Sustainability of the Firms Competitive Advantage in Future: of ARM Holding's - Case Study Example

Running Head: Case of ARM Holdings Case of ARM Holdings [Institute’s Table of Contents Executive Summary 3 Introduction 4 Analysis of the Industry structure of Semiconductor Industry 4 Porter Five Forces Model 5 Threat of Competitive Rivalry 5 Supplier Power 6 Buyer Power 6 Threat of New Entrants 6 Threat of Substitutes 7 Analysis of ARM Holding’s Strategy 7 Market Penetration 7 Porter’s Generic Strategies 7 Strategic Positioning 8 Alternative: Forward Integration 8 Sustainability of the firm’s competitive advantage in future 9 Energy Efficiency: the Talk of Future 9 Ethical Consumerism 10 Economic Uncertainty and ARM’s Business Model 10 References 12 Executive Summary This report conducts a strategic analysis of ARM Holdings, the leading semiconductor intellectual property supplier founded in the year 1990. The organization has achieved impeccable growth in the past few years, both in terms of profits and revenue. It operates in a moderately high competitive industry with strong players such as Intel, Toshiba, Samsung, and others (Tibken, 2011). The Industry Life cycle indicates that it is still enjoying growth and would continue to do so for the next decade or so. ARM Holdings tends to follow a market penetration strategy in order to increase the number of ARM chips in most of the consumer electronics items. The company has appeared to be following a narrow differentiation strategy but it is not trying to appeal to broader segments. Its intelligent positioning in the market with its unique business model has allowed ARM to generate a stable stream of cash flows with royalties and remain at an advantage in the future of economic uncertainty. Furthermore, its competitive advantage of being designing energy efficient chips is most likely to provide ARM much advantage as energy efficiency and ethical consumerism become topics that are more prominent (Crossan, et al., 2011, p. 241). Introduction Since the year 1990, the year in which it was founded, ARM Holdings has shipped over 25 billion chips to companies and customers all over the world with the help of its 250 partners. ARM has licensed them its chips over 750 times. With design centers in India, US, UK, Sweden, Norway, Japan, France and other countries, the company now distinguishes itself as the world’s leading semiconductor intellectual property supplier (ARM Holdings, 2012a). This paper is an attempt to conduct a strategic analysis of ARM Holdings by looking at its industry structure and strategies employed. The paper would do the same with the help of different tools and frameworks such as Porter Five Forces Model, Industry Lifecycle Model, Porter Generic Strategies, and others. This section of the paper introduced ARM Holdings and explained the rationale of the paper. The second section of the paper would conduct a brief analysis of the semi conductor industry in order to capture a glance of the industry environment. The third section or chapter would aim to explore the strategy or strategies employed by ARM Holdings and the degree to which they are a perfect match. Furthermore, the section would also present a few recommendations for future strategies that could be employed by ARM Holdings. The paper would conclude by commenting on the sustainability and viability of ARM Holdings’ strategy and business model in the future. Analysis of the Industry structure of Semiconductor Industry The semiconductor industry enjoys an interesting industry life cycle, which has been going back and forth between the growth and maturity stage. The semiconductor industry is such that new chips, designs, and models become obsolete or out of demand very quickly, sometimes that is only a few weeks (Kipley and Lewis, 2011, p. 36). Therefore, whenever companies launch a new model, they attain quick growth however; the model soon dies in terms of demand pushing the industry to maturity. However, just when the industry is about to be pushed towards decline, the players would come up with new designs or models in order to bring back the growth phase. This also explains why the industry has an extremely cyclical demand pattern (Patrizio, 2012; Chandler, et al., 2009, p. 45-46). On a macro level, the firm is still far away from its maturity and the market still has potential for at least a decade for growth, through market penetration, market development, and product development (Hitt, et al., 2010, p. 374). Porter Five Forces Model Porter Five Forces, which identifies the five competitive forces influencing the industry, is a viable tool to understand the industry environment in which ARM Holdings is operating. Threat of Competitive Rivalry The threat of competitive rivalry in the industry has remained moderate to moderately high but considering the recent turn of events, the rivalry appears to be increasing. Rather than