Intel Competitive Challenges free essay sample

The Hypercompetitive Environment of the Chip Industry The fundamental nature of competition in many of the world’s industries is changing. The pace of this change is relentless and is increasing. Conventional sources of competitive advantage such as economies of scale and huge advertising budgets are not as effective as they once were. Moreover, the traditional managerial mind-set is unlikely to lead a firm to strategic competitiveness. Managers must adopt a new mind-set that values flexibility, speed, innovation, integration, and the challenges that evolve from constantly changing conditions. The conditions of the competitive landscape result in a perilous business world, one where the investments required to compete on a global scale are enormous and the consequences of failure are severe. The chip industry is intensely competitive, particularly between the two largest chip manufacturers Intel (who holds the industrys top position and sets desktop processor standards) and AMD (who is beginning to successfully challenge Intels leadership position). Contracts with major computer manufacturers and other significant customers can cause an immediate swing in the chip makers market shares. Growing demand for electronics and rapid technological advancements characterize this industry that obliterates the company that stands still. Hypercompetition describes the realities of the competitive landscape for semiconductor producers. In this industry, the notion of market stability is replaced by an assumption of inherent instability and change. Hypercompetition results from the dynamics of constant strategic maneuvering among innovative, global combatants. Rapidly escalating competition results from price-quality positioning, the frantic race to beat competitors to the market with innovative products and technology to establish a first-mover advantage (however short-lived it might be), and competition to protect or invade established product or geographic markets. In the chip industry, competitors are aggressively challenging each other in the hopes of improving their competitive position and ultimately their performance. Several factors create hypercompetitive environments and influence the nature of the current competitive landscape. The two primary drivers are the emergence of a global economy and technology, specifically rapid technological change. II. Technology Diffusion and Disruptive Technologies Rapid technological change is significantly altering the nature of competition and contributing to unstable competitive environments as a result of doing so. The rate of technology diffusion the speed at which new technologies become available and are used has increased substantially over the past 15 to 20 years. Perpetual innovation describes how rapidly and consistently new, information-intensive technologies replace previous ones. Shorter product life cycles result from these rapid diffusions of new technologies. Therefore, a competitive premium is placed on the ability to quickly introduce new, innovative goods and services into the marketplace. In fact, when products become somewhat indistinguishable because of the widespread and rapid diffusion of technologies, speed to market with innovative products may be the primary source of competitive advantage. An indicator of constant innovation and rapid technology diffusion is that it now may take only 12 to 18 months for firms to gather information about their competitors’ research and development and product decisions. In the global economy, competitors can sometimes imitate a firm’s successful competitive actions within a few days. Once a source of competitive advantage, the protection firms previously possessed through their patents has been stifled by the current rate of technological diffusion. Indeed, many firms competing in the electronics industry no longer apply for patents to prevent competitors from gaining access to technological knowledge. Disruptive technologies that destroy the value of an existing technology and create new markets surface frequently in today’s competitive markets. These types of products represent radical or breakthrough innovations and can seriously harm industry incumbents or create essentially new industries altogether. Some incumbents, though, are able to adapt based on their superior resources, experience, and ability to gain access to the new technology through multiple sources (e. g. , alliances, acquisitions, and ongoing internal research). One certainty does exist when a disruptive technology creates a new industry, competitors will follow. Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position. Especially in highly competitive industries, firms constantly jockey for advantage as they launch strategic actions and respond or react to rivals’ moves. It is important to understand industry-specific competitive rivalry because it influences the companys ability to gain and sustain a competitive advantage. Due to competitive conditions in the semiconductor industry, Intel and AMD closely monitor quarterly changes in their market shares. They engage in price wars and new product development to keep each other from eating away at their shares and to win back lost share. While new products introduce enhanced features, their appeal to the market is measured by ever-increasing processor speeds and improvements to energy consumption. Because of the competitive intensity, Intel employs aggressive exclusionary discounting practices, while AMD is pursuing antitrust investigations and legal remedies for what it calls monopolistic competitive behavior. Competitive behavior is the set of competitive actions and competitive responses taken to build or defend the companys competitive advantage and to improve its market position. Through competitive behavior, the company tries to successfully position itself relative to the five forces of competition and to defend current competitive advantages while building advantages for the future. Increasingly, this takes place in more than one market. Firms competing against each other in several product or geographic markets are engaged in multimarket competition. All competitive behavior (the total set of actions and responses taken by all firms competing within