Case study: Intel Corporation 1968-2003

Intel has made numerous strategic changes to its business model over the last 30 years to address changing market conditions and therefore maintain its ability to add value, buttressing the organizations effectiveness at capturing profits. The technology landscape has been extremely dynamic over this period and companies that have not adapted rapidly have faced extinction. Intel is amongst the survivors while others such as Compaq no longer exist. The first major course correction that is relevant to this discussion is Intel’s transition from being a supplier of memory chips to designing and manufacturing microprocessors. Though Intel’s exit from the low margin highly competitive memory chip market was evolutionary, it was nevertheless perhaps the most critical “added value” preserving action the company has taken. Cross licensing patents in the memory chip business made it very difficult for Intel to control its pricing. There were many other suppliers in the DRAM market with lower cost structures, suppressing margins in the industry.

Intel’s ability to add value was being inhibited by this abundance of competitors with an aggregate production capacity greater than the market was demanding. Transitioning to the microprocessor business allowed Intel to create a new portfolio of patents, and set it up to dominate the market for personal computer microprocessors. After gaining huge success as a microprocessor supplier to IBM, Intel wisely broke free of IBM’s requirement that the company license its technology to secondary suppliers. This decision dramatically improved Intel’s ability to add value and extract profits from the PC business. As a result of this decision Intel’s leverage relative to the PC manufacturers such as IBM, Compaq and Dell dramatically increased. The OEMs were now clamoring for the scarce supply of the most advanced microprocessors that they could only source from Intel. Per Exhibit 1 Intel’s revenue grew more than tenfold from 1980 to 1993. Intel’s “Intel inside” campaign was highly unusual for a non-consumer facing component supplier however the strategy proved effective at adding and capturing value. Through this marketing Intel successfully differentiated its products from competitors and gained valuable mind share.

The fact that Intel was able to essentially impose this requirement on OEMs was a manifestation of their superior ability to add value relative to the PC manufacturers. AMD managed to mount a credible threat to Intel’s hegemony of the PC microprocessor market. Intel reacted to this threat by increasing research and development and expending resources to recapture and maintain a technological lead over AMD. AMD’s presence in the market negatively impacted Intel’s ability to add value to and extract value from the PC industry. Per Exhibit 1 R&D expenditure grew to $3.9 billion during this period. Net income dropped from 10.5 billion to $3.7 billion between 2000 and 2001. Microsoft and Intel were the two entities that extracted the most value from the PC revolution. Though there were moments of conflict between them, for example with regards to the RISC vs. CISC processor architectures, the two companies essentially enjoyed a symbiotic relationship which helped maintain this highly lucrative market.

It is only in recent years that the alliance has begun to fray as a result of challenges from the mobile computing paradigm shift. Exhibit 5B reflects “Wintel” dominance of the PC industry in the 90s with Intel capturing greater than 70% of the CPU market and Microsoft capturing over 80% of the PC operating system market. As computing has increasingly gone mobile the key requirements of microprocessors has transitioned from clock speed to low power leaving Intel open to attack from a strong competitor, namely, ARM holdings which has always focused on designing low-power, battery life preserving microprocessor cores, which it licenses to its partners such as ,Texas Instruments and Samsung. ARM-based microprocessors have grown to dominate the fast-growing mobile computing space, leaving Intel scrambling to reengineer its microprocessors to minimize power consumption. This is an ongoing disruption to Intel’s value adding and capturing capability and it is yet to be seen how successful the company is at addressing this challenge.