Nov 29, 2004

Intel Should Take Note: Sony and IBM Point to Future

Integrated Supply is back! An early-1990s marketing concept led in great part by successful players in the automotive industry, it nonetheless proved difficult for most American industrial companies to understand and adopt. But Paul Otellini, Intel’s new CEO (who plans to leverage his extensive Marketing background to drive Intel's faltering growth going forward), would do well to take note of the path IBM and Sony are taking together. And the sooner the better - chip industry analysts and insiders alike are in agreement that the chip business is quickly changing in dramatic ways; most notably, the declining supremacy of product engineering groups, at least those groups with a myopic over-reliance on developing faster and faster chips and little or no focus on the OEM customer applications they’re used in.

Even the simplest description of Integrated Supply points out both its allure and its challenges: suppliers who “integrate” themselves into their customers’ business challenges will earn the right to have preferred (auto companies call it Tier I) supply relationships. Take on the customer’s biggest problem and you have an attractive opportunity to shift the procurement dialogue away from a commodity focus on lowest price. As the theory goes, “reduce the total costs I incur using your products by $X million per year and I’ll focus our negotiation less on the cost/unit of the product versus competing alternatives”.

There’s only one catch: the value-added you create has to be tangible (i.e., think dollars) and not conceptual. The opportunity here is not about the easy path of dreaming up value-added ideas that are then artfully spelled out in marketing brochures and sales pitch books. The opportunity is about tangible, unique solutions that create real economic value for the end-user. While not rocket science, there’s only one way to successfully integrate solutions with real customer problems – it’s called market-driven strategy and IBM gets it big time. It’s time for growth and marketplace differentiation at key customer Sony and IBM has risen to the challenge.

IBM’s move to integrate supply through a close working relationship with Sony (and Toshiba) is aimed at helping Sony realize its consumer products growth ambition through new, differentiated offerings (Sony has already gone as far as they can in lowering costs by relocating plants to developing countries). And when Sony recognized it needed intensive involvement from its chip supplier, IBM responded decisively and the companies are about to launch new products built on what is being hailed as a new generation of multi-processor chip technology.

Meanwhile, Intel has had a qualified integrated supply success of its own: the Centrino microprocessor, which comes bundled with innovative wireless attributes. But recent comments coming from the company suggest they continue to wring their hands in paralyzing fear that additional moves to embed new software and functionality in its chips will threaten its “Wintel” duopoly with Microsoft, who is genetically predisposed to want to retain all the value-added software and applications development profits for itself. Sounds like the typical trappings of an incumbent position for Intel (be careful what you wish for, you just might get it).

What strategic marketing and growth strategy choices will Intel make? It wont be a pleasant few years for the company (and its earnings) as they fight two battles at once: the internal fight to re-direct resources to customers and away from conventional chip spped engineering, and the external fight to wrest greater control of customer value-added (and profits) from Microsoft and other hungry players.

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