Strategies to Turn Adversity into Profits

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During the 1980s, the United States’ market share of semiconductor sales began to decline. Several explanations were advanced to explain the trend. For example, the MIT study Made in America attributed this decline to outdated strategies, short-term horizons, technological weaknesses in development and production, neglect of human resources, and failure of cooperation between government and industry.1 Other researchers attributed the sales decline to industry structure: the vertically integrated and diversified Japanese semiconductor firms had been cross-subsidized by downstream businesses, whereas U.S. semiconductor makers had arm’slength customer and supplier relations.2 Still others blamed the decline on the high cost of capital, unfavorable exchange rates, and government policies in the United States.

Interestingly, despite these interpretations, Intel, Micron Technology, LSI Logic, Texas Instruments, and other corporations performed well during this time, and, by the early 1990s, the United States had reclaimed its leading position in the industry.

In this article, I argue that examining the causes of decline and resurgence in U.S. leadership may be incomplete without a firm- and product-level perspective that explores the role of corporate strategies. Such a perspective can provide insights into how a firm is able to react to its local environment, influence it, or profit in spite of it. I argue that a firm can, through its strategic choices, shape its environment and the technology and capabilities that allow it to exploit an innovation. In so doing, firms can help a country maintain or regain leadership position in a particular industry.

I discuss the strategies of three firms — Intel, Micron Technology, and Texas Instruments (TI) — during the evolution of dynamic random access memory (DRAM) and microprocessors. Each firm pursued some combination of the following three strategies for protecting their profits: (1) by blocking in which the firm prevents others from imitating its innovation; (2) by running in which the firm frequently introduces new products and “cannibalizes” its own products; and (3) by teaming up collaboratively with other companies to, for example, improve the chances of establishing an industry standard or dominant design.3

Intel, for example, licensed its microprocessor design early in the product’s life cycle. After its architecture emerged as the standard microprocessor for personal computers, Intel refused to license it or renew existing licenses and vigorously defended its copyrights and patents. At the same time, Intel also introduced new products more rapidly, borrowing from existing products, and leaving the competition behind while building brand recognition through its “Intel Inside” advertising campaign. Micron Technology and TI followed somewhat similar strategies, which enabled them to remain competitive by influencing their local environments.

First, I will outline the evolution of DRAM to illustrate an earlier trend in which a U.S. firm would invent and commercialize a semiconductor product, but, shortly after the emergence of the dominant design, the firm would lose its competitive advantage. Next, I present my framework and relevant theory, followed by the strategies of Intel, Micron Technology, and TI that illustrate the theory. Finally, I discuss alternate explanations for the U.S. resurgence in the semiconductor industry.

Competitive Advantage Lost: The DRAM Story

U.S. firms invented most of the semiconductor products shown in Table 1 (1994 sales estimate, $53.8 billion).4 However, chronicling the progression of DRAM technology, in particular, illustrates a disturbing trend in the evolution of most of these products: the inventor lost a competitive advantage following the emergence of a dominant design.

Introduced by Intel in 1970, the first DRAM had three transistors per bit of information and was known as a three-transistor cell device.5 The original chip contained only 1,024 bits of information; today’s chips may have as many as 256 million bits. The first DRAM also required several power sources, one to refresh the memory and the others to supply the energy for moving data.

Subsequently, many firms entered the DRAM market, and together with pioneer Intel, they contributed several key product innovations. First, Intel developed a one-transistor cell. This was an important innovation because the fewer transistors required to store a bit of information, the more bits could be packed on a chip. Mostek introduced the next two innovations. First, it reduced to one the number of power sources and introduced multiplexed addressing,6 an innovation that simplified packaging of the chip. A single power supply innovation and multiplexed addressing were introduced with later versions of the 4K DRAM. Eventually the 64K DRAM emerged as the dominant design.7 As a result, rethinking critical DRAM features — the one-transistor cell, the refresh mechanism that recharges the capacitor of the cell, use of one voltage source, and multiplexed addressing — has been unnecessary when introducing new DRAM models.

