Management Cases - Hardware and Semiconductor

By pjain      Published May 25, 2021, 9:50 p.m. in blog Business-Management   

IBM 40 years of Blunders

PC 1981 Success and blunders

Till 1980, the computer industry was split along verticals competitors. They built chips, OS, as well as the application software.

After an inflection point, competition became more along vertical lines : competing solely on either the chips, OS, or the application software while maintaining compatibility with other players.

Gave keys to treasure to Microsoft for "Standards" and Second Sourcing

PC too open - Lagged design in attempt for "Standards"

An example of Strategic Inflection Point was for IBM. When consumers could suddenly get individual computer parts independently, such as: microchips, hard drives and software, then pre-built computers stopped being as popular. People suddenly preferred hand-picking their parts, and building their own PC. IBM’s design didn’t compete well with the customizable PC, so they ended up selling less PCs than the companies who sold individual components.

Dell, Compaq, etc. made billions with much better industrial design and "options" - they went after consumer and SME market, while IBM continued to look stodgy trying to overcharge for memory and disk size.

PS2 failed

IBM tried to reverse this open systems approach with its PS/2 with IP-restrictions to prevent third party systems. However it was too late, the PS/2 never really took off except in "captive" corporate accounts.

Windows NT vs IBM OS2 - Guess who lost despite billions invested

Compaq, Dell, and Novell became the players who understood the new battle. IBM launched OS/2 which was meant to work with other PC manufacturers. Its name rhymed with IBM’s PS/2 and the fact that IBM was competing with these manufacturers in the PC business produced a lot of friction for IBM to market OS/2.

Intel A Huge Market Success

The increase in Intel’s market value has been an equivalent financial marvel. A $1,000 investment in Intel stock made in the days of the IBM PC and the Intel 8086 chip would be worth more than $30,000 today.

1968-1978 Intel the Startup Years on DRAMs SEGMENT

Intel was founded in 1968 by Robert Noyce and Gordon Moore to develop the DRAM, an integrated circuit, as a low cost, small footprint replacement to core memory used in mainframe computers.

Andy Grove a fresh UC Berkeley grad was an assistant of Moore’s at Fairchild and was hired on as the first employee. Quite often he is referred to as the third founder.

The company relied mainly on DRAMs during its first decade as sales exploded to $400M by 1978.

CPU Segment - with entrenchment of Complex Platform

Grove drove Intel to a leadership position in the PLATFORM based not commodity like DRAMs. Experimental work and a contract from a calculator maker for Intel resulted in a 4 bit calculator chip called the microprocessor.

Grove is often referred as Intel's third founder because he became the most recognizable face of Intel as he transform the company from a commodity memory player to the lead microprocessor supplier that expanded revenue from roughly $2.7B in 1987 to nearly $21B when Grove stepped down in 1997.

1985 Intel in Severe Recession

In 1985, the company’s earnings were a mere penny per share; in 1986, Intel lost $173 million. Those two years were marked by layoffs, plant closings, salary cuts, and time off without pay.

1985 Grove Exits Memory/DRAM on Japanese Threat

However DRAMs were commodities priced by the bit and with growth came many competitors, including nimble startups like Mostek and well-capitalized Japanese conglomerates like NEC, Toshiba and Hitachi.

  1. The very low cost of capital in Japan was at a time when prime rate was 14%+ in the USA.

  2. Japan's corps got ULTRA easy credit from the government of

  3. Using high yield OLD CHEAP equipment with better worker discipline to keep yields high at LARGER LINE WIDTHs.

  4. Japanese LEAP-FROG. By focusing only on DRAMs, they invested deeply in advanced devices and the ability to employee multiple design teams in order to increase their chance of winning the next generation design.

  5. Japanese semiconductor manufacturers PRICING FACTORS. They decided to win this business with the 10% rule: They would undercut Intel by 10% to get the customer. If Intel matched, they would undercut by another 10%—and so on until they got the customer.

  6. The field became over crowded even among the super-competitive Japanese alone.

  7. The dollar soared in value relative to the Yen, price-cutting and dumping ensued to the point Intel’s market share crashed to a low of 1.3% in 1984.

Combined, this was a SIP when the DRAM business became untenable for US makers like Intel.

