Intel Outside

An Analysis of the Intel Corporation

Vitaliy LeeISM 158

March 4, 2004

Introduction

I. Summary of the PC Component segment of Semiconductor Industry

a. Industry Profile

b. Typical Industry Competitive Strategy

c. Porter Model Evaluation

d. Globalization of the Industry

e. Importance of IT to the Industry

II. The Intel Company

a. Company Profile

b. Market and Financial Performance

c. Competitive Strategy Statement

d. Significance of Information Systems

e. Strengths and Weaknesses of Intel

III. Structured Analysis of Information Systems Use

a. Strategic Option Generator

b. Roles, Roles and Relationships

c. Redefine/Define

d. Significance of Telecommunications

e. Success Factor Profile

IV Final Analysis

a. Success of Business Strategy and I/T Use to Date

b. Have the Above factors positioned them for the Future?

Bibliography

Introduction

The goal of this paper is to analyze the PC Component segment of the Semiconductor Industry with a focus on analyzing the Intel Corporation as well as the significance of IT to the success of the company. The paper is divided up into four different sections. The first section analyzes the industry overall. It looks at the structure of the industry, competitive strategies within the industry using Porter analysis, and the importance of information technology to the industry. The second section deals specifically with Intel. It looks at the company profile, its business leaders, financial performance, and significance of information systems. The third section is a structured analysis of information systems use at Intel. Several key concepts regarding information systems are examined. The last section is a final analysis of Intel’s success up to date and examines how well the company is positioned for the future.

Section I - Industry Summary: An Analysis of the PC Component segment of the

Semiconductor Industry

A. Industry Profile

It is important to concretely define the industry that will be analyzed. Defining it as the Semiconductor Industry would be much too broad, while defining it as the microprocessor industry would be much too narrow. What is meant by the PC Component segment are these product categories: microprocessors, memory, graphics chips, motherboards, and networking hardware. From now on, that industry will be referred to as the PC Component industry.

With globalization, the world is becoming a smaller place and thus companies are more frequently relying on information systems for efficiency, effectiveness, and competitive advantage. This increasing dependence on information systems is the driving factor for the exploding expansion in the use of personal computers and other electronic devices. This means there is an increased demand for semiconductors and more specifically for PC components. In order for us to understand Intel’s success in the PC component industry, we must first look at Intel’s dominance in the broader picture of the Semiconductor Industry.

Because the Semiconductor Industry is relatively new, it is useful to look at the history of the industry. Semiconductor materials were studied in laboratories as early as 1830. By 1874, electricity was being used not only to carry power, but to carry information. Radio receivers required a device called a rectifier to detect signals. Ferdinand Braun used the rectifying properties of the galena crystal, a semiconductor material composed of lead

sulfide to create the cat’s whisker diode. Thus was born the first semiconductor device. Until 1959, electronic components were discrete, and packaging each component and hand wiring components into circuits was very inefficient. More efficient ways of making circuits were developed by the military. In 1959, a process called planar technology was developed by Jean Hoerni and Robert Novce. This process allowed various layers to be diffused onto a surface of a silicon wafer to make a transistor. This process replaced hand wiring by allowing metal interconnections to be evaporated onto the flat transistor surface. Thus the integrated circuit was developed and is now a huge part of our daily life.

Figure 1: Revenues for the Semiconductor Industry (1999 – 2003)

Figure 2: Net Profit for the Semiconductor Industry (1999 – 2003)

As we examine Figure 1 and Figure 2, we can quickly analyze the industry’s financial situation. During the last three years, the Semiconductor Industry has seen the worst cyclical downturns in their recent history. Depressed by the dot-com bust, the industry has finally been showing signs of recovery. Capacity utilization was pushed into 80 percent range as semiconductor shipments have increased during the summer months of

2003. In 2003, the worldwide Semiconductor Industry grew 11.8 percent mainly because of a favorable supply environment due to increased fabrication utilization and falling

inventory levels. With revenues totaling over $107 billion, the industry is finally recovering from stagnant levels of performance in the last several years. It is expected that the market will grow 18 percent in 2004 and then settle down to a compound annual growth rate of 12 percent with projected revenues reaching $155 billion in 2008. Personal computers continue to be one of the leading consumers of semiconductors by expending around 30 percent of the chips sold worldwide. In 2003, PC shipments reached around 152 million units and that number is expected to grow 10 percent in the coming year.1 The PC Component Industry is a rather complex industry that has several parts. Different product categories such as microprocessors and memory make up the industry, but what makes it complex is that different companies in the industry compete in one category, but are not major competitors in other categories.

Company 2003 Revenue

2003 Market Share (%)

2002 Revenue

2002 Market Share (%)

2003-2002 Growth (%)

Intel 28,050 16.0 25,400 16.2 10.4Samsung

Electronics 10,320 5.9 8,630 5.5 19.6

Renesas Technology 7,516 4.3 NA NA NA

Toshiba 7,422 4.2 6,455 4.1 15.0Texas

Instruments 7,400 4.2 6,240 4.0 18.6

Figure 3: Revenues and Market Share of top Semiconductor Companies (millions)

Figure 3 shows the breakdown of the top companies in the industry. Overall the Semiconductor Industry is dominated by Intel, Samsung Electronics, Renesas Technology, Toshiba, and Texas Instruments, but because of the nature of the industry it would be more beneficial to look at competitors for each of the product categories.

In the PC microprocessor product category, two companies dominate the market, Intel and Advanced Micro Devices (AMD). The industry has suffered since the dot-com bust which crippled chip sales in 2001. Recent economic recovery has once again increased demand for PC microprocessors. In 2003, the PC microprocessor revenue grew 17.7 percent mainly because of the strengthening chip industry that posted a 13.6 percent increase in unit shipments. Although Intel controls a large portion of the market share, in recent years AMD has challenged Intel’s supremacy. Figure 4 compares the financial position of the two companies. 1

Company 2003 Revenue

2003 CPU Market Share (%)

2003 Profit Margin (%)

2003 Net Profit

Intel 28,050 82.6 17.1 5,000

AMD 2,900 15.8 4.7 470

Figure 4: Intel vs. AMD

1 Electronic News, “Semiconductor Industry Immortality”, October 4, 1999

In November of 2003, Intel controlled 82.6 percent of the PC microprocessor market, as compared to 15.8 percent controlled by AMD. AMD is looking to reenergize its sales by trying to differentiate itself from Intel. Recently, AMD released the first 64-bit processor to raise the bar in the industry. Intel has decided to wait for the market’s reaction to this new product, a move that might give AMD a competitive advantage in the long run. 2

Another part of the PC Component industry is memory. Looking at the dynamic RAM (DRAM) product category, Samsung is the leader. Overall revenue in the market for DRAM in 2003 was $17.3 billion. Consolidation was a big issue in 2003 as top six DRAM makers controlled around 87 percent of the revenue. Top six competitors include Samsung, Micron, Infineon, Hynix, Nanya, and Elpida. DRAM prices have been extremely low due to the PC market downturn starting in 2001, but have recently shown signs of recovery as prices crept upward. Looking at SRAM, we also see that Samsung is the market leader in this product category as well.

Flash memory has been an increasing source of revenue for the PC Semiconductor Industry. Samsung and Spansion, which is a joint venture between AMD and Fujitsu, have passed Intel as the leading makers of flash memory. Overall flash memory sales reached $11.2 billion. There are two types of flash memory, NAND and NOR. A rapid increase in demand for NAND flash cards has boosted revenues for Samsung and Toshiba. Meanwhile Intel was not able to capitalize because it only supplies the slower growing market for NOR memory. Additionally, Intel has raised prices for the NOR flash memory by as much as 30 percent. This caused customers to flock to cheaper alternatives offered by AMD, thus reducing Intel’s market share. AMD’s flash memory group reported increases of 161 percent in revenue from flash memory. 3

In recent years, the graphics market has been gaining momentum. Intel has commanded 35 percent market share of all graphics products shipped during 2003, while Nvidia and ATI controlled 25 percent and 22 percent respectively. Intel mainly controls the integrated graphics chip sets by holding on to a 67 percent market share. Nvidia is the leader in standalone graphics chips with 53 percent, while ATI has 71 percent of the mobile graphics chip market. It will be interesting to see how this part of the industry will look as competition for the consumer’s dollar heats up.