With the emergence of a dominant design, manufacturers were able to shift their emphasis to process innovation: design for manufacturability and process competencies. As newer generations of DRAM were and introduced — 256K, 1M, and 4M, Japanese firms began to dominate the DRAM business. Intel exited the market in 1984; others followed, including Mostek, the firm that had been responsible for so much of the dominant design. At one point, only two U.S. firms remained in the DRAM business: Micron Technology — a start-up of entrepreneurs from Mostek — and veteran TI. Later I will explore TI’s strategies for staying competitive in the market.

In the late 1980s, some pondered the fate of DRAM manufacturers and other chip makers, suggesting that U.S. local conditions were conducive to design activities before a product became dominant but not after. Given the apparent resilience of certain U.S. semiconductor firms, I argue that focusing on corporate strategies, capabilities, and the underpinning technology reveals the factors that led to their success.

Strategies to Protect Profits

Asking why a nation would lose or regain its leadership position in an industry is tantamount to asking the question: How do firms protect their profits? A firm can make a profit if it continues to offer products or services at a lower cost than its competitors or continues to offer differentiated products at premium prices that more than compensate for the extra cost of differentiation.8

Profits from an innovation are likely to attract competitors so innovators must find ways to protect them. I propose three generic strategies: blocking, running, and teaming up (see Figure 1).9

Blocking

A firm can block in two ways. First, if a firm’s capabilities at each stage of its value chain are unique and inimitable, the firm can limit access to them and thereby keep out competitors. That would be the case, for example, when the firm has intellectual property that can be protected. Second, if all firms are equally capable of performing these activities, incumbents may still prevent entry to the market by signaling that post-entry prices will be low.10 This is achieved, for example, by establishing a reputation for retaliating against new entrants or by making heavy, nonreversible investments. Such signals may discourage profit-motivated potential entrants. Blocking works only as long as a company’s competencies and endowments are unique and inimitable or as long as industry barriers to entry persist. But competitors can circumvent patents or copyrights and challenge them in court until they fall. Moreover, such capabilities last only until discontinuities such as deregulation/regulation, changing customer preferences and expectations, or radical technological change render them obsolete.

Running

The run strategy admits that blockades to market entry, no matter how formidable they may appear, are often penetrable and/or eventually fall. Sitting behind these blockades only gives competitors time to catch up or leapfrog the innovator. The innovator must run. That is, it must be innovative enough to build new capabilities and introduce new products rapidly, well ahead of its competitors. It must be able to declare its own capabilities obsolete and/or cannibalize its products before competitors. Running can give a firm many first-mover advantages including the ability to control parts of its own environment.

Teaming Up

The teaming up strategy is almost the opposite of blocking. The incumbent actually encourages entry. Why would a firm want to give away its technology? For several reasons: (1) to win a standard (dominant design); (2) to increase downstream demand; (3) to build capabilities; (4) to exploit the second source effect; and (5) to access markets that would otherwise be inaccessible.11

Enabling Factors

Three other factors allow a firm to make a profit: (1) the competencies and endowments that underpin its ability to offer the products; (2) its national environment; and (3) the nature of the technology that undergirds its products. The interaction of these factors, especially how the corporate strategies shape the other three factors, is critical.

Capabilities

A firm’s competencies are its ability to perform the activities that underlie the offering of low-cost or differentiated products or services to customers. These abilities run the gamut from designing high-performance automotive engines to finding attractive markets for appropriate products.12 Endowments are things like brand name, patents, reputation, geographic location, client relations, and distribution channels that allow a firm to leverage its competencies. The ability of a firm to implement its profit-protecting strategies, offer low-cost or differentiated products, or influence its proximate environment rests on its competencies and endowments. Thus, a firm can introduce new products faster than its competitors only if it has the capabilities to do so or can acquire them rapidly. Complementary competencies or endowments lead to easier alliances with partner companies. Firms that collaboratively cultivate good relationships with governmental entities are more likely to influence legislation in their favor.

