Strategic Management in ARM Holdings - Case Study Example

?Strategic Management: ARM Holdings Company Overview: ARM Holdings is widely recognized as the world's leading semiconductor and intellectual property suppliers. The British multinational firm, founded in the year 1990 is headquartered in Cambridge, UK and is listed on the London Stock Exchange primarily, with secondary listing on the NASDAQ. It employs over 2000 people and has offices around the globe including state of the art design centers based in the U.S., France, India, Sweden and Taiwan. It follows a unique business model (Figure 1) whereby it licenses IP to a wide network of partners, comprising of firms which are pioneers in the supplying of semiconductors and systems (ARM Holdings, 2012a). Figure 1: Business Model Source: ARM Annual Report (2011) pp. 14 The company’s model is highly cash generative, as is seen from the figure above. A significant proportion of ARM’s revenues are generated from royalties, which is an integral and reliable part of its cash flow. ARM Strategy “To continue to gain market share in long-term growth markets such as mobile phones, tablets, consumer electronics and embedded digital devices" ARM Annual Report, 2011 pp. 17 The company's fundamental strategy is to achieve sustained growth through customer satisfaction and delivering of products and services which meet their requirements, on time. The company is highly focused on corporate strategies that ensure continuous improvement with regard to its products and services, as well as improving its internal functioning which includes enhancing employee growth, performance and productivity. ARM’s key growth strategy is built on three key drivers: increasing its market outreach through greater penetration; increasing value of products and services offered; and generating additional royalties from new technologies. AMR has so far managed to achieve over 95% market penetration in the mobile handsets product category. As a part of its long-term strategy the company aims to offer more license based products in order to increase its revenues from royalties. It is also planning to increase and expand its market share in newer target-end markets. The rapid innovation in technology is driving the growth of smart devices which require ARM processor-based chips, thus increasing the demand for ARM products paving way for a greater and larger market segments. ARM's corporate strategy is to exploit this opportunity in increasing its cash inflows, by increasing the value received by ARM for every smart device sold. Furthermore the company also plans to outsource its R&D activities, in a bid to increase its revenues from license fees and royalties. The development and licensing of new technology is likely to result in greater revenues in terms of additional royalties received. The Macro environment: PESTLE Analysis The macro-environment comprises of factors which are external to the organization and have a significant influence on the overall functioning of the company. It comprises of PESTLE i.e. Political, Economic, Social/ Cultural, Technological, Legal and Environmental factors. Political factors: Governments in most of the countries during the past year have been struggling to balance their national budgets and are keen on reducing their national debt. Most of their efforts are hence directed towards saving up on investments related to IT projects (Menifield, 2010). Furthermore, due to the recent economic meltdown, governments in countries such as U.K, U.S. as well as China have been struggling to devise a deficit plan to counter the sluggish market attitudes, and reduce unemployment. Government in most of the European nations was focused on developing counter strategies to address the issues faced by nations in terms of defaulting debts. In China, there were wide ranging concerns faced by the government with regard to sustaining of national growth, mainly due to the effect of economic crisis on a majority of its export markets (The Guardian, 2012; Businessweek, 2011, ARM Annual Report, 2011). Economic factors: Consumer spending power is one of the key economic factors which have a greater and wide ranging impact on the company in question, since the prosperity of the industry is dependent on the economic status of the country as well as that of the consumers (Haberberg and Rieple, 2008). Thus if the economy is in boom, the industry directly benefits from it, and manages to earn higher profitability and vice versa. According to the Chief Executive Officer at ARM Holdings, Warren East, the year 2012 is likely to open up new competitive markets for the company thus enabling it to expand its product range and outreach, and increase its revenues. However, the global macro-economic condition still remains uncertain which may influence the consumer spending thus potentially affecting revenue growth and negatively impacting the industry in general (ARM Holdings, 2012b). Social / Cultural factors: There is a strong growth in consumer assertiveness with regard to technological advancements over the