AMD vs Intel: Competitive Challenges

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AMD vs Intel Competitive Challenges

• Sample Case Analysis Presentation
• Professor Josh Philpot
• April 8, 2009

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Agenda

• Identification of Key Strategic Issues
• External Analysis
• Internal Analysis
• Summary SWOT
• Strategic Alternatives Recommendations
• Questions Answers

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Key Strategic Issues
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Key Strategic Issues

• Hyper-competitive Rivalry
• Identifying Core Competencies and Competitive
  Advantage
• Antitrust
• Key Problem Statement
• How can AMD compete against the much larger and
  better funded market leader, Intel?

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About AMD and Intel

• AMD Background
• Founded in 1969 by Jerry Sanders
• 2005 Revenue of 5.8B
• Key products Microprocessors, Embedded
  Microprocessors, Flash Memory (Spansion),
  Graphics (ATI)
• Intel Background
• Founded in 1968 by Robert Noyce and Gordon Moore
• 2005 Revenue 38.8B
• Key products Microprocessors, Chipsets,
  Motherboards, Flash Memory, and Communication
  components

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External Analysis
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Industry Definition

• AMD Competes in the Semiconductor industry,
  primarilly providing Microprocessors for Servers,
  Desktop, and Laptop Computers.

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General Environment
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External Analysis Key Environmental Factors

• Moores Law Rapidly increasing performance but
  declining ASP.
• Increasing global pervasiveness of computers
• Access and use of the internet is increasing
• Mobile computing

Source China Country Commercial Guide (CCG)
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External Analysis Key Environmental Factors

• Demographic
• High demand for technology/mobility by the
  younger generations
• Increasingly high skilled tech-savvy population
  in APAC
• Sociocultral
• Strong demand for low cost computers in vast
  emerging markets
• Global
• Computer adoption and penetration in emerging
  markets
• Economic
• Strong economic growth in BRIC and emerging
  markets
• Political Legal
• Heightened sensitivity to perceived
  anti-competitiveness in some regions

External environment conducive to high growth
globally Mobile computing and Low Cost are key
growth opportunities
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Porters Five Forces Model
New Entrants
Competitive Rivalry
Suppliers
Buyers
Substitutes
Source Forces Driving Industry
Competitors Michael Porter, Techniques for
Analyzing Industries and Competitors, New York
Free Press (1980), p. 4.
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Five Forces Analysis

• Threat of New Entrants in CPU industry Low
• Microprocessors dominated by Intel then AMD.
  (Other players include IBM, SUN, Transmetta,
  CELL, etc)
• Room for incumbents to decrease margins
• CPU Manufacturing
• Huge capital outlay/Fixed Costs
• High RD requirement fast cycle market
• Highly cyclical market
• Most complex devices ever manufactured by humans
• CPU Design
• Reliance on eco-system (i.e. SW and HW
  compatibility)
• High RD requirement

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Five Forces Analysis

• Supplier Power in CPU industry Low
• Raw materials are mostly commodities
• Equipment vendors have little pricing power
• Buyer Power in CPU industry Moderate/High
• Dell 18, HP 15, Lenovo 7 have high bargaining
  power
• Smaller players have much less bargaining power
• Substitute Products in CPU industry Moderate
• Distributive Computing
• Emerging Threat from GPGPU

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Five Forces Analysis

• Competitive Rivalry Extremely High
• Intel and AMD involved in frequent price wars and
  legal battles
• Cutthroat competition steadily driving down
  price/performance
• High Fixed Costs
• Fast Cycle -- High rate of obsolesce
• Difficult to differentiate
• Highly Cyclical / Relatively low long-term growth

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Porters Five Forces Model
New Entrants Low
Buyers Moderate/High
Competitive Rivalry High
Suppliers Low
Substitutes Moderate

• Potential for Market Leader to make high returns
  in CPU market
• Difficult for the runners up driving hyper
  competition
• Slow growth in mature, high volume growth
  requires lower ASP