When examining the PC component segment of the Semiconductor Industry, it is most important to understand its complexity. One must understand that all companies do not compete in all product categories. Intel and AMD are the dominant companies in microprocessors, but are not big competitors in DRAM or SRAM memory. On the other hand, Samsung is the leader in DRAM and flash memory, but is not a player in the graphics product category. The structure of the industry is summarized in Figure 5.

2 “AMD still in Intel’s shadow”, Paul R. La Monica, September 22, 20033 News.com, “In a flash, Intel loses memory lead”, November 20, 2003

Figure 5

B. Representative Competitive Strategies within the Industry

It is a well known fact that overall the Semiconductor Industry is highly cyclical. The companies in the industry constantly face great fluctuations in the demand for their products. When looking at the PC Component segment of the semiconductor industry, implementing the right competitive strategy is extremely important to be a successful company in a volatile industry such as this one. Figure 6, summarizes competitive strategies (options) within the industry.

The Semiconductor Industry lives by the doctrine: “smaller, faster, and cheaper”. One of the most important factors to understand is the extremely short live-cycle of products in the PC industry. State-of-the-art components only stay that way for several months before they are replaced by newer and better products. That is why differentiation is the main strategy for the Semiconductor Industry. Companies must constantly go back to the drawing-board to come up with products that are superior to their competition. The microprocessor segment of the industry must be examined to gain a clearer understanding of the competitive strategies. The rivalry between Intel and AMD must be explored. The two things that must be considered are microprocessor speeds and alliances between microprocessor manufacturers and PC manufacturers and software companies. The only thing an average consumer understands about microprocessors is speed, therefore there is a common belief that faster is better. Producers must cater or as some believe create the

demand for faster microprocessors. That is why Research and Development are probably the most important division of Intel or AMD. R&D, marketing, manufacturing, and sales are all components that drive the differentiation strategy. 2

Industry Options

ProductsMicroprocessors and Logic Chips Memory Graphic Chips and

Motherboards

CustomersLarge PC

Manufacturers Automotive Government Consumer Electronics Military

Manufacturing StrategyVirtual Integration Vendor Emphasis Outsourcing

Company StructureAlliances Independent

Information SystemsProduct

Development Manufacturing Sales/Distribution

Customer Service

BusinessSystems

Figure 6: Business Strategy Model

In addition to the main strategy of differentiation, there are additional strategies that support it. The two supporting strategies for the PC Component segment of the Semiconductor Industry are alliance and innovation. In the last several years, semiconductor companies have been forced to create alliances. The main reason was that sluggish demand for PC components after the dot-com bust caused financial strain on even the biggest competitors in the industry. These alliances allow companies to increase the efficiency of the manufacturing process by working together to lower costs. Furthermore, some chip makers no longer control the entire production process, but rather delegate some production to outside companies. Foundry companies that solely manufacture have become a viable outsourcing option.

2“AMD still in Intel’s shadow”, Paul R. La Monica, September 22, 2003

Another supporting competitive strategy is innovation, although this strategy is used more cautiously because repercussions of a failure can be very negative. Traditionally the leading companies in the industry would use this strategy while the smaller competitors take a more defensive approach of following the leader. Lately this has not been the case. Smaller companies have been taking a more offensive approach. For example, AMD recently released the first 64-bit microprocessor to try to gain a competitive advantage over Intel. This caused Intel to go on a defensive approach of waiting for the market’s reaction, an approach that could cost Intel in the future.

C. Porter Model Evaluation of Industry Forces

In this section, the Porter Model is used to analyze the US market of the PC Component industry. We will examine Figure 7 and break down individual components of the model.

Intra-industry Rivalry

Intense competition between individual companies marks the entire industry. Chip makers are always under pressure to innovate and create products that are “smaller, faster, and cheaper”. This is mainly the result of a particularly short product cycle that is associated with PC components such as microprocessors and memory. State-of-the-art products become obsolete almost immediately after being released. This forces companies to design and produce cutting-edge technology while competing in a very volatile and cyclic PC market. This is the type of pressure that makes this industry so intriguing.

Bargaining Power of Suppliers

There are several different things to look at when considering the bargaining power of suppliers in the PC Component industry. First are the major companies that dominate the industry. Most of the larger semiconductor companies have hundreds of suppliers. This allows the company to reduce the bargaining power of each individual supplier to a minimum because risk is diffused over many suppliers. When looking at smaller chip manufacturers, overwhelming production costs that lead to outsourcing are forcing them to be dependent on a handful of large foundries. These large foundries have strong bargaining power against the smaller manufacturers because they control the supply of cutting-edge equipment, production skills, and knowledge. Overall, suppliers that are unique have some power, while other suppliers have relatively none.

Bargaining Power of Buyers

The whole industry is dominated by a small number of large companies. In the microprocessor product category, Intel is the dominant force with over 80 percent of the whole market share. If one is looking at the graphics chip market, only three companies,

Intel, ATI, and Nvidia, are significant players in that product category. For the exception of memory products, the buyers have little bargaining power. But it needs to be mentioned that large PC manufacturers like Dell or Gateway do have some bargaining power, especially in products such as DRAM memory. Their power is based on volume. Their ability to purchase very large quantities gives them leverage in negotiations. This creates a sort of tug-of-war between the two because they both depend on each other. It appears that companies like Dell are gaining more and more power as companies like AMD put more pressure on larger companies like Intel. 4

Threat of New Entrants

This represents the likelihood that additional companies will start competing in the industry. New entrants can be new companies or existing companies that enter the industry due to changes in business strategy. The Semiconductor Industry is still rather young. In the earlier days of the industry, new entrants were not unusual as engineers from established companies left to establish their own start-ups. As the industry is getting older, the threat of new entrants is very low. Extremely high barriers of entry represent a major hurdle. This is mainly due to enormous capital that must be poured into fixed assets such as a chip manufacturing plant. The short product cycle makes it next to impossible to try to keep up with the largest established companies in the industry. That is not saying that it is completely impossible. Smaller, “fabless” chip companies that outsource manufacturing processes have sprung up to compete with the giants in the smaller niche markets. In addition to that, through heavy government subsidization, companies from China and India could enter the market as well. 4

Substitutes

A substitute product is any viable alternative to those offered by companies in the industry. Due to the nature of technology, as of right now, the industry has no substitute products. As computers play a larger role in our lives, PC components will always be required. There is no way to substitute the products such as microprocessors or memory. New technological advances will be required before substitute products are available.

Porter Model Analysis Conclusions

Several conclusions can be derived from performing the Porter analysis on the PC component industry. There obviously exists intense competition between the large companies in the industry. Extremely short product cycles force companies to always innovate. To be successful, companies must bring the latest products while minimizing costs and maximizing efficiency. Overall, the bargaining power of buyers is relatively low, but large PC manufacturers have some power because of volume. Bargaining power of suppliers is low due to the fact that there are so many of them, which is advantageous to the industry. Because the industry is maturing and there exist high barriers of entry, the threat of new entrants is rater low. In conclusion, it seems that the actual volatility of the PC market is the biggest concern for the industry.

4Fabless Semiconductor Corporation, “State of World Semiconductor Industry”, 2002

Figure 7

D. Globalization of the Industry

Only 10 percent of the world’s population has access to a Personal Computer, which leaves tremendous opportunities for growth in the PC Component segment of the Semiconductor Industry. Because the industry is so competitive, companies have to look at newer markets to gain competitive advantage over the competition. Demand for semiconductors is high worldwide because new technology requires new chips and more of them. It is a simple fact that computers require PC components. The industry has already spread into many parts of the world and is starting to show signs of maturity.

