Business Model of Intel

Intel (NASDAQ: INTC) entered its second half-century in 2018. The company was created in 1968 when the world was seeing a boom in hardware capability. It is the era of mobile computing. Intel has also evolved as the world of computing has. The world of computing has transitioned from a PC centric era to a data-centric era. Intel has also altered its operating and business model to respond to the changing industry environment. 2018 was a profitable year for the company when its revenue and profits in both PC centric and data-centric businesses grew. In many more areas including AI, autonomous driving, and 5G, Intel has continued to expand its capabilities. The path ahead is full of opportunities, but it is equally challenging. The company is investing a lot in research and development to improve the existing products and to grow its portfolio of products and services. Intel is a global leader in the design and manufacturing of essential technologies that power the cloud and a smart and connected world. The company has set its priorities for the near future to face the upcoming challenges and find faster growth. Read more about Intel’s business model, operations, and its competitive advantage in this post.

Operating Segments of Intel

Intel has divided its operations into the following segments.

• • Client Computing Group (CCG)
• • Data Center Group (DCG)
• • Internet of Things Group (IOTG)
• • Non-Volatile Memory Solutions Group (NSG)
• • Programmable Solutions Group (PSG)
• • All other
  

However, it is only the first two – CCG and DCG that are considered reportable operating segments. Here is a detailed discussion of how these operating segments work.

Client Computing Group :-

The client computing group is the largest operating segment of Intel, based on revenue. In 2018, this segment generated around 52% of Intel’s entire revenue (Intel form 10K 2018). The CCG segment delivers client computing end-user solutions. Its primary focus is upon the higher growth segments, including 2-in-1, thin-and-light, commercial, and gaming, as well as growing adjacencies such as WiFi and modem.

Data Center Group

The data center group or the DCG is the second-largest operating segment of Intel (based on revenue). In 2018, it generated around 32% of the company’s entire revenue. This segment designs and develops workload-optimized platforms for computing, storage, and network functions. Among the main customers of the DCG segment are cloud service providers, enterprise and government, and communications service providers. DCG segment has experienced faster growth than the entire company in 2018 as a whole. Strong demand in key workloads like AI and network function virtualization in the cloud service provider and communications service provider market segments fueled the growth of this segment.

IOTG

This segment of Intel makes high-performance computing products for targeted verticals and embedded markets. The customers of IOTG include retailers, manufacturers, health care providers, energy companies, automakers, and governments. Intel through its IOTG services helps its customers create, store, and process data generated by connected devices to accelerate business transformations. IOTG generated around $3.5 billion in revenue in 2018 compared to $3.2 billion in the previous year. Growing demand for edge computing and computer-vision based applications fueled the growth of the IOTG segment.

NSG

The core offerings of this segment include Intel Optane and Intel 3D NAND technologies. These technologies drive innovation in SSDs and next-generation memory and storage products. The customers of this segment are enterprise and cloud-based data centers, users of business and consumer desktops and laptops, and a variety of Internet of Things application providers. The company is ramping 64-layer (64L) triple-level cell (TLC) and quad-level cell (QLC) NAND technologies, and Intel Optane technology in innovative new form factors and densities. It will help Intel customers solve many vital challenges in a rapidly evolving technological landscape.

PSG

The programmable solutions group or the PSG offers programmable semiconductors, mainly FPGAs and related products for a broad range of market segments, including communications, data center, industrial, and military. PSG delivers FPGA acceleration in tandem with Intel microprocessors in collaboration with the other businesses run by Intel. This integration helps broaden the use of FPGAs and combines the benefits of both technologies to allow higher flexibility for systems to operate with increased efficiency and higher performance.

Main Products by Intel

The world is growing increasingly connected and smart. Intel is at the forefront of the new technologies and solutions that form the building blocks of a more intelligent and more connected world. In a broad spectrum of markets, these products and solutions are utilized by customers as integrated solutions. Intel products serve customer needs and expectations. Their focus is upon providing compelling user experiences. The company closely works with its customers and partners to offer products and solutions which deliver higher performance and whose total cost of ownership is lower. The company has been able to provide higher value to its customers by improving its products and by expanding its product portfolio, including adjacent products like modem and memory, where the company experienced significant growth in 2018.