a market) is called competitive dynamics. A strategy’s success is determined not only by the company’s initial competitive actions, but also by how well it anticipates competitors’ responses to them and by how well the firm anticipates and responds to its competitors’ initial actions (attacks). Actions and responses to those of rivals are the basic building block of business-level strategies what the company does to successfully use its competitive advantages in specific product markets. The pattern of actions and responses between AMD and Intel shows that the firms are mutually interdependent, that they feel each other’s actions and responses, and that marketplace success is a function of both individual strategies and the consequences of their use. Competitive rivalry can have a major and direct effect on the firm’s financial performance, and intensified rivalry within an industry results in decreased average profitability for both firms. A straightforward model of competitive rivalry can be used to predict competitors’ behavior (actions and responses) and reduce the uncertainty associated with their actions. Competitor analysis is the first step the firm takes to be able to predict the extent and nature of its rivalry with each competitor operating in the same market, offering similar products, and targeting similar customers. The number of markets in which firms compete against each other (called market commonality, defined below) and the similarity in their resources (called resource similarity, also defined in the following section) determine the extent to which firms are competitors. Firms with high market commonality and highly similar resources are direct and mutually acknowledged competitors. Market commonality and resource similarity are the building blocks of a competitor analysis. Market Commonality is the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. When firms compete in several markets, they have the potential to respond to a competitor’s actions not only within the market in which the actions are taken, but also in other markets where they compete with the rival. This potential creates a complicated competitive mosaic in which the moves an organization makes in one market are designed to achieve goals in another market in ways that aren’t immediately apparent to the rival. This potential complicates the rivalry between competitors. From a perspective of predicting behavior, firms with greater multimarket contact are less likely to initiate an attack, but more likely to move (respond) aggressively when attacked. Although multimarket competition generally reduces competitive rivalry, such does not appear to be the case between Intel and AMD. Their common markets include: Microprocessor, †¢ Commercial and Consumer Embedded Processor, †¢ Graphics and Chipsets, and †¢ Consumer Electronics. In other words, AMD competes with Intel in each of its business divisions: Computational Products, Personal Connectivity Solutions, and Memory Products (Flash Memory Devices). Resource Similarity is the extent to which the company’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount. Firms with similar types and amounts of resources are likely to have similar strengths and weaknesses and use similar strategies. From AMDs perspective, Intel has dominated the market for microprocessors for many years. Intel’s market power and significant financial resources enable it to market its products aggressively, to target AMD customers and channel partners with special incentives, and to discipline customers who do business with AMD. These aggressive activities have resulted in lower unit sales and average selling prices, adversely affecting industry margins and profitability. As long as Intel remains in a dominant position, AMD may be materially adversely affected by Intel’s: business practices, including rebating, and allocation strategies and pricing actions, designed to limit AMDs market share, †¢ product mix and introduction schedules, †¢ product bundling, marketing and merchandising strategies, †¢ exclusivity payments to its current and potential customers, †¢ control over industry standards, PC manufacturers and other PC industry participants (such as suppliers and software companies), and †¢ marketing and advertising expenditures to position the Intel brand over the brands of its OEM customers. Intel exerts substantial influence over computer manufacturers and their channels of distribution through various brand and marketing programs. Because of its dominant position in the microprocessor market, Intel has been able to control x86 microprocessor and computer system standards and to dictate the type of products the microprocessor market requires of Intel’s competitors. Intel also dominates the computer system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a computer system. As a result, OEMs that purchase microprocessors for computer systems are highly dependent on Intel, less innovative on their own and, to a large extent, are distributors of Intel technology. Additionally, Intel is able to drive de facto standards for x86 microprocessors that could cause delayed access to such standards. Intel is expected to maintain its dominant position in the microprocessor market and to continue to invest heavily in marketing, research and development, new manufacturing facilities and other technology companies. Intel has substantially greater financial resources than AMD and accordingly spends substantially greater amounts on research and development and production capacity. It preserves core competencies in the design and manufacture of integrated circuits, a global presence, and strong brand recognition. With these resources to draw from, intense competition from Intel is expected to continue. Overcapacity in the industry and demand that falls short of expectations could lead to the under-utilization of microprocessor manufacturing facilities. Both AMD and Intel have added significant capacity in recent years, both by expanding capacity at wafer fabrication facilities and by transitioning to more advanced manufacturing technologies. And further expansion plans are in the works. In the past, capacity additions sometimes exceeded demand requirements leading to oversupply situations and downturns in the