teram paper

Advanced Micro Devices: The Cost of Innovation in a Shrinking Market

Name BA 301 Final Term Paper Section 005 Mar 12, 2014

Table of Contents Executive Summary .................................................................................................................................. 1 Position ..................................................................................................................................................... 3

Company Overview .............................................................................................................................. 3 Mission, Vision, Values ........................................................................................................................ 3

Mission Statement ............................................................................................................................ 3 Vision Statement ............................................................................................................................... 3 Values ............................................................................................................................................... 3

Terminology ......................................................................................................................................... 4 Current Operations ................................................................................................................................ 5 Current Market Conditions ................................................................................................................... 5 Stakeholders .......................................................................................................................................... 6

Sense ......................................................................................................................................................... 7 Problems ............................................................................................................................................... 7

Revenue Concentrated in Few Customers ........................................................................................ 7 Highly Leveraged ............................................................................................................................. 7 Losing Skilled Labor to New Competitors ....................................................................................... 8 Dominance of Intel ........................................................................................................................... 8 Long Decline in PC Market .............................................................................................................. 9 Low Research & Development Budget ............................................................................................ 9

Problem Statement ................................................................................................................................ 9 Uncover ................................................................................................................................................... 10

Assessing the Root Causes of the Problem......................................................................................... 10 Aging PC Market ............................................................................................................................ 10 Competition from Mobile and Tablet Markets ............................................................................... 10 Lack of Innovation .......................................................................................................................... 11 Weak Market Position .................................................................................................................... 11

Solve ....................................................................................................................................................... 12 Solution Analysis ................................................................................................................................ 12

Abandon Microprocessor Market ................................................................................................... 12 Focus on Low Power Low Cost Market ......................................................................................... 12 Use Bundle Pricing to Acquire Large Customers ........................................................................... 13 Restructure Organization to Drive Employee Retention and Recruitment .................................... 14 Restructure to Cut Costs ................................................................................................................. 14

Weighted Decision Matrix .................................................................................................................. 15 Long Term Financial Impact .......................................................................................................... 15

Short Term Financial Impact .......................................................................................................... 15 External Image ................................................................................................................................ 16 Potential Risk .................................................................................................................................. 16 Adheres to Mission / Vision / Values ............................................................................................. 17

Build ....................................................................................................................................................... 17 Ethical Screen ..................................................................................................................................... 17 Cost Benefit Analysis ......................................................................................................................... 18 Feasibility Analysis ............................................................................................................................ 19

Achieve ................................................................................................................................................... 19 Implementation Plan ........................................................................................................................... 19 Outcome Measures & Evaluation ....................................................................................................... 20

Bibliography ........................................................................................................................................... 22 Appendices ............................................................................................................................................. 25

Appendix A ......................................................................................................................................... 25 Appendix B ......................................................................................................................................... 26

Executive Summary

AMD is the second largest of two makers of microprocessors, the core processing component

of PCs. While AMD has always been far smaller than Intel, its primary competitor, both in terms of

size and market share, the last decade has seen a steady decline in AMD’s market share and a

significant decline in the overall market for PCs. This paper will analyze how AMD arrived at their

current poor financial state, some options to improve their condition, and will finally suggest a solution

- that AMD should leave the costly mid to high performance market segments of the microprocessor

market to focus on creating value targeted products.

AMD’s mission, vision, and values will be introduced along with a list of stakeholders in

AMD’s actions to better understand how various problems affect the company, and ensure that

potential solutions satisfactorily address company guidelines and backers. A brief overview of AMD,

its current financial state, and the general trends in the PC market will also aide in placing problems

and solutions into context.

Six primary problems that endanger AMD’s future are then introduced:

• Intel as a dominant and aggressive competitor that is crowding AMD out of the market

• Revenues concentrated among a handful of large customers, increasing AMD’s risk

• AMD’s highly leveraged status, large interest payments, and the possibility of default

• Manufacturers of mobile device processors are growing quickly and attracting AMD talent

• The long term continuing decline of both PC unit sales and prices

• Severe cuts to research and development that will decrease future competitiveness

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The most urgent and mission critical of these problems is the declining PC market and AMD’s

declining position within that market. This issue will be thoroughly analyzed in a fishbone diagram,

revealing many separate core causes that must be addressed. While many causes of the PC market

decline are outside of AMD’s control, five causes with potential solutions have been identified with the

solutions outlined below:

• Leave the declining microprocessor market to focus on the growing graphics market

• Stop competing in the costly mid to high end markets, and instead produce value products

• Use unique position as graphics and microprocessor supplier to bundle both together to

major PC manufacturers

• Solve employee defections by restructuring with an emphasis on hiring and retention

• Continue to restructure to cut costs in an effort to profit off of lower revenues

These solutions will be compared using a weighted decision matrix which will indicate that

shifting research and production to focus solely on the value segment of the market will best

address the given problem without being counter to AMD’s mission, vision, and values. A cost

benefit analysis over a five year timeframe will confirm the decision as one that will result in a net

positive benefit to AMD’s finances. It will also outline a number of intangible benefits that

outweigh the appearance of ceding ground to Intel. An ethical screen and feasibility analysis of the

solution further demonstrate the solution’s viability. The paper concludes with a plan for

implementing the solution and suggestions on how to measure its effectiveness over time.

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Position

Company Overview

AMD is a semiconductor manufacturer that was founded in 1969 and is currently

headquartered in Sunnydale, California (“Advanced Micro Devices, Inc. 2012 Annual Report”). AMD

began as a maker of logic chips, but their focus changed after introducing their version of an Intel

microprocessor they had reverse-engineered in 1975. Since that time, AMD has been one of two major

producers of x86 microprocessors, always 2nd in market share to Intel Corporation (“Advanced Micro

Devices”). In 2006, AMD acquired ATI, one of the two leading providers of graphics processors for

PCs and associated devices, making graphics cards AMD’s other primary market after

microprocessors. AMD no longer makes the microprocessors they design, having spun off their

fabrication plant into GlobalFoundries in 2009. As of December 29, 2012, AMD had approximately

10,340 employees who worked in facilities spread over 5 countries (“Advanced Micro Devices, Inc.

2012 Annual Report”).

Mission, Vision, Values

According to AMD’s Chief Marketing Officer’s brand guidelines, AMD’s mission, vision, and

values are as follows:

Mission Statement

AMD pioneers technology that frees people to push the limits of what is possible.

Vision Statement

To be the leading designer and integrator of innovative, tailored technology solutions that

empower people to push the boundaries of what is possible.

Values

• Ownership and Commitment - We do what we say and own what we do

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• Customer Focus - When our customers win, we win

• Innovation Leadership - We chart and pave our own path to success

The AMD Way comes alive when we take Action in 4 ways:

• Achievement: Plan and play to win in all we do, every time… every day matters

• Accountability: Build trust by honoring our commitments

• Alignment: Work as one AMD to debate, decide, embrace, and execute

• Agility: Continuously learn and improve in all aspects of our business

(LaForce)

Terminology

Microprocessors will sometimes be referred to in this paper, or in the references, as CPUs

(Central Processing Unit) or MPUs (Microprocessor Unit). Every PC (Personal Computer) has at least

one microprocessor inside that is responsible for processing all logic and calculations. Tablets,

smartphones, and other smart devices have microprocessors as well, though they are rarely of the same

design as those found in a PC, typically being slower, smaller, and consuming far less power. This

paper will often distinguish the processors used specifically for PCs by using the terms “legacy” or

“x86” microprocessors or simply by referring to PC sales, which mirror those for PC microprocessors,

as opposed to using statistics for the microprocessor or semiconductor industry as a whole. AMD is

primarily a seller of x86 microprocessors, but has begun to sell CPUs for tablets as well.

Processing for video graphics, on the other hand, is done on the GPU (Graphics Processing

Unit). The GPU is nearly always collocated with the CPU, in which case it is often called an IGP

(Integrated Graphics Processor) or APU (Accelerated Processing Unit). Applications that require

greater graphics processing, advanced video games or computer graphics modeling for example, often

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require an additional GPU on a separate add-in board (AIB), often referred to as discrete graphics.

AMD is the only manufacturer of both IGPs and AIBs.

Current Operations

In 2012 AMD had net revenues of $5,422M, down from $6,568M in 2011. $4,005M in

revenues came from their computing sector and the remaining $1,417M came from their graphics

sector. This resulted in a net loss of $1,183M, which they partially attribute to a gain of $105M in the

graphics market, and a loss of $231M in the computing market. The remaining loss of $930M is due

primarily to a $703M charge associated with a limited waiver of exclusivity for manufacture of

specific products from GlobalFoundries, and expenditures from their third restructuring plan since

2008 (“Advanced Micro Devices, Inc. 2012 Annual Report”).