National Environment

According to Porter, four characteristics of a firm’s local environment are instrumental to the firm’s competitiveness:

  • Factor conditions
  • Demand conditions
  • Related and supporting industries
  • Firm strategy, structure, and rivalry

These, together with political or legal conditions and technological and macroeconomic conditions, can profoundly impact a firm’s ability to protect its profits as well as build its competencies and endowments. National environment directly and indirectly impacts a local firm’s ability to protect its profits. For example, enactment and enforcement of laws to protect copyrights, patents, and trade secrets directly affect the appropriability of local inventions. Cooperation among firms is also a function of local policies. Until the mid-1980s, U.S. antitrust laws did not allow certain types of R&D cooperation. This changed in 1984 after many firms lobbied, making possible the formation of such alliances as Sematech.

Indirectly, a firm’s environment influences its competencies and endowments. For example, U.S. firms must prove that the drugs they want to market not only are safe, but also possess therapeutic value — that is, the drugs actually cure the ailment for which they are earmarked. Successsful U.S. firms build competencies that allow them to be better global competitors.14

Technology

The technology underpinning an innovation inherently affects a firm’s ability to protect profits derived from the innovation. The type of technology and its current evolutionary phase are pertinent variables. Some technologies are more difficult to imitate than others. For example, because it is copyrightable, software, such as operating systems, is more amenable to protection than memory chips whose patents are easily circumvented. In contrast, attaining industry-standard status is more important for products exhibiting network externalities. Firms may seek alliances in such cases to improve their chances of becoming the industry standard.

As a technology evolves, so does the type of environment required for profit making. In particular, the type of environment that supports design activities before a product becomes dominant differs from that required to support tasks after.15 Before a dominant design surfaces, emphasis is on product innovation.16 This favors a region in which research institutions emphasize product R&D, where demand conditions emphasize product features, and where a significant number of lead users exist. The presence of industries that provide design tools and services, as well as a broad scope of complementary products, also can nurture product innovation. Finally, access to technological knowledge, the availability of venture capital funds, and the free movement of employees among firms foster start-up firms that take advantage of new product ideas from incumbents or universities.

Following the emergence of a dominant design, emphasis shifts to process innovation and incremental product innovation — manufacturing. Demand conditions that emphasize low cost and a large number of customers who tend to be followers characterize the post-dominant design phase. Suppliers of special materials and equipment catering to the increased emphasis on process innovation are present in this phase.

Thus, a firm in an environment conducive to product innovation may find itself performing well early in the life of a product and poorly once a dominant design has emerged.

Interrelatedness of Factors

The preceding strategies and factors are interdependent. A firm can use the appropriability of its intellectual property to prevent entry to a market only if the legal system allows that and if the firm possesses the intellectual property and the ability to defend it. Protection also depends on the strictness of the technology’s appropriability. Teaming up is a function of a country’s political and legal system and a firm’s competencies. Certain governments do not permit all kinds of alliance. A firm also decides what capabilities to build and when and where to do so; investments in R&D and other capabilities reflect such decisions. For example, over the years, Wal-Mart’s decisions have reversed the balance of bargaining power between it and such previously powerful suppliers as Procter & Gamble.

A firm’s strategic decisions, such as relocating to environments that are more conducive to its value-chain activities, can help shape its environment. For example, if a German microchip firm believes that Bavaria does not provide a suitable environment for making semiconductors, it can relocate to California’s Silicon Valley.

When a firm attributes its poor performance to its political or legal environment, lobbying may be in order. For example, before 1984, R&D collaboration between firms was illegal in the United States. At a disadvantage to their Japanese competitors whose government encouraged corporate collaboration, U.S. firms protested. U.S. law was changed, leading to the formation of the Microelectronics and Computer Center (MCC) and Sematech, which I discuss later.

Strategies in Practice

The following case studies show how, over the evolution of a technology, combinations of the different strategies — blocking, teaming up, or running —helped build capabilities and shaped environments conducive to innovation.

Intel

Intel’s success and, to some extent, U.S. success in the semiconductor industry can be attributed to a series of strategic decisions dating back to the development of the microprocessor. Intel has blocked market entry by vigorously protecting its intellectual property, has employed the running strategy by accelerating the rate at which it introduces new generations of its microprocessors, and has used a strategically savvy advertising campaign to increase its brand-name recognition.