industry. Fluctuations in the growth rate of industry capacity relative to the growth rate in demand for products contribute to cyclicality in the semiconductor market, which may in the future put additional pressure on average selling prices. Despite Intels resource advantage, AMD does have a strong research and development focus on product design and system and manufacturing process development. The company has been particularly dedicated to delivering the next generation of microprocessors with improved system performance and performance-per-watt characteristics and has devoted significant resources to product design and improved manufacturing process technologies (and plans to continue to do so in the future). To stretch it resources, AMD also works with other industry leaders, public foundations, universities and industry consortia to conduct early stage research and development. With respect to graphics and chipset products for consumer electronics devices, AMDs primary RD objective is to develop products and technologies that meet the rapidly-changing demands of the PC and consumer electronics industries on a timely basis so as to meet market windows. The company focuses on delivering a range of integrated platforms to serve key markets to bring customers improved system stability, better time-to-market and increased performance and energy efficiency. Longer-term RD is focused on developing monolithic silicon solutions for specialized uses that are comprised of microprocessors, graphics processors and video processors. Its research and development expenses for 2006, 2005, and 2004 were $1,205 million, $1,144 million and $934 million, respectively. In 2006, AMD opened a new RD facility in Shanghai, China and a new advanced microprocessor development facility in Colorado. AMD makes substantial investments in research and development for process technologies in an effort to design and manufacture leading-edge microprocessors. It conducts microprocessor manufacturing process development activities primarily through a joint technology development agreement with IBM, which includes laboratory-based research of emerging technologies. Their joint development projects incorporate a network of partners, giving AMD access to extended resources to remain competitive. Market commonality and resource similarity influence the drivers of competitive behavior (awareness, motivation, and ability) that constitute competitive rivalry. In this case, all drivers of competitive behavior are high. AMD and Intel are clearly direct competitors, and they openly recognize the degree of their mutual interdependence. †¢ Awareness affects the extent to which the firms understand the consequences of their competitive actions and responses. Motivation (which concerns the incentive to take action or to respond to competitor attacks) relates to perceived gains and losses. [Again, high stakes are involved in trying to gain a more advantageous position over a rival with whom the firm shares many markets. And, the probability is high that an attacked firm (Intel) will respond to its competitors (AMDs) actions in an effort to protect its p osition in each market. ] †¢ Ability relates to each firm’s resources and the flexibility that they provide for competitive action. Resource dissimilarity also influences competitive actions and responses between firms, in that the greater the resource imbalance between competitors, the greater will be the delay in response by the firm with a resource disadvantage. However, even when facing competitors with greater resources (hence, abilities) or more attractive market positions, firms should eventually respond, no matter how daunting the task seems. Choosing not to respond can ultimately result in failure. Competitive actions and responses can be either strategic or tactical. A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. On the other hand, a tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse. Pricing decisions are easily-reversed tactical actions that are often taken to increase demand in certain markets during certain periods. It is important to carefully study competitive rivalry between Intel and AMD to select and implement a successful competitive strategy. Understanding Intels awareness, motivation, and ability helps AMD to predict the likelihood of an attack and the probability that Intel will respond to actions taken against it. Competitive behavior between AMD and Intel can be predicted by examining the factors that affect the likelihood a firm will take a competitive action and the factors that affect the likelihood a firm will respond to a competitor’s action. Factors that affect the likelihood a competitor will use strategic actions and tactical actions to attack its competitors include first mover incentives, organizational size, and quality. A first mover is a firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. Sustaining a competitive advantage for any length of time can be difficult for companies in the semiconductor industry, which is characterized by rapid technological developments and relatively short product life cycles. In this hypercompetitive, the benefits of being a successful first mover can be substantial. First movers can gain (1) the loyalty of customers who become committed to the products of the company who first makes them available, and (2) market share that can be difficult for competitors to take during future competitive rivalry. To be a first mover, the firm must have readily available the resources for significant RD investments to rapidly and successfully produce and market a stream of innovative products. Available resources, or organizational slack, provide the ability for firms to be first movers. As a liquid resource, slack can quickly be allocated to support competitive actions, such as RD investments and aggressive marketing campaigns that lead to first-mover advantages. The relationship between slack and the ability to be a first mover allows AMD to predict that Intel (who is a first mover) likely has available slack and will probably take aggressive competitive actions to continuously introduce innovative products. Furthermore, it can predict that Intel will try to rapidly gain market share and customer loyalty in order to earn above-average returns until