Intel Corporation: The Dram Decision

Introduction

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.

Discussion

DRAM Decision

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).

Figure 1

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