Ti wireless business analysis

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Analysis of TI's position in the cellular handse semiconductor industry

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Ti wireless business analysis

  1. 1. Strategic ManagementGroup ProjectPGSEM 2008 SectionA – Professor PD JoseAn analysis of Texas Instruments in thecellular handset semiconductor industrySubmitters:Mahendran Shanmuga Sundaram - 2008049 - Texas InstrumentsNaufal Ashiq Kukkady - 2008039 - Ittiam SystemsAmith D’souza - 2008009 - Texas Instruments
  2. 2. Strategic ManagementGroup Project PGSEM 2008ContentsCONTENTS ................................................................................................................................................. 21. INTRODUCTION ................................................................................................................................... 3 1.1 TEXAS INSTRUMENTS INC. ..................................................................................................................... 3 1.2 WHY TEXAS INSTRUMENTS AND THE CELLULAR HANDSET SEMICONDUCTOR INDUSTRY?...................... 42. THE CELLULAR HANDSET SEMICONDUCTOR INDUSTRY .................................................... 5 2.1 OVERVIEW OF THE INDUSTRY ............................................................................................................... 5 2.2 ANALYSIS OF THE INDUSTRY STRUCTURE............................................................................................... 73. TEXAS INSTRUMENTS IN THE CELLULAR HANDSET SEMICONDUCTOR INDUSTRY 10 3.1 TEXAS INSTRUMENTS – POSITIONING IN THE CELLULAR HANDSET INDUSTRY ......................................10 3.2 TEXAS INSTRUMENTS CURRENT STRATEGY ...........................................................................................10 3.3 THE IMPORTANCE OF CORPORATE LEVEL STRATEGY ............................................................................114. THE COMPETITION AND EMERGING TRENDS IN THE CELLULAR HANDSETSEMICONDUCTOR INDUSTRY ............................................................................................................12 4.1 THE COMPETITORS AND COMPETITOR STRATEGIES ..............................................................................12 4.2 CHANGES IN THE CELLULAR HANDSET SEMICONDUCTOR INDUSTRY LANDSCAPE .................................145. EVALUATING TEXAS INSTRUMENTS IN THE CELLULAR HANDSETSEMICONDUCTOR INDUSTRY ............................................................................................................15 5.1 SWOT – STRENGTHS WEAKNESSES OPPORTUNITIES THREATS ............................................................15 5.2 SOURCES OF COMPETITIVE ADVANTAGE ..............................................................................................156. EMERGING STRATEGIES FOR TEXAS INSTRUMENTS IN THE CELLULAR HANDSETSEMICONDUCTOR MARKET ................................................................................................................177. THE ROAD AHEAD FOR TEXAS INSTRUMENTS........................................................................19REFERENCES............................................................................................................................................20EXHIBITS ...................................................................................................................................................21PGSEM 2008Indian Institute of Management Bangalore -2-
  3. 3. Strategic ManagementGroup Project PGSEM 20081. Introduction1.1 Texas Instruments Inc.Texas Instruments (TI) is engaged in the design and manufacture of semiconductors that areat the cutting edge of technology. The company provides digital signal processing (DSP),wireless, digital light projection (DLP) and analog technologies in the semiconductorbusiness domain. In addition to semiconductors, the company’s businesses comprise theeducation technology business, which supplies graphing handheld calculators.Texas Instruments was established by the name of Geophysical Service in 1930, the firstindependent contractor specializing in the reflection seismograph method of geophysicalexploration. This industry relied heavily on the analysis of the electrical signals that weregenerated by the seismographic methods for geophysical survey. GSI’s name was changed toTexas Instruments in 1951 and GSI became it’s wholly owned subsidiary. In 1953, TI waslisted on the New York Stock Exchange. Incidentally it was in the 1950’s that TI acquired alicense from Western Electric to manufacture semiconductors.TI has been an innovator and inventor par excellence in the semiconductor industry, it wasthe first company to manufacture commercial silicon transistors for radios, the integratedcircuit was invented at TI by the Nobel laureate Jack Kilby in 1958, TI was the first companyto manufacture digital signal processors (DSPs) and the first single chip speech synthesizer(made famous by ―Speak n Spell‖ featured in the movie ET). Over the years TI has built upa core competence in the analog, digital and wireless domains on the basis of a solidunderstanding of the core principles of signal processing and semiconductor manufacturing.Leading-edge CMOS (complimentary metal oxide semiconductor) technology is thefoundation for TI’s signal processing products across its digital portfolio. TI has always massproduced semiconductor products that have been at the cutting edge of technology, it wasamong the first to mass manufacture chips using state-of-the-art 90-nm technology on300mm wafers and 