Analysis of the strategic situation of ARM Holdings - Coursework Example

Analysis of the strategic situation of ARM Holdings, the producer of microprocessors Contents Introduction 3 Analysis of the business environment 3 PESTEL Analysis 3 Porters Five Force 4 Industry Life Cycle 5 ARM’s Strategy 6 Synergies 6 Positioning 7 Differentiation/ Competitive advantage 7 Value Chain 8 Strategic resources 10 Conclusion 11 In conclusion, ARM Holding’s strategic approach to gaining market share has been considered. Within this spectrum of understanding it’s revealed that the organization has remained singularly committed to the innovation of microprocessors for a variety of technological devices. Still, the organization has demonstrated degrees of flexibility in meeting manufacturer needs that makes it distinct from competitors such as Intel. From an overarching perspective ARM Holdings has sought to carve out market share by constructing semiconductors that implement very low amounts of power. This has made them the choice of the world’s largest technology company Apple, Inc. Additionally, ARM has sought to increase penetration into markets where they are applicable. Ultimately, the primary intention is to develop innovative technology and establish a deeper ecosystem as a means of achieving these aims. 11 Critical appraisal of strategy 11 Reference 13 Introduction ARM Holdings is the world’s largest supplier of semiconductors and is at the growing stage of digital electronic products. The semiconductor industry has shown a strong growth rate in 2010 and ARM revenues from royalty has outperformed the industry (ARM-a, 2010). ARM has a global edge in the mobile phone and tablets market. ARM’s chips are designed to run on low energy. ARM has managed to launch a serious go at Intel (Andersen, 2012). ARM’s chips are capable of connecting parking meters, traffic lights, fridges and forest to the Internet. The company designs and has already produced micro processors for street lights, motors and washing machine but the new products are set to use 50% less power (Garside, 2012). Analysis of the business environment PESTEL Analysis Economical factors: A country that has a stable GDP will be able to finance the semi conductor as the plant itself costs a huge amount of money. The UK is leading trading and power center and has the third largest economy after France and Germany (CIA, 2012). Therefore the country is in a position to finance the needs and requirements of the industry. While these larger scale economic factors are a strong indicator of economic success, one recognizes that oftentimes the semiconductor industry doesn’t operate in unison with macroeconomic trends. The semiconductor industry is large scale, totalling over $300 billion worldwide. While ARM constitutes a major player in the United Kingdom, globally they are supplanted by a series of organizations from the United States, Japan, and South Korea (‘History of arm’, 2012). Technological Factors: The technologies used by ARM are a major threat to Intel who is dominating the global microprocessor market. With low-end mobile phones the company has become the processor of choice in smart phones as well as tablets. The chips are more efficient in terms of energy than Intel (Fern, 2011). The larger scale semi-conductor industry plays a crucial role in the supply chain of technological products. Indeed, as microprocessors form the core of a variety of crucial technological devices novel innovations in the market drive industry wide change. Additionally, this process necessitates a high degree of industry volatility. Environmental factors: The products of ARM are low power but at the same time enable more efficient energy products. In this way it has helped the environment and shown concern over climate change. ARM has improved its strategy in terms of low carbon business operation (ARM-b, 2010). Porters Five Force Bargaining Power of Supplier: The semi conductor industry is characterised by a high number of suppliers and dominated by a small number of players. These factors allow the firms to apply pricing pressure on the suppliers. Thus the bargaining power of suppliers is low. Bargaining power of Customer: The bargaining power of the customers is high because buyers have the advantage when it comes to purchasing. Chips are sold to OEMs and the ODMs who constitute of strong buyers influence. In addition, the customers have the right to access ARMs intellectual property thus posing a limit as to the amount that customers are willing to pay for (Morning Star, 2009). Threat of substitute: Presently the threat of substitute semiconductor chips is relatively low, but in the future there might be substitutes that replace the silicon chips. Threat of new entrants: The threat of new entrants is low because the start up cost and the initial investment required is very high, establishing a high barrier to entry. The plants require high advanced chip making technology in addition to human capital. Rivalry among the firms: The rivalry among firms is high as there are big players involved in the industry including Intel. Industry Life Cycle The semiconductor industry is currently at the growing stage of the industry life cycle and after few years it would enter the maturity stage. The performance of the company and the profitability are related to market, cost reduction and better utilization of the assets. Thus the ability to recognize as well mange the life cycles is important as the time needed to recover the investment shortens with the life cycle. A product life cycle is stated in the figure 1; the semiconductor industry follows a bell shaped curve. The changing shape and trend is an upward sloping curve that rapidly tends to plummet. Thus depending upon the type of device and the niche market the positioning of the products in the life cycle are becoming increasingly difficult. Still, the microprocessor market has introduced new products over the years (Sonian, n.d, p.15). Thus the industry is at the growing stage and the microprocessor is in the introduction phase of the industry life cycle. There are a number of industry survival and success factors. While the macroeconomic considerations are important for success across the industry, the rapid pace of technological progress is such that organization’s that survive are able to remain in a state of perpetual innovation ("Arm holdings plc," 2012). Indeed, in the context of Moore’s Law if the organizations in the semiconductor industry are unable to devise ways to fit more information into a smaller chip then, simply put, they won’t survive. Figure 1: Life Cycle of Semi Conductor ARM’s Strategy Synergies ARM Holdings have planned to acquire some of the companies and implement long term synergies in the price. ARM holding acquired Artisan components which value the company at about 7.9 x 2004E prices and creating goodwill of 335million Pounds. Although the company core business remains to scale new products segment but are concerned about the 2005E EPS. ARMs potential synergy is to strengthen the Artisan’s IP into enhanced products. With a high rate of royalty it enables client to reduce the cost of in house development and design of the chips (UBS, n.d). The company believes that by combining the top level management of the IP division and the Processor under the leadership of Simon, ARM