In the mid-1970s, Intel licensed its 1972 invention —the microprocessor — to several semiconductor and computer companies including Mostek, Advanced Micro Devices (AMD), and NEC. These firms built an alliance that assured customers of future supplies of microprocessors and the systems support that is vital to incorporating a microprocessor architecture into a new system. Together, they also developed the many complementary chips critical to the success of a microprocessor. In 1980, when IBM needed a microprocessor for its personal computer, it chose Intel’s, partly because of the low-cost availability of these complementary chips.17

As the Intel architecture emerged as the dominant design in microprocessors, Intel decided to keep future generations of the chip proprietary, prosecuting any firm that violated its intellectual property rights. In keeping with this decision, it filed a suit against NEC claiming that NEC had violated the copyright on the microcode18 for its 8088 and 8086 microprocessors. In a landmark case, in 1986, the courts ruled in favor of Intel. Software had previously been declared copyrightable, but hardware had not. Until then, microcode had been classified somewhere in between. NEC appealed the case because the judge belonged to an investment club that owned $80 worth of Intel stock in his name. When the case was retried in 1989, a different judge ruled again that NEC had violated Intel’s 8088 and 8086 microcode, establishing that microcode is copyrightable. The ruling meant that the microcode for the next-generation Intel microprocessors would be copyrightable, and the firms licensing earlier versions of Intel’s microprocessors could not build later generations of its microprocessors without new licenses.

Obstructing NEC in court sent a message to the microchip community that Intel would use legal means to protect its intellectual property. Intel made this threat even more credible when it filed a lawsuit against AMD and subsequently won.

Despite Intel’s success in defending its intellectual property, AMD, Cyrix, NextGen,19 IBM, and Chips & Technologies entered the market to produce Intel-compatible microprocessors. Consequently, in addition to protecting its intellectual property, Intel had to seek other ways to protect its profits. In 1985, Intel withdrew from the DRAM business to concentrate on microprocessors.20 By so doing, the firm was able to develop new generations of microprocessors with dramatically greater complexity (as measured by the number of transistors in each chip) and large increases in performance (as measured by the number of instructions that the microprocessor executes per second21). More significantly, Intel was able to introduce these more complex and better performing processors at a faster rate than earlier generations (see Table 2). For example, the P6 (Pentium Pro) was introduced only three years after the Pentium and was about twice as complex and twice as fast. This compares favorably with the 486 that was introduced four years after its predecessor, the 386. Some generations of microprocessors were introduced before sales of the earlier generation had peaked (see Table 2).

Intel also strove to enhance its brand-name identity. Long buried in the system box, the Intel microprocessor began to emerge from anonymity in 1991 when Intel launched its “Intel Inside” advertising campaign in technical and business magazines and on nationwide television in the United States. In addition, PC manufacturers were offered discounts on chips if they displayed the Intel logo on their PCs.

Also working in Intel’s favor is the high cost of constructing a semiconductor plant, which at $1.5 billion22 constitutes a barrier to entry for many firms. Other deterrents to competitors include Intel’s existing fabrication expertise, its focus on only microprocessors, and a “war chest” of about $10 billion.23

Bolstered by the protection of its copyrights (the blocking strategy in action) and ongoing generational product innovations (the running strategy in action), Intel does not have to depend on its manufacturing competence, which is usually critical following the emergence of a dominant design. The landmark legal rulings establishing that microcode is copyrightable make it difficult for competitors to imitate Intel’s designs. To design a microprocessor able to run the array of PC-compatible software that operates only on an Intel architecture — of which its microcode is a critical part — is a nearly insurmountable barrier to this market.

Micron Technology

In 1987, Micron Technology was the only U.S. DRAM maker with manufacturing operations in the United States.24 (In the year ending August 1995, it earned $805 million on revenues of $2.8 billion.) Strategic decisions in response to the U.S. environment, which was not conducive to post-dominant design performance, enabled Micron to survive in the 1980s and thrive in the early 1990s.

Founded by Ward Parkinson, who designed DRAMs for innovator Mostek, Micron introduced its first DRAM in 1982. To offer the low cost dictated by the nature of the DRAM business,25 Micron decided to capitalize on its competencies in design rather than try to out-manufacture its deep-pocketed, vertically integrated Japanese competitors. Micron used its design skills to create what has been described as a “phantom” fabrication plant.

