Intel and Firm Analysis
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
J-oldroyd@northwestern.edu
801-422-7888
650 TNRB
Persistence of Superior Returns by
Industry
The Typical cross-country correlation in in dusty
profitability is extremely weak
Source: Tarun Khanna, Harvard Business School
1
Persistence of superior returns 19801989
Industry
Cigarettes
Soft Drinks
Malt beverages
Paper Mills
Metal Cans
Pharaceuticals
Toiletries
Steel mills
Periodicals
Aircraft engines
Book publishing
Cement
Bolts
Vehicle Parts
Cars
Aircraft parts
Petroleum refining
Surgical instruments
Radio & TV
Mobile homes
Meat packing
Plastic products
Electronic components
Process control
Computers
Semiconductors
% if above
average return
retained each
year
% remaining
after 10
years
100
83
79
78
78
72
72
67
67
67
64
64
62
59
59
55
54
54
53
53
52
50
48
46
45
44
Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996
100
14.5
9.5
8.3
8.3
3.7
3.7
1.8
1.8
1.8
1.1
1.1
0.8
0.5
0.5
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0
0
0
2
A Cautionary Note
People began to notice problems with the
industry approach…
U.S.
Transient
46%
Year
2% Industry
18%
Corporate
parent
4%
Rest of
World
Transient
42%
Year Industry
3% 10%
Business
Group
11%
Business
segment
30%
In the U.S., corporate strategy is typically the
icing on the cake, not the cake itself
• Business units must be competitive
on their own merits
• …in attractive industries
• But the icing can make the decision
difference between a good cake and a
bad one
Firm
34%
In much of the rest of the world, corporate
strategy is more prominent
Membership in a diversified entity has a larger
effect on profitability
The effect on profitability is more likely to be
positive
Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000
Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey
Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997
3
Variance within the Steel industry
Performance Differentials in
the Steel Industry
1990 Value of $1
(1981-1990)
Invested in 1981
$4.50
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
Average = $1.38
$1.00
$0.50
$1.29
$1.38
Inland
USX
$0.76
$0.07
$0.26
$0.00
LTV
Source: R.P. Rumelt (1995)
Armco
Bethlehem
Nucor
4
Firm Strategy
Industry
Choose
Your
Sandbox
Firm
Business Definition
Firm Resources
Business
Unit
Which Business
Units?
Business Unit
Boundaries
Managing Cross
Business Synergies
Strategic
Advantage
5
Moore’s Law
Gordon Moore:
#29, Moore, Gordon Earle
72 , self made
Source: technology, Intel (quote, executives, news)
Net Worth: $5,300 mil
Hometown: Woodside, CA
Undergraduate: University of California Berkeley, Bachelor
Graduate: California Institute of Technology, PhD
Author of "Moore's Law": Power of microchips doubles every year (later amended to every 2 years).
Developed first integrated circuit at Fairchild Semiconductor in 1950s, cofounded
Intel with Robert
Noyce (d.
1990), venture capitalist Arthur Rock. Intel now world leader in microchips (annual sales, $30 billion),
but Silicon Valley's linchpin lately slipping; stepped down as Intel's chairman emeritus; gave half of fortune to
Gordon and Betty Moore Foundation to support the environment, education and science.
6
Would you have invested?
7
The Top 25
8
Why are Microsoft and Intel Friends?
9
Comparison
10
Creating Advantages
Become the Standard
•
•
License the technology at low cost to many suppliers to
become the standard
Low bargaining power (e.g., IBM)Intel does not reap
high profits from the standard
Become a Proprietary Standard
•
•
•
Intel eliminates licensing on the 386 once it has capacity
to supply the industry; IBM is only competitor
IBM does not choose to incorporate 386 as the PC
standard right away, opening the door for Intel to
negotiate with Compaq
Speed to market capabilities allow Intel to be first to
market with next generation microprocessors
Sustaining Advantage
“Intel Inside” campaign (Differentiators)
•
•
creates brand awareness with end customers (costly to
imitate)
creates bargaining power over computer manufacturers
Speed to market capabilities (Sequencing)
•
reputation and ability for developing the next generation
of processes faster than other players
Cost and complexity of market entry
•
cost of development and fab is approximately $1 billion
Intel’s financial resources allow it to:
•
•
buy options on a wide variety of new technologies
vigorously defend its patents
The Transitory Nature of Advantages
“Every competitive advantage is predicated upon a
particular set of conditions that exist at a particular
point in time for particular reasons. Many of history’s
seemingly unassailable advantages have proved
transitory because the underlying factors changed. The
very existence of competitive advantage sets in motion
creative innovations that, as competitors strive to level
the playing field, cause the advantage to dissipate.”