65nm production. TI has built up a reputation of producing chips withlower power consumption, thus attaining a very favorable position in the lucrative wirelessand portable device markets.In terms of market leadership, TI is the third largest semiconductor company in the world. Itis the number one producer of Digital Signal Processors. It is number one in analog with anestimated market share of 14% in 2006. TI is currently number two in the wireless marketbehind Qualcomm.TI has been rated by its employees as one of the best semiconductor companies to work forand has been consistently featured in the Fortune ―100 best companies to work for‖ list.Texas Instruments is headquartered in Dallas, Texas and employs more than 30,000 peopleworldwide. It has sales and R&D offices across the Americas, Asia, Japan and Europe. Thecompany recorded revenues of $13,835 million during the fiscal year ended December 2007,a decrease of 2.9% over 2006. However the profit from operations has been better than thatPGSEM 2008Indian Institute of Management Bangalore -3-
  4. 4. Strategic ManagementGroup Project PGSEM 2008of the previous year. TI continues to maintain a gross margin > 50% and profit fromoperations stands at ~30% which is good compared to the industry level averages in thesemiconductor industry.1.2 Why Texas Instruments and the cellular handset semiconductorindustry?The cellular handset semiconductor industry is one of the most dynamic technology drivenindustries. Worldwide, more than one billion cellular handset units are expected to beshipped this year. Every semiconductor manufacturing company would want to have a shareof this industry pie for the sheer volume and returns that it offers. However it is not easy forincumbents in this market; as customers (i.e. handset manufacturers) get more concentratedand the prices of mobile handsets keep going down, they face a number of challenges inorder to maintain the levels of profitability that they have been used to over the years.The dynamic nature of this industry is best illustrated by recent happenings, during thecourse of preparing this report, two of Europe’s largest players in the industry, ST-NXP andEricsson have announced a tie up to take on the market leaders, TI and Qualcomm. Overthe past five years there have been a number of acquisitions, spin offs and mergers. Webelieve that this industry offers a good insight into the world of technology driven industrieswhere change is extremely fast paced.Texas Instruments was the world leader in the cellular handset semiconductor industry tillthe 1st quarter of 2007, when it was overtaken by Qualcomm. The strategies followed by TIin this industry make an interesting read, since in spite of its slip; TI continues to remainprofitable in wireless. We believe that this analysis will illustrate how incumbents adapt tochange, and how the strategies of a firm need to evolve in a fast paced, technology drivenindustry.PGSEM 2008Indian Institute of Management Bangalore -4-
  5. 5. Strategic ManagementGroup Project PGSEM 20082. The cellular handset semiconductor industry2.1 Overview of the industryIn this section we present a brief overview of the cellular handset semiconductor industry.Throughout this report, the terms cellular and wireless are used interchangeably.The value chain Wireless Wireless Wireless *indirect Infrastructure Infrastructure Service handset Semiconductors Manufacturers Providers* sales Wireless Wireless Direct Handset Handset Handset Semiconductors Manufacturers Sales Consumer Handset Accessories Application Software and GamesThe figure shown above outlines the interactions between the various players in the wirelessindustry. The end consumer is aware of four players: The wireless service providers. Services offered by these companies are usually differentiated on the basis of tariffs and cellular network technologies that they provide. In North America, handsets are usually sold via the service providers who offer large rebates in order to lock in customers. Examples: Verizon, Vodafone, Airtel, etc. The wireless handset manufacturers. In Asia, handsets are normally sold directly through handset retailers. Examples: Nokia, Motorola, Samsung, etc. The application software and gaming manufacturers. These companies cater to the ever growing demand for differentiated applications and games on mobile phones. Example: mCheck, EA Mobile, etc. The handset accessory manufacturers. These companies sell accessories that compliment the wireless handset. Product offerings from this sector include multimedia devices, storage cards, GPS receivers, etc. Example: SanDisk, Jabra, etc.The overall wireless industry as illustrated in the value chain diagram is estimated to beworth over one trillion dollars.PGSEM 2008Indian Institute of Management Bangalore -5-
