INTEL CORPORATION
Product Transitions and Demand
Generation
Feryal Erhun
CERC, Stanford University
Rate of Innovation Is Increasing and Product Life
Cycles Are Shortening
Life cycles of most electronic goods
are well under one year
Semiconductor industry has been
following the Moores law and
launching products every 18-24
months
Result: Frequent product
rollovers and managing
multiple product
generations simultaneously
90nm
2003
65nm
2005
45nm
2007
32nm
2009
22nm
2
2011
32 nm
Vulnerable Time to
Fail or Lose Market
Share
90 nm
130 nm
180 nm
22 nm
1998
Desktops
Laptops
Netbooks
2000
Personal
Devices
2002
2004
2006
Smartphones
2008
Smart TVs
Demand Volume
45 nm
65 nm
2010
Embedded
3
40% of Product Transitions Have Led to
Product Failures
Company
Problem
Consequence
Sega
Product over-hype (excessive
marketing)
Loss of market share
IBM
Overly optimistic sales forecast
Excess inventory
Ford
Excess inventory of old model
Delayed new model
introduction
Ashton-Tate
(dBase IV)
Delay due to technical problems
Company sold to Borland
Worst Case: Company Failure
Released in 1981
Weighed 24 lbs
Cost $1,795
Featured
A 5-inch display
64 kilobytes of
memory
A modem
Two 5 1/4-inch
floppy disk drives
Osborne I The first portable computer
Industry Realities
600 product changes/week
Best-in-class on-time NPI under 40%
80% of NPI attempts require product content
negotiations
Product change timing issues increase inventory
10%-20%
Change-driven component shortages reduce capacity
10%-15%
Inability to consolidate buying increases COGS
5%+
6
What Is a Product Transition?
Product transition (or product rollover) is the process of
introduction of new product and the eventual displacement of old
products.
Sales
New product
Old product
Time
Planned new
product launch
Demand Risk Factors
Product capability
Perceived value/quality of new product
Overlap of market segments with old product
Familiarity of new technology by customer base
Market competitiveness
Likelihood of new product introduction by competitors
Likelihood of price-cuts by competitors of existing products
Degree of brand loyalty
8
Amazon vs. the Tablet Market
Kindle Fire is a tablet computer version of Amazons Kindle e-book reader
The Nook Tablet is a tablet computer by Barnes & Noble.
Released on November 14, 2011; retails at $199.
Estimates of the device's initial BOM ranged from $150 to $190.
Make money on the selling of digital content on the Fire, rather than through the
device itself
Became available on November 17, 2011; retails at $249.
Barnes & Noble is offering discount prices on its Nook readers and tablets to buyers who sign
up to subscribe to the New York Times or People magazine.
The Nook Tablet will be offered at $199, a $50 price cut, until March to those who buy a Nook
subscription to People. That puts Barnes & Noble tablet at the same price as Amazon's Kindle
Fire. Bizjournals.com 1/9/12
The iPad is a line of tablet computers by Apple
Introduced on January 27, 2010; retails starting at $499.
The latest report from Apples Asian suppliers is that the company will introduce two
new versions of its iPad late in January and will cut the price of its current iPad 2.
It also said that Apple will take on Amazons $199 Kindle Fire with a price cut on its
iPad 2. Bizjournals.com 12/29/11
Demand Risk Factors (contd)
Information accessibility
Availability of timely sales information
Availability of inventory status of old product
Technology change
Time to market pressure, technology gap, need for new
process technology
Continuity of design teams across product generations
10
Supply Risk Factors
Value chain alignment
Number of supply chain levels, number of suppliers, number of new
suppliers
Proximity to demand or supply base, partnership relationship with
supplier and customer
Internal execution
Capacity
Different production processes required to manufacture old and new
products
Extent to which production equipment can be shared between old and new
products
Design of new product
Design for manufacturability, modularity
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12
13
Transition Factors
14
Intels Supply Chain Complexity
High fixed cost environment
Building a fab costs $6B
Less fragmented industry
Long lead times
Two to three years to build the facility
Manufacturing lead time 13 weeks
Built to forecast
Long term and short term planning for production
Network of global operations
Four geographies: Americas, Europe, A/PAC, Japan
15
Year 2000 Snapshot
February 2000: AMD launched the 1 GHz
processor, and created a buzz in the industry.
March 2000: Nasdaq index crossed 5000 mark
November 2000: Intel introduced P4
Pentium III processors architecture was incapable of
scaling much beyond 1 GHz.
Intel needed a new scalable product not only to compete
with AMD, but also to cater to the higher speed
demands of the market.
March 2001: Nasdaq index fell below 1900
16
Signals for Strategy Revision
Sales of P4 lower than expected
Sales of PIII higher than expected
Value chain alignment problems
Economic environment
17
Transition Factors for P4
Product
Pricing
Marketing
Indicator
Environmental
Indicators
Product
Capability
Adoption
Rate
Competition
Timing
Internal
Execution
Value Chain
Alignment
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Decisions
Demand side decisions:
Pricing:
Marketing:
Rethink pricing of the P4 processor relative to Pentium III?