harnessing their market segments, Intel and ARM have now appeared to be not only attacking each other’s market segments (The Economist, 2012). The industry is overcrowded by many players such as Intel, Samsung Electronics, Toshiba, Texas Instruments and others, none of which holds the global market share of more than 15 percent (Intel, the industry leader has only 13.2 percent market share) (Tibken, 2011). The fact is that many of them have expanded to other businesses such as consumer electronics, computers, and other technology manufacturing (Investopedia, 2011). The demands from the side of the customers, quickly changing fashions and fads, companies coming up with new products and technologies everyday and other similar factors have intensified with rivalries since they now have to spend more and more on RandD. The price of a new product may decrease by more than 50 percent within a couple of months of its introduction thus forcing the firms to skim the maximum revenue thus intensifying the rivalry (BBC, 2012). Supplier Power The supplier power in the industry can be termed as weak or moderately low because in the global industry, the firms have diversified to do business with many suppliers in order to decrease their bargaining power. However, it is expected that in the future, the bargaining power of many of the suppliers that have been able to provide specialized inputs would increase since firms are facing more and more pressures to meet unique and ever-changing consumer demand (Thompson and Martin, 2009, p. 41). Buyer Power The semiconductor industry has been able to keep the buyer power at a moderately low level, which comes as a surprise because they do not sell it to the end consumers but to other firms. However, these firms have dictated their terms due to their size, quality, brands, and differentiation, which have allowed them to keep the upper hand (Investopedia, 2011). Threat of New Entrants The threat of new entrants is extremely low, courtesy to the intelligence of the existing players that have increased the bar by constantly updating the manufacturing and production techniques. Entering the industry would require huge fixed investments and it would be extremely painful to get hold of the manufacturing technology and supply and distribution channels (Hill and Jones, 2011, p. 109). Threat of Substitutes Lastly, the threat of substitutes is moderately high but it depends on the segment. Technically, there are no substitutes for semiconductor chips but the real threat comes from the copycat suppliers, especially in other countries (Patrizio, 2012). Analysis of ARM Holding’s Strategy Market Penetration Amongst the strategies and plans of ARM Holdings, at the top of the list is their aspiration to ensure that at least, half of the tablets, mini notebooks, and mobile PCs have the ARM based processers. Quite clearly, they are following a market penetration strategy, which appears to be right on target (Malaval and Bénaroya, 2011, pp. 63-64). The market still has much potential for growth, although, the growth might have slowed in the recent years due to environmental factors. This strategy will also work because ARM has already achieved over 95 percent penetration in the mobile phone chips market and it can expect to replicate its success in other consumer electronics, hard disk drives, digital products and microprocessors (ARM Holdings, 2012b). Porter’s Generic Strategies In terms of Porter’s Generic Strategies, it appears that ARM Holdings is following a mix of narrow differentiation strategy. ARM differentiates itself and its products based on the proposition that they are more energy efficient than all other products available in the market. Furthermore, they are cheaper as well but most of the marketing efforts have concentrated their focus on the energy efficient part. Nevertheless, the company has plans to expand its focus in order to move from a narrow to a boarder market by penetrating the market as mentioned earlier (Thompson and Strickland, 2011, p. 64). Strategic Positioning It is also important to note that ARM has been able to position itself strategically in a volatile and extremely competitive industry in such a way that it has been able to pave a way for sustainable and consistent growth for over the past couple of decades. Rather than investing heavily in creating manufacturing plants for the semiconductor chips and then looking after the selling function as well, as most of its competitors do, ARM created a new industry within the semiconductor industry by taking up a unique strategic position a different model (Thompson and Martin, 2009, p. 41). Depicting a perfect example of the blue ocean theory, rather than competing with what should have been its competitors, the firm created a new market of intellectual property and confined itself to the designing part and developed partnerships with what should have been its competitors (Carpenter, et al., 2011, p. 52). Quite clearly, ARM Holdings has created a business model, for which itself that is more likely to provide it with stable and consistent growth over the years, ensuring reliable stream of cash flows. Whereas, companies like Intel are formed on a different business model that has helped them in aggressive growth over the past few decades (Goldman and Nieuwenhuizen, 2011, p. 127). Alternative: Forward Integration A viable alternative for ARM holdings for the near future would be to consider the strategy of forward integration. Currently, the company is not involved in the manufacturing and selling of the semiconductor chips and only relies on earning from the royalties, which is the least risk option, but also with the least return option. ARM holdings has been in the business for almost 20 years now and it has developed a reputation, which could help it borrow more money for the long term. In fact, considering the law interest rates, this might be just the right time to borrow. It could also offer new shares to acquire more cash for investment; however, this option might require extensive efforts to convince the existing shareholders whose stake in the organisation would get diluted (Gamble and Thompson, 2009, p. 49). Furthermore, the company’s own cash reserves have appeared healthy and are increasing over the past few years. The company currently has short-term assets of almost 507 million GBPs. Although, before going for this option, ARM holdings will have to do a lot of homework and will have to certain about the macroenvironment (Dess, et al., 2009, p. 168). Sustainability of the firm’s competitive advantage in future Although, considering the ever changing market situations and extreme volatility, it is troublesome to evaluate or comment on sustainability of competitive advantages in the future, it does appear that ARM would benefit in the future with its competitive advantage of building energy efficient chips and cheaper chips in the future. There are a couple of important reasons for the same (Jeffs, 2010, pp. 208-209). Energy Efficiency: the Talk of Future First, considering the increasing concern amongst policymakers, customers and people all over the world about energy consumption due to increasing demand and depleting energy resources, it is highly likely that more and more energy efficient appliances, including semiconductors, would rule the future (Hunger and Wheelen, 2010, p. 30). Ethical Consumerism Second, the trend of ethical consumerism is one rise for the past few years and it is continued to rise looking at the fact that consumers are now more aware and knowledgeable about their purchases and their impact on the society. This niche market, which will soon became a significant segment of the market consists of customers who prefer to buy ethical, fair trade, energy efficient, recyclable, environmental friendly, organic, green and sustainable products (Mullins, 2011, p. 96). Furthermore, they boycott the products of companies that are damaging the environment, animal, or wildlife, causing pollution and involved in other questionable actions. The market that started as a small niche of 13.5 billion pounds in 1999 grew to 47 billion pounds in the year 2010. These are figures from UK only, which is also the home for ARM holdings (Haberberg and Rieple, 2011, p. 208). Economic Uncertainty and ARM’s Business Model Furthermore, the fact is that the next few years are going to be marked with extreme financial crunch and economic certainty. There are still fears of a double dip recession in Europe, consumer confidence is shacking, unemployment rates are still high, and many financial institutions are putting up losses (Mockler, 2010, p. 52). Even worse, the European Sovereign Debt Crisis, if not handled properly will cause ripples that will tear up the global economic system and especially the banking sector would collapse in the most dreadful way. Greece is on the verge of bankruptcy and if that happens, the dominos (Portugal, Spain, Italy, and Ireland) would just not stop falling. The point here is that the semiconductor market is extremely responsive to the economic conditions as we witnessed during the recent economic recession (Fitzroy, et al., 2012, p. 88). Large corporations such as Intel, Toshiba, and Samsung have created structures with high fixed costs due to their size and structure and any economic or financial uncertainty is likely to do more damage to the big players in the market. However, this does not include ARM Holdings that has a business model that allows it to generate a stable stream of cash flows with less expenses (BBC, 2012). This explains both, Intel, the market leader and five decade old giant and ARM, which is only a couple of decades old and has a minimal market share, share almost the same 5 year annual average profit margin. 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