AMD is able to effectively respond to its first move. A second mover responds to the first mover’s competitive actions. Often, successful imitation of the first mover’s innovations allows the second mover to avoid both the mistakes and the huge spending of the pioneers. Second movers also have the time to develop processes and technologies that are more efficient than those used by the first mover or that create additional value for consumers. AMDs product introductions have always followed carefully behind Intels, until the arrival of Athlon, which turned the tables on Intel and gave AMD a first mover advantage. Delivered with the added punch of securing a large position in the high-end server industry (with its Opteron chips), AMD might conclude that Intel will take aggressive strategic actions to regain a first movers’ advantage. An organization’s size also affects the likelihood of competitive actions, as well as the types and timing of those actions. In general, small firms (perceived as more nimble and flexible) are more likely than large companies to launch competitive actions, and they tend to do it more quickly. Relying on speed and surprise to defend their competitive advantages or develop new ones, small firms can gain an advantageous market position through a greater variety of competitive actions. Although large firms tend to limit the types of competitive actions used, they are likely to initiate more competitive actions, along with more strategic actions, during a given period due to available slack resources. The competitive actions the firm likely will encounter from larger competitors will be different from the competitive actions it will encounter from smaller competitors. Depending on a limited number or types of competitive actions (which is the large firm’s tendency) can lead to reduced competitive success across time, partly because competitors learn how to effectively respond to the predictable. In contrast, remaining flexible and nimble (which is the small firm’s tendency) in order to develop and use a wide variety of unique competitive actions contributes to success against rivals. From a strategic perspective, quality (which is the outcome of how the firm completes its primary and support activities) exists when a companys products meet or exceed customers’ expectations. Quality is extremely critical to satisfying customers or doing the right things relative to performance measures that are important to them. Because quality affects competitive rivalry, AMD should watch for any quality problems that might emerge at Intel. It can predict that Intel would not likely be aggressive in its competitive actions so long as quality problems require managements attention. However, after the problems are corrected, Intel would be likely to take more aggressive competitive actions to recover credibility with customers. The success of AMD’s competitive actions will also be affected by the likelihood, type, and effectiveness of Intel responses. Intel will be more likely to respond when (1) AMDs action leads to better use of its capabilities to gain a competitive advantage or an improved market position, (2) the action damages Intel’s ability to use its capabilities to create or maintain an advantage, or (3) Intel’s market position becomes less defensible. In addition to market commonality and resource similarity and awareness, motivation, and ability, understanding three additional factors (type of competitive action, reputation, and market dependence) will help AMD to predict the likelihood of a competitive response from Intel. Competitive responses to strategic actions differ from responses to tactical actions. In general, strategic actions receive strategic responses and tactical actions receive tactical responses, and strategic actions elicit fewer total competitive responses. This is because strategic responses, such as market-based moves, involve a significant commitment of resources and are difficult to implement and reverse. The time needed to implement a strategic action and to assess its effectiveness can delay the competitor’s response to that action. In contrast, Intel is likely to respond quickly to tactical actions, such as immediately matching price reductions. Also, actions that target a large number of customers are likely to elicit strong responses. If the effects of AMDs strategic action on Intel are significant (as many recent actions have been), response is likely to be swift and strong. Intel has a reputation for vigorously defending its market position, and past behavior is very likely a predictor of the competitors future behavior. High market dependence, or the extent to which Intel’s revenues or profits are derived from each market, is also an indicator of a likely response to AMD actions that threaten its market position. Generally, products in the IC industry compete on product quality, power consumption, reliability, speed, size (or form factor), cost, selling price, adherence to industry standards, software and hardware compatibility and stability, brand recognition, timely product introductions and availability. Technological advances in the industry result in frequent product introductions, regular price reductions, short product life cycles and increased product capabilities that may result in significant performance improvements. AMDs ability to compete depends on its ability to develop, introduce and sell new products or enhanced versions of existing products on a timely basis and at competitive prices, while reducing manufacturing costs. The realities of competition in the semiconductor industry suggest that to be market leaders, companies must regularly develop innovative products desired by customers. Firms failing to innovate will stagnate. This means that innovation should be an intrinsic part of virtually all of a firm’s activities. In the words of AMDs CEO: The success of our business is dependent upon our ability to introduce products on a timely basis with required features and performance levels that provide value to our customers and support and coincide with significant industry transitions. AMDs success depends on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to customers. Its ability to develop and qualify new products and related technologies to meet