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Teaching Note for Case Intel Beyond 2003: Looking for its Third Act, SM-106TN
Teaching Note forIntel Beyond 2003: Looking for its Third Act
INTRODUCTION
Position in the Book
This case opens the part of the book entitled “Convergence or Collision – Take I: Computing Meets Cellular Phone and Consumer Electronics.” It helps set the stage for the discussion of the other cases in this part of the book (Nokia, Samsung Electronics, Hewlett Packard). In fact, some instructors may want to examine in the discussion of each of these other cases later on what the implications are for Intel of the strategy and action of these different companies.
The case highlights each of the three key themes of the book. It raises issues about how Intel’s broadening of its corporate strategy requires it to interact differently with the environment (theme I); for instance, it is unlikely that Intel will be able to dominate the communications and wireless communications segments in the same way as it was able to do in the PC market segment (P-controlled change). In fact, even in the core microprocessor business there are some indications that P-controlled change may be in danger of morphing into limited change or even P-independent change. The case also shows the difficulty of aligning strategy and action when the company attempts to diversify its product-market position (theme II); and it shows how the interplay of the new corporate strategy and industry change may once again require a corporate transformation (theme III).
Overview of the Case
The case describes the first five years of Intel’s Epoch III - Intel the Internet Building Block Company -, during which Craig Barrett was the company’s CEO. Already from before starting his tenure as CEO, Barrett had been concerned that the growth of the PC market segment would not be sufficient to support Intel’s profitable growth objectives in the future. At the same time, he was concerned that the company’s extremely successful microprocessor business had become like a “creosote bush,” a desert plant that poisons the ground around it, thereby preventing other plants from growing near by. Consequently, early on in his tenure Barrett initiated company-wide initiatives to broaden Intel’s technology base, expanding the company into the networking, communications infrastructure, and wireless communications industries. Barrett saw
opportunities for Intel to capitalize on the convergence between computing and communications industries. This convergence was happening, in part because of the increased demand for intelligent appliances in communications market segments and the potential economic benefits of bringing Moore’s Law to bear on the design and manufacturing of components for existing and new appliances in these market segments. In order to change the mentality and augment the skill set of Intel’s senior leadership, Barrett also introduced a set of courses on “Growing the Business.” These courses exposed Intel’s senior leadership to ideas on managing internal corporate venturing, ecosystem development, and disruptive technologies. Intel began to conceive of a new strategic process – the “green” process – to complement the strategic process associated with the core business, which became known as the “blue” process. (The green and blue processes correspond to the autonomous and induced strategy processes, respectively, in the framework of the strategy-making process in established companies discussed in Strategic Dynamics, pp. 16-19.)
As it entered new areas, the company needed to develop new technical and competencies and new organizational structures from those that made the company successful in PC microprocessors. Intel needed to bring in from the outside many new technical and business competencies in addition to developing new ones internally, so the company faced many difficult strategic issues associated with acquiring and integrating other companies. The drive toward expanding the scope of the company through developing “green” businesses, however, became perhaps somewhat impulsively turbocharged by the Internet boom of the late 1990. The Internet boom generated a plethora of new ideas, potential new products and services and associated market segments, and new companies, many of which eventually turned out to be unviable. Like many other companies, Intel also fell prey for a while to the “grow big fast” fad that developed around the Internet boom, and pursued several businesses with, at least in retrospect, questionable links to its core competencies. By 2003, the company had learned several key lessons from the hectic previous five years and seemed to have “reined in the chaos” that had ensued as a result of relaxing its traditional tight discipline in funding business opportunities.
