Intel Corp Strategic Analysis: Advanced Business Strategy
Analysis conducted for the Business Strategy Specialization: Advanced Business Strategy course offered by UVA Darden School of Business on Coursera
Introduction
Intel Corporation is a global manufacturer of semiconductor and micro processing technology. Famously known as a company that pioneered the emergence of the industry, Intel has been able to maintain their leading position through numerous business cycles via a relentless pursuit of business excellence and commitment to creating value to stakeholders. However, computing hardware and technology is a notoriously fast evolving industry and Intel’s competitive position is constantly under threat from other firms. Below we will conduct several strategic analyses to help us better understand Intel’s competitive position in the current global environment.
Competitive Life Cycle Analysis
In their 2019 annual report, Intel often emphasizes the need to position itself to capitalize on technological “inflection points”. These “inflection points” compare well to the dynamics of a competitive life cycle, and a deeper look at Intel’s business reveals that they are currently in the midst of intense competition across multiple lines of business.
Intel organizes their business revenues into two groups: PC-centric and data-centric revenues. PC-centric revenues come from the design and manufacturing of technology to support personal computing and current internet infrastructure. Data-centric revenues refer to the design and manufacturing of technological capabilities that capitalize on next generation opportunities: data centers and cloud computing, internet of things, artificial intelligence, and autonomous driving. With support from Addendum 1, we analyze the competitive life cycle for each of these groups.
The global PC unit has been in existence for over 40 years. The global PC market is huge and represents a major revenue-generating opportunity for Intel as this business unit accounts for 52% of Intel’s total revenues. However market growth faces headwinds as more computing transitions to mobile devices. The total size of the global market opportunity seems to have reached the top of the S-curve, and Intel revenues are expected to hold steady in the coming years. In a mature industry, we expect innovation and disruption to occur, and we see this happening in two ways. First, in alignment with its past development, Intel prescribes to Moore’s law which states that the functionality and performance of microprocessors should double every 2–2.5 years (either by increase in density of transistors on a chip, or reduction in size of the chip). As such, the 10-nanometer chips introduced in 2019 are followed by a development pipeline of 7-nanometer chips expected to debut in 2021 and 5-nanometer chips after that. So although the PC industry is quite mature, Intel lives in a constant state of 2–2.5yr disruptive cycles as it competes primarily with Advanced Micro Devices (AMD) to maintain its edge in this lucrative industry. Another innovation which will disrupt the status quo is the transition from the traditional CPU model to an xPU model which combines the traditional functionality of CPU, GPU, AI accelerators, and FPGA into one unit.
Meanwhile Intel’s data-centric business unit comprised 48% of annual revenues in 2019 but exists in an entirely different stage of the competitive life cycle. The key business lines, cloud data centers, internet of things, artificial intelligence, and autonomous driving, are all in the early or late growth stage. While these next generation industries have been on many companies radar for a long time, requirements of new technological applications or devices have yet to be cemented, so competition remains fierce and the “shakeout” phase has yet to occur. Major competitors include Xilinx, Micron, Qualcomm, Broadcom, ARM, AMD, etc. depending on the specific micro processing technology. Revenues in these sectors are still growing and they are likely in the beginning to middle of the S-curve. Current percentages of Intel revenue are: cloud / data center: 33%, internet of things: 5%, autonomous driving: 1%, artificial intelligence: 6%.
Overall, Intel estimates its total addressable market (TAM) value at $300bn and annual invests about $13bn or 20% of earnings into R&D alone (excluding capital investments) to ensure their legacy business stays ahead of disruption and emerging businesses stay competitive to capitalize on dynamic market opportunities.
Key management positions including CEO and Chairman of the Board have recently transitioned to leaders with strong financial backgrounds and this is expected to help them appropriate assess and navigate future decisions around strategy investments. However Intel leadership are not career-engineers, as in the case of several key competitors, and this presents a separate set of challenges.
Internationalization Analysis
There is demand for computing technology in every country across the globe. Given the high amount of global trade in this industry, it has been critical for Intel to develop a sound international strategy to establish and protect their competitive position.
While requirements for micro processing and computer technology are fairly standard with low national differentiation, Intel has integrated globally in order to efficiently conduct design and manufacturing operations (Addendum 2). The design, manufacturing, and assembly-and-test footprint is shared in Addendum 3. This strategy has resulted in several key benefits:
· Take advantage of global markets for technical talent (nearly 90% of Intel’s 108,000 global employees are in technical roles)
· Establish operations in the home markets of key clients and buyers of their product
· Establish a flexible supply chain that can withstand supply shocks or ramp-up to meet demand
· Have presence in major manufacturing or innovation hubs to build out a diverse support network of 3rd party partners
In most cases, Intel has employed a strategy of Foreign Direct Investment (FDI) to enter international markets. This is largely because microprocessor manufacturing requires advanced manufacturing techniques that are capital intensive, and such processes are different to manage externally. A primary benefit of this strategy is that Intel can ensure protection of highly confidential intellectual property and technology trade secrets.
Complimentary to their strategy of FDI, Intel has also built a network of alliances with partners to take advantage of Intel’s presence in markets that occupy global leadership positions in manufacturing or innovation in order to augment their own capabilities.
Intel’s strategy appears to be an industry standard as there is little firm-level differentiation between competitors (Addendum 4).
Diversification Analysis
We observe that the scope of Intel’s business is highly diversified business and they enjoy the benefits of a shared value chain across related industries.