4Fabless Semiconductor Corporation, “State of World Semiconductor Industry”, 2002

Intel and the Porter Competitive Model (US Market)

Substitute Products or

Services

Bargaining Power of Buyers

Bargaining Power of Suppliers

Potential New

Entrants

Intra-Industry RivalrySBU: IntelRivals: Samsung, Renesas, Toshiba, Texas Instruments, AMD

▪ Small “fabless” manufacturers ▪ Large foreign companies expanding into the industry.▪ Start ups

▪ US Material Providers▪ Foreign Material Providers▪ Foundries▪ IT Product and Service Suppliers▪ Manufacturing Equipment Suppliers

▪ Large PC manufacturers▪ Automotive ▪ Consumer Electronics▪ Government▪ Military

▪ None. Will require new technological advances

Markets that are showing the biggest growth are located in Asia, mainly in China. In the past, semiconductor companies located low value-added operations like packaging in

4Fabless Semiconductor Corporation, “State of World Semiconductor Industry”, 2002

developing Asian countries. In the last decade, companies have started to locate high value-added design and manufacturing operations in countries like Ireland and China. The process of manufacturing is moving to countries that provide the most competitive costs of production, which in turn lowers prices. Alliances between countries and companies have further driven down the costs of manufacturing.

E. Importance of IT to the Industry

The use of Information Technology is very significant in the industry. The Semiconductor Industry deals with exceptionally complex and high-tech products. Almost every business function needs to use IT to maximize efficiency, effectiveness, and competitive advantage. Business functions like product design, manufacturing, and inventory control must all use IT.

As chips get smaller, manufacturers have to use complex computer based-design systems to not only save money, but more importantly time. Information systems allow for information sharing and simulation analysis, which increases productivity and saves time. In addition to that, computer systems allow for design of superior products that are “smaller, faster, and cheaper”.

Manufacturing has gotten so advanced that complex computer systems are a necessity. The key in manufacturing in this industry is volume because more units you produce, the lower your cost per unit. IT helps integrate all the different parts of manufacturing into a seamless wonder of modern technology.

The Internet has allowed companies to conduct most of their B2B transactions online. Customer can place orders as well as check payment and shipments. Suppliers have access to confidential data and inventory levels, which speeds up the development process and improves efficiency.

PC Component Industry Value Chain

ResearchAnd Development

DesignProduction

And Manufacturing

MarketingSalesAnd

DistributionSupport Buyer

Section II – Company Perspective:An Analysis of Intel

A. Company Profile

In order to understand Intel’s position in the market today, it helps to look at its history and the company’s path to success. Intel was founded in 1968 by Robert Noyce and Gordon Moore. Their mission was to make semiconductor memory practical. Success started rather slowly when Japanese manufacturer Busicom asked Intel to design chips for high-performance calculators. Going against Busicom’s proposal of developing several custom chips, Intel engineer Ted Hoff designed a single chip that retrieved instructions from semiconductor memory. This new chip not only met Busicom’s specifications, but could also be used in variety of applications without needing a redesign. This developed a “vision of ubiquitous microprocessor-based computing”. In 1971, Intel released the 4004, the first microprocessor. This new device opened new markets for Intel and sparked “boundless creativity and innovation”. The turning point for the company came in 1981 when Intel convinced IBM to use the 8088 microprocessor in its first PC. The company was growing steadily as new microprocessors were introduced. The 286, 386, 486, and later the revolutionary Pentium set new standards in computing. Today Intel is the leader in PC Component segment of the Semiconductor Industry. 5

“Intel supplies the computing industry with chips, boards, systems, and software building blocks that are the ingredients of computers and servers”. 6 Intel’s mission is to be the paramount “building block” supplier of the Internet economy. Its goal is to provide the customer with high quality products and superior customer service. Here is a quick rundown on Intel’s products.

Intel is the main supplier of microchips used in variety of desktops and mobile PCs. Intel dominates the microprocessor market by providing over 80 percent of the chips. The most recently released Pentium 4 Prescott is the leading-edge CPU on the market today. In addition to that, Intel manufactures chipsets that perform essential logic functions surrounding the microprocessor. Intel also supplies motherboards as well as integrated graphic chips that are essential subsystems of a PC. This paper covers the PC Component segment of the Semiconductor Industry, but it is also worth mentioning Intel’s presence in other product categories. Intel is a large supplier of communication products like networking devices and equipment as well as other products such as embedded control microchips for laser printers, routers, and automation instruments. Intel provides application processors for wireless handheld devices and cellular phones. 6

One of the most impressive business functions of Intel is manufacturing. Through scale of operations and agility of its factory network, Intel is the leader in semiconductor manufacturing. Worldwide, Intel owns 11 fabrication facilities and 6 assembly/test facilities. Over $4.7 billion was spent in 2002 on capital investments that increase 5Landley.net, History of Intel: 30 Years of Innovation6Intel.com, “Corporate Overview”

manufacturing efficiency. This year, six of Intel’s fabrication facilities are using 0.13 micron manufacturing technology.

Intel is committed to provide the best products to its customers. This is achieved by extensive capital investment in Research and Development. In 2002, Intel spent $4 billion on R&D and maintains over 6,000 scientists and researchers committed to the task. This supports Intel’s differentiation strategy and lays a foundation for future growth.

The Internet is a valuable tool for an e-Business company like Intel. It uses the Internet to handle business processes such as inventory and materials processing. 85 percent of customer orders and 60 percent of material transactions are processed online. Intel strives to become a “100 percent e-Corporation that maximizes profitability, responsiveness, and innovation”.

B. Business Leaders

A company in any industry needs great leaders to get to the top. It is even harder for company leader to stay at the top without those leaders. Intel is no different.

Gordon Moore – Co-Founder and former Chairman of the BoardIt is hard to talk about the success of Intel or even the success of the microprocessor without mentioning Gordon Moore. He was one of the founders of Intel in 1968. Dr. Moore led the company to produce the world’s first microprocessor and evolve as the leader in the Semiconductor Industry. Widely known for Moore’s Law, which predicts that the number of transistors the industry would be able to put on a chip would double every 18 months. Considered as one of the pioneers of the industry, Dr. Moore’s vision and leadership were essential for Intel’s rise to success. 7

Craig R. Barrett – Chief Executive OfficerDr. Barrett became Intel’s fourth President in 1997 and CEO in 1998. As the successor to the legendary Andy Grove, he had very large shoes to fill. Dr. Barrett has been with Intel since 1974 when he became a Technology Development manager. Although relatively new to the position, Dr. Barrett is extremely knowledgeable and experienced. He was responsible for steering the company through the dot-com bust by looking ahead to the

future. His vision for the future is convergence of computers with communications. He plans to achieve that future with an aggressive diversification strategy. His active support and involvement in information systems is one of the reasons for Intel’s strong IS organization. Even before he became CEO, Barrett initiated a task force to establish data standards as well as standardizing desktop computers within the company. Barrett is now looking to diversify Intel into other markets such as communications. 7

7Intel.com, “Executive Bios”

Andrew Grove – Chairman of the Board and former CEOIn 1968, he participated in the founding of Intel. Dr. Grove served as the CEO between 1987 and 1997. During this time, he played a major role in leading Intel to the top and into a new era of high-tech. In 1997, Dr. Grove was named Man of the Year by Time magazine as the person “most responsible for the amazing growth in the power and innovative potential of microchips.” His passion and paranoiac obsession has “made real the defining law of the digital age”. He made Moore’s Law a reality. He introduced the technological leadership strategy. His vision and leadership was responsible for Intel’s successful design and manufacturing systems. He shifted the company’s focus from the broad semiconductor industry to a more defined microprocessor industry. After Grove became the CEO, Intel’s revenues grew nearly six fold and Intel went from tenth in the industry to number one. He refined the Strategic Long Range Planning process by refocusing Intel’s direction. He used aggressive marketing as a tool to gain market share. During his time, Intel developed the now well-known “Intel Inside” campaign. Grove did not only have a profound effect on Intel, but the whole industry as well. He has written over 40 technical papers and holds several patents on semiconductor devices and technology. He has been elected as a member of the National Academy for Engineering and won numerous awards such as “CEO of the Year” from CEO magazine and “Distinguished Executive of the Year” from Academy of Management. His work has had a huge impact on the industry.

