Innovation Blog

Intel Swims Upstream, Profits Downstream — “Moving Up” Strategy Pays Off

By Shlomo Maital

“if you see a successful organization, know that someone once made a courageous decision”.    – Peter Drucker

Jane E. Shaw 

     In January 2009, at a time of general global panic over the 2007-9 crisis,  Intel’s Board of Directors did what boards should do, but generally do not —  it met in Santa Clara, CA., and chose to invest $7 b. in new chip plants in Oregon, Arizona and New Mexico,  at a time when many other global companies were desperately slashing payrolls, investment and costs to survive. [1]   It was a courageous move.

    The Board’s decision was based on a strategy built by  Mobility Group GM David (Dadi) Perlmutter, and MPG Mobile Platform Group Mgr Moolley Eden, who drove the design of  a new chip, “Atom”.  The Board itself, led by Chair Jane E. Shaw,  (formally appointed as Chair only in May) took  a triple gamble.  It called for a large investment, when the future of demand for Intel microprocessors was in doubt.  And it made those investments in the United States, where wages and production costs are high, rather than in Malaysia, Viet Nam, or China.  Moreover, it invested in a low-price chip, Atom, used in netbooks, that threatened to ‘cannibalize’ Intel’s expensive four-core chips, much as Ford Motor Co.’s compact car Falcon, introduced in 1960, eroded demand for Ford’s higher-priced cars during the 1960’s.   

     Intel’s bold strategy was the quintessential embodiment of what management professors (including me) teach, but rarely see practiced:  Move up in a downturn!   Invest in a downturn, to capture market advantage during the upturn.   Intel has done the same in past downturns.  Intel has a huge pile of cash (driven by a zero-dividend policy, high margins and hence large retained earnings) and no leverage at all (Intel avoids bankers as if they had leprosy, because “they don’t understand high-tech”). It self-finances its investments.  It never has to deleverage, like other firms.  And  Intel  uses its cash aggressively, especially in downturns.  It generated $11 b. in cash last year.

    “They continued to innovate while many of their competitors were swimming in debt and reducing their head count,” said Bill Kreher, an analyst with Edward Jones. “The big and strong will emerge even stronger from the downturn, and Intel is no exception.”

     Here are the results of Intel’s gamble, according to Ashlee Vance, writing in The New York Times:

On Thursday, Intel, the first major tech company to report earnings, said that revenue rose 28 percent to $10.6 billion in the fourth quarter, and the company earned the largest gross profit margin in its history. Net income was $2.3 billion, or 40 cents a share, up tenfold from the $234 million, or 4 cents a share, it earned in the last quarter of 2008.  This week, Gartner, a technology research firm, reported that worldwide PC shipments rose 22 percent to 90 million units during the fourth quarter, which is a healthy recovery from the dismal fourth quarter of 2008. Because of its investment in the downturn, Intel, which makes the chips at the heart of most PCs, is poised to benefit from that surge more than most tech firms.

Why was the decision to go with the Atom so bold?  Even Intel’s nimble competitor AMD is full of praise:

   Intel executives had feared that the Atom and netbooks could undermine the company’s more profitable business with traditional laptops, but they pushed hard on the products anyway. The new plants produce the chip at a lower cost, and Intel is the leading player in the fast-growing netbook market.  “I have to give them a pat on the back for having the guts to go with Atom despite the fact that it could have hurt their business,” said Fred Weber, a former executive with Intel’s rival, Advanced Micro Devices. “They built the right chip for the right time.”

  Other global companies, too, have employed bold “Moving Up” strategies.  Oracle, Cisco and HP all made strategic acquisitions during the past year.  Oracle bought Sun Microsystems and thus added hardware to its software portfolio, Cisco spent $7 b. on a raft of acquisitions, and HP bought EDS’s services business.  

     The flip side of “Moving Up” is this — for smaller companies without cash reserves, your troubles are just beginning, not ending, as the recovery begins.  Those huge formidable competitors you face?  They’ve become much more formidable.  They used the downturn to bulk up their muscles on steroids.  

  For the record, here are the members of Intel’s Board of Directors who made the courageous decision:   

   Jane E. Shaw Chairman of the Board,  Paul S. Otellini President and Chief Executive Officer, Ambassador Charlene Barshefsky, Senior International Partner Wilmer Cutler Pickering Hale and Dorr LLP,   Susan L. Decker,  Entrepreneur-in-Residence Harvard Business School,  John J. Donahoe, President and Chief Executive Officer eBay Inc.,  Reed E. Hundt Principal Charles Ross Partners, LLC,  James D. Plummer  Dean of the School of Engineering Stanford University,  David S. Pottruck Chairman and Chief Executive Officer Red Eagle Ventures, Inc., John L. Thornton, Professor and Director of Global Leadership Tsinghua University, Beijing,   Frank D. Yeary, Vice Chancellor University of California, Berkeley, David B. Yoffie, Max and Doris Starr Professor of International Business Administration, Harvard Business School.

[1] See  Ashlee Vance,  “Intel’s bet on innovation pays off in faster chips”,  New York Times, Jan. 15, 2010.