AMD’s microprocessor market share as of April 19, 2013 sits at 14.8% with the remainder of

the market belonging to Intel, marking AMD’s lowest share since the third quarter of 2002 (Danely). If

processors for tablets and phones are also taken into consideration, AMD recently fell from 2nd to 4th

place at 6.4% market share behind Samsung and Qualcomm (Lineback). AMD fares better in the

graphics market where they hold a 35% market share of add-in boards to Nvidia’s 65% (Dow). When

all GPUs are taken into consideration to include integrated chipsets, Intel leads with 65% to AMD’s

18% (Dow).

Current Market Conditions

PC sales have been declining annually since 2008, dropping from 45 million units sold to 32.9

million units sold. Prices have also been declining, combining with the unit sales drop to result in sales

revenue for PCs dropping nearly in half over the same period, from $33.8B to $17.9B. The rate of

decline is expected to slow but not reverse in future years (Hulkower). The sales of graphics units

have dropped as well over this period at an average rate of 2% per quarter, though 2013 showed a 2%

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increase in sales with sales of AIBs expected to increase over the next several years. The increase in

graphics sales despite the decrease in PC sales is partly explained by an increase in the average number

of GPUs per PC from 1.2 to 1.4, and partly explained by new medical and military applications for

these cards (Dow).

Stakeholders

• Employees – If AMD’s financial situation doesn’t improve, employee job security is at stake.

• Shareholders – AMD’s stock could plunge if competitive new products aren’t released

regularly.

• Creditors – Any number of factors could lead to AMD being unable to meet their debt

obligations which heightens creditor interest in AMD’s decisions.

• Competitors – If AMD failed, both Intel and NVIDIA would have near monopolies in their

respective markets, able to price their products at whatever level they wished.

• PC distributors – Without AMD, distributors like Dell and HP would be completely beholden

to Intel to make their products.

• Consumers – Monopolies in the microprocessor and graphics markets would likely lead to

increased prices and slower technological advancement.

• Federal Trade Commission – This institution would need to decide whether to respond, and in

what way, to monopolies in the x86 microprocessor and graphics card markets.

• Video Game Companies – An AMD collapse would mean less competition in the graphics

industry, but it would also ease production of PC games with fewer products to optimize for.

• Universities – Much of the technology used to create processors is licensed from universities

which would lose out on revenue should AMD falter (Goettler and Gordon).

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• GlobalFoundries – This chip manufacturer was spun off from AMD in 2009, and AMD

continues to be their primary customer.

• The Emirate of Abu Dhabi – This rich Middle Eastern government bought GlobalFoundries

from AMD in an effort to diversify from oil, and is highly invested in AMD’s success.

Sense

Problems

Six problems have been identified that are either contributing to AMD’s financial troubles,

influencing their declining market share, or endangering their future. The most urgent mission critical

problem has been selected as a problem statement that will be further analyzed in the next section.

Revenue Concentrated in Few Customers

Five customers accounted for 59% of the net revenue for the computing sector, and 48% of the

net revenue for the graphics segment in 2012. Hewlett-Packard alone accounted for over 10% of

AMD’s total net revenue (“MarketLine AMD SWOT Analysis.”). The loss of any of these key

customers would have a significant impact on future revenue and profitability, but because this is only

a potential problem that doesn’t currently affect AMD’s ability to pioneer technology, it isn’t mission

critical or urgent.

Highly Leveraged

The debt to equity ratio for AMD increased from 126.79% to 379.55% in 2012, indicating their

substantial increase in debt (“GlobalData AMD SWOT Analysis.”). This will greatly increase the

interest payments AMD has to make, and reduce its available cash flow for revenue generating

activities such as expansion, or research and development. This reduction in the ability to innovate and

lead makes this problem mission critical. Furthermore, the increased debt increases the likelihood that

AMD won’t be able to make a future principle or interest payment. AMD has set up the debt

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agreements such that the default on one note would cause a cross default on their other notes, allowing

the other note holders to accelerate repayment of those notes, causing further financial trouble

(“Advanced Micro Devices, Inc. 2012 Annual Report”). This problem is not yet urgent, as the first of

four large notes isn’t due until 2015 (“Advanced Micro Devices, Inc. 2012 Annual Report”).

