Intel Corporation: 1968- 2003 Operation Strategy

PGP 16 – Term V

Group 7(B): Hemant Raj Singh Ravi Kant Verma

Arkaprabha Debanath Panii Ngaonii Illaria Luzzi

Anirban Bhar

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Company background

Started in 1968 as a manufacture of memory chips 1970 produced 1103, world first 1Kb DRAM EPROM Flash memory

By late 90s enter Internet business 2002, Semiconductor Industry was mired in recession “Innovation was the key to escaping a recession”- invested more in R&D Pouring billions into networking and communications silicon

Memory

Internet

Switched to Microprocessors in the 80s 4004 microprocessor 8086 and 8088 microprocessors: breakthrough

Microprocessors

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Key issues

Would this moves restore Intel’s historical performance?

Would Intel be able to once again shape industry structure to become

the leading building block suppliers in these new areas?

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Memory Manufacturing

Replace magnetic core memory DRAM was cost affective Increased performance Smaller First mover advantage Standard, interchangeable chips Cross-licensing among established players forced competitors to compete on price/performance

Manufacturing process was complex Fixed cost were high in setting up the plant Pricing depends on: Shape of learning curve & how quickly competitors expanded capacity

DRAM Success factors

But

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Memory Manufacturing

Hitachi &Mitsubishi Very large companies compared to Intel Aided by abundant and cheap capital market available Bank loans American semiconductor companies relied on their own funding Significant cost advantage because of advanced manufacturing process Cost and yield, Japanese were much ahead Supplier relationship, work closely

Reduced market share to 1% Japanese captured most of the memory market share Industry overcapacity 1 Mb DRAM good product but too late to make an impact Intel much behind time….

Competitors

Exit of DRAMs

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Memory Manufacturing

“DRAMS gave us fame, but EPROMs gave us rich”

Easily programmable and erasable

Kept the price high Methodical and quit approach Kept below competitors’ radar

EPROM

• Japanese started producing

•Price slash Down by 90%

EPROM

•Quick to react

• Introduce Flash Memory

Flash Memory

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As a Microprocessor Company

4004 microprocessor used in Japanese calculator 8086 & 8088 microprocessors goes into IBM’s first machine

Computer industries was vertical, shifted to horizontal around 80s The presence of IBM was crucial Market less fragmented Second source manufacturing, a necessary evil Intellectual property well ahead of its competitions

Products

Reason for growth

Secondary source, Intellectual property

Becoming proprietary

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Challenges in Microprocessor

RISC vs CISC

• Reduced Instruction Set Computing vs Complex Instruction Set Computing

• RISC simpler architecture

• Better performance

• displace the traditional CISC architecture

• Price/performance a real threat

• Not an operational problem, Media hype

Customers

• Complex relationship with OEMs

• Reimburse half of advertising cost

• “Intel inside” sticker compulsory

• Good start :300 OEMs

• Spent $500 million

• Forward integration, development of computer based instruments

• “bug in the Pentium”: replacement policy, cost Intel $475 million

Complementors

• Software lack behind hardware design

• Intel 32 bit microprocessors waited 10yrs for Microsoft to produce 32 bit OS

• Courted independent software vendors

• Intel capital to systematize outsource technology

• Exceedingly careful in Antitrust

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Why should Intel go for new Market ?

Reduction in Average silicon content $ value CAGR of -11 % High time to pursue to build new business “Networking is becoming more important, whether it’s in the home, small business,

or enterprise. If you want to be involved in this new era, you have to look for the new growth opportunities” …….. Craig Barrett, CEO

Client platforms Server platforms

Cellular and wireless Communication and networking

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What went wrong in 2001 ?

Craig Barrett , new CEO 1998 Spent roughly $12 billion on acquisitions and new venture Even corporate mission was changed From “being the preeminent supplier to the new computing industry worldwide” To “being the preeminent building-block supplier to the worldwide Internet economy” In spite of all this effort there was a deep in 2001 net revenue What went wrong ?? Intel or market

Exhibit 1: Intel’s Financial results

Year Net Revenue in $ millions

1998 26,273

1999 29,389

2000 33,726

2001 26,539

Market is responsible and not Intel Recession + global microprocessor revenue reduction + internal implementation errors

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Can Intel continue with expansion strategy ?

After the copyright stint , Intel is way ahead...... In the mobile PC domain, Intel’s microprocessors had significant advantages over AMD’s

AMD Vs Intel

Change in environment is greater than in Intel In 2002, Intel had roughly 89% market segment share in mobile CPUs Wireless data and communications semiconductor Intel holding 8% of the market Have to win the architectural battle

Winning Strategy

Commitment to communications

Technical expertise

Deep pockets

Manufacturing expertise

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Description Mechanism

DRAMs Intel were market leader of DRAMs, but Japanese got hold of market share due to advance manufacturing process and good capital financing

Manufacturing process and financing

1 Mb DRAMs were a breakthrough, but the relevance was not felt by the time it was launched

Goal timing

EPROM lasted and dominated because product was distinct and relevant

Product relevance

EPROM under low radar of competitors Avoiding Product duplication

Quick change to flash memory as soon as EPROM were absorb by Japanese

Quick adaptation

Intellectual property and patent are very important Ambiguity and uncertainty reduction

Need complementors and create an ecosystem like in microprocessors manufacturing

Flexible way of structuring through dependence

Past Lessons

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How to overcome implementing errors ?

Internal implementation errors can be handled very well by shutting down unproductive business to achieve operational excellence back to basic strategy

Foundation should be built on marketing the product as it is OEMs based, good Customer relations is required

Active promotions and advertisement to involve end-customer

Outsource small bit of algorithms and programming to third party if necessary and create an ecosystem

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Attempts to time the completion of new capacity investment to exploits the opportunities associated with market upturns Invest during the economic downturn when competitors are cutting cost Build a gap in performance with advanced technology, but main challenge is to keep ready to be the technical supplier of the Internet

Capacity expansion strategy

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THANK YOU

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