Topic 4: Intel

1. Topic 4: Intel • A. Industry structure: How did we get here? • B. Conventional strategy for ICs • Learning curves &volume-driven strategies • The emphasis on anticipatory strategies • C. Strategic planning at Intel • The compatibility/frontier trade-off • Collaborate/protection trade-off • Some recent competitive issues

2. A. How did we get here: Some basic definitions • The transistor • The integrated circuit • The microprocessor • The DRAM • 8086, 286, 386, 486, Pentium, Celeron, etc • Moore’s law

3. A. Value chain for transistors & ICs: an overview of early demand • The transistor is invented at Bell Labs • Why were they doing this anyway? • Shockley, Bardeen & personality issues • Bell Labs’s policies & open licensing • “Subsidies” for commercializing the transistor • Military, NASA • High fraction of demand in 1950s • Replacing the vacuum tube everywhere possible • Sony & the transistor radio • The general growth of consumer electronics

4. A. The peculiar history of electronics in the US • The location & size of the industry • The preferences of Shockley’s mother • Shockley’s managerial style • Ego clashes & the history of new start ups in the Santa Clara Valley • Multiple inventors of the integrated circuit • Texas Instruments (Jack Kilby) • Fairchild (Robert Noyce) – a little later, Intel • Open cross-licensing to avoid patent disputes • DOD as benign manager of US industrial policy

5. A. Competitive events shape the structure of ICs in the US • Cross-licensing seeded IBM, Motorola and others • Everything gets known quickly, so locus of competitive behavior  costs/features/delivery & specialty niches • “Civility” of early electronics industry disappears • Easy sharing of patents is now gone (TI, Bell labs, Intel) • The rise of international competition in the 1980s • DRAMs competition leads to much exit • Policy concerns about upstream equipment vendors in US • Growth of the Sematech “R&D cartel” within the US • Worldwide excess capacity in the late 1990s

6. B. Conventional wisdom on anticipatory strategy in ICs • High sunk costs for R&D & new fab plant • Var costs fall w/time (6-9 mo) & volume (??) • Learn from competitors • BCG style “learning curve” strategies • Volume-driven strategies for differentiation • Focus on a niche or guaranteed demand • The returns & risks to being early/fast • High margins/prices early in product cycle • Increasing scale of investment in fabrication plants • Increasing financial risks & lead times

7. B. Why an emphasis on anticipating planning for future? • Getting the cost curve/price/margins at right time • Lead time needed for next generation • Waiting for learning curves to be realized • Waiting for complementors to invent • Anticipating desired design • Trade-off in micro-processor product cycle • Cannibalize existing revenues for sake of tomorrow • “Usually” thru new features on chip • Note: Intel tends to resist “harvesting”, I.e., tries to achieve high margins early in a product cycle, while cannibalizing older designs, even those that are still profitable

8. B. Intel language & vocabulary for anticipatory strategies • “Only the paranoid survive” = Anticipating industry evolution • “Strategic inflection points” = Unforeseen technical or commercial change • E.g., Andy Grove & the prolonged exit from the DRAM market just as Microprocessors takes off • Intel’s problem: unique or a harbinger? • Why execution & planning are key to capability building • Strategic trade-off b/w frontier & compatibility • B/w collaborating w/others & protecting self

9. C. Why execution is so important to Intel • Strategic issue: the costs of being wrong • Foreclosing options upon exit • The DRAM decision as illustration • Opportunity cost of missing high early margins • Benefits realized later & un-measurable • Benefit from a loss avoided; no accounting possible • Benefit of any single decision depends on many • Note: Unique history of 86 platform hides a big issue • A growing market provides revenue in spite of imperfection • Higher margins w/better features (Until recently) • What happens when things go wrong? Who is accountable?

10. C. Intel’s problems: reaching the technical frontier is so important • In a race, small differences matter • Ordinal differences • Intel’s history with DRAMs, IBM • Direct competitors (e.g. AMD & others) • Controlling the market for X86 clones • Intel’s history with licensing the 386 • Celeron and the sub-$1000 PC (more in a second) • Indirect competitors • Illustration: CISC vs RISC in the 90s • Paranoia about others growing out of niche?

11. C. Intel’s problem: maintaining compatibility in x86 chips • Compatibility buys slack with customers • Do not need to be quite so near the frontier • No need to rewrite software • Compatibility is expensive • Compatibility may hurt performance • Avoid the costs of compatibility w/expensive investments? • Optimize design process w/design tools • Communicate w/DRAM equipment suppliers • Quality control • This makes sense IF there are sufficient revenues

12. C: A summary of Intel’s Compatibility/frontier trade-off • Technical frontier as strategic enabler • Further from the frontier --> greater risks of an unforeseen entrant or strategic inflexion point • Planning & execution eliminate unnecessary costs • Volume-driven business • Build to compatibility as a volume protector and a guarantee of demand • Why the costs of compatibility got covered through most of the 80s & 90s: bigger/better/faster sells • Q: Which anticipatory investments would a paranoid executive do?

13. C: Intel’s problem: Protecting demand hurts collaborators • Branding and trademarks • Does it protect against direct competitors? • The risk: OEM reactions & other collaborators • Developing complimentary technologies • Video, compiler, interconnect bus, testing • The risk: OEM reactions & other collaborators • Do complementors/collaborators like protecting Intel’s demand? • Symptomatic of a big issue for all platform providers

14. C: A few of Intel’s collaborators are tomorrow’s competitors • Dependence on margins for bigger chips • Bringing functionality onto chip • Trying to push standard ahead of direct competitors • How to balance internal/external motives • Always in a manager’s interest to grow • The short run temptation to be a black widow • Not in organization’s interest to burn bridges w/too many OEMs  diminishes value of chip & limits future collaborations

15. C: A summary of Intel’s collaborator/protection trade-off • Need to build value into each generation • Intel will take value from someone else who is presently a partner • These are never decisions in the abstract; everyone knows everyone else here • Collaboration today will be more difficult if Intel is viewed as short-term collaborator • How to make managers keep commitment? • Cannot promise not to reconsider every relationship

16. C: Some recent Intel strategic issues • Technical leadership & the patent portfolio • Using patents as a bargaining tool (FTC probe) • Internal info as bargaining tool (also FTC probe) • The move to smaller chips/low margins • AMD got there first • How Intel responded w/Celeron • Was this a surprise? Was this wise? • New market development • Future mismatch of mkt need & Intel’s design? • Using existing assets or moving direction toward them

17. Learning points • Learning curve • Volume-driven business • Protecting and growing demand • The frontier/compatibility tradeoff • The collaboration/protection trade-off • The paranoid executive • Anticipating industry evolution