The New Intel
...but it also is the most technologically advanced. • Comparison Intel, Texas Instrument and Motorola are the three largest domestic semiconductor suppliers. Intel products are used in 4/5 of PC’s that are constructed and saw a 12% sales growth in 1999. Texas Instrument (TI) was the creator of the integrated circuit and has switched focus to DSPs or digital signal processors that convert analog signals into digital binary code. Motorola holds a strong foundation in the cellular market and is the producer of the processor housed in Apple computer systems. Intel has been the dominant force in the industry, with market share in excess of 80 percent. The company has the ability to render competing product obsolete and is regarded as a manufacturing powerhouse. The first and most well-known of Intel’s competitors is Advanced Micro Devices Inc. AMD is a distant second in the PC microprocessor industry, but is considered to be Intel’s arch rival. AMD had only 14% market share at the end of 1999; however this number is already growing just 3 months into the new millennium. The most impressive accomplishment came on March 6, 2000 when they became the first company to break the gigahertz barrier when they introduced the 1-GHz Athlon processor. Intel’s innovative products, production capacity, and vast amount of resources have left the microprocessor market with only two main suppliers: Intel and AMD. 3.3 Company Analysis • Position in the Industry In 1998 market share data stated that Intel had the top share of the market at 80%, AMD at 5.7%, Motorola at 4.4%, IBM at 3.4%, Sun Microsystems at 1.1%, Cyrix/National Semiconductor at 1% and other firms comprising the remaining 4.4%. National, which bought Cyrix has since left direct competition with Intel and has concentrated efforts on other semiconductor applications. Intel is late to market within the communications and networking industries. At the time of the case, the Communications Group accounted for approximately 10% of Intel’s revenues and was expected to grow over 33% between 2000 and 2003. The Networking Communications group accounted for about 2% of Intel’s annual revenue and is expected to grow 30 to 40% between 2000 and 2003. Within these newly departmentalized units, Intel has proven themselves in wireless memory chips for cell phones. Intel is the number one supplier of memory chips used in cell phones. While network cards, modems, switches, routers, web appliances seem to be a far cry from Intel’s core business, the production of mobile memory for cell phones fits Intel’s core competencies in production, distribution, and marketing. Additionally, competition is an issue in regards to most of Intel’s new product lines. 3.4. Customer Analysis In relation to the above, there are four major market segments as follows:- i. Geographic Segmentation: This segmentation calls for dividing the market into different geographical units such as nation, states, region or cities; ii. Demographic Segmentation: In this segmentation, the market is divided into groups such as age, gender, occupation, race and nationality; iii. Psychographic Segmentation: Buyers are divided into different groups on the basis of lifestyle such as culture-oriented, sport-oriented or outdoor-oriented. People differ in attitudes, interest and activities and these affect the goods or services they consumed; iv. Behavioral Segmentation: In this segmentation, buyers are divided into groups on the basis of their knowledge of, attitude towards or response to a product. The above 4 mentioned segmentation plays important roles in computer products as below: • Consumer Trends Consumer trends focus on the general trends of computers and technology products, the demographics associated with the adoption of these products, the emergence of the Internet and e-commerce, the buying influences of technological products, and business-to-business tech spending. These trends affect the demand for both consumer and business technology products and their corresponding industries. • General Trends in Computer and Technology Buying Businesses are no longer setting the requirements or parameters for new computer product developments. Changes in processing speed and computing power have not been significant enough over the past few years for businesses to justify buying new machines. Thus, personal computer design is now increasingly being governed by consumer needs, wants, and desires. For example, Consumers are demanding portable products with the capabilities of a personal computer for their fast-paced lifestyle. They want the use of technology during commuting and while at work. • Growth of Internet Driving Computer Consumption The growth of Internet access has increased faster than computer consumption between 1997 and 2000. In 1997, only 18% of households had at least one person using the Internet at home. There appears to be a direct relationship between computer consumption and the growth of Internet access. An 18% rise in households with Internet access between 1998 and 2000 corresponds with a 12% rise in new computer buyers throughout the same period. Thus, the explosion of Internet surfing as a home, recreational activity appears to be driving computer consumption. • Demographic Trends in Home Computer and Internet Access The adoption of Internet access has a direct relationship with such demographic factors as annual family income, householder’s educational attainment, marriage status, household size, whether school age children are present, the degree of urbanization of the household’s location, and geographic region. 