  6. 6. Strategic ManagementGroup Project PGSEM 2008Our analysis of TI is centered on the cellular handset semiconductor industry. The cellularhandset semiconductor industry feeds in to the wireless handset industry which integratesthe silicon chip into a distinct form factor, adds the necessary software to make the mobiledevice work, brands the device, and then sells it to the end consumer. There is no directinteraction between the end consumers and the semiconductor manufacturers.Wireless handset manufacturersThe buyers in this industry i.e. the customers for wireless handset semiconductor chips, arethe wireless handset manufacturers. The wireless handset manufacturers usually segmenttheir product offerings on the basis of price points. This kind of segmentation gives rise tothree distinct types of phones, low cost entry level phones, mid-range multimedia featurephones and high-end multimedia phones and smartphones (Exhibit 2).Cellular phones are also segmented on the basis of standards that are used to achievecommunication over the air interface i.e. modem technologies. The oldest digital modemtechnology standard in use today is the GSM standard which is considered a 2G (generation)technology. There are a number of other technology standards in use including CDMA,TDMA, iDEN etc. Exhibit 1 shows the breakup of the world mobile subscriber basebetween the various cellular modem technology standards. CDMA and GSM phones cannotwork interchangeably i.e. a CDMA phone will not work in a GSM network environment andvice-versa.The main concerns for a wireless handset manufacturer are - enhanced user experience and afast time to market (TTM) for new innovative phones, all this at a lowered cost ofproduction.Cell phones sold to the end consumer are complimented by a number of accessories formultimedia, connectivity and storage. In line with this we find that there is a cell phoneaccessory and cell phone application software business that compliments the handsetmanufacturers.The major handset manufacturers of the world include Nokia, Samsung, Motorola, SonyEricsson, LG, Sagem, Panasonic, NEC, Fujitsu, BlackBerry, Kyocera etc.Exhibit 3 provides cell phone sales numbers for 2007.Wireless Semiconductor ManufacturingWireless semiconductor manufacturers produce two types of chips: i) single chip solutions,where the modem and the application processor is integrated into one chip and ii)standalone application and standalone modem processor (also called baseband) chips.The single chip solutions are usually targeted at the low cost and feature phone segment ofthe handset market. Stand alone processors are targeted at more expensive phones wheremultimedia rich features and smart phone capabilities are the norm. Single chip solutionswhen used; drastically reduce the bill-of-materials (BOM) for handset manufacturers.PGSEM 2008Indian Institute of Management Bangalore -6-
  7. 7. Strategic ManagementGroup Project PGSEM 2008Semiconductor chip manufacturers also segment their products on the basis of the cellularnetwork technology that their modem (a.k.a. baseband) supports.The silicon technology process that is used to manufacture the phone is a major source ofdifferentiation for the semiconductor manufacturer. Latest cutting edge manufacturingprocess technologies bring down the overall cost of production for semiconductor chips. Allmanufacturers do not pocess the fabrication facilities (fabs) that are required for themanufacture of silicon chips. There are a number of independent silicon foundries thatprovide their services to such manufacturers.Chips that are produced for the wireless handset industry are different from the chips thatare manufactured for the general purpose computer desktop and laptop industry. The majorpoint of differentiation is the power consumed; typically wireless chips consume a fewhundred milliwatts of power as compared to a few watts consumed by desktop chips.The major cellular handset semiconductor manufacturers of the world are: Qualcomm,Texas Instruments, ST-NXP (recently in a tie up with Ericsson), Infineon, MediaTek,Broadcom, Freescale Semiconductors etc.Of these Qualcomm, MediaTek and Broadcom are fables manufacturers. The major siliconfoundries that cater to such companies are TSMC, UMC, SMIC, etc.2.2 Analysis of the industry structureIn this section we analyze the cellular handset semiconductor industry using Porter’s ―FiveForces‖ industry analysis model.Barriers to entry- The industry exhibits a need for high economies of scale in order to remain profitable,the fixed cost vis-à-vis R&D investments and equipment required to manufacture chips isvery high.- This is a highly specialized industry; semiconductor chips for wireless handsets havespecific technology requirements. The technologies that are required to make a wirelesshandset chip have been developed over the years by the various firms in this industry andare protected well by IP. Any new entrant will have a long learning curve before it is ableto catch up with the incumbents in terms of developing the expertise required to design andmanufacture wireless handset chips.- Handset manufacturers would be wary of signing up deals with new entrants whosetechnology is not yet proven, however new entrants with a significant background insemiconductor design and manufacturing in other domains may not face this entry barrier.Overall we believe that the barriers to entry in this industry are moderate to high.PGSEM 2008Indian Institute of Management Bangalore -7-
  8. 8. Strategic ManagementGroup Project PGSEM 2008Supplier power- Firms that do not pocess their own silicon fabs are dependent on silicon foundriesfor the manufacturing of the chips. Silicon foundries do not provide differentiatedtechnologies since the manufacturing process technology is usually developed (or codeveloped with the silicon foundry) by the chip designing firm itself.- There are several hardware IP (intellectual property) blocks that are supplied to the chipdesigners, however these specific IP blocks are not highly differentiated and it is alwayspossible for the cellular handset semiconductor company to backward integrate ordevelop the required hardware IP block in house.Overall we believe that the supplier power in this industry is low.Buyer power- The wireless handset industry (the buyer industry) is highly concentrated; this is evidentfrom Exhibit 3.