In one of the strategy classes in my Master’s program, I deep dived into Intel, and was left fascinated.
It is a catastrophic mistake to assume that one strategy and plan of action that works well today, will continue to reap extraordinary results forever. Reflecting upon trends, redefining goals, revisiting and revising strategies are important, crucial steps. Intel’s transformational journey from a Memory Company to a Microcomputer Company has been phenomenal, with many factors to analyze and learn from.
PRIME POSITIONING AT LAUNCH
Intel, the Memory Chip company, realized the growing need and demand for memory devices, and the inability of companies to mass produce DRAMs in 1970. Even though Intel was a fresh face, it grabbed the opportunity and established itself as the first to offer what nobody could. With founders from the semiconductor industry, Intel knew investment in Research and Development was the key to innovation. Thwarting Competitors and Potential New Threats: Intel knew how to compete. It joined and benefited from a shared network of cross-licensors and set high barriers for new entrants. It knew how to guard its secret sauce, and to stay ahead in the game it pursued three alternative approaches to mass produce DRAMs — a move named the Goldilocks Strategy. Two of those were achievable with relative ease. Intel discarded the one easier to replicate or match, to leverage competencies and establish itself as the go-to manufacturer. Intel also knew that new entrants were easily discouraged with investments in Research and Development, its geographically spread out plants and relationships with OEMs. In the 1990s, Intel dreaded RISC, but leveraged high switching costs of a CISC to RISC migration, and instead, improved the Pentium processor by incorporating techniques used in RISC, brushing off threats of substitution. In 2019, Intel offered a 50 per cent price cut on i9 chips to compete with AMD, succumbing to competitive pricing. Buyer Power: With the demand of memory chips, Intel knew the need of the hour was mass production. Leveraging absence of rivals, buyer’s weak bargaining power and willingness to pay, Intel played it right. But there were instances where it knowingly let go of such leverage to relax its overwhelmed pipelines.
Supplier Power: Even though Intel functioned in a horizontal industrial layout, Intel itself was vertically structured, leaving no room for dependence on suppliers for research, development or manufacturing. Though as a supplier to OEMs, Intel did its best with manufacturing capacity limitations in mind.
THE FIRST DRIFT: Drowning DRAMs to Emerging EPROMs
Manufacturing chips came with huge fixed costs, requiring heavy investment in expensive equipment. These limitations magnified into bigger problems when the market witnessed Japanese competitors who were flushed with capital to invest in equipment and manufacturing. They benefited from fast-paced production and offered products to the market at a low price for higher market share. This move, called ‘Dumping’ in economic terms helped Buyer’s Power grow strong. At the time, competition with TI and Mostek was also tight and Intel eventually fell behind significantly by 1984 and slipped down the slide. Intel’s evaluation of EPROMs, readjusting focus to EPROMs and flash memory, was wise as DRAMs were a lost cause. EPROMs enabled instant re-writes with use of ultraviolet light, but Intel was slow to realize its worth and underpriced it when weak buyer’s power could be leveraged. It could have been an irreversible move for many but Intel hiked its price to slow down the demand so that its manufacturing pipeline did not get overwhelmed. Even with hands tied, Intel intelligently killed two birds with one shot.
THE SECOND DRIFT: Microprocessors in the Making
In 1971, Intel made the first microprocessor, but was oblivious of its potential, just as it was with EPROMs at first. Competitors such as Texas Instruments (TI), Toshiba, Fairchild and others made their versions of processors it went unnoticed. A decade later, Project Crush won Intel a jackpot deal with IBM. Even as it enjoyed huge profits as the leader in microprocessor industry, Intel was disadvantaged. It could have leveraged Supplier’s Bargaining Power but had to settle for second — sourcing with competitors as per demands from IBM, to accommodate low manufacturing capacity. That meant sharing knowledge with competitors that could have been its secret sauce.
PILLAR OF STRENGTH: Innovation, Proprietary and Marketing
Meticulous Marketing: Intel’s Marketing was crafty and helped cross the bridge. Checkmate turned the tide with design wins for Intel. RedX was another. The Intel Inside master stroke in 1991 branded Intel as one of the best, forged relationships with Intermediate Customers (OEMs), and, by sharing marketing cost and negating bargaining power, Intel gained salience in the market as the processor behind every PC. Empowering Proprietary: Discontent with sharing profits and intellectual property with its second sources such as AMD, Intel decided to sole source and become proprietary. Later in early 2000s, Intel leveraged XScale, its own proprietary derivative to establish a position of advantage in the wireless device domain. These gave Intel an incumbent’s advantage, driving new entrants away from stepping into competition.
INTEL TOWARDS THE INTERNET
Intel foresaw the future heading towards the Internet, a potential indirect threat of substitution in early 2000s as growth in PC domain dwindled. Restructuring, reevaluating, reorienting, and bifurcating into segments at the right time to be better prepared were crucial moves that cannot be emphasized enough. Tying Loose Ends to cover bases: From forcibly second-sourcing back in the day, to losing against the Japanese, to making price hikes, to now gradually losing market share to AMD, Intel’s low manufacturing capacity has always lead to delays, pipeline bottlenecks and longer time to market. It has been a weak point that strategists have had to work around. It is about time Intel bridged this gap.
FORAYING INTO THE FUTURE
Intel’s main motto has always been to utilize, nurture and capture cutting-edge technology as its differentiator from competitors, backed by investments in Research and Development. In 2020, Intel still leads the microprocessor market, though competitors like AMD are catching up. With Apple’s switch from Intel to in-house production of ARM — based processors, Intel must be on its toes with strategic solutions to maintain an unbridgeable margin of lead. The new Intel chips with Foveros Technology look promising, and are already embedded in Microsoft’s Surface Neo, Galaxy Book S and Lenovo ThinkPad X1 Fold. Intel now needs to move from a nobody to a somebody in the mobile processor domain even as it continues to lead in PC processors, and maybe consider its own line of PCs. That could be a good way forward.
Ramon Casadesus-Masanell, David Yoffie, and Sasha Mattu (2010). Intel Corporation:1968–2003. HBS №9–703–427.Boston, MA: Harvard Business School Publishing.
Anthony Smoak (2016), Andy Grove and Intel’s Move From Memory to Microprocessors, viewed 26 June 2020,<https://anthonysmoak.com/2016/03/27/andy-grove-and-intels-move-from-memory-to-microprocessors/#>.