ARM Holdings s response to changes in the microenvironment - Essay Example

?ARM Holdings: A Case Study ARM is the producer of most microprocessors used in mobile devices like mobile phones, smart phones, servers and embeddeddevices. Intel dominates the manufacture of microprocessors for laptops, desktops, tablets and other computer devices. Though they share a related field in different industries, both firms are different, and each dominates a section of the market that its competitor did not want to venture, until recently. Recent events in the information technology industry have caused a shift towards the mobile industry, and both firms have enough interest to invest in research that will enable them to produce microprocessors for use in the domain of its competitor. ARM intends to shift into building processor architectures for the PC, tablet, and laptop industry while Intel wants to shift to producing processors for the mobile industry. However, this shift is faced with limitations since the two companies are pushing their strengths that had resulted in their domination of their current market. This study analyses ARM’s response to changes in the microenvironment, and analyses these changes for their appropriateness in enabling the firm to retain a competitive edge and maintain relevance in a highly volatile environment (ARM ltd., 2012). Research ARM does not build its processors; rather it sells the architecture to firms like NVidia, QUALCOMM, Apple and Texas Instruments that have the necessary infrastructure to build the designs. It charges these companies for up to 2 % of the revenue from the processors for each processor that is incorporated into a device. The ARM processors are characterised by low energy consumption that makes them ideal for mobile devices, and the firm also designs some processor architecture that are incorporated into servers. ARM processors have low energy consumption, and mobile firms aiming to increase the processing power of their devices just incorporate extra cores into the devices, with the average number of cores per device increasing from 1.5 in 2006 to 2.5 in 2010 (Keir, 2011). On the contrary, the computer industry developments do not involve additional of extra processors but replacing existing processors with others that are more powerful. Therefore, the mobile industry has more potential for growth than the PC industry, and that is why Intel has shifted attention towards developing microprocessors for mobile devices. Intel aims at doing this by improving the energy consumption of its processors since their processing power is the best in the world. On the other hand, ARM has already developed processors for use in personal computers, tablets and other devices that use operating systems that are primarily built for computer systems. This will pose a threat to companies like AMD since ARM has the capacity to improve on its technologies since it does not build the processors (BDTi, 2011). Environmental Analysis Industry Cycle The microprocessor industry has reached its maturity stage as it has existed for a long time and firms have already established their niche markets. However, since this is a research, innovation and development-intensive market, the industry has retained the characteristic of an emerging market. In addition, due to the versatility of information technologies, it is likely to remain so as firms come up with new architectures, forms, and configurations of processors. Therefore, in its strategy, ARM should not only look at current developments, but also anticipate future changes in order to have a competitive edge against leading market players like Intel, and avoid being overtaken by emerging firms (Porter, 2008: 89). Porter’s Forces There are five main environmental forces that ARM has to deal with in its quest to venture into the PC market and retain its competitive edge in the mobile market, three of which are macroeconomic and two microeconomic. The porter forces give an over view of the steps the firm should take in order to achieve its objectives; these changes include: The entry of Intel and other firms into the mobile microchip manufacturing market poses new competition for ARM. In order to retain and expand its share of the market, ARM must commit considerable amounts of resources into research and development in order for it to stay ahead of competition in terms of innovation. Entry of these other firms into ARM’s market niche will pose a threat to the market share since Intel’s processors have high processing power, and all the firm has to do is work on energy consumption. After doing so, these Intel chips will be appropriate alternatives, especially since Intel has more resources and infrastructure it could commit to research and development. In this case, ARM has to concentrate on its greatest strength of using minimal resources in designing processors, and then selling the designs; increased efficiency in doing so will build trust between the firm and its customers. An increasing widespread use of smartphones has resulted in OEMs having higher bargaining power since they buy parts in higher numbers than before; therefore, ARM should position itself in such a way that it will benefit from the economies of scale of selling chips in bulk. On the other hand, the information technology industry is expanding at a fast rate, and the market flow of labour cannot keep up. ARM must ensure that it compensates its employees appropriately to prevent the loss of the best talents to other competitive firms. Finally, the high rates of technological developments have resulted from high involvement in innovation, an art that ARM should practise in order to keep up with market changes (Porter, Argyres and McGahan, 2005: 45). In addition to using porter’s forces to identify the gap between its vision and its current performance, the firm should use porter’s value chain and generic strategies to formulate its strategic plan (Porter, 2008: 96). Organisational Strategy ARM’s long-term strategy is to increase its market share in mobile phones, electronics, and embedded devices. The firm aims to achieve this by expanding to all the markets that