The company has a broad product portfolio of innovative solutions for a wide range of customers, including data transfer, storage, and analysis solutions. These products, for example, the gaming CPUs made by Intel, can be sold to the consumers directly or can be integrated by its customers further into their products like notebooks or storage servers. Some of these products can also be combined to enable synergistic incremental value and higher performance.

Platform Products by Intel :-

The platform products by Intel include a CPU and chipset, an SoC, or a multichip package that processes data and controls other devices in a system. These products are parts or raw material for solutions sold through CCG, DCG, and IOTG.

Accelerators :-

The accelerators by Intel are silicon products that can operate alone or in combination with Intel processors in a system like FPGAs, visual processing units (VPU), and Mobileye EyeQ SoC.

Boards and systems :-

The product in this category include server boards and small form factor systems such as Intel NUC.

Connectivity :-

The connectivity products by Intel include Cellular modem, Ethernet controllers, silicon photonics, fabric, WiFi, and Bluetooth.

Memory and storage :-

The memory and storage products made and sold by Intel include SSD, persistent memory, and memory components

As the company has moved from being a PC centric to a data-centric company, it has also added new products to its existing product portfolio.

Major drivers of the competitive strength of Intel

Intel products compete with those by other brands mainly based on performance, energy efficiency, integration, ease-of-use, and several more features, including innovative design, features, price, quality, reliability, security features, and developer support, time-to-market, brand recognition, customer support and customization, and availability. The importance of these factors varies based upon the end-user and type of application. For example, performance may be most important in the case of the Intel products for data center servers. In the case of memory products, energy efficiency and prices might be most important.

Some of the key competitive advantages of Intel include

Positioned for growth in the era of data-centric computing

Computing has evolved faster with cloud computing and edge computing, 5G, as well as the growth of AI and analytics, that generate massive amounts of untapped data and create significant opportunities. Intel is one of the select few companies that have an extensive product portfolio of products that can fulfill the needs of the data-centric world. Intel has all the products that can help its customers process, analyze, store, and transfer large amounts of data. In this way, Intel has the opportunity to be the leading end-to-end platform provider for our customers.

Research and development

Intel has made significant capital and R&D investments into its integrated manufacturing network. Its investment enables it to have more direct control over its design, development, and manufacturing processes, quality control, product costs, production timing, performance, power consumption, and manufacturing yield. Apart from that, Intel also has the scale and expertise necessary to engage its customers deeply on their product needs. The costs of constructing new fabrication facilities to support smaller transistor geometries and larger wafers have grown. Now, a few companies having the capability to build and equip leading-edge manufacturing facilities. Most of the competitors of Intel rely on third-party foundries like Taiwan Semiconductor Manufacturing Company, Ltd. or Samsung Electronics Co., Ltd. for their manufacturing assembly and test needs. In this way, the research and development capabilities of Intel are a significant strength of the brand that enables it to remain ahead of competitors.

Risks and challenges before Intel

While the business model of Intel is full of opportunities, it is also full of significant risks. Apart from the high-level competition and fast-changing industry environment, more challenges in the global markets can affect Intel’s business stability and profitability. The increasing rivalry is among the most significant risks, but other challenges have also grown.

High level of competition :-

The industry in which Intel operates experiences heavy competition. Apart from the rapidly changing technological environment, there are several other factors like fast-changing customer needs, as well as market developments too make the industry environment highly challenging. Intel both needs to anticipate and respond to these changes swiftly to remain competitive. Intel faces intense competition from companies with a similar product portfolio.  To stay competitive, Intel must retain its focus on research and development. If the company does not make a significant investment in research and development every year, it will not be able to maintain its competitive position in the market successfully.

Global or regional conditions can affect the profitability of the company

Intel has manufacturing, assembly and test, R&D, sales, and other operations in several countries around the globe. While the U.S. is a top market for Intel, its sales and revenue from China have grown. In 2018, the company earned around 84% of its revenue from non-US markets. Adverse changes and economic fluctuations in the global or local economic environment can hurt the financial results of Intel. Slowed economic growth, uncertainty in fiscal or monetary policy, higher interest rates, tighter credit, inflation, lower capital expenditures by businesses including on IT, and several more similar factors can harm the growth and profitability of Intel. International trade disputes like the growing trade wars between the U.S. and China can lead to increased tariff and higher operational costs and an increase in the expenses on commodities for the brand, which will, in turn, reduce the profits.

