Strategy and Resource Allocation

A solid and well-crafted strategy is vital for the success of companies, specially if they are operating in emerging and high-tech sectors where innovation plays a central role. This point is clear and beyong discussion. What is not so clear, however, is what forces within a company are responsible for the formulation of that strategy. The board of directors? The management team? Those guys are responsible for the deliberate or declared strategy, which will only in part translate into the effective strategy the company will be following. One of the factors affecting the transition from declared strategy to effective strategy is the resource allocation.

The Intel case shows clearly how resource allocation has a direct impact upon the effective strategy of a company. Intel started doing memories, more specifically they had a dominant market position in the production of Ramdon Access Memories (RAMs).

In 1971 in one of its projects an engineer came up, casually, with a rough version of a microprocessor. Since the deliberate strategy of the company was to concentrate on memories, which were regarded as the corner-stone of their business, the microprocessor did not receive much attention. It was produced to supply some minor applications (note that the personal computer was not included in those applications, during that time Intel did not even considered PCs as a potential application for the microprocessor).

Intel had a peculiar way to allocate resources, every month managers of the production department would meet and decide how to divide the capacity among the different products, basing their decision on expected sales and gross margins of each product, figures that would be elaborated by the sales and financial departments respectively. From this process we can see how the resource allocation and not the deliberate strategy was in reality guiding the company. Early in the 1980’s the Japanese comapanies decided to strike the memories market, leading to a price war and sinking margins for most of Intel’s products.

The resource allocation scheme made the rest, gradually and spontaneously Intel started to shift from memories to microprocessors (due to the lower competition microprocessors enjoyed much higher margins back then). For some time, however, Intel maintained its deliberate strategy focused on memories, meaning that the R&D department was still developing new memories while microprocessors used the majority of the production capacity.

Only in 1984 Grove and Moore recognized that Intel was no longer in the memories market, the future of the company was in microprocessors, their mission therefore was to change the culture of the company to transform that vision into a reality. And the rest is history.