Case Study

Strategy development at Intel*

Jill Shepherd, Segal Graduate School of Business
Simon Fraser University, Canada
Intel (an abbreviation of Integrated Electronics) is a digital company operating in, having
arguably created, the semiconductor industry. Over 30 years the company has achieved
strategic trans- formation twice.
Epoch I
Between 1968 and 1985, during which the CEO was mostly Gordon Moore, Intel was a
memory company. Founded by Gordon Moore and Robert Noyce, Intel was the first
company to specialise in integrated circuit memory products. Noyce co-invented the
integrated circuit, whereas Moore, a physical chemist, saw the potential of metal–oxide–
semiconductor (MOS) process technology as a way of mass producing semiconductors
at low cost. Both managers left Fairchild Semiconductors, the subsidiary of Fairchild
Camera and Instrument Corporation they had helped found. According to Noyce, senior
management at Fairchild were unsupportive of innovation, perhaps because it had
become too complex and big an organisation. In turn, Andy Grove joined Intel, thinking
that the departure of Moore and Noyce left Fairchild fatally bereft of middle
management. Their aim was not to transform the industry, but to make memory chips
which did not compete directly with Fairchild and others because they were complex.
Two events were critical in these early days. First, the first Intel memory chip was static
(SRAM), but was soon replaced by a dynamic (DRAM) chip. Second, the traditional
strategic choice of second-sourcing manufacturing ‘failed’ as the chosen company could
not deliver a new-generation manufacturing process. Intel was obliged to do all its own
manufacturing, but also retained all the profits. This early success and ‘luck’, according
to Gordon Moore, lasted nearly 20 years. Although this good fortune can be construed
as luck, perhaps Intel was ahead of the silicon technology com- petence game – maybe
without knowing it – and was expecting too much of its supplier.
Developing, manufacturing and marketing DRAM chips involved an approach to
manage- ment which was structured, disciplined and controlled. Technical excellence
was married with goals stipulated by senior management, which needed cross-
functional discipline if they were to be reached on time. An ethos of top-down financial
rigour was balanced by a culture in which those who knew what was needed to achieve
the goals were never crowded out because they were junior. Knowledge was more
powerful when associated with technical excellence than hierarchical position, creating
an Intel ethos of constructive debate. Insofar as it existed, strategic planning was fairly
informal: ideas bubbled up from engineers and marketers which top management
assessed and allocated funds to. Recruitment processes focused on hiring staff suited
to the Intel culture, and rewards were associated with high performance.
Epoch II
Come the early 1980s, Intel moved towards a different era, courtesy of a more crowded
market- place. Over 10 years, the big earner, DRAM, lost market share from 83 per cent
to 1.3 per cent and
* Intel is one of the most researched companies, courtesy of a highly productive
partnership between once CEO and sub- sequent Chairman of Intel, Andy Grove, and
Robert Burgelman, a Professor of Management at Stanford University Graduate School
of Business.
Exploring Strategy by Johnson, Whittington & Scholes
Exploring Strategy Classic Case Studies
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amounted to only 5 per cent of Intel’s revenue, down from 90 per cent. Innovation
moved towards the equipment manufacturers away from the chip suppliers and
professional buyers sought much tougher deals. Competition had heated up with
choices having to be made as to which technical areas to excel in.
At this time Intel made a decision to distance geographically its three main product
devel- opment areas, DRAM, EPROM (its most profitable product in the mid-1980s) and
microprocessors. In the case of microprocessors, the development of which had begun
in Epoch I, the new basis of advantage increasingly became chip design rather than
manufacturing process as it was in the other areas.
Over time DRAM lost manufacturing capacity within Intel to the unplanned
microprocessor area. A rule, created by the first financial director and designed to
maintain Intel as a technological leading-edge company, stipulated that manufacturing
capacity was allocated in proportion to the profit margins achieved in the different
product sectors. The emphasis within the DRAM group was on finding sophisticated
technical solutions to DRAM’s problems; it was, however, innovation in markets where
innovation was no longer commercially viable. DRAM managers none the less fought to
have manufacturing capacity assigned purely to DRAM, proposing that capacity be allo-
cated on the basis of manufacturing cost. Senior management refused.
Once this decision was made to keep the resource allocation rule, the strategic freedom
left to corporate managers to recover the founding businesses, SCRAM and DRAM, to
which they were very attached, diminished as market share fell beyond what could be
deemed worthwhile recovering. DRAM managers had to compete internally with the
technological prowess of the other product areas where morale and excitement were at
high levels and innovation was happening in an increasingly dynamic market. And as
microprocessors gradually became more profitable, manu- facturing capacity and
investment were increasingly allocated away from memory towards them. Eventually
corporate managers realised that Intel would never be a player in the 64K DRAM chip
game, despite having been the creator of the business. In 1985, top management came
to realise they had to withdraw from the DRAM market. In 1986, Intel made a net loss of
$173m (≈ 1150m; £103m) and lost nearly a third of its workforce.
However, lingering resistance to the exit continued. Manufacturing personnel ignored
impli- cations of exiting from DRAM by trying to show they could compete in the
marketplace externally, by explaining failure in terms of the strong dollar against the
Japanese yen and battling with poor morale. Eventually Andy Grove, CEO from 1987,
took the executive decision to withdraw from EPROM, leaving no doubt that
microprocessors now represented Intel’s future strategic direction. The subsequent exit
from EPROM was rapidly executed. Staff associated with EPROM left and set up their
own start-up.