Apart from the above-outlined risks, other risks and challenges can also harm the results and profitability of the brand, including manufacturing and product-related threats as well as security and privacy-related risks. Its global supply chain is also full of dangers, and managing it can be highly challenging. Intel sources form thousands of suppliers from around the globe, and reduced availability of raw material can lead to production delays or other difficulties in manufacturing. For the assembly and testing of certain products and components, the company also depends on third party providers. If any of the third-party providers are unable to provide their services in a timely and cost-effective manner, that too will lead to problems and complexities for Intel. Several legal and political challenges can lead to an increase in operational costs and compliance costs. Overall, there are several risks and challenges related to the business model of Intel Corporation. However, the transition to a data-centric model has proved useful for the business, and its revenues and profits have kept increasing in recent years.

Five Operational Performance Objectives

A well-defined set of operations performance objectives is critical to running an organization profitably.  There are five basic performance objectives that apply to all kinds of business operations. These five basic operations objectives are – cost, dependability, flexibility, quality, and speed. These five performance objectives have both internal and external implications. The internal effects of these performance objectives have a definite impact on cost.

Quality:

Quality is a leading operational performance objective. It refers to consistent performance according to your customer’s expectations. Quality also affects customer satisfaction to a significant extent. However, quality can have a different meaning in one industry and a different one in another. Compare an automobile business with a technology business. The same quality standards do not apply to each one. Quality can acquire different meanings in different settings or industry environments. While in some industries, the level of staff friendliness is the main scale to measure quality, product efficiency is the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality is the truth. Quality can, therefore, have a direct and major influence on customer satisfaction as well as organizational performance.

 Quality is also related to a company’s social image. It can make many things easier for businesses like customer acquisition through positive word of mouth and increase customer retention as well as higher brand recall. These things grow an organization’s profitability. In the context of the computing industry, quality is measured on the basis of several factors. While product performance is a leading indicator of quality, pricing, marketing and brand image are also indicators of quality for computing brands. 

Intel is not a PC brand but a well known brand in the world of computing that makes chips and processors. It also offers an extensive range of other products and services. However, the brand is recognized for the quality of products it makes. It is why Intel has acquired a distinct position in the world of computing. A large number of PC and laptop brands depend on Intel for the input to create their products. The company strives to continuously grow the quality of its products and services. Its investment in research and development is also a sign of the company’ consistent focus on quality. The company offers a nice range of higher performance processors. Apple has also been using parts made by Intel in its PCs and laptops. It is mainly because of its focus on quality that several large brands rely on Intel. Quality is one of the central factors that has been driving the growth of Inte

Speed:

As the industry has evolved with the advancement of digital technology, speed has become essential to acquire business growth. In fact, you cannot imagine smooth operational performance without speed in the 21st century. Now in nearly every industry speed matters just as much as quality or prices. Customers want products delivered to their doorsteps faster. In this era, where a large range of services are delivered and consumed online including a large range of technology and entertainment services, speed matters a lot and sometimes it can be a leading differentiating factor for a company. A company that brings ideas to the table and products to the shelves faster than its competitors usually finds itself ahead of the others in the market.  In some industries where services have to be consumed instantly, speed matters more than ever. Apart from that, in some industries, businesses need to keep the shelf filled with the latest items in order to engage their customers and it is also a reason that speed is so important. 

The advancement of digital technology has led to enormous changes in the world of computing. Speed has become more integral to business growth. Intel altered its business model so it does not remain caught in an innovation gap. It changed its business model to data-centric from PC centric. Computing has gone mobile and the needs of the users have evolved. Intel accordingly expanded its product/services line to meet the new demands better. However, managing a global business on a large scale also requires managing the value chain for the best results. Intel’s supply chain plays a critical role in its business system. The resiliency of its supply chain ensures that products move from suppliers to manufacturing and then finally to the sales and distribution channels faster. The world of technology is evolving fast requiring businesses like Intel to deliver critical performance updates to their products at a quicker pace. Data and analytics play a vital role in ensuring that things keep moving fast in Intel’s business operations. Managers need to make critical decisions based on real-time data and analytics to ensure that the company retains its competitive edge. The efficiency and productivity of iNtel’s business operations depend to a large extent on the quality of decisions in the supply chain. These decisions depend on the quality of the data. Intel has developed technologies that process enormous volumes of data and make it easier to make critical decisions. It ensures that issues are sorted out faster in the supply chain and ideas and products keep moving throughout the system faster.

