Advanced Micro Devices or AMD is one the tenured and well-known semiconductor companies in the world alongside companies like Intel Corporation, Nvidia, and Qualcomm. It has taken advantage of its strengths to develop and market processors and other semiconductor products with an overall better price-to-performance ratio. However, despite its competitive advantage, it is important to note that it does not have leading positions in specific markets within the semiconductor industry. This article analyzes the industry and competitive positions of AMD using the Five Forces Framework of Michael E. Porter.
Analyzing and Understanding the Industry and Competitive Positions of AMD Using Porter’s Five Forces Framework
1. Industry or Competitive Rivalry
AMD competes against Intel in the CPU market and against Nvidia in the special-purpose computing markets. It is important to underscore the fact that has struggled to become a dominant player in these markets because of the established market command of its competitors. Intel banks on being a pioneer in developing microprocessors and promoting the x86 instruction set architecture while Nvidia is credited for popularizing graphics processors.
However, despite lagging behind the competition, AMD has developed a marketing mix based on the principle of offering products with a better price-to-performance ratio than its competitors. It has a product strategy and a corresponding pricing strategy built around aggressive pricing. The company specifically employed penetration pricing to attract customers and gain or expand its position in the various markets and segments that it serves.
The entire semiconductor industry is still highly competitive. Semiconductor companies are forced to invest heavily in research and development to answer current tech demands and bring forth technological innovations. These companies also compete for talent. Their research and development pursuits are dependent on the capabilities of their scientists and engineers. Marketing activities across the industry are also aggressive.
Nevertheless, based on the aforementioned, the intensity of competitive rivalry is a strong force for AMD. Its established competitors compel it to keep its affordable pricing scheme while also forcing it further to find solutions to reduce its manufacturing and operation costs. The same competition also necessitates the company to invest heavily in research and development to produce products that can compete against counterparts.
Below are the factors explaining why the intensity of competitive rivalry is a strong force for AMD:
• High Levels of Research and Development Investments and Activities, Business Expansion Pursuits, and Marketing Activities
• High Importance of Branding and Marketing, and High Relevance of Product Differentiation and Differentiation Potential
• Moderate Firm-to-Buyer Concentration Ratio, Low Number of Dominant Players, High Rate at Which the Market Grows
2. Threat of Substitutes
Substitutes are different from the products that they intend to replace but they can provide the same functionalities and benefits. The availability of substitutes for semiconductors varies for the simplest reasons that there are different types of semiconductor products. However, when it comes to CPUs and the personal computers in which these semiconductors are used, the substitutes are mobile devices like smartphones and mobile processors.
The CPU market is expected to decline alongside the decline of the PC market due to the popularity of smartphones and tablet devices. The x86 architecture and the general complex instruction set architecture or CISC are also competing against the rising relevance of reduced instruction set architecture or RISC and the specific ARM architecture used in mobile devices and even in Apple products like Mac computers.
It is possible for personal computers to resurge in popularity in the future due to the arrival of quantum computing. These quantum computers are also substitutes for current CPUs and GPUs. Quantum computing presents a form of computing that is different from traditional computing based on binaries. It is expected to disrupt existing and established standards in the industry and append the way computers are developed and utilized.
The threat of substitutes is a moderate to strong force for AMD because of the aforesaid trends and possibilities. It would lose its position if it fails to invest in technologies and capabilities needed to develop next-generation processors and other semiconductors that befit future industry standards. The company would lose relevance if ARM architecture becomes the dominant instruction set architecture and if quantum computing becomes the norm.
Below are the factors explaining why the threat of substitutes is a moderate to strong force for AMD:
• Moderate to High Number of Substitute Technologies and Products, Moderate Propensity of Buyers to Switch, and High Differentiation Potential
• High Possibility of Market Disruptions Due to Technological Innovations, and High Levels of Research and Development Investments and Activities
3. Threat of New Entrants
Operating in the semiconductor industry can be capital-intensive. Remember that the level of research and development investments and activities is high because semiconductor companies need to demonstrate relevance to current trends in manufacturing processes and relevant semiconductor technologies. It is also imperative for them to be trendsetters or pioneers in newer generations of semiconductor technologies to maintain their competitive advantage.
Branding is also an important factor for new entrants to succeed. A startup firm would have to compete against incumbents not only for end-use customers but also for suppliers, operators of third-party distributor channels, industry linkages, and other important business partnerships. Doing so requires heft investments in promotion strategy and specific promotional activities geared toward raising brand awareness and communication value propositions.