Offer bigger incentives and rebates instead of cutting the prices?
Advertise P4 more intensely?
Timing and roadmaps:
Accelerate the introduction of the 2.0 GHz processor and the
cheaper SDRAM-based chipset?
19
Decisions (contd)
Supply side decisions:
Internal execution:
Drive internal improvements through die shrink
conversion faster?
Change current capacity allocation between PIII and P4?
Value chain alignment:
Move to DDR-SDRAM immediately?
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Reduce P4 Price?
Pros
Cons
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Reduce P4 Price?
Pros
Triggers sales
Quick switch of
customers from PIII to
P4
Can be implemented
instantly
Cons
Lowers new product profit
margin
Might kill PIII instantly
leading to excess inventory
Once priced at low price
point, difficult to raise
price in future
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Incentives and Rebates for P4
Pros
Cons
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Incentives and Rebates for P4
Pros
Triggers sales
New product can still be
kept at a higher absolute
price point
Can be controlled by
changing rebates and
incentive schemes
depending on sales
Can be implemented
instantly
Cons
Identifying a proper
incentive scheme is
difficult
The impact may not be as
effective as intended
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Advertise P4 More Intensely?
Pros
Cons
25
Advertise P4 More Intensely?
Pros
More product awareness
strengthens brand too
Can trigger sales if
targeted to right segment
at right time
Can be implemented
soon
Cons
Might lose control over PIII
sales with customer
suddenly switching to new
Not much effective if key
underlying issue is high
price or low product
performance
26
Product Roadmap
2.0 GHz Processor and the SDRAM-based Chipset
Pros
Cons
27
Product Roadmap
2.0 GHz Processor and the SDRAM-based Chipset
Pros
Triggers sales
Gain lead over
competition
Cons
Disrupts future roadmaps
First-generation P4 is killed
before its ROI is recognized
Additional pull-in
expenses and costs
Profit margin on firstgeneration P4 is lost by
launching a new cheaper
product
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Internal Improvements
Pros
Cons
29
Internal Improvements
Pros
Triggers sales
Gain lead over
competition
Cons
Disrupts future roadmaps
Additional pull-in
expenses and costs
30
What Should Intel Do?
31
Transition Playbook
Map out in advance primary strategy, risks, and
contingency strategies
Explore ways to minimize risks
Define and monitor key supply chain indicators
Coordinate plans and actions across multiple
functions in alignment with pre-defined
strategies
Invoke contingencies as needed
Measure performance
32
Example of Dynamics of Dual Roll
Disposal by markdown
Excess inventory
of old product
Dual roll by price
Out of stock
of old product
Delivery delay
Switch to other dual roll
No action
Adjust new price
Silent dual roll
of new product
Delay intro of new
Primary Strategy
Risk Resolution
Contingency Strategy
Call the play
Events after play initiated
Modify the play
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Example of P4 Dynamics
Customer incentives
Subsidize RDRAM
Dual roll by price
Slow sales of P4
(Hi platform cost)
Accelerate DDR-SDRAM
Price cut/breakaway
Shift capacity out
Primary Strategy
Risk Resolution
Contingency Strategy
Call the play
Events after play initiated
Modify the play
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What Actually Happened:
Intels Breakaway Campaign
Breakaway campaigns primary goal was P4
demand generation
Intels breakaway campaign consisted of :
Accelerating product roadmaps Instance of Intels
One Generation Ahead (OGA) Strategy
Moving products down in price point Introducing
one new low price point
Timing these changes with the launch of WinXP
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Impact of Breakaway Campaign
Demand side impact:
1. Record demand for the new SDRAM compatible platform
(exceeded expectations)
2. RDRAM platform sales declined over the following
quarters
3. Intels products regained the lead in the market
Supply side impact:
1. Availability of Intels SDRAM platform components was
tight, due in large to the die size
2. Supply returned to normal balance 1-2 quarters after DDR
platform launch
3. Second generation P4 product helped store that balance
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Summary
Product transitions can be a source of competitive
advantage.
Product transition requires careful design of primary
and contingent strategies.
Primary strategy based on tight control of demand and
supply risks.
Successful contingent strategies require agile supply
chains: information integration, design postponement,
production flexibility, quick response, demand
generation, and sound contingency planning.
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Key Lessons Learned
Ability to drive a new standard is affected by the strength of the
market and the strength of the competition
Despite dominant market share, attention towards the voice of
customer and supply chain partners suggestions is important for
success of any product (eg. RDRAM vs. DDR)
Close coordination between supply (planning) and demand
(marketing) side is very crucial during transitional periods to
mark the success of new product in the market
Need to adopt both proactive as well as reactive strategies during
product rollovers
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