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INTEL CORPORATIONProduct Transitions and Demand

Generation

Feryal Erhun

CERC, Stanford University


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Life cycles of most electronic goods

are well under one year

Semiconductor industry has been

following the Moore’s law andlaunching products every 18-24

months

Result: Frequent product

rollovers and managing

multiple product

generations simultaneously

Rate of Innovation Is Increasing and Product Life

Cycles Are Shortening

22nm

2011

32nm

2009

45nm

2007

65nm

2005

90nm

2003


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Desktops Laptops EmbeddedSmartphonesNetbooks Personal

Devices

Smart TVs

180 nm

130 nm

90 nm

65 nm

45 nm

32 nm

22 nm

1998 2000 2002 2004 2006 2008 2010

D em an d V ol um e

Vulnerable Time to

Fail or Lose Market

Share


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40% of Product Transitions Have Led to

Product Failures …

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Company Problem Consequence

Sega Product over-hype (excessivemarketing)

Loss of market share

IBM Overly optimistic sales forecast Excess inventory

Ford Excess inventory of old model Delayed new model

introduction

Ashton-Tate

(dBase IV)

Delay due to technical problems Company sold to Borland


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… Worst Case: Company Failure

Released in 1981

Weighed 24 lbs

Cost $1,795

Featured A 5-inch display

64 kilobytes ofmemory

A modem

Two 5 1/4-inchfloppy disk drives

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Osborne I – The first portable computer


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Industry Realities

600 product changes/week

Best-in-class “on-time” NPI under 40%

80% of NPI attempts require product content

negotiations Product change timing issues increase inventory

10%-20%

Change-driven component shortages reduce capacity 10%-15%

Inability to consolidate buying increases COGS

5%+


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Product transition (or product rollover) is the process of

introduction of new product and the eventual displacement of old

products.

Old product

Time

SalesNew product

Planned new

product launch

What Is a Product Transition?


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Demand Risk Factors

Product capability Perceived value/quality of new product

Overlap of market segments with old product

Familiarity of new technology by customer base

Market competitiveness Likelihood of new product introduction by competitors

Likelihood of price-cuts by competitors of existing products

Degree of brand loyalty


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Amazon vs. the Tablet Market

The Nook Tablet is a tablet computer by Barnes & Noble. Became available on November 17, 2011; retails at $249.

Barnes & Noble is offering discount prices on its Nook readers and tablets to buyers who signup to subscribe to the New York Times or People magazine.

The Nook Tablet will be offered at $199, a $50 price cut, until March to those who buy a Nooksubscription to People. That puts Barnes & Noble tablet at the same price as Amazon's Kindle

Fire. – Bizjournals.com 1/9/12

Kindle Fire is a tablet computer version of Amazon s Kindle e-book reader Released on November 14, 2011; retails at $199.

Estimates of the device's initial BOM ranged from $150 to $190.

Make money on the selling of digital content on the Fire, rather than through the

device itself

The iPad is a line of tablet computers by Apple

Introduced on January 27, 2010; retails starting at $499.

The latest report from Apple’s Asian suppliers is that the company will introduce two

new versions of its iPad late in January and will cut the price of its current iPad 2.

It also said that Apple will take on Amazon s $199 Kindle Fire with a price cut on itsiPad 2. – Bizjournals.com 12/29/11


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Demand Risk Factors (cont

d)

Information accessibility Availability of timely sales information

Availability of inventory status of old product

Technology change Time to market pressure, technology gap, need for new

process technology Continuity of design teams across product generations


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Supply Risk Factors

Value chain alignment Number of supply chain levels, number of suppliers, number of new

suppliers

Proximity to demand or supply base, partnership relationship with

supplier and customer Internal execution

Capacity Different production processes required to manufacture old and new

products

Extent to which production equipment can be shared between old and newproducts

Design of new product Design for manufacturability, modularity


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Transition Factors


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Intel

s Supply Chain Complexity

High fixed cost environment Building a fab costs $6B

Less fragmented industry

Long lead times Two to three years to build the facility

Manufacturing lead time 13 weeks

Built to forecast Long term and short term planning for production

Network of global operations

Four geographies: Americas, Europe, A/PAC, Japan


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Year 2000 Snapshot

February 2000: AMD launched the 1 GHzprocessor, and created a buzz in the industry.

March 2000: Nasdaq index crossed 5000 mark

November 2000: Intel introduced P4 Pentium III processor’s architecture was incapable of

scaling much beyond 1 GHz.

