Analyze the structure of the semiconductor industry using the Five Forces Model. Assess the attractiveness (profitability) of the industry based on a five forces analysis. Briefly discuss the major changes in the industry’s structure for the previous 7 year period.
- Number and size of competitors- Two competitors. Intel held 57% and 88% of PC and server market, respectively. AMD held 43% of remaining PC market.
- Standardization of products- Each generation mass produced and standardized, but changes rapidly occur as result of technological advancements and consumer demand. Product differentiated based on quality and performance (number of transistors and clock speed).
- Switching costs- based on software reliance, licensing, sole source agreements, and relatively few competitors, difficult for buyer to switch.
- Growth and demand for product- insatiable growth and demand, obstacle maintaining market share and requires consistent advancements as result of improving technology.
- Level of unused production capacity- Firms focused on maximum efficiency, economies of scale, to reduce per unit cost, improving margins.
- High fixed costs and highly perishable- Industry incurs large fixed costs (primarily related to the fab manufacturing facilities, and R&D), and as a result of the fast advancements in technology and demand, semiconductors confront obsolescence, as well as sales influenced by economic factors (i.e. recession adversely affects sales).
- Difficulty for firms leaving industry- Due to high upfront fixed costs, difficult to leave the industry. Although not impossible as firms can vertically/horizontally integrate migrating into new lines of related business.
As a result of the fragmented PC manufacturing industry, based on market share, and the few suppliers of semi-conductors, buyers had little influence on pricing. Additionally, through savvy marketing, Intel in particular created significant demand through their “Intel Inside” campaign, influencing demand for their product and therefore allowing them to have greater control of pricing.
In 2005 the dominant semiconductor supplier was Intel. As a result of their marketing campaign and stronghold in the market they maintained supplier power and could control price.
- Substitutes- While there is a threat of substitutes, there are few companies producing this product, therefore threat of substitutes is virtually nonexistent.
- New entrants- Capital investment required for R&D, as well as fixed costs sunk into fab facilities, there are high barriers to entry. In more recent times, entrants circumvented this obstacle by licensing production out.
As a result of these barriers, listed above, I would find it too difficult to enter this market unless my firm had a mind-blowing advancement in semi-conductor technology. While this industry is clearly profitable, and therefore attractive for consideration of market entry, the number of barriers, the large cost, the established competitors, and the sales and marketing effort required to penetrate the market make this an unlikely candidate for pursuing market entry. However, one important factor of consideration, improving the likelihood of profitability in the microprocessor industry is the large fragmented PC industry. As a competitor entering this market, developing a standard chip (compared to a “high-speed/high-value”) could facilitate market entry for those PC manufacturer’s that are less concerned with modern technological advancements and focused on a niche market that is satisfied with slower, less advanced, computers. With greater than 40% of the PC market share going to lesser known manufacturers, this is where an entry opportunity exists.
The major change in the industry between 2005-2012 was a result of microprocessor advancements and transition from PC’s to cellphones and tablets. The requirements for cellphones and tablets were different from the needs of a PC; lower wattage, drawing less power, and less heat generation, whereas PC’s weren’t as restricted and could consume all the power they needed (which was initially related to the processing power abilities). Additionally, competitors began licensing their technologies out for production rather than absorbing the cost of fab facilities, assisting with profitability and allowing those companies to focus on what they did best while reducing fixed costs.
Identify the key resources and capabilities that drive Intel’s competitive advantage in the PC segment and assess the sustainability of Intel’s competitive advantage in that segment using the VRIO framework.
- Value- As a result of Intel’s strategic emphasis on driving down cost, through efficiencies and manufacturing economies of scale, this helped to drive down PC costs making them more affordable for consumers; helping to grow the market and their market share. In addition to driving down costs, Intel leveraged their market share, quality, and brand through a savvy marketing campaign influencing consumer perception and driving demand (through not only end-users, but PC manufacturers as well). Intel’s emphasis on fulfilling Moore’s Law, improving semi-conductor capacity/abilities at an exponential rate, and in keeping pace with technological advancements and consumer demand, allowed Intel to maintain market presence and consumer awareness. And, as a result of Intel’s emphasis on perfecting the production process, bearing uniformity, with fixed assets in place and the ability to cannibalize equipment where possible through each generation of chips, allowed the company to keep costs low while improving production quality and the number of useable units in each “run.”
