In 1981, the major buyer in the value chain structure of x86

microcomputer industry was IBM. The major suppliers were multiple

semiconductor companies. As semiconductor industry required secondsource manufacturing partners during that time, AMD and other couple of
companies such as Fujitsu, Siemens, etc. entered the market as new
entrants. Overall, from a value chain perspective, this could be categorized
as a one buyer, one firm and multiple supplier structure. The spread of the
value chain is relatively large as buyers of IBM PCs were relatively
unsophisticated and willing to pay a premium for the IBM branded product.
Winning IBM contract means winning the whole industry design (Andy
Grove, 1980) was a felicitous summary indicating the strong buyers power
during that period. IBM was able to force Intel license its microprocessors to
other companies to ensure adequate supply, which resulted in a reduced
captured value for Intel with the sales margin stagnant around 3% between
1981 and 1982. As Intel management realized that it was giving away its
technology but not getting fair value return by adopting the second-source
strategy, in 1985 they made a bold decision to be the sole-source
manufacturer for the new 386 CPU, which was well received by Compaq. It
was an instant success due to the fact computer users were willing to pay a
premium for the enhanced performance which boosted the selling price to be
$150 compared to $40 of the 286 chip. Therefore, Intel captured an
increased value. On the flip side, the FTC investigation on antitrust violations
during 1990s was a drag on Intels captured value since it deprived of certain
advantages previously possessed when negotiating with customers and
could adversely affected the pricing.
In 1998, there was more competition in the PC industry. Hence, from a value
chain perspective, the major buyers were the OEMs, which marketed
finished computer systems. In terms of suppliers, Intel adopted a dual
supplier strategy when possible in order to secure quality and timeliness of
the equipment. In addition, Intel also formed a consortium that included
several other major chip markets to fund the technical work and to reach the
critical mass needed to gain industry acceptance. AMD was still a player in
the semiconductor market. However, it does not create major threat to
Intels market share due to its successful Intel Inside campaign and limited
breakthrough of its own technology. Initially, Intel Inside as a brand identity
involved setting up a co-op fund that made a concession on its price to
reimburse up to half of the participating OEMs advertising costs, which
effectively increased the value spread by increasing the opportunity cost of
suppliers when doing businesses with others. In the meantime, Microsoft and
other software companies have become complementors in the value chain
to help boost the Intels success. Microsoft and Intel had incentives to
promote two shared goals: growth in the overall PC market and improvement
in the PC performance. In addition to the increased value spread, the
cooperation between the two companies also raised barriers to imitation and
made it even more difficult for competitors to grab a piece of the pie. This

commonality of interests yielded much fruitful captured value for Intel as

shown in its steadily growing margin between 1998 and 2000. In summary,
this is a multiple buyer, one firm and multiple supplier structure. The spread
of the value chain has increased due to the introduction of the
complementors.
In 2003, the major buyers and suppliers remained similar as those in 1998.
However, there were more competitions from outside of the PC market such
as personal digital assistants (PDAs), network computers, smart phones and
other wireless devices. These can be categorized as substitutes to the PC
industry and hence created threat to the microprocessor market. Also, the PC
industry life cycle was undergoing significant change, which set a friction on
Intel when negotiating with both buyers and suppliers. During the period of
2000 and 2003, average prices for microprocessors continued to fall and
Intel captured less value as the margin went down below 20%. In the
meantime, AMD has couple of technology breakthroughs. In 2003, AMD
signed joint manufacturing technology development agreement to develop
future generation manufacturing technologies. Hence, AMD has become
another major player in addition to Intel in the microprocessor market and
stirred up a fierce competition which could significantly reduce Intels added
value. However, it was noticeable that Intels sales and margin bumped up
from 2003 onwards due to its capability to change the rules of the game in
the mobile PC domain where Intel had roughly 89% market share. The mobile
market primarily targeted the corporate buyers which were more technically
literate and less price-sensitive. To stimulate demand and create a higher
willingness-to-pay, in 2003 Intel introduced an entire system (CPU, chipsets,
and other functions) with better performance including longer battery life,
seamless wireless networking, etc.). In summary, this is a multiple buyer,
multiple firms and multiple supplier structure. The spread of the value
chain was squeezed due to the introduction of substitutes.
While we would perceive it is true that PC sales have slowed for several
years with the advent of tablets and smartphones, we find it hard to fully
agree that it is the most recommended solution to reinvigorating Intels
business by shifting the focus to tablets and smartphone. We believe Intel
should still count on the development and release of new microprocessors
which are more compatible with the exciting features catering to users
needs. On top of the technological advancement, there needs to be a new
platform or product to really drive additional PC sales, like Microsoft's new
Surface Book laptop, which serves to increase the consumers willingness-topay. Meanwhile, Intel should seek to work extensively with strategic
complementors in launching the desired features like improved battery life,
wireless charging, instant touch-screen power to boost the willingness-to-pay.
Although it is inevitably true that Intels communications and networking
segments may perform well and gain certain share of the market, we are

predicting that microprocessors will remain its core business and continue to
grow organically.