years. The introduction of wide range of technologically enabled products over the years is indicative of the socio-cultural composition of contemporary consumers and their attitudes towards such products. Furthermore according to various research groups the market for innovative and model devices such as Tablets and other mobile devices is on the rise, which is likely to present with newer revenue generation opportunities for ARM Holdings (Morgan Stanley Research, 2011). Technological factors: There have been significant transformations in the manner in which society functions and operates, in recent times. Technology has taken over almost every significant aspect of our daily lives. Intelligent electronic devices are being increasingly integrated in objects of everyday use be it RFID tags or EPOS. This presents a very positive and favourable environment for ARM to expand its markets and increase its consumer outreach. Recently the company announced a new low-powered computer chip, code named Flycather, which would help connect traffic lights, parking meters, fridges and even forests to the internet, thus enabling its consumers the choice and opportunity to find and reserve parking spaces with their smartphones and making life easier for them in the process (The Guardian, 2012). Legal factors: Multinational companies operate in different regulatory and legislative environments, thus enabling the companies to adjust and adapt to the regulatory framework in each country. The difference in national regulations and laws has a major impact on the profitability of the companies concerned. ARM Holdings has offices in Asia, Europe as well as North America thus exposing it to a wide range of diverse legal and political environments, which may directly or indirectly affect its profitability. Environmental factors: Environmental factors have a direct impact on the functioning of the company. Recently Japan was hit by a devastating earthquake which severely damaged the infrastructure, and bringing various factories and production units to a complete halt. Also, Thailand was hit by floods affecting millions of people and disrupting the business environment. The extent and cost of damage caused in the production units, has a direct negative impact on the revenues generated by the companies. Thailand for instance is the key supplier of hard disk drives used in laptops, contributing to approximately 45% of world's total supplies. Any damage to the country is bound to affect global trade, as was observed in case of ARM Holding, whose revenue from royalties were severely affected during early 2012 (ARM Holdings Annual Report, 2011). Micro environment: The micro-environment of a company comprises of key stakeholders such as customers, suppliers, employees, competitors, and shareholders. ARM Holdings Plc., caters to B2B (business to business) market type and provides products across various market segments such as mobiles, PCs, tablets, etc. Its key competitors include MIPS Technologies, IBM Microelectronics, and Toshiba Semiconductor & Storage Products Company. ARM Holdings Plc has relatively few suppliers, however all of them are assessed and selected on the basis of their Customer relation credentials. All its suppliers are obliged to follow the Human and Ethical Rights Policy implemented by the company, thus ensuring greater service to the community in general. ARM endeavours to hire skilled staff and takes keen interest in retaining them, thus fulfilling the responsibilities of an ethical employer. It even won the Best Company to Work For survey, conducted in the year 2008, and won the First Class Employer award in the following year. It has consistently featured as one of the best employers to work for in several nationwide surveys and polls. Competitive Stance: Most of the technologically advanced products are getting smarter by the day, and hence the requirement for ARM processor-based chips is on a steady rise. The company is aiming to increase its outreach by targeting these newer product offerings and providing processor chips and knowhow. Furthermore, it is only on the lookout to introduce novel product ideas in a bid to expand its market; the introduction and development of Flycatcher being a case in point. With regard to its product differentiation strategy, the company is involved in extensive R&D work, with units based across the globe. Also with the rise in number of innovative consumer technology products, ARM is boldly venturing into newer markets both geographically as well as in terms of product offering. Value chain: ARM is involved in providing licensed products comprising of hardware and standard operating system peripheral blocks. It also offers maintenance and support services, and tools to assist in software development tasks. The company's products are licensed to some of the top companies in the world including Samsung, Intels, Sun Microsystems, and LSI Logic to name a few. Its key product differentiation strategy involves licensing intellectual property to IC manufacturers, and has entered into a joint