Business Strategy of ARM Holdings - Case Study Example

Business strategy report Business strategy report Table of contents Executive summary………………………………………………………………………3 2. Strategic analysis………………………………………………………………………..3 2.1 Profile of the industry……………………………………………………………….3 2.2 Organizational purpose………………………………………………………………4 2.3 External and internal environment……………………………………………………6 2.4 Basis of competition & KSFs…………………………………………………..……11 3. Strategic development……………………………………………………………………12 3.1 Existing strategies……………………………………………………………………12 3.2 Generation of strategic options………………………………………………………15 3.3 Evaluation and ranking of options…………………………………………………...16 3.4 Choice of strategies…………………………………………………………………..17 4. Strategic implementation……………………….………………………………………..17 5. Bibliography………………………………………………………………..……………19 1. Executive summary ARM holdings is a multinational company that deals with semiconductors and software. It designs a technology and lends it to a company to use in various devices for a fee (Buckingham 2008). This paper dwells on the strategic analysis, strategic development, and strategic implementation of various strategies that gives the company a competitive advantage over its competitors. In strategic analysis, the paper looks into the profile of the company, competitors, and consumers. It then seeks to understand the purpose of the organization by stating its mission and vision statements. It then gauges the organization’s internal and external environments by internalizing the PESTEL, SWOT, and VRIN strategic tools. It then looks into the basis of competition for the company and its key successful factors. With strategic development, it touches on the existing strategies of the organization, generation of strategic options and ranking them to come with the suitable strategies the company should adopt. It finally focuses on implementation of the prioritized strategies. 2. Strategic analysis 2.1 Industry’s profile ARM holdings plc is a multinational British company operating in the design of semiconductor and software (Demand 2013). It also designs the ARM’s CPU though it also develops software under other brands including keil and DS-5 brands. It is a public limited company that has it’s headquarter in Cambridge. Its main competitors include the actions semiconductors limited with a market capital of $154800000 and advanced micro devices Inc operating in NYSE with a market capital of $2116678200. ARM has a market capitalization of euro 12139.95m with a market size of 2000 in the London stock exchange (Speculand 2009). The company has a wide market in the mobile devices especially the smart phones. Almost all devices that are not powered the other Intel processors contains the ARM chip. Thus, the company’s growth paralleled other big mobile companies using android including Samsung and apple. Microsoft uses a certain ARM processor that originates from Nvidia. Other fables semiconductor companies make use of chips produced mainly from ARM designs. Such companies include mediate and Taiwan semiconductor that operates in the NYSE. Its market in mobile devices is growing rapidly and it is targeting the microcontrollers next. The company ships more than 50 billion chips, and is licensed in over 300 companies with over 1100 licenses. It is highly gaining market share in the growth of long-term markets. 95% of smart phones, 80% digital cameras, and 35% electronic devices use ARM technology today. Its employees are over circa 2000. The company has grown significantly in the last five years since it sold 6.1 billion units of chips in 2010. Currently, the company is selling over 10 billion units of microchips in its market. 2.2 Organizational purpose The organization’s mission statement is for it to become the main architecture of their visualized digital world. Its vision is to ensure that everyone uses technology in innovation and creation of new and improved products and business models (Huber 2011). Their main ethical value is to ensure that all employees are equally motivated to increase their job productivity. This is because the company aims at reaching a wider market base and customer satisfaction is important. The company also interacts and collaborates with many global companies to develop new and creative products for its consumers worldwide. The company also ensures that it develops a good relation with its employees to enhance their job satisfaction thus improving on their productivity. To determine the company’s indicators for the last few years, it is important to have a look at both its ROCE and the component ratios. ROCE is returns on capital employed. It is calculated using the following formula: earnings before any taxation and interest/ the capital employed (Browne 2007). Capital employed is the sum of all the equity of shareholders and the liabilities of their debt. It is calculated as a subtraction of the current level of liabilities from the total assets of the company. However, it is easier to calculate ROCE using the average capital that is employed rather than the capital employed. Average capital employed equals to the average of the opening plus the closing capital that is used in a given time. It is important for a company’s ROCE to be higher than its capital cost. Otherwise, it will indicate that the company is unable to employ its cost effectively and is failing to generate its value of shareholding. It