Much of Micron’s success has been attributed to its ability to increase the number of chips, or dies, per silicon wafer, while minimizing the number of layers required to build the chip’s electronic infrastructure. By using this technique, Micron produced low-cost chips without the first-class manufacturing know-how of its Japanese competitors.

Usually, shortly after a new generation of DRAM has been introduced, engineers redesign it to make the dies smaller. This reduction of the die size is normally called a “shrink.” Micron performed four shrinks of its 4M DRAM, compared with an industry average of two per DRAM generation.26 It also managed to reduce the number of layers for that design to twelve, compared with an industry average of eighteen.27 When its competitors began to manufacture eight-inch-diameter wafers in order to reduce cost (by using more dies per wafer), Micron did not need to alter its process immediately to remain competitive and avoided the costly changes associated with new or upgraded fabrication facilities.

Micron’s strategies to improve its competitive position were not limited to exploiting its design competencies. Like Intel, it took to the courts. Following a decline in the PC market at the end of 1984, Japanese firms were left with over-capacity in DRAMs. In 1985, they dropped the price of 64K DRAMs from $2 to 25 cents in the United States. U.S. firms charged that Japanese firms were dumping DRAMs in the United States — selling them for less than they cost to produce in Japan. In 1985, Micron filed a $300 million suit against six Japanese chipmakers — Hitachi, Fujitsu, NEC, Mitsubishi, Oki, and Toshiba — charging that they had conspired to monopolize the DRAM market and drive U.S. manufacturers out of business in violation of parts of the Sherman Act, Clayton Act, Wilson Tariff Act, and Antidumping Act of 1916.28 The International Trade Commission upheld the dumping complaint. The Semiconductor Industry Association (SIA) also filed an unfair-trading complaint with the U.S. Trade Representative. U.S. and Japanese officials reached an agreement that was signed in August 1986.29 The agreement stipulated that Japan had to open its markets to U.S. DRAM makers and that Japanese firms had to sell DRAMs in the United States at or above prices fixed by the U.S. Department of Commerce.30

Micron’s actions altered its environment and its competitiveness. First, supporting the effort to establish fixed prices allowed Micron to be competitive again, and the corporation has taken legal recourse against patent violations.

Partly as a result of the lawsuit by Micron and subsequent events, Sematech was established in 1987 with a $100 million contribution from the U.S. government. Member firms contributed another $100 million. The goal of Sematech was to help build a local environment that was more conducive to such post-dominant design activities as manufacturing and related industries. Finally, it led to TI’s decision to use the courts to maintain competitiveness.

Texas Instruments

In the late 1970s, TI was the top-ranked semiconductor manufacturer in the world. However, the onslaught of competition from Japanese firms quickly eroded TI’s leadership position. Like Micron, TI went to court (blocking); and like Intel, it struck alliances with competitors (teaming up).

By the time TI lost its leadership position, it had accumulated thousands of patents. In 1986, following Micron’s successful suit against Japanese firms and the subsequent establishment of a fixed price for DRAMs sold in the United States, TI filed a lawsuit against NEC, Mitsubishi, Sharp, Fujitsu, Hitachi, Oki, Toshiba, and Samsung, claiming infringement of patents issued between 1970 and 1985.31 All firms eventually settled out of court, with many agreeing to pay royalties to TI.

TI next turned to U.S. firms, filing a suit against Micron in November 1988, again claiming infringement of patents issued between 1970 and 1985. This case was settled in May 1989, and Micron agreed to pay royalties. Next, TI filed a suit against Analog Devices, Cypress Semiconductor, Integrated Device Technology, LSI Logic, and VLSI Technology for infringing patents awarded to TI for the plastic encapsulation process used to seal chips in plastic protective packaging.

The benefits of TI’s strong protection of its intellectual property have been threefold. First, between 1987 and 1994, it collected royalties of $1.9 billion compared with an operating income of $1.3 billion for the same period. Royalty income allowed TI to build new fabrication plants, an advantage enjoyed by vertically integrated Japanese firms. Second, by signaling to the industry that it would vigorously defend infringement of its intellectual property, TI was ensuring that competitors would honor its patents and, in doing so, be slowed in the DRAM race — effective blocking. Finally, TI also used the patents to negotiate cross-licensing agreements and strategic alliances that allowed it to obtain manufacturing capabilities in Japan — effective teaming up. For example, in 1987, it settled its suit against Hitachi with a cross-licensing agreement that led to an agreement in 1988 to jointly develop a 16M DRAM.32 Since then, the firms have together developed 16M, 64M, and 256M DRAMs.

