The semiconductor business is complex and dynamic. This makes it very difficult to manage. On the one hand, both the technology in the chips and the consumer demand for chips are highly volatile. This makes planning for the future as far as chip designs and the production plants needs difficult. On the other hand, it is incredibly expensive to build new chip plants, about $$5$ billion each, and chip manufacturing equipment needs to be ordered well ahead of when it is needed. The lead time for ordering new equipment can be up to three years. This creates a great challenge. Firms have to decide how much and what type of equipment to purchase long before they have a good handle on what the demand for semiconductor chips will be$.$ Guessing wrong leaves the firm with too much or too little capacity.

Intel has figured out a way to limit the risk it faces by using option contracts. Intel pays an up$-$front fee for the right to purchase key pieces of equipment at a specific future date. At that point, Intel either purchases the equipment or releases the supplier from the contract. In these cases, the supplier is then free to sell the equipment to someone else. This all seems fairly simple. The challenge isn$$t in setting up the contracts; it is in pricing those contracts. There are few buyers and suppliers of chip manufacturing equipment; the equipment is not standard commodity, prices for equipment options result from difficult negotiations. Karl Kempf, a mathematician with Intel, has figured out how to make this process go more smoothly. The model predicts demand and runs thousands of potential outcomes to zero in on the most likely outcomes to make options decisions. Where there is significant uncertainty about the need for equipment, they use the simulation results to identify the specific equipment for which they need option contracts and the value of those options to Intel. Intel estimates that since $2008,$ the use of options in equipment purchases has saved the firm in excess of $$125$ million and provided the firm with at least $$2$ billion in revenue upside for expansions it could have quickly made using optioned equipment.

Options are great, but what if the demand conditions fundamentally change? The model is only as good as the assumptions used to build it$.$ Intel started to see a decline in demand in its core business in $2011$ due to mobile computing, but did not react until $2016.$ In $2016$ the company altered course from PC$-$centric to data$-$centric in an attempt to be at the forefront of the next frontier of computing. The objective is to compete in the profitable end markets, such as cloud computing and the Internet of Things $($IOT$).$ The new strategic direction for Intel is based on six strategic pillars that will drive future design and engineering efforts: process technology, architecture, memory, interconnect, software, and security. Data is the future, but can Intel execute on this radical shift in strategy? Can their experience with options help?