4.0 Product Market Focus 4.1 Marketing and Process • Process Processors are used in a variety of industries in addition to the consumer PC market. Chips are most often sold to Original Equipment Manufacturers (OEM), which are simply manufacturers of end products. Partnerships between developers and manufacturers remain stable due to the intense interaction and volume of dependence on each other throughout the process. Traditionally, the industry has concentrated efforts through a push strategy, concentrating on selling its products to manufacturers, who represent the final purchaser of the chip sets. The manufacturer then features the components in the end product as selling points in differentiation. Intel has served to change this strategy and begin pulling sales out of end-consumers through a unique branding strategy along with a strong marketing mix management. • Positioning Intel relies on a functional positioning concept on which it has built its marketing mix strategies. The company then positions itself through the users of its product based on image and attributes. Although the basic attributes of semiconductors are the same, Intel’s innovation and expertise has allowed them to be positioned as top of the brand for processors. Its competitive advantage of image differentiation and awareness creates a position in the marketplace of quality, performance and overall leadership. The idea is for the consumer to think of processors and the Intel brand name as one in the same. 4.2 Target Market Intel has also positioned each of its segmented product lines to the ultimate end user. The Celeron line is priced low to serve the sub-$1000 PC market and is positioned as a lower performing chip for those users that only require limited computing functions. The Pentium line is positioned for use in performance PCs and entry-level servers and workstations. Finally, the Xeon line is positioned to mid-to high-end servers and workstations. Each line’s position is further supported through its price and performance levels. Through Intel’s early market interaction, the company has created a brand name and position within the industry that has helped it achieve and maintain dominance as a processor powerhouse. The company is intent on carrying their strong market position to new ventures in communications and wireless applications. Representing Intel’s core business, microprocessors account for approximately 80 to 90% of Intel’s revenues and approximately 100% of profits. As noted in the previous paragraph, commoditization of computer components occurred and aggressive segmentation became a necessity. 5.0 Marketing Program 5.1 Product Strategy • New Business Initiatives Intel’s New Business Group, headed by Gerry Parker, was deployed with the purpose to create new businesses from scratch. At the time of the case, Intel had invested over $50 million in 25 different new business projects. Most of the New Business Group’s projects were fairly distant from Intel’s core competencies and distinctive capabilities. Web hosting, for instance was perhaps Intel’s furthest departure from its core business. The web hosting market was projected to grow at a 30% compound annual rate until 2004, and Intel expected to invest $1 billion in this new business venture by 2001. At the time of the case, web hosting accounted for approximately 1% of Intel’s annual revenues. Intel’s web hosting initiative put it into competitive relationships with a number of its current customers. In contrast to Intel’s New Business Group, Intel Capital’s purpose is to stimulate advances in computing by investing in promising companies. Ultimately, the unit’s goal is to create demand for Intel’s core products, microprocessors, through the cultivation of complimentary products. Intel Capital allows Intel to be aware of environmental instabilities including disruptive technologies through the constant monitoring of smaller, innovative firms’ operation. Intel’s new business initiatives and investment activities in smaller firms was a strategic maneuver to stimulate demand for current Intel products and to monitor its external environment. While its strategy is effective in theory, Intel Capital’s vision lacks focus in cultivating exclusively complimentary products to Intel’s core business. 