is used to show that the organization is gaining value from both its assets and its liabilities. It shows how much a business is gaining from all its assets and how much it is losing from its liabilities. In the year ending 2013, it EBIT was $269600. Its total equity was $2172000 and its total liabilities were $541600. The total amounts to $2713600. Its total assets amounted to $2713600 (Publishing 2008). Thus its Capital employed in 2013 was 2713600-2713600=0. Its ROCE, therefore is $269600/0=0. The company did not gain from its assets in 2013 and it did not lose from its liabilities. Compared to the previous years, the ROCE of the company has evolved since previously, the company used to lose from its liabilities. To date, the company has balanced its level of assets with its liabilities though a lot has to be done to improve and start gaining from its assets. The competitors are also trending on the same ground thus; the company has somehow maintained its competitive advantage. 2.3 External and internal environment External To look at the internal factors influencing this organization, we will look at the PESTEL analysis and the OT from the SWOT analysis. PESTEL stands for political, economic, social, technological, environmental, and legal factors. Political factors determine to what extent the government intervenes in the economy of the organization. In UK the government intervenes in various ways including taxation, tariffs, price controls and other government regulations. They do so to correct any arising government failure, achieve an equitable income and wealth distribution and to improve the economy’s performance. ARM holdings also have to deal with the political factors of all its countries of operation to ensure that it abides with the given regulations thus maximizing on profits. Economic factors include economic growth, interest, inflation and the exchange rates in the countries of operation. These economic factors determine how the organization operates and all its decision-making ventures. For instance, interest rates affect its cost of capital and the extent to which it grows and expands. Considering the extent to which the company has grown since it was founded in the 1990s, it has recorded an increased interest throughout the years. That is why the company is able to expand and operate in many countries reaching a wide range of customers. The exchange rate, on the other hand determines how and where the company exports and supply its goods and the prices of such goods. If the exchange rate is very high, the company may fail to operate in such a country due to the expected losses that can be amassed in the process. Social factors include all the cultural aspects, health, growth of a population, age and career distribution and attitudes. The company has to ensure that it is careful on all the cultural aspects of its specific market to ensure that the consumers continue buying their products. The company emphasizes on ensuring that its working population is youthful to ensure that it has sufficient and willing labor-force. The company also changes its management strategies over time to ensure that it adapts to various social changes in the market. Technological factors includes all aspects of modern technology that the organization operates in. considering that the company deals with semiconductors and software chips, then it is concerned with modern technology to gain a competitive advantage over its competitors. Though most other similar organization uses advanced technology, the company has to keep with the pace to ensure that it is able to attract more customers and retain them. Environmental factors incorporate all aspects of ecological and also environmental factors. Growing awareness of the potential effect of climate change affects how this company operates and the products they are able to offer. They consider the climatic condition of a country or a region before they embark on establishing a client base. Though some aspects of the environment are difficult to predict, the company has to keep an up-to-date weather forecast to predict the weather condition of a certain location before establishing business in such locations and then incurring losses afterwards. Legal factors influence the operation of the company, its cost, and demand for all of its products. The company ensures that it follows all the set rules and regulation of operation to prevent getting into legal wrangles that can compromise the profits of the company. OT analysis There are various opportunities and threats facing ARM holdings in the market. The first opportunity is the increasing demand for smart phones in the market today. Most individuals are increasingly buying smart phones as opposed to other phones due to the purposes they serve. Due to this reason, the company can amass more profits from this venture because 95% of smart phones in the world use their chips. Increased demand means increased profits for the company. Another opportunity is the positive outlook for the market of the semiconductor market. Its threat includes an intense competition especially in the smart phone segment. It has to maintain its competitive advantage to continue attracting and retaining more customers. Secondly, there is a threat of technological advancement and the company has to keep abreast with the advancing technology to ensure that it provides high quality goods