holding would be able to drive the successful collaboration of IP division and also exploit the synergies to a maximum effect (Reuters, 2012). Positioning The company ARM has positioned itself to be a low power device but with efficient energy available at a low cost which can beat the technology of Intel. At the present ARM is competing with Intel and has achieved huge success. Differentiation/ Competitive advantage The semi conductor industry is dominated by a few players and all of the firms tend to use the same kind of technology to stay ahead. The competitive advantage lies in the manufacturing and design of the chips. The competitive advantage with ARMs Holding lies with its eco system. ARM has built an extensive community for technology providers and also designers in collaboration with third party which is known as the ARM Connected Community. This facilitate the opportunities for companies who are the members, to increase the winning opportunities in design and in a way shorten the time which is required to market the complete ARM solutions. Since the competition is stiff and there are around 900 companies within the same community spanning the supply chain process. Therefore the community not only serves the ARM technology but also adds on to the competitive advantage and also provides barrier to entry for companies providing same technology in the same industry as ARM (ARM-b, n.d). According to Porters a firm can go for the differentiation strategy, low cost strategy or else the focus strategy. In case of ARM, the company has entered the niche segment of microprocessors and chip design. Value Chain The value chain forms an important part of any business. It is through the value chain process that organisations are able to taste success. With an effective value chain, the cost can be reduced and at the same time more desirable results can be expected. The value chain system of the semi conductor industry includes the primary as well as the support activities. The primary activities take into consideration the silicon extraction, design of the semi conductors, production of raw water, mask production, it includes both front and back end production and finally it consists of the marketing, sales and logistic. The support activities include the human resource, infrastructure, management, financing, administration, procurement and purchasing. The following figure demonstrates the value chain in the semi conductor industry (PWC, 2009, p. 23). It seems that from a holistic perspective ARM is most distinctive from other semiconductor organizations, particularly Intel, in that the company has opened its value chain to collaboration. While Intel determines all aspects of its end design, ARM has been more willing to tailor its products to manufacture needs or desires (Vance, 2010). Ultimately, it is this flexibility of design that constitutes ARM’s greatest and most distinct value chain element. Figure 2: Value Chain of Semiconductor Industry (Source: PWC, 2009) The change in the consumer devices has shown a drastic change. The consumers used to purchase any hardware components such as television or computers and after than would seek the necessary software but today things have changed the model is no longer into existence and is not accepted by the consumers. Consumers demand solutions that have Internet connectivity, have a user-friendly interface and service available at a switch of a bottom. Therefore this transformation can be made available with the help of an effective value chain. ARM has a few companies in its supply chain but a large number of companies in its value chain process (ARM, 2011). This has been made possible with an extensive use of ARM partners. Figure 3: ARM supply and value chain (Source: ARM, 2011, p. 45) Strategic resources ARM has its resources in forms of well build new technology. ARM technology is its best in the current fiscal year. The company has been able to bring up to date technology that is needed by the consumers. ARM IP has enabled VeriSilicon to provide with a high quality chip design services, reduced the cost and had sufficient time to market the customers. Thus it can be said that ARM with its partners are trying to leverage the demand of its customers with a high quality silicon solutions which are delivered in timely and at a cost effective manner. The consumers are demanding connected life and the suppliers of the advanced semi conductor solutions are addressing the requirements for devices to match the requirements, needs and demands (ARM, 2011). Currently the organization is not vertically integrated, as the demands of the semiconductor industry are such that it is primary focused on innovative production. Still, ARM is recognized for having considerable financial assets. The total revenue earned by ARM amounted to £491.8million. The licensing revenue also increased by 37%, the royalty revenue amounted to about £252.3millions. Thus the company has reported profits in the fiscal year 2011 as compared to the previous year 2010. ARM risk well managed with a systematic process of risk identification that cuts down the rates of risk. Conclusion In conclusion, ARM Holding’s strategic approach to gaining market share has been considered. Within this spectrum of understanding it’s revealed that the organization has remained singularly committed to the innovation of microprocessors for a variety of technological devices. Still, the organization has demonstrated degrees of flexibility in meeting manufacturer needs that makes it distinct from competitors such as Intel. From an overarching perspective ARM Holdings has sought to carve out market share by constructing semiconductors that implement very low amounts of power. This has made them the choice of the world’s largest technology company Apple, Inc. Additionally, ARM has sought to increase penetration into markets where they are applicable. Ultimately, the primary intention is to develop innovative technology and establish a deeper ecosystem as a means of achieving these aims. Critical appraisal of strategy The strategy applied by the company is mainly of long-term to gain market share in mobile phones, electronics and other digital devices. ARM mainly concentrates on increasing penetration, increases the value of ARM and extends the business model. But ARM has not taken care of the short-term strategies that are needed to fulfil the company’s objectives. In these regards, one questions the organization’s sustainability. Still, ARM has got a strong technology base that has helped it to gain the market share and penetrate the existing market. With people demanding technology products, the company is making sure that the demands are being met. ARM is distinct for its innovation in technology and with its partners it has been able to bring out the technology in the market. The strategy mainly used by the company concentrates on a particular market segment. This has helped it to gain success as the microprocessor and chips are in high demand. Thus it can be concluded that ARM has emerged to be one of the biggest competitors for Intel. With its innovative technology, the company has been able to gain market share and continue to expand into international environments. Reference Anderson, J. B., 2012. Innovation Management. [Online]. 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