Losing Skilled Labor to New Competitors

AMD has lost many critical employees over the last few years to a growing number of

competitors. As recently as 2009, Intel and AMD were the only major options for top semiconductor

engineers, but since then AMD has lost personnel to Apple, Qualcomm, and Samsung, all major

players in the still growing markets for mobile devices and tablets (Caulfield). This is a mission critical

problem because AMD is reliant on innovative engineers to create products that can sell in their highly

competitive markets, and the number of engineers with the experience of those that left AMD is small.

This issue is not yet urgent as the loss of key people affects only future products, and there remains

time for replacements to be recruited.

Dominance of Intel

Intel has dominated the market for microprocessors for many years, with revenues nearly ten

times that of AMD in 2013 (“Intel Corp. 2012 Annual Report.”). Their substantial market share allows

them to set and control industry standards that AMD must try to adhere to, and it allows them to exert

influence over PC manufacturers who might otherwise choose AMD products. Their much greater

assets and revenues allow them to spend far more money on research and development, advertising,

and aggressive pricing strategies that AMD can’t match, all of which work to ensure Intel retains its

position (“Advanced Micro Devices, Inc. 2012 Annual Report”). This is a serious problem that is

neither mission critical nor urgent, as AMD has dealt with Intel’s dominance, while continuing to

innovate, every year since its inception.

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Long Decline in PC Market

PC sales have steadily dropped from $33.8B to $17.9B over the past 5 years, with no sign of

slowing down. This number is driven by both unit sales and average price falling over the same period.

This decline was started by the maturation of the PC market, which is an environment in which 87% of

households own at least one PC, and has been accelerated by the demand for tablets and mobile

devices (Hulkower). This is an urgent mission critical problem for AMD as 85% of their sales are

derived from products for PCs, and continued steep declines in the market will reduce their cash flow

and ability to innovate until they’re bankrupt (“MarketLine AMD SWOT Analysis.”).

Low Research & Development Budget

In an effort to cut costs and remain profitable, AMD has cut their research and development

budget by 34% over the past four years. Over the same period Intel has increased their R&D budget by

over 90% and Nvidia has increased theirs by over 38%. Intel now spends $10.6B, and Nvidia $1.3B, to

AMD’s $1.2B in an industry characterized by short product cycles and rapid technological

advancement (Levine-Weinberg). This is a mission critical problem, directly reducing AMD’s ability

to pioneer technology, but it’s not urgent as it will only affect future products.

Problem Statement

85% of AMD’s current revenue is derived from the legacy PC market which has experienced a

42% decline in sales over the past 6 years, with both unit sales and price declining annually. This drop

in demand has contributed to net losses over the past two years exceeding $1.2B.

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Uncover

Assessing the Root Causes of the Problem

The root causes of the decline in PC sales and AMD’s subsequent losses were investigated in a

Fishbone Diagram attached in Appendix A. These causes can be divided into the four primary areas

outlined below:

Aging PC Market

The decline in the PC market began in 2008, a year before the release of the iPhone and two

years before the release of the iPad, which demonstrates that the decline can’t be entirely explained by

a shift in product preferences (Hulkower). 73% of all US adults own a PC, and in households with a

PC, an average of two are owned. While the percentage of household ownership and the number of

PCs owned per home are still rising, the rate is far slower than it once was, and the numbers are high

enough that future increases are unlikely to reach the old rate. The most likely reason to buy a new PC,

which 38% of consumers cite as their reason for buying, is the failure of an old PC (Hulkower). It is

therefore likely that the falling demand will slow and bottom out once the market reaches the

replacement rate level, but it remains uncertain when this will happen. The feasibility of AMD

addressing these issues and bringing back market demand is low.

Competition from Mobile and Tablet Markets

While tablets and smartphones didn’t start the PC sales decline, there is little doubt that they

accelerated it. With PCs already existing in 87% of households (Hulkower), consumers elect to

purchase smaller more mobile form factors when purchasing new devices instead of additional

stationary PCs, resulting in sales of tablets being higher than PCs over the most recent Christmas

season (Rivera). A mid-2013 Mintel market summary saw slowing price decreases as evidence that

the demand was finally leveling out (Hulkower), but 2013 ended up having the worst decline in the

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market’s history. Though sales in the US may be close to bottoming out, tablets and smartphones are

heavily impacting sales in emerging markets where consumers are more likely to buy a smartphone

first, and a tablet second (Rivera). AMD has never produced smartphone microprocessors, and has

only recently started making chips for tablets, completely missing out on these quickly growing fields.