- Rarity- Given the limited competition in the semi-conductor industry, Intel’s product offering is rare. Additionally, their emphasis on vertical integration allows them to acquire specialized knowledge, advancing their capabilities to integrate software/programing embedded into their chips. Their infrastructure, existing relationships (with buyers), branding, acquired knowledge, and quality facilitate a unique position in the market and contribute to the rarity of their product. In short, Intel possesses a size, scale, reputation, and branding position that facilitates their unique position and ownership of market share in chip industry.
- Inimitability- As a result of Intel’s position since essentially the inception of commercialized chips, the company possesses significant tacit knowledge and has acquired insight that competitors would find difficult to follow. While licensing exposes a company, as a result of access to their full production process making them more vulnerable to imitation, Intel has limited licensing to maintain control of their production process (a result of “lesson’s learned” early on in their business). Even if competitors were able to improve chip performance/production process, they would have to overcome the barriers that come with entering this particular market. Additionally, as a result of Intel’s first-mover advantage and their ability to grow as a business and own large percentages of market share, they experience positive network externalities; their value improved as a result of the increase in the number of PC users, recognizing their product/brand was operating the PC.
- Organized to exploit- While Intel maintained a sustainable competitive advantage, commandeering the lion’s share of the microprocessors required for the PC industry, they are at a disadvantage and are struggling in the tablet/cellphone industry. They seem to have overlooked the significant growth, and speed of that growth, in the tablet/cellphone market, and the coinciding decline in the PC market. Because their product offering sought to fulfill the demands of the PC market, they weren’t in position to adequately meet the unique demands of tablets/cellphones. Intel’s reactive approach cost them an opportunity to enter this market and they are struggling to gain share in these industries. However, given the close proximity and nature of the memory business, as it related to the microprocessor business, the company was in position to exploit their knowledge and cut off the memory lines and emphasize R&D to improve their capabilities in the processor industry. This was enhanced by their emphasis on cross-licensing and building partnerships with buyers in an effort to limit reverse engineering by competitors.
Identify Intel’s strengths and weaknesses in the emerging smart phone and tablet markets. Comment on the benefits and downsides of Intel’s vertical integration model (in comparison to ARM’s outsourcing model).
- Capabilities- As part of Intel’s strategic decision, they decided they would be best equipped to vertically integrate and own the production process of their chips, as well as other facets related to their process; acquiring businesses that would contribute to their programming, security, and software knowledge. This allowed them to maintain greater control of the quality, establishing uniformity in the process and output, and reinforce their brand image. This decision was also driven by the lack of control they had earlier in their business as a result of licensing agreements that were in place. Buyers leveraged these licenses to not only drive down cost as a result of their expectations, but they opened Intel to exposure and vulnerability to imitation. Moving into the next generation of chips, focused on tablets and cellphones, Intel failed to enter the market in a timely manner and ARM saw an opportunity to develop and market their unique chip that catered to the tablet/cellphone industry. In an effort to keep fixed costs low, ARM opted for an alternative strategy of licensing out the production of their chips. This not only allowed them to focus on what they specialize in (chip design/technology), but it kept costs low and allowed them to focus on market share and provided greater flexibility in creating a sustainable advantage over Intel.
- Coordination- In consideration of only the material in the Case readings, it is difficult to establish which approach is better (Intel’s vertical integration vs. ARM’s outsourcing). Intel is a leader in PC chips and ARM in cellphone chips. Based on the case, it appears Intel’s lack of market share in the cellphone chip industry is more so related to its slow move into the industry, and the position ARM maintains in the market; a barrier that even Intel can’t overcome… as of the writing of the case. Given this, and the content in Chapter 7, it seems Intel’s vertically integrated process facilitated speed to market (with numerous additional benefits addressed previously), but it also seems that outsourcing facilitates speed to market, while offering greater flexibility and keeping costs low. Intel’s business model requires a high level of teamwork (reciprocal interdependence), as a result of their vertical integration, while ARM requires a lower level of teamwork (modular interdependence) as a result of their internal focus on engineering/designing their chips and being able to license out the production.
