AMD vs Intel: Competitive Challenges

1. AMD vs Intel: Competitive Challenges Sample Case Analysis Presentation Professor Josh Philpot April 7, 2010

2. Agenda • Identification of Key Strategic Issues • External Analysis • Internal Analysis • Summary SWOT • Strategic Alternatives & Recommendations • Questions & Answers

3. Key Strategic Issues

4. Key Strategic Issues • Hyper-competitive Rivalry • Identifying Core Competencies and Competitive Advantage • Political/Legal Key Problem Statement: How can AMD compete against the much larger and better funded market leader, Intel?

5. 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

6. External Analysis

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

8. General Environment

9. External Analysis: Key Environmental Factors • “Moore’s Law” Rapidly increasing performance but declining ASP. • Increasing global pervasiveness of computer chips • Access and use of the internet is increasing • Mobile computing Source: China Country Commercial Guide (CCG)

10. 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

11. 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.

12. Five Forces Analysis Threat of New Entrants in CPU industry: Moderate • Microprocessors dominated by Intel then AMD. Emerging threat from fabless business model: ARM, Nvidia, Apple A-4 (Other current players include IBM, SUN, Transmetta, CELL, etc) • Room for incumbents to decrease margins • CPU Manufacturing: • Huge capital outlay/Fixed Costs • High R&D 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 R&D requirement

13. 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

14. Five Forces Analysis Competitive Rivalry – Extremely High • Incumbents involved in frequent price and legal battles • Hyper-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

15. Porters Five Forces Model New Entrants Moderate Competitive Rivalry High Buyers Moderate/High Suppliers Low Substitutes Moderate • Potential for Market Leader to make high returns in CPU market • Difficult for the runner’s up – driving hyper competition • Slow growth in mature, high volume growth requires lower ASP

16. Intel SWOT

17. Internal Analysis

18. 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 engineering and processes

19. 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.

20. AMD SWOT

21. Key Financials Low Profitability vs. Intel • AMD ~15% of Intel revenue • Growing LT debt • Low ROA

22. Cash Is King AMD has a weak cash position relative to Intel

23. Strategic Alternatives • Continue Fighting Intel Head-on, competing with mfg. process development 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

24. Recommendation Explained • Funnel R&D resources/innovation to AMD’s existing core competency / competitive advantage – Design • Maintain server performance/watt lead against Intel • Aggressively integrate Gfx, develop GPU compute • Develop low cost/power CPU for growth markets: mobile devices and emerging markets • Focus on winning –establishing/maintaining a sustainable competitive advantage (better products, lower cost, etc) • litigation alone won’t create a sustainable competitive advantage, although it may provide tactical wins, near-term gains, fines for Intel, etc. • Partner with a better funded foundry who can amortize process R&D and fab cost across a higher volume *See speaker notes

25. 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.

26. GPU The processors in video cards are purpose-designed for running thousands of threads simultaneously. So how come applications don’t use them to offload processing? A new toolkit from AMD allows you to do just that. 8/13/2008 -AMD Website

27. “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 world’s only U.S.-headquartered semiconductor foundry. AMD Spins Into Two Companies 9:58 AM EDT Tue. Oct. 07, 2008 After more than a year in the works, Advanced Micro Devices (NYSE:AMD) 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.

28. Legal Political events in 2009 EU Fine - $1.4B Settlement w/ AMD - $1.25B FTC investigation begun- ?

29. ATI Acquisition