Lack of Innovation

A large part of the drive for consumers and businesses to upgrade their PCs every few years

was so that they could take advantage of the latest technologies in software and hardware. The power

offered by 64 bit computing, or the new features of Windows XP are both examples of advances that

boosted PC sales due to their general purpose applications. Today, even the cheapest computers can

quickly and easily run all software outside of graphically intense games, and hardware makers instead

try to differentiate their products by adding features found in in tablets and phones like portability or

touch screen capability (Hulkower). The latest mass-market operating system, Windows 8, has been so

negatively received that it has been thought to have further reduced PC sales as customers prefer to put

off buying PCs just to avoid the new operating system (Sun). These all contribute as reasons why

consumers decline to buy new PCs, and are content with their current PC until it fails.

Weak Market Position

While the PC market decline plays a large part in AMD’s declining revenue and profits, the

weak market position of AMD discussed in the earlier ‘Problems’ section also plays a significant role.

Despite the declining sales in the market as a whole, PC segments for Apple and Lenovo have

increased sales and turned profits, demonstrating that it’s still possible to perform well under current

market conditions (Rivera). Costly interest payments on large debts, being consistently outperformed

and outmaneuvered by Intel, and losing skilled labor to competitors have exacerbated AMD’s losses

from the overall market decline, and should be considered when developing a solution.

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Solve

Solution Analysis

The root causes that can be most easily addressed have been circled in red on the Fishbone

Diagram in Appendix A. Possible solutions to these causes are analyzed below:

Abandon Microprocessor Market

AMD has little control over the declining sales of the PC market, and they have very little

existing market share as compared with Intel. One option they could take to get around the aging PC

market problem and avoid further losses is to abandon the microprocessor market altogether and focus

on the graphics segment, which is currently doing well and is projected to grow. During the one period

when AMD produced microprocessors that outperformed Intel in 2003, AMD still lost considerable

money as Intel was able to effectively block access to major customers like Dell and HP through

discount pricing options (Lévâque). While Intel ended up paying over $3B in fines and settlements,

this was minor compared to profits generated over the period of the discounts, and won’t discourage

Intel from doing it again if AMD ever presents a challenge in the future (Cunningham). The graphics

market provides a much more even playing field in which AMD might grow without worrying about

possible repercussions.

Focus on Low Power Low Cost Market

AMD is competing on too many fronts against Intel and Nvidia, both of which dwarf AMD in

market share in their respective markets. AMD could reduce these costly efforts, addressing the root

cause that AMD can’t compete in research and development or in licensing, by focusing only on the

low power, low cost section of the market that they have historically performed well in. When AMD

focused on the value market prior to 2003, their market share had been steady at 15% for roughly a

decade, an indication of the long term viability of the segment despite its low margins (Farivar).

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AMD’s best-selling lines of processors in the past few years have been Brazos and Llanos, both of

which are low cost low powered processors designed for ultrabooks or tablets, whereas their state of

the art Bulldozer line has been both costly to produce and a disappointment in terms of sales (Walrath).

In addition to it being a better suited and viable market for AMD, the focus would bring down AMD’s

large research and development costs and licensing costs away from costly new technology.

Use Bundle Pricing to Acquire Large Customers

AMD is the only company that offers both add-in board graphics solutions and powerful

microprocessors. AMD could use this to their advantage by bundling them together and selling in

quantity to PC manufacturers with product lines for gamers. This doesn’t exactly solve the problem

that non-gamers have no real reason to purchase mid to high end CPUs, but it effectively tailors

AMD’s product lines to the segments of the market who do have a reason to purchase these products.

AMD has received some of their most positive press in years, and a much needed stock boost, after

winning contracts to provide the GPUs for all three modern video game consoles: the Nintendo Wii U,

Playstation 4, and Xbox One (Levine-Weinberg). While PC sales have been suffering, sales of

computers designed specifically for gaming have recently increased and are projected to grow. This

specialized market is made more valuable by the very high profit margins it has as compared with the

rest of the PC market (Evangelho). There are a large number of boutique high-end PC manufacturers

that cater to this market. AMD could capitalize with their recent success in the gaming industry by

bundling their high-end processors and graphics cards to targeted manufacturers. Success would

increase market share against both Intel and Nvidia in the high-end market, where AMD has struggled

lately.

