SCS Company operates the majority of her research and development facilities in North America and Europe. The following table shows the expenditures on research and development activities of SCS for each of the last three fiscal years (in thousands).
Year Amount Percent of Revenue
2003 $564,740 34%
2002 $548,400 30%
2001 $503,108 28%
Research and development activities expenses primarily consist of materials expense, salaries and related costs of employees engaged in ongoing research, design and development activities and subcontracting costs.
In spite of the importance of R&D, it is noticed that the R&D expenses of SCS are reaching a high level. The average R&D expense among the same industry is 25% of the revenue. According to the above figures, the R&D expenses of SCS in recent years has exceeded the industry average, especially in the last two years. In year 2003, it even exceeded the industry average by nearly 10%. The Semiconductor Industry’s Technical Authority reveals in the “Semiconductor International” that the R&D expense of SCS is ranked at the 7th highest among the Top 300 semiconductor companies. By comparing to Intel Corporation Ltd, its R&D expense is just 23% of the total revenue; it exceeded more than 10%.
There is uncertainty associated with the R&D investments of SCS.
The R&D activities are intended to maintain and enhance the competitive position of SCS by utilizing the latest advances in the design and manufacture of semiconductors and storage systems. Technical innovations are inherently complex and require long development cycles and the commitment of extensive engineering resources. This will incur substantial research and development costs to confirm the technical feasibility and commercial viability of a product that in the end may not be successful. If SCS is not able to successfully and timely complete the research and development programs, it will face competitive disadvantages. There is no assurance that it will recover the development costs associated with such programs or that it will be able to secure the financial resources necessary to fund future research and development efforts. It is a kind of Weakness of SCS.
Therefore, SCS should control the R&D expense to a reasonable level – close to or below the industry average. However, it is difficult for SCS to decrease its R&D expense sharply by 10% in just one year. But it is recommended that the figures should be dropped gradually to the acceptable level.
Target Growth Markets and Selected Customers
SCS concentrate its sales and marketing efforts on leading OEM customers in targeted growth markets, including communications, consumer products and storage components applications. The engineering expertise of SCS is focused on developing technologies that will meet the needs of leading-edge customers in order to succeed in these market areas.
SCS has a highly concentrated customer base and it is increasingly dependent on a limited number of customers for a substantial portion of revenues as a result of its strategy to focus its marketing and selling efforts on select, large-volume customer. For example, Sony and IBM represented 16% and 19%, respectively, of its total consolidated revenue for the year ended December 31, 2003.
The operating results and financial condition could be significantly affected if:
- SCS does not win new product designs from major existing customers;
- Major customers are also affected by the global economy weakness and reduce or cancel their existing business with SCS;
- Major customers make significant changes in scheduled deliveries;
- There are declines in the prices of products that it sells to these customers.
SCS operates in highly competitive markets. The Semiconductor and Storage Systems segments in which it conducts business are characterized by rapid technological change, short product cycles and evolving industry standards. It is believed that the company’s future success depends, in part, on its ability to improve on existing technologies and to develop and implement new ones in order to continue to reduce semiconductor chip size and improve product performance and manufacturing yields. Moreover, SCS has to be able to adopt an implement emerging industry standards in a timely manner and to adapt products and processes to technological changes. If it is not able to implement new process technologies successfully or to achieve volume production of new products at acceptable yields, its operating results and financial condition may be adversely impacted.
The competitors of SCS include many large domestic and foreign companies that have substantially greater financial, technical and management resources than it does. Several major diversified electronics companies offer ASIC products and/or other standard products that are competitive with its product lines. Other competitors are specialized, rapidly growing companies that sell products into the same markets that SCS target. Some of its large customers may develop internal design and production capabilities to manufacture their own products, thereby displacing SCS’s products. There is no assurance that the price and performance of SCS’s products will be superior relative to the products of its competitors. As a result, SCS may experience a loss of competitive position that could result in lower prices, fewer customer orders, reduced revenues, reduced gross profit margins and loss of market share. It’s more serious if SCS loss the market position of its target customers which occupied its revenue with more than 10%, such as Sony & IBM.