Intel needed a new scalable product not only to compete

with AMD, but also to cater to the higher speeddemands of the market.

March 2001: Nasdaq index fell below 1900

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Signals for Strategy Revision

Sales of P4 lower than expected

Sales of PIII higher than expected

Value chain alignment problems Economic environment


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Transition Factors for P4

ProductPricing

Timing

MarketingIndicator

Value Chain Alignment

Competition

AdoptionRate

Environmental

Indicators

ProductCapability

Internal

Execution


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Decisions

Demand side decisions:

Pricing:

Rethink pricing of the P4 processor relative to Pentium III?

Offer bigger incentives and rebates instead of cutting the prices?

Marketing:

Advertise P4 more intensely?

Timing and roadmaps:

Accelerate the introduction of the 2.0 GHz processor and the

cheaper SDRAM-based chipset?


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Decisions (cont

d)

Supply side decisions:

Internal execution:

Drive internal improvements through die shrink

conversion faster? Change current capacity allocation between PIII and P4?

Value chain alignment: Move to DDR-SDRAM immediately?


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Reduce P4 Price?

Pros Cons


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Reduce P4 Price?

Pros Cons

Triggers sales

Quick switch ofcustomers from PIII toP4

Can be implemented

instantly

Lowers new product profit

margin Might kill PIII instantly

leading to excess inventory

Once priced at low price

point, difficult to raiseprice in future


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Incentives and Rebates for P4

Pros Cons

Triggers sales

New product can still bekept at a higher absoluteprice point

Can be controlled by

changing rebates andincentive schemesdepending on sales

Can be implemented

instantly

Identifying a proper

incentive scheme isdifficult

The impact may not be aseffective as intended


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Advertise P4 More Intensely?

Pros Cons


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Advertise P4 More Intensely?

Pros Cons

More product awareness–

strengthens brand too Can trigger sales if

targeted to right segmentat right time

Can be implementedsoon

Might lose control over PIII

sales with customersuddenly switching to new

Not much effective if keyunderlying issue is high

price or low productperformance


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Product Roadmap2.0 GHz Processor and the SDRAM-based Chipset

Pros Cons


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Product Roadmap2.0 GHz Processor and the SDRAM-based Chipset

Pros Cons

Triggers sales

Gain lead overcompetition

Disrupts future roadmaps

First-generation P4 is killedbefore its ROI is recognized

Additional pull-inexpenses and costs

Profit margin on first-generation P4 is lost bylaunching a new cheaperproduct


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Internal Improvements

Pros Cons


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Internal Improvements

Pros Cons

Triggers sales

Gain lead overcompetition

Disrupts future roadmaps

Additional pull-inexpenses and costs


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What Should Intel Do?


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Transition Playbook

Map out in advance primary strategy, risks, andcontingency strategies

Explore ways to minimize risks

Define and monitor key supply chain indicators Coordinate plans and actions across multiple

functions in alignment with pre-defined

strategies Invoke contingencies as needed

Measure performance


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Example of Dynamics of Dual Roll

Dual roll by price

Excess inventory

of old product

Delivery delay

of new product

Out of stock

of old product

Switch to other dual roll

No action

Adjust new price

Disposal by markdown

Silent dual roll

Delay intro of new

Primary Strategy

Cal l the play

Risk Resolut ion

Events after play ini t iated

Cont ingency Strategy

Modi fy the play


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Demand side impact:1. Record demand for the new SDRAM compatible platform(exceeded expectations)

2. RDRAM platform sales declined over the followingquarters

3. Intel’s products regained the lead in the market

Supply side impact:1. Availability of Intel’s SDRAM platform components was

tight, due in large to the die size2. Supply returned to normal balance 1-2 quarters after DDR

platform launch3. Second generation P4 product helped store that balance

Impact of Breakaway Campaign


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Summary

Product transitions can be a source of competitiveadvantage.

Product transition requires careful design of primaryand contingent strategies.

Primary strategy based on tight control of demand andsupply risks.

Successful contingent strategies require agile supply

chains: information integration, design postponement,production flexibility, quick response, demandgeneration, and sound contingency planning.


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Key Lessons Learned

Ability to drive a new standard is affected by the strength of themarket and the strength of the competition

Despite dominant market share, attention towards the voice ofcustomer and supply chain partners’ suggestions is important for

success of any product (eg. RDRAM vs. DDR) Close coordination between supply (planning) and demand

(marketing) side is very crucial during transitional periods tomark the success of new product in the market

Need to adopt both proactive as well as reactive strategies duringproduct rollovers

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