Japanese entry into DRAMs would have been the end for Intel, the innovative silicon valley startup with some of the brightest minds in the industry were.

This was a large part of Intel's revenue base and options included - Push the technology envelope and develop a new and superior memory chip. - Target niche markets where competition less (right then) eg NVRAMs, Static-RAMs - Innovate and Huge investment to build giant new dedicated factory in the hopes of establishing a cost advantage

Eventually Grove saw there was no easy way out with Japanese behemoths were dumping DRAM chips. So he decided to exit the business that Intel started with instead! For example buggy makers got stuck in self-identifying as best "buggy" coach makers, instead of being "transportation" industry and missed out on cars. Similarly Intel identified itself as memories, and it was hard to get out of DRAMs in 1985. Indeed Grove asked Moore - If you were a new CEO what would you do - stay or get out? Moore immediately responded - Get out! This lack of emotional decision making was a Grove hallmark to get to proper decisions.

CPUS crowded also on second sourcing REQUIRED to get design wins

While Intel had invented the microprocessor in 1971, but in the mid-1980s, second sourcing which was needed by customers to get design wins.

By 1980, IBM’s selection of the 8088 processor for its PC, which launched in 1981 and shipped roughly 400 thousand units in its first year or in the words of Bill Lowe, VP of the Personal System’s Group, more than the installed base of big blue’s mainframes.

In 1982, a key investment by IBM in December 1982 helped guarantee Intel had the resources to support the company’s growth and development of new processors.

This had created multiple competitors, and a downturn had led to excess capacity. Microprocessors weren’t an obviously attractive business.

Also, building giant factories and process R&D was expensive - eliminating the bulk of revenue from DRAM would make the break-even point to payoff CAPEX much harder as volumes fell. On the other hand, they could focus on factories and processes suited more to the higher speed chips (CMOS) rather than the cheaper and slower MOS devices for DRAM.

Grove redirected Intel’s resources away from memories and instead poured it into its smaller microprocessor business.

Intel would take three years to exit the DRAM business.

Seen in this way, focus on CPUs was a "Bet the Company" bold decision to commit Intel’s future to microprocessors.

Eventually it saved the company and started it on the road to today’s greatness. Intel has grown to be the world’s largest semiconductor manufacturer, overshadowing the Japanese companies that had almost put it out of business a decade earlier.

Intel Inside Campaign, Bundle-Sales and Restrictive Contracts

All of the following strong-arm tactics added up to market dominance and a market capitalization of $197B, up from $4B when Grove took over.

TACTIC : Intel Inside Branding Campaign to Create Consumer Brand Company

Grove under threat of x86 genericisation, preempted the commoditization of chips (with the Intel Inside campaign). Intel Inside led a dramatic branding campaign that made Intel a worldwide recognizable household name; and kept the PC market split amongst many rivals with none attaining even 30% market share

As a result of its very successful Intel Inside campaign, Intel had effectively transformed itself from an engineering company into a consumer products company. It had created a direct relationship with consumers—even if consumers didn’t buy from it directly.

Bundling up chip-sets for Motherboards

During this era, Intel doubled down on CPUs and co-processors like Math and memory management and subsumed all the ancillary chipset logic of the PC in order to make the PC makers life easier yet more dependent on Intel.

Restrictive Contracts with OEMs

Intel's contracts like Microsoft encouraged them to have all their boxes with Intel CPUs for cheaper sales. Its expectation is to lock in OEMs.

Restrictive Contracts on Intel Inside sticker and discount back.

This got a slap on hand as a monopoly practice but it escaped penalties.

Intel tried to Get out of Second Sourcing

Intel’s future survival and dominance would require a roadmap out of commodity and into a sole source technology leadership position. Grove pushed AMD out of a second sourcing agreement that originally was required by IBM

EPROM NVRam SEG and Israeli R&D connections

One of the highly profitable areas came from the experimental work in the early days on a new memory called EPROM.

All three semiconductor building blocks of the modern computer were invented by 1971, three years into the company’s existence and yet each would reach its prime importance at various stages.

