Innovation Management in ARM Holdings - Case Study Example

Innovation Management in ARM Table of Content Executive Summary 2. Introduction 3. Company Overview 4. Long Term Strategies 5. Innovation Management in Arm Holdings 5.1. Innovativeness of ARM 5.2. Technological Innovations 6. Competitive Advantages 7. Organisational Culture 8. Conclusion 1. Executive Summary Modern business scenario involves complex managerial issues in terms of product innovation and sustainability. In order to ensure competitive advantages over its rivals, a business firm should be innovative in every respect. This is the context when organizations pay higher attention to innovation management. This concept assists firms to respond to internal or external opportunities on time in a viable manner so as to increase its productivity. This involves creating novel ideas, products, business processes, and promotional strategies. Innovation management will be effective only if the firm integrates its workforce, technology, and market in a scientific way. This report on ARM Holdings plc gives specific focus to the firm’s innovation capabilities. 2. Introduction ARM Holdings plc, commonly known as ARM, is a UK based multinational semiconductor and software design company headquartered in Cambridge, England. Although ARM designs systems and platforms, SoC infrastructure and software, and other software development tools, the company is well known for designing processors (CPU). In 2012, ARM gained the top rank among the ten most innovative companies in Europe listed by Forbes (Sharf, 2012). It is interesting to see that 90 percent of the smart phones are powered by the code that ARM designs even when the company and its businesses are still unknown to many people engaged in the tech world. In addition, the code developed by ARM plays a significant role in supporting the technological base of corporate giants like Apple and Samsung. ARM’s business landscape is not just limited to consumer devices but it also backs up major servers and data centres. For instance, in 2011 Hewlett Packard signed an agreement to use ARM chips to support its new centre (Ibid). The company has made notable achievements in terms of revenue growth too. ARM posted revenue of $422.4 million for the first half of 2012, which represents an increase of 12% from a year earlier (Ibid). 3. Company overview In 1983, the ARM was originally founded as Advanced RISC Machines Ltd, a joint venture between Apple Computer, Acorn Computers, and VLSI Technology. The company waited until 1993 to realize a profit from its operations. In 1994, the company opened its Silicon Valley and Tokyo offices. The ARM formed alliances with Palmchip Corporation in 1997 to spread its presence to the disk drive market. The firm changed its name in 1998 from Advanced RISC Machines Ltd to ARM Ltd and in the same year the company was listed on the London Stock Exchange and NASDAQ. In 2010, ARM made an alliance with IBM, Texas Instruments, Samsung, ST-Ericsson, and Freescale Semiconductor to form a Not For Profit Open Source engineering company, Linaro (ARM company strategy, n.d.). ARM dominates the market of mobile phone processors and tablet computers, and arguably it is the best-known among the ‘Silicon Fen’ companies. The organisation calls its product ‘The Architecture for the Digital World’. ARM processors are currently used in all classes of computing devices including smartTVs, smartwatches, smartphones, tablets, servers, and supercomputers. The Microsoft’s Windows 8 operating system works on the ARM architecture platforms. 4. Long term business strategies While looking at the company strategy, it seems that the ARM strives to promote its technology to gain increased market share in “long-term structural growth markets, such as mobile phones, consumer electronics, and embedded digital devices” (ARM Company strategy). The ARM management mainly focuses on three areas to enhance long-term and sustainable revenue growth. First, the company tries to strengthen penetration in markets where ARM technology is particularly relevant. ARM gains significant royalty revenues from those markets. The organisation currently enjoys over 95% penetration in some markets like mobile handset chips. Considering the increasing applicability of the ARM’s technology, it is not a difficult task for the company to attain the same level of penetration in other technology segments. Second, the organisation takes great efforts to maximise the number of ARM-based chips used in various electronic devices and hence to increase the value to the company. Generally a smartphone contains three ARM based chips and clearly chips in a smartphone are more costly than in a simple phone. Therefore, the company is continually investing in R&D to invent more advanced technology to further increase the number of chips used per device. Third, ARM plans to expand its business to additional types of technology so as to broaden its revenue sources. For instance, the company introduced two major technologies, physical IP and media processors, over the last few years to expand its technological landscape. The company maintains good balance between the need for continued investment and current profitability and shareholder returns. 5. Innovation management in Arm Holdings Today intensity of market competition is on the rise, and hence firms cannot survive this market threat unless they offer something innovative to their customers. Creativity and innovation are two inter-related concepts; creativity is simply about generating novel ideals whereas innovation is the process of converting those novel ideas into something of value (Adams, p. 102). The author adds that innovation can be internal or external and an effective strategic innovation management is essential to deal with activities like recognising opportunity, finding resources, developing ventures, and creating value. In the view of Henry and Walker, technological innovation is of particular importance in moving an organisation to the next phase of growth (p.102). 5.1 Innovativeness of ARM While analysing the corporate history of ARM, it seems that the company has been successful in maintaining its innovativeness throughout the years. The innovative business model has greatly assisted the organisation to become the world’s leading semiconductor intellectual property (IP) supplier. According to Down, introduction of a new method of production can be considered as a type of innovation (p.158). The ARM’s official website states that “instead of bearing the costs associated with manufacturing, we licence our technology to a network of partners, mainly leading semiconductor manufacturers and OEMs” (ARM Company overview). These partners use the ARM’s technology to develop smart and low energy chips that can support modern electronic devices. This innovative business model is really beneficial for the company to limit its production costs and hence to improve financial stability of the organisation. The most fascinating feature is that this business approach can aid ARM to run a risk-free business (to a great extent) when its competitors are struggling with immense pressures associated with fund availability and varying market demand. Reducing risks and uncertainties is a better way to limit a business’ exposure to financial losses (Newbery, lecture notes). As a result, ARM does not need to pay much attention to risk management, and this can concentrate more on R&D and business expansion. A significant percent of the ARM’s earnings come from royalty revenues, which are likely to grow much faster than license revenues and costs. Since the company has a strong customer base of world’s largest semiconductor manufacturers, it receives regular royalty payments. Therefore the firm has a highly reliable cash flow to create value for its investors. 