- The wireless handset manufacturer is price sensitive; the overall BOM is a very importantfactor in the profitability of a wireless handset manufacturer.- The switching cost for the wireless handset manufacturer is very low at the startingphase of the development of a new cell phone.- Differentiated product offerings from the semiconductor supplier make it easier for acellular handset semiconductor firm to negotiate with the buyers.Overall we believe that buyer power in this industry is high.Rivalry- The industry growth rate is healthy; it is directly linked to the growth rate of the handsetindustry which has been growing at a rate of 16% through 2007.- The market is highly concentrated with the big four players (Qualcomm, TI, ST-NXP-Ericsson, Infineon) having a share greater than 60% (Exhibit 5).- The product offerings in the 2.5G segment are not highly differentiated leading to a pricebased rivalry in this segment.- When going in for the design and manufacture of a new handset, the wireless handsetmanufacturer follows an intense screening process that of the product offerings from thevarious firms in the cellular handset semiconductor industry, since no firm enjoys a nichein any segment there is an intense rivalry between the various firms in order to bag a―design-in‖ with the wireless handset manufacturer.Overall we believe that the rivalry within this industry is moderate to high.Substitutes- General purpose processors from the PC world could substitute special purposewireless processors. This would require the following: the power consumption of theseprocessors is reduced drastically and they are enhanced to contain a lot more features andperipherals on a single chip. If such a thing does happen then the desktop processor wouldPGSEM 2008Indian Institute of Management Bangalore -8-
  9. 9. Strategic ManagementGroup Project PGSEM 2008have evolved to be a wireless handset application processor. General purpose processorsfrom the PC world are not credible substitutes for wireless processors.Overall, the threat from substitute products is very low.Industry AttractivenessThis industry may look unattractive on basis of high buyer power and possible highrivalry among the incumbents, however on the basis of the phenomenal growth ratethe opportunities that this industry provides over the long term (it is estimated that by 2010two thirds of the worlds population would own a cell phone, many would be first timebuyers and many would be repeat buyers) we believe that it is an attractive industry.PGSEM 2008Indian Institute of Management Bangalore -9-
  10. 10. Strategic ManagementGroup Project PGSEM 20083. Texas Instruments in the cellular handset semiconductorindustry3.1 Texas Instruments – positioning in the cellular handset industryTexas Instruments’ wireless portfolio is a direct result of its commitment to the growth ofthe wireless industry. TI provides all the elements needed to bring mobile devices to anysegment of the wireless market (Exhibit 6). It has product offerings in all segments of thehandset market.  The entry level handset segment is catered by TCS23xx ―Locosto™‖ family of products. This family enables Ultra Low-Cost (ULC) handsets targeted at emerging, fast-growing regions as well as established cost-sensitive markets.  The feature phone segment is catered to by the OMAP-Vox solutions; this adds modem and application processor functionality on a single chip.  High end phones, Smartphones and PDAs, and solutions looking to deliver the most differentiated, multimedia-rich applications that will attract users to next-generation devices and services are catered by OMAP™ processors.Besides this TI has a product offering in the two manufacturing based segments of thisindustry. The OMAP-Vox solutions are single chip modem and application processors andthe OMAPTM processor solutions are pure application processors.TI has leveraged its DSP expertise to offer differentiated high performance solutions tohandset manufacturers in the wireless segment. TI has always been at the cutting edge oftechnology, it has an excellent track record in the development of fabrication processes forsilicon, its wireless offerings are backed by manufacturing and execution excellence.TI does not come across as a complete software and hardware systems solution provider. TIhas no complete solution offerings (E.g.: CellAirityTM from Broadcom, Brew fromQualcomm, etc). To develop software for its product offerings TI relies on a vast eco-systemthat it has created with a number of partner companies.In the modem sphere where TI does not have cutting edge technology product offerings, itusually ties up with other players to offer a proven bundled solution.TI has been a historical supplier to Nokia, the largest handset manufacturer in the world.3.2 Texas Instruments current strategyIn the current market scenario, TI’s strategy has been to target big customers (Nokia,Motorola, Samsung and LG) with custom software and hardware product offerings. Besidescustom offerings of the catalog product lineup TI has got specific design-ins with Nokia toimplement and manufacture Nokia specific processor designs and products.PGSEM 2008Indian Institute of Management Bangalore - 10 -