Dependability:

Dependability or reliability is in itself considered a sign of quality in this era. Dependability, reliability, or trust are synonymous with brand equity which is an important strength for any industry-leading brand. How dependable your business is or how much your customers trust your brand affects your brand equity. However, there are several factors that affect dependability in each industry. For example, while the quality of raw materials and the final product will have a direct impact on the dependability of a business, in the case of others it is the timeliness of delivery. Keeping the promise you made to your customers also affects dependability. Another factor that has kept growing in importance for businesses, as well as customers in the twenty-first century that also affects dependability, is the overall level of customer experience. Brands that offer a superior customer experience overall are considered to be more dependable by the customers. Apple and Amazon are two great examples of companies that have maintained very high-level customer loyalty because they deliver superior customer experience.

In the case of computing and related brands, dependability comes from performance and product quality. While marketing and company culture also matter for these businesses apart from brand equity, the first two factors are critical to winning in an intensely competitive industry environment. Intel is a well recognized and highly reliable brand in the world of computing. The Intel Inside logo can be easily recognized on PCs and laptops. Nearly all laptop and computing brands rely on Intel chips and processors for their products and the exclusive reason is the performance and quality of the products made by Intel. The focus of the brand on product quality as well as research and development to continuously improve the performance of its products are the most important factors that have continued to grow the trust that customers place in the Intel brand.

Flexibility:

Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile, hospitality or retail industries, flexibility can mean different things.

In the case of the computing or cloud technology industries, flexibility is central to delivering performance based on customer expectations. It is important in nearly all aspects of business operations from supply chain to manufacturing to sales and marketing. Especially, down the supply chain whose smooth operation is critical to the success of the company, it is essential to maintain flexibility in operations. It is why apart from the use of modern technologies that enable more flexible and fast operations, the company has also formed strong and long lasting relationships with the suppliers. In the other areas of operations too including manufacturing, the company has optimized its operations so that it can cater to the needs of its customers with higher efficiency. For a business like Intel, maintaining flexibility is also critical to maintain its competitive edge. The volume, variety and velocity of data that its manufacturing operations generate also requires Intel to use the latest technologies such that it can process large volumes of data in a short span of time. Overall, Intel has maintained a high level of flexibility that has helped the company maintain its leadership position and stay ahead of its competitors.

Cost:

Cost in terms of operations performance mainly means the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price. Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing or all of these factors. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company reduces its operating expenses that will help it increase its profits because a penny saved equals a penny earned. To keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.

For Intel’s business operations, the leading category of costs are the costs of sales followed by the operating expenses. Intel’s cost of sales in fiscal 2019 were $29.8 billion compared to $27.1 billion in 2018. The operating expenses of the company reduced slightly in 2019 compared to the previous year falling down to $20.1 billion from $20.4 billion. The net revenue of the company in 2019 was $71.97 billion. Operating income of the company was $20.1 billion. Operating income = Net Revenue – (Cost of sales + operating expenses).

The research and development expenses of the company are among its leading operating expenses. In 2019, the research and development expenses of the company were $13.4 billion compared to $13.54 billion in 2018. The marketing, general, and administrative expenses of the company reached $6.2 billion in 2019 compared to $6.8 billion in 2018. The company has maintained strong relationships with its suppliers to keep its cost of raw material under control.