Clayton Christensen
Source: Clayton Christensen, Past and Future of Competitive Advantage, 2001
13
Structure of Microprocessor Market Before and After the 386
PC
Mfr
Licensee
Licensee
PC
Mfr
Intel
PC
Mfr
IBM
Licensee
PC
Mfr
Licensee
PC
Mfr
14
What is the Resourced Based View?
The RBV assumes that firms are
endowed with different bundles of
resources. These may include:
locations, brand names, distributions
channels, patents, cultures etc.
The RBV seeks to understand what
resources are important and what a firm
needs to do to protected and renew their
important resources.
15
Resources and Capabilities must be…
Valuable:
The resource must have value by
adding value to the customer or
lower the producers costs.
(Patented 8 track technology is
no longer valuable)
Rare:
The resource must have limited
access. (Eg. Tangible like Oil
field, retail space, Prime time TV
or intangible skilled labor and
sales channels.)
Non-substitutable:
The resource does not have an
abundant substitute. (eg. Skilled
labor can be substituted with
automation.)
Appropriable:
The owner must be able to
capture the value created. (eg.
Public roads vs. toll roads)
16
Types of Resources
Resources and capabilities
Examples
Physical
Internal
• PP&E
• Physical infrastructure
• Financial Resources
• Product selection decision
Intellectual
• Brand names
• Patients/ IP
• R&D capability
• Market insight
Network
• Supplier channels
External • Customer relationships
• Complementary networks
• Warner Bros. Film library
• DeBeers diamond mines
• Toyota’s superior lean
production facilities
• P&G’s Brand names
• Amazon’s technology
•
patients
Rx drug development
process
• Microsoft’s broad
•
•
customer base
Kellogg’s supply channels
Airlines partnerships
17
Resources & Capabilities
Resources
Intangible & Tangible
Endowments
•Knowledge
•Brand Names
•Financial Capital
•Oil reserves
Capabilities
& Activities
Orchestrating
•Effective use of logistics
(e.g., Wal-Mart)
•Motivating & retaining
employees (Marriott)
•Design and production
Skills (Komatsu)
•Speed to market (Intel)
Resource
Commitments
Lumpy commitments
•Investment in new fabs
•New market entry
18
The VRIO Framework
Is a resource or capability . . .
Valuable?
Rare?
Costly to
Imitate?
No
--
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Exploited by the
organization
No
Yes
Competitive
Implications
Performance
Implications
Disadvantage
Below normal
Parity
Normal
Temporary
Advantage
Above normal
Sustained
Advantage
Above normal
19
Creating Firm Strategy
Mission Statement
Objectives
Strategic
Analysis:
•Industry analysis
•Customer/mkt
place trends
•Envmt forecasts
•Competitor
analysis
•Assessment of
firm capabilities
(SWOT)
Strategy
The central, integrated,
externally-oriented
concept of how
we will achieve
our objectives
Supporting Organizational Arrangements
Structure, processes, functional integration, etc.
Where will we be active? (and
with how much emphasis?)
What will be our speed
and sequence of
moves?
•Speed of expansion
•Sequence of initiatives
Staging
• Product, market, and
geographic categories
• technologies
• value chain stages
Arenas
Economic
Logic
Vehicles
How will we get there?
How will we obtain our
returns?
• Cost economies (scale, scope,
learning)
•Premium price (service,
features)
Differentiators
•Internal development
•JVs
•Licensing/franchising
•Acquisitions
How will we win?
•Image, customization, price,
styling, reliability, etc.