5.2 Technological innovations Since the ARM’s business model is highly relied on technology, the organisation gives particular importance to R&D. Generally, every semiconductor company spends nearly $50-$150 million every year to utilise the benefits offered by ARM. As a result, the industry incurs an additional $20 billion of annual cost. The company’s strategy of designing once and licensing many times is effective to spread the firm’s R&D costs over the whole industry, and this can make electronic products affordable. The company’s Cambridge based R&D group is responsible for performing technological innovations providing the firm with a long term roadmap. The S-curves in technological improvement can benefit the ARM to predict technological limits and to determine whether and when a new and more radical technology is needed (Cook, lecture notes). ARM has a successful history of developing key technologies like NEON, TrustZone, Thumb-2, and Jazelle that currently constitute a crucial part of the ARM architecture. This R&D group deals with a wide range of on-going activities including critical scrutiny of the ARM architecture, energy efficient computing, and addressing the challenges posed by VSDM technology advances. The organisation has revealed its plans to start more R&D units across different parts of the globe in order to promote technological innovations and to improve the firm’s operational efficiency. Recently the organisation has opened an ARM Design Centre in the Hsinchu Science Park, Hsinchu to expand its R&D presence in Taiwan. In addition, ARM management has announced its plans to set up its first R&D centre in the Asia-Pacific region to strengthen its presence in the newly emerging markets. 6. Competitive advantages The ARM has good range of competitive advantages over its market rivals. The major strength of the company is that it has been dominating the market for low-power, high performance semiconductors traditionally. Even the industry leader Intel cannot effectively compete with the significant technological achievements made by ARM. Evidently the company’s unique business model that licenses the ARM’s intellectual property rights to firms like Intel and Samsung is one of the notable competitive advantages of the organisation. As discussed already, this innovative business strategy assists the organisation to keep its costs low and profits high. For instance, ARM’s cost of goods sold represented only 6% of its revenues in 2012. Innovation is a key characteristic of competitive companies, particularly in case of technology driven business (Cook, lecture notes). Competitive advantage is a situation where an organisation is able to generate profits above the industry average (Innovation and Competitive Advantage, lecture notes). Referring to this view, it can be undoubtedly stated that ARM is a technology powered business with great competitive advantages. The innovative business approach aids the company to set aside more cash for R&D, which gives ARM an intellectual edge over its competitors. As Hargreaves (2013) reports, the company spent 29 percent of its revenues on R&D in 2012 whereas ARM’s major competitor Intel spent only 15 percent of its revenues. It is really interesting to note that the company still earns a net profit margin of 39% even after all R&D costs (Ibid). 7. Organisational culture ARM has a strong organisational culture that promotes employee creativity and drives revenue growth through three distinct ways. The organisation tries to strengthen its competitive position in the mobile applications sector in addition to enhancing the growth beyond mobile applications. In addition, ARM focuses specifically on new technology outsourcing. As the organisation tries to maintain innovativeness throughout its business operations, ARM management is really interested to foster employee creativity. Considering the nature of the ARM business, it is particularly important to note that technological innovations are inevitable for the company to maintain its market competitiveness. Similarly, the organisation has realised the significance of being an environmental conscious company as today people are increasingly aware of the environmental impacts of business operations. As a result, the ARM is really concerned about environmental sustainability. The main feature of the ARM’s organisational culture is that it has built up a broad community of third party technology providers, commonly referred to as ARM Connected Community. Such a system increases the scope of networking opportunities for the member companies, and this in turn would improve the firm’s business volume. Most importantly, this strong business network is able to prevent the entry of new market players successfully. 8. Conclusion From the above discussion, it is clear that ARM follows an innovative business model that pays particular attention to reducing cost of operations and increasing revenues. The firm’s business model does not bear manufacturing costs, but it licenses its technology to partners. This innovative business approach aids the organisation to run its operations with minimum capital reserves and avoids risk and uncertainty to a great extent. ARM’s customers include corporate giants like Samsung, HP, and Apple, and those business relationships have assisted the company to develop a strong and uninterrupted revenue stream. The company’s major revenue sources include license fees and royalty revenues. As the ARM is a technology driven business, it invests significantly in R&D to promote technological innovations and thereby maintains its dominant market position. To sum up, ARM is one of the most innovative companies in the world with great potential for future growth. References ARM Company strategy. [online] available at: http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-strategy [accessed 23 Feb. 2014]. ARM Company overview. [online] available at:http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-homeprofile [accessed 23 Feb. 2014]. Down, S. 2010. Enterprise, Entrepreneurship and Small Business. US: SAGE. Hargreaves, R. 2013. “How I Rate ARM Holdings plc As A ‘Buy And Forget’ Share”. The Motley Fool, Aug 15. [online] available at: http://www.fool.co.uk/investing/2013/08/15/how-i-rate-arm-holdings-plc-as-a-buy-and-forget-share/ [accessed 23 Feb. 2014]. Henry, J & Walker, D. 1991. Managing innovation. US: Newbury Park. Sharf, S. 2012. “The Ten Most Innovative Companies In Europe (2012)”. Forbes. [online] available at: http://www.forbes.com/sites/samanthasharf/2012/09/05/the-ten-most-innovative-companies-in-europe/ [accessed 23 Feb. 2014]. Lecture notes. Read More