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Case II-13: Intel Corporation – Strategy for the 1990s
Is Intel still a technology leader? How well do the three corporate macro strategies outlined in the case serve to guide Intel through the 1990s?
INTELS STRATEGY
Intels strategy in 1990 is to be the architectural leader in microprocessors, a proprietary, high profit margin business. This implies an emphasis on design skills and the ability to implement design architectures.
They also want to continue as the leader in transistor density. This implies the continued importance of process technology skills associated with “line width reduction”.
Intel wants to be a world class manufacturer. This is particularly important because their corporate strategy is to be the sole source supplier of microprocessors to OEM PC makers. Customers will be locked into one supplier, so it is essential their manufacturing capacity and capability support this strategy.
RATIONALIZING TECHOLOGY STRATEGY WITH CHANGING INDUSTRY DYNAMICS
There are three key Intel managers discussed in the case. While each appears to represent a significantly different viewpoint, a more detailed analysis uncovers common threads in their logic and an evolution in the strategic position of the company.
Chou argues that Intel does not need to have a high volume product to continue learning and remain a technological leader. He argues that learning is “time and engineering constricted, not number of wafers constrained”. In his view, enhanced learning techniques can take the place of “brute force” techniques of volume production. Chous position contradicts the traditional learning model in which cost reduction is related to cumulative volume. This was the learning model used at Intel prior to its exit from the DRAM business.
Parker suggests that the industry paradigm” has shifted, i.e., cumulative volume still drives learning, but the learning accumulates more at the point of the equipment supplier and less at the semiconductor manufacturer. In his view, high volume semiconductor manufacturers learn more quickly than low volume producers. Part of this learning capability is due to the close linkages they have with equipment vendors. The implication of Parkers view is that Intel is now a technology follower because of relatively weak linkages with equipment supplier. To improve Intels technology leadership, they must improve these linkages.
Barrett believes that Intel is a technology leader and that manufacturing improvements have accelerated since the exit from the DRAM business. He attributes this to improved engineering techniques, not advances in process equipment. He agrees with Chou that high volume manufacturing is not critical to success. This view is somewhat contradicted by selectively staying in the EPROM business – a high volume, commodity business. Upon further examination, however, his belief is that EPROMS are not critical because they provide advantages for learning, but because they provide a critical link between Intel and its competitive environment. Staying in a commodity business allows Intel to learn how to lower unit costs and to use this knowledge across all of its products.
These three senior managers have different views of Intels position and the changing nature of the industry. Parkers view suggests that a volume product such as EPROM is not necessary for Intels product mix, since process improvements will come from equipment suppliers. Barretts viewpoint suggests that EPROM is necessary only to support the microcontroller business in the short-term and to keep the microprocessor business on an efficient cost reduction curve in the long-term. In spite of these differences, the link between technology strategy and corporate strategy appears to be quite good.
Clearly microprocessors will continue to be the driving force at Intel in terms of future profits. The role of EPROM and FLASH technology, and their fit with the business and technology strategies is less clear.
EPROMS
Sales in 1989 were about $210 million which gives Intel a 21% share of the worldwide market. Intel is the leader in terms of sales volume. Gross margin on EPROM is much less than for microprocessors, about 15-20%. Given the low gross profit margin and relatively high R&D costs, EPROMS may be a money losing business for Intel. With the exception of micro controllers, EPROM is a commodity business
Key Question: Does Intel need the EPROM business?
The technological importance of EPROM for Intel is limited. Intels process technology for EPROM is probably not better than that of the competition. It was, and perhaps still is, an enabling technology for microcontrollers which, in turn, is a low-margin business, similar to Drams which Intel previously abandoned.
The strategic importance of EPROM is also limited. Intel has beaten back the Japanese competitors probably because they won the dumping case more than any technological or marketing strength. Flash appear to be more important than EPROM in the future
It appears middle managers are shifting resources away from EPROM. For example, the Israel EPROM facility was converted to microprocessors. Intels top management seems to be delaying the inevitable, but no immediate decision is needed.
FLASH
The technological importance of Flash for Intel is still uncertain. Its middle-level champion views it as important for neural networks, but this is a very long term consideration. Intel does not seem to have any major Flash patents or know how to differentiate its Flash products from competitive offerings. A number of competitors are or are planning to enter this business.
The strategic importance of Flash for Intel is also somewhat unclear. Some view Flash as a potential replacement for disk drives. However, case exhibits 3 and 4 suggest that Flash is still much more expensive than physical drives. Also, one may recall that the demise of disc drives has been many times prematurely announced in the past. A more probable application of Flash is for use in portable computing devices. A key question is whether Flash will rapidly become a commodity product.
Is Intel still a technology leader?
I believe Intel remains a technology leader and a key force in the industry. My reasons are as follows:
Intel is