SANTA CLARA, CALIF. – The announcement last month that Paul Otellini will step down from Intel’s helm next year leaves the company searching not only for a new leader, but the correct direction to take to compete in a computing world now dominated by smartphones and tablets.

When Intel begins its search, a decision will have to be made on whether to look outside for a new leader or to promote from within. The company’s history has been to take the latter route, but with the new challenges facing the chip giant, there is good reason to bring in a fresh face.

After a 40-year career with the world’s leading chipmaker, Otellini will take his final bow as Intel president/CEO next May at the company’s stockholder meeting. Otellini decided to give a long lead time on the move in order to provide for a smooth transition. This may prove very wise as the new arrival’s task will not be simple, particularly if an outsider is brought in, analysts said.

“This is such an interesting time for Otellini to depart,” said Craig Stice, senior principal analyst, computer platforms, at IHS.

Stice believes the transition will be smoother if a current Intel exec is moved up; however, if the company looks to an outsider — particularly one from the mobile world — the changeover would be more difficult.

“My gut tells me it will be internal, because all the changes it has made over the last few years would make them want to continue down that path," he said.

Steve Baker, industry analysis senior VP for The NPD Group, is leaning toward the idea of an internal move, but he also made an argument for bringing in an outsider.

“I am not sure how someone from the outside would fit. So if I had to say, I would say inside might be better, but I wouldn’t be surprised if they went outside,” he said.

On the other hand, Baker noted there are areas where a fresh point of view could prove beneficial.

“They have client device challenges and do need to finish the readjustment process towards the more efficient side of the processor market, which is important both in client but also server side as well,” he said.

The biggest issue to overcome for whomever takes over will be the company’s inertia.

“Anyone who comes in will not be able to make any immediate changes,” Stice said, adding that Intel’s product roadmap is set and it takes years to make an impact.

With that said, the company must find someone who can retain Intel’s position and increase growth in the traditional computer market, while attempting to increase its presence in the tablet and smartphone space. The latter job will be particularly difficult as Intel faces some very tough and entrenched opposition from the swarm of ARM-based processors that dominate the smartphone and tablet segments.

Deron Kershaw, industry analyst for Gap Intelligence, said this mission will be the successor’s most pressing issue.

The person who takes over at Intel will face several obstacles. First, is the significant head start ARM processors now have in the mobile field, Kershaw said, adding that there is very little reason for manufacturers or even consumers to demand that an Intel processor be used, particularly on the smartphone side of the business.

“Otellini had Intel focused on increasing the power and performance of its chips while ARM-based competitors developed ‘good-enough’ processors with much longer battery life. Intel was so used to competing with AMD that the company didn’t fully realize how big of a threat Qualcomm and Nvidia were until it was too late,” Kershaw said.

Intel recently showed several tablet reference designs centered on its dual-core Z2760 Clover Trail processors. These are designed for use in Windows 8 tablets, but Kershaw does not believe Intel can succeed by simply retrofitting Atom processors like Clover Trail into mobile devices, and it will have to come up with a new product.

However, Intel should be more than up to the challenge.

“With Intel’s strong brand and impressive manufacturing capabilities, the company can certainly have a slice of the pie, but ARM has a formidable advantage right now,” Kershaw said.

Gap Intelligence’s Stice was also optimistic on Intel’s chances to gain ground with its current technology, but he sees Intel as being very dependent on Windows 8. Piling onto Intel’s tablet conundrum is the fact that Microsoft developed Windows RT, a version of Windows 8 designed for use with ARM processors. Stice called this move understandable by Microsoft, but still a bit of a knock against Intel and an unneeded additional challenge that it must overcome.

However, the smartphone market could prove problematical for Intel.

Here, Stice said, Intel has a much steeper hill to climb against the established players.

Baker said Intel has the manufacturing scale and financial backing to break into the smartphone market in a meaningful way.

“They just have to catch up to their competitors in design. If they catch up, it will be hard for others to keep up with them, but they haven’t caught up yet,” he said.

On the bright side, Intel will probably be able to focus its energy on the mobile market as it shows no sign of losing its 80 percent market share in the traditional desktop and laptop segment. Its only competitor, AMD, is going through its own problems with rumors swirling that it might be on the selling block.

Intel has also done a very good job designing and backing the Ultrabook concept. Kershaw said that despite slow sales, the company should continue down this path, and he suggested a price break on Intel’s part to help spur sales.

Stice agreed, adding that keeping the laptop relative in a world dominated by tablets will not be easy, but that Intel is doing a good job with the Ultrabook and its convertible laptop/tablet concepts.