Strategic Management for Market Success

Introduction

Strategic Management is a core component for a successful company in the modern market. Fundamentally, it is built on setting objectives, developing an insight into market competition segment, evaluating internal structures, and reviewing established approaches aimed at putting an organisation at a better position in the market (Jasper and Crossan, 2012). According to Akter et al. (2016), business entities in contemporary market adopt a strategy in order to navigate the heightening competition, changing consumer preferences and needs, rapid changes in organizational culture, demand of technology-driven business operations, and increasing regulations on most industries. For sustainability and growth, business entities need to integrate a systematic and elaborate approach such beating competition, innovate constantly to remain relevant, conforming to changing demands and policies set, and identifying opportunities brought by technology or globalisation. However, the question raised is whether elaborate strategic management of internal and external factors by a business entity enough for sustainability and growth or subject to other factors. Advanced Micro Devices (AMD) Company provides high-performance computing, graphics and visualization technologies, which are the building blocks for gaming, immersive platforms, and the datacentre. AMD has built a solid foundation with huge consumer base ranked in the fortune 500 businesses, and cutting-edge scientific research facilities worldwide. This essay will examines AMD focusing on their vision and mission statement backed up by the financial statements of the last 5 year. In order to capture an insight of the company’s strategic plan over that period, approaches adopted by different CEOs is compared and analysed. Then a PESTLE analysis will be carried out on tariffs, recession, external product, research and development budget, consumer protection and natural catastrophes. Subsequently, Poster’s Five Force analysis will be conducted on the company’s competitors in the market that include Intel and NVidia. Lastly, it outlines recommendations on ways the company can improve future performance.

AMD Vision Statement

The company is built on vision “High performance computing is transforming our lives”. Since its founding in 1969, it has focused on “leading-edge semiconductors products”. Lisa Su, current Chief Executive Officer of AMD, is credited with turning the company from the brink of bankruptcy to 1,300% gain in stock in 2020 since her appointment in 2014 (Duffy, 2020). Core to her success is attributable to change in the organization culture, restructuring the market, product, and customers through targeting the right consumers and consistency (Duffy, 2020). Other steps taken immediately after her appointment was cutting costs through discontinuing certain businesses and letting off some partners, for instance, ownership of the foundry that manufactured the company’s semiconductors. As pointed by Allan (2019), ideally, Su approach was identifying what not to do and doing what the company was ‘really, really good at’ striving to be the best on areas of focus. Based on the argument by Alvesson (2012), organizational change is grounded on understanding the culture redefining things that need to be done and how to be done as well as behavioural aspects. To her, it was fundamentally critical to identify and focus on core aim as DNA of the company. Before her appointment, the company under the leadership of Rory Read, her predecessor, is accused of focusing on cutting costs through layoffs rather than putting in place plans of business sustainability and growth. As pointed by Martin (2014), key elements in organizational growth is not only identifying core business variables but also focusing the resources that satisfaction of consumers. However, in 2019, she managed it to push the revenue even to its new all-time high. Building on the argument forwarded by Eisenhardt and Sull, (2001) contending business is rooted on revenue generations rather than cost incurred, Lisa Su strived to build a long term- relationship with their customers reflected by positive market performance. Furthermore, Eisenhardt and Sull (2001) highlighted the having insight of consumer segment, deep understanding needs, and coming up with an elaborate and unique approach of meeting and creating value to those targeted is a roadmap to business success. According to Porter (1996), the burden of re-establishing a clear strategy lies on largely on an organization and its leadership. Lisa Su managed to decrease debt from $1,767 million in 2014 to $1,699 million and in 2017. In 2018, the debt stood at $1,528 million, which the gross leverage reduced below 2.0x while in in 2018 the debt went even down to $563 million, a gross leverage of 0.5 x. Comparatively, in 2012, the net income of AMD was -1,830$ million and the loss decreased to -83$ million in the following year. In 2014, the net income decreased to -403$ million. The net income in 2015 was -666.0$ million and in 2016 -349$ million, which improved by 317$ million. Lisa put more effort and reached the -33$ million in 2017. This was an improvement of 284$ million, but this was not enough. She turned it to a positive figure in 2018, an unbelievable 337$ million. The following year, AMD ended the year 2019 with 341$ million net income, which is an improvement of 1,007$ million.

Company Expenses: Lisa Su vs Rory Read

Revenue increased and cost of sales was in control year over year under Lisa Su leadership. However, through the losses from Rory Read era, the R & D expenses went down contributing to low net profit between 2014 and 2015, which led to failure in providing a high-end graphic chip called Fury X. After a recoup, Lisa Su could increase the R&D costs and provide the products with the vision of AMD. All this can be reflected in the share price and the surge (Figure 3).

PESTLE

Political Factors:

AMD has operations located over the global, but the chips are manufactured mainly in United States of America (US) and Taiwan. The company’s supplies its chips mainly to China and the US. Figure shows that the two most external consumptions are in the UK and China from 2017 to 2019.