The period pre and post the exiting of DRAM was turbulent. Although seemingly messy,
it gave rise to a great deal of new thinking. A new link was created between
manufacturing and technology, trying to rid the company of the rivalries established in
the era of internal competition between DRAM and other technology areas and return to
the era of collaboration. The approach to technology was also rethought and moved
away from being so product based. Product definition and design as well as sales and
marketing became more important, manufacturing less so. Corporate strategy came into
line with market developments and middle management priorities; and formal strategic
planning processes and corporate management’s statements of strategy began to
champion microprocessors.
That said, the potential of the PC was not recognised immediately. Indeed, a
presentation made by a newly recruited manager on that potential failed to grab the
attention of managers. Later Intel managers reflected this was because the presenter,
although enthusiastic, appeared to be ‘an amateur’. Had that same analytical content
been presented by a ‘smooth-talker’, perhaps the importance of the PC market would
have been taken on board sooner by corporate management.
By the mid-1990s the relatively informal processes of strategy development were
becoming difficult in what had become a huge corporation. More formal strategic long-
range plans were introduced where each business unit had a subcommittee which on a
yearly basis developed a business plan to be submitted for approval to corporate. Whilst
this added discipline, the problem was that these plans became repetitive and lacked
the innovation and renewal that had driven Intel’s success.
Epoch III
Intel’s performance as a microprocessor company was financially spectacular. In 1998
Andy Grove became Chairman and Craig Barrett took over as CEO. Both were aware
that, once again, Intel was facing new challenges. After 10 years of 30 per cent per
annum compound growth, 1998 saw a slow- down. The era of the Internet had arrived
and the company needed to broaden its horizons. Not only did Intel need to maintain its
competence in design and product development alongside con- tinuing manufacturing
competence, but also it needed to understand more the needs of the user and develop
competences in corporate venturing, allowing part or full ownership of companies with
strategically important technologies. After a period of adhering strongly to its focus on
micropro- cessors, it needed ways of regaining the entrepreneurial flourish of its former
days. In any case, the business had become more complex, requiring as many chips as
possible to be put along the whole value chain of the Internet moving it towards wireless
and the digital home.
Barrett launched a series of seminars for Intel top management aimed at getting them to
dream up new businesses and a New Business Group (NBG), with different processes
and values, was founded with the brief to kickstart new internal business ventures. A
framework was created to handle the interface between the NBG and the rest of the
company to establish whether any pro- posed new business was not only strategically
important externally but also built on, or required, the development of new competences
internally.
The early years under Barrett saw a flourish of activity and new ventures. In the first two
years these included: buying DEC’s chip unit with rights to the zippy StrongARM
processor, which Intel adopts for some mobile and networking products; dozens of new
products in 1998, including routers and switches; the launch of the cheap Celeron chip;
the establishment of a home-products group to develop web appliances and Internet-
enabled TVs and set-top boxes; the acquisition of networking chipmaker Level One,
specialising in chips that connect network cards to wiring; and of Dialogic, a maker of
PC-based phone systems, giving Intel technology for the convergence of voice and data
networks; and a home networking kit to send data over phone wiring in homes. The
year of 1999 saw the launch of 13 networking chips and Intel’s first web-hosting centre,
with capacity for 10,000 servers and for serving hundreds of e-commerce companies;
the acquisition of DSP Communications, a leader in wireless phone technology, and
IPivot, a maker of gear for speeding up secure e-commerce transactions; and in 2000
the launch of seven server appliances, called the NetStructure family, to speed up and
manage web traffic.
In 2002 efforts were directed at promoting wireless technology development through an
investment fund which was extended in 2004 to fuel the advance of the Digital Age into
people’s homes making the transfer of photos, music, documents, films possible
between various devices. The fund backed start-ups working in the area and was also
aimed at expanding interest in the area, both technological and consumer oriented. Intel
believed that PCs would be needed for storage in the digital home but saw its future in
all kinds of semiconductors, not just those for PCs. For example, Intel invested in three
companies: BridgeCo, which designs chips to link devices within the home; Entropic,
which designed chips for networking over coaxial cable; and Musicmatch, selling
software that records, organises and plays music. By how much digital appliances
would complement or sub- stitute for PCs remained to be seen, but by 2003 Intel had
determined to establish itself as a leader in the design, marketing and selling of chips.
In 2004 it was announced that in 2005 Paul S. Otellini, who does not have the
engineering background of Barrett, would take over from him as CEO, who would take
over as Chairman, making Andy Grove Chairman Emeritus. Business
Week commented:
In this new age of ‘Think Intel Everywhere’, not just inside the PC, Intel will face tough
competition, as it enters the communication, entertainment and wireless sectors whilst
also defending its flank from other microprocessor companies such as AMD. . . . Whilst
remaining driven by innovation Barrett and Otellini have spent time trying to learn from
past mistakes, to become more market savvy, forging closer relationship with customers
to avoid designing products no one desires, becoming more cooperative and less
arrogant whilst also investing in five new factories in 2005.
Questions
Identify the different strategy development processes operating in Intel. How
different/similar were these processes within and between the different epochs?
How effective were these different processes? What effect did these processes
have on Intel’s performance?
What were the tensions between processes within each epoch?
What proposals would you make as to the most appropriate strategy
development processes that should exist as Intel moves into a more and more
diversified business model?