While Intel needed to extend itself into new business areas, the core business was also changing rapidly. As a result of its sole source strategy in the PC market segment since the mid-1980s, Intel had become a world-class manufacturing company, regularly investing billions of dollars in new plant and equipment. CEO Barrett’s background was in manufacturing and he strongly believed in staying “one generation ahead” of all Intel’s competitors in process technology and manufacturing. Chairman Andy Grove went so far as to say that “capacity is strategy.” Establishing Intel globally as the architectural leader, innovator, and premier manufacturer in major new geographies, especially China, India, and Russia, became one of Barrett’s top priorities. In the US, however, AMD had become a more capable competitor in the PC market segment, especially on the low end. By 2003, Microsoft, Intel’s major partner and complementor in the PC market segment, had weathered the late 1990s storm of government prosecution and remained the undisputed sole source of both operating system software and major applications in the PC market segment. Dell had been able to perfection its strategy of distributing “Wintel” technology based on outstanding operational excellence and had grown PC market segment share to the point that its bargaining power was significantly enhanced. In addition, it was becoming clear that users were no longer willing to pay more for increased processing power (even though they continued to like it). Hence, the core PC business needed to search for new sources of value
by broadening its view of “performance” and getting a better understanding of consumers’ “usage models.” This seemed to drive Intel to move beyond its traditional component orientation toward a “platform” orientation, which implied vertical integration. The increased importance of integrating communications capability in “mobility” computing was a first major manifestation of the need to move toward “platform” development. The attendant specialized technical requirements of the chips used in laptops and notebooks, in turn, seemed to be driving mobile and desktop computing apart.
In the enterprise computing market segment, Intel had been successful on the low-to-mid end with its Xeon product line and was trying to gain a position in the high-end of the market segment with its new IA-64 product line (Itanium), but penetration had been slower than anticipated and the competition of both AMD and incumbent players IBM and Sun was intense. Hence, here too, Barrett and Intel faced significant strategic challenges.
How to maintain its market-driving strategy that had accounted for much of its success during Epoch II, and how to balance the challenges of defending and further exploiting the core businesses while successfully expanding into new ones, are among the major strategic leadership challenges highlighted in the case. With extensive interview data of the leaders of all of the major functional areas and the various product groups, as well as of CEO Barrett, COO Paul Otellini, and Chairman Andy Grove, this case offers an unparalleled opportunity to examine these strategic leadership challenges.
MAJOR THEMES
1. Let chaos reign, then rein in chaos
2. Convergence of computing and communication
3. Market-driving versus market-driven strategies
4. Capacity is destiny
ANALYSIS
Preparation Questions:
1. By 2003, what key lessons has Intel’s top management learned from the previous five years?
2. Beyond 2003, what key strategic challenges does the IA core business face?
3. What is the strategic logic of Intel’s diversification into communications/networking and wireless communications? What are the key strategic challenges in capitalizing on the convergence?
4. By 2008, what will Intel look like as a corporation? What are the possible outcomes of the combination of external and internal strategic forces?
The discussion can follow an elaboration of the preparation questions assigned to the students in advance of reading the case.
Discussion:
1. From 1998-2003, what key lessons has Intel’s top management learned?
This period encompasses two years of high growth and two years of severe recession for technology companies, including Intel, which created turmoil for the company that impacted many of Intel’s established practices.
- Importance of execution (role of the COO) and focus.
While CEO Andy Grove had been Intel’s top strategist during Epoch II, COO Craig Barrett had been “Mr. Inside,” in charge of flawless (most of the time) execution of the corporate strategy. When Barrett took over as CEO in early 1998, he did not immediately appoint a new COO and execution started to suffer, leading to a number of uncharacteristic missteps in key products. For instance, Barrett says, “We stumbled and took our eyes off the ball.” Barrett refers to problems in motherboard quality that led to product recalls and changes in technology design practices (“leapfrog teams”) that enabled competitors to pull closer to Intel in its core market. This is not to say that the failure to appoint a new COO was the only reason for the execution problems. For instance, Barrett cites other factors such as increased globalization that made execution more difficult.
- Foundations for diversifying: strategic position and distinctive competencies.