evolving industry requirements, at acceptable prices and on a timely basis are significant factors in determining competitiveness in its target markets. Three types of innovat ive activity can contribute to competitive success. Invention is the act of creating or developing a new product or process. Innovation is the process of creating a commercial product from an invention. An invention brings something new into being, while an innovation brings something new into use. Therefore, technical criteria are used to determine the success of an invention, whereas commercial criteria are used to determine the success of an innovation. ) Finally, imitation is the adoption of a similar innovation by a different firm. Imitation usually leads to product or process standardization, and products based on imitation often are offered at lower prices, but without as many features. In fast-cycle markets, capabilities that contribute to competitive advantages are not shielded from imitation. Reverse engineering is commonly used to quickly gain knowledge to imitate and improve upon existing competitor products. The rate of technology diffusion is rapid, inexpensive, and continuous. Firms competing in fast-cycle markets recognize the importance of speed; the costs of hesitation and delay are just as steep as going over budget or missing a financial forecast. High-velocity environments place considerable pressures on top managers to quickly make effective strategic decisions. Indeed, the pace of competition in fast-cycle markets is almost frenzied, as companies rely on innovations as the engines of their growth. Because prices fall quickly in these markets, companies need to profit quickly from their product innovations. In search of fast and effective means of developing new products, it is common for firms to use strategic alliances to gain access to new technologies and thereby develop and introduce more new products into the market. The breadth and depth of resources needed to internally develop sufficient innovations to meet market needs and remain competitive can be enormous. Being open to using external resources to help produce innovations can be beneficial in several ways. First, alliances provide information on new business opportunities and how to exploit them. In addition, firms can align complementary assets with cooperative partner assets aimed at future opportunities for innovation. However, alliances formed for the purpose of innovation are not without risks. In addition to conflict that is natural when firms try to work together to reach a mutual goal, cooperative strategy participants also take a risk that a partner will appropriate a firm’s technology or knowledge and use it to enhance its own competitive abilities. The ideal partnership is one in which the firms have complementary skills as well as compatible strategic goals. However, because companies are operating in a network of firms (and may be participating in multiple alliances simultaneously), managing alliances can be challenging. In established organizations, most innovation comes from efforts in research and development (RD). Two types of internal innovations (incremental and radical innovations) are developed through RD activities. Most innovations are incremental as they build on existing knowledge bases and provide small improvements in the current product lines. Alternatively, radical innovations provide significant technological breakthroughs and create new knowledge. Radical innovations use new technologies to serve newly created markets. Because they establish new functionalities for users, radical innovations have strong potential to lead to significant growth in revenue and profits. Developing new processes is a critical part of producing radical innovations. Both types of innovation can create value, but radical innovations have the potential to contribute more significantly to a firm’s efforts to earn above-average returns. Internal innovation requires an entrepreneurial mind-sets and the integration of knowledge and skills for maximum success. Customer and stakeholder value can be created from internal corporate venturing processes used to develop and commercialize new products. An entrepreneurial mind-set is necessary so that managers and employees will consistently try to identify entrepreneurial opportunities the firm can pursue. The importance of knowledge to identify and exploit opportunities as well as to gain and sustain a competitive advantage suggests that firms must have strong human capital. Social capital is also critical for access to complementary resources from partners in order to compete effectively in domestic and international markets. By developing resources (human and social capital), taking advantage of opportunities in domestic and international markets, and using the resources and knowledge gained in these markets to be innovative, firms can achieve competitive advantages. Without a competitive advantage, the firm’s success will be only temporary. New product development processes can be completed more quickly, and products can be more easily commercialized, with the use of effective cross-functional teams. Cross-functional teams can facilitate efforts to integrate activities associated with innovation across organizational functions. Grouping product development stages into parallel or overlapping processes allows the company to tailor its product development efforts to its unique core competencies and to the needs of the market. Shared values and effective leadership are important for achieving cross-functional integration and implementing innovation. Highly effective shared values should be framed around AMD’s vision and mission. Strategic leaders also facilitate integration and innovation by setting goals, allocating resources, and ensuring high-quality communication to create synergy and gain commitment. They create the culture that promotes integration, unity, and internal innovation. In addition to innovating through alliances and internal efforts, it is common to gain access to new products, capabilities, technologies, and markets through an acquisition strategy. AMDs strategic acquisition of ATI Technologies enhances its ability to deliver customer solutions and alters the landscape of the technology industry.