- Control- As a result of Intel’s vertically integrated strategy, based on their unique capabilities and differentiated chips, they maintain significant control. Additionally, in maintaining control of the production process Intel is in position to alter the manufacturing process/equipment in unison with chip technology advancements. They are able to modify the process, if necessary, as chips are designed in anticipation of the “new” requirements, before the market learns of the new process. This facilitates a strategic advantage. On the other hand, ARM doesn’t own any of their production facilities, doesn’t need a workforce that specializes on production facility/manufacturing processes, and can keep costs low. This strategy allows them to keep costs low, and similarly to Intel, they can communicate with their licensed production facilities new production changes/requirements before the market learns of them, while maintaining focus on what they do best; making high demand quality chips for tablets and cellphones.
An advantage of this control for Intel is the specialized knowledge the company acquires/possesses, maintaining an understanding of the FULL production process from design to market. This intricate knowledge allows the company to maintain an understanding of all the pieces that go into the process, that others may not have. The benefit is knowledge; the disadvantage is cost. ARM, not acquiring all the detailed knowledge Intel is, has the benefit of specializing in chip design R&D, their primary focus, while keeping costs low. From a long-term perspective, strategically, I believe Intel’s position is stronger and they are poised to advance beyond ARM, if Intel makes the right choices in foregoing the cellphone market, at least as it is now, and works on the “next big thing.”
- Flexibility- It is clear that flexibility, in ARM’s decision to not take on the production process, provided a strategic advantage in introducing their better chip equipped to supply the needs of the growing tablet/cellphone market. Their minimalist approach in focusing on what they do best, designing chips, kept cost low and gave them leverage in moving into the market and maintaining market share. While I do believe this provided an advantage, I think Intel’s difficulty in entering the market is a result of their slow movement in positioning themselves, and failure to not only develop a chip to supply the needs of this “new” market, but I believe they underestimated the speed in which this market would grow. ARM captured the market quickly, and as a result of switching costs, a result of their high quality chips and having software in place already adapted to their chips, Intel is confronted with a barrier to entry.
- Focus- Intel’s emphasis on vertical integration, through numerous acquisitions, facilitated loss of focus and impeded their ability to make strategic decisions in advancing their technologies to serve the growing tablet/cellphone market. It seems they were so focused on growing their PC chip business and owning peripheral business inputs related to this chip development, they weren’t capable of seeing the mass demand for tablets/cellphones on the horizon. ARM, seeing Intel’s weakness in not having a chip in the market that was capable of serving the needs of the tablet/cellphone market, while solely focusing on their unique chip, without incurring the significant costs associated with vertical related processes, gave them an opportunity to gobble up market share. They are a lean organization that is agile and equipped to focus on development, without the loss of focus on other peripherals aspects/processes.
- Evaluate Intel’s strategy of diversifying into the software segment. How does the strategy create value for Intel? Slack- As a result of Intel’s vertical integration and emphasis on acquisitions for peripheral inputs (an emphasis on software), Intel maintains tremendous breadth and scope of the chip industry. For example, rather than outsourcing programmers and software engineers, they have these resources in house and are able to design chips that are packaged with software potentially creating a unique advantage in the market. Additionally, they don’t need to negotiate terms as a result of outsourcing this aspect and they are equipped to spread this internal knowledge among departments in the development process. Not only are they able to equip chips with software/programming, but they are able to develop secondary software as a package with the chips, to cater to the needs of their customer. This captured economies of scope provides a strategic advantage in product offering and cost. Additionally, the breadth and scope of knowledge acquired by management, interacting with the full requirements of the chips from development to market, equips them with insight that may not be readily available in a less integrated company.
- Synergy- Again, the breadth of scope that exists in Intel’s operations requires a high level of interaction, communication and understanding to effectively integrate the varying processes. As a result of this, significant value is created, and synergy must exist to balance all the activities and to maximize the present, and potential, opportunities.
- Shared knowledge- As a result of the depth of vertical integration, Intel maintains a strategic advantage and is in position to cross internal boundaries to enhance the organizational effectiveness. While they aren’t in position to be as agile as a less vertically integrated company, inhibiting their ability to move quickly, their shared knowledge provides an invaluable advantage. At their core, they specialize in offering quality chips that advance the processing capability of PC’s and servers. Their expanded knowledge of the production process, programming and software needs, and security support provides a full dynamic of operational need and understanding, equipping Intel with a knowledge base of understanding unique to their company, facilitating unmatched value.