Douglas F. Busch – Vice President and Chief Information Officer

After joining Intel in 1987, Busch held different positions in manufacturing and information systems. He was mainly responsible for the company’s intranet and was a key proponent to the introduction of advanced technology that improved the effectiveness of manufacturing systems. He is responsible for “leading Intel’s global IT organization in delivering infrastructure and business solutions to enable Intel’s

manufacturing and engineers operations, e-Business processes, and knowledge-worker productivity”. 7

C. Market and Financial Performance

Knowing that the Semiconductor Industry is very cyclical, it is expected for Intel’s financial performance to reflect this over a significant period of time. Taking a look at Figure 8, we notice that Intel enjoyed very high growth from 1994 to 2000 when sales increased from $11.5 billion to $33.7 billion. 2000 was a record year for Intel in terms of sales and net profit. It is amazing to see the company achieving a 33.6 percent net profit margin, which is very high by the industries standards. 2000 was also the last year before the dot-com bust, which had a profound affect not only on Intel, but the whole

7Intel.com, “Executive Bios”

semiconductor industry. As demand for PCs fell dramatically, PC component manufacturers were hit hard. In 2001, we see this downturn reflected financially. Sales

7Intel.com, “Executive Bios”

slipped downward to $26.5 billion or around 22 percent less than the previous year. What is more dramatic is the fall of net profit margin to 13.7 percent or almost 60 percent lower than the previous year. This started a downturn in the industry that lasted through 2002 and first quarter of 2003. The latter part of 2003 was promising to Intel as the company began showing strong signs of recovery. By the end of 2003, Intel posted sales of $28 billion, which was a significant increase over 2002. What was even more promising was the increase of net profit margin from 12.9 percent to 17.1 percent. One of the most impressive things about Intel is their current assets to current liabilities ratio. In 2003 the company’s current assets outweigh its current liabilities $20.1 to $6.6 billion. Comparing this to AMD’s $1.7 to $1 ratio, we see that Intel is in very strong financial situation.

Net Profit (Dollars in Billions)

Figure 8: Key Financial Data

All of this information is pointing to positive trend of further recovery for Intel and the industry overall. Industry analysts are expecting another good year for Intel in 2004, but there is some skepticism about the overall economy and how it will affect this very cyclical industry. Looking even further ahead, industry analysts believe that Intel will continue to be the leader in the industry for a long time. It is predicted that sales will steadily grow to record levels and the company will fully recover from the dot-com bust. Spending on R&D and capital has been kept at very high levels, which will be beneficial in the future. New manufacturing processes will allow for production of smaller chips at higher quantity. This will make the manufacturing process even more efficient, which will further reduce costs and increase profits. D. Competitive Strategy Statement

An exert from Intel’s 2002 Annual Report states, “Rapid advances characterize the semiconductor industry, and our ability to continue to compete depends on our ability to improve our products and processes faster than our competitors, anticipate changing customer requirements, and develop and launch new products to meet them, and at the same time reduce our costs. Our ability to compete also depends on our ability to provide worldwide support for our customers.”

The above statement summarizes Intel’s competitive strategies. Intel looks to provide superior products and exceptional customer support around the world by differentiating itself from other companies in the industry. Through extensive capital investment in R&D, Intel is able to develop more efficient manufacturing processes thus providing the customer with a higher quality product than the competition. Every part of producing a chip from designing it to supporting it must be focused to maximize efficiency, effectiveness, and competitive advantage. In such a volatile industry, it takes the right competitive strategy in order to succeed.

E. Significance of Information and Information Systems

It must be clearly understood that without Intel’s state-of-the-art Information Technology, there is absolutely no way the company would be able to compete in an industry that relies so heavily on IT for almost all business functions. By using IT effectively, Intel has gained significant competitive advantage that allowed it to become the leader of the Semiconductor Industry.

Analyzing the major business function of Intel, it is easy to see that IT plays an enormous role in every one of them by supporting the competitive strategies of the company. Short product-cycles, increased complexities of products such as microprocessors, and an extremely cyclical industry require Intel to design and manufacture products very quickly and efficiently. Advanced Computer Aided Design (CAD) has allowed Intel to design superior products while minimizing cost. Intel’s manufacturing process has gotten so advanced that IT use is a necessity. High quantities must be achieved to maximize economies of scale while maintaining high quality measures that Intel is known for. The

process requires integrated enterprise information systems as well as other control platforms such as computer numeric control to make the process as efficient as possible. Computer based inventory-control systems help connect Intel with its large buyers such as Dell.

Overall high-tech Information Technology support Intel’s differentiation strategy by allowing the company to stay ahead of the competition and bringing quality cutting-edge products to meet changing customer requirements.

F. Strengths and Weaknesses of Intel

An industry leading company like Intel knows that it is hard to get to the top, while it is easy to be dethroned. In such an ultra-competitive industry, a company must understand not only its strengths, but more importantly its weaknesses. In order for Intel to stay at the top of the PC Component segment of Semiconductor Industry, its competitive business strategies must be tailored to the company’s strengths while minimizing the affect of its weaknesses.

Strengths

◦ Leadership – A company is only as good as its leader. Intel has had a long tradition of successful individuals that guided the company to become the leader of the industry. Gordon Moore and Andy Grove put the company into prominence, and now seasoned and motivated leadership led by Craig Barrett is ready to keep Intel in the forefront of the industry. ◦ Strong Financial Situation – Looking at past and present financial performance, it is clear why this is one of Intel’s major strengths. Maintaining profitability after the dot-com bust is a very impressive accomplishment considering the industry that Intel is in. Future looks bright financially as sales are predicted to increase and reach record breaking amounts in the near future.

◦ Information Systems – Intel’s design and manufacturing systems are top of the line, which is one of the reasons why the company manages to stay on top. IT systems are used effectively for competitive advantage because they allow Intel to design and manufacture superior products ahead of the competition while maintaining low costs.

◦ Industry Leader – Intel is the top company in the industry. Intel controls over 80 percent of the microprocessor market and over 50 percent of the graphics chip market. Intel is also a big competitor in the memory and motherboard market. Being the leader means Intel can invest more money into R&D, which then translates into increased efficiency of design and manufacturing processes.

◦ Company Network – Unlike some companies, Intel controls the entire production process for most of the products. Intel believes that their “network of manufacturing

facilities and assembly/test facilities is their competitive advantage.” The network allows Intel to have more direct control over processes, quality control, product cost, volume, and timing of production. This is the type of luxury that some “fables” manufactures do not possess.

Weaknesses

◦ Competition – As the leader of the industry, Intel faces a never-ending battle of other competitors trying to take its spot at the top. Competition is only going to get fiercer especially in the microprocessor market. AMD is no longer playing catch-up to Intel. Instead with the release of the 64-bit processor, AMD has put Intel in a defensive position. In the memory market, companies like Samsung have overtaken Intel in some product categories like flash memory. The future of Intel depends on how it reacts to these challenges. ◦ Volatility of the Industry – The PC Industry overall is very cyclical. The general shape of the economy dictates demand for PC Components. An unexpected recession could have extremely negative effects on Intel if the company does not position itself well.

◦ Loss of Focus – As Intel tries to expand its customer base by venturing into other products like wireless chipsets and communications, it is important for the company to remain focused. Most of Intel’s revenue still comes from microprocessor and motherboard products, so the company must avoid overextending itself over too many product markets.

Section III – Structured Analysis of Information Systems at Intel

This section of the paper deals with the use of information technology by Intel to gain competitive advantage. It will examine the business opportunities that affect the organization of information systems. Furthermore, this section will analyze the role of information systems and senior management within Intel as well as their significance to the company’s success.

A. Strategic Option Generator

The Strategic Option Generator is a conceptual model used to identify strategic opportunities involving the use of information systems and evaluate companies that used information systems to gain a competitive advantage. For this section, we will focus on using the model to understand the success of Intel. The Strategic Option Generator is divided into four different sections: strategic targets, thrust, mode, and direction. The different strategic options selected by Intel are highlighted by the model in Figure 8.

Target

Supplier Customer Competitor

Thrust

Differentiation Cost Innovation Growth Alliance

Mode

Offensive Defensive

Direction

Use Provide

Execution

Strategic Advantage

Figure 9: Analysis of Intel Using the Strategic Option Generator

◦ Target: The strategic target for Intel is customer because their strategy is to supply superior technology that is the building block of the Internet economy. Because product life-cycles are very short, Intel must anticipate and meet ever-changing customer demand for technology by providing top of the line products.

