Intel Corporation continues to lead the global CPU market and remains one of the leading semiconductor companies in the world. However, despite its market position and industry reputation, its dominance in the CPU market has been challenged by Advanced Micro Devices or AMD and it has failed to gain traction in the GPU market, which is dominated by Nvidia Corporation, and the mobile computing market, which is populated by companies like Qualcomm, Apple, and MediaTek. This article analyzes the industry and competitive positions of Intel using the Five Forces Framework of Michael E. Porter.
An Analysis of Intel Corporation Based on Porter’s Five Forces Framework: Understanding Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
The semiconductor industry is a highly competitive industry with several major companies maximizing the utilization of resources for research and development pursuits, workforce acquisition, business expansion, and marketing. It also caters to different segments of customers or more specific markets. These include the personal computer market, data center market, mobile device market, and different industrial market segments.
Intel focuses on the PC market and the data center market. It remains the leading producer and supplier of central processing units for individual PC users and enterprise computers used in data centers and large organizations. The company is also a supplier of graphics processors for the GPU market and other semiconductor products like low-powered chips, network interface controllers, and flash memory for original equipment manufacturers.
AMD is its biggest rival in the CPU market while Nvidia dominates the GPU market and has a relevant position in the data center market. Apple has also become its emerging competitor in the PC market with the introduction of its Apple A series of processors. The company has struggled to compete in the mobile market due to the market positions of fabless semiconductor companies like Qualcomm, MediaTek, and Apple.
Nevertheless, based on the aforementioned, the intensity of competitive rivalry is a strong force for Intel. It compels the company to invest in continuous innovative pursuits to keep up with current trends and influence the direction of the semiconductor industry. The level of competition in the industry also prevents it from raising its prices while also forcing it to spend on relevant and impactful marketing strategies and specific promotional activities.
Below are the factors explaining why the intensity of competitive rivalry is a strong force for Intel Corporation:
• High Levels of Research and Development Investments and Activities, Business Expansion Pursuits, and Marketing Activities
• High Importance of Branding and Marketing, and High Relevance of Product Differentiation and Differentiation Potential
• Moderate Firm-to-Buyer Concentration Ratio, Low Number of Dominant Players, High Rate at Which the Market Grows
2. Threat of Substitutes
Remember that Intel dominates the CPU market for personal computers and enterprise computers used in data centers. This means that a substantial portion of its revenues and profits are dependent on the sales of its consumer-grade and enterprise-level central processing units. It is important to note that the substitutes to CPUs used for general-purpose computing are dedicated processors used for special-purpose computing.
Graphic processors are substitutes for general-purpose processors in special-purpose computing requirements like blockchain operations, big data analytics, and training of artificial intelligence models. There are also dedicated processors used for more specific purposes. Examples include data processing units, artificial intelligence accelerators like tensor processing units, and image processors used in computational photographic applications.
It is also important to note that the instruction set architecture of Intel is based on the x86 architecture and complex instruction set computer or CISC. The popularity of smartphones and the pivot of Apple toward its home-designed chips have made a strong case point for architectures based on reduced instruction set computer or RISC and the more specific ARM architecture. These are substitutes for Intel CPUs.
The threat of substitutes is a strong force for Intel Corporation because of emerging disruptions. The PC market has been experiencing a decline in growth due to smartphones and tablets while the possible arrival of quantum computing would render traditional computing obsolete in the future. These factors compel Intel to invest in research and development pursuits aimed at introducing and determining next-generation technologies.
Below are the factors explaining why the threat of substitutes is a strong force for Intel Corporation:
• Moderate to High Number of Substitute Technologies and Products, Moderate Propensity of Buyers to Switch, and High Differentiation Potential
• High Possibility of Market Disruptions Due to Technological Innovations, and High Levels of Research and Development Investments and Activities
3. Threat of New Entrants
The semiconductor industry is capital-intensive. Investors planning to enter the industry would require access to capital and substantial financial resources to invest in research and development, manufacturing capabilities, and marketing activities to compete with established semiconductor companies like Intel. Capital heightens the barrier to entry for new entrants while proprietary technologies and economies of scale raise this barrier further.
It is still possible to enter the industry. This has been demonstrated by deep-pocketed tech companies like Apple and Google. Both companies have become chipmakers without owning semiconductor foundries because they have outsourced their manufacturing requirements to contract manufacturers. TSMC manufactures the A series and M series of chips from Apple while Samsung Electronics manufactures the Tensor chips of Google.