Outsourcing manufacturing capabilities to contract manufacturers somewhat lowers the entry barrier. It allows a new entrant to become a chipmaker even without owning manufacturing facilities. Apple has demonstrated this through its A series and M series of systems-on-chips. However, because companies like AMD and Nvidia also outsource from companies like TSMC, a new entrant needs to match the transaction volumes of these incumbents.
The threat of new entrants is a weak force for AMD and other established semiconductor companies. Their current positions in the different markets that they serve have afforded them with relevant resources needed to stay in the competition. AMD moderates this force further through its product strategy and pricing strategy. A new entrant or a group of investors aspiring to enter the industry would need substantial financial resources.
Below are the factors explaining why the threat of new entrants is a weak force for AMD:
• High Level of Capital Requirement, High Dependence on Economies of Scale, and High Impact of Cost Advantage and Cost Leadership
• Moderate Importance of Brand Equity and Brand Loyalty, and High Importance of Branding and Marketing Activities
• High Level of Geographic Barriers, High Importance of Distribution, and High Importance of Regulatory Barriers
Bargaining Power of Buyers
Customers of semiconductor products can be sensitive to prices. This is the reason why AMD has succeeded in its product strategy that revolves around producing capable processors at lower costs and a pricing strategy that centers on low price points relative to its competitors. The value proposition of its CPUs and GPUs has actually raised the bargaining power of customers in the specific CPU market and GPU market.
However, aside from price, customers value performance or specific product features and benefits. This is the reason why products from Intel and Nvidia remain a popular choice despite their higher price tags. The Intel Core and Intel Xeon lines of general-purpose processors have been considered standard across the PC market. Graphics processors from Nvidia are known for their unmatched capabilities and reliability.
Differentiation affects purchasing decisions based on the aforesaid. This compels AMD and even other semiconductor companies to spend on innovation or build further their innovative capabilities while also taking into consideration the costs of deploying such capabilities. It is also important for companies to communicate their differentiation or the value propositions of their products through effective and impactful marketing activities.
Nevertheless, based on the aforementioned, the bargaining power of buyers is a moderate force for AMD. It should be a strong force given the intensity of competition but the company has moderated it through its better price-to-performance value proposition. However, because of this differentiation, it has also compelled AMD to stick to its low prices while continuously looking for solutions to bring down or retain its production costs.
Below are the factors explaining why the bargaining power of buyers is a moderate force for AMD:
• Moderate Firm-to-Buyer Concentration Ratio, Low Number of Dominant Players, and High Relevance of Product Differentiation
• High Cost of Switching to Competitors, High to Moderate Levels of Alternatives and Substitutes, and, High Sensitivity to Prices
Bargaining Power of Suppliers
There are numerous suppliers of general raw materials or production inputs used in semiconductors. However, in some instances, there are inputs that are considered rare. Examples include rare earth metals. The overall demand for these raw materials or production inputs is also high because of the number of semiconductor companies producing different types and classes of semiconductor products for different applications.
Outsourced or contract manufacturers can help in sourcing inputs. These same contract manufacturers can also be considered suppliers. The number of capable companies like TSMC with advanced manufacturing capabilities is few. This means fabless semiconductor companies can also compete with manufacturers. Established semiconductor manufacturers can tend to accommodate larger fabless companies because of their huge volume of orders.
It is also important to underscore the fact that the global supply chain for the entire semiconductor industry is vulnerable to disruptions due to geopolitical factors, macroeconomic events, changes in the regulatory environment, natural disasters, and shortages. Disruptions limit the power of even the largest semiconductor companies to haggle costs, secure critical supplies, and even meet their production schedules on time.
The bargaining power of suppliers is a moderate force for AMD. It is true that there are numerous suppliers of inputs for semiconductors but the demand remains high and is expected to increase further alongside the growing demand for consumer electronics products and general electronics products. The company manages this force through long-term contracts but there have been instances in the past when it had to pay a premium for supplies.
Below are the factors explaining why the bargaining power of suppliers is a moderate force for AMD:
• Low Switching Cost for the Firm, High Switching Cost for the Supplier, and High Availability of Market Information
• Moderate Supplier-to-Firm Concentration Ratio, and Moderate Level of Vertical Integration and Forward Integration Possibilities
• High Supplier-to-Firm Concentration Ratio, and Moderate Level of Vertical Integration and Forward Integration Possibilities
Photo Credit: AMD Boot, Computex Taipei / Quintin Lin / Adapted / CC-SA 2.0