Strategies to Turn Adversity into Profits

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 For example, the MIT study Made in America attributed this decline to outdated strategies, short-term horizons, technological weaknesses in development and production, neglect of human resources, and failure of cooperation between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.

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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.