for its customers. Internal To look at its internal market, the paper takes an in-depth look into the strengths and weaknesses of the organization and it’s VRIN. The company has various strengths including a strong focus on research and development of new products according to customer preferences. Its brand equity is also strong (Barrow, Barrow, & Brown 2012). Thirdly, its financial performance is commendable with an income of approximately $149 million with over 2000 employees (PWC 2013). Its main weakness is dependence on the Europeans market. Most of its customers are spread across the European market thus failing of such markets would result into the collapse of the company. The organization has to ensure that it ventures into other markets to ensure that they spread their risks to other areas thus increasing on profits. The VRIN framework on the other hand determines whether a resource is suitable for the competitive advantage in the market. For a certain resource to have the competitive advantage, it has to be valuable, rare, inimitable, and non-substitutable. The products produced by the ARM holdings are valuable since approximately 95% smart phones, 35% of all electronic devices and 35% of digital cameras uses them. The products and the technology used is rare though other competitors try to imitate them with little success. Moreover, the products are not easily substitutable. That is why the company has a wider market base as compared to most of their competitors. Thus, the company has a competitive advantage and it is upon them to ensure that they maintain such advantage. They can achieve this by a continued improvement on their products and innovations of the highest level of creativity. To determine its competitive advantage, the paper explores the porter’s five forces. It determines the intensity of the company’s competitiveness and the attractiveness of its market. The five forces include the threat of a new entrant or entrants into the market. Profitable markets always attract more firms. As a result, it may increase the number of entrants resulting into an overall reduction of its profitability. Since the demand for smart phones is on the rise, more firms can venture into it reducing the profitability of the venture. This may negatively affect the ARM holdings negatively. However, with government regulations and existence of entry barriers can correct this situation. In such a situation, it is important to establish high entry barriers and low exit ones. As a result, it is difficult for many new firms to enter and the existing ones that are not performing can easily exit the market. Threat of products or services that can act as substitutes can result into customers switching into the alternatives. Several companies do not use the technology and products from ARM holdings. Such companies rely on the alternatives form other competitors of the company to serve their needs. It is important for the organization to ensure that its price is the same or slightly lower than that of the substitute product. If their products are of a higher price than the substitute products available, then the likelihood of customers choosing the alternative product is very high. The bargaining power of customers is also another force. The customers have an ability to bargain towards their preferred prices that putting the company under pressure. The company can however reduce this bargaining power by ensuring that they implement a loyalty program. The customers have a high bargaining power in case they have a high number of alternatives to choose from. In the case of ARM holdings, customers have some alternatives to choose from the competitors. However, if a high number of customers turn up to request a reduction in the prices of products, then the company has no alternative but to act according to the wishes of the customers. The bargaining power that the suppliers of the company have is also a determining force. Suppliers of the company can exert pressure on the company in the event that the company has very few alternatives. Such suppliers may refuse to have any work relations with the company or overcharge them for certain resources. Intensity of the rivalry between competitors is another determining force. It is important for the organization to ensure that it comes up with strategies to ensure its competitive advantage. If competition overpowers the organization, then it will attract less customers resulting into less profit for the company. 2.4 Basis of competition and KSFs The basis of competition for the organization is for the ARM’s technology to continue gaining a market share in most of the long-term growth of the markets (Brown & Turner 2008). It also seeks to improve the value the company receives from each of its device and come up with new devices that can generate more royalty revenue. Their main motivators include increasing their penetration of the market. Since the company has a penetration of 95% in the market of mobile handsets, it seeks to increase its application and market share to other areas. They also seek to increase the value in every smart device that is electronic. A smarter model of phones and television can generate a much more royalty compared to the current models. They also seek to generate more royalties from other complementary technologies. By so doing, they will be in a position to beat competition and maintain a competitive advantage. The most important key successful indicators for this company is understanding the customers and working with their preferences. Once the company understands their customers and their preferences, it will be easy to come up with products and technology that is up to their expectations thus maximizing on profits. Managing experienced and qualified employees and coming up with innovative marketing programs for their products are also performance indicators for the organization. 