The barrier to entry still remains high because an aspiring new entrant also competes for talented scientists and engineers. Furthermore, because branding and a well-rounded marketing mix are important factors in gaining a foothold in the semiconductor market, a new entrant would need to invest heavily in building and spreading brand awareness, and in specific promotional activities aimed at communicating the value proposition of its products.
Nevertheless, based on the aforementioned, the threat of new entrants is a weak force for Intel corporation although it is moderated by the availability of outsourcing. Its current position in the CPU market has afforded it with relevant resources needed to stay in the competition and keep the barrier to entry high for new entrants through innovation, business expansion, and marketing. These resources are not readily available to a new entrant.
Below are the factors explaining why the threat of new entrants is a strong force for Intel Corporation:
• High Level of Capital Requirement, High Dependence on Economies of Scale, and High Impact of Cost Advantage and Cost Leadership
• Moderate Importance of Brand Equity and Brand Loyalty, and High Importance of Branding and Marketing Activities
• High Level of Geographic Barriers, High Importance of Distribution, and High Importance of Regulatory Barriers
4. Bargaining Power of Buyers
The customers of semiconductor products can be sensitive to prices. They also value differentiation as determined by performance or product features and benefits. Take note that AMD has built its market position through a value proposition centered on offering CPUs and GPUs that have a better price-to-performance ratio. Its CPUs are more affordable than Intel Core and Intel Xeon CPUs but can have remarkable performance.
Graphics processors from Nvidia are more expensive than their counterparts from Intel and AMD. However, because its products are known for providing unmatched performance and technological advances, it has become a leader in the GPU market and special-purpose computing. Customers would prefer Nvidia GPUs despite their high price tags because of their established capabilities and demonstrated reliability.
The introduction of the M series of systems-on-chips from Apple has also provided the target market for CPUs with another option. The products that use these chips, specifically the Mac line of personal computers, might be more expensive than Intel-powered chips but they have demonstrated a remarkable value for money. This has been supplemented by the established brand reputation and customer following of Apple.
The bargaining power of buyers is a strong force for Intel Corporation. It compels the company to invest heavily in research and development to introduce next-generation technologies in its processors and maintain their differentiation. The same bargaining power also prevents the company from raising the prices of its products to recover product development costs. It cannot offer CPUs at price points that are far higher than CPUs from AMD and it cannot offer GPUs that are as expensive or more expensive than the GPUs from Nvidia.
Below are the factors explaining why the bargaining power of buyers is a strong force for Intel Corporation
• High Sensitivity to Price and Moderate Cost of Switching to Competitors Despite Moderate Levels of Alternatives and Substitutes
• High Cost of Switching to Competitors, High to Moderate Levels of Alternatives and Substitutes, and, High Sensitivity to Prices
5. Bargaining Power of Suppliers
There are several suppliers of raw materials and components to the semiconductor industry. This lowers the bargaining power of these suppliers due to the presence of options while also increasing the bargaining power of established semiconductor companies like Intel. It is also important to underscore the fact that there is a low number of dominant players in the entire semiconductor industry and the more specific CPU market.
Remember that Intel is the largest producer and supplier of central processing units for the PC market and the data center market. Suppliers would naturally want to do business with companies with larger orders. The market position of Intel lessens the risks associated with supply chain disruptions due to geopolitical factors, macroeconomic events, changes in the regulatory environment, natural disasters, and shortages due to demand.
Furthermore, to lessen its dependence on suppliers, the company has optimized its supply chain through vertical integration and forward integration. Intel owns and operates numerous semiconductor foundries or manufacturing facilities around the world. It has dedicated foundries for specific manufacturing processes or process nodes. It continues to build new ones or retrofit existing ones to accommodate newer process technologies.
The bargaining power of suppliers can be considered a weak force for Intel Corporation because of its dominance in the CPU market and overall position in the greater semiconductor industry and in addition to its vertical integration and forward integration strategies. However, considering the intensity of competition among other relevant players, this status is not permanent. It competes with companies like AMD and Nvidia for supplies.
Below are the factors explaining why the bargaining power of suppliers is a strong force for Intel Corporation
• Low Switching Cost for the Firm, High Switching Cost for the Supplier, and High Availability of Market Information
• Moderate Supplier-to-Firm Concentration Ratio, and Moderate Level of Vertical Integration and Forward Integration Possibilities
High Supplier-to-Firm Concentration Ratio, and Moderate Level of Vertical Integration and Forward Integration Possibilities
Photo credit: Intel headquarters at 2200 Mission College Boulevard in Santa Clara, California / Coolcaesar / Adapted / CC BY-SA 4.0