Intel Case

Initially, Intel entered the microprocessor industry with very little added value. The company’s fortunes changed due to two significant events: a contract victory over Motorola and the ability to build sufficient production capacity.

At the advent of the personal computer (PC) industry, PC companies were incapable of producing their own microprocessors. This left PC companies dependent on third-party manufacturers to provide microprocessors. In 1980 Intel beat out Motorola for a contract to supply all of IBM’s computers with the 8088 microprocessor. This was a significant change in added value for Intel, as IBM’s prowess in the PC industry became the de-facto standard. Other PC manufacturers did not have the market power to challenge IBM’s standard. This standard led to a 10x increase in IBM’s revenues in just four years and ultimately benefitted Intel in a significant way.

While Intel’s contract victory proved extremely successful, the company soon realized it did not have the capacity to produce microprocessors on the scale that was projected for the PC industry. This forced Intel to license as many as 12 other companies to manufacture microprocessors. This decision to license the production to external companies left Intel with only 30% of the total revenues and profits from the production of these microprocessors. Eventually Intel was able to decrease its dependency on these license agreements from 12 to 4, thereby increasing its share of revenues and profits to 75%. Intel eventually became the sole manufacturer of the 386 microprocessor for the veteran IBM and up-and-coming young firmed named Compaq.

Intel’s ability to become the de-facto standard early on in the microprocessor industry and its ability to successfully ramp up production capacity to meet an ever increasing demand for microprocessors allowed Intel to capture a significant amount of added value. Without these two events, Intel potentially would have missed out on a significant amount of profits in the PC industry.