1980s Contracts to Lockin PC-makers - Wintel

Late 1980s - CISC vs RISC v2 for Mobile, Low Power

  1. Led by academic thought and chip architects, most at Intel thought the future lay in the more powerful RISC (reduced instruction set computing) chip architecture. They thought RISC could be a “10X” change.

2, Evolution potential of CISC (complex instruction set computing) chips - advances in optimization has been borne out now 30 years out x86 architectures still survive.

  1. PLATFORM LOCKINs. Grove didn’t believe that RISC would replace CISC in PCs, primarily because it was backward incompatible.

So Grove bet on a chip technology (sticking with CISC versus switching to RISC)

However being data-driven, Grove was willing to run an experiment just in case he was wrong. Accordingly, he supported a project to develop an Intel RISC chip in a separate unit (Oregon design center). As things turned out, Intel went on to have a huge success with its next-generation 486 CISC chip and has stayed with CISC ever since. But the RISC chip it developed was a sensible insurance policy and even turned into a moneymaker.

1994 Intel handling of the Pentium flaw

Under Grove, Intel suffered a public relations disaster (the Pentium flaw) which threatened Intel’s reputation in 1994. This threatened Intel’s reputation in 1994

1996+ Intel dealt with the explosive in growth of the Internet

Under Grove when he stepped down in 1997.

SIP: Curse of End of Moore's Law - Computation Not needed as gets Cheaper

Intel’s chips are so good that most people don’t feel any pressure to upgrade from the x486 to Pentium Pros. They already have more processing power than they need to run their favorite applications. If performance/chip size are not needed, the market will become saturated and Intel’s competitors—AMD, Cyrix, and others—will catch up.

Intel’s Pentium chips are almost too powerful for their own good. Given the power of the Pentium, why should people upgrade to Intel’s latest chip, the Pentium Pro? And if they don’t, how will Intel continue to grow?

Intel's response has been multiple

  1. MULTI-CORE Cpus at lower speeds that beat the power exponential curve

  2. Boost network speeds in Carriers like AT&T, MCI, Verizon. provide more bandwidth for networks. After all, without more bandwidth, people can’t access the large quantities of data that require the number-crunching power of Intel CPUs.

  3. Boost the Web to be hungry. “hybrid applications” such as interactive games on the Web.

  4. Video and web conferencing to burn CPU cycles. It is even venturing outside its core business to ensure that essential complementary products get developed. The company has invested more than $100 million in ProShare, a videophone product. If desktop videoconferencing takes off, so, too, will demand for the Pentium Pro.

## Grove, succession issues - messed up Intel for decades on

Grove survived a personal crisis (prostate cancer).

SIP LOST : Intel lost out on 3D chips to NVDA

SIP LOST: Intel lost the ARM fight for Foundry

Intel kept its design and process technology inhouse and secretive. While it enabled high margin x86 server and PC processors it lost out on the dominant Foundry market that saw Apple to world's most valueable company by 2020.

Basically Intel's CPU designs could not be used with others in a Foundry arrangement.

SIP LOST: Intel lost the ARM fight for Mobile CPUs

Commoditization and Low-Cost PCs

  • The Chromebooks at $200, and Oracle's $500 network computer (NC) were supposed to replace $2000+ PCs based on more expensive Intel-based machines with the Microsoft software taking most of the profit.

  • Linux OS was a huge thread as it would kill the platform API lockin of Wintel alliance.

Intel Dominates the On-Premise Private Cloud - Microsoft Windows relationship wins!

Intel Dominates the Cloud - Benefits from Data Center - 20+ Years

2017 Intel loses to Apple ARM chips

2020 Intel screwup - bean counter promotion

AMD - Surviving and Thriving Intel Bullying

1980s - Intel Bullies

Intel’s future survival and dominance would require a roadmap out of commodity and into a sole source technology leadership position. Grove pushed AMD out of a second sourcing agreement that originally was required by IBM

1990 AMD responds with Nexgen tight instruction set clone, End-Run around Intel RISC fail

However Microsoft and IBM did not cooperate fully, and the x486 instruction continued as the base of effective second sourcing even though AMD had no more access to Intel's detailed chip design specs.

AMD nearly Bankrupts, Goes Fabless

Lisa Su - Tech Genius Outsmarts Intel

Intel Bean Counter, CXOs stuffing own pockets


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