Analysis of  Intel’s Operations based on the 4Vs model:

Operations and operational processes are like the fundamental building blocks of organizations that have a significant influence on the productivity of the organization and the quality of the organizational output as well. Focusing on operational efficiency has helped businesses find faster market growth as well as maximize output. Many times, if the efficiency of processes is low then it is mainly because the organization has adopted a poor operational design. Processes across business organizations and industries can differ significantly and that is why all processes must be managed differently. Some of the leading differences between various processes are due to the technologies and the level of know-how involved. Different processes require different production equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four particular characteristics of demand that have a significant impact on process management and which are as follows:

• The volume of the products and services produced
• Variety of products and services produced
• Variation in the demand for products and services.
• Degree of visibility that customers have of the production of products and services

Volume of products and services:

Does the business being discussed produce a large amount of the same products and services or various items in small volumes? For example, a car company will produce thousands of pieces of the same model.  On the other hand, a fashion brand will produce limited pieces of various designs. If the volume of output is high, it indicates repeatability or high-level familiarity of the processes. Many times since a large business produces more and more of the same thing, it gains significant expertise in producing that product. It also helps the business gain a significant competitive advantage compared to the smaller ones.

There are two main categories of products and services manufactured and sold by Intel. They are PC centric and data-centric products and services. The PC centric business of Intel accounts for the larger part of its revenue. Its share in Intel’s net revenue was 52% in 2019. Intel produces a broad range of products and services. However, apart from its PC centric business, Intel also offers many data-centric products. The company has optimized its manufacturing operations so that it can quickly scale up according to market demand. Overall, despite its large range of products, it has super optimized its manufacturing operations to maintain the quality of its products. The company produces these products and services in large volumes. It has achieved economies of scale which have helped it maintain its operating profits higher.

Variety of processes (products and services produced):

 Variety is related to the various types of activities that are being performed by the company and how well it manages the various processes. The level of operational complexity is very high when it comes to a mixed model manufacturer that is engaged in lots of changeovers between processes. It means apart from having to choose from a very wide range of inputs, the company has to handle the additional complexity of matching specific customer requirements in terms of products and services. Generally, the high variety processes are more costly as compared to the lower variety processes.

Intel uses both high and low variety processes for the production of the goods and services it offers. It produces a broad category of products and services. Manufacturing requires a mix of high variety and low variety processes. Technological products like processors and other computer parts are generally difficult to produce and apart from technical know-how also require complex manufacturing processes and equipment. However, Intel maintains a consistent focus on innovation in order to improve its products and services. Process innovation allows Intel to manipulate a large volume of data in real-time and process it for making important decisions quickly.  

 Variation in demand of products and services:

In fact, demand variation is among the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly, then managing processes becomes somewhat complex. If demand is predictably constant, it is easier to gear resources to efficiently cater to the existing demand, Moreover, businesses can plan operational activities including marketing and sales or after-sales services in advance.

On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let’s take a simple example of seasonal variations in retail and e-commerce. Demand for an extensive range of products surges suddenly during the festive season, including gifts, electronics, home decor products as well as fashion products. Another essential factor that can cause a variation in demand for specific products and services is the level of competition in the market. If the overall level of competition in the market is very high, the companies have to care a lot to maintain the demand for their products and services, and that may require a considerable annual investment in marketing as well as technology.

As in the case of computing and cloud technology products and services, they are consumed by individual and corporate customers throughout the year. The sales of laptops and computing products, and well as cloud technology products, do not show significant seasonal variations. Their demand has continuously surged, driven by the competitive edge businesses around the world can gain through the use of digital technology products. It is why seasonal variations are generally not common in the PC or cloud industry since these products stay in demand throughout the year.

Visibility of processes:

Visibility denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not right about an automobile business. Customers generally do not have a clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. It is the only aspect of automobile operations that they can see. It is equally right about businesses like Apple Inc. However, when it comes to companies like Amazon or even Facebook, these are highly customer-facing businesses, or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot. However, even in the physical retail industry, accountability and transparency have become of paramount importance because of the growing focus on the brand image as well as customer trust and customer experience.

In the case of Intel, mainly PC and laptop businesses purchase and consume the products made by its Pc centric division. It is a very low visibility business. The largest part of its business operations is its supply chain and manufacturing operations. The company also sells its products online. However, when compared to several other businesses including the Pc and laptop brands or other leading technology brands it is a low visibility business. Customers generally do not get a view of what happens behind the scenes at Intel. The manufacturing or research and development operations of Intel are generally not visible to the customers at all. 

    

Sources:

Intel Annual Report 2018.