Avoiding commoditization and creating differentiation in the Semiconductor industry

Abstract

As product cycle times shrink and the industry increasingly embraces fab-lite business models, the value within the semiconductor industry no longer comes from the ability to manufacture chips so much as from the IP (Intellectual Property) and from operational excellence. Lower barriers to entry and globalize knowledge production have led more and more semiconductor companies to enter the already crowded market space. At the same time, with the middleware in most products and the hardware interfaces becoming standardized, chips are becoming commodities. Even as the amount of silicon chips has grown over time, the ratio of product revenue to the amount of silicon produced has reached a plateau. Handheld consumer electronics providers are being forced to cut prices due to market pressures and this has resulted in them forcing their vendors to cut prices further. Average selling prices are on a continuous decline and so is the Year on Year growth for most semiconductor markets. Thus the only way to sustain profitability is to sell more and more units each year and improve internal efficiency. With saturation in traditional markets, and fundamental changes within the Semiconductor vendor industry, firms can either maintain the status quo and stay on the commoditization path or re-look at the overall business strategy of differentiation and product strategies for different technologies. The report analyzes the current semiconductor vendor industry, from a strategic, operational and financial viewpoint. It looks at the trends in technology, current and potential market segments, changes in the semiconductor value chain and the demands of the end consumer. These then serve as inputs in the strategy formulation process for these firms to beat commoditization through innovative approaches towards differentiation.