Navigating a changing world.

When giants fail: revisiting the exploration-exploitation dilemma

A case study of this decade's Kodak

In our work as scenario planners, the cautionary tales of Kodak and Nokia, once industrial giants that stumbled by missing crucial changes, are often cited. Kodak famously failed to adapt to the digital revolution, despite having invented the digital camera itself. Nokia lost its dominance in the mobile phone market by underestimating the rise of smartphones. However, these examples are somewhat dated. Today, a new, current example is unfolding of a company struggling with strategic missteps, and in one of the most crucial industries at that.

"…the examples of stumbling industrial giants such as Kodak and Nokia are somewhat dated. Today a current example is unfolding of a company struggling with strategic missteps, right before our eyes."

Intel, the American semiconductor giant, has a rich history of pioneering innovation. Founded in 1968, the company pioneered the development of the microprocessor and launched the world's very first single-chip processor. One of the founders, Gordon Moore, even formulated the famous "Moore's Law", which predicted that the number of transistors on an integrated circuit would double every two years. This prediction, which drove decades of exponential growth in computing power, proved astonishingly accurate and became an industry standard. By the early 2000s, Intel was the undisputed leader in the semiconductor industry, with its powerful processors being used in PCs worldwide.

Fast forward to today and Intel is in serious trouble. The company's market value, which was still US$ 261 billion in 2021 (a year before the rise of breakthrough AI technologies such as ChatGPT), has plummeted by two thirds to less than US$ 100 billion. The most recent financial results, from August 2024, showed a net loss of US$ 1.6 billion and massive job cuts of around 15% of the workforce. In addition, Intel has drastically scaled back its investments, pointing to deeper problems.

Although these setbacks have unfolded under the current CEO, Pat Gelsinger, many of Intel's challenges lie in serious missteps by earlier leaders who failed to recognise or address crucial changes and developments in the industry.

A faltering Intel

In the late 2000s a far-reaching shift took place in the computing domain: the transition from PCs to mobile phones. Companies such as Apple and Qualcomm quickly recognised the importance of mobile processors, which used less energy and were better suited to smartphones. These companies not only adapted but, in some respects, led this major shift as mobile computing overtook traditional PCs as the dominant platform. Intel, however, was slow to react.

Meanwhile, the semiconductor industry itself was also undergoing a structural transformation. Traditionally, companies such as Intel designed and produced their chips in an integrated model. But the industry began to "disintegrate", with specialised companies focusing exclusively on chip design and outsourcing production to foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), now one of the 10 most valuable companies in the world. Intel was once again slow to recognise this trend and continued to cling to the integrated model, while companies such as AMD worked with TSMC to innovate faster. As a result, they were able to capture significant market share, especially when Intel ran into manufacturing delays that further undermined their competitive position.

"Intel has recently missed another major technological wave: the transition from central to graphics processors that powers the current AI boom."

What is currently attracting a great deal of attention is that Intel has once again fallen behind by missing a major technological trend: the shift from central processing units (CPUs) to graphics processing units (GPUs), which are powering the current revolution in artificial intelligence. GPUs, which are much more efficient at processing the huge amounts of data needed for AI and machine learning tasks, now form the backbone of cloud computing and AI. Companies such as NVIDIA, which recently overtook Microsoft as the world's second most valuable company, have been able to profit fully from this shift. Intel, meanwhile, continues to lag and is losing even more ground in an industry that continues to develop at a breakneck pace.

The exploration-exploitation dilemma

For many industry experts, Intel's problems lie in a classic example of the exploration-exploitation dilemma. For much of its history, Intel has focused strongly on exploitation: optimising existing capabilities and market dominance. As the dominant player in the PC processor market, Intel was especially focused on maximising the use of this position. This emphasis on short-term returns through exploitation, however, came at the expense of exploration: actively investigating a changing world, experimenting with new ideas and investing in forward-looking innovations that may not immediately yield returns but could have positioned Intel for long-term success.

Intel's lack of sufficient time and resources for exploration ultimately made it vulnerable to major shifts in the industry, from mobile computing to decentralised chip production, and ultimately to AI-driven GPUs. By focusing on short-term gains and optimising the status quo, Intel was insufficiently prepared for radical changes in the sector.

Exploration through scenario planning

This is where scenario planning could have played a transformative role. First introduced in the business sector by Shell, Peter Schwartz, a key figure within Shell's scenario planning team, describes scenario planning as "a tool for ordering one's perceptions about alternative future environments in which one's decisions might be played out."

Scenario planning involves developing diverse, challenging, relevant and plausible future scenarios to broaden the frame of reference of decision-makers. It forces them to think more broadly and challenges their "self-invented future" by creating deviating world views.

"…well-executed scenario planning leads to a deeply strategic dialogue about the future of your sector and the possible role your organisation could play in it."

Well-executed scenario planning leads to a deeply strategic dialogue about the future of your sector, region or country, and the role your organisation could play in it. Had Intel started with robust scenario planning, it might have been able to better challenge the frames of reference of its leaders and enable them to recognise the early signals of changes in the industry. Intel's current struggles ultimately highlight the dangers of an overly strong focus on exploitation and the failure to challenge oneself sufficiently to spot changes on the horizon.

To remain competitive in today's rapidly changing landscape, organisations have to develop more ambidexterity: leveraging existing competences as well as exploring new opportunities. In this context, scenario planning is a proven and timeless method that is invaluable in helping organisations recognise signals of change and adjust in time.

At Jester Strategy we specialise in providing organisations with the tools and insights they need to navigate uncertainty and seize opportunities. With our expert-led approach to scenario planning, we help organisations uncover the most important trends, identify potential risks and chart a strategic path that balances both exploration and exploitation.

Do not let the unexpected catch you out. Get in touch with us to find out how scenario planning can strengthen your organisation.