1. Introduction
Intel Corporation (Intel) is a semiconductor chipmaker, supplying advanced technology solutions for the computing and communications industries. Intel’s products consist of microprocessors, chipsets, motherboards, flash memory, and communications infrastructure components (including network and embedded processors), wired and wireless connectivity products, products for networked storage, application processors, and cellular baseband chipsets. It was founded in 1968 and first competed in the SRAM, DRAM, and ROM markets. The company operates in North America, Asia Pacific, South America, Australia, Europe and Africa.
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Nearly everyone is aware of Intel. It is the world’s fifth most valuable brand valued at around $35 billion. Most of the world’s personal computers are driven by Intel microprocessors. By concentrating on producing great microprocessors Intel was able to leave its competitors behind. The company invested billions of dollars in highly productive manufacturing plants that could produce more processors in a day than some of their rivals could produce in a year.
Intel microprocessors were first produced in 1971, and eventually grew to be their core product in the 1980’s. Intel began putting its microprocessors into personal computers for IBM and Compaq, which cemented its position as a key processor supplier. Intel introduced its first “Pentium” chip in 1993, which would grow to be a very popular and long lasting line. It also started its famous “Intel Inside” advertising campaign in 1990. In 2000, Intel had almost a monopoly on the processor market. However, after 2000, PC demand slowed as consumers turned towards cheaper systems. As a result, AMD experienced rapid growth with its low-end strategy. AMD would eventually become Intel’s biggest rival.
2. Analysis the Business level strategy of Intel
2.1 Identify the current strategies of Intel’s microprocessors
Wheelen and Hunger (2010) defines that business strategy focuses on improving the competitive position of a company’s or business unit’s products or services within specific industry or market segment that the company or business unit serves. According to Porter, business level strategies can be classified into the following types: (1) Cost leadership; (2) Differentiation strategy; (3) Focus strategy and (4) Integration strategy.
Moreover, Bowman (1995) introduces competitive strategy options based on the principle that organizations achieve competitive advantage to provide value to the customer by satisfaction of their needs. As with Porter’s Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. There are six core strategic options:
‘No frill’: likely to be segment specific.
Low price: risk of price war and low margins/need to be a ‘cost leader’.
Hybrid: low cost base and reinvestment in low price and differentiation.
Differentiation:
Without a price premium: perceived added value by user, yielding market share benefits.
With a price premium: perceived added value sufficient to bear price
Focused differentiation: perceived added value to a ‘particular segment’ warranting a premium price.
Increased price/standard: higher margins if competitors do not value follow/risk of losing market share.
Increased price/low values: only feasible in a monopoly situation.
Low value/standard price: loss of market share.
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The Strategy Clock- Adapting from Cliff Bowman, 1995
The competitive advantage categories which best fit Intel’s microprocessors are the differentiation strategy. The differentiation strategy involves providing consumers extra value-added features. Intel uses speed, innovation, and manufacturing techniques as bases of uniqueness. Intel has created lots of different types of chips and software and then combined them together into platforms. A platform is an integrated set of proven technologies designed to work together. They provide people and businesses with improved communications and computing capabilities. These platforms will enable Intel to bring added value for consumers, win a larger share of consumer expenditure and increase revenue. Intel is in a position to charge a premium for the platform technologies; thus, consumers are indeed getting features not offered by the competition. Also, following the invention of the microprocessor in 1971, Intel was able to capture value because of its uniqueness and technological lead. In the early years, not only the patents, but also the secrecy about its manufacturing processes protected Intel’s uniqueness, and allowed the company to avoid competition.
Intel has been one of the world’s high achieving businesses. Its global appeal is not surprising. In recent years almost every time you opened up a laptop you would see that it was labeled ‘Intel® Inside’. Seeing this, the user knew that they had a high performing and reliable computer. However, Intel has moved on. The problem with simply being a producer of processors is that other firms can move into your market. Once they produce similar products the only way you can differentiate is by offering lower prices. Intel also falls into the cost leadership strategy because Intel has invested in building manufacturing facilities around the world to produce its products. The lower end product such as the Intel’s Celeron is a standard product with relatively little differentiation and is acceptable to the majority of the computer users in the world.
