Amd Advanced Micro Devices (Amd)

AMD Advanced Micro Devices (AMD) is facing an uncertain operating environment. The company has developed strong technological competencies and built them into the number two market position in microchips, behind Intel. The latter company, however, still dominates that industry and has used that dominance to muscle market share away from AMD in Japan and other jurisdictions. For their part, AMD has won market share in the United States and now has the three largest personal computer makers under its belt.

The key driver of AMD's business in the coming years is most likely to be the ongoing, high intensity, competitive rivalry with Intel. AMD relies on a number of critical resources to drive its business. The first is the company's technological capabilities. The chip and microprocessor industries are driven by constant technological improvement, based on metrics such as performance, speed, capacity and power usage. New product introductions occur on nearly an annual basis, sometimes representing minor improvements over the previous technology and sometimes representing major improvements.

AMD has demonstrated that they are well-positioned with respect to their technological capabilities. They have been able to keep pace with Intel and at times have surpassed their rival in terms of technical superiority. However, such leads do not seem to last long, meaning that AMD has been unable to carve out a sustainable competitive advantage in technological development. The company requires a high level of fiscal resources in order to compete. Investments in research and development run into the hundreds of millions, in order to compete against Intel.

This is coupled with high levels of expenses for other inputs such marketing and legal expertise. At the time of the case, AMD had grown sales to $5.8 billion in fiscal 2005, a year in which profits sat at $40 million, down from $73 million the year previous. The firm was solvent and liquid, with cash holdings nearly equal to current assets and just $1.3 billion in debt vs. assets of $7.2 billion (MSN Moneycentral, 2009). These resources represent a strong internal capability for AMD to continue to fund its growth.

In terms of capabilities, several key capabilities are required to ensure AMD's success going forward. These are technological superiority, legal superiority and marketing superiority. At present, AMD and Intel are running roughly even on technology. Each firm has been able to match the developments of the other. One firm will take the technological lead, only to give it back with their rival's next product release. There is also no clear winner in terms of legal superiority.

AMD has taken to the legal system to try to gain competitive advantage by curtailing Intel's aggressive marketing capabilities. The defeat of AMD's petition in the U.S. For investigation into Intel marketing practices in Japan gives a fairly strong indication that they are inferior to Intel in terms of legal capabilities. The question of jurisdiction should have been self-evident and AMD's unwillingness to hear the case in Japan has represented a bluff that has been called.

In a back-and-forth set of legal and antitrust battles, AMD will need a much higher level of legal expertise than they have demonstrated to this point. A final competency is with respect to marketing. In the chip industry in particular, marketing is based on large contracts with major manufacturers. AMD has demonstrated marketing superiority in the personal computer market and now has Dell, HP and Lenovo as customers. This gives AMD a position of strength.

It is worth noting, however, that growth in the chip industry is expected to come from devices other than computers in the coming years. AMD needs to utilize the marketing savvy that landed them Dell to build a large customer base in the portable devices market. Value chain analysis allows analysts to better understand the point or points at which the company adds value to goods (Porter, 1985). This value is the main offering of any company, from which they derive their revenues.

AMD adds the majority of its value during the operations stage. It is at this stage where the company turns raw materials into microchips and semiconductors. The design of the products, and the quality of their manufacture, are the two specific operational areas where the most value is added. AMD adds little value during any other process. They have no particular expertise in logistics, do not typically service their products, and their marketing efforts are limited. This is one area where AMD differs from Intel.

Intel adds value during the marketing process. They have built their brand over the course of years and as such have a strong brand identity with consumers. A chip by any other name may not be trusted, and may not have resonance with average consumers. This has historically provided Intel with some degree of competitive advantage, although now the performance attributes of AMD's chips have been noticed by key industry buyers, if not end users. SWOT AMD has several strengths that it can leverage to build upon its recent successes.

One is that the company is strong technologically. They have been able to keep up with Intel's moves and as such have been able to improve their market share. They do not have a competitive advantage in technology, but neither are they at a disadvantage. AMD's marketing department has demonstrated the ability to win some key victories recently. Not only has this helped the firm build up its market share in personal computing, but it has given them valuable experience to fight battles in other areas of business.

Given the expected shift in industry growth to portable devices, this expertise can be valuable to help AMD become established with key manufacturers in that industry. Another strength is the company's deep financial pockets. This will help the company fight expensive legal battles while continuing to invest heavily in research and development. Moreover, financial strength will be necessary to help AMD withstand withering pressure from Intel, particularly with respect to price wars that could force AMD to sell its key products at a loss in order to retain market share.