  11. 11. Strategic ManagementGroup Project PGSEM 2008In terms of software for its wireless offerings, TI has traditionally not charged its customersfor the software that is delivered along with its hardware. Software is viewed as a strategicenabler for TI and not as a revenue generator.TI has ignored the grey market in China, or for that matter the grey market for cell phonesall over the world. The grey market is essentially an undifferentiated phone market, wherethe handset manufacturer simply integrates standard components of hardware and softwareto get a standard undifferentiated and unbranded phone into the market. The grey phonemarket is mainly centered on the Chinese and Asian markets and caters to the low costsegment of the market.3.3 The importance of corporate level strategyTI is a corporate entity, with a number of SBEs (strategic business entities) catering to itssemiconductor and education technology businesses. There is a vast amount of synergy thatcan be established between the various semiconductor businesses. As we have alreadymentioned, TI has leveraged its expertise in the DSP and Analog domain to provide cuttingedge products in the Wireless domain. TI will find economies of scope in ensuring that thevarious SBEs co-ordinate their R&D and product offerings. This requires a corporate levelco-ordination between the various SBEs. We believe that a corporate level strategy isimportant for TI to ensure that its wireless business leverages other TI businesses in order toachieve greater profitability.The corporate level strategy that is of consequence to the wireless business within TIincludes, the manufacturing strategy (related to the fab less model for manufacturing), thebusiness model strategy and the decision to exit markets where the competition becomespurely price based.PGSEM 2008Indian Institute of Management Bangalore - 11 -
  12. 12. Strategic ManagementGroup Project PGSEM 20084. The competition and emerging trends in the cellular handsetsemiconductor industry4.1 The competitors and competitor strategiesQualcommQualcomm, after nearly a decade of trying, now controls the two standards — CDMA2000and WCDMA these technologies are or will be behind just about every cellular system in theworld. Both are based on technology Qualcomm developed, called CDMA (code divisionmultiple access). Qualcomm gets royalties for every CDMA phone sold and for CDMA-based equipment. Virtually every 3G network will be based on Qualcomms CDMA. GSMwill migrate to WCDMA.Qualcomm has a unique business model of licensing its technologies, a model from which itderives a significant portion of its revenue.Qualcomm was one of the leading performers among handset chipset makers in the first halfof 2008, increasing its 3G handset market share by working with Nokia and High TechComputer (HTC). Other handset vendors such as Research in Motion (RIM) and otherJapanese vendors are also interested in Qualcomms chipsets, which may help it maintain itsmarket share in the second half of the year.Qualcomm has been in several legal tussles with competitors (notably TI and Broadcom)over patent infringements. It has recently reached an agreement with Nokia, wherein the twoparties have agreed to put their differences aside and cooperate through a mutually beneficialpartnership.ST-NXP-EricssonST and NXP teamed up for the creation of an industry leader mid 2008. The new companythat is formed will be IP rich, with transfer of over 3500 patent families and hundreds oflicenses from the parent companies. This partnership is expected to bring in complementaryproduct and customer portfolios under one brand. This partnership has received a strongendorsement from key customers.The stated goals of the new entity include, focus on leadership in multimedia convergenceapplications to grow faster than the market, and to follow a lighter asset business model.A new merger has been announced between this newly formed company and Ericssonmobile platforms. The combined entity is expected to be the third largest wirelesssemiconductor entity behind Qualcomm and TI. The new entity has the unique position ofbeing a supplier to 4 out of the 5 handset manufacturers (Motorola being the onlymanufacturer left out).PGSEM 2008Indian Institute of Management Bangalore - 12 -
  13. 13. Strategic ManagementGroup Project PGSEM 2008InfineonInfineon’s cellular ICs include solutions for GSM/GPRS, EDGE and 3G/UMTS solutions.It has sought to leverage its strengths in power management and system integration todesign low complexity, low cost and high performance chips. The company recentlyannounced the latest additions to its single chip X-GOLD family of cellular ICs. Infineon’shighly integrated power management features enable industry leading battery life standards.The company does not have an application processor family that complements its rich andhighly competitive baseband solutions. Secondly, it does not have a complete set of mobileconnectivity products. Infineon will not be in a position to compete with the likes ofQualcomm, Broadcom and STM, all of whom have a complete portfolio to build single-stopcellular platforms.Infineon has a major order from Nokia for delivery of its low cost GSM/GPRS solutionsfor the low cost mass market entry level handset segment.MediaTekThe supplier has risen rapidly in the cellular chip market to capture 10% of the 2006 $3.4-billion GSM/GPRS baseband market. MediaTek is a broad cost leader and has most of itstarget markets in China and regions around China.MediaTek plans to make foray into 3G-chip market after completing the acquisition ofAnalog Devices Inc.