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Restructure Organization to Drive Employee Retention and Recruitment

AMD’s founder and former CEO Jerry Saunders was known for the mantra “People first,

profits and products will follow.” Saunders has expressed dismay over the course AMD has taken that

has resulted in mass layoffs and key personnel leaving for spots in the competition stating “If AMD is

losing those people who can do that innovation, then it will be a tough slog” (Caulfield). One possible

solution to combat the root cause of losing key employees to quickly growing competitors would be to

recognize the important part that these key individuals play in the industry and restructure to shift more

money and effort towards hiring and retention. While this would have clear upfront costs and no

certain benefits, the potential benefits are large. AMD’s success in the early 2000’s at beating Intel in

creating better products despite AMD’s much smaller size and resources is largely credited to

Saunders’s hiring of one employee, Atiq Raza, called "the Michael Jordan of microprocessor design"

by the Wall Street Journal (Farivar). There is no guarantee that making employees the central focus

again will result in finding or hiring another Raza, but it could at least reduce the deficit of innovation

that will result from more key personnel leaving.

Restructure to Cut Costs

This option is essentially to continue on with the current strategy AMD has adopted over the

past decade, and survive the declining market by cutting costs. It would strictly serve to address the

root cause that it can’t raise prices to offset net losses because of aggressive competitor pricing, which

leaves cutting costs as an option to restore profit margins. AMD has restructured in this manner three

times since 2008, spinning off their manufacturing facility, laying off employees, and cutting expenses

across the board. This has enabled AMD to earn a profit in 2009 and 2010 despite the decline in PC

sales and their dwindling market share (“Advanced Micro Devices, Inc. 2012 Annual Report”). As

long as the market demand continues to decrease, it is to AMD’s advantage to continually restructure

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and adapt to the decreased market size. If the long decline were to stop in the next year or two, another

round of cost cutting might make AMD lean enough to turn a profit that will enable them to pay off

their large notes and continue to innovate in the microprocessor field.

Weighted Decision Matrix

A Weighted Decision Matrix measuring the solutions above is included in Appendix B. The

lower the number, the better the solution addresses the particular criteria. The following paragraphs

outline the criteria by which solutions are judged in order of decreasing importance.

Long Term Financial Impact

AMD is performing poorly, but not so poorly as to make short term decisions paramount. To

achieve their mission and vision of being a leader in technical innovation, they need to reverse the

trends that diminish their market share and must place long term performance first in order of

importance. Given the poor market outlook for PCs and microprocessors combined with the fierce

competition in that field and their failure to turn a profit from it, abandoning microprocessors or

focusing on the value segment would likely result in the best long term financial performance. Bundle

pricing, focusing on employees, and cost cutting could all result in long term improvements as well,

but there are potential negatives that make it difficult to judge whether the difference will be a net

positive or negative.

Short Term Financial Impact

Next in order of importance is short term financial impact. AMD has had two bad years in a

row, and has enough debt that opinion articles can state that “AMD is still one or two bad quarters

away from a serious liquidity crisis” (Levine-Weinberg). While a short term boost won’t achieve

AMD’s vision of being leading innovative designer, it will ensure that they survive long enough to

address that vision. Cutting costs will provide the greatest short term boost, followed by leaving the

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MPU market and then leaving the mid-to end market due to the immediate research and development

cost savings those decisions will realize. Focusing on retention and hiring of employees, on the other

hand, will moderately increase costs and have a negative short term impact.

External Image

The external image that AMD presents with any decision is very important to them as a

publicly traded company. There are significant stock movements with every public announcement, and

any decision portrayed as negative in the media will create added difficulties in overcoming their

financial position and market share, making this option third in importance after financial effects.

Another round of cost cutting would likely be portrayed very negatively after so many recent attempts

to restructure have resulted in only temporary boosts to net income and continued sliding in market

share. Dropping out of microprocessor manufacturing or restricting their market focus would also

likely be perceived as defeats of different magnitude. Bundle pricing would or recruitment focus would

generate positive news so long as AMD was successful in acquiring new contracts or significant new

hires.

Potential Risk

AMD is already highly leveraged and can’t afford the losses that the failure of a risky decision

might bring. Abandoning the microprocessor market will restrict AMD’s future to the graphics

segment. Though this segment currently outperforms the computing segment, it is risky in that it

restricts their opportunities and makes them more vulnerable to changes in the graphics market. Bundle

pricing and restricting the market to lower power devices are relatively low risk solutions though their

ultimate benefit is uncertain.