The company is not without its weaknesses, however. AMD has not demonstrated in terms of outputs that its legal team is up to the challenge of taking down Intel. Its recent antitrust salvo was a failure that will bring out a strong response from its customer, emboldened that AMD played a strong card and failed to win. AMD's financial strength is compromised in part by the company's high burn rate. Both S/G/a expenses and R&D expenses have increased at a faster rate than company growth.

At present, the company's expenditures would eat its cash reserves in a year. The continued high levels of investment necessary to stay in business increase the risk level of AMD's business. Of particular concern is that AMD is becoming a one-product company. They are strong in chips and have placed a significant emphasis on chip development as the key to their future success. Although AMD operates in the semiconductor market as well, they are the #15 player, down from #11 the year previous.

This line, if stronger, could be a buffer against the Intel-initiated price wars but instead is at risk of becoming irrelevant to AMD. That said, there are several opportunities for AMD. One is geographic expansion. There are many markets, including Japan, where AMD is relatively weak. The legal action taken with respect to the Japanese market was an attempt to pry market share from Intel in that country.

If AMD can find a way to open up Japan and other relatively untapped markets, it can leverage it technological strength to steal business away from Intel. Another opportunity is with respect to portable devices. AMD has become a significant player in personal computers in recent years, but there is substantial growth available in portable devices. Indeed, this is expected to drive growth in the chip market significantly higher in the coming years.

If AMD can become established with leading manufacturers of portable devices, it can build strong market share in that business. As these devices become more complex, they will require more complex operating systems, so AMD's experience with Windows-based systems will come in handy for capturing share in the portable devices market. There is still strong room for growth in personal computing as well. AMD has captured the three largest players in the market, but the market is fragmented with the top five companies holding less than 50% market share.

This represents yet more opportunity for AMD, if they can leverage their position with the market leaders to capture share among the smaller computer makers as well. Being in a high risk business, AMD also faces numerous threats. The greatest threat at present comes from indirect, intense competition with Intel. That chip giant has $38.8 billion in revenues, compared with just $5.8 at AMD. Intel's size and financial might gives it many advantages. In addition to greater technological capacity, Intel also has stronger pricing capabilities as a result of its size.

The rivalry, already intense, has only intensified as a result of AMD's antitrust action against Intel. Response is expected to be multi-faceted and brutal. Technological change represents another key threat. As new technologies emerge and the end needs of users shift, the existing industry paradigm can shift quickly and decisively. For example, if the personal computer were to become outmoded in the next ten years, AMD's capture of the market leading manufacturers would be worthless. This is entirely possible, given the pace of change.

AMD must always be on top of change in the industry, or risk being left behind. Lastly, there is the risk of talent defection. AMD relies on top talent to develop its technology, to market the products, and to fight the legal battles. If their supply of talent were to be compromised, either by Intel or by startups, AMD would find it increasingly difficult to compete.

They must ensure that their human resources systems are sufficient to attract and retain the top talent that is required to drive their business forward. Analysis of Current Issues There are three current issues facing AMD. The first is the competitive relationship with Intel. The firm has won a decision in Japan against Intel but similar action in the U.S. has been less successful. It remains to be seen whether or not AMD can parlay its success in the Japanese courts into increased market share in that country.

Intel's response to AMD's recent exploitation of the regulatory system and marketing success has been to engage the company in a price war. AMD is going to need a complex, integrated strategy in order to not only fend off Intel attacks but to strike back at its much larger rival. The second current issue is with respect to integrating ATI into the company and building the synergies that AMD management hopes will allow it to better compete against Intel.

There are several culture issues that must be addressed in bringing a new firm into the fold. Moreover, building the communications systems that will facilitate knowledge-building and product synergies will take time. Furthermore, there is a high risk of talent defection from ATI as a result of this takeover. Too much defection could reduce the value of the transaction. The third strategic issue is with respect to building share in the new portable device markets.

AMD has an opportunity to establish market share in these growing segments and if it can do so, it can achieve substantial growth that will not only help revenues but will also help the company to build the critical mass necessary to battle Intel and other competitors. Strategic Options The first strategic option is to continue focusing on stealing PC makers away from Intel.

There is significant room for expansion in this market and despite the rise in portable devices, there is no indication that personal computing is going to disappear anytime soon. This option has relatively low R&D costs and plays to AMD's existing strengths in marketing and technological development. This option, however, does not give AMD much chance.