A social-media follower of mine alerted me to a post on AktHub regarding the recent management change in Intel's (INTC -1.79%) data center group (DCG).
As investors may recall, Intel executive Diane Bryant took over DCG in 2012 from former Intel executive Kirk Skaugen. Bryant ran the division rather successfully until the company announced that she would be taking an extended leave of absence "to tend to a personal family matter."
Image source: Intel.
Since that leave is expected to last for several months, Intel chose a new general manager for DCG and said that Bryant's new job would be announced when she returns.
The post on AktHub offered the following interpretation:
- That Intel made the change "to appease investors" since DCG has fallen short of the company's growth targets over the last few years.
- That the new leader "has no loyalties" and will therefore be more willing to take more aggressive cost-cutting measures.
The poster went on to suggest that, in response to mounting competitive threats in the data center market, Intel would take "major restructuring and cost reduction" actions.
Here's why this doesn't make sense to me.
Bryant was doing a good job
DCG's growth has fallen short of expectations due in large part to worse-than-expected enterprise server sales. Intel's DCG has managed to do a good job of capitalizing on growth opportunities within the data center -- where they could be had (e.g., cloud computing, networking, and so on); it's not Intel's fault that the enterprise server market isn't doing well.
So I don't think the explanation that Intel wanted to drive a management shakeup in DCG makes sense considering DCG's solid performance under Bryant.
Cost-cutting seems doubtful
Over the last several years, Intel has dramatically stepped up its investment in DCG. This isn't surprising considering DCG has been a solid source of growth for the company and is expected to continue to be for years to come.
I don't think that the new DCG general manager's modus operandi will be to come in and start slashing investments, as this post suggests.
Remember that in the face of intensifying competition (and, yes, it is intensifying), cost-cutting is the last thing that a company really ought to do. Cost-cutting can help boost profitability in the short term, which can serve as a cushion to revenue declines and/or gross profit margin erosion, but over the long term, it's a losing game.
Why is it a losing game? It's simple: Cutting investments will hurt the quality of the company's product pipeline. A weaker product pipeline makes it easier for new competitors to disrupt portions of a company's business. Then, as those competitors enjoy revenue growth from such disruption, they'll be able to invest more into their efforts, further strengthening their market positions and ultimately hurting the incumbent.
When it comes to dealing with intensifying competition, the only way out is through. In Intel's case, that means investing more in product development, boosting marketing efforts, and strengthening customer relationships.
In the near term, this would likely cause profit margins to decline (since increased operating expenses eat into today's potential profitability), but over the long term such investments are the best way for a market leader to defend its competitive positioning.