In addition to the Hitachi alliances, TI has entered into a joint venture with Acer, a Taiwanese firm, and Nippon Steel of Japan on DRAM development and manufacturing.

Product Technology Dictates Protective Strategy

Microprocessors exhibit network externalities characterized by customer-switching costs that increase as the installed user base increases. (Switching costs include a user’s accumulated software, the investment in learning an operating system, and development tools that designers of microprocessors build.) Above all, microcode is copyrightable, resulting in corporate alliances early in the life of products in order to collaboratively establish a dominant design. After dominant-design status has been attained, a firm can prevent imitation by defending its intellectual property rights in the courts. To have the leading market share, a maker of microprocessors does not have to be the best at manufacturing but, as a result, its profits may be less.

DRAMs do not exhibit the same network externalities as microprocessors. Because they as yet lack copyrightable microcode, they are easier to design than microprocessors. Thus, skills in manufacturing during the post-dominant design phase are critical. Replicating DRAM technology is easier, and firms depend on low-cost strategies, such as efficient manufacturing or designs that “substitute” for manufacturing, as was the case with Micron. Alliances are formed not to win dominant designs but to make the cost of expensive fabrication plants more bearable and to pool manufacturing competencies.

Alternate Explanations for Decline

My framework and cases suggest that strategic decisions — whether explicitly planned or implicitly evolving — taken by firms during the life cycles of several products were largely responsible for the resurgence of the U.S. semiconductor industry. However, other explanations have been posited33 for the loss of U.S. leadership: (1) the high cost of capital; (2) the formation of Sematech; (3) Intel’s decision to focus on microprocessors; and (4) the entry of Korean, Singaporean, and Taiwanese firms into semiconductor manufacturing.

Cost of Capital

In the 1980s when the United States lost its leadership role to Japan, this was attributed to the lower cost of capital in Japan.34 For two reasons, low cost of capital is not a plausible explanation for the U.S. comeback. First, when the U.S. semiconductor industry began to rebound in the early 1990s, the cost of capital in Japan was lower than in the United States. In addition, it is possible for firms to benefit from strategic alliances with counterparts in countries where capital costs less. By jointly developing and manufacturing DRAMs with Hitachi, TI gained access through Hitachi to cheaper capital in Japan. Motorola also jointly developed and manufactured DRAMs with Toshiba.

Second, by defending intellectual property rights, it is possible to collect billions of dollars in royalties that can be invested in development and manufacturing, as TI has done.

Sematech

Some have argued that the establishment of Sematech helped provide U.S. firms with the capabilities for post-dominant design activities that allowed them to recapture the industry lead.35 If Sematech were, indeed, the reason for the U.S. resurgence, credit should be given to the firms’ strategic decisions that led to the formation of Sematech. U.S. semiconductor firms lobbied to make cooperative R&D efforts legal, and they decided to allocate valuable resources to the venture.

Intel’s Focus on Microprocessors

Some observers claimed that Intel “groped its way” into deciding to withdraw from the DRAM business,36 resulting in an industry turnaround.37 Rather, I feel that a series of strategic decisions — a combination of teaming up, blocking, and running — allowed Intel to attain and maintain its competitive advantage. While the firm’s focus on microprocessors may have helped its generic profit-protecting strategies, it was not, in and of itself, enough to give the firm the dominant and near-monopoly position that it holds in PC microprocessors. Some have suggested that an infusion of $400 million from IBM (through an equity stake that IBM acquired in Intel) made the firm’s success possible.38 A similar investment by Digital Equipment Corporation in MIPS did not save the pioneer RISC microprocessor maker. If a single incident has to be chosen as the key point in Intel’s history, it is either IBM’s choice of the Intel microprocessor architecture for its PC or the landmark rulings declaring that microcode is copyrightable.

