The Intel Case: Fading Memories

(Burgelman, 1991, 1994)

Leadership & Capabilities Model (LCM)
Reconsidering the Intel case
Observations and Conclusions

Successful shift from memory to processors - 1974 to 1984

(Burgelman, 1991; 1994)

Top-management continued to consider Intel a memory company

even though market share in memory (DRAM) was in steep decline
Innovation enabled Intel to lead the market with new products
Manufacturing scale came to dominate process technology
design as basis for competitive advantage

Innovation culture empowered middle management to invest in

innovative products w/o explicit executive consent

Competences in circuit design (CD) and process technology design

(TD) were transferable to microprocessors

800

80%
75%
70%
65%

600

60%
55%

500

50%

45%
400

40%
35%

300

30%
25%

200

20%
15%

100

10%
5%

0%
1974

1975

1976

1977

1978

1979

Year

1980

1981

1982

1983

1984

Market Share

$ millions

700

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0
1974

1975

1976

1977

1978

Estimated Memory Sales

1979

1980

1981

Estimated Microprocessor Sales

1982

1983

1984

Strategic decision in 1984 to exit memory was

sensemaking after-the-fact

Intels internal selection environment, i.e., the production

rulethat favored microprocessors, was more adaptively
robust that top-down strategy

Combination of top-down strategy and bottom-up, or

autonomous, strategy is enacted at firms

Importance of knowing how and when to bring toplevel official strategy in line with bottom-up strategic
action
Such realignment does not necessarily involve a
change in leadership

Three Key Questions

What could explain Intels initial Dominance

of and subsequent decline in DRAM?

Why has Intel been more successful in

Microprocessors

What was Intels Strategy for DRAM?

Innovative Design: Intel was the first to develop DRAM. Moors Law
was the brain child of Gordon Moore who was the founder. The law
was based on the demand of memory . Intel also produced Worlds
first 1Kb DRAM.

Price High in early life-cycle: make money and reinvest in

subsequent generations.

Move Quickly to New generations: As competitors offered substitute

products and overall market price decreased, Intel moved to new
generations.

Thus, Intel emphasis was on product design, not so much on

process development or realizing efficiencies through
manufacturing .

Japanese Entered the Market

Access to Capital with lower interest rates. Japanese

investors had a more long term view than US

investors.
Related industries helped advance DRAMS (eg
Nikon)
Sophisticated Demand: DRAMS were used across
different products
More competitive industry: with greater competition
Japanese firms had greater need to be efficient,
which increased their access to get trained labor.
Strength in manufacturing: Yields were high as 80%,
where in US it was around 60%.

Japanese Strategy
Closer relationships with equipment suppliers,

enabling them to develop manufacturing

machinery that produced higher results.

The strategy was build on building

capabilities and working to improve process

development.

Japanese Institutional Factors

Japanese banking Systems provided lower

cost of capital by channeling funds through

loans.
What is the implication of having lower
interest rates in silicon industry? And how it
relates to pricing strategy?
Japanese Stock market revolved around
long-term investment horizons.
Continuous investment despite economic
downturns.

Increased complexity
Each subsequent generation was more

complex in terms of design and

manufacturing.
Firms with better manufacturing process had
more competitive advantages.
US firms failed due to overreliance on
product strategy and lack of access to
capital

Wrong Strategy

Wrong Strategy
Intel though that pushing product design

through new features

Lack of process capabilities and efficient
manufacturing capabilities resisted putting
new features to market.
Japanese also entered the EPROM market

Be careful with unidimensional (one

product) strategy
Protect your technological innovations or
avoid commodity business. When a novel
technology becomes a commodity, the
company(s) with higher manufacturing
capability wins.
Competitive advantage is temporary. Life
span of strategies are getting shorter.
Use current profits to develop
complimentary capabilities.