As previously mentioned, 52% of Intel’s revenues come from PC-centric business, 33% come from cloud or data centers, and the remaining 15% come from other emerging sectors. Since the underlying design and manufacturing process of microprocessors can be leveraged across specific applications, Intel has moved to diversify its business and capitalize on new opportunities.
To achieve diversification, Intel has adopted both organic and inorganic growth methods. Legacy, PC-centric business lines have been developed from within. But more recently, Intel has deployed a strategy of acquisition to grow its capabilities in new areas. In 2017 Intel acquired Mobileye for $15bn to jumpstart their competitiveness in intelligent transportation and mobility. This move reportedly opened a $70bn total addressable market opportunity across advanced driver-assistance systems, autonomous vehicles, and crowd-sourced maps. Another notable acquisition occurred in 2017 with the purchase of Israel-based Habana labs for $1.7bn to increase competitiveness in AI Accelerator technology. In the past 5 years, Intel has deployed approximately $30bn to complete 33 acquisitions to open new opportunities or re-inforce their competitiveness. One other notable instance, Intel streamlined its operations through divestment of its 5G smartphone modem business, enabling the organization to refocus human and financial capital towards more attractive opportunities.
Through further analysis of Intel’s diversification strategy and existing value chain, we can see that the firm has most recently employed strategies of horizontal integration to open new market opportunities. This has allowed Intel to capitalize on historical investments to integrate vertically which have given them end-to-end control of the design and manufacturing value chain and sets them apart in an industry where competitors typically focus on specific parts of the vertical value chain.
Intel holds a distinct competitive advantage in regards to diversification across related industries due to their existing global supply chain, network of technical talent, and large cash reserves. We can combine this assessment with Intel’s push into industries that are set to dominate the next generation of devices and conclude that Intel’s diversification strategy has positioned them well (Addendum 5).
Stakeholder Analysis
As a global company, Intel has wide range of stakeholders to be managed. Given the sheer size of the company, it is nearly impossible to prioritize the needs of one group over the other, so Intel has adopted numerous policies to meet these different needs. It all stats with Intel culture, which has 5 main tenets:
· We must be customer obsessed
· We must show up as “One Intel”
· We must be fearless
· We need truth and transparency
· We must create a diverse and inclusive workplace
Upon employment, Intel employees are responsible to uphold Intel Values, Intel Code of Conduct, and Intel Global Human Rights Principles.
Intel’s culture and values are realized through a number of programs to address the most critical needs of stakeholders, identified in Addendum 6.
Product Functionality: A multi-year innovation program, “Project Athena”, was launched to advance functionality of the PC ecosystem to better meet experience indicators in performance, responsiveness, battery life, etc. In total, Intel invest about 20% of revenues each year into R&D operations to meet their commitment to Moore’s law and double the performance of Intel chips every 2–2.5 years.
Environmental Impact, Sustainability, and Ethics: All Intel manufacturing sites are designed to meet LEED standards and recently a LEED platinum foundry was opened in Israel. Intel has invested $200mn in energy conservation projects since 2012 resulting in savings of 4.5bn kWh. Semiconductor manufacturing is a water-intensive process, and currently Intel returns 80% of the 1.5bn gallons used each year back to the environment. Their goal is to achieve 100% restoration by 2025.
Working Conditions: Intel invests significant resources to retain and develop internal talents. In order to project overall health, wellness, and safety, they have implemented programs to support flexible work schedules or other benefits for families, competitive pay, and on-site athletic facilities.
Financial Returns: Since 1990 Intel has returned $199bn to shareholders through dividends or share re-purchases. These programs have not just rewarded shareholders, as Intel employees are also offered stock-options as part of their compensation packages.
Truth and Transparency: The audit, compensation, corporate governance and nominating, and finance committees are all independent. Intel also willingly adheres to US EEOC mandates to disclose information about survey pay and employee representation.
Diversity and Inclusion: Female board members occupy 3 out of 7 positions on the board. In order to address gaps in representation by women of color, Intel has joined 11 other companies to fun an initiative to double the number of women in color graduating in the US by 2025. Overall, Intel has committed $300mn to solving problems of workforce representation.
Conclusion
Intel is a global company, and this is evidenced by the expansive nature of their business scope and number of ongoing strategic initiatives. Having been a market leader since the 1960’s, Intel has successfully adopted an internal culture that enables them to skillfully respond to the ongoing, dynamic change of business and stakeholder needs. However, given the industry’s short business cycles and critical need for ongoing innovation, combined with stagnant growth of their legacy PC-centric business, Intel faces significant headwinds. However according to 2019 Q4 financial statements, revenue outperformed expectations and was led by the ongoing expansion of next-generation data-centric segments. Thus while we are at an inflection point, Intel’s prior investments to integrate vertically, management efforts to concentrate capital investments in revenue-generating opportunities, and their fleet of strategic initiatives to manage stakeholders appear to have Intel well positioned to continue its track record of market leadership in years to come.
Sources used:
1. Intel Corporation Annual Report 2019
2. Morningstar Equity Analyst Report, Intel Corporation
3. https://www.intel.com
4. https://en.wikipedia.org/wiki/Intel
5. https://www.ft.com/content/9d0e84aa-4997-11e8-8ee8-cae73aab7ccb
6. http://panmore.com/intel-corporate-social-responsibility-strategy-stakeholders