The trade war between the US and China that saw Tariffs going up from 10% to 25% on $200 billion worth of products and President Trump wants to increase further 25% on $325 billion worth of products. This could have material adverse effect. If this trade war continues, the worst case scenario will be that they lose China as a customer, because of the high tariffs from China as it affects the revenue, which could decrease the costs in research and development or other variable costs. On the other side, AMD could increase the price of the chips to their customers losing the competitive advantage, the company position its products in low and middle range segment

As tariffs increase, the yearly trade growth decreases, according to figure 5. This shows that the trade war can have an impact on businesses imports and exports.

Economic Factors:

The Covid- 19 pandemic has caused businesses to closed operations during this crisis and, in order to keep the operations costs low, many have had to lay off their employees resulting in unemployment rate surging. According to the data from US Department of Labour, between March and May 2020, 33million Americans claimed unemployment benefits.

From the figure 7, the graph measuring the likelihood of recession occurrence indicates many signs of a recession or even depression in economics globally, which is an economic factor. Additionally, gross domestic product (GDP) in the USA show signs of shrinking. Figure shows that GDP in USA went down to a negative 0.3% in the first quarter of 2020 and it will probably fall even lower because of the shutdowns.

All this proves that it will have an impact on AMDs growth and could have a material adverse effect, because the consumer purchasing behaviour. Less income means people only buy essential things to survive (Valášková, and Klieštik, 2015; Reed, and Crawford 2014). The figure 8 below shows a sharper drop in consumer sentiment than 2008 recession. Although US government has set in measures to cushion furlough and laid employees economic expert warn hard times ahead affecting significantly purchasing powers and behaviour.

Social Factors:

Social factors encompass factors that influence the consumer use and need of a product. For instance, Bitcoin and cryptocurrencies, two sectors that relies heavily on the semiconductors and chipsets, have built own society who believes in decentralization, but it has another factor that keeps the interest alive, which is scarcity (Böhme, et al., 2015). After every 4 year, Bitcoin cuts its supply, which is called halving and miners accept a 50% reduce in Bitcoins for verifying transactions (Bitcoinblockhalf, n.d.). The supply decreases and the users of this new technology faces scarcity, which leads to high demand as it can be seen in the surge from $0 to $20,000 in a matter of years. Then Bitcoin crashed and demand decreased in large numbers, which was not profitable for miners and AMD had already increased the inventory, which led to an excess hence supply is a construct of social elements (Yawar and Seuring stated, 2015). This did not only reflected in their quarterly outlook 2018, but also in the stock, which halved the value in 2018.

Technology Factors:

Research and development is an important factor for companies like AMD in order to compete. Using technology has become more expensive measured by materials, skills, and process. Based on illustration by Blatter et al. (2012) and Muehleman and Wolter (2019), demands of higher skills requirements is directly proportional to the cost of hiring, for example, hiring costs of manual labour is much lowers compared to those in engineering or information technology occupation in which AMD operates. However, research and development budget is limited as it is depended on the profits company in order to reinvest it in the companies’ activity. During leadership of Mr. Rory Read, the R&D expenses were reduced leading to lower profitability (Figure 2). There is also a correlation between labour expanses in figure 2 and R&D expenses. Whenever Lisa Su increased the R&D expenses, labour expenses increased, too, but only 2013 and 2014 can be taken and whenever Rory Reads decreased R&D expenses, labour expenses went down. Nevertheless, it is not proven that AMD needs to spend millions in R&D, and Kamien and Schwartz (1975) believe that future profits does not depend on R&D. Failing to meet the customers preference in the future could send AMD years back and competitions could overtake the company.

Legal factors:

Consumer protection can be a legal issue for businesses, as it needs to provide the product while protecting the customers. According Kerber (2016), the European General Data Protection Regulation enacted and implemented to protect citizen confidentiality and privacy within EU countries is considerably an important step towards personal data protection. The regulation imposes significant new requirements on collect, process and transfer personal data, as well as significant fines for non-compliance. This can effect AMD not only with more costs to improve the consumer protections, but also with fines.

Ecological factors:

Pollution from industrial waste especially unrecyclable semiconductors has caused negative image on the industry. The consumer awareness on global warming, sustainability, and health and environmental effects of such elements as silicon and other heavy metals core in making semiconductors threatens the industry and AMD operations (Fashola et al. 2016)

Poster’s Five Forces

Competitive Rivalry:

AMD is in a semiconductor industry. Its main competitors include Intel, IBM and NVidia. The revenue of Intel was $72 billion in 2019 while NVidias had $11.716 billion, which is much higher than AMD. Over the past 5years, despite gradually rise, market share of AMD still lags Intel. However, from the figure below, gap has been reducing with increase from below 20% in 2016 to approximately 37% in 2020 whereas Intel has seen a drop from 80% to 62% over the same period.

