64-The Good News and the Bad News of Reliability in Product Innovation

It is not common for a competitor who sells less than half the total units of the market leader to outcompete that leader for several years. It takes an unusual failure by the market leader to open the door for that to happen. However, once that door is open, the smaller company must clearly outperform in order to gain the share that the leader surrenders. Here is an example of how that happens.

Posted 12/8/08

Over the years, we have studied several thousand customer buying decisions. We concluded from these studies that customers buy in a hierarchy of needs: Function, Reliability, Convenience and Price. Functions describe how a customer uses a product. Reliability defines how the company fulfills the promises made or implied to the customer. Convenience indicates the ease with which the customer can find, purchase and install the product.

Reliability is critical to a company’s success in any market, save the very fast growing, newly-developing markets. (See “Reliability: The Hard Road to Sustainable Advantage” in the Perspectives on StrategyStreet.com.) And, even there, it quickly demonstrates its value to a company who would rely upon it. Reliability indicates to the consumer that the product works, or will be fixed quickly if it fails. For the distributor or retailer customer, Reliability of a manufacturer indicates that the product will be delivered as and when it is promised and that the company will maintain a consistent market presence with the retailer or distributor.

Reliability innovations are powerful factors for both good and bad. Two examples.

A good news story. I traveled to Philadelphia recently. The Philadelphia natives speak fondly of Wanamaker’s department stores, gone now for several years. The department stores are now part of Macys. At its beginning, though, Wanamaker’s built its success largely on Reliability.

John Wanamaker started his first store in the late 1800s. People called him “Honest John.” He attributed his success in business to his golden rule of “fair value, courtesy and satisfaction.” He spent much of his time working to gain the trust of his customers. This trust bred customer loyalty, which led to bigger sales and profits. He taught his sales people to avoid pressuring customers. They should, instead, act as guides for them around the store. This created a bond between the sales associates and customers. Some of these sales associates worked for Wanamaker for over thirty years and kept their customers coming back. The pricing practice at the time was to haggle with customers around the list price. Wanamaker did not like that. He listed one price and then promised a money-back guarantee if the customer were not satisfied. These tactics certainly paid off for Wanamaker. By 1900, he was the largest retailer in the world.

Advanced Micro Devices offers a bad news example of the power of Reliability. In the fall of 2007, the company introduced the Barcelona chip product. The Barcelona chip was part of the Opteron family of chips, which offered customers higher performance and higher prices than the average chip in the marketplace. Unfortunately, Barcelona was late to the market and, worse, had early technical problems. These Reliability failures contributed to substantial losses for the company for a year. The big beneficiary of AMD’s problems has been Intel. Intel now has an 81% share of chips for PCs and servers. That share has risen more than four percentage points from 2007. AMD’s Reliability failure opened the door for Intel and Intel was able to take advantage of it.

AMD learns from its mistakes, however. It has come back strong in the past. Recently, it introduced the Shanghai chip to replace the Barcelona product. AMD did not release Shanghai until it was thoroughly tested by beta customers. Perhaps Reliability will start to work in favor of AMD this time. (See the Symptom & Implication, “Competitors are emphasizing reliability in product quality” on StrategyStreet.com.)

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Update 2022:

AMD rebounded to become a solid industry competitor. We can see its market strength in the market share changes over the years and in comments by industry analysts.

During the period from 2008 to 2021, Intel’s worldwide market share fell from 13.3% to 12.5%.  Samsung grew its share from 6.8% to an industry leading 13%.  AMD’s share was below 2.3% in 2008 and grew to 2.7% by 2021.  The smaller companies in the industry, those with market shares below 2.3%, saw their total market share fall from 54.3% to 44.1%.

AMD and Intel control most of the x86 CPU market worldwide.  AMD has improved its position in that market.  In 2012 it had a 28% share of that market to Intel’s 72%.  By the first half of 2022, AMD’s share had increased to 36% compared to Intel’s 64%.

In the PC graphics processing unit market, AMD has also competed well.  In 2009, the market shares were: Intel 51%, AMD 18% and Nvidia 29%.  By 2021, AMD had held its market share position at 18% while Intel, at 62% of the market, took market share from Nvidia at 20%.

An industry analyst in 2022 summarized the rivalry between AMD and Intel: “AMD has had a massively successful past few years with their Ryzen and Threadripper lines of CPUs. With twice the number of cores and threads as their counterparts, they’ve given Intel something to worry about and proven their worth as a reliable choice for PC components. Intel, on the other hand, has seen some embarrassing failures such as their lackluster release of Cannon Lake.”

In mature markets, the failure of a competitor to meet customer expectations is an important, often leading, cause of market share movement. As the company considers its product innovation program, its first step should be to eliminate any source of its failure with customers, both visible and hidden. See HERE and HERE for how to do this.

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Update 2/26

By 2025, Intel still dominated the full x86 market with a 69% market share compared to AMD’s 31%. Intel remains the clear leader in much of the corporate market based on its brand incumbency and entrenched OEM designs. However, Intel has lost its reputation for invincibility and inevitability in some important market segments because it has failed to live up to its Reliability reputation. AMD has gained share in the profitable Performance Leader product sector of the market by offering more Function, Reliability and Value (Performance for Price) than Intel.

Intel has struggled for the last several years in Function, in Cost and in Pricing. These struggles caused severe damage to Intel’s Reliability reputation. The problems began 10 years ago and have compounded since then. The company failed in its early efforts to create 10nm product to replace its 14nm standard product. Its architecture stagnated while the market demanded more Function. Its manufacturing and design problems delayed important improvements and developments by several years, with the result that the company lost its Reliability reputation in the Performance Leader product lines with Very Large and Large customers. This series of failures caused Intel to become bureaucratic and risk-averse, slowing innovation further and raising costs. In Pricing, Intel tried to retain its premium position against AMD, a position it had maintained for many years. Some customers determined that AMD offered better Function and Value per watt and per dollar and began to switch some of their purchases to AMD, away from Intel’s former monopoly hold on their business. Intel had to reduce its prices to compete with AMD, squeezing formerly comfortable margins and returns on equity. Intel was failing in the market. Note that, in a mature market, most market share moves only after an incumbent supplier fails a customer. See HERE for an important explanation of this phenomenon.

AMD was the beneficiary of Intel’s customer failures. It would not have been the beneficiary had it not been able to execute superbly. The company introduced new Functions in the form of its Zen architecture, which delivered clear Performance leadership for some customers. Very Large customers responded to AMD’s Reliability in its execution, its predictability and clear product roadmaps. AMD also had a major Cost advantage due to its relationship with TSMC as its supplier of small nanometer chips. AMD designed its products to use TSMC’s 7nm and 5nm chips promptly. These chips provided clear Performance advantages over comparable Intel products, especially in the server markets. Then, AMD Priced its products strategically. During the early iterations of the Zen architecture, the company undercut Intel’s prices to offset Intel’s lingering Reliability advantages. Once AMD had established credibility in the market it matched Intel’s pricing. In the later generations of the Zen architecture, AMD was comfortable and successful in charging a premium over Intel for its better Performance.

In short, Intel opened the competitive door by failing on Function and Reliability. AMD took advantage of this failure by outperforming Intel on Function and gaining its own superior Reliability reputation.

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