What Are the Key Drivers of Profitability in Intels Business Model - Term Paper Example

What are the key drivers of profitability in Intel’s business model? To understand the key drivers of profitability in Intel’s business model we divide the business model into its constituent parts: value proposition, market segment, value-chain structure, revenue generation, position in value network and competitive strategy. With regards to value proposition, Intel assures its customers on increasingly more powerful microprocessors with an almost rigid adherence to Moore’s Law (Yoffie, Casadesus-Masanell & Mattu, 2004). This implies that every 18 months customers can pay a premium price and obtain a more superior product. Secondly, the market segment for Intel is Original Equipment Manufacturers (OEMs). We are informed that the microprocessor accounts for 20 – 40% of the total manufacturing costs of a PC(Yoffie, Casadesus-Masanell & Mattu, 2004). This should ordinarily make the manufacturers price sensitive, however Intel’s threat to integrate forwards prevents them from adopting that practice. In fact the converse happens because Intel is the market leader in chips production. Intel has strong relationships with a few OEMs whom it can selectively give its new microprocessors at a premium price. The premium price ensures that Intel sustains its profitability. On the value-chain structure we see Intel to be at the base. Here the business realized that improving the performance of sophistication of its microprocessors was not enough to grow its business. Intel therefore established Intel Architecture Lab (IAL) to tackle PC platform problems so as to increase the demand for its chips (Yoffie, Casadesus-Masanell & Mattu, 2004). This assures Intel of a growing market and more profits. The organization has also partnered with Independent Hardware Vendors (IHVs) and Independent Software Vendors (ISVs) where it outsources pieces of technology to ensure that its products are delivered timely and in adequate supply. The guarantee on timely delivery and adequate supply sustains the Intel brand image, which consequently gives the company a basis for pricing its products at a premium. With regards to revenue generation and margins, Intel obtains a majority of its profits from the sale of microprocessors. The firm’s ability to control demand through selective selling, investments in software development and complementary relationship with Microsoft are all geared towards increasing the market and profits from Intel’s powerful microprocessors. As a sole-source manufacturer, Intel has asserted its position within the PC value network as a powerful supplier. The market had few, if any, manufacturers that could match its consistency with regards to product innovation. The fact that microprocessors contribute 20 - 40% of the PC manufacturing cost informs us that Intel produces a critical element of the PC value network. Marketing strategies such as ‘Intel Inside’ also affirms the company’s commitment to its brand through greater exposure. A strong position within the value network can therefore be viewed as a driver of profitability. Finally, Intel’s competitive strategy can also be viewed as a driver of profitability. Intel at the moment enjoys high capacity utilization within its production plants because of the learning curve and its economies of scale (Yoffie, Casadesus-Masanell & Mattu, 2004). Also, the organization has a large number of patents, copyrights and trade secrets that guarantee that its products sustain their competitive edge. What are the key drivers of profitability in Microsoft’s business model? In describing the key drivers of profitability in Microsoft’s business model a similar approach to the first question is applied, that is through an analysis of the constituent parts of a business model. These parts as mentioned above are value proposition, market segment, value-chain structure, revenue generation, position in value network and competitive strategy. Microsoft’s value proposition to Original Equipment Manufacturers (OEMs) is to provide an operating system that is stable, supports as many software applications as possible and is popular. To consumers Microsoft provides an operating system that can be upgraded while retaining backward compatibility to the entire installed base of applications. Essentially, the company was providing what both OEMs and consumers wanted. The greater the value proposition the more valuable the products will be to the consumers and hence the more willing they will be to procure the products at a premium price. The market segment targeted by Microsoft was the entire PC population. And given that this market was controlled by OEMs, Microsoft entered into collaborations with the likes of IBM to create OS/2 and with Intel to design operating systems that could be run on Intel architecture that was gaining popularity in Personal Computers (PCs) (Yoffie, Casadesus-Masanell & Mattu, 2004). Working with the leading brands in the PC value-chain guaranteed Microsoft a greater likelihood for making profits. Looking at the PC value-chain structure at the period when the case was written. Intel was at the base followed by OEMs, operating systems development firms and then software applications development firms. To maximize on its returns from the perspective of the value-chain, Microsoft got into partnership with IBM to launch an operating system and also developed a symbiotic relationship with Intel. By specializing in operating systems software development, Microsoft was able to build itself a strong brand and claim a strategic position within the PC value-chain structure. Having