Sustainability of ARMs Strategy - Case Study Example

Sustainability of ARM’s strategy Contents Executive Summary 3 Introduction 4 Porter’s analysis 4 PEST Analysis 6 Organisation’s strategy analysis 6 Capabilities and resource analysis 7 Differentiation strategy 7 Value Chain 7 Critical strategy appraisal 9 Key factors for success 9 VRIN Analysis 9 Current Issues 10 Conclusion 11 Reference List 12 Bibliography 13 Executive Summary The current study has evaluated the strategies implemented by ARM and their sustainability for its long-term future and development. The study revealed that even though demand for the microprocessors is declining with fall in the sales of some categories such as, PCs, yet it has found a way to renew its features and offerings in various advanced forms. Advanced microprocessors are taking over traditional chips and subsequently companies such as, Intel, are restructuring their manufacturing and research departments in order to meet demands of the future. ARM has slowly gained a reputation in the microprocessor market for its flexible innovation, technology license and chip designs. However, several threats lies ahead of the chip designer such as, new cloud servicing companies, increasing competition from major competitors and developing relationship with new clients. Introduction The objective of the current paper is to evaluate long-term sustainability of the strategies and tactics developed and currently implemented by ARM. This paper consists of three major sections devoted to the analysis and evaluation of ARM’s strategies. In the first part, ARM’s external environment will be evaluated through Porter’s analysis and PEST analysis. This section will also elaborate on the influence of external environment on numerous strategic options of ARM. In the second part, internal strategies of ARM will be discussed, including the firm’s value chain, resources, internal weaknesses and strengths, external threats and opportunities. In the third part, an elaborative analysis of the strategic sustainability of ARM will be provided. Porter’s analysis Bargaining power of Suppliers: The bargaining power of suppliers in this microprocessor industry can be regarded as strong. The microprocessor as well as semiconductor industry is extremely competitive with almost 1000 chipmakers selling their products in the market. In such situations, raw materials demand is expected to increase. At present, there are about 34 producers and suppliers in the silicon wafer business (Memslibary, 2010; Haberberg, 2014). However, supplies needed during the process of fabrication are highly concentrated. For example, ASLM is responsible for almost 65 percent supplies of stepper (Haberberg, 2014). Analysts are also expecting a rise in microprocessor’s demand as it is increasingly being used in home appliances like, fridges and television and also in internet. At the same time, laptops made for higher technological applications require double microprocessors in their system. As a result of the above factors, it can be said that supplier’s bargaining power has increased considerably in this industry (Rosso, 2014). Bargaining power of buyers: The bargaining power of buyers can be considered as moderate to high and slowly increasing in ascending order to power. IBM, Dell and HP have been historically dominating the server industry (Haberberg, 2014). Nonetheless, cloud computing has completely changed the functioning of businesses and companies are currently no longer dependent on vendors or suppliers. This is possible as companies are able to rent their online space with the help of remote servers, thereby resulting in power shift from vendors to service providers such as, Amazon, Microsoft and Google (Niccolai, 2014). As a result, the overall buying power of buyers has greatly increased as their dependency over vendors has reduced. Threat of new entrants: The overall profitability of the industry and the low barriers to entry make threat of new entrants high. While businesses such as, Apple and Intel, have successfully developed themselves in the market, entry of the newcomers such as, AMD, and have intensified the competition (Haberberg, 2014). For instance, with strong intellectual and financial backing, Google is trying to establish itself in this market. Also, new business will require large production, significant capital and resources for achieving success and surviving during the first few years of business. Google’s recent acquisition of Nest Systems is an indication of the critical importance that businesses are giving to improvement of this function, particularly in the research area (Haberberg, 2014). ARM has also been frequently making new developments in advanced microprocessors equipped with higher energy saving features so that traditional microprocessors can be replaced and an overall rise in the company sales and revenues is facilitated. Competitor’s rivalry: The microprocessor sectors are majorly dominated by Intel and AMD. While Intel is an industry leader due to its mass manufacturing as well as extensive distribution, AMD has been developing its aggressive selling strategy with the objective of capturing maximum consumer base (Roskill Information Services, 2010). On the other hand, ARM has been selling chip designs, instead of chips. The company has been gaining huge profits from these chip designs and its major buyers include Smartphone and tablet manufacturers. ARM’s newly prepared microprocessor was sold