Figure 9 puts AMD in the same competition segment with NVidia having same market share. However, NVidia sell units the same level with AMD. Arguably, customers buy from NVidia or Intel for their quality and strong brand name, but not really interested in the community if they increase the price. According to Porter (1996), ina competitive environment, a business can outperform a rival by differentiating oneself. In addition, AMD can gain competitive edge by focusing on quality of product through R&D

Threat of Entry:

The profits in the semiconductor industry are high. Growth of smartphones, smart TVs, and personalised computers, main consumers of semiconductors, are projected to growth with no any indication of slowing down (Henderson, and Scott, 2018). As such, other players may want part of the profits. However, resources in investment (financial and skill labour) discourages new comers given that quality and performance are essential for many, if not all, consumers (Han, and Park, 2016). AMD counts as an incumbent company and it is proven that new threats let incumbent companies change to a non-monotonic u-shaped pricing (Seamans, 2012). This means AMD is price sensitive, but not internationally nor in the difference. For example, ChipMos technologies started with an operating expenses of $733.9 million in 2000 and increased to $1,330.3 million in 2018 (ChipMos Technologies Inc, n.d.). Geographic revenue increased from $6,525,865 in 2002 to $18,480,027 in 2018, which they are focused on Japan, Singapore and ROC. This examples shows that it is possible that new threats could slowly take the market shares in geographic areas, expand in a fast way and it can be to a continuing threat.

Substitutes:

Potential substitute threats of AMD could be that big companies such as google and Microsoft build their own chips, because as mentioned before, they are customers of AMD. These companies buy in bulk and when they lose them, they could not only lose profits, but many other customers, because Microsoft and google spend much more in R&D and marketing than AMD. Furthermore, google and Microsoft provide cloud computing. Google cloud can be a threat to AMD partly, because AMD provides storage chips, which the price depending on the quality and the service. In this case, not every laptop or computer does need a high offline storage and the customers of Google could use the cloud of Google, which are less expensive. This could harm AMD and in combination of creating own chips, could have a material adverse effect and bring the company further down. The switching costs currently is high and takes time, but when big companies create their own valuable chips, in the long term, it will change to low switching costs . As pointed by Porter (2008), the low availability is benefiting AMD, but it could change when they do not work continuously on their product and service.

Bargaining Power of Buyers:

The bargaining power of buyers in the semiconductor industry is low, because there a many buyers who buy in bulk such as Amazon, Apple, Google, Lenovo, Microsoft and Sony. As AMD provides low and middle range prices with good quality, which is an advantage for AMD in the semiconductor industry as mentioned before, but AMD is depended on intermediate consumers as these big companies distribute the whole product. However, using Poster (2008) assertion, the buyers can get power through the substitute as mentioned before when they create a cloud, where AMD can get a hit and they need to sell the chips only cheaper as they do not need to improve it.

Bargaining power of Suppliers:

AMD wants to deliver through material, services, and technology suppliers’ globally and they can benefit from the bargaining power of suppliers, which is moderate. AMD benefits from the suppliers that are not concentrated especially the raw materials AMD needs. However, the agreements between supplier and AMD, can be negative for AMD. Globalfoundries Inc. (GF) is a wafer foundry facility and AMD have to purchase their entire microprocessor and APU product from GF for a period (AMD, n.d.). Only a broken agreement can cost for AMD, when changing suppliers. This means the switching costs could be high.

Recommendations

AMD need to invest more on R&D that will in turn reflect on its quality, consistency, and consumers satisfaction

Following in the footsteps of NVidia, AMD should diversify its product line in Smart TVs, Car, and phones semiconductors

Conclusion:

Overall, AMDs performance and position is currently strong as it provides in a semiconductor industry a different pricing strategy. Lisa Su was able to bring the vision of AMD back by providing strong financial reports and sending the stock to new all-time highs despite strong competitors such as NVidia and Intel, and previous CEOs performance. The 5 factors can have material adverse effect and cannot be avoid as it is not in the power of AMD, but it can minimize the risks by using this experience, forecasting the outcome and put measurements such as cutting costs by laying off employees, calculating inventory operations and reducing it slowly and reacting to new policies fast. Moreover, the 5 forces gave an insight of the industry including the rivalry Intel and NVidia, which are stronger and new threats can occur to take market shares locally or in other sectors in order to growth and be competitive. In addition, buyers could turn into high competitors and it can all turn into material adverse effect for the company. The supplier part is beneficial for AMD and at the moment, it could not harm the company their growth. Finally, the recommendation is that AMD should focus on their different part of the organization and improve it whether in R&D, brand image or even alliances. However, strategic management is not enough for the whole analysis and needs a strategic risk management.

References

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and according to John, “Those of us trying to change our organizations’ culture need to define the things we want to do, the ways we want to behave and want each other to behave, to provide training and then to do what is necessary to reinforce those behaviours.” (John, 2010)

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