Currently, Intel and AMD are locked in a battle over multi-core processors. The release of Intel’s Core2Duo line gave them a temporary advantage, as these processors were both more powerful and less expensive than AMD’s Dual Core Athlon processors. This forced AMD on the defensive, as they had to drastically slash prices in order to keep up with Intel. Intel still has a technological advantage over AMD, but AMD is trying to fight back, and has recently released a large lineup of Quad-Core processors that they hope will give them an advantage. However, Intel fired back by announcing its own line of new Quad-Core processors and a new Six-Core processor that will ship at the end of the year. Intel has also been doing well with server processor sales. It has been supplying chips to companies like Google and Amazon for advanced tasks like cloud computing. Intel in recent years gained huge advantage over AMD with its introduction of dual-core which has made its processors both cheaper and more efficient.
2.2 Evaluate Strategy for Intel’s processors
2.2.1 Strengths
Strong market position and brand image
Intel is the world’s largest semiconductor chip maker, developing integrated digital technology platforms for the computing and communications industries. The company has a strong market position in each of the three sub-segments of the microprocessor business: desktop, mobile, and server. Key brand names for Intel include: Core 2 Duo, Pentium D and Pentium 4 in desktops; Core 2 Duo, Core Duo and Pentium M in notebooks; and Xeon and Itanium in servers. The company accounted for 81.8% of global microprocessor revenue, compared to 80.9% share in the third quarter of 2008. Unlike most of its competitors and the industry decline, the company managed a lower decline in its revenues.
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Intel has a strong brand image, which it has successfully established despite operating in an industry where products are increasingly becoming commoditized. More importantly, the company has managed to attract the attention of consumers through its’ Intel Inside’ brand campaign. The business week’s Inter-brand Best Global Brands 2008 has ranked Intel at the seventh place with a brand value of $31,261 million (Intel’s website). The company’s strong market position and brand image enhances its investor confidence. Intel has a strong market position and brand image, which increases its bargaining power and enhances investor confidence.
Advanced technological capabilities
Historically, Intel has been a leader in introducing new technologies, as well as pioneering new manufacturing processes. Having the most advanced manufacturing technology provides obvious benefits, including lower cost and the ability to produce higher performance products. Intel plans to introduce a new micro architecture approximately every two years and ramp the next generation of silicon process technology in the intervening years, giving the company a roadmap for continuous improvement in its major product lines.
Strong technological capabilities have helped Intel accelerate product development. The company’s new product launches in 2007 included Intel Core 2 Quad, Intel Core 2 Duo processors, Quad-core and dual-core Intel Xeon processors, and Intel Core 2 Duo mobile processors manufactured using 45nm technology. This strong technological capability enhances the company’s product portfolio.
Strategic collaborations
The advantage may not always be achieved by competition alone; collaboration between organizations may be a crucial ingredient in taking advantage or avoiding competition. Intel has strategic collaborations with various prominent technology players (Johnson G. & Scholes K., 2002). Intel has a broad base of partners to launch new services, reach more customers, and improve the expertise in niche areas. The company has partnerships with major players including Asustek Computer, Comstar, Cisco, Fujitsu, Dell, Compaq, IBM, Microsoft, Micron Technology, Sprint, Verizon, and Yahoo!. Based on these joint efforts the company launched various significant products. The company’s strategic collaborations with major global companies enable it to expand its customer base and product portfolio, and acts as a competitive advantage.
Focus on research and development
Intel has a strong focus on research and development (R&D) operations. The company has invested a significant amount on product development. The company reported the R&D expenses of $5.7 billion, $5.8 billion, and $5.9 billion during FY2008, 2007 and 2006, respectively (Intel, annual report 2009). The company’s R&D efforts focus on advanced computing, communications, and wireless technologies. It also concentrates on energy efficiency by developing new micro architectures and advanced process technology. As a result of these, Intel has launched significant products and advanced technologies.
In addition, Intel plans to invest $12 million in Intel Visual Computing Institute, a new research center at Saarland University in Germany, to explore advanced graphics and visual computing technologies. The company is developing 32nm process technology, next generation process technology, and is planning to begin manufacturing products on that technology in the second half of 2009. Significant focus on R&D serves as an edge to the company, providing it with new and innovative products.