◦ Thrust: The main thrust (strategy) of Intel is definitely differentiation. Intel is the leader in the industry because of their dedication to bringing the newest leading-edge technology faster than their competitors. Through advanced manufacturing techniques, Intel is able to support its strategy of differentiation by staying ahead of competition. In addition to their main thrust, Intel uses supporting strategies of innovation and growth. Innovation is a key strategy because customers often seek the latest technology to satisfy their needs. Growth has also been essential to Intel to offset the tremendous fixed costs of manufacturing facilities. Recently, the company has set its sights on aggressively expanding into newer markets presented by the growing Internet economy. 8

◦ Mode: Intel is the leader in the industry. This means that Intel is in offensive mode for both business strategy and the use of information systems. In order to continue its reign at the top, Intel must stay in offensive mode by offering the newest and best technology ahead of the competition.

◦ Direction: Traditionally, Intel had a “USE” mode for information technology. Every business function uses advanced information systems to streamline and more effectively conduct business operations. Their engineering design and manufacturing systems must be the best in order to sustain competitive advantage. Recently, Intel has moved towards B2B, which extended the use of their systems to “PROVIDE” mode. Intel’s main use for information technology is to integrate and simplify B2B e-Commerce. Intel’s new NetStructure and RosettaNet systems allow the sharing of important business information like order entry, pricing, and inventory levels. This accelerates and controls Internet transaction so that B2B e-Commerce can happen faster and more reliably, which in turn improves efficiency and reduces costs. 9

B. Roles, Roles, and Relationships

Role of Information Systems

Being in an ultra competitive industry, effective and efficient use of information technology is a must for Intel to stay at the top. Information Systems play a major role in every major business function of Intel. The goal is to streamline every business process into a seamless network that maximizes value to customer and volume while minimizing costs. Product development, manufacturing, and customer/supplier services are business functions that depend on information systems the most.

Engineering and design systems play fundamental roles in Intel’s success. Computer Aided Design (CAD) systems enable Intel to speed up the design process while reducing costs. NIKE, Intel’s next generation CAD system, helps improve developmental 8Internet World, “Inside Intel’s Value Chain”, John Pallatto, July 15, 20019 Intel Technology Journal, “Networking and Communications”, Q2 2001

efficiency and user productivity by supporting code sharing. The system helps cut down on costs by reducing costly redesigns that often plagued older systems. In addition to that, Intel’s FUB Circuit Design Environment (FCDE) allows for better layout planning and estimation, which in turn reduces redesigns even further.

When looking at Intel’s manufacturing capabilities, the crucial word to remember is volume. Higher volume means cost per unit is lower. Intel is able to effectively compete because of its high-tech manufacturing process, which includes state-of-the-art information systems. Intel’s Copy EXACTLY! Philosophy is an important element of its manufacturing strategy. In order to be successful, the philosophy requires tremendous resources and well implemented information systems. Operational Modeling and Simulation Systems (OM&S) are used to lower costs by speeding up the process of trying alternative solutions to different operational scenarios. Intel also uses defect control systems to minimize defective product and maximize volume. 10

Information Systems also play an integral part in Intel’s customer and supplier services. In order to support its B2B e-Commerce strategy, Intel uses Electronic Data Interchange (EDI) systems such as RosettaNet to connect itself to customers and suppliers. By using the Web to reduce friction points that slow down decision-making, Intel is able to accelerate sales, revenue, and profits. Using inventory systems, Intel is able to improve inventory management between itself and customers as well as suppliers. All of this allows business functions to be more efficient and effective.

Role of Senior Management

The basic role of senior management is to provide a long-term vision for the future of the company. Senior management must be able to communicate this vision to the IS organization. It is critical for senior management to realize the value and actively support information systems.

Andrew Grove’s vision and leadership made Intel into an industry giant, and Craig Barrett’s support and involvement with information systems has kept the company at the top. Grove fully acknowledged the value of information technology in improving Intel’s design and manufacturing processes. Grove pioneered Intel’s Copy Exactly! Philosophy that utilized the use of information systems to speed up and streamline the manufacturing processes. Craig Barrett has been a proponent of information technology long before becoming the CEO of Intel. “Intel can’t design a next generation chip without IT infrastructure, Boeing can’t design an airplane, and GM can’t design a new automobile without advanced IT and communications infrastructure…” 12 This quote illustrates his belief that IT is an essential part of a successful business. His efforts to sponsor and participate in promoting the significance of IT laid a foundation for a strong company culture. He was responsible for things such as establishing data standards and standardizing desktop computers.

10 Intel Technology Journal, “CAD Architecture and Tools”, Q1 1999 12 “Craig Barrett: Inside Intel’s future”, Mike Ricciuti, October 22, 2003

The Relationship

Successful information systems are products of good working relationships between the business managers that run the business and the information systems organization. Information systems must be a high priority resource that receives thorough senior management attention. Most importantly, senior managers must support the information systems organization. Examining Intel, it is clear that there is a very good working relationship between the two. Andy Grove, although an engineer at heart, has always supported the information systems organization because he believed that it is crucial to design and manufacturing processes. Grove once commented about the importance of IS within Intel, “it does an excellent job supporting our engineers in the design and development of our products.” As Grove’s successor, Craig Barrett has provided both business and information systems leadership. His business vision and active support has allowed the IS organization to become very good at streamlining business processes, improving productivity, and adding value to customer. Because of Barrett’s support and belief in the importance of information technology, Intel’s IS organization can concentrate on improving the business rather than defending its budget or gaining support from senior management. This allows the CIO Douglas Busch to focus on providing information technology leadership.

Intel’s overall success and the strength of its information technology can be partly attributed to this effective partnership between senior management and the IS organization.

C. Redefine/Define

Looking at Intel, information systems were used to redefine business processes in order to improve the competitive effort to provide value to customer. More specifically, Intel redefined product design, manufacturing, and later B2B e-Commerce processes.

It is hard to argue against the notion that Intel became successful primarily because of their advanced design and manufacturing processes. Intel is able to produce high quality products in very high quantities, and this is imperative to staying successful in the industry.

Superior design systems are the first essential factor in providing value to customer. As products got smaller and smaller, Intel faced a tremendous challenge of designing those products while maintaining cost efficiency and quality. CAD systems gave Intel the tools needed to tackle that challenge. NIKE is Intel’s state-of-the-art CAD system that “enables integrated solutions for gigahertz design”. It was developed in an effort to reduce the deficiencies of older systems. Deficiencies such as difficulty sharing design data across multiple domains, ad hoc persistence mechanisms, and inconsistent environments all played a factor in slowing down the design process. NIKE provided a

tool for customers (engineers) that allowed for better sharing of data, incremental processing, and unified interface. In addition to NIKE, Intel also utilizes the FUB Circuit Design Environment (FCDE). The FCDE is an integrated, interactive, and incremental circuit design environment that performs “what-if” analysis that allows engineers to try many different variations trough better layout planning and estimation. This improves the overall design time and reduces costly redesigns. All of these changes in the design process led to increased productivity due in part to code sharing, sped up development by allowing better layout planning, and decreased costs by reducing the number of redesigns. 10

It is my opinion that Intel’s unprecedented manufacturing capabilities are the reason why Intel is such a successful company. Intel’s Copy EXACTLY! Philosophy is the driver for their manufacturing process. The philosophy was developed to redefine the manufacturing process and achieve three things: minimize the time required for technology to be transferred, ensure product quality, and retain yield. Copy EXACTLY! states that “everything which might affect the process is to be copied down to the finest detail, unless it is either physically impossible, or there is an overwhelming competitive benefit to introducing a change.” The positive result of the Copy EXACTLY! Strategy is exemplified in Figure 9. Intel’s manufacturing systems helped the philosophy become reality. Assembly Test Manufacturing Information Systems (ATMs) allow customers to make quicker decisions, provide real-time asynchronous collaboration to improve virtual work team efficiencies, and enable inter and intra-organizational sharing of information. Problems that took three to four days to identify, now only take thirty minutes making the process run “better, faster, cheaper”. Operational Modeling and Simulation (OM&S) systems decreased costs and improved delivery, quality, and product performance. Intel’s move to full hold-scan testing systems helped reduce manufacturing defects by significantly speeding up production tests. Other manufacturing systems helped Intel create a seamless and efficient manufacturing process. 11

Figure 10: Yield after implementation of Copy EXACTLY! Strategy

10 Intel Technology Journal, “CAD Architecture and Tools”, Q1 1999 11 Intel Technology Journal, “Manufacturer’s Processes and Strategies”, Q4 1998

Andrew Grove believes that one of Intel’s main strengths is its global network. Using this network, Intel has redefined its B2B processes in an effort to transform itself into 100 percent e-Corporation. In order to continue to be the leader in the industry, Intel realized that it must develop an e-Business strategy that would make it easy and efficient for people to do business with the company. Intel’s RosettaNet program connects the company to major suppliers and customers in an effort to simplify the sharing of important information to speed up transaction and reduce costs. Intel is able to share design specifications with important direct customers, thus staying responsive and adding value to customer. The automated customer-order entry of RosettaNet has decreased errors by nearly 75 percent and dramatically increased online sales revenue. Intel’s NetStructure is another system designed to improve performance and reliability of transactions over the Internet. These Internet based systems no doubt play a huge part in Intel’s future success. Overall, it can be argued that Intel is using information technology to redefine the whole business by trying to develop into a 100 percent e-Corporation.

