CASE 4.

INTEL

1. Why did Intel lose its competitive advantage in the DRAM business? Was
the company correct to exit this business? What were the barriers to exit at
Intel? How were they overcome?
Why did Intel lose its competitive advantage?
Until 1983, Intel was the undisputed leader in the DRAM business but once it has
become more attractive, competitors from all around the World started entering
the market. Among them, the Japanese were the most underestimated
competitors in the DRAM business. The Japanese companies managed to reach
yields peaks closer to 80%, while the best Intel could do at that time was around
50%, although they had better economies of scale and experience. So Japanese
producers could exploit a big cost advantage on their American competitors.
Moreover, once these computer companies had more sources among which to
choose from, buyers gained more bargaining power, corroding the Intel market
share and providing benefits to the smaller, newer companies. Whats more, the
Eastern companies seized the lead in developing more powerful DRAM chips,
leaving Intel behind in the development of new alternatives. The market share
of Intel fell to the 1%.
So the strategic choice that the company had to face, was to build a new
fabrication facility at a cost of $600,000,000 for developing a new 1Mb DRAM
chip, or to exit completely the DRAM business.
What were the barriers to exit?
The first big exit-barrier to the DRAM market was the emotional attachment
within the company to this particular business. Building a 1Mb chip would seem
really challenging for everyone in the company.
Another barrier is the fact that Intel with the DRAM was thought to be the
leading company in technology in the computer industry, and an exit from this
market would have implied a loss of all the knowledge the company had gained.
Moreover, they would have lost some of their customers reliability.
Theoretically, they would even have to change most of the companys
important employees, since their competences would not have been of use
anymore in a new market.
How were they overcome?
Grove tried to remove the head of the DRAM division, replacing him with
someone else that would later be fired within a year. Then he completely
deleted the division, officially exiting the market.
So they designed a new strategy to fit into the new-born microprocessors
market, an almost unexplored area that would give the company a new
opportunity.
Was the company correct to exit this business?
Once they lose their competitive advantage, it would have been too expensive
to regain a good amount of market share and profitability from the DRAM
business. Intel was a year behind in the development cycle compared to the

Japanese companies, and the DRAM market was already mature and filled by
competitors, and was passing through a large slump brought about by the Asian
competitors. Deciding to stay in that market would have implied unaffordable
costs and no profitability. Moreover, they understood the potential in the
microprocessors business, and exploited it in the best way.
Therefore, they definitely made the right decision.
2. How secure is Intels competitive position?
During the 90s, Intel had to face the risk of the new Apple Macintosh and RISC
based chips that keep the companys future in an uncertain environment.
Spending over $5.5 billion a year on R&D, Intel managed to push the limits of
technology to a whole new level. Due to its huge scale, the company gain a
considerable leverage over equipment suppliers.
In order to avoid what happened with the DRAM and Japanese competitors, Intel
is already patenting their newest products, as well as only giving licenses to the
companies that they prefer.
Buyer Power was very low:
- Price Sensitivity is small
- Bargaining Power is small
Threat of Entry was very low:
- There are huge economies of scale
- There is an absolute cost advantage
- There is a very high capital requirement
- Product isnt so differentiable
- Intel holds hundreds of patents
- Vendors are prohibited to sell Intels specially designed product to others
Supplier Power shouldnt be a problem:
- (We dont have enough data for a deeper Supplier Power analysis)
Threat of Substitutes does not exist at this time:
- Almost every computer in the world has a microchip with the same
architecture of the Intel ones
Industry Rivalry is very low:
- The market is extremely concentrated
- The main competitor is AMD, but its far away to be a threat
- The product is not really differentiable
- Exit barriers are high
- Cost conditions foster Intels advantage

3.The generic strategy that Intel pursues in its core microprocessor a cost leadership strategy
with their manufacturing of 1103 DRAM chip;

They establish high yields and high volume in production so that the unit cost would
fall.
Low prices meant that DRAMS would be used more widely among computer
manufacturers.
Due to a manufacturing problem that only intel had knowlegde of how to solve, their
chips were in high demand. With the advantage of economies of scale existing meaning

the cost of production of each unit was falling everyday, Intel were able to produce high
volumes of chips at low prices.
However, with the launch of the 80286 microprocessor in 1982, Intel seemed to change
strategy. Due to such high demand in the market for a faster chip, Intel decide to use a
differentiation strategy.

They cut the number of licenses down to four in order to concentrate the number of
competitors
They run an extensive marketing and sales campaign, Checkmate, which is successful
in capturing more computer manufacturing companies.
Thier prices are set to premium mainly as they know they are in high demand.

Following on from this point, there is yet more demand for faster and more powerful chips.
Intel produced the i386 in october 1985, however IBM are reluctant to comply and produce a
computer which is compatible to the i386. Therefore, Compaq take full advantage of this
situation and surge into market leader position in 1986, using the i386 by Intel. Sale revenues
and profits are at their highest for Intel here. They use a cost leadership strategy;

They build two or four processors into this chip. This gives them specialization and
better performance. Initially, they price their chip at premium prices as they know that
their product is in high demand.
As manufacturing yields improve, they are able to drop their prices, giving themselves
cost leadership advantage.