Introduction
Intel initially started manufacturing memory chips in but started processor manufacturing in 1971. However, due to intense competition in memory chip manufacturing industry, it spin off its business in 1985 and decided to focus only on process manufacturing. The manufacturing of chips required two types of facilities: 1) a fab, where silicon wafers were processed to make chips and 2) an assembly plant, where chips were sealed in ceramic packages to protect their delicate electronics from the outside environment. Its biggest breakthrough came when IBM outsourced its processor manufacturing to Intel. However, since 1972, Intel has also started setting up factories off shore. However, it was in global marketing and sales lot before. Now the major problem Intel is facing is how to grow in one of the most potential markets, China and for that purpose what distribution strategy would be useful. Although the distribution strategy of Intel differ by country, but the customer contracts of the company were not negotiated on a country-by-country basis, rather on global basis. The 40% combined global market share was enjoyed by three companies, HP, Dell and IBM which also provided them an advantage in negotiating with the Intel.
Issues
The main issues Intel is facing in selling in Asia and other emerging economies is related to distribution.Initially, Intel’s distribution strategy was based on how it distributes products in its mature markets of USA and Western Europe. But as China’s business and social environment was totally different, so the company developed a distribution mix in China as opposed to its mature markets. Because it basically supplies components to Personal Computer Marnufactures, Intel depended on three approaches to distribute its mobile PC and desktop processors to end-customers:
The Issues that Intel Needs to Address now are,
What distribution method(s) would be most effective at addressing the competitive threats and actualizing the opportunities in the short run (1-2 years) and in the long run (3-5+ years)?
How therecommended distribution method(s) relates to market share, revenue, and profit in China?
SWOT Analysis of Intel
Strengths
Intel has great reputation in the market due to which it is charging premium prices
AMD was mainly selling the copies of Intel’s products due to the licensing arrangements in the past. So Intel has the reputation of being the original brand
Intel enjoyed strong brand awareness among technology
Intel has strong distribution Network in China, a basic requisition for success of a processor manufacturing company
Weaknesses
Cant charge high prices due to price war with AMD
High demand of processors and motherboards and chipsets
Strong brand awareness
Price disadvantage against AMD
American Sanctions regarding technology transfer to China
Opportunities in Chinese Market
Rapid growth in PC owners specifically people looking to buy second and 3rd pc
Rapid urbanization further fueling the demand
Rapidly growing LOEMs like Lenovo which even become MNC through buying IBM PC manufacturing plant
Growing MNC market share in China which is biggest source of revenue for Intel
Threats
Deficiencies in infrastructure to an underdeveloped legal system and a capricious government may affect growth negatively
Unfavorable government regulation
Growth may become stagnant due to wrong distribution policy
AMD may replace Intel in China due to better distribution
AMD may replace Intel products due to lower prices
Weak proprietary protection in China
Competitive Threats
The main Intel Competitor in China is AMD. AMD and Intel are competing each other for long. In 1982, AMD started manufacturing copies of Intel’s 8088 microprocessor sold to IBM. As that deal also covered future projects as well that Intel had sold to IBM for its first PC. That deal also covered future products as well that ended by 1993
AMD first arrived China in 1993 but is not gained much market share as yet. Although it has two manufacturing facilities in China but still it has just 10% market share. Whereas, globally, AMD has 15% market share.
The major threat is that AMD’s product prices are lower than that of Intel and as consumers are increasingly becoming less loyal to the brands. Chinese Market is very important for Intel as its growth got stagnant in its traditionally strong markets of USA and Europe and getting stagnant in other developed countries as well.
While Intel has a strong awareness in Tire 1 and Tire 2 cities, some consumer perceive AMD’s Athlon a stronger processor than Intel’s. Moreover, AMD has a strong presence in tier 3 and 4 cities due to its lower cost and because it provides better channel support to small retailers and providing strong localized promotions. AMD has also indulge in more favorable agreements for with its distributors along with better margins. Moreover, AMD is also threatening the high end processor market for gamers as well as gamers perceived AMD processors better than Intel’s for video games and they are ready to spend more money for superior performance. This is also a setback for Intel as it prides itself on the innovation and leading processing technology.
Another setback is that Lenovo, which recently bought IBM has decided to use AMD chips for the first time in history for a low-cost computers’ line. Lenovo is the company which was using only Intel’s processors from since its inception.
Effective Distribution for 1-2 years
Currently the market share for MNC’s is quite low whereas the greatest market share comes from the Channel and then the LOEM is the distribution segment with largest market share.
For 1-2 years, the effective distribution strategy would be to support Channel as much as possible. This is because now people are increasingly getting price conscious and better reach into remote areas and could more efficiently service small, low-volume resellers who had limited access to capital and credit.