Figure 11 summarizes the above information. After analyzing these business processes, it can be concluded that information systems played an important role in redefining those processes by speeding up the flow of information and increasing operational efficiencies throughout the company. Because of this, Intel achieved sustainable strategic advantage.

Figure 11: Intel Value to Customer Analysis Chart

◦ NIKE CAD system◦ FUB Circuit Design Environment◦ Assembly Test Information Systems◦ Operational Modeling Systems◦ RosettaNet system

◦ Microprocessors, memory, graphic cards, networking hardware◦ Superior quality◦ Latest technology◦ Competitive prices◦ Product support

Value-Add Process What the Customer Buys

Value to Customer

Product/Service

Del

iver

y Pr

oces

s

PC C

ompo

nent

s

D. Significance of Telecommunications

As businesses become more global, effective telecommunications integration with computers will play a larger role in the overall success of the business. Intel has developed an extensive global network that is considered one of the best, but mustcontinue to improve and refine in order to achieve its goal of becoming a 100 percent e-Corporation.

As of right now, Intel uses the Internet to conduct around 90 percent of its direct purchases and 70 percent of indirect purchases. Intel’s RosettaNet connects the company to many of its largest customers and suppliers by combining information technology with global communications. It has allowed the company to move away from electronic data interchange (EDI). In 2003, Intel processed more than 15 percent of its revenues and supply purchases using the RosettaNet. The network allows real-time access to information such as global inventory status and enables efficient supply chain collaboration. Customers can place their order online and have it shipped from any of Intel’s distribution facilities around the world. The network currently receives around $2 billion worth of orders a month. RosettaNet has reduced transaction processing time from day down to minutes. This network has allowed Intel to achieve greater operational efficiency through productivity gains, faster throughput, and improved customer and supplier satisfaction. 9

Intel did not only focus its attention on customers and suppliers, but also its employees. The NIKE software architecture runs on several mainframes and allows users to share data across several domains. The increase in employee collaboration ultimately increases productivity overall. Intel’s manufacturing systems are connected with design systems to speed up product development. Well implemented telecommunication networks are required for Intel’ manufacturing process.

In an effort to become a fully digital company, Intel used telecommunications technology to develop an extensive intranet. It provides internet services to over 60,000 Intel employees. This employee portal includes things such as pay stubs, e-mail, and schedules. Benefits of Intel’s corporate portal include organized information that is easy to navigate, highly personalized interface, and increased collaboration. Overall, the main reason for the intranet is to increase employee productivity and job satisfaction. Future plans call for a new connectivity model called Virtual Private Networking (VPN), which would be used instead of the high-maintenance legacy technology implemented today. The new model would allow employees who are out of the office to connect to Intel’s resources using Internet bandwidth. VPN technology would allow for streaming media such as audio and video. This new model would lower costs and reduce time required to establish connections to new sites or business partners. 9

It is important to understand that Intel would not be able to effectively compete or operate without a well designed telecommunications network. With Intel’s heavy dependence on the Internet and its quest to become a 100 percent e-Corporation, telecommunications will play an increasing role in the company’s future success.

9 Intel Technology Journal, “Networking and Communications”, Q2 2001

E. Success Factor Profile

Intel has been and will continue to be a very successful company. Intel’s quest to become a 100 percent e-Corporation is linked to its ability to effectively use information technology to develop and deliver high quality products that meet customer needs and requirements. The five major success factors that explain Intel’s sustained success in the industry are as follows:

◦ Vision: Andrew Grove’s vision is arguably the main reason to Intel’s ascend to become the best. His leadership made Intel’s product development and manufacturing operations into the best in the industry. He saw the market opportunities for Intel and took appropriate business risks to take advantage of them. As Grove’s successor, Craig Barrett continued to keep the company thriving with his vision of convergence of technology with telecommunications. Along with his vision and active support for information technology, Intel is well positioned for continued growth and success in the future.

◦ Culture: Andrew Grove and Craig Barrett have instilled a strong company culture at Intel. Grove infused a company culture that emphasizes superior design and manufacturing to deliver the highest quality products. Barrett especially, was responsible for getting people in the organization to recognize the need for information technology. He was successful at getting employees to accept the use of competitively focused information systems.

◦ IS Integral to Business: It cannot be overstated that information systems played a huge role in Intel’s success. It is a concrete fact that without IS, Intel would not be able to compete. Through the use of information technology, Intel has been able to constantly improve business processes. Their design and manufacturing systems give Intel significant competitive advantage by allowing it to anticipate and meet customer needs. Systems like NIKE allow customers (employees) to share data across several domains, thus allowing better collaboration and increasing productivity. Intel’s RosettaNet has brought new levels of efficiency and speed to B2B e-Commerce and supply chain management.

◦ Linkage to Customers: By using the Internet as well as RosettaNet, Intel has made it easier for customers to do business with the company. Customers can order products online, which almost eliminates any required paperwork thus decreases the processing period from days down to minutes. This increases the efficiency of transactions and therefore reduces costs. Additionally, Intel is able to provide better support as well as receive feedback on upcoming products, which all adds value to customer.

◦ Linkage to Suppliers: Intel estimates that 90 percent of its direct supply purchases like materials and equipment are transacted online. Suppliers use Web access to process orders and check inventory levels, payments, and shipments. Most important suppliers have online access to Intel’s confidential engineering and product-specification documents, which reduces the time required to design products.

Section IV – Final Analysis

A. Success of Business Strategy and I/T Use to Date

Intel has been a very successful company. The ultimate test came during the dot-com bust, but Intel prevailed and stayed profitable through the trouble years. The company emerged even stronger and posted $5 billion profit in 2003. Two main factors can be attributed to Intel’s success: role of senior management and effective use of information systems and telecommunications. Andrew Grove positioned Intel at the top of the industry by making sure to maintain competitive advantage through their top notch design and manufacturing processes. Craig Barrett was largely responsible for providing leadership and vision that guided Intel through the tough years after the dot-com bust. His active support for information systems allowed Intel’s IS organization to reach new heights of productivity and efficiency.

Information systems played a very important role in Intel’s success. It is undoubtedly the case that Intel could not have been successful without the support of their top of the line design and manufacturing systems. Information systems were essential in helping Intel implement its Copy EXACTLY! philosophy. Looking ahead to the future, as competition becomes even more intense, Intel’s information systems will be further improved and refined in order for them to keep their competitive advantage.

Looking at Intel from a broader perspective, the company was able to be successful because it brought value to customer. Intel was able to anticipate customer needs and develop products that met customer requirements while providing exceptional quality and support.

Here is a quick rundown of the major reasons for Intel’s success: ◦ Experiences vision and leadership of Andrew Grove and Craig Barrett◦ Superior design and manufacturing systems make it possible to produce high

yields while maintaining quality and cost effectiveness.◦ Well implemented and integrated information systems that support all of Intel’s crucial business processes.◦ Intel’s global network makes B2B e-Commerce more efficient.

In conclusion, Intel’s success can be attributed to the reasons mentioned above. The company must use the same success factors to stay at the top of the industry.