to Google, which was subsequently used in its chrome laptops (Kendrick, 2013). Even though ARM’s primary product is different, advanced technology and higher quality and flexible chip designs are giving a tough competition to the microprocessor providers (Kendrick, 2013). ARM’s average share increased from 14% in 2012 to 22% in 2013 (Haberberg, 2014). Profit margins in the microprocessor business are extremely low due to factors such as, intense rivalry, high manufacturing and fixed costs and price competition. Threat of substitutes: The major threats are from competitors such as, AMD and Intel, who are heavily spending on their research budget for allowing suitable replacements for chip designs manufactured by ARM. Also, cloud computing services can become viable replacements for chips in future, as they work in a virtual environment with no need for hardware (Haberberg, 2014). PEST Analysis Political: Being fundamental parts of laptops and PCs, microprocessors have a huge demand. As a result, the government taxes on export and import of microprocessors have increased leading to lower profit margin for chip providers (Haberberg, 2014). Economical: The microprocessor industry is affected by economic factors such as, inflation rate, money supply and trends in GNP. Cost of production is high and majority of the amount in spent in manufacturing plants and research facilities (Haberberg, 2014). While decline in PC sale has reduced the manufacturing of processors, manufacturers have started producing alternative forms such as, chip designs, for replacing the traditional chip. Also, demand for the advanced processors has increased (Haberberg, 2014). Social: The microprocessor industry is affected by various social factors such as, education, preference, income as well as culture of the different markets. While the sale of PC is comparatively higher than laptops in the developing countries, the situation appears to reverse in the developed ones (Sparkes, 2013). In addition, affordable low-cost laptops and tablets have increased the demand for advanced microprocessors in the developing nations (BBC, 2013). Technological: There is a significant rise in the demand for advanced microprocessors, both among industries and consumers. Markets are booming with smartphones and tablets and consequently, electronic device makers require advanced microprocessors with more powerful technological features and lesser energy usage (Economist, 2012). Also, home appliances like, fridges and smart television set, can be connected to internet service, making them a potential product for microprocessors (Economist, 2009). Organisation’s strategy analysis Following is the internal analysis of ARM, which is discussed through its value chain and differentiation strategy. Capabilities and resource analysis ARM has achieved phenomenal advantage in few years of its incorporation, mainly due to sustained client servicing practice, low-cost and high value innovation and high flexibility in terms of new designs and manufacturing (Haberberg, 2014). The brand has successfully established long-term relationship with its clients as well as attained cost-leadership. Differentiation strategy The major differentiation strategy of ARM has been flexible innovation and client servicing. Although ARM’s first processor manufactured for Apple had failed, the company was able to launch its low-power processer in the industry. The company was able to win clients when the sector for mobile phones was developing (Haberberg, 2014). ARM had covered its development and manufacturing costs through licensing fees as well as payments from firms made for chip designs created by ARM. Additionally, ARM gets royalty for every processor that has designs incorporated by the company. Hence, it can be said that the company has also been differentiating itself through gaining royalty and in turn re-purchase orders from the clients (Haberberg, 2014). ARM distinguishes itself by participating in community activities and market solutions for improving the ecosystem. Another differentiation comes from its flexibility in terms of work, providing solutions and developing products, according to specific demands of the clients. Further analysis of the organisation will be done through value chain. Value Chain The value chain of ARM consists of primary and secondary activities. Primary Activities 1. Inbound Logistics: ARM’s inbound logistics consists of controlling the suppliers. Although the company is not a direct manufacturer of PC components or microprocessor chips, it has successfully established a niche in the market for flexible chip designs, which are increasingly being replaced over traditional chips (Haberberg, 2014).. 2. Operations: As ARM’s major offering is microprocessor chip designs, its major operations base includes research sites and manufacturing plants. From these manufacturing sites, the research designs are sent directly to clients and after approval, chips are manufactured based on the approved specifications. ARM often takes direct orders for the chips; while in other cases, clients give these orders to third parties. Technology royalties make up ARM’s revenues, which are then invested in operational procedures (Haberberg, 2014). 3. Marketing: ARM spends minimum amount in marketing and promotional activities. Most of its clients are on long-term contracts and the company gathers new clients purely on the basis of internal industry referrals and word-of-mouth advertising (Haberberg, 2014; Vance, 2014). 