You Suffer from this Strategic Blind Spot

By the early-1980s, Intel Corporation was doing a booming business in the dynamic random access memory (DRAM) business, supplying memory chips for computer manufacturers. In the 1970s, Intel competed with other small American memory manufacturers, with names like Mostek and Advanced Memory Systems. But the 1980s saw Japanese competitors, previously fringe players, coming strong onto the world market, pushing customer expectations even higher for quality and design. Also, the Japanese rivals seemed to have unlimited access to funds to build advanced fabrication facilities to manufacture the semiconductors. Where were they getting all of this cash? Intel, a small company at the time, watched as the Japanese contenders built out enormous manufacturing capacity to produce the DRAM chips for an increasing world appetite. In the process, DRAM margins were compressing. The cost to stay in the game by pre-funding new manufacturing capacity for demanding customers was a formidable challenge.

Intel leadership applied the standard playbook when facing a rapidly commoditizing market. Observing the DRAM market as a whole and trying to niche into a unique application, value adds, or advanced technology purpose. Anything to create differentiation and real economic value. But the Japanese were relentless, and none of the strategies worked as well as hoped. In the process, DRAM pricing and margins continued to spiral down.

While the memory business continued to be a tough place to make money, there was light in one corner of the market. In 1971, Intel had designed the world’s first commercially produced microprocessor, the Intel 4004. Microprocessors are the brains inside every computer, doing all the calculations, which are then stored in the DRAM. When IBM debuted its iconic IBM PC in 1981, Intel’s advanced 8088 chip was baked into the design. And when all the clone computer manufacturers came out to compete with the IBM PC, they also baked Intel’s chips into their design. The new surge in the microprocessor market represented a new hope for Intel.

But the good news story took a hiatus in 1984, with customers cutting back on chip orders. However, by this time, Intel was massively invested in new chip-making capacity and could not roll back the manufacturing process fast enough to cope with the drop in demand. The company machine continued to roll forward, suffering heavy losses in the DRAM business. In 1985, after months of management indecisiveness and clinging to the hope that a miracle could be found, Intel CEO Andy Grove and Chairman Gordon Moore faced stark choices.

Grove asked Moore, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore responded immediately, “He would get us out of memories.” Grove replied, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”

And that’s what they did. Grove and Moore went out the revolving door on the main floor, stomped out their cigarettes, and walked back in, symbolically exiting the DRAM business and re-entering as a microprocessor company.

But Intel’s core identity was deeply rooted in DRAM manufacturing, and many executives were cool to the idea of exiting memories. It was an immense struggle to turn the corporate culture around to dump the memory business and focus on the microprocessor market. The company continued to lose money. Some executives quit, others transferred, plants were shut down, and thousands of people were laid off. But, one year later, the company was out of the DRAM business; it took another year to return to profitability.

What started as a small business in the corner of an ageing manufacturing facility quickly became Intel’s mainstay product; they were now a microprocessor company. By 1992, Intel was the leading force in the microprocessor industry. Its focus on this sector allowed it to grow to become the largest semiconductor company on the planet, dwarfing its Japanese competitors.

Insight and Application

Companies often suffer from market myopia, the short-sightedness blinding them to changes in customer demand and competitor threats. But when the corporate culture is also wedded to existing products and markets, implementing the necessary change to return a business to health is severely hindered. Intel had grown up as a memory company, DRAM making up the bulk of their sales. Microprocessors were a tiny segment of their business. But what would be evident to an outsider, that any future DRAM business would always be a losing market for Intel, challenged Intel’s very identity. Getting out of DRAM would be the equivalent of burying a child. But of course, this is what needed to happen. When Grove and Moore walked out the symbolic revolving door and back in, they were stating that the business segment that had been so good to them at the beginning was now dead; long live the new microprocessor business.

Image Attribution: Alpha Stock Images — http://alphastockimages.com/

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