Intel and Firm Analysis

1. Intel and Firm Analysis James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650 TNRB

2. Persistence of Superior Returns by Industry The Typical cross-country correlation in in dusty profitability is extremely weak Source: Tarun Khanna, Harvard Business School

3. Persistence of superior returns 1980-1989 Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996

4. A Cautionary Note People began to notice problems with the industry approach… Year Rest of World Industry Year 2% Industry • In the U.S., corporate strategy is typically the icing on the cake, not the cake itself • Business units must be competitive on their own merits • …in attractive industries • But the icing can make the decision difference between a good cake and a bad one U.S. 18% 3% 10% Corporate Business Transient Transient Group parent 42% 11% 46% 4% Business Firm segment 34% 30% In much of the rest of the world, corporate strategy is more prominent Membership in a diversified entity has a larger effect on profitability The effect on profitability is more likely to be positive Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000 Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997

5. Variance within the Steel industry Performance Differentials in the Steel Industry(1981-1990) 1990 Value of $1 Invested in 1981 $4.50 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.38 Average = $1.38 $1.29 $1.50 $1.00 $0.76 $0.50 $0.26 $0.07 $0.00 LTV Armco Bethlehem Inland USX Nucor Source: R.P. Rumelt (1995)

6. Firm Strategy Firm Industry Business Unit • Which Business Units? • Business Unit Boundaries • Managing Cross Business Synergies • Choose Your Sandbox • Business Definition • Firm Resources Strategic Advantage

7. Moore’s Law Gordon Moore: #29, Moore, Gordon Earle 72 , self made Source: technology, Intel (quote, executives, news) Net Worth: $5,300 mil Hometown: Woodside, CA Undergraduate: University of California Berkeley, Bachelor Graduate: California Institute of Technology, PhD Author of "Moore's Law": Power of microchips doubles every year (later amended to every 2 years). Developed first integrated circuit at Fairchild Semiconductor in 1950s, cofounded Intel with Robert Noyce (d. 1990), venture capitalist Arthur Rock. Intel now world leader in microchips (annual sales, $30 billion), but Silicon Valley's linchpin lately slipping; stepped down as Intel's chairman emeritus; gave half of fortune to Gordon and Betty Moore Foundation to support the environment, education and science.

8. Would you have invested?

9. The Top 25

10. Why are Microsoft and Intel Friends?

11. Comparison

12. Creating Advantages • Become the Standard • License the technology at low cost to many suppliers to become the standard • Low bargaining power (e.g., IBM)Intel does not reap high profits from the standard • Become a Proprietary Standard • Intel eliminates licensing on the 386 once it has capacity to supply the industry; IBM is only competitor • IBM does not choose to incorporate 386 as the PC standard right away, opening the door for Intel to negotiate with Compaq • Speed to market capabilities allow Intel to be first to market with next generation microprocessors

13. Sustaining Advantage • “Intel Inside” campaign (Differentiators) • creates brand awareness with end customers (costly to imitate) • creates bargaining power over computer manufacturers • Speed to market capabilities (Sequencing) • reputation and ability for developing the next generation of processes faster than other players • Cost and complexity of market entry • cost of development and fab is approximately $1 billion • Intel’s financial resources allow it to: • buy options on a wide variety of new technologies • vigorously defend its patents

14. The Transitory Nature of Advantages “Every competitive advantage is predicated upon a particular set of conditions that exist at a particular point in time for particular reasons. Many of history’s seemingly unassailable advantages have proved transitory because the underlying factors changed. The very existence of competitive advantage sets in motion creative innovations that, as competitors strive to level the playing field, cause the advantage to dissipate.” Clayton Christensen Source: Clayton Christensen, Past and Future of Competitive Advantage, 2001

15. Structure of Microprocessor Market Before and After the 386 PC Mfr Licensee PC Mfr Licensee IBM PC Mfr Intel PC Mfr Licensee Licensee PC Mfr

16. What is the Resourced Based View? The RBV assumes that firms are endowed with different bundles of resources. These may include: locations, brand names, distributions channels, patents, cultures etc. Resourced Based View (RBV) The RBV seeks to understand what resources are important and what a firm needs to do to protected and renew their important resources.

17. Resources and Capabilities must be… Valuable: The resource must have value by adding value to the customer or lower the producers costs. (Patented 8 track technology is no longer valuable) Rare: The resource must have limited access. (Eg. Tangible like Oil field, retail space, Prime time TV or intangible skilled labor and sales channels.) Non-substitutable: The resource does not have an abundant substitute. (eg. Skilled labor can be substituted with automation.) Appropriable: The owner must be able to capture the value created. (eg. Public roads vs. toll roads)

18. Types of Resources • Resources and capabilities • Examples Physical • Warner Bros. Film library • DeBeers diamond mines • Toyota’s superior lean production facilities • PP&E • Physical infrastructure • Financial Resources • Product selection decision Internal Intellectual • P&G’s Brand names • Amazon’s technology patients • Rx drug development process • Brand names • Patients/ IP • R&D capability • Market insight Network • Microsoft’s broad customer base • Kellogg’s supply channels • Airlines partnerships • Supplier channels • Customer relationships • Complementary networks External

19. Resources & Capabilities Capabilities & Activities Resource Commitments Resources • Intangible & Tangible • Endowments • Knowledge • Brand Names • Financial Capital • Oil reserves • Orchestrating • Effective use of logistics • (e.g., Wal-Mart) • Motivating & retaining • employees (Marriott) • Design and production • Skills (Komatsu) • Speed to market (Intel) • Lumpy commitments • Investment in new fabs • New market entry

20. The VRIO FrameworkIs a resource or capability . . .

21. Creating Firm Strategy Mission Statement Objectives • Strategic Analysis: • Industry analysis • Customer/mkt place trends • Envmt forecasts • Competitor analysis • Assessment of firm capabilities (SWOT) Strategy The central, integrated, externally-oriented concept of how we will achieve our objectives Supporting Organizational Arrangements Structure, processes, functional integration, etc.

22. Where will we be active? (and with how much emphasis?) Arenas • What will be our speed and sequence of moves? • Speed of expansion • Sequence of initiatives • Product, market, and geographic categories • technologies • value chain stages Vehicles Staging Economic Logic Differentiators • How will we get there? • Internal development • JVs • Licensing/franchising • Acquisitions • How will we obtain our returns? • Cost economies (scale, scope, learning) • Premium price (service, features) • How will we win? • Image, customization, price, styling, reliability, etc.