3. Strategic development 3.1 Existing strategy Porter’s generic strategy It describes how a company is able to pursue a competitive advantage over its chosen market. It focuses on three strategies including lower cost, focus, or differentiation. If company targets customers based on giving lower costs then it follows the cost leadership strategy. Differentiation strategy focuses on attracting customers using other strategies that are not cost related. Focus strategy applies both the cost and differentiation strategies of operation. The choice of offering low prices on products or offering differentiated products and services depends on the targeted customers. ARM holdings offer a focus strategy by offering low prices on their differentiated goods and services. By so doing, they are able to attract and retain more customers. Ansoff matrix It is a strategic tool of planning that provides a framework to assist companies in future growths. It provides four growth alternatives, which includes: (i) Market penetration strategy where an organization tries to expand its market share in its current market scenario. (ii) Market development where a company tries to expand into new markets (iii) Product development- where a company tries to come up with new products and services targeted in achieving its market growths (iv) Diversification strategy- a company tries to grow by introducing new products in new markets. It is risky since the strategy requires both product and market development. ARM holdings incorporate the four strategies since it is willing to continue gaining more customers for its products and services. It aims at having a wider customer base thus amassing more profits for the organization. At the corporate level, it is important to understand how a company understands its strategies. This is through the incorporation of various strategy tools including the BCG and the ADL. The BCG is a matrix developed by the Boston consulting group to help in the evaluation of the strategic position of the brand portfolio of the business and its potential (Bensoussan & Fleisher 2013). It classifies a business into four categories based on the industries growth rate and its competitive position, which is the relative market share. It helps the business to understand which firm it should invest in and which one it should not invest. The four categories are: (i) Dogs that holds a low market share compared to its competitors and operates in slowly growing markets. Strategic choices includes retrenchment or liquidation (ii) Cash cows- they are the most profitable brands and should be completely utilized to provide as much cash as required. However, corporate should avoid investing in them to induce growth but only to support them in maintaining their current market share. Strategic choices include product development, retrenchment, and diversification. (iii) Stars-they operate in high growth industries and maintain a high market share. They are the primary units for any company to invest in since they are likely to become cash cows and generate more cash required though not all of them. Strategic choices include vertical integration, market penetration, development of the market and the product. (iv) Question marks- require a closer consideration. They hold lower market share in fast growing markets thus consuming money and incurring losses. Some may have a potential to succeed and become stars and later cash-cows though some may fail and eventually become dogs even after a large investment. Strategic choices are development and penetration of the market and the product. The company is a star since it operates in industries of high growth and maintains an equally high market share. The ADL matrix is used to recommend general strategies to enhance the competitiveness of a product and to increase its market share. It follows the industry maturity where it gauges four categories of industry maturity: (i) Embryonic-is the introduction stage with rapid market growth with little competition, advanced technology, high investment and prices. (ii) Growth-the market continues to grow extensively increasing the sales recorded with competitors starting to emerge. A new product brought into the market is a plus for such a company. (iii) Mature-is where the market is stable with a stabilized market share and clientele base. Competitors are on the increase and a lot is focused on differentiation to gain a competitive advantage. (iv) Aging- increased demand with companies starting to leave the market. The fight for the market share for the remaining companies becomes so expensive resulting into such companies leaving the markets until the demise of the market is experienced. Competitive position can either be dominant, strong, favorable, tenable, and weak. The company experiences a strong competitive position and the industry is mature. (Stamm 2008) 3.2 Generic/strategic options