AMD: A Customer-? Centric Approach to Innovation – Case Analysis Executive Summary After several years as an Intel’s follower, AMD had finally achieved the market recognition of a superior product for the Server and Workstation Segment and, as a consequence, is gaining market share at Intel’s expenses. Faced with the need of increasing volume, AMD considers essential to leverage the success obtained with Opteron to increase market share in other segments.
The analysis of the data presented in the case indicates that there is still volume to make in the Server Segment and important issues to address in this same segment. We can also conclude that there is a high probability of failure in succeeding in other segments. For these reasons, AMD should focus in its key segment in the short-term and, only after consolidating its market position in this particular segment and establishing the value of AMD’s Brand, consider a major strategy to expand to other segments.
Market Summary Customer Analysis AMD is present in the B2B market with little interaction with the final consumer. Its costumer basis is composed by the OEMs, according to the following segmentation: Segment Server And Workstations Desktop Higher-end Business Mid-range Business Lower-end Business Higher-end Business and Consumer Mid-range Business and consumer Lower-end consumer Higher-end Business and Consumer Consumer Lower-end Consumer
Key Customers Dell, HP, IBM, Sun Dell, HP, Lenovo Fujitsu, Gateway Dell, HP, Lenovo, Fujitsu Mobile AMD has gained its space in the server and workstations segment but there are still some major problems to address in its customer’s purchase process in order to increase its market share: • There is a power relation between Intel and the Key Customers that influences the purchase process. Since Intel is the major supplier in all 1 • • • egments, the customers are afraid of retaliation from Intel if they buy from AMD; Although there is a high awareness from customers on AMD products, there is low familiarity with the product line and even lower purchase consideration in the market; Though AMD is reaching CIOs and IT managers, there is still the need of engaging the CFOs and CEOs; The impacts of working with more than one supplier are significant for the OEMs, since it increases complexity of their business, and, therefore, while their costumers keeps buying their products with Intel’s microprocessors there is no real need for changing this behaviour.
Trends and market growth Although there is no data to take conclusions on the desktop and mobile segments, there is enough data to estimate Market Demand for the Server and Workstations segment. As we can see in the picture below, though at a decreasing rate, the market demand for servers is increasing for the last three years. Server Shipments (in thousands) 6000 5000 4000 3000 2000 1000 0 2002 HP 2003 Dell IBM 2004 Sun Total 2005 Note: Data obtained from case’s Exhibit 6. Assuming an increase slightly ower than the verified in 2005, and keeping all other variables unchanged, we obtained the following estimation of Product Demands for 2006: Market-Demand AMD-Market-Share Intel-Market-Share AMD-Total-Units Intel-Total-Units 2002 2701 8% 92% 216 2485 2003 3370 4% 96% 135 3235 2004 4172 7% 93% 292 3880 2005 4793 15% 85% 719 4074 2006 5416 24% 76% 1300 4116 Note: the value for 2006’s market demand assumed a 14% increase in Servers shipments. The presented market shares are calculated means from case’s Exhibit 2b and the expressed units are in thousands. 2
The data analysed showed an interesting change in OEM’s servers segment that may impact AMD futures decisions regarding this segment. As we can see in the picture below, there was a considerable change in OEM’s Market Share. Server Unit Share (%) 60 50 40 % 30 20 10 0 2002 HP 2003 Dell 2004 IBM Sun 2005 Others First Half 2006 Note: Data obtained from case’s Exhibit 6. As a consequence of its “MAID” project, AMD is focusing in major OEM players. In spite of that, the reduced market share (in units) didn’t affect AMD’s market share that reached is high in mid 2006.
According to this, two assumptions can be made: • AMD’s market share could be higher in 2006, and if its major clients keep loosing market share, AMD will be facing a short term problem in its most profitable segment (assuming that the loss of OEM’s market share will not be compensated with the increase in demand, as verified in First Half of 2006); • There is considerable volume to explore by AMD in other OEM players. Although there is no information available in the case about this considerable change, the hypothesis of a new major player in the market should be explored by AMD. Company Analysis (SWOT) Servers and Workstations Segment Strenghts •? Better product than Intel’s in performance and power consumption •? Innovation, R -? Time-? to-? market •? Customer-? Centric •? Market recogition in all product offer in the segment Opportunities •? Dell’s mid-? range and lower-? end servers and workstations •? Change in OEMs market share (new players not yet adressed? ) •? No competition in price Weaknesses •? No market awareness regarding AMD product line and Brand •? AMD dimension faced to Intel Trheaths •? New line of Intel’s icroprocessors •? Intel’s reshapping offer. •? Intel pricing strategy •? Decrease in OEMs Market Share Desktop and Mobile Segment Strenghts •? Better product than Intel’s in performance and power consumption •? Innovation, R -? Time-? to-? Market •? Customer-? Centric •? Success of Servers Segment Weaknesses •? No market awareness regarding AMD product line and Brand •? AMD dimension faced to Intel •? Most of its market share in low-? end products (“cheap” vs quality) •? Price/performance vs Opteron Trheaths •? New line of Intel’s microprocessoes •?
Intel’s reshapping offer. •? Intel pricing strategy •? Computer-? makers razor-? thin margins (Intel’s distribution of pro^its/Intel Inside) Opportunities •? HP and Gateway •? VARs and system integrators Competition Analysis Even with the success of AMD in the Servers Segment, Intel keeps being the number one player in all microprocessors segments, with market shares around 70% and higher. According to case’s Exhibits 3 and 4, by revenue, AMD is around 15% the size of Intel. More, if we consider the “Intel Inside” advertising, Intel has spent $7 billion, while AMD’s revenues in 2005 were around $5. 9 billion. This numbers are a good indication that it will be very hard to compete directly in all segments and Intel has made clear in the past that will use of any means to keep its dominant position and limit AMD’s ability to enter other market segments. Furthermore, Intel announced a new product roadmap with launching of products in all segments that will exceed in terms of performance AMD’s products and addressing the power consumption problem. Key Success factors and critical issues
If AMD wants to keep the momentum, it will have to address its short-term issues: • Loss of market margin of its most important clients in its most valuable segment (Servers and Workstations) could peril AMD’s market margin; • The lack of market awareness to AMD’s products and brand is biasing its customer purchase process • Intel’s new product line Regarding the first issue, it is important that AMD proceed to a market analysis in order to identify what is driving this change and execute a plan to attack the new players in the server market.
The lack of awareness of AMD’s products and Brand was perfectly addressed by the “Power Campaign”, which brought visibility of AMD to final consumers. But the consumer memory is short, and AMD will have to keep investing in advertisement campaigns. For the last issue, it is essential that AMD differentiate its offer from Intel’s. The proposed change of paradigm in the Desktop segment should be further analysed (“reinventing the commercial client) since it will probably cannibalize the Desktop segment and will bring volume to the Server Segment, where are the core capabilities and strengths of AMD.
But the most important AMD’s investment should be in its customer-centric approach. This will definitely ensure AMD’s success in the market, since it will correctly address market real needs and will permit AMD to have a value added offer completely different from Intel’s, that has always followed a Market Driving approach. Marketing Strategy – Direction Lines From all stated, AMD should focus its Marketing Strategy according to the following directives: • Execute analysis to changes in Server and Workstations market. Invest in the Server and Workstation Segment in order to increase market share and consolidate position and market recognition of high quality products. • Invest in the Customer-centric approach in order to increase the added value of its products line and differentiate its offer from Intel’s. • Invest in advertisement in order to achieve higher brand awareness (“We are here to change the world”). • Invest in the message of Market Driven Superior Innovation. • Further investigate the change in paradigm for the Desktop Segment. 5