Entry of Asian Firms

Low-cost Korean firms became formidable competitors of the Japanese firms in the DRAM market in the early 1990s. At the same time, foundry capacity in Taiwan and Singapore provided U.S. producers with extra fab capacity that enabled them to remain in the market. In support of the strategic-decision viewpoint that I take here, U.S. firms focused on design while contracting with these Asian foundries or, alternatively, formed alliances with Korean firms to produce chips. In this way, U.S. firms maintained a competitive advantage during the post-dominant design phase.

Summary

The strategic decisions of Intel, Micron Technology, and TI to protect their profits had both a direct and indirect effect in enabling them to stay competitive and eventually contributed to the resurgence of the U.S. semiconductor industry. Directly, the strategies allowed the firms to overcome an environment that was not conducive to post-dominant design performance. Indirectly, they influenced the local environment, which, in turn, helped the industry.

A series of decisions by each firm and reaction by the U.S. government allowed these firms to stay in the industry and stage a comeback. In particular, Intel’s strategic alliances and the design of a 16-bit microprocessor may have led to IBM’s choice of the Intel architecture and subsequent emergence of the Intel architecture as the standard. The firm’s decision to defend its intellectual property gave Intel adequate protection. Intel’s decision to accelerate the development of newer generations of microprocessors allowed it to stay ahead of competitors. Its decision to build brand identity with its “Intel Inside” campaign further differentiated its products. As Intel has grown strong, so have local semiconductor companies that offer complementary chips and local, related industries such as PC software.

Micron used its design competencies to compensate for its limited manufacturing ability and sued its Japanese competitors for dumping DRAMs in the United States. Subsequent DRAM price fixing, supported by the U.S. government, allowed Micron to remain in the industry. Micron’s court actions reiterated that even semiconductor patents might be appropriable. Spurred to action, TI went to court and successfully prosecuted Japanese and Korean semiconductor companies that had infringed on its DRAM patents.

The health of an industry is not only a function of the environment that a nation provides, but also of firms’ strategic decisions to protect their profits. These decisions allow firms to thrive despite the environment or to make that environment more conducive to innovation.

Topics

References

1. M.L. Dertouzos, R.K. Lester, and R.M. Solow, Made in America (Cambridge, Massachusetts: MIT Press, 1988).

2. M.G. Borrus, Competing for Control: America’s Stake in Microelectronics (Cambridge, Massachusetts: Ballinger, 1988); and

C.H. Ferguson, “Technological Development, Strategic Behavior and Government Policy in Information Technology Industries” (Cambridge, Massachusetts: MIT Sloan School of Management, Ph.D. diss., 1989).

3. A. Afuah, Innovation Management: Strategies, Implementation and Profits (New York: Oxford University Press, 1998), pp. 243–269.

4. Integrated Circuit Engineering, Status 1995: A Report on the Integrated Circuit Industry (Scottsdale, Arizona: ICE, 1995).

5. Although normally credited with the first design of a DRAM, Advanced Memory Systems did not have the process technology to build a commercially viable chip. Intel did.

6. To read or store information in RAM, the computer must send an address signal through pins protruding from the chip. In the first DRAMs, the number of pins increased rapidly as the bit density of the chip increased. Mostek’s multiplexed addressing allowed the DRAM to have considerably fewer address pins even as density increased, making DRAM packages a lot smaller and simpler.

7. Utterback and Abernathy developed the concept of “dominant design,” a design whose major components and underlying core concepts do not vary substantially from one product model to the other and which commands a high percentage of the market share. See:

J.M. Utterback, Mastering the Dynamics of Innovation (Boston, Massachusetts: Harvard Business School Press, 1994).

8. M.E. Porter, “Towards a Dynamic Theory of Strategy,” Strategic Management Journal, volume 12, Winter 1991, pp. 95–117.

