For a strategy to work, ones must identified it core competencies, its resources and capabilities and design a way to feedback that strategy. This paper research has that entire component to identify if Asset-light strategy thus works.
For Texas Instruments, its core competency or what distinguish them from market place is its semiconductor product. As per Prahalad and Hamel (1990) this competency can underlie business unit in which TI focus its strategy on its Analog devices which bring 43% of their revenue in 2010. Using fab-Light strategy, TI outsource 25% of its wafer manufacturing to foundries and most of that are from advanced logic such as their wireless product lines where it requires new and expensive processes and equipment. In contrast, the processes and
equipment required for manufacturing TI’s analog products and embedded processing products do not have this requirement and thus TI focus on this product lines and were manufactured internally rather than to outsource. In 2010 the demand for these analog and embedded processing products lines increases 40% each making their factory utilization high, its fixed cost spread over increased output and benefitting its profit margin and cash
generation as seen in table 5.1.
Table 5.1 Texas Instruments NOPLAT Trend Source: Compiled by case writer
In accordance with view point of Resource base theory, where it emphasizes that abnormal returns are sourced from within-firm features (Silverman, 2002) and having abnormal returns
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means the firm have competitive advantage. If a firm is a bundle of resources and capabilities (Silverman, 2002) wherein resources include it assets and capabilities is the capacity
performance of that resources then to have abnormal return or competitive advantage, a firm must have high capabilities over its resources or as in financial language wherein it was defined as Return on invested capital (ROIC) is the net operating profit (NOPLAT) divided by invested capital (heavy asset).
Going back to the light-asset valuation as described from last chapter it can be simply interpreted as the performance of the firm’s capabilities. If ROIC is higher than the cost of capital and risk-free rate, then the results of that will be the multiplier of the firm resources.
Therefore Texas Instruments capabilities greatly improve when they deploy their fab-lite strategy from 2006 to 2010 as shown in light-asset value in table 4.3 from the previous chapters. Now we know its capabilities improved but Peteraf (1993) mentions that the scarcities of strategic resources attribute the fact that some firm outperform than others and enjoy abnormal returns. This means that every firm have a certain volume of resources, others are huge as Intel assets while other can be small like the fabless firms, therefore to properly justified the capabilities of each firm it must be compare with its resources itself and thus this is the interpretation of value of its Degree of Asset-Lightness (DAL) as seen in table 4.6. In that table its shows that TI perform even Intel with its vast resources it have.
In Figure 2.1 of the Industry Overview, it shows the “Semiconductor Industry Value Chain”.
For an IDM firm which TI, Intel and Toshiba which shows vertical integrated type of which everything from design down to assembly and test are owned and done by this IDMs. On the other hand, fabless type of firm concentrated only on design and marketing which is on the top level only as seen on Figure 2.4. The difference between the 2 value chains is the
economies of scale that can be enjoy by those IDM firms, where in tight supply environments,
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foundries could run out of capacity and leave fabless companies stranded.
As per figure 5.2 below showing that foundry only have around 20% capacity for 8 inch or 200 mm wafers compare to the capacity that IDM can.
Figure 5.2 Foundries and IDM Capacity Source: McKinsey on Semiconductor
The core idea of asset-light operations is to leverage the full use of external resources, to reduce their own investment, focus their resources on the most profitable stage of the industrial chain to improve corporate profitability. Below figure 5.3 is the graphic
representation of Texas Instruments business model focusing on its core competency which give it superior performance over others.
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Figure 5.3 TI Analog Business Model Source: Compiled by case writer
TI Analog Business Model is model based on Harvard Business Case for Business model Essentials (Casadesus-Masanell and Ricart, 2009). Business model define as the way the firm operates. “Choices” is how the organization will operate and it each choice creates its
“consequences”. A consequence is “flexible” if it is sensitive to the choices that generate it.
“Rigid” on the other hand does not change rapidly.
Texas Instruments light-asset strategy is to outsource the manufacturing of its non-core products such as in wireless to third party foundry which needed a high technology node such as 65 nm, 45 nm and 32 nm. While TI will focus on its core competency, the analog devices, which can be manufactured internally thru the old node technologies such as 0.25 um, 0.18 um and 130 nm in 300 mm in Richardson Texas, 200 mm wafer fab at Aizu-Wakamatsu Japan
Focus on
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and 200 mm fab at Chengdu China. With this current fab where operational efficiency are high and since no additional investment made, TI can choose to lower the price of its analog products that will resulted to high profitability.