2.2.2 Weaknesses
Customer concentration
Intel is dependent on a few customers for a significant proportion of its revenues. In 2007 and 2006, Dell accounted for approximately 18% and 19%, respectively, of the company’s total sales, and Hewlett-Packard accounted for approximately 17% and 16%, respectively. A substantial majority of the sales to these customers consisted of products from Intel’s architecture business. Such a high dependence on a few customers reduces the company’s bargaining power and increases its business risk.
3. Report to the Board of Directors
3.1 Findings
Besides the strengths and weaknesses of Intel’s microprocessors strategy as be identified early, some opportunities and threats for its business unit are briefed in SWOT analysis below:
Growing global semiconductor market
The global semiconductors market has shown positive and healthy growth rates in recent years, and this performance is set to continue. The global semiconductors is forecast to grow at a CAGR of 9% for the five-year period 2006-2011, which is expected to drive the market to a value of $370.5 billion by the end of 2012. As the number one player in the semiconductor industry, the company is well-positioned to capitalize on this opportunity (Datamonitor, 2009).
Expanding PC market
The global PC market, comprising both laptop and desktop computers, is rapidly expanding. The market’s volume is expected to rise to 260.8 million units by the end of 2011, representing a CAGR of 7.2% for the period 2006-2011. The performance of the market is forecast to accelerate, with an anticipated CAGR of 6.1% for the 2006-2011 periods, which is expected to drive the market to a value of $220.1 billion by the end of 2011. This expanding PC market provides an opportunity for the company to expand its revenue base (Datamonitor, 2009).
3.2 Recommendations
Basing on strengthens and weakness found from strategy for Intel’s microprocessors, some recommendation will be given to narrow its weakness and boost competitive advantages for this strategic business unit.
Differentiate Product via Bundling and Specialization
AMD is capable of imitating or improving on most of Intel’s technologies. Without such technological barriers, competition often degrades into price wars, causing both companies to lose profit. It can avoid costly price wars by differentiating its products towards the specific orientations of the customer. This can be done by bundling components into platforms, as it has successfully done with the Centrino platform, and also developing technologies fit the specific needs of a certain customer group, such as with the vPro technology which enhances security for businesses. Unable to gain dominance in the general markets, AMD is likely to concentrate efforts in the niche graphic market for gaming machines. In the short term, Intel should try to keep up at least technologically in the graphics end by cooperating with NVIDIA, since falling behind would potentially allow AMD to establish a reputation in this high prestige market first that can proliferate to other sectors.
Control Low-End and Emerging Markets
The cost effectiveness of the Atom processor makes it Intel’s best weapon for waging an aggressive campaign against AMD in the market for low-end laptop processors. Among all sectors, the low-end market was one of Intel’s weakest points both because of the lack of focus as well as the success of the AMD Athlon 64 processor which cost less than Intel’s equivalent Core 2 Duo and performed better than Intel’s low-end Celeron. But now armed with a cheap high performance processor better suited for this market than anything AMD can immediately offer, Intel should take this golden opportunity to “Atom” bomb the low-end market before AMD can respond in kind.
In the emerging markets of affordable Mobile Internet Devices and classmate PC’s targeted toward first time users, the threat of competition is even higher due to Intel’s lack of a well-established position as in the traditional PC market relative to the numerous competitors, but the potential for growth here is incredible. Intel must plant a strong foothold early by continually improving the Atom processor and developing strong ties with manufacturers of these products.
Reducing bargaining power
From a strategic standpoint, we can see that chip manufacturers don’t have a strong dependence on any particular PC assembler, nor should they be worried at this moment about an increase in buyer power that requires the creation of artificial competition. However, Intel should pay attention to a few changes in the industry structure that might make it interesting to integrate forward.
A joint-venture of an IBM, Motorola et al. to produce microprocessors was recently announced. This is a risk for incumbents in the industry – particularly Intel – since the entry of technical capable players may lead the industry to “commoditization”. A third player may destabilize the “follow the leader” game being current played in the industry, breaking the coordination between players and, therefore, leading to the loss of bargaining power against buyers (Rebecca, 2005).
In conclusion, for the desktop market, Intel should attempt to leverage its current dominant position, while continuing development on the integrated chipsets through intensive research investments. In the laptop market, however, Intel should focus its resources on developing energy-efficient performance technology, and differentiate products via bundling and specialization. It should also control low-end and emerging markets as well as consolidate its reputation and customer base.
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