built a strong brand, the other players in the value-chain, in our case Intel and IBM, were compelled to cooperate with Microsoft. This cooperation between the different members of the value-chain improves the image of the end product such that consumers become attracted to the end product of the brand cooperation. The strength of the end product implies a greater value proposition which in turn acts as a driver of profitability. Microsoft generates its revenue using diverse methods such as segmented pricing - based on how a given organization relates with Microsoft, size of customer and bundled pricing (Yoffie, Casadesus-Masanell & Mattu, 2004). Another strategy that Microsoft used was to provide OEMs one single master copy of the software for the OEM to reproduce. This eliminated the costs for distribution and manufacturing that Microsoft would have incurred. This reduction of costs directly influences the bottom line figures for Microsoft, i.e. profits. At the case’s given point in time Microsoft had not yet greatly boosted its position in the value network. This is manifested through Intel’s almost solo effort to improve PC platforms. However, the firm’s quick ascent to market leadership in operating systems had given it huge bargaining powers. Market leadership is one way through which any organization can use to increase brand strength and profitability. It could also be argued that through it’s market leadership, Microsoft was advancing its importance within the value network. Finally, Microsoft’s competitive strategy is also a driver of profitability as evidenced through the company’s use of strategies such as bundling and segment pricing, collaborative production of software and its involvement in setting up industry standards such as the PCI bus initiative (Yoffie, Casadesus-Masanell & Mattu, 2004). Given the drivers of profitability, in what areas should you expect conflict? In what areas should you expect Cooperation? From the discussion above, conflict will be manifested in value proposition, revenue generation, position in value network and competitive strategy. From Yoffie, Casadesus-Masanell and Mattu (2004) the two companies, Intel and Microsoft, were fighting over a technology called Native Signal Processing (NSP). Intel was of the opinion that NSP would be of great value to its customers thus increase its value proposition. On the other hand, Microsoft saw NSP as a threat to its value proposition because software developers could simply bypass Windows and give graphic handling instruction directly to the microprocessor (Yoffie, Casadesus-Masanell & Mattu, 2004). From Coughlan (2002) this value proposition impasse between Microsoft and Intel is best examined using behavioral theory. Microsoft believes that NSP will diminish its value proposition and as such it seeks to aggressively defend its territory as a result of the endowment effect. The endowment effect because it is evident that Microsoft’s concern about NSP is not based on the technology itself but on who produces and owns the technology. Probably at this point both organizations need to make use of Porter’s Analysis Framework to help them understand what is driving the wedge between them. It would be better to begin looking at the NSP issue firstly from the point of view of what are the future goals of both organizations. Intel holds the belief that NSP would be beneficial to both organizations because it would decrease compatibility problems which had hindered multimedia application software developers in the past (Coughlan, 2002). Intel further argued that these new multimedia standards that would result out of NSP could also help in the growth of Microsoft products. Microsoft was livid mainly because Intel was developing software, which Microsoft viewed to be its domain. The lack of information sharing between the two companies could be the source of the Microsoft’s stubbornness. Microsoft is stubborn because it has not critically looked at the future goals and current strategy of Intel. Gates and his company are basing their judgment on assumptions (emanating from information processing limitations) that Intel is seeking to support its rivals or to enter into the software market. This conflict in value proposition directly affects how both companies are going to sustain their revenue streams and competitive strategies. On the other hand, from our discussion on Microsoft’s and Intel’s drivers of profitability it is most likely that the two firms will need to co-operate in market segmentation, value-chain structure and position in the value-network. Both businesses are targeting the same market with the difference being their position within the value-chain. Intel provides powerful microprocessors which Microsoft uses to build a more robust operating system. The co-operation necessary in such a value chain is clear. However, the introduction of NSP is viewed by Microsoft as an intrusion by Intel in the value chain that will reduce Microsoft’s ability to capture more value (Coughlan, 2002). It appears as if Intel is integrating forwards. What both players are refusing to understand is their position in the value-network. Are they competitors or are they complementors? The duo have previously worked together to deliver more value to their customers and as market leaders they could do more. References Yoffie, D. B., Casadesus-Masanell, R. & Mattu, S. (2004, 16th March). Wintel (A): cooperation or conflict? Harvard Business School Publishing, (9-704-419), 305 -367. Coughlan, P. J. (2002, 28th Feb.). Competitor analysis: anticipating competitive actions. Harvard Business School Publishing, (9-701-120), 131 – 140. Read More