Intel Corporation: The Dram Decision
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Morison’s (2004) essay, “Gunfire at Sea: A Case Study in Innovation”, is a commentary on the social implications of technological change that surrounded the introduction of continuous-aim firing in both the British and American navies. Morison discusses (1) conditions that foster technological innovation, (2) reactions to the changes produced by innovation, and (3) the elements of an adaptive society. The Cogan and Burgelman (2004) case, “Intel Corporation: The DRAM Decision”, paired with the aforementioned reading, recounts Intel’s encounter with technological change and how they came to exemplify the idea of an adaptive society.
Throughout its history, Intel has centered its strategy on the tenets of technological leadership and innovation (Burgelman, 1994). Intel established its reputation for taking calculated risks early on in 1969 by pioneering the metal-oxide semiconductor (MOS) processing technology. This new process technology enabled Intel to increase the number of circuits while simultaneously being able to reduce the cost-per-bit by tenfold. In 1970, Intel once again led the way with the introduction of the world’s first DRAM. While other companies had designed functioning DRAMs, they had failed to develop a process technology that would allow manufacturing of the devices to be commercially viable. By 1972, unit sales for the 1103, Intel’s original DRAM, had accounted for over 90% of the company’s $23.4 million revenue (Cogan & Burgelman, 2004).
By 1984, a combination of factors had contributed to lowering the profitability of the DRAM industry. As the DRAM industry matured, DRAMs began to take on the characteristics of a commodity product (Burgelman, 1994; Burgelman & Grove, 2004). Competitors had closed the gap on Intel’s lead in technology development causing the basis of competition to shift towards manufacturing capacity. Gaining market share in an industries where product features had become standardized required companies to agressively pursue capacity expansion, while engaging simultaneously in cutthroat price competition. Also, with each successive DRAM generation, companies wishing to keep pace with the demand for increasing production yields were forced to commit increasingly large capital investments to retrofit their fabrication facilities. Figure 1 contains a snapshot of the DRAM industry between the periods of 1974 through 1984. The important thing to note is that Intel begins to fall behind the competition beginning with the 16K generation and is virtually non-existent in any of the future generations (Burgelman, 1994).
In 1984, the decision Andy Grove, chief operating officer, was faced with the following options: (1) divesting itself of DRAM altogether, (2) licensing the technology away, (3) pursuing a a niche position, or (4) investing in the the next generation of DRAM and, effectively, committing to a low-margin business (Cogan & Burgelman, 2004).
Fortune, intellectual climate, and the prepared mind
Morison (2004) propounds the theory that ideas for change are the product of interactions between fortune, an intellectual climate open to change, and the presence of prepared minds capable of recognizing the possibilities of change. At a certain level, all three factors are required to incubate ideas for change and cannot be extricated from one another. Intel’s history is fraught with technological innovations that were preceded by the confluence of chance, intellectual climate, and the prepared mind. The inventions of Electrically Programmable Read Only Memory (EPROM) and the microprocessor were examples of two such events (Burgelman, 1994; Burgelman & Grove, 2004).
In 1969, while attempting to understand and fix a strange phenomena that was causing reliability problems with the nascent MOS process, Dov Frohman inadvertently stumbled upon the possibility of creating a new kind of programmable memory that could store information permanently. According to Morison (2004), serendipity is the product of purposeful search. In other words, Dov Frohman’s discovery of EPROM, although unintentional, occurred while he was actively engaged in a search to remedy the faulty MOS process. Serendipity, as stated earlier, does not occur independently of the other factors. The unanticipated innovation of EPROM was adroitly recognized by the prepared minds of Frohman and Intel’s Chief Executive Officer (CEO), Gordon Moore. Even without any immediate market applications, Moore felt it incumbent upon the future of company to support the technology (Burgelman, 1994).
The invention of the microprocessor also followed a similar path. The Japanese firm, Busicom, had hired Intel to develop a set of around 15 chips that would enable their calculators to perform advanced functions. A team of designers, under the direction of Ted Hoff, had suggested a more novel approach that involved a smaller set of four general purpose chips. In early 1970, the package of chips and the proprietary rights to the design of the 4004, the central processing unit (CPU), were delivered to Busicom for the contracted price of $60,000. At around the same time, a debate surfaced about whether Intel should attempt to renegotiate the rights to the CPU design. Eventually, Hoff was able to convince Intel to return to the bargaining table, where the company would, once again, encounter a twist of fate. Intel had decided to drastically cut the contract price in exchange for a the rights to sell the chip outside of the calculator market. Busicom, in financial trouble, jumped at the offer. Intel, with its release of the 4004 the following year, had unwittingly paved the way for the personal computing revolution (Burgelman, 1994; Cogan & Burgelman, 2004).
