Shaking Up Intel's Insides

How its incoming CEO intends to make the chipmaker more market-focused

Long before announcing a sweeping reorganization of Intel Corp.'s (INTC ) operating divisions on Jan. 17, CEO-designate Paul S. Otellini had been telling the world about a major shift in the chipmaker's strategy. Gone were the days, he said, when the company could get by with a single-minded focus on microprocessor design. Intel would instead focus more on bringing together chips and software into so-called platforms designed to perform specific tasks, such as showing movies on home PCs or keeping corporate computers virus-free. "For the first three decades of the company, we made mostly discrete chips. But they weren't designed to be used together...and they weren't marketed together," Otellini told BusinessWeek in November.

Now he's making it clear to employees that, under his leadership, Intel truly is entering a new era. Otellini, who officially takes the helm on May 18, will be the first chief executive without an engineering degree at a company where gearheads have reigned supreme. He believes that to keep Intel growing, every idea and technical solution should be focused on meeting customers' needs from the outset. So rather than relying on its engineering prowess, Intel's reorganization will bring together engineers, software writers, and marketers into five market-focused units: corporate computing, the digital home, mobile computing, health care, and channel products -- PCs for small manufacturers.

The reorganization is not without challenges, but if Otellini succeeds it will amount to a revolution. For years, Intel has built one-size-fits-all processors, then expected customers to adopt them in various markets. But tech companies increasingly are being asked to deliver solutions that respond to the end user's demands. Corporations, for instance, are looking to prevent their systems from crashing, but employees frequent sites that contain viruses or spyware. Intel has responded by developing chips and software that quarantine these PCs and limit the damage.

TANDEM APPROACH

Otellini's reorganization is supposed to ensure that such product tailoring becomes part of Intel's DNA. How will it work? The company's Centrino wireless notebook platform provides some clues. Intel first determined consumers wanted a powerful notebook with decent battery life that connected wirelessly to the Net. Armed with this knowledge, engineers and software writers designed a package of chips that would do that. Later, engineers and marketing people joined forces to create advertising that would persuade consumers to pay a premium for Centrino-powered notebooks. It worked: As of December, Intel had 87% of the notebook PC market, says Mercury Research.

But imposing such a management structure across the company won't be easy. For one thing, Otellini has taken the unusual step of putting two execs apiece in charge of the two biggest groups, mobility and corporate computing. Intel has used this "two-men-in-a-box" approach before, but it will be particularly tricky under the new structure. Each unit will be responsible for several market segments; for example, the mobility unit will build platforms for notebooks, handhelds, and cell phones. So divvying up each co-chief's duties will be a challenge. Getting that right is crucial or the rank and file won't know who to report to.

The new regime will cause a jolt to the culture. For decades, employees have been compensated for their own work. Now teams will be judged as a whole. Engineers, long the top dogs, may resist working with others. "It's like saying to a baseball player, 'Gee, we're deciding to play pro football,"' says Edward E. Lawler, a professor at USC's Marshall School of Business. "All of a sudden, the rules of the game are very different."

Otellini has begun to put the pieces in place. Now he'll need the teamwork of his people to pull it off.

By Cliff Edwards in San Mateo, Calif.

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