5.2 Price Strategy The function of effective pricing is to satisfy organizational, channel, and buyer expectations. Pricing strategy offers a unique aspect to Intel’s strategy and requires strong management and industry knowledge to correctly position the product to manufacturers and end-consumers. Intel has the capabilities to offer low priced, quality processors as a selling point to manufacturers who are focused on the end product’s price. To the consumer, Intel focuses on its performance and quality in branding to pull their chip use through the value chain and leverage their brand onto manufacturers. Intel operates in an oligopolistic market, where its position can be argued to have monopolistic qualities. Intel’s status coupled with Microsoft’s power have been said to create a duopoly, in which the two firms control the PC industry. Operating in such an environment that houses extreme competition and price rivalry, price becomes less flexible of an issue for firms. While Intel is required by market forces to keep its pricing competitive to ensure continuing dominance, its power within the industry allows it to set the tone for price levels based on quality of performance. Its market position and firm financial and production strength give Intel leverage over competition when smaller firms try to gain share by undercutting price. In light of the increased importance of Internet applications and the computer industry redefining itself in the sub-$1000 market, Intel has had to segment the market and price products accordingly. The low-end PC market contains fierce competition and a fast growing, high profit outlet for manufacturers. Due to Intel’s effective branding strategy and production capabilities that reduce costs, it has been able to counter AMD’s price focus and remain a leader against their low-end lines with 60% share in the market. Mid-level processors are priced in Intel’s Pentium line. As of 2000, four Pentium chips were released in multiple Gigahertz ranges that were segmented and priced according to speed. These products ranged from $250 to $400. Intel’s Xeon processors were developed for the business server and workstation computers. The company has taken a penetrative approach to pricing. Its chip usage accounts for 88% of the low-end market and virtually no presence in the high-end server category. The overall segmentation of the product lines has served as a means of targeting different user groups, with pricing reflecting purchasing power, quality and performance in its strategy. 5.3 Promotion Strategy The semiconductor industry is unique in its product offering, marketing, and value chain approach. As a component part, the products of Intel are not seen by the end-user but are vital to the products used by consumers. Production and distribution of the product are highly related to the pricing strategy as well as the demands from manufacturers purchasing components. Intel thrives on subduing the competition through production/capacity advantages and customer relationships in distribution. These two factors are related to price in terms of cost, margins, and sales opportunities. Intel is the low-cost producer of the major semiconductor companies. CEO Craig Barrett is renowned for his manufacturing knowledge and production capabilities and has helped to stabilize costs through efficiencies. Efforts to lower costs have made it possible to increase margins and have room to undercut any competition that may enter at lower prices. Intel uses various discounting options to create price discrepancies between buyers based on size and power within the market. Intel offers significant price breaks for large PC vendors, offering volume/price discounts and incentives on chip purchases that usually sell in quantities of 1,000 or 10,000 In effect Intel is killing off channels, resulting in one channel with a small number of large competitors such as Dell, Gateway and HP. For, example in most recent activity (2004) a Pentium 4 processor was sold to major vendors for around $100 while smaller firms paid in excess of $200 per chip. 5.4 Distribution Strategy With the exception of a few home-networking products, Intel does not sell directly to end consumers. As a result, Intel relies almost entirely on multiple indirect sales channels. The following is a shortened grouping of Intel’s sales channels: • Major hardware OEM’s (Original Equipment Manufacturer) such as Dell, Cisco Systems, and Nokia • Distributors such as Avnet, Arrow Electronics, and Tech Data • Independent software vendors such as Microsoft, Oracle, and IBM • Resellers large and small, located in many different places around the world • Technology development partners such as Hewlett Packard Intel’s effective use of, and continual improvement in its distribution system has helped Intel achieve its competitive advantage. In no other industry does the term “time is money” ring truer, and Intel’s ability to meet demand faster than its competitors leads to higher profit margins and superior customer value. For instance, Intel is able to penetrate Japan’s highly restrictive chain of intermediaries as a result of information technology agreement and its innovative distribution strategy. Furthermore, Intel has utilized the power of the Internet to develop an extranet where select buyers and suppliers have access to privileged information. The extranet is secured and can be monitored and tracked by Intel with relative ease. The benefit of an extranet is that Intel can modify access rights per user or create specific content sites for particular users. This allows Intel more control of information dissemination but is also limited in personality. 