best RISC architecture

RISC non compatibility with other software's

Customer will not switch until there is 2X difference in performance

INTEL & CUSTOMERS

Intel followed 3 decisions & practices

Aggressive marketing – “Intel Inside”

Involvement in subsystem & full system design

Supplier relationship

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“INTEL INSIDE”– MARKETING INNOVATION

Intel is “superior to other chips” Market maturity, education higher (2nd, 3rd PC) Buyer Intel preference moved from 60% to 80% AMD: “it shouldn’t matter which chip” but it DOES

IBM, Compaq resisted, but then gave in Couldn’t fight Intel Better to have branded “Intel Inside” “premium” chip 6% rebate for use in partner marketing

Fight competitors with technology, marketing, lawyers and money power (all pointed to same goal) 1997 spent $750 million More valuable than patent

ANALYSIS

CREATING AND SUSTAINING COMPETITIVE ADVANTAGE IN MICROPROCESSORS

Sustaining Competitive Advantage Threats to sustaining competitive advantage

Threats

Imitation Substitution

Saturation Buyer power

Supplier PowerComplementors

Power

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 Response

Substitution

Alternative architecture, especially RISC

•Hedged against adoption of RISC by releasing i-860•Introduced Pentium (improved version of x86)


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.

Buyer Power


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 integration

Supplier Power

Made Long term contacts necessary for Custom solutions

•Intel never asked for custom solutions, rather focused on standard solutions.


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 well

Complement Power

Microsoft ‘ bargaining Power

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


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

WHAT ARE SOURCES OF COMPETITIVE ADVANTAGE IN MICROPROCESSOR INDUSTRY?

New product innovation Ability to ramp up process and production

facilities Marketing

Microprocessor industry is a highly technical field with new chips commanding higher demand and premium.

Utilizing economies of scale to gain cost advantage. Ability to introduce new chips mean an increase in the

profit margins. The other face involves aggressive marketing. As Intel

showed with project ‘CRUSH’ and project ‘CHECKMATE’ and later with the “Intel Inside” campaign, aggressive marketing and building brand recognition played a major role in gaining competitive edge.

WHAT STRATEGY DID INTEL USE TO GAIN AND SUSTAIN MARKET LEADERSHIP IN MICROPROCESSORS FOR OVER TWO DECADES?

Intel pursued the strategy of “Leadership at Product Development coupled with Aggressive Marketing”.

Intel’s microprocessor business faced the dual threats of

Clones and RISC architecture.

Intel countered these threats by always being on forefront of the product innovation. Intel kept on improving its products very fast and launched new better products quickly which helped it commanded premium on its latest offerings.

Intel also launched massive campaigns like project CHECKMATE and “Intel Inside” campaign which proved to be a critical factor in their success.

WHY HAS INTEL BEEN ABLE TO SUSTAIN ITS COMPETITIVE ADVANTAGE IN MICROPROCESSORS, BUT NOT IN DRAMS?

Intel started well in DRAMs business but couldn’t sustain its competitive advantage.

Intel’s strategy of ‘Leadership at Product development’ was severely tested by the shrinkage in product life cycle of DRAMs. Japanese firms viz. Fujitsu and Hitachi were quick to launch higher memory capacity DRAMs and they beat Intel on several occasions.

Intel also struggled with the development and ramp up of its production facilities in mid 1980s.

Japanese were pursuing the strategy of investing heavily in manufacturing in addition to working closely with the production equipment manufacturers. All these factors combined made Intel lose its competitive edge over Japanese rivals

WHAT EFFECT HAS THE GROWTH OF THE INTERNET HAD ON INTEL?

The immediate impact of growth in internet was the enhanced utility of personal computer as a tool in many areas. This in turn led to an increased demand for microprocessors which benefited Intel’s growth. Along with sharing information internet had other usage like entertainment and information sharing which added anew segment of home users to the PC customers list which further catapulted the demand for microprocessors.

The threat however comes from the usage of internet wherein the data and applications are stored in a remote location. Computation requirements can also be met from remote servers. Thus the processing needs of a user are thus reduced drastically and instead data communication takes precedence.

The mushrooming of these classes of applications if continued would thus reduce the need of higher end processors for the PC owners, which has the potential of altering Intel’s growth trajectory as it derives its margins from launch of newer faster processors.

Intel is hedging this risk by investing over half a billion in various small companies and start-ups which are involved in internet technologies. Intel’s strategy is to simultaneously develop high end expensive chips and low cost chips to cater to two different segments of customers i.e. Internet application providers and PC users.

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Intel case