4. Outbound Logistics: This includes distributing final goods to the clients or buyers. ARM sells its chip designs through licensing. 5. Services: Flexible innovation and community services for better ecosystem have helped ARM in achieving a niche image among other competitors such as, Intel (Haberberg, 2014). Secondary activities ARM’s secondary activities are as important as the primary ones, providing crucial support to the overall running of its strategies. Procurement: Procurement involves sourcing of raw materials for preparing the chip designs. The procurement cost is lower compared to other companies such as, Intel, as ARM licenses its chip designs many times across the industry (Haberberg, 2014). Technology: ARM has been able to set the price of digital electronics relatively low by spreading the technology across the microprocessor industry (Haberberg, 2014). This initiative has been achieved by multiple licensing of the technologically advanced and flexible chip designs. Infrastructure: ARM’s infrastructure comprises highly skilled chip designers who have gained expertise in improvising on the chip designs according to the specifications of different clients (Haberberg, 2014). Critical strategy appraisal Key factors for success The above analysis has revealed various success factors that are critical for facilitating the growth and development of any company in the microprocessor industry. Some of these critical success factors are as follows: 1. First mover advantage: First mover advantage provides a company with great competitive advantage over the late comers. First movers such as, Intel, are able to develop long-term relationship with suppliers, buyers and other third parties. Microprocessor chips are technologically complex products and therefore, buyers, suppliers, distributors and other electronic manufacturers tend to hesitate in approaching the new chip producers. Although ARM has been continuously pushing its flexible chip designs and also have been successful so far, its overall revenues and profits are relatively lower compared to Intel (Haberberg, 2014). 2. Innovation: Innovation is certainly a critical success factor in the microprocessor industry and the best example is that of ARM. Even though the company’s first microprocessor had failed to make a mark, the design and technology was so advanced that it was approved. The chip designs are known to consume lower power and through solely modifying the designs, the company is able to sell its design license to multiple firms (Haberberg, 2014). VRIN Analysis VRIN Template (Core Competency) Resources Valuable Rare Cannot Imitate? Non-Substitutable Core Competency Financial           Internal funds no no yes yes  Temporary Advantage Physical           Technology  yes  yes  yes yes  Sustainable competitive advantage Products/services  yes yes  yes yes  Sustainable competitive advantage CAPABILITIES           Management           Financial management   yes  yes no  yes  Temporary Advantage Marketing           Marketing advertisements  no  no yes  no  Temporary Advantage Current Issues Various issues have started to pose threat to the current sales, revenues and future growth and development of ARM. The first issue is the recent development of cloud computing services, which implies that companies no longer need individual servers (Haberberg, 2014). Hence, the demand for hardware vendors has slumped considerably forcing chip makers and designers to configure their products. This situation also means that ARM will require shedding its long-term relationship with the big clients such as, IBM and HP, besides building relationship with the providers of cloud services (Haberberg, 2014). Second issue is the increasing threat of malware security that has aggravated substantially during the internet era. This issue can be a potential threat to ARM’s chip designs as they are subject to online theft and hacking. The third issue is the increasing research and development activities from competitors such as, Intel and AMD, which can be a threat to ARM’s future growth (Haberberg, 2014). Intel has boosted its research budget for development of the advanced processors with all competitive features. At the same time, AMD is planning to launch a prototype based on the architecture of ARM (Burton, 2013). Conclusion The objective of the report was to evaluate the current strategy of ARM and its sustainability in future. From the study, it can be said that although ARM has resources and capabilities that can provide it with a competitive advantage; it will have to modify its on-going strategies according to industry patterns and demands prevalent among the buyers and electronic device manufacturers. So far, the company has been able to carve a niche set of customers and market owing to flexible innovation and long-term service contracts. Even so, the current demands in the microprocessor industry will force the firm to shed its old clients and develop relationship with the new providers of cloud service. Reference List BBC, 2013. PC sales see longest decline in history. [online] Available at: http://www.bbc.co.uk/news/business-23251285 [Accessed 30 July 2014]. Burton, G., 2013. ARM vs Intel: a battle of business models. [online] Available at: http://www.computing.co.uk/ctg/analysis/2270488/arm-vs-intel-a-battle-of-business-models/page/2#. [Accessed 30 July 2014]. Economist, 2009. 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