`s handset-chip. Following the acquisition MediaTek will also gainaccess to new market opportunities, including LG, Samsung, and Sharp. It will contractTaiwan Semiconductor Manufacturing Co. (TSMC) by the end of this year to make itswideband code division multiple access (WCDMA) chips using 65-nanometer process forSamsung’s handsets. Industry watchers have estimated that the verification of MediaTek`s3G chips at TSMC would go as smoothly as expected since ADI has set up partnership tieswith TSMC before selling its handset-chip asset to MediaTek.BroadcomBroadcom entered this market with successful acquisitions. It paid about $260 million to buySanta Claras Mobilink Telecom Inc. in 2002. Two years later, it paid $100 million for SanDiego-based Zyray Wireless Inc. and $123 million for Britains Alphamosaic Ltd.Broadcom is beginning to ship 3G chipsets, and Nokia recently selected Broadcoms cellularprocessor for future equipment using EDGE (Enhanced Data Rates for GSM Evolution), afast version of GSM (Global System for Mobile Communications).Broadcom has an impressive track record of taking over established markets. It became theleading vendor of Ethernet controllers during the shift to Gigabit Ethernet. Similarly, earlydeployment of 802.11g made the company number one in WLAN chips. Broadcom hasdeveloped the key components for a complete cell phone, it can now use integration toreduce its customers costs and simplify their designs. Cell phones represent BroadcomsPGSEM 2008Indian Institute of Management Bangalore - 13 -
  14. 14. Strategic ManagementGroup Project PGSEM 2008toughest challenge yet, but the company has the history and technology to succeed whereothers have failed.4.2 Changes in the cellular handset semiconductor industry landscapeThe visible changes in the cellular handset industry are driven by the end consumer’s usagetrends. Convergence is the new key word; there is a convergence of portable entertainment,data networks and voice communications. In such an environment, the modem is becominga commodity, a highly standardized and undifferentiated product. The focus is clearly on the―user experience‖, software and applications that enable this.Traditionally handset manufacturers had a single supplier policy for semiconductors or hadtheir own in-house semiconductor manufacturing units. Over the years, handsetmanufacturers have spun off their semiconductor operations (Siemens spun off Infineon,Motorola spun off Freescale etc.) and moved on to a strategy in which they sourcesemiconductors from multiple vendors (Motorola now sources chips from Freescale andTI).There are a number of strategic tie ups and mergers happening in the industry right now, ST-NXP merged in order to get the economies of scale required to remain profitable in thisindustry. Interestingly this entity has recently tied up with Ericsson to form a largesemiconductor entity that supplies to 4 of the 5 major handset manufacturers.Developing economies are leapfrogging cellular technologies in order to save costs oninfrastructure setups. A country with an established 2G (GSM) based network would look tomigrate directly to 4G (WiMax, LTE) offerings in the future bypassing the 3G (CDMA)route, as is happening in Pakistan.PGSEM 2008Indian Institute of Management Bangalore - 14 -
  15. 15. Strategic ManagementGroup Project PGSEM 20085. Evaluating Texas Instruments in the cellular handsetsemiconductor industry5.1 SWOT – Strengths Weaknesses Opportunities ThreatsThe following diagram outlines our perception of the strengths, weaknesses, opportunitiesand threats that TI faces within the wireless handset semiconductor industry. Strengths: Opportunities: -Vertically integrated manufacturing -Emerging 4G technologies (LTE and WiMax) -Diverse product line containing a -Strategic tie ups with companies number of complimentary products that compliment TI’s core -Synergy between business units competencies -Well developed eco-system to -Leverage on the open source support its OMAPTM line of wireless software development community to processors work on TI products Weaknesses: Threats: -Inability to survive in markets -Consolidation among competitors. where cost leadership is the norm -Lack of in-house 3G baseband -New entrants with the capabilities and resources could always enter modem chips this market – E.g.: Intel, NVIDIA -No emphasis on software as a source for revenue5.2 Sources of competitive advantageIn this section we enumerate the factors that give, TI a competitive advantage in the wirelesshandset semiconductor industry. 1. Expertise built over the years. TI has built up vast expertise in satisfying the needs of the wireless market over the past 20 years. 2. The R&D staff of TI is highly experienced in the wireless domain. 3. There is a lot of IP (intellectual property – patents, trademarks copyrights etc.) with TI in the wireless domain. 4. Vertically integrated manufacturing. TI possesses the expertise to design, manufacture and sell its wireless chips.PGSEM 2008Indian Institute of Management Bangalore - 15 -
  16. 16. Strategic ManagementGroup Project PGSEM 2008 5. Cutting edge of technology. TI has always worked at the cutting edge of technology in all the wireless product offerings. E.g. DRPTM technology (stands for Digital Radio Processing). 6. Business synergy. There is a lot of synergy between the Wireless, DSP, Analog and DLP businesses of TI. This synergy when exploited can provide economies of scope and allow TI to leverage expertise into the multiple areas into which the wireless handset is permeating. 7. Development centers located around the world. TI has R&D and manufacturing centers located all over the world in different time zones. There is an advantage in this split of facilities that will allow the organization to function 24X7 albeit through different geographical locations. 8. Eco – System partners. TI has enabled a number of partner companies in the wireless space through the OMAPTM Developer Network and the OMAPTM Technology Centers. These centers have enabled partner companies to enter a mutually beneficial tie up with TI to demonstrate proven innovative designs on applications using TI’s wireless products. The eco system acts as a source for complimenter products that add value to the customer and at the same time enhance the sale of TI’s wireless products.The factors that are unique to TI and give it a competitive advantage by virtue of being itscore competency are its continuous effort to work at the cutting edge of technology; it’sbuilt up expertise, the vast eco-system that TI has developed, and the IP that itpossesses in the wireless domain.PGSEM 2008Indian Institute of Management Bangalore - 16 -
