A titan of the technology industry recently passed away on March 21,2016. Andy Grove was instrumental in taking a commodity product such as the microchip and making it a branded must have hardware feature. “Intel Inside” and “Pentium” were on the minds of the majority of PC consumers during the 1990’s. As the beneficiary of Andy Grove’s leadership, Intel was able to sustain high profitability and sustainable profit growth. With the help of a Redmond based operating systems company, the “Wintel” standard won the format wars against Apple and IBM’s OS/2. Regarding Andy Grove and his Intel tenure, the Economist reported, “Under his leadership it increased annual revenues from $1.9 billion to more than $26 billion and made millionaires of hundreds of employees.”

For all of Andy Grove’s successes in the semiconductor market, it was not a forgone conclusion that Intel would ever make the leap into this industry. Most people of my generation who grew up in the 80’s and 90’s are not familiar with the fact that at the time of Intel’s founding, the company primarily produced replacement computer memories for mainframes. Intel first and foremost was founded as a memory company.

An article by Robert A. Burgelman in the Administrative Science Quarterly highlights the processes and decision calculus of Intel executives which led the company to exit the dynamic random access memory (DRAM) market. Burgelman provides key insights regarding the transformation of Intel from a memory company into a microcomputer company.

DRAM at one point in time accounted for over 90% of Intel’s sales revenue. The article states that DRAM was essentially the “technology driver” on which Intel’s learning curve depended. Over time the DRAM business matured as Japanese companies were able to involve equipment suppliers in the continuous improvement of the manufacturing process in each successive DRAM generation. Consequentially, top Japanese producers were able to reach production yields that were up to 40% higher than top U.S. companies. DRAMs essentially became a commodity product.

Intel tried to maintain a competitive advantage and introduced several innovative technology design efforts with its next generation DRAM offerings. These products did not provide enough competitive advantage, thus the company lost its strategic position in the DRAM market over time. Intel declined from an 82.9% market share in 1974 to a paltry 1.3% share in 1984.

Intel’s serendipitous and fortuitous entry into microprocessors happened when Busicom, a Japanese calculator company, contacted Intel for the development of a new chipset. Intel developed the microprocessor but the design was owned by Busicom. Legendary Intel employee Ted Hoff had the foresight to lobby top management to buy back the design for uses in non calculator devices. The microprocessor became an important source of sales revenue for Intel, eventually displacing DRAMs as the number one business.

There continued to be a disconnect between stated corporate strategy and the activities of middle managers during the transition period. Top executives gave weak justifications for the company’s reluctance to face reality and exit the DRAM space; they were emotionally attached to the DRAM business. A middle manager stated that Intel’s decision to abandon the DRAM market was tantamount to Ford deciding to exit the car business!

The demand for Intel microprocessors led middle managers to begin allocating factory resources to heavily produce microprocessors over DRAM. Intel’s cultural rule that information power should always trump hierarchical position power gave middle managers the decision space to make production allocation decisions that overrode corporate stated goals. These actions further dissolved the strategic context of DRAMs.

“By the middle of 1984 some middle managers made the decision to adopt a new process technology which inherently favored logic [microprocessor] rather than memory advances”. By the end of 1984, Intel’s top management was finally forced to face business reality with respect to DRAMs. In order to regain leadership in DRAM, management was faced with a 100 million dollar capital investment decision for a 1 MEG product. Top management decided against the investment and thus eliminated the possibility of Intel remaining in the DRAM space.

It should not be understated that Andy Grove saw a future where microprocessors would become the dominant driver of Intel’s success. He had the foresight to tell his direct reports to “make data based decisions and not to fear emotional opposition”. This was a gutsy call because the culture of Intel viewed DRAM memory as a “core technology of the company and not just a product”.

Andy Grove himself is quoted as saying, “The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the ‘self-evident truth’ that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true.”

Under Andy Grove’s leadership, Intel embarked upon a high stakes technological paradigm shift where either complacency or botched execution could have jeopardized the very existence of the company. Rest in peace Mr. Grove.
References:

Burgelman, Robert A (1994). Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments. Administrative Science Quarterly. Vol. 39, No. 1 (Mar., 1994), pp. 24-56.