In addition, it is revealed from Chart # 1 that a substantial portion of SCS customers is located outside the United States - 67% of its total revenue is from customers in foreign countries – Asia and Europe. Both manufacturing and sales of its products may be adversely impacted by changes in political and economic conditions abroad. A change in the current tax laws, tariff structures, export laws, regulatory requirements or trade policies in either the United States or foreign countries could adversely impact SCS’s ability to manufacture or sell its products in foreign markets. Moreover, a significant decrease in sales by its customers to end users in either Asia or Europe could result in a decline in orders.
Besides, SCS has quite a lot of exposure to fluctuations in foreign currency exchange rates. Apart from customers, it has international subsidiaries and distributors that operate a sell its products globally. It routinely hedges these exposures in an effort to minimize the impact of currency fluctuations. However, it may still be adversely affected by changes in foreign currency exchange rates or declining economic conditions in those countries.
Based on the above weaknesses and threats that SCS are facing, it is suggested that SCS should not only target in just a small number of customers, but rather to look for more customers in different regions.
Operation Resources
As of December 31, 2003, SCS has 4982 full-time employees.
In early 2003, SCS carried a number of actions to downsize operations, which resulted in the reduction in work force of more than 600 employees. With the continuous economic weakness in the late 2003, SCS decided to discontinue certain development programs and to refocus sales and marketing efforts for certain product lines in the Semiconductor segment, which caused the reduction in work force by 150 employees primarily involved in fabrication. Moreover, SCS sold the Tsukuba, Japan manufacturing facility to another wafer fabrication company. As a result of this sale, SCS’s work force was reduced by another 200 employees.
A continued general economic weakness may further reduce the revenue of SCS Company:
The semiconductor industry is cyclical in nature and is characterized by wide fluctuations in product supply and demand. Since 2001, the financial condition and results of operations have been significantly adversely affected by the weakness in the U.S. economy. While SCS is unable to quantify the effect that the weakened U.S. economy has had on her financial condition and results of operations. It is noted that the revenue of SCS declined from approximately $3.2 billion in 2000 to approximately $2.4 billion in 2001, and from approximately $2.4 billion in 2002 to approximately $2.2 billion in 2003. In addition, SCS had net income of approximately $315 million in 2000 compared with a net loss of approximately $890 million in 2001, and its net loss increased from approximately $343 million in 2002 to approximately $387 million in 2003.
The results of operations are becoming increasingly dependent on the global economy. Any geopolitical factors such as additional terrorist activities, armed conflict or global health conditions may adversely affect the global economy, which may affect the recovery of SCS in 2004 and adversely impact the operating results and financial condition of SCS. In addition, goodwill and other long-lived assets could be impacted by a further decline in revenues because impairment is measured based upon estimates of future cash flows. These estimates include assumptions about future conditions within SCS and industry.
“Buy one get one free” strategy for Host Adapter Board (HAB)
Host Adapter Board (HAB) is a part of the Storage Components System. It is mainly used in the computer to store the data. Again, since the electronic industry is characterized by rapid changes in products, design tools and process technologies, the computer board is practically having a short lifetime, normally two and a half year after assembly completion. When the computer board is expired, it has to be scrapped. In spite of this, SCS’s Marketing Department raised a promotion to the customers that they can get one free board when they buy one board that will end its lifetime within six months. The HAB group has an inventory database to show the entire computer board inventory with manufacturing date and the expiry date, a report will be generated at the end of each month. The HAB group will send the inventory list of the computer board which are to be expired within nine months to the Customer Services Representatives (CSR) and the CSR will send the report to the respective customers for this “buy one get one free” promotion.
