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418 CHAPTER 12 STRATEGY DEVELOPMENT PROCESSES

ILLUSTRATION 12.5

The development of the microprocessor business at Intel

Resource allocation systems rather than management’s intention may drive

strategy development.

Between 1968 and 1985 Intel specialised in integ-

rated circuit memory products. By the early 1980s it

had two main product areas. DRAM (Dynamic Random

Access Memory) had been the basis of the firm’s

growth and top management remained committed

to R&D investment in it. However, given increased

competition, DRAMs had lost market share. EPROM

(Erasable Programmable Read Only Memory) had

become Intel’s most profitable product. There was

also the emerging business in microprocessors. Micro-

processors, however, involved different processes,

with an emphasis on chip design rather than manu-

facturing processes as in the other product areas.

By the end of the 1980s, however, it was the

micro processor business that emerged as the basis of

Intel’s future growth and identity. This did not happen

because of top management’s planned direction.

They remained committed to the memory business.

However, in a company in which there had been an

ethos of top-down financial rigour, a resource alloca-

tion rule had been created by the first finance

director designed to maintain Intel as a technological

leading-edge company. It stipulated that manufactur-

ing capacity was allocated in proportion to the profit

margins achieved in the different product sectors.

The emphasis within the DRAM group was on finding

sophisticated technical solutions to DRAM’s problems;

it was, however, innovation in markets where innovation

was no longer commerically viable. DRAM managers

none the less continued to fight to have manufactur-

ing capacity assigned purely to DRAM, proposing that

capacity be allocated on the basis of manufacturing

cost. Senior management refused, however, to change

the basis of resource allocation.

By the early 1980s DRAMs amounted to only 5 per

cent of Intel’s revenue, down from 90 per cent. Since

DRAM profits were also declining and micropro cessor

profits were increasing, over time DRAM lost manu-

facturing capacity within Intel to the microprocessor

area. Once this decision was made to keep the

resource allocation rule, the strategic freedom left to

corporate managers to recover the founding busi-

nesses to which they were very attached diminished as

market share fell beyond what could be deemed

worthwhile recovering. DRAM managers had to com-

pete internally with the technological prowess of the

other product areas where morale and excitement

were at high levels and innovation was happening in

an increasingly dynamic market. And as microproces-

sors became more and more profitable, the business

received increased funding, with manufacturing

capacity and investment increasingly allocated away

from memory towards them, providing it with the basis

for future growth. Eventually corporate managers

realised that Intel would never be a player in the 64K

DRAM memory game, despite having been the creator

of the business. In 1985, top management came to

realise they had to withdraw from the DRAM market.

Lingering resistance to the exit continued. Manu-

facturing personnel ignored implications of exiting

from DRAM by trying to show they could compete in

the marketplace externally, by explaining failure

in terms of the strong dollar against the Japanese yen

and battling with poor morale. Eventually Andy Grove,

CEO from 1987, took the executive decision to

withdraw from EPROM too, leaving no doubt that

microprocessors now represented Intel’s future strat-

egic direction. The subsequent exit from EPROM was

rapidly executed. Staff associated with EPROM left

and set up their own business.

Source : Based on the case study on Intel by Jill Shepherd (Segal

Graduate School of Business, Simon Fraser University, Canada) in

8th edition of Exploring Corporate Strategy , Pearson, 2008.

Questions 1 What other examples can you think of where

resource allocation processes strongly

influence strategy development?

2 What role should top management play in

relation to resource allocation processes in

organisations?

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