Between 1968 and 1985 Intel specialised in integrated circuit memory products. By the early 1980s it had two main product areas. DRAM (Dynamic Random Access Memory) had been the basis of the firm’s growth and top management remained committed to R&D investment in it. However, given increased competition, DRAMs had lost market share. EPROM [Erasable Programmable Read Only Memory) had become Intel’s most profitable product. There was also the emerging business in microprocessors. Microprocessors, however, involved different processes, with an emphasis on chip design rather than manufacturing processes as in the other product areas. By the end of the 1980s, however, it was the microprocessor business that emerged as the basis of Intel’s future growth and identity. This did not happen because of top management’s planned direction. They remained committed to the memory business. However, in a company in which there had been an ethos of top-down financial rigour, a resource allocation rule had been created by the first Finance Director designed to maintain Intel as a technological leading-edge company. It stipulated that manufacturing capacity was allocated in proportion to the profit margins achieved in the different product sectors. The emphasis within the DRAM group was on finding sophisticated technical solutions to DRAM’s problems; it was, however, innovation in markets where innovation was no longer commerically viable. DRAM managers nonetheless continued to fight to have manufacturing capacity assigned purely to DRAM, proposing that capacity be allocated on the basis of manufacturing cost. Senior management refused, however, to change the basis of resource allocation. By the early 1980s DRAMs amounted to only 5 per cent of Intel’s revenue, down from 90 per cent. Since DRAM profits were also declining and microprocessor profits were increasing, over time DRAM lost manufacturing capacity within Intel to the microprocessor area. Once this decision was made to keep the resource allocation rule, the strategic freedom left to corporate managers to recover the founding businesses to which they were very attached diminished as market share fell beyond what could be deemed worthwhile recovering. DRAM managers had to compete internally with the technological prowess of the other product areas where morale and excitement were at high levels and innovation was happening in an increasingly dynamic market. And as microprocessors became more and more profitable, the business received increased funding, with manufacturing capacity and investment increasingly allocated away from memory towards them, providing it with the basis for future growth. Eventually corporate managers realised that Intel would never be a player in the 64K DRAM memory game, despite having been the creator of the business. In 1985, top management came to realise they had to withdraw from the DRAM market. Lingering resistance to the exit continued. Manufacturing personnel ignored implications of exiting from DRAM by trying to show they could compete in the marketplace externally, by explaining failure in terms of the strong dollar against the Japanese yen and battling with poor morale. Eventually Andy Grove, CEO from 1987, took the executive decision to withdraw from EPROM too, leaving no doubt that microprocessors now represented Intel’s future strategic direction. The subsequent exit from EPROM was rapidly executed. Staff associated with EPROM left and set up their own start-up. Source: Based on the case study on Intel by Jill Shepherd (Segal Graduate School of Business, Simon Fraser University, Canada] in 8th edition of Exploring Corporate Strategy. Questions 1 What other examples can you think of where resource allocation processes strongly influence strategy development? 2 What role should top management play in relation to resource allocation processes in organisations?