  17. 17. Strategic ManagementGroup Project PGSEM 20086. Emerging strategies for Texas Instruments in the cellularhandset semiconductor marketIn the previous section we have evaluated Texas Instruments in the wireless semiconductorindustry. In this section we would like to enumerate the strategies that TI could follow inthis industry given the changing nature of this industry.1) Target inorganic growth through acquisitions. TI has some well defined domains in which it has no position of strength, e.g.: the 3Gmodem space and the broad cost leader entry level phone space. TI could target acquiring aplayer in the above mentioned fields and compete successfully in those fields (acquire a 3Gmodem company like Interdigital).2) Develop Technologies in house. TI can target organic growth, and ensure that it scales up its R&D to cover the gaps in itscurrent wireless product line up. Targeted R&D in 3G modem technology and emerging 4Gtechnologies like WiMax and LTE (Long Term Evolution) is the need of the hour.3) Strategic tie ups. TI can enter into strategic tie ups with companies that can compliment its products. Thetie up could be on the basis of a pure marketing strategy wherein it can offer bundledsolutions to a customer or it could also be a technical tie up wherein TI works with thecollaborator to ensure that complimentary products that provide high value are developedand sold under the TI name. Strategic tie ups would be most suitable in the wireless softwarespace where TI does not have a strong presence.4) Venture Capital Funding TI can target venture capital funding for companies that can demonstrate creativeapplications using TI wireless technology. In the short run it can direct the strategy of such acompany and in the long run can go in for either a sell off or an acquisition depending uponthe need.5) Sell off TI can sell off its wireless semiconductor business. TI’s wireless semiconductor businessis one of the finest in the world and if TI does not feel that this fits into its strategic businessplans, it could target a sell off immediately. TI can capitalize on its position of strength andcommand a premium price in case it goes for a sell off.6) Broad cost leadership TI can target to become a broad cost leader by manufacturing its legacy systems at a verylow cost of production and target the entry level phone segment with a very low cost highperformance product.PGSEM 2008Indian Institute of Management Bangalore - 17 -
  18. 18. Strategic ManagementGroup Project PGSEM 2008Of all the strategies we have enumerated above, we immediately rule out the following:1) Sell off Given its current position of strength in the wireless segment, TI would not consider a selloff. The wireless business (contributing to one third of TI’s current revenues) is large andprofitable (> 50% gross margins). Given TI’s vast experience and expertise and its currentposition, a sell off is definitely ruled out. Any thought of a wireless business sell off would bepremature and is not the way ahead for TI.2) Broad Cost Leadership TI has never been a successful broad cost leader. In the past it has sold off businesses inwhich attempts at broad cost leadership have failed (digital watches, laptop computers etc.).By going in for broad cost leadership, TI would also have products that are in the focuseddifferentiator and the broad differentiator category. In such a scenario TI is most likely goingto lose market focus and end up as a stuck in the middle player.3) Acquiring a Broad Cost Leader On the basis of the arguments that we have put forth in 2), moving into a position ofbroad cost leadership is ruled out.PGSEM 2008Indian Institute of Management Bangalore - 18 -
  19. 19. Strategic ManagementGroup Project PGSEM 20087. The road ahead for Texas InstrumentsIn the previous section we have discussed the various options that are open for TI and thestrategies that it could follow. In this section we would like to define our view of the strategythat TI should pursue in the wireless semiconductor handset industry.1) Strategic tie ups Strategic tie ups have a number of advantages over acquisitions, they allow for flexibility;it is easier for TI to go in for tie-ups with companies that have complimenting technologiesand products. E.g.: TI’s tie up with Ericsson for 3G modem integration with OMAPTMprocessors. However tie ups are fraught with risks due to changes in the externalenvironment E.g.: Ericsson’s merger with ST-NXP a TI rival. From a perspective of risk –vs. – return we believe that TI is better off going in for strategic tie ups over large scaleacquisitions. Strategic tie-ups can also help in enhancing TI’s eco-system to develop bettersoftware solutions on TI processors, an area in which TI, as a standalone entity, has notbeen in a position of strength in the wireless domain. By making use of this eco-system TIcan concentrate on its core competence of designing and manufacturing wireless handsetprocessors, and its eco-system