9. Afuah (1998).

10. See J. Tirole, The Theory of Industrial Organization (Cambridge, Massachusetts: MIT Press, 1988).

11. R. Garud and A. Kumaraswamy, “Changing Competitive Dynamics in Network Industries: An Exploration of Sun Microsystems’ Open Systems Strategy,” Strategic Management Journal, volume 14, July 1993, pp. 351–369;

S. Hariharan and C.K. Prahalad, “Strategic Windows in the Structuring of Industries: Compatibility Standards and Industry Evolution,” in Building Strategically-Responsive Organizations, H. Thomas et al., eds. (New York: John Wiley, 1994); and

D. Harhoff, “Strategic Spillover Production, Vertical Integration, and Incentives for Research and Development” (Cambridge, Massachusetts: MIT Sloan School of Management, unpublished Ph.D. diss., 1991).

12. See C. K. Prahalad and G. Hamel, “The Core Competencies of the Corporation,” Harvard Business Review, volume 68, May–June 1990, pp. 79–91; and

D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal, volume 18, number 7, 1997, pp. 509–533.

13. M.E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990).

14. L.G. Thomas, “Spare the Rod and Spoil the Industry: Vigorous Competition and Vigorous Regulation Promote Global Competitive Advantage. A Ten Nation Study of Government Industrial Policies and Corporate Pharmaceutical Advantage” (New York: Columbia Business School, working paper, 1989).

15. J.M. Utterback and A.N. Afuah, “The Dynamic Diamond: A Technological Innovation Perspective” (Cambridge, Massachusetts: MIT, Sloan School of Management, working paper, 1995).

16. Utterback (1994).

17. One reason often given for IBM choosing the Intel design is that Intel had a version of its 16-bit design (the 8088) that could use the older and cheaper 8-bit complementary chips. Since IBM wanted a low-cost PC, it chose Intel’s 8088.

18. This is a layer of instructions embedded in the microprocessor hardware that helps execute instructions from a computer’s instruction set.

19. AMD acquired NextGen, and, in early 1997, it appeared to be posing the first real threat to Intel’s dominant position in microprocessors. Its goal was to gain 30 percent of the microprocessor market share.

20. R.A. Burgelman, “Fading Memories: The Process Theory of Strategic Business Exit in Dynamic Environments,” Administrative Science Quarterly, volume 39, March 1994, pp. 24–56.

21. Usually measured in terms of MIPS, or million instructions per second, a unit of performance that one design manager and former colleague of the author jokingly called “meaningless indicator of performance.”

22. Wall Street Journal, 17 October 1995, p. A3.

23. Enticing to competitors, Intel’s profits for 1995 were estimated at more than $3.5 billion, suggesting that the company has even more money to block competition.

24. The only other U.S. firm producing DRAMs, TI, did so outside the U.S. in a Japanese fab, using a Japanese design. Motorola signed an agreement in November 1987 to package and distribute Toshiba DRAMs.

25. Unlike microprocessors, DRAM does not have microcode that is protected by U.S. copyright laws. Appropriability of DRAM patents is weaker.

26. “Semiconductors: Remind Me How to Make Money,” The Economist, 26 August 1995, p. 55.

27. D.B. Davis, “Micron’s Formula,” Electronics Business, volume 19, March 1993, p. 59.

28. S. Zipper, “Micron Files $300 Million Suit against Six Japanese IC Makers,” Electronic News, 16 September 1985, p. 1.

29. “Big Prices for Wee DRAMS,” The Economist, 27 February 1988, p. 52.

30. Setting prices for DRAMs has been criticized by economists as being inefficient and hurting DRAM users such as Sun Microsystems. Micron did not agree.

31. See J.D. Kidd and R. Ristelhueber, “Japanese Split on TI Patents; NEC Counters,” Electronic News, volume 32, 31 March 1986, p. 1.

32.”TI, Hitachi Settle DRAM Patent Suit,” Electronic News, volume 33, 1 June 1987, p. 29; and

“TI, Hitachi Sign 16M DRAM Pact: Plan Joint Development,” Electronic News, volume 34, 26 December 1988, p. 1.

33. The author would like to thank an anonymous referee for raising this question and suggesting some alternate hypotheses.

34. Dertouzos et al. (1988).

35. Some critics, such as T.J. Rodgers, the CEO of Cypress Semiconductor, disagree.

36. Burgelman (1994).

37. “The Pizzazz Factor,” The Economist, volume 336, 16 September 1995, p. S14.

38. Ibid.

Reprint #:

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