venture with Apple Computers thus getting an edge over its competitors in the market. Figure: ARM’s supply and value chain Source: ARM Annual Report, 2011, pp. 45 Resource Analysis: ARM is committed to providing sustainable products and expanding its customer base and market outreach through innovation and creativity. The company excels in the provision of low-power and energy efficient smart products created by its partners and invests considerable amount of capital in R&D activities. The management at ARM Holdings are constantly involved in bringing about significant and positive transformations in product offerings through continuous collaborations and partnerships with industry leaders. The strategy applied by the company is viable and holds significant relevance in terms of achieving sustained long-term growth. Semiconductor and intellectual property services industry has grown by leaps and bounds over the years, with the existence of major market players such as Motorola and Intel who were highly focused on safeguarding their rights through patents, trade secrets as well as other various means. The semiconductor industry has been in existence for over four decades now, and has shown a strong growth despite the recent global economic meltdown. The market structure of this industry is relatively different since the demand for its products arise mostly from the end markets and industrial sectors, rather than directly from end users/ consumers. The products supplied by the companies in this industry cater to an extremely diverse range of markets ranging from consumer electronics such as mobile phones, TV sets, and PCs to broader market types such as telecommunication handsets and network and infrastructure services. Some of the world's leading manufacturers of this type of products are largely based in industrialized countries such as Western Europe, U.S., Japan etc. The companies / firms in this industry can be broadly categorized into three key sub-categories i.e. fabless companies involved in outsourcing of raw materials such as Qualcomm Inc.,; the vertically integrated companies which offer all kinds of value based products and services such as Intel and Infineon; and lastly new and emerging industry sector which caters to provision of intellectual property and licencing companies, such as ARM. The industry has several strong players in the market, which is led by the British multi-national ARM Holdings, followed by Infineon, Micron, Toshiba Semiconductor, Samsung Semiconductor and Intel. In terms of global markets, the key vendors who dominate the market place in recent times include ARM Holdings Plc., Synopsys Inc., and Imagination Technologies (PR Newswire, 2012). The semiconductor industry is largely led and driven by innovations which require investment of huge capital and hence in the development of designs for every new product introduced. The companies involved in production of semiconductors hence are largely diverting their investments towards semiconductor IP vendors in a bid to reduce and save their time and efforts, thus fuelling more growth in the latter market type. ARM Holdings being the industry leader, is likely to benefit significantly in terms of increased revenues and profitability due to the fast rate of market growth. References: Haberberg, A., Rieple, A., (2008). Strategic management: Theory and Application, Oxford University Press, Pp. 105-110 Menifield, C. E., (2010). Comparitive public budgeting: A global perspective, Jones & Bartlett Publishers, Pp. 110-120 Primary Sources: ARM Holdings (2012a). Company Profile [Online] Available at: http://www.arm.com/about/company-profile/index.php [Accessed: March 26, 2012] ARM Holdings (2012b). Investor Relations [Online] Available at: http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-newsArticle&ID=1654432&highlight= [Accessed: March 26, 2012] ARM Holdings Annual Report (2011). [Online] Available at: http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-irhome [Accessed: March 26, 2012] Businessweek (2011). Osborne Vows More Austerity as Slump Hits U.K. Deficit Plan [Online] Available at: http://www.businessweek.com/news/2011-12-01/osborne-vows-more-austerity-as-slump-hits-u-k-deficit-plan.html [Accessed: March 26, 2012] Morgan Stanley Research (2011). Tablet demand and disruption [Online] Available at: www.morganstanley.com [Accessed: March 26, 2012] PR Newswire (2012). World Semiconductor Companies [Online] Available at: http://www.prnewswire.com/news-releases/world-semiconductor-companies-139680163.html [Accessed: March 29, 2012] The Guardian (2011). Deficit, national debt and government borrowing - how has it changed since 1946? [Online] Available at: http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data [Accessed: March 26, 2012] The Guardian (2012). Arm Holdings, UK firm whose designs feature in all smartphones and tablets, unveils new chip to enable 'internet of things' [Online] Available at: http://www.guardian.co.uk/business/2012/mar/13/flycatcher-computer-chip-arm-holdings?INTCMP=SRCH [Accessed: March 27, 2012] Read More