5.5 Branding Strategy Intel is one of the Top 10 best-known brands with a very recognizable brand image. Intel has positioned itself as the top of the brand, with mass consumers identifying the product with Intel’s brand name. Fierce competition within the processor sector of the industry caused Intel to take a proactive approach to reaching end-consumers. The company developed a pull strategy for their product, creating awareness of and demand for the processor, essentially pulling it through the manufacturing process. The idea was to associate Intel with quality, innovation, and leadership within the industry. This branding strategy became one of the world’s largest co-op marketing campaigns and marked the first time that a manufacturer related directly to consumers for chips. Intel adopted its first tagline “Intel: The Computer Inside”, later evolving into today’s “Intel Inside” to create awareness for the processors and elicit demand for PC’s featuring the company’s chips. The strategy relied on conveying the messages of “safety”, “reliability”, and “leading technology”. The Intel Inside program was greatly effective and stimulated further advertising in the industry as well as significantly driving demand for PCs. 6.0 Financial and Cost Analysis Intel’s dominance in the semiconductor industry extends beyond market leadership and groundbreaking innovation to financial and cost leadership. The financial strength of the company can be seen through its five-year financial summary compared with that of AMD and multiple comparative common size income statements segmented by industry sector. Ratio analyses and comparison to the industry reveals that Intel has significant financial prowess and extensive resources and equity ownership. Intel reported working capital in 2000 to be $12.5 billion on top of 2000 net income of $10 billion on $33.73 billion in sales revenue, a 15% rise from 1999. Inventory, valuated on the FIFO system was turned over 6.8 times and accounts receivable turnover occurred 8.62 times. In terms of leverage, Intel possesses a highly enviable debt-to-equity ratio of .03 as well as the ability to cover interest payment 251 times over, which far outperforms the industry average. Intel has over $37 billion in shareholders equity while holding $10.62 billion in debt. From a liquidity standpoint, the company has the ability to cover short-term liabilities with a 2.45 current ratio; however, this has been under the industry average since 1997. The company’s operating cycle has consistently been lower than the industry average, hovering around 113 days to the industry’s 124 days. This is correlated with long lead times in the industry, or large gaps between order processing and delivery. Intel is also proficient with regards to fixed asset turnover, and mirrored the industry exactly in 2000, at 2.5. For every dollar in fixed assets, Intel was able to generate $2.5 in sales. Intel’s reign at the top of the industry is partially due to its ability to generate profits and reduce costs through technology. As the industry leader, Intel possesses strong profitability ratios compared to the industry. The company has a 22.95% Return on Assets and a 30.11% Return on Equity. The company sufficiently manages assets and equity investments to create profitable returns. For every dollar of assets, Intel generates $22.95 in sales, and for every dollar in equity, it is able to generate $30.11 in sales. Intel is able to maintain pronounced profit margins that consistently beat the industry average. In 2000 margins were 31.24% overall, compared to 22.54 for the industry, with an upward trend since 1996. From a cost perspective, income statements were compared according to specific sectors and competition within the semiconductor industry. Selling & Administrative, Cost of Goods Sold, Interest Expense and Depreciation were compared. For the communications market, Intel was compared to Motorola, Lucent, and Conexant. Intel has significantly less COGS, amounting to 27.96% of sales or $9.43 billion versus the next lowest competitor Conexant at 51.78%. Intel ranked second behind Motorola in SG&A at 26.64% and had the least amount of interest expense. Intel’s COGS consistently beat competitors across each industry as well as representing a low interest expense and industry leading SG&A expenses in both the networking and microprocessor markets. Depreciation across all industry sectors was the highest, mostly due to high capital holdings and equipment. Market data puts the company as the industry leader in market capitalization (value) between $179 billion and $220 billion. The next highest valued company, Texas Instrument, was valued over a $100 bill...