B. Have the Above Factors Properly Positioned Them for the Future?

It is reasonable to assume that Intel will stay successful in the future. It is estimated that in 2004 sales will surpass $33 billion while profits will increase to nearly $7 billion. Intel’s success will be heavily impacted by the overall shape of the economy, but the

above factors have definitely positioned the company well. Intel’s manufacturing and design systems will continue to give the company competitive advantage. The

company’s RosettaNet will be the tool to transform Intel into a 100 percent e-Corporation. As CEO Craig Barrett nears the mandatory retirement age, it will be interesting to see who will be picked to replace him. It will be tough for whoever comes in given the fact that Intel will grow and expand its business into new markets and take advantage of new opportunities. As the chief operating officer Paul Otellini states, “We develop technology for markets that don’t exist for products that don’t exist. It’s a daunting business.” Future senior management must continue to actively support information systems to maintain the high quality of the IS organization. Effective use of information technology will be important to meet increasing competition from companies like ADM.

In conclusion, Intel is in good shape heading into what looks to be very profitable years for the industry. It will be exciting to watch Intel’s growth.

Bibliography

“Craig Barrett: Inside Intel’s future”, Mike Ricciuti, October 22, 2003

Internet World, “Inside Intel’s Value Chain”, John Pallatto, July 15, 2001

Intel.com, “Annual Report 2002”

Intel.com, “Corporate Overview”

Intel.com, “Executive Bios”

Intel Technology Journal, Volume 6 Issue 2, May 2002

Intel Technology Journal, “Networking and Communications”, Q2 2001

Intel Technology Journal, “CAD Architecture and Tools”, Q1 1999

Intel Technology Journal, “Manufacturing Processes and Strategies”, Q4 1998

“Craig Barrett: Taking Intel into New Territory”, Jacob Dalton, September 2002

Landley.net, History of Intel: 30 Years of Innovation

Electronic News, “Semiconductor Industry Immortality”, October 4, 1999

Cnn.com, “Intel Redirected”, February 16, 2000

News.com, “In a flash, Intel loses memory lead”, November 20, 2003

“Semi Market Thaws in 2003”, Jason Lopez, December 4, 2003

“AMD still in Intel’s shadow”, Paul R. La Monica, September 22, 2003

Fabless Semiconductor Corporation, “State of World Semiconductor Industry”, 2002

Top 3 Articles

1. Intel Technology Journal – all of the articles published by the journal were the most useful when researching and analyzing Intel’s information systems. The journals gave me in-depth information about the company’s design and manufacturing systems. (I did not include the articles because they are extremely long).

2. “Craig Barrett: Inside Intel’s future”, Mike Ricciuti, October 22, 2003 – This article was not only informative about Craig Barrett’s accomplishments, it also gave me information about the future of the company.

3. “Semi Market Thaws in 2003”, Jason Lopez, December 4, 2003 – This article was good because it gave a very concise rundown of the semiconductor industry. I was one of the first articles I read to understand the structure and financial state of the industry.

“Craig Barrett: Inside Intel’s future”, Mike Ricciuti, October 22, 2003

Craig Barrett is on a mission.

To keep Intel at the forefront of the microprocessor business, Intel's CEO poured cash into research and development while institutional investors called for layoffs. That perseverance seems to have paid off. With the tech economy gradually gaining steam, Intel beat expectations and turned a healthy profit during the third quarter.

Now, Barrett, who spoke Tuesday at an industry conference sponsored by Gartner, is out to prove that the convergence of computing, communications and digital content will help drive an industry resurgence.

Barrett's speech was also a call to arms. Intel's CEO sees a faulty educational system that does little to teach adequate math and science skills as a major problem the high-tech economy--and the nation--will need to address in the coming years. Among other ideas, Barrett advocates giving foreign nationals who are recent engineering school graduates instant green cards in order to shore up the domestic engineering talent pool.

While most of the world sees high-tech as the leading driver of the economy in the coming years, the United States--and in particular Intel's home state of California--treats the industry as a second-class citizen, according to Barrett.

Coupled with the growth of Intel's business outside of the United States, that's led the company to place a greater value on its overseas operations.

Barrett sat down with CNET News.com editors to discuss global economic issues, along with how Intel will deliver new technologies and why companies should adopt them.

Q: What will Intel have in store to coincide with Microsoft's introduction of Longhorn, its next version of Windows? A: The aspects of Longhorn are that it is more secure, and we have talked about some of the technologies we are trying to align. And we have talked about some of the other technologies that we want to bring forward in the future. We try to align our capabilities with Microsoft's capabilities to bring to the user.

How much of a sales driver for Intel will Longhorn be? Kind of tough to say. You are at least a couple of years away from delivery and a lot can happen.

To put it another way, following Moore's Law, what kind of horsepower would be available if you bought a new machine at the same time that the new OS is out? I think you will see a variety of technologies provided in addition to the standard more clocks or cycles. I think you will see the integration of technologies, whether it's wireless or some degree of virtualization, such as Vanderpool. You will most likely see movement probably beyond hyperthreading into the multiple core situations, which are starting at a high level and are cascading down to the desktop.

And that's within three years? Well, it's kind of within that 2- to 5-year timeframe.

Will there be enough horsepower at that time for speech recognition? I'm not sure there is ever enough for speech recognition. We've been talking about speech recognition for 20 years, since Intel built the first digital signal processor. Speech recognition was always the next application, for next year. It's clearly getting better and better, and you can do all sorts of memos--and Andy Grove uses it. So it's getting there. But you assume Moore's Law, processing power, continues to grow, so we are going to double every 18 months or so. In four years you get four times as much as today to do that sort of digital signal processing.

When you are working with Microsoft, do they have a reference platform for the minimum requirements for a 2005 or 2006 system? Obviously, we share road maps with Microsoft and other people. That benchmark is out there for them. We both have

to work in the multiyear lead-time situations. It may take us three years to go from design to bottoms-up product out the door.

What kind of an impact will Vanderpool, which allows users to partition individual chips inside their computers, have when it comes to the marketplace? It will certainly give users a lot of flexibility to have different profiles on the same machine. If people use it for multiple OSes, running in sync on the same processor, it opens up a lot of different use models, and perhaps competitive models in the marketplace. If you are able to say, have two OSes running simultaneously, you won't have to rely on a single OS for everything. So you could have Mac OS and Longhorn on the same system, using Longhorn for business stuff and Mac OS for personal stuff. But first you'd need to convince Steve Jobs that it's a great idea. Even more important will be Vanderpool for fault-tolerance. Lots of aspects of that.

Will the consumer market or the business market be the dominant market for Intel in the coming years? I think that the theme is convergence, and it is equally dominant on both sides.

How do you convince IT buyers, who you said are Intel's weakest market right now, to buy? I think the world is convincing them of the need to upgrade, and that is the competitive environment. There is a silver lining in this issue of offshore outsourcing and loss of white collar jobs and differential wage rates and competitiveness around the world. The U.S. has been the biggest investor in IT, and it has made us the most productive economy. And if you want to stay in that position, you have to continue to invest. And people are waking up to that. We have to go to them today and say, do you want to do this with 4-year-old technology or today's technology? Does the fact that companies need to spend a larger amount of their budgets on security take away from spending on other areas? I don't think so. What we spend on security is like a tax. It's the infrastructure. You get benefits from the capabilities. Does the benefit outweigh the cost? I say yes. Security is in the press a lot today, but we will get over that and we will put out better hardware, and Microsoft will put out better software. People will get more intelligent on how they guard against these things. We're still in the infant process on this whole thing. To assume that you are going to stop today because there are new vulnerabilities is kind of naive in my mind. The world is not going to stop. You can choose to, but you will be left behind.

Is there a point at which the security tax is too high? We're a pretty homogeneous environment at Intel. We're probably as big of a target as any in the world. It's not an unbearable burden for us to carry at this stage. Would I wish to get more net benefit out of this capability to overcome that tax? Yes. Would I stop deployment of new technology? No. Do I like it? No, but we are still learning.

How long before we see the Trusted Computing platform supported on multiple systems? I think it will take longer than most people anticipate. Maybe in the five- to 10-year range.

What do you say to people who say Intel is out there pushing Moore’s Law, but have a 600MHz machine and say they are doing just fine? If you look at the convergence of computing, communications and digital content, and you think 600MHz is enough, that's fine. I'll take my 3.2GHz machine over your 600MHz any day. If I'm into rich content, data mining and multitasking (you need more).

