Strategy development at Intel
Technical excellence was married
By Jill Shepherd
Intel (an abbreviation of Integrated Electronics)
is a digital company operating in, having
arguably created, and the semiconductor
industry. Over thirty years the company has
achieved strategic transformation 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
specialize 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
they had become too complex and big an
organization. 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.
Firstly, the first Intel memory chip was static
(SRAM), but was soon replaced by a dynamic
chip (DRAM). Secondly, 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 competence game –
maybe without knowing it – and was expecting
too much of its supplier.
Developing, manufacturing and marketing
DRAMs involved an approach to management
which was structured, disciplined and
controlled.
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 rigor 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
marketplace. Over ten years, the big earner,
DRAM, lost market share from 83 per cent to
1.3 per cent and 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
geographically distance its three main product
development 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
nonetheless fought to have manufacturing
capacity assigned purely to DRAM, proposing
that capacity be allocated 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,
manufacturing capacity and investment was
increasingly allocated away from memory
towards them. Eventually corporate managers
realized that Intel would never be a player in the
64K DRAM memory game, despite having been
the creator of the business. In 1985, top
management came to realize they had to
withdraw from the DRAM market. In 1986,
Intel made a net loss of $173m (≈ a150m) and
lost nearly a third of its workforce.
However, lingering resistance to the exit
continued. Manufacturing personnel ignored
implications 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
recognized 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 planning 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 slowdown. 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 continuing
manufacturing competence, but it also 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
microprocessors, 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 kick start 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 proposed 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 Strong ARM 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,
specializing 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. 1999 saw the launch of 13
networking chips and Intel’s first web-hosting
center, 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 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,
organizes and plays music. By how many digital
appliances would complement or substitute 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 Craig Barrett 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
1. Identify the different strategy development
processes operating in Intel. How different/
similar were these processes within and between
the different epochs?
2. How effective were these different processes?
What effect did these processes have on Intel’s
performance?
3. What were the tensions between processes
within each epoch?
4. 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?