partners can develop the differentiated software applicationsto run on these processors.2) Funding new companies This is one of the best options that TI has in order to ensure that creative minds outsidethe company work on, and demonstrate innovative new applications using TI technology.Targeting start up firms, or established small firms would be a good idea provided theproduct offering of the company is worth the investment and is inline with the strategicrequirements of TI. There is a certain element of risk involved in pursuing this option;however the returns can be phenomenally high. E.g. TI could fund a company that makesinnovative use of its low end wireless chips and uses it creatively in a completely differenthigh growth industry. While funding such companies TI should assume the role of a venturecapitalist and ensure that it helps the company in terms of directing its strategy rather thandictating the strategy and killing creativity.3) Continue in house development of cutting edge solutions TI missed out on the 3G modem bandwagon since it lacked a 3G baseband solution;however it should not let this happen with 4G technologies. 4G technologies are still beingdefined and this definition is at a very early stage. TI should aggressively pursue R&D onthese technologies targeting a solid IP portfolio that will allow it to provide differentiatedsolutions in the future.Besides the abovementioned points, TI should continue to focus on improving itsexecution efficiency, which should directly lead to an increase of gross profit margins inthe wireless business. TI should continue with its policy of partnering with silicon foundriesfor the development of new process technologies, this will save TI a lot of capitalexpenditure. The practice of supporting the big customers with custom design andproduction programs involving both hardware and software should continue. TI shouldalso look out to acquire small companies that have good product offerings, which can fillup the gaps in its current wireless product portfolio (namely 3G baseband processors).PGSEM 2008Indian Institute of Management Bangalore - 19 -
  20. 20. Strategic ManagementGroup Project PGSEM 2008References 1. Company Profile – Texas Instruments – www.datamonitor.com 2. www.ti.com – financial data 3. http://findarticles.com/p/articles/mi_qa5293/is_20080324/ai_n25348181 4. http://techon.nikkeibp.co.jp/article/HONSHI/20070126/126940/ 5. http://www.broadcom.com/press/release.php?id=962241 6. http://www.infoworld.com/article/07/10/03/Broadcom-goes-high-definition-on- cellphone-chip_1.html?PHONES 7. http://news.cnet.com/8301-10784_3-9797486-7.html 8. http://www.broadcom.com/press/release.php?id=1080667 9. http://www.nsti.org/press/PRshow.html?id=2279 10. www.mediatek.com/Products/Baseband.html 11. www.cn-c114.net/583/a334361.html 12. http://www.topix.com/com/ifx 13. http://wirelessanalyst.blogspot.com/2008/06/infineon-wireless-business.html 14. http://www.eetindia.co.in/ART_8800476702_1800007_NT_f174142f.HTM 15. www.sramanamitra.com/2008/06/28/infineon-wireless-business 16. http://investor.qualcomm.com/events.cfm?AcceptDisclaimer=Yes 17. 15.http://www.usatoday.com/tech/columnist/kevinmaney/2003-04-22- qualcomm_x.htm 18. www.infoworld.com/article/07/05/29/Qualcomm-infringed-Broadcom-patents- jury-says_1.html 19. http://www.modumobile.com/#/catalog/modu_creative_mate/ 20. http://www.nxp.com/news/content/file_1453.html 21. http://news.cnet.com/2100-1039_3-6075684.html 22. http://www.fiercewireless.com/story/qualcomm-loses-motorola-freescale-ti/2007- 09-11 23. http://focus.ti.com/general/docs/wtbu/wtbugencontent.tsp?templateId=6123&nav igationId=11948&contentId=4600#2g 24. http://www.broadcom.com/products/Cellular 25. http://www.gartner.com/it/page.jsp?id=612207 26. http://focus.ti.com/general/docs/wtbu/wtbudocumentcenter.tsp?templateId=6123 &navigationId=12669#61 27. http://focus.ti.com/general/docs/wtbu/wtbugencontent.tsp?templateId=6123&nav igationId=12004&contentId=4585PGSEM 2008Indian Institute of Management Bangalore - 20 -
  21. 21. Strategic ManagementGroup Project PGSEM 2008ExhibitsPGSEM 2008Indian Institute of Management Bangalore - 21 -
  22. 22. Strategic ManagementGroup Project PGSEM 2008Exhibit 1Subscriber Statistics – As of Q4 2007.Source: http://www.gsmworld.com/news/statistics/pdf/gsma_stats_q4_07.pdfSource:http://focus.ti.com/general/docs/wtbu/wtbudocumentcenter.tsp?templateId=6123&navigationId=12669#61PGSEM 2008Indian Institute of Management Bangalore - 22 -
  23. 23. Strategic ManagementGroup Project PGSEM 2008Exhibit 2: Price based market segmentationPGSEM 2008Indian Institute of Management Bangalore - 23 -
  24. 24. Strategic ManagementGroup Project PGSEM 2008Exhibit 3 Mobile Phone Sales in 2007 and 2006.Source: http://www.gartner.com/it/page.jsp?id=612207PGSEM 2008Indian Institute of Management Bangalore - 24 -
  25. 25. Strategic ManagementGroup Project PGSEM 2008Exhibit 4: TI income statement 2007Source: http://www.ti.com/corp/docs/investor/ar07/ar07.pdfPGSEM 2008Indian Institute of Management Bangalore - 25 -
  26. 26. Strategic ManagementGroup Project PGSEM 2008Exhibit 5: Wireless Semiconductor market shareSource: http://www.st.com/stonline/press/news/pressroom.phpPGSEM 2008Indian Institute of Management Bangalore - 26 -
  27. 27. Strategic ManagementGroup Project PGSEM 2008Exhibit 6 TI Positioning in the wireless semiconductor industrySource:http://focus.ti.com/general/docs/wtbu/wtbugencontent.tsp?templateId=6123&navigationId=11988&contentId=4638PGSEM 2008Indian Institute of Management Bangalore - 27 -

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