The main aim of the company is to continue increasing on its profits. To do so, the company has to ensure product development by creating new and innovative products in line with the preferences of the customers. They can also ensure market development and expansion by getting into new markets and expanding on the current markets. The company also competes based on offering differentiated products, which are cost effective. Thus, they focus on the focus strategy of the porter’s generic strategies. The firm also seeks to increase its share of the existing markets by ensuring that they provide high quality products at a consumer friendly price. They also seek to compete in offering low prices in its operations and supply chain of its product. As a result, it is able to attract and retain more customers. It is also important for them to hire qualified and experienced employees who are highly motivated to increase on the customers’ satisfaction. They should ensure that their employees are well motivated to increase on their productivity. 3.3 Evaluation and ranking of options Using the BCG tool, the strategic option considered is the star since it ensures that the company generates a high market share. It is a strategic tool to use since it is likely to rise through the ranks to become cash cows and generate more cash for the company. However, it is likely to fail and fall to dogs. Thus, it is important for the company to invest on it wisely. The ADL, on the other hand, realized the strategic option of a mature industry with a strong competitive advantage. However, the company should ensure that it invest wisely on such an option to prevent it from aging and leaving the industry prematurely. Since the company has risen through the ranks since the 1990s, it is expected to invest in the next five years to reap the expected benefits. Within the next five years, the company can even rise to become a cash-cow industry generating a lot of cash for the company. By then, the company will have diversified and penetrated new markets and improved on its products for a better client base. Thus, the portfolio of the current level of SBU of the organization is functional since it enables the organization to generate more market share. The company should consider venturing into other geographical locations away from the European markets it relies on. 3.4 Choice of strategies Considering that there are limited resources and the organization cannot adopt all business strategies, it should follow them in the order of importance. The first strategy should be product development and market development. This is likely to attract more customers in the current markets. As a result, the company is more likely to have a competitive advantage over its competitors (Russell Arthur Smith 2011). Later, the company can diversify into other areas and introduce their products there. As a result, they will increase their client base thus amassing on more profits. In the next five years, the company should focus on product and market development in line with the preferences of their customers. 4. Strategic implementation The major implementation issues include the cost of operation. To ensure product and market development, the company will have to budget more cash for such operations. It is important that the company invest wisely to prevent them from going bankrupt. Another issue of concern is reaching out to all targeted customers and getting to know their preferences. It is important for the organization to ensure that they reach out to all their targeted customers and access their preferences, which they should incorporate in the product development (Michalski 2011). They also need to ensure to ensure that they keep their staff motivated enough for them to have the required job satisfaction in the mission of improving on their products and markets. The company should ensure that it access the risks that are associated with each strategy and address them. They should come up with a risk control method that would ensure that they are not affected at a great extent by the occurring risks. One risk associated with these strategies is the issue of competition. Depending on how they implement their strategies, the competition might turn out to be too stiff for them. They should ensure that how they implement these strategies gives them a top position over their competitors. They should also ensure that they conduct promotions and marketing of their products to create awareness to their customers and ensure that the strategy of market development is fruitful. The company should also ensure that it has enough capital to fuel its strategies. Lack of enough capital would prevent the strategies from being successful thus impacting negatively on the organization. The company should also ensure that it gathers enough feedback from its targeted consumers thus coming up with products and services that are up to their expectations. These projects should take place within the next five years within the work schedule shown. (Sekhar 2010) Bibliography Barrow, C., Barrow, P., & Brown, R, 2012. The business plan workbook. London ; Philadelphia: Kogan Page. Bensoussan, B. E., & Fleisher, C. S, 2013. Analysis without paralysis. Upper Saddle River, N.J: FT Press. Brown, M., & Turner, P, 2008. The admirable company. London: Profile. Browne, C. H, 2007. 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