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Intel SWOT
Strengths Manufacturing Process Technology Manufacturing Capacity Design Expertise Well established ecosystem relationships Cash Market Leader 70-80 MSS Opportunities Regain lost MSS Expand to new markets Consumer Electronics Embedded Graphics Low Cost / Low power
Weakness Big (bureaucratic, less nimble) High Fixed Cost needs high volume Limited growth potential-mature market Highly dependant on single product, CPU Threats High Performance/Low Power Opteron Anti-trust Litigation GPU based computing Cyclical downturn
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Internal Analysis
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AMD Resources

• Key Tangible Resources
• Fabs Austin, Germany, planned New York
• IP Leading edge CPU and GFX design IP
• Intangible Resources
• Strong brand with global presence
• World-class design engineers and processes

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AMD Core Competencies

• Core Competencies
• World-class highly efficient CPU design
• Effective marketing
• Customers
• Primary Customer Computer Manufacturers
• End User Corporate and consumer users of
  computers

Valuable, rare, costly to imitate and
non-substitutable.
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AMD SWOT
Strengths Design Expertise CPU power/performance Graphics Relatively nimble Opportunities Continue Taking CPU MSS GfX/CPU Integration Low Cost CPU for emerging markets
Weakness High Debt / Low Cash History of Quality problems Manufacturing capacity Manufacturing process technology Threats Competing against much bigger and better funded market leader Continued price war Debt servicing will prevent RD Cyclical Downturn
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Key Financials
AMD Select Financial Data AMD Select Financial Data AMD Select Financial Data      
  2004 2004 2005 2006 2007
Revenue 5,001 5,001 5,848 5,627 5,858
Net Income 91 91 165 (166) (3,379)
           
LT Debt 2,043 2,043 1,786 4,189 5,664
Total Assets 7,844 7,844 7,288 13,147 11,550
           
Intel Select Financial Data Intel Select Financial Data Intel Select Financial Data      
    2004 2005 2006 2007
Revenue Revenue 34,209 38,826 35,382 38,334
Net Income Net Income 7,516 8,664 5,044 6,976
           
LT Debt LT Debt 703 2,106 1,848 1,980
Total Assets Total Assets 48,143 48,314 48,368 55,651

• Low Profitability vs. Intel
• AMD 15 of Intel revenue
• Growing LT debt
• Low ROA

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Cash Is King
AMD has a weak cash position relative to Intel
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Strategic Alternatives

• Continue Fighting Intel Head-on, competing with
  process and design capability
• Merge with a better funded partner (e.g. IBM)
• Focus on core Design competency
• CPU Design, Graphics Integration, GPU for
  computing
• Go fabless in close partnership with a leading
  edge foundry

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Recommendation Explained

• Funnel all RD resources/innovation to AMDs
  existing core competency / competitive advantage
  Design
• Maintain server CPU performance/watt lead
• Aggressively integrate Gfx, develop GPU compute
• Develop low cost/power CPU for growth markets
  mobile devices and emerging markets
• Focus on winning dont get too distracted with
  litigation
• Focus on establishing/maintaining a sustainable
  competitive advantage
• Partner with a better funded foundry who can
  amortize process RD and fab cost across a higher
  volume

See speaker notes
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• And The Rest Of The Story.

Not part of the case recommendation Just an FYI
regarding what strategy AMD has pursued since the
time of the case.
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GPU

• The processors in video cards are
  purpose-designed for running thousands of threads
  simultaneously. So how come applications dont
  use them to offload processing? A new toolkit
  from AMD allows you to do just that. 8/13/2008
• -AMD Website

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Asset Smart Strategy

• On March 2, 2009 AMD closed its Asset Smart
  strategic transaction with the Advanced
  Technology Investment Company (ATIC) and Mubadala
  Development Company of Abu Dhabi, setting the
  stage for the formal launch of the worlds only
  U.S.-headquartered semiconductor foundry.

AMD Spins Into Two Companies 958 AM EDT Tue.
Oct. 07, 2008 After more than a year in the
works, Advanced Micro Devices (NYSEAMD) Inc.
(AMD) said Tuesday it will spin off into two
companies in a bid to better compete with rival
Intel Corp. and ultimately cut costs to reduce
its mounting debt.
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ATI Acquisition