The period from 1998-2003 was a time of tremendous diversification for the company. Intel went thought three restructurings in three years. Along with these restructurings, the company spent several billions of dollars buying businesses that were in some instances only peripherally related to its traditional areas of distinctive competence. However, Intel quickly learned that it had no particular competence in businesses such as Online Services. The company fairly quickly sold or closed many of these businesses, which had been performing poorly in the marketplace (“road kill”). It also found out that OEM customers would resist forward integration into systems. So, while Intel successfully entered into the “white box” server market segment, it soon withdrew under customer pressure, but after having enticed its OEM customers to actually enter the segment. (See comments by John Miner and Sean Maloney.)
- Who we really are; What we really can do best.
These experiences forced the senior management to consider both where they thought the future was going, and what skills the company had to meet new opportunities. By 2003, Intel was clearly falling back on its silicon-based competencies, and wanted all new business developments to draw on these competencies. Paul Otellini points out that Intel will have failed if it is not able to integrate the computing and communications businesses within the relatively short term. (Also see comments by John Miner). Barrett speaks of the four-legged stool that will support the company going forward: R&D; capital expenditure; branding; and venture capital investments through Intel Capital. These will support Intel’s efforts in five areas: Mobile, Desktop and Server-Enterprise microprocessors as well as handheld devices and network and communication infrastructure. Going forward, Barrett has rallied the company around an easy to understand mission statement: “Silicon Leadership, Architectural Innovation, and Worldwide Opportunity,”
- Exploiting the “global” opportunity.
As Intel contends with these challenges, it must also deal with its increasing globalization. Barrett views international markets as major growth opportunities for Intel and has invested a lot of his time visiting these markets. An increasing percentage of its revenue is derived outside the United States. Further, more and more R&D, design and manufacturing will be done at locations outside of the U.S. The company faces challenges integrating these activities with teams at locations around the world. In addition, the company recognizes that it will have to increase the numbers of non-U.S. citizens in its senior management ranks as well as internationalizing it intake of entering recruits.
- Building strategic leadership capability for a “broader” Intel.
To execute the new mission, Intel must refine how it selects, trains and evaluates leaders. During Epoch II, Intel’s strategy was extremely narrow and could be set almost single-handedly by the CEO (Andy Grove). The other top and senior executives, from Craig Barrett down, were mostly involved in executing the corporate strategy. As Intel’s corporate strategy broadens beyond microprocessors for the PC market segment, the company will develop multiple distinct businesses, each of which will require general management talent to set the business-level strategy. As Barrett observes in the case, “In the 1990s, we were very vertical around desktop microprocessors…Now we are migrating to a more horizontal structure.” Hence, Intel must develop new general management talent that can develop appropriate new business strategies, to be based on sophisticated understanding of new “usage models” for different types of devices (see below). At the same time, the company will have to maintain strategic and operational integration among increasingly differentiated design, manufacturing, sales and marketing groups.
2. Beyond 2003, what key strategic challenges does the Intel Architecture Group (IAG) core business face?
The case illustrates several key strategic challenges the company faces in each of its core market segments (desktop, mobile, and servers) in the near future. Some of the most salient challenges are discussed below.
- How well are Intel’s desktop PC, mobile PC, and server businesses doing in 2003? What is the relative share of desktop, mobile, and servers in Intel’s core business?
--Desktop PC. Although it is under stress from the technology recession, Intel’s desktop PC group continues to earn the overwhelming majority of the company’s revenue. Exhibit 1 illustrates the financial results for each of these activities. These results show that over 80 percent of Intel’s revenue is derived from IAG’s activities. Intel, however, faces several important strategic issues in the PC market segment: Average sales prices for PCs continue to decline; the competitive challenge of AMD is increasing; Dell’s bargaining power is increasing; and Microsoft seems to be able to continue to capitalize on its monopoly position and maintain its strong bargaining position. Exhibit 9, which shows the distribution of the PC industry profit pool, paints a somewhat distressing picture from Intel’s point of view. It poignantly and urgently raises the question of what Intel can do to regain its share of the PC industry profit pool in the near future.