What's your take on the telecoms? Obviously it's a core part of your business. I think they are still struggling with two things: the movement to more standard building blocks that will lower the cost of telecommunications. The other thing is the competitive environment. That comes in two categories—-rules and regulations and the battle between the wire line and wireless guys and the cable guys. And you can add voice over IP. They are trying to deal with how to grow if the revenue per user goes down. You grow by adding new services, but you have to do that at the same time that people are coming in and trying to undermine your basic business model. At the same time, the government says that if you make an investment, you have to share. So they are kind of between a rock and a hard place.

Is that stalling that part of your business? In the U.S. that is stalling. But in China and India there is rampant expansion. They are suffering from overcapacity and investments from the late '90s. That's why the rule of thumb is that the communications sector will improve after the computing sector.

Is Sun Microsystems still viable? Scott (McNealy) has a parallel on the desktop, and that is Apple. They are sophisticated software companies who are wed to hardware revenues and margins. And they are both wed to proprietary hardware. The question is, 'What is the business model that you can carry over that is successful?' Apple's model has been their increasingly happy with 2 percent of the marketplace, and they are happy to cede the other 98 percent of the marketplace to other people.

I don't know if Scott is on that same track or not. He has had 10 quarters of decreasing revenues. He is increasingly facing competition from Itanium and the more standard building blocks and at the high end from big-iron companies. So he has to decide whether he is going to be a closed-source, proprietary-limited player, as Apple has decided to do, or he is going to do something different. He is at least using Intel architecture at the bottom of the scale. Customers want Solaris on cost-effective building blocks. We have tried to win designs at Sun, as we do at Apple all of the time. I don't have any unique advice for these guys.

Is Sun still a valuable partner, and will that relationship grow in the future? I'm biased in this area. I think that SPARC is not a long-term player in this area. To be a long-term player, (McNealy) will have to start to accept product margins that make (Sun's) price/performance more attractive. We compete enough with them in the big-iron area to know what the price/performance advantage of our architecture is, and that's why he is losing. He will either take a huge margin hit, or he needs to do something different. But he has a lot of cash, and if his board supports him, he can continue to move at the speed he has been moving.

Will Intel ever be able to crack Apple?

We keep trying, but frankly it gets less and less interesting each year. When they were 10 percent of the market it was a more interesting issue. But at 2 percent of the market...our sales can blip 2 percent quarter on quarter, so we can shrink or grow by a couple of Apples. There are lots of interesting aspects in there. Steve (Jobs) is trying to appeal more to the Intel base. You might ask why he doesn't take his OS and try to compete in the other 98 percent of the market. But he doesn't choose to do that.

The OS X kernel runs just fine on Intel. Just a matter of the app stack to stick on top of that. But you'll have to talk to Steve about that. We just try to get design wins with these guys.

Intel does have some marketing approaches in common with Apple, such as the consumer approach with Centrino. With Centrino, we're trying to make sure the consumer gets the whole brand experience. So we have to make sure it works with what's out there. People are going away from thinking about what particular protocol you have out there to a smart system that will pick out the best connection out there period, and the brand will migrate to that.

Is that something that you are going to provide as a feature on Intel-based systems? There is a lot of work going on in tuneable radios and giving the user the best possible experience. We started off with 802.11b, but then it's a, g, x or whatever coming. So you want to come into the room and punch a button and say, "Give me the best connection, and the radio is going to tune to that." And hopefully, we will have the billing in place to handle it. That's clearly where the industry is going.

Are you angling for the job of secretary of education? You've talked about education three years in a row here. It's a complicated problem. There is so much inertia and momentum needed to turn (the educational system) even one degree. The rest of the world is hungry, and the U.S. sees this as a God-given right. We still fortunately have the best university education system, and we need to build off of that and rebuild the K-12 system to complement that. You talked a lot about the U.S. business climate. What needs to be done to make the situation better for companies? Is it stock options, less brain drain? It's K through 12 education which is this hoary problem. It's more money into the likes of the National Science Foundation for what I call physical science research, IQ research, engineering research, and our research universities. I'd love to see a government that could effectively talk about broadband or infrastructure. So you are saying that the Bush administration doesn't have a handle on broadband and communications convergence? I don't want to pick on Bush. I don't think the Clinton administration had a good handle on this either. You've got the FCC that is in the middle of this through regulation. And we just had a decision which needs some clarification on new broadband investment, and if you need to unbundle that and make it available to the competition. That needs to be clarified. The government needs policies that promote investment, not inhibit investment. I'm not here advocating that we revisit the entire telecommunications regulation infrastructure. At least on the 21st century infrastructure, which is

broadband, there should be policies that promote investment in that. The rest of the world treats our industry as an investment in the future. The United States treats our industry as, you have always been here, you'll always be here, so let’s raise taxes. What's the response from politicians when you deliver this message? We (in high-tech) may have two advantages here. People in our business have a longer thought process than politicians looking to get re-elected. And we tend to travel more than most politicians. I visit about 30 countries a year. So you get to see what is going on around the rest of the world so you can bring that to bear. The message from Intel has been consistent. Fix the education system, R & D, infrastructure, and do no harm (with legislation). Whether they chose to listen and how they put it in their priorities is something we can't control. We give the message.

I thought you might ask me, "Hey, Craig, you are a U.S. citizen. Don't you have a patriotic duty to support the U.S. economy?" Increasingly our business, like other businesses, is international in nature. We will maintain a position as a U.S. flagship company. But we will do business around the globe and use resources around the world. Intel and Microsoft and Hewlett-Packard and Dell are increasingly in this mold. The world is the marketplace. We have a patriotic allegiance to the United States and we will speak as loudly as we can. But if people won't listen, that won't keep us from doing the right thing for our company.

“Semi Market Thaws in 2003”, Jason Lopez, December 4, 2003

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Semiconductor vendors saw a thaw in the markets in 2003. In its annual rankings, Gartner reports the overall industry grew 11.8 percent, well above the 2 percent growth rate of 2002.

Unsurprisingly, Intel retained the top spot, bringing in US$28.05 billion in 2003 -- almost three times more than second-place Samsung, which earned $10.3 billion in chip revenue. "The 28 billion-dollar machine is computer microprocessors -- and right now the only companies that are serious market-share players are Intel and AMD," Gartner analyst Jeremey Donovan told NewsFactor.

Still, AMD is far from approaching the top ten, with only a single-digit share of the PC chip market and annual revenues of $2.6 billion.

"There are people who believe that AMD has, in theory, a superior architecture," Donovan said, "but what Intel has is a quality road map for distribution. It's just too hard to compete with that." Intel's share dropped 0.2 percentage points from last year, but it still has a commanding 16 percent of the global chip market.

There's Intel, Then There's the Rest

No. 2 Samsung -- with a 5.9 percent market share -- saw big growth in 2003, up 19.6 percent compared to the previous year. The firm switched its production focus to NAND flash, capitalizing on higher selling prices. Another NAND winner was Toshiba, which enjoyed 15 percent growth in 2003.

A new entrant, mostly in name, climbed into the third spot. Renesas Technology (pronounced similarly to "Renaissance"), a joint venture between Hitachi and Mitsubishi Electric, grabbed 4.3 percent of global market share with $7.5 billion in revenue. The firms were previously Nos. 10 and 11 respectively.

The top ten firms in order by revenue for 2003 are Intel, Samsung, Renesas, Toshiba, Texas Instruments, STMicroelectronics, Infineon, NEC, Motorola, and Siemens. These companies controlled 51.6 percent of the global chip market.

Chicken and Egg

One characteristic of many of the top ten companies is product focus. While Samsung and Toshiba, for example, make a broad range of chips, firms like Intel, Texas Instruments, or Infineon have staked off a big corner of the market.

Texas Instruments -- ranked 5th -- kept a strong presence in wireless chips and increased its focus in specialty applications. It surged 18.6 percent in 2003 with $7.4 billion in revenue and a 4.2 percent market share. The European giant Infineon grew 33 percent on wireless and DRAM chips.

Top ten firms also tend to make their own semiconductors. "What distinguishes a lot of these top ten companies from others is that they own their own fabs," says Donovan. "It's a chicken and egg thing -- they own enough fabs because they do enough volume to own their own fabs."