The target market of Channel is home consumers and small and medium sized business. 90% of the college students and internet cafés purchases computers through channel whereas around half of small and medium sized business and home consumers purchase pc through the channel. The corporate does not purchase through channel or LOEMs so they must be purchasing from MNCs which are already biggest customers of Intel. So focusing on channel and increasing market share of the channel would mean that around 90% of market share would be maintained in the long term by Intel (as currently AMD is the only competitor in China having 10% market share) and it can be further increased as well.
As the PC owners specifically buying second and third pc are increasingly becoming price conscious so DIY or do it yourself PC would be best way to target such consumers. Channel distributors are in best position to cater these consumers.
Rapid urbanization further fueling the demand. Again, channel distributors is the best bet because the retail stores that sell DIY’s often sell products from LOEMs and even MNC’s as well. These are already using Intel although competition at this level will also need to be addressed.
Growing MNC market share in China which is biggest source of revenue for Intel. As MNCs does not have huge market share in China so company can Address MNCs as a part of global strategy because they are selling uniform products at uniform prices globally.
If we look at the threats, the main threat is in low cost computing. This is because AMD has better local support and margin. Providing more support to channel distributors promoting Celeron. It may also need to increase margins for the Channel players in order to further increase its market share. Considering the fact that Intel would have a huge economy of scale advantage as compared to AMD due to huge market share, it should be able to afford further discounts for the channel players. Moreover, some of the biggest players in the channel, that are known as COEMS can be motivated to become LOEMs using Intel’s processors which would further strengthen Intel’s position.
How it relates to market share, revenue, and profit
Current Channel Revenue= 56% of total Intel Revenue in China
Intel China grew last year at 26.4% (4651/3679)
Total Channel sales in 2004 (4651*56%) 2605
Net Profit Ratio 3.24% (2017 statements) =2605*3.24%=84.40
Expected revenue next year 2605*1.264 = 3293
Net profit in 1 year =3293*3.24% = 106.69 million
However, this profit might go down if company decides to add more sales representatives.
Effective Distribution for 3-5 Years
For three to five years, LOEMs would be best distribution channel. This is because they are rapidly growing and as Multinationals does not have much market share in China, LOEMs does have second largest share and then they also distribute their products through local retailers that also sale DIY systems. Moreover, they are rapidly growing just as Lenovo acquired PC plant of IBM. So in 3 to 5 years, they are expected to become even larger distribution segments than traditional channel for Intel. Focusing on LOEMs would also make it difficult for AMD to capture Intel’s market share just like it partnered with Lenovo for low price PCs. Partnering with LOEMs are also important because they are preferred by the government institutions. It would also help company long term growth and will help it protecting against the unfavorable government regulations in China. Moreover, they are expert in local markets and have developed their products according to their needs so their growth will automatically bring Intel’s growth.
Explain how the distribution method(s) you recommended to John Antone relates to market share, revenue, and profit in China? Provide relevant qualitative and quantitative explanations and back up your answer with a financial analysis. This question will require you to make reasonable assumptions about data that are not present in the case.
How it relates to market share, revenue, and profit
Current Channel Revenue= 25% of total Intel Revenue in China
Intel China grew last year at 26.4% (4651/3679)
Total Channel sales in 2004 (4651*25%) 1173
Net Profit Ratio 3.24% (2017 statements) =1173*3.24%=38
Expected revenue next year 1173*1.264 = 1483
Net profit in 1 year =1483*3.24% = 48.05 million
However, this profit might go down if company decides to add more sales representatives
The focus should be increasing this profit and revenue growth rate constant.
Overview Briefing
Any business can be successful only if it put sufficient focus on customers. By focusing on Channel customers, the company would not only able to get a huge market share but will also able to deal with majority of the customers in Chinese markets. Giving preference to fulling customer needs with their desired products the profit margin will automatic improve company’s profitability.
The marketing strategy would be again customer focus that would bring profitability. However, the company should devise specific metrics to measure its performance, particularly against competitors. Again the focus should be to enhance the customers’ perceived value.
The market segmentation where Intel China should focus on are channel distribution system and OELMs. Channel distribution would boost sales immediately while OELM would ensure long term success of the company in China through products popular in local markets and also getting government approval to go into government institutions. MNC is not a viable option to be managed at local level in China because they focus on uniform products with uniform prices on global bases and so they should be managed as part of Intel’s global strategy.
Intel has strong products as compared to its only competitor AMD. It has product line that can cater the needs of all types of distributes and consumers. Its source of advantage mainly comes from its superior product and successful distribution strategy. Moreover, Intel has partnered with large MNCs who use its chipset in their strong and very fast computers.
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