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Adheres to Mission / Vision / Values

Lastly, once financial consideration, image, and risk are accounted for, AMD would like for

their decisions to follow the mission, vision, and values that have been ingrained in the company.

Abandoning the microprocessor, which has been AMD’s primary focus since 1975, is clearly counter

to their stated mission and vision, and would likely require a rewrite of these. Likewise, focusing on

the value segment of the market and excluding advanced chips would be less innovative, though

innovation can exist with that segment. The only decision that is completely in line with the AMD

mission, vision, and values is to once again put people first and restructure to focus on recruitment and

retention.

Build

The solution with the lowest weighted score in the decision matrix was to transition to focusing

solely on the low power, low cost segment of the market.

Ethical Screen

The solution entails that AMD no longer innovate in the mid to high performance markets, but

it will likely result in them innovating to a greater extent in the value market which is the area with the

greatest customer interest. PC sellers like HP and Dell, and the consumers who purchase high end PCs

will be most hurt by AMD’s decision to focus on value. Intel will have complete control over the high

end market and will likely raise prices significantly as a result. If AMD were to go bankrupt entirely,

prices have been estimated to rise 50%, reducing consumer surplus by as much as $12B (Goettler and

Gordon). While Intel won’t be able to capture the entire market, they will likely raise prices to a

similar degree in those market segments where it will hold a monopoly. Licensors of high performance

microprocessor technology, and businesses that make the equipment AMD uses to make this

technology will also lose sales. Also, any AMD employees whose focus is on performance CPUs will

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either need to be reassigned or laid off. These downsides are far less significant than if AMD continued

to lose market share and went bankrupt.

Cost Benefit Analysis

There is a 5 year timeframe for the following cost benefit analysis, allowing for all current high

end products and equipment to be completely sold, and for support of those products to be ended.

5 YEAR TIMEFRAME Tangible Benefits Tangible Costs

• Operating costs reduced by $1.2B / yr • R&D expenses reduced $300M / yr • Licensing costs reduced by $30M / yr

• Loss of $800M in yearly revenues • Reduction of licensing revenues from

AMD patents by $20M / yr • Loss of $50M selling unneeded equipment • Loss of $20M in write-offs for unsellable

products while transition ends Intangible Benefits Intangible Costs

• No longer in costly tech arms race with Intel

• Can license tested technologies instead of risky untested ones

• Media will likely turn on Intel as a monopoly

• Can now better target their market with more effective advertising

• Leaving declining market for a more healthy one

• Moral loss from ceding ground to Intel • Loss of customers who buy in the

performance market • Media may portray as a defeat for AMD • Key employees that prefer to work on

performance products may defect • May miss out on new advancements that

increase PC sales again

Estimated reductions in cost due to no longer producing high performance products aren’t

eliminated entirely because more will be spent on research & development, equipment, and licensing

costs for value products. Even so, the conservative estimate of $1.5B in savings will exceed the $900M

in lost revenues, and should be enough to bring AMD back to profitability. The intangible benefits of

leaving the costly battle with Intel when the winner receives less and less every year also exceeds the

intangible cost of a perceived defeat. Also, AMD will be able to counter this perception with renewed

efforts in the value segment, and increased market share will result. While it’s possible that some

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unknowable factor might result in a rebound in the PC market, it’s unlikely given the current direction

of development, and AMD could always reenter the market at a later date if the benefits exceed the

large upfront costs of reentry.

Feasibility Analysis

This solution is easily feasible, as AMD already has a long history of being the “value”

competitor to Intel. It was only in the last 10 years that they took the costly decision to compete against

Intel in the high performance market. In addition, AMD already has several highly successful existing

products in this market segment and is currently developing their successors, making it a relatively

painless transition requiring no great advances in technology or cuts in costs. They would simply have

to phase out their existing and planned high performance lines over time to ensure that they got as

much return from their sunk investments in those products as possible.