Reactions to change in the DRAM industry
Morison (2004) notes that human nature is designed to protect oneself against the shock of change by clinging onto what is familiar and comfortable long after an individual’s environment has been altered (Morison, 2004). By 1994, the basis of competition had shifted and the capicity for large-scale manufacturing had become the key success factor in the DRAM industry. Stressing the importance of manufacturing competence, however, was a hard sell at Intel. The early pioneers at Intel had prided themselves on being technology development scientists. Intel continued to rely on their competencies in technological innovation long after DRAMs had evolved into commodity products. The development of the 5-volt-single-power-supply 16K DRAM in 1979 and the CMOS 256K DRAM in 1983 were two instances in which Intel attempted to overcome manufacturing cost disadvantage by introducing a technically superior product (Burgelman, 1994; Burgelman & Grove, 2004).
Opposition to change usually comes from men at upper levels who identify closely with incumbent technologies and the societies that exist around them. Often, these men at upper levels are moved by their honest disbelief in the superiority of the new technology, even when there is overwhelming evidence that suggests otherwise (Morison, 2004). Intel’s DRAM business, once again provides an example. Top management at Intel made heroic attempts to offer rational justification for continuing to support the DRAM-focused strategy that had made their company successful in the past, even after it became patently obvious that this strategy had outgrown its effectiveness. DRAMs were viewed as the technology driver because they were still the largest volume product produced by Intel in 1984, and thus considered to be the basis of the Intel’s learning curve. Among upper management, there was even the idea that DRAM as a product offering would allow Intel to be a one-stop shop for its customers. Both arguments seemed to ignore the reality that Intel’s market share in the DRAM industry had plummetted below three percent (Burgelman & Grove, 2004; Cogan & Burgelman, 2004).
Adapting to a changing society
Morison (2004) lists three requirements that enable societies to be adaptive: (1) the articulation of a grand purpose, (2) the presence of an environment that is equipped for change, and (3) the existence of a mechanism for settling conflicts. Clearly, all three of these elements are exhibited by Intel in 1984, as the need to adapt to dynamic changes within the semiconductor industry become more and more apparent.
Identifying too closely with a concept, convention or attitude, in certain instances, can hinder a society’s ability to adapt. Within any group, there exists a need, therefore, to define a grand purpose and to see to it that that grand purpose is communicated to every member within the group. Only then can individuals, untrammeled by rituals, make lucid decisions concerning the need for adaptation (Morison, 2004). In the case of Intel, holding onto the identity of Intel as a memory company made it difficult for them to dissociate themselves from the DRAM business. Although, Intel’s strategy was DRAM-focused, the generic, overarching corporate strategy, in the larger context, remained intact—to achieve differentiation through technology leadership and innovation (Burgelman, 1994; Burgelman & Grove, 2004 ). The communication of this guiding principle helped to realign Intel with their original strategic vision and enabled them to concentrate their efforts on moving into markets with higher margins to achieve this strategic goal (Burgelman, 1994).
A society has to be ready and willing for adaptation in a manner that allows society to embrace the promises of new technology without losing their sense of continuity and essential integrity (Morison, 2004). Intel’s manufacturing allocation process, a key component of company’s control structure, allowed Intel to be acutely responsive to external pressures (Burgelman & Grove, 2004). Intel’s product divisions shared manufacturing facilities, and when high sales justified it, Intel would allocate their capacity in such a way as to maximize profitability. This process gradually undermined Intel’s perception of itself as a memory company (Burgelman, 1994; Burgelman & Grove, 2004).
Morison (2004) infers that societies must be able to resolve conflicts, and restore order in order to accommodate the changes. At Intel, the concept of constructive confrontation encouraged individuals to debate openly over strategic initiatives within the company. The concept was to prevent hierarchical position power from overriding knowledge power. During the course of debates, issues could be forcefully aired, but once a decision was made, those who disagreed with the decision were still expected support the outcomes (Burgelman, 1994).
Intel, ultimately, made the decision to exit the DRAM industry and redeploy their resources into reinventing themselves as a microprocessor company. Their ability to adapt to a changing environment allowed them to realign their competencies in technology development and enter a new era of profitability and growth along a new S-curve.