ARM processors may be applicable, maximising the number of processors per consumer device, and increasing innovative features for the chips such that each chip earns several royalties for ARM. In these objectives, the firm aims at maximising revenue and remain relevant in the microchip technologies in the long term (Robinson, 2011). The firm has as much as 95 per cent penetration in the smartphone market; and ARM aims at expanding its business to include personal computers and embedded devices, following the same model that it has used for the mobile market. This involves selling its designs to firms and getting royalties from the use of its design in the manufacture of mobile phone microchips. In order to gain these new markets, the firm intends to build new partnerships with manufacturing firms, as it did with the mobile industry business that took more than 10 years to develop. This means that ARM does not intend to make quick profits but intends to build relationships that will be helpful for the firm in the long run (ARM, 2012a). In addition to the widespread use of smartphones, these phones have been getting smarter due to the incorporation of more features into the devices, and they need more processing power to cater for the increased functionality. Smartphones now contain an average of up to three processors, but ARM intends to increase the count per device to increase the revenue from each device from the current value. Currently, every smartphone earns 6 – 7 times more than normal phones for ARM, mainly due to the costly nature of smart phone processors, and the increased count per device. Moreover, consumer products like television are getting smarter with the incorporation of more features, and ARM figures they could do with ARM silicon chips, as well (ARM, 2012b). Recently ARM has developed chips with the necessary building blocks for incorporation of physical IP into mobile devices, and developed hardware acceleration enabled chips to enhance device rendering of 3D graphics and high definition video. Currently, ARM is in the process of licencing these new developments to leading semiconductor companies, and the firm forecasts that these ventures are likely to increase the revenue margin per chip per device. The firm is involved in rigorous research and development with business partners to increase the revenue generated per chip even before incorporation in devices, due to the promising nature of the developments and pending patents (ARM, 2012b). ARM aims at maintaining a balance between its profiteering motives and social motives by investing in its employees who are of so much value to the firm; mainly because they are the designers of the firm’s technologies, and the people who create and maintain business partnerships. The firm hires a combination of seasoned professionals and talented graduates who are taken through excellent human resource practises of training and development; and performance management among others (ARM, 2012b). Analysis of Strategy ARM’s main aim is to capture existing and emerging markets, however, to ensure it has total control of the industry, it should do enough research and development to ensure that it creates new markets instead of competing for existing ones. The firm is also aiming at increasing the processor count per device, which is a poor effort at innovation since one day the device count will be saturated and the firm has to think of alternatives. Therefore, instead of taking this approach, the firm should invest in increasing the processing power of each chip and the market will be for it to take, just like Intel controls the PC market. ARM also plans to improve the functionality of its current processors, which is not innovation per se, but mere improvements on a past innovation. Therefore, it should diversify its research and developments to include the invention of new technologies that may be useful in keeping the firm afloat in case the current technologies become obsolete (Rainer and Turban2009: 39). Moreover, the firm should not be content with the current meagre profits; it should invest some of its profit in the building of manufacturing infrastructure so that it can start building its own chips and maximise profitability. In addition, ARM should conduct consumer surveys to ensure that it innovations are in line with consumer needs, since consumers may be buying ARM-powered devices due to lack of options and may switch to Intel once Intel-powered devices are available (Ceruzzi, 2003: 221). Conclusion Before formulating its strategic plan, ARM must consider the current state of the market, and anticipate future changes in the macro economy. In addition, it must apply the various available approaches to analyse the difference between its current performance and stakeholder expectations, and work on filling the gap. Moreover, ARM should consider the implications of Intel venturing into its market niche, and come up with counter-strategies to avoid losing its competitive edge and the grip it has on the smart phone market. Though the firm has an elaborate strategic plan, this should be reviewed to minimise the likelihood of the firm making moves that may have grave consequences on its business. References ARM ltd. (2012) ARM homepage, viewed 15 March 2012, . ARM (2012a) Processor licensees, The Architecture for the Digital World, viewed 15 March 2012, . ARM (2012b) Company strategy, The Architecture for the Digital World, viewed 15 March 2012, . BDTi (2011) Case study: maximizing DSP software performance on ARM processors, viewed 15 March 2012, . Ceruzzi, P.E. (2003) A history of modern computing, MIT Press. Keir, T. (2011) ‘ARM servers are coming, but will not be cheap’, PCWorld, viewed 15 march 2012, . Porter, M., Argyres, N., & McGahan, A.M. (2005) ‘An interview with Michael porter’, The Academy of Management Executive, vol. 16, no. 2, pp. 43-52. Porter, M.E. (2008) ‘The five competitive forces that shape strategy’, Harvard Business Review, pp.86-104. Rainer, R.K., & Turban, E. (2009) Introduction to information systems, Wiley. Robinson, D. (2011) ‘40 years of microprocessor development’, The Inquirer, viewed 15 March 2012, . Read More