17 Oct School of Business,
Intel Corporation: 1968–2013
Charles W.L. Hill
School of Business, University of Washington Seattle, WA 981095, June 2013
inTroducTion
In 2012 Intel was the leading manufacturer of micropro- cessors for personal computers in the world, a position that it had held onto for more than two decades. Over 80% of all personal computers sold in 2012 used Intel microprocessors. The company reported revenues of $53 billion and net pro ts of $11 billion. Meanwhile, Intel’s only viable competitor, AMD, which in the early 2000s had been gaining share from Intel, lost $1.2 billion on sales of $5.4 billion.
Despite its historic dominance, the future looked uncertain for Intel. The rise of mobile devices had led to a strong substitution effect, with sales of PCs fall- ing as consumers switched to smart phones and tablets for many of their computing needs. In the rst quarter of 2013, global PC sales fell 14% on a year over year basis according to the research rm IDC. This was the worst yearly decline since IDC started tracking PC sales in 1994, and the fth quarter in a row that PC sales had fallen. At the same time, sales of smart phones and tab- lets were booming. IDC predicted that sales of tablets would grow almost 60% in 2013, and that tablet ship- ments would exceed those of portable PCs.1
The crux of the problem for Intel is that most tablets and smart phones used microprocessors that are based on technology licensed from ARM Holdings PLC, a British company whose chip designs are valued for their low power consumption, which extends battery life. While Intel has a line of chips aimed at mobile devices—the Atom chips—microprocessors incorporating ARM’s technology were found on 95% of smart phones in 2012 and over 30% of all mobile computing devices, a cate- gory that includes tablets and PC notebooks.2 Moreover, in 2012 Microsoft issued a version of its Windows 8
operating system that ran on ARM chips, rather than Intel chips, creating a potential threat to Intel’s core PC business.
The FoundaTion oF inTel
Two executives from Fairchild Semiconductor, Robert Noyce and Gordon Moore, founded Intel in 1968. Fairchild Semiconductor was one of the leading semi- conductor companies in the world and a key enterprise in an area south of San Francisco that would come to be known as Silicon Valley. Noyce and Moore were no ordinary executives. They had been among the eight founders of Fairchild Semiconductor. Noyce was gen- eral manager at the company, while Moore was head of R&D. Three years previously, Moore had articu- lated what came to be known as Moore’s Law. He had observed that since 1958, due to process improvements the industry had doubled the number of transistors that could be put on a chip every year (in 1975 he altered this to doubling every two years).
Fairchild Semiconductor had been established in 1957 with funding from Sherman Fairchild, who had backed the founders on the understanding that Fairchild Semiconductor would be a subsidiary of his Fairchild Camera and Instrument Corporation on New York. By 1968 Noyce and Moore were chaf ng at the bit under management practices imposed from New York, and both decided it was time to strike out on their own. Such were the reputations of Noyce and Moore that they were able to raise $2.3 million to fund the new venture “in an afternoon on the basis of a couple of sheets of paper
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Case 11 Intel Corporation: 1968–2013
containing one of the sketchiest business plans ever nanced”.3
When business reporters got wind of the new ven- ture, they asked Noyce and Moore what they were in- tending to do, only to be greeted by vague replies. The two executives, however, knew exactly what they were going to do—manufacture silicon memory chips—they just didn’t want potential competitors to know that. At the time, sales of mainframe computers were expanding. While these machines used integrated circuits to perform logic calculations, programs and data were stored on magnetic devices. Although inexpensive to produce, it was relatively slow to access information on a magnetic device. Noyce and Moore knew that if they could build a silicon based integrated circuit that could function as a memory device, they could speed up computers, making them more powerful, which would expand their applica- tions and allow them to shrink in size.
These memory chips were knows as dynamic ran- dom access memories (DRAMs). While much of the theoretical work required to design an integrated cir- cuit that could function as a memory device had already been done, manufacturing DRAMs cost ef ciently had so far proved impossible. At the same time, some key research on manufacturing was being done at Fairchild. This research included a technique known as metal oxide on silicon, or MOS. Noyce and Moore wanted to mass- produce DRAMs, and after looking at other possible alternatives, they concluded that commercializing the MOS research was the way to do it. This prompted some cynics to note that Intel was established to steal the MOS process from Fairchild.
andy Grove
To help them, Noyce and Moore hired a number of re- searchers away from Fairchild, including, most notably, a young Hungarian Jewish émigré called Andy Grove. At Fairchild, Grove had reported directly to Moore. At Intel he became the director of operations with responsibility for getting products designed on time and built on cost. Through the force of his own personality, Grove would transmute this position into control over just about ev- erything Intel did, making him effectively the equal of Noyce and Moore, long before he was elevated to the CEO position in 1987.
Grove was an interesting character. Born in 1936, he went into hiding when the Germans invaded Hungary dur- ing World War II and managed to escape the Holocaust.
After WWII, the tyranny of the Germans was replaced by the tyranny of the Soviets as Hungary became a satellite state of the Soviet Union. In 1956, after the failure of an uprising against the Soviet puppet government, Grove es- caped across the border to Austria, and made his way to the United States. He put himself through college in New York by waiting on tables, and then went to UC Berkley for graduate work, where he received a Ph.D. in chemical engineering in 1963. His next stop was Fairchild, where he worked until Moore recruited him away in 1968.