Achieve

Implementation Plan

Implementation of the solution will not be difficult, but it will take an estimate of 5 years’ time

to sell off all current and paid for inventory and equipment that is no longer needed. No initial

announcement of the transition should be made, as there are many existing and planned products in the

mid to high end markets that will likely sell less should AMD announce it will no longer produce or

support them in the future. An outline of the steps AMD needs to take after confirming the decision

follows:

1. Immediately stop research and development on mid to high end products

2. Begin looking for buyers of equipment of equipment that will no longer be needed

3. Finish with contracted production of current mid to high end products and stop manufacture of

them once the contracted amount is completed

19

4. Start to transition those employees working on mid-high end lines onto the value lines

5. Modify all marketing materials to emphasize leadership in value to the consumer

6. As the contracted production of performance products ends, salvage all equipment that can be

used in the making of value products, and sell the rest

7. As costs decrease while products are retired, use newly available cash to increase research and

development budget for value products to increase competitiveness in this segment

8. After o years, or after inventories of performance products are at least 60% sold, whichever

comes first, craft a press release announcing the retirement of product lines and focus on value

9. Phase out support for high end products and transition remaining employees

Outcome Measures & Evaluation

The assumption made in the solution is that mid to high performance products will continue to

have low or negative profit margins as compared with value products when all cost factors are

considered. AMD will need to continue to measure the success of individual product lines to ensure

that this trend continues while products are phased out. The slow nature of the solution means that

AMD could alter their decision at any time in the first few years in the event of an unlikely change in

the market that reverses the long term trends. After two years, when most of the production contracts

have ended, and most equipment has been sold, it will become too expensive for AMD to reenter the

high-end market and the transition must be seen through to completion regardless of how well it

works.

Once cost savings have exceeded revenue losses by enough to turn a profit, care must be taken

in slowly increasing expenditures on value products to find an optimal point at which to operate. The

market for these products won’t increase due to AMD’s focus on them, but with greater advertising

focus and research & development efforts all narrowed on value products, AMD should be able to shift

20

value oriented customers over from Intel, whose focus will be on optimizing their secured monopoly

position in the mid to high end segments. The overall success of the solution will be measured by

increasing profits and increasing market share within the value market segment.

21

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24

N et L

osses

W eak M

arket Position

A ging PC

M arket

L ack of Innovation

C om

petition from T

ablets & M

obile

M any com

puter m akers w

ith high supply

Prices forced dow nw

ards as dem and decreases

A verage of 2 PC

s ow ned per house

Subsequent devices purchased A

re usually m obile

H ighly leveraged

V ideo gam

es are the only applications that effectively

use high-end C PU

s

L ess likely to acquire any m

ore financing

H igh adult &

household ow nership rates

R ate at w

hich ow nership rate rises

Is slow ing and nearing m

axim um

A dditional PC

s considered discretionary item

L arge int paym

ents reduce cash flow

A M

D ’s narrow

focus on PC s

C an’t raise prices

A M

D ignored sm

art phones

A M

D ignored tablets until recently

A ggressive com

petitor pricing

N on-gam

ers have no reason to purchase

G row

ing use of cloud com puting

L ack of softw

are that can drive sales

Failure of W indow

s 8

N ew

m akers Q

ualcom &

Sam

sung ow n m

arket

A ppendix A

: Fishbone D iagram

M ust constantly follow

Intel’s lead

M ust com

bat anti-com petitive practices

L acks funds to com

pete in R

& D

or licensing

H as already recently settled

w ith Intel for a low

am ount

Intel has dom inant position

Attem pt to recreate tablet

experience w ith PCs

Consum ers already ow

n PCs

Choose tablets or sm artphones

w hen buying additional devices

Reduces need for additional PCs or servers

Costs stabile so m argins are decreased

N ew

PCs bought are typically replacem

ents for failed PCs

Em erging m

arkets choose m obile

For first devices

M obile devices are cheaper and m

eet basic needs

D oesn’t tax hardw

are so no upgrades are needed

Q ualcom

& Sam

sung attracting AM D

em ployees

25

A ppendix B

: W eighted D

ecision M atrix

C riteria

W eight

R aw

W

eighted R

aw

W eighted

R aw

W

eighted R

aw

W eighted

R aw

W

eighted LT Fin Im

pact 30%

3

0.9 3

0.9

5

1.5 5

1.5

5

1.5 ST Fin Im

pact 25%

3

0.8 4

1.0

4

1.0 7

1.8

2

0.5 External Im

age 20%

7

1.4 6

1.2

5

1.0 2

0.4

8

1.6 Potential R

isk 15%

8

1.2 3

0.5

3

0.5 5

0.8

7

1.1 A

dheres to M V

V 10%

9

0.9 7

0.7

5

0.5 1

0.1

6

0.6 Total

100% 30

5.15

23

4.25 22

4.45

20

4.50 28

5.25

A bandon M

PU E

m ployee Focus

C ut C

osts L

ow Pow

er/C ost

B undle Pricing

26