- Similar business models- Given Intel’s unique position, they are able to not only create and meet the needs of buyers, but they are able to modify their product to accommodate the needs/specifications of their primary customer, PC and server manufacturer’s. Additionally, while designing/developing new chips (hardware) seems distinctly separate from programing and security (software), and fab facilities, all require highly specialized knowledge and skills with a fundamental understanding of technology and what drives improvements.
- Spreading capital- The size and scope of Intel provides extensive opportunities to share not only financial resources, but employee and managerial resources. For example, engineers working on the development of a new chip, can also assist with the development and design of the requirements for the new fab facility. Additionally, programmers can work cross-functionally and assist with programming of chips while simultaneously working on programming software for Intel’s security software. Because of the organizations capital strength and streams of revenue, they are in position to transfer funds to separate internal “entities” to focus on technological developments or software improvements which in turn facilitate a significant strategic advantage.
- Stepping stone- Intel’s aggressive emphasis on software related acquisitions is a clear sign of their foresight and desire to transition into the software industry. PC sales have declined 3.7% 2012-2017 and their inability to penetrate the growing tablet/cellphone industry has required a change of focus to remain a profitable company. I don’t believe they will completely exit the processor industry as they are seeking to integrate their software developments into their processors in hopes of providing a strategic advantage, in particular offering processors with security built-in, to prevents attacks at the source. The company’s early decision to exit the memory business in favor of processors is one such example of their “short hop” to remain profitable and competitive in an industry that see’s increasingly thin margins.
Based on my above analysis, I make the following recommendations:
Focus on newly acquired companies within the past 5 years, and not only develop clear objectives for each, ensuring their purpose is aligned with Intel’s current objectives, but ensure all unnecessary personnel are eliminated from the organization and implement a centralized process/team to coordinate all activities, across independent divisions, that are truly/fully cross-functional (i.e. administrative duties, accounting functions, development teams, etc.). Since labor is typically a large expense, this needs to be evaluated to ensure the organization is “lean.”
As a result of existing knowledge and relationships continue to improve the PC/server microprocessor production, but place an emphasis on servers, with a particular focus on super computers and large-scale sophisticated software programs. Super-computers, artificial intelligence, and the ability to handle big data for a multitude of processes, whether it be consumer analysis, transportation networks (i.e. autonomous vehicles and logistical improvements), and social networks, will be critical to the next advancements in technology. Additionally, continue R&D to develop chips that are “hardwired” with security features. This may be the advantage they need to facilitate market penetration in the tablet/cellphone industry. ARM has seen a compound annual growth rate (CAGR) 2005-2012 of 12.04% Net Revenue vs. Intel 4.05%. This is attributed to Intel’s declining growth (-3.73%) in the PC market, while tablets and cellphones have seen almost 30% growth over the same period. Intel’s failure to penetrate the tablet/cellphone market has stifled Net Revenue growth, comparatively, and they need to look forward to the next big-profit technological advancement.
In an effort to fully realize the capabilities of acquired firms, Intel leadership needs to find a way to remove the internal barriers that exist and create a workforce that is willing to partner with incorporated/acquired firms, in specific, to adopt the existing technologies, knowledge, and position of the acquired firms to enhance Intel’s large knowledgebase. Based on the case, software engineers were reluctant to incorporate existing knowledge and performance advantages of acquired firms, as a result of them not being developed internally; this is counterproductive and impedes Intel’s ability to fully maximize the benefit of the acquisition… ultimately hurting profit potential and technological/software improvements.
Cease acquisitions for the next 2-3 years to allow the company to digest, and focus on, existing resources. The company has not only made significant financial outlays in acquisitions, but they are too diversified and it is impeding agility and ability to maximize revenue potential with the existing infrastructure. While it is an unrelated industry, Macy’s went through a period of significant acquisitions attempting to create a national brand presence and the collateral damage was too many stores, lowering ROA, and significant operational inefficiencies with numerous underperforming stores. As a result, in difficult economic times (threat of recession) and significant competition, they have been forced to downsize, sell off poorly/unsatisfactorily performing stores, and large cuts to reshape their organizational direction. In short, acquisitions only make sense when a company is able to realize improved revenue/net profits and given Intel’s declining position, and their mission “to earn profits,” they need to slow the reigns and show investors profitability.