Over the next three decades, Grove would stamp his personality and management style on Intel. Regarded by many as one of the most effective managers of the late twentieth century, Grove was a very demanding and according to some, autocratic leader who set high ex- pectations for everyone, including himself. He was de- tail orientated, pushed hard to measure everything, and was constantly looking for ways to drive down costs and speed up development processes. He was known for a confrontational “in your face” management style, and would frequently intimidate employees, shouting at those who failed to meet his expectations. Grove him- self, who seemed to enjoy a good ght, characterized this behavior as “constructive confrontation”. He would push people to their limits to get things done. As he once noted, “there is a growth rate at which everybody fails, and the whole situation results in chaos. I feel it is my most important function. . . . to identify the maximum growth rate at which this wholesale failure begins”.4
Grove demanded discipline, insisting for example, that everybody be at their desks at 8 a.m., even if they had worked long into the night. He instituted a “late list”, requiring that people who arrived after 8 a.m. sign in. If people arrived late for meetings, he would not let them attend. Every year he sent around a memo to employees reminding them that Christmas Eve was not a holiday, and that they were expected to work a full day. Known as the “Scrooge memo”, many would be returned with nasty comments scrawled over them. May you eat yellow snow, said one. A very neat man, if people’s desks were messy, Grove would publically criticize them. Accord- ing to one observer, “Andy Grove had an approach to discipline and control that made you wonder how much he had been unwittingly in uenced by the totalitarian re- gime he had been so keen to escape”.5
Grove controlled managers through a regular budget- ing process that required them to make detailed revenue and cost projections. He also insisted that all managers establish medium term objectives, and a set of key re- sults by which success or failure would be measured.
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He instituted regular one-on-one meetings where perfor- mance was reviewed against objectives, holding manag- ers accountable for shortfalls. He also required monthly management reviews where managers from different parts of the company would meet to hear a presentation of its current strengths, weaknesses, opportunities and threats. The goal was to get managers to step back and look at the bigger picture, and to encourage them to help each other solve problems.
Grove would also practice management by walking around, inspecting facilities and of ces, demanding that they be clean, something that earned him the nickname “Mr. Clean”. He pushed the human resource department to institute a standard system of ranking and rating that had four performance categories; “superior”, “exceeds expectations”, “meets expectations”, or “does not meet expectations”. People were compared against others of their rank. Pay raises and later, stock option awards were based on these rankings.
Despite his autocratic style, Grove was grudgingly admired within the company. He was a brilliant prob- lem solver, a man with tremendous control of facts and details, someone who was determined to master the challenging technical projects that Intel was working on. Moreover, while he drove everyone hard, he drove himself harder still, thereby earning the respect of many employees.
The MeMory chip coMpany
Making a DRAM using MOS methods proved to be extremely challenging. One major problem—small partials of dust would contaminate the circuits during manufacturing, making them useless. So Intel had to de- velop “clean rooms” for keeping dust out of the process. Another was how to etch circuit lines on silicon wafers, without having the etched lines fracture and break as the wafer was heated and cooled repeatedly during the manufacturing process. The solution to this problem, identi ed by Moore, was to “dope” the metal oxide with impurities, making it less brittle. Intel subsequently went to some lengths to keep this aspect of the manu- facturing process secret from competitors for as long as possible.
Intel, of course, was not alone in the race to develop a commercial process for manufacturing DRAMs. Among the potential competitors was another semiconductor
company started in 1969 by Jerry Sanders, a former mar- keting director at Fairchild. Sanders started his company with the help several other Fairchild employees who had not been recruited by Intel. Called Advanced Micro devices, or AMD, the company found it tough to raise capital until it received an investment from non other than Robert Noyce, who saw something he liked in the amboyant Sanders.
Driven by constant pressure from Andy Grove, whose “in your face” management style was bearing fruit, albeit at some human cost, by October 1970 In- tel succeeded in producing a DRAM chip, named the 1103, in relatively high yields (which implied that rela- tively few chips had to be discarded). The 1103 could store 1,024 bits of information (zeros or ones), which was 4 times as much as the highest capacity semicon- ductor memory device currently available. Since the xed costs required to establish a manufacturing facility were very high, the key to making money on the 1103 was high yields and high volume. If Intel could achieve both, unit costs would fall enabling Intel to make a lot of pro t at low price points. In turn, low prices implied that DRAMs would start to gain wide adoption among computer manufacturers.
The 1103 put Intel rmly on the map. The chip soon became the memory technology of choice for computer makers, and by the end of 1971, 14 out of the world’s 18 leading mainframe computer makers were using the 1103. However, Intel did not have the market entirely to itself. Computer makers did not want to become depen- dent upon a single source of supply for critical compo- nents. To avoid this, most computer makers mandated that components had to be at least duel sourced, and for Intel, this meant that if it wanted business, it had to license its technology to other companies. Intel rst li- censed the rights to produce the 1103 to a Canadian rm, MIL, in exchange for an upfront payment and per unit royalty fee. Before long, MIL was competing against Intel in the market for the 1103, but MIL made a critical mistake in their manufacturing processes, and it wasn’t long before a stream of former MIL customers were knocking on Intel’s door.
Along the way, Intel received an inquiry from two disgruntled engineers at Honeywell, asking if Intel was interested in building memory systems. The idea was to mount thousands of 1103 chips on a circuit board that could then be plugged into a mainframe computer to in- crease its memory capability. Impressed by the idea, Intel promptly hired the two engineers and set up a division to do this. Before long, the new division was selling circuit
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