Market share in memory chips (DRAM) was in steep decline

Existing capabilities, Circuit Design (CD )& Technology Design (TD) did not
match competitive dynamics
Exploration did not focus on manufacturing scale (& large market)

Middle management empowered to invest in innovative products

Exploration led to microprocessors without a top-down initiative an example
of sustained investment

Competences CD and TD were transferable to microprocessors

Avoiding timing delay associated with absorptive capacity build-up priming
investment in exploration came through investment in DRAM

Internal selection environment favored microprocessors

Did production rule save the day? No, the market saved the day -microprocessor
market provided higher margins in self-reinforcing cycle
Production rule reflected transactional leadership efficiency: go for the highest
return on incremental assets!

Intels successful transition had more to do with unique

circumstances (luck) than strategy (brains)
Loss of market share in memory (precipitating ultimate exit)
predated successful transition to microprocessors no
transforming strategy was articulated.
Market for microprocessors developed quickly little time
delay between investment in exploration & sustaining rents
(feeding the positive feedback loop) thus limiting the need
for sustained commitment to exploration investment
Intel was well positioned with respect to process technology
design capabilities to successfully explore microprocessor
market

Value
Creation

Creating
Value by
becoming
Standard

Value
Capture

Capturing
value by
becoming
a
proprietary
Standard

Sustaining
Value

Sustaining
value by
countering
threats

Value Creation
Fragmented Standards
Perfect Storm: IBM was looking for a

microprocessor for its PC, which will become

a de-facto standard. Intel won the contract.
Wintel become a standard industry
architecture.
HOW DO YOU MAKE MONEY FROM A
STANDARD? E.g., Mattress Sizes, nuts and
bolts etc.

Proprietary Standard
One can earn rents from a standard by making

it proprietary.
Enforcing Proprietary standard

Suing companies that attempt to copy its

microcode
Cutting no of licenses from 12 to 4 thereby
increasing profits 30% to 75%.
Building sufficient production capacity so that
there is no need to license to other manufacturer
Becoming the sole manufacturer for 386 for IBM
and subsequently Compaq.

Sustaining Competitive Advantage

Threats to sustaining competitive advantage
Imitation

Saturation

Supplier Power

Substitution

Threats

Buyer power

Complementors
Power

Imitation
THREATS

Intels Response

AMD and Cyrix

imitated Intels
microprocessor

Intellectual property Protection

Intel Inside Campaign: Created Brand
Awareness. Program also included software
vendors with the line Runs even better on
a Intel Microprocessor

With increase in
market size, there
was a shift towards
to Cyrix and AMD

Higher Capacity and Cheaper

Microprocessor

Substitution
THREATS

Intels Response

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.

Saturation
THREATS

Growth in PC
tapered off

Intels Response

Concentration on Mobile computing and

Internet

Buyer Power
THREATS

Buyers wanted RICS

architecture

Recalling Pentium
Processors

Intels Response
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

Replaced all the microprocessors

Supplier Power
THREATS

Intels Response

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 Intels

goodwill in replacing chips
Intel showed that suppliers appropriate value
from Intel as well

Complement Power
THREATS

Microsoft
bargaining Power

Intels Response

CREATE market ecosystem by investing in

complementors
Partnerships with Apple (later in 2006),
Linux-Red hat

Disadvantages with
DRAM

What Intel did right

with Microprocessors?

Easier to Imitate

Intel Branded the

Microprocessor

Difficult to patent

Kept the No. of

Competitors down

There is no microcode that

can be protected

Changed Industry
structure and dynamics

There was little opportunity

for a proprietary Standard

Successful at
counteracting threats to
sustainability

Factors led to Intels interest in Internet

Market Saturation: Growth in PCs matured
Demand in networked Computing and PDAs
Imitation: With imitation more players enter

the market and the product becomes a

commodity leading to perfect competition
and eroding margins.
Dominance: Intel wanted to to stay ahead
of competition so early entry to Internet,
PDAs would flatten the curve when the
competitors enter.