Intel Case Study

Bruce Egsieker

The Rise of the World’s Most Powerful Chip Company

Intel was founded in the summer of 1968 in Santa Clara California by two engineers who had been employed in the research laboratories of Fairchild Semiconductor Corporation in Palo Alto California: Robert Noyce and Gordon Moore. Noyce had been the co-inventor of the integrated circuit, and together with Moore at Fairchild was a pioneering scientist in the development of semiconductor technologies. As soon as they could they lured Andy Grove away from Fairchild. Andy Grove came to the U.S. in 1957 from Budapest Hungry. He was to become a star.

They went to Arthur Rock in San Francisco with a business plan for their startup company. Arthur Rock, the man who coined the phrase “venture capital” would raise $2.3 million dollars in half a day for the new startup company. With Noyce as the co-inventor of the integrated circuit his name was known, hence the speed of raising the money. They took a 17,000 square foot building South of San Francisco, a former Union Carbide plant, as the location for operations. They opened their doors in 1968.

Intel’s first product was a bipolar static random access memory (SRAM) chip, which was introduced in 1969. The silicon chip contained 64 bits of active memory storage capacity and held close to 400 transistors…the essential components of electronic circuitry. The intent was to break into the growing mainframe computer memory business. At this time, mainframe computer’s active memories wee built with magnetic core technology, an intricate product in which rings of magnetic metal were woven together with interlocking strands of copper. Magnetic core memory was entrenched. To displace it would take a ten-fold reduction in cost per bit. Intel’s SRAM offered such an advantage and sales started to rapidly increase.

Within three years of startup, Intel found itself with three product lines in addition to the MOS-Based random access memory products developed during its infancy. (MOS-based random access memory, which is metal oxide-semiconductors). In 1970, propelled by its MOS process technology breakthrough, Intel introduced the world's first DRAM chips well ahead of competitors.

Intel was able to break the DRAM (dynamic random access memory) production barrier because of its new MOS process technology. Drams were similar to RAMs in that they were both high-density random access memory silicon chips, but the DRAM was more cost effective to manufacture. As a consequence, instead of SRAM’s taking the lead in replacing magnetic core memory as Intel had envisioned, DRAM’s replaced the magnetic cores to become the standard technology used by computers to store and process information.

Three types of technological competencies evolved within Intel: 1) circuit design, 2) process technologies (making it), 3) manufacturing engineering. I might also point out that Intel had distinctive marketing competencies. DRAM’s had enormous intrinsic cost advantages over the competing magnetic core technology. By 1972 Intel’s DRAM was the world’s largest selling semiconductor product, accounting for 90.0% of Intel’s revenues. By the end of the 1970’s, Drams had displaced magnetic core memories, and the nature of competition began to change dramatically.

Intel’s organization structure was flexible and set up by project teams. Intel’s management is demanding and does expect long hours of work each day. The DRAM became the technology of choice and set the industry on a familiar path of falling costs, rising performance, and diminishing size of the chip. Intel about to become a multi-billion dollar business, created the demand for memory single-handedly. By the end of the 1970 sales were $4.2 million dollars. In 1971 they began making plans for a stock offering, as they needed additional cash for growth and new research and development of new technologies. The I.P.O. (initial public offering) took place in October of 1971 at an offer price of $23.50 per share of common stock. Noyce and Moore’s stock was now worth $20.0 million dollars or 37.0% of the company.

One footnote at this point, Andy Grove V.P. of Operations was visited by engineers who wanted to start a chip company. They gave him a seventy-page business plan and asked him to be the venture capitalist. He went forward with it and today the company is Advanced Micro Devises (ADM) with then Barry Sanders as its C.E.O.

Intel needed in 1971 a big long-term customer, someone to give them continuous long-term cash flow. I.B.M. purchased at the time 70.0% of the memory business. Intel had been working with ROM (read only memory). But, in their labs they had come up with a system that could not only read but could erase data too. EPROM was born (erasable, programmable read only memory). The discovery was astonishing. Initially they sold for $100 for a 2K EPROM and Intel’s cost was $30. Intel remained a complete monopoly in EPROM’s for two years and this new technology innovation allowed them to land major contracts with I.B.M.

By 1974, Intel had commercialized the three technical innovations of DRAM, the first EPROM, and the first microprocessor. It had increased its annual sales to $134 million and its workforce to 3,100 people. By 1974, Intel had become the world’s fifth largest maker of integrated circuits. Arthur Rock, the venture capitalist now stepped aside as C.E.O. in favor of Bob Noyce. Intel’s stock had soared to $88 per share by the last quarter of 1975. This value even with the burning of their Malaysia plant which was 50% of Intel’s entire worldwide assembly capacity. The plant was completely rebuilt.

Intel was in a perpetual struggle to make its product’s not only powerful but also smaller, faster, and cheaper. They worked very hard to increase the process of manufacturing.

In 1976 Intel came out with the 16-bit chip, which had a significant speed advantage over the 8-bit 8080 chips. Even though Zilog, a competitor, was first with the 16-bit chip (two former Intel employee’s) Intel’s 16-bit chip yielded outstanding quality performance.

Other Highlights:

· 1984, Intel scientists designed a one-megabit DRAM. This new chip allowed them to leapfrog the rest of the industry.

· Intel always regarded DRAMS as its main “technology driver,” meaning it was the product area where new process techniques were applied first.

· 1984 Intel decides to get out of the DRAM (memory business). This was do to effective price cutting by Japan resulting in financial loses in DRAMS. They decided to shift Intel’s intellectual property technology development form memory to microprocessors, which were profitable. Intel produced its last DRAM in October of 1985. Much of Intel’s microprocessor success stemmed from IBM’s focus on Intel’s capabilities as a supplier of high quality chips.

· 1987 Andy Grove takes over as C.E.O. He will become one of the great corporate C.E.O.’s.

· 1990 Intel launches the “Intel Inside” campaign creating outstanding brand equity.

· By 1997 Intel’s financials were remarkable…earnings over $7.0 billion dollars, gross margin was 60.0% (the rest of the industry is 20.0%), and stock valuation of $113 billion dollars. From the beginning, Intel’s strategy was to push the envelope of product design and to be first to market with the newest devices. They have certainly done this.

· In 1997 Andy Grove is chosen as Time Magazine’s Man of the Year.

· 1998 Andy Grove retires and Craig Barrett is named C.E.O.

· Sept of 1999, Intel unveiled a new family of chips for the networking and communications gear that zips data traffic through the arteries of the Internet.

· Oct of 1999, Intel purchased DSP Communications Inc., a leading maker of wireless phone technology.

· May 2000, Intel announces an investment of $2.0 billion to produce flash chips, integral to digital electronic consumer goods for mobile phones and Internet Infrastructure equipment. Intel producing 1.0 billion chips in two years.

With Intel’s products you could draw a log chart showing years along the x-axis and capacity running along the y-axis…as to measure of capacity, number of transistors on a chip, clock cycle speed, etc.

A Few Ideas about the New Intel under Craig Barrett

He is certainly kicking up a sandstorm within the company. He is reshaping the company into a supplier of all sorts of network gear, and information appliances. He is also moving Intel into e-commerce, consumer electronics, Internet servers, and wireless phones. Intel has built gigantic computer centers to run web and e-commerce sites for other companies. They announced in 2000 a family of special-purpose network servers for the web traffic. They will go head to head with Cisco Systems. They have also divided the company into the “blue” products (the old bread and butter semiconductor business) and its green products, which is everything new. The future of Intel looks great.