It is an effective strategy for SCS that the wastage of products can be minimized and the storage spaces of the warehouse can be maximized. SCS has two production strategies, one is build to forecast and the other is build to order. For the build to order strategy, the computer boards will be shipped to the customer right after its completion. Those products do not occupy any warehouse space. For the build to forecast strategy, the production of the computer board is just based on the marketing forecast. It may not sell out at last and may have to keep for some times before it is sold. Therefore, for the products under build to forecast strategy, it is expected to reserve the warehouse space for them and may have to be scrapped eventually. However, SCS must keep the build to forecast strategy. It is because there is a certain number of customers in the market are looking for stocks instead of waiting for a long lead-time to get their products.
By applying this “buy one get one free” strategy, the scrapping of the products can be eliminated and also attracts more sales from the customers. Moreover, the warehouse storage charges are counted by the number of boards stored in the warehouse on a monthly basis. That is as more as and as long as the boards that SCS kept in the warehouse, the higher the warehouse service charge is. Additionally, the warehouse has to perform inventory reconciliation at the end of each month to ensure that the physical inventory is matched with the system and is aligned with the sales. The inventory reconciliation is another charges of storing the computer boards at the warehouse. Hence, the “buy one get one free” strategy helps SCS to eliminate the operation costs and to increase the revenue of the organization. This in turn is strength for SCS.
Furthermore, as this is a good marketing strategy for SCS to deal with the products that are going to expire, it is recommended that this “buy one get one free” strategy can be applied to the other products. For examples, the storage components and the integrated circuits portions. This could lead to the same effects as those of the computer board as stated above.
Alliances with Key Partners
SCS is seeking to establish relationships with key partners in a diverse range of semiconductor technologies to promote new products, services, operating standards and manufacturing capabilities and to avail it of cost efficiencies that may be obtained through collaborative development. The partner program is designed to effectively market the Company’s Host Bus Adapter product families utilizing distribution and reseller partnerships. Such partnerships enable SCS to provide an extended population of customers with the full range of product offerings, services and support needed to ensure their success. Moreover, SCS expands its business by acquiring the other semiconductor companies.
SCS engages in acquisitions and alliances giving rise to economic and technological risks. SCS is continually exploring strategic acquisitions that build upon its existing library of intellectual property, human capital and engineering talent, and increase its leadership position in the markets where it operate. SCS completed two acquisitions in 2002 and two acquisitions in 2001, but did not complete any material acquisitions or alliances in 2003.
Nevertheless, it is undoubtedly that mergers and acquisitions of high-technology companies bear inherent risks. No assurance can be given that SCS’s previous or future acquisitions will be successful and will not materially adversely affect its business, operating results or financial condition. Therefore, SCS must manage any growth effectively. Failure to manage growth effectively and to integrate acquisitions could adversely affect its operating results and financial condition.
In addition, SCS intends to continue to make investments in companies, products and technologies through strategic alliances. Investment activities often involve risks, including the need to acquire timely access to needed capital for investments related to alliances and to invest in companies and technologies that contribute to the growth of its business.
Outsourcing a substantial portion of raw material.
SCS Company has outsourced a substantial portion of wafers manufactured and has consolidated its internal semiconductor manufacturing in Gresham, Oregon. It has also developed outsourcing arrangements for the manufacture of some of its products based on process technology that is unique to the supplier. Previously, there are wafer foundries located in Tsukuba, Japan and Colorado, the United States. But those factories were closed last years. Tsukuba, Japan was sold; the other was shut down by SCS. Instead, SCS tends to outsource the wafers and other material from some of the large companies located in Taiwan and Japan, such as UMC Company Limited, TSMC Company Limited, Kyocera Corporation Limited and Ibiden Corporation Limited.
There is no assurance that the third party manufacturer will be able to produce and deliver wafers and material that meet the SCS’s specifications or that it will be able to provide successfully the process technology it has committed. If the third party is not able to deliver products and process technology on a timely and reliable basis, the Company’s results of operations could be adversely affected. In fact, it is noticed that after the closure of the Tsukuba and Colorado wafer fabrication, the reported wafer issues happened at the offshore subcontractors have increased ~ 5%. Mostly, those wafer issues can be identified at the early stage of assembly. Some of them may have to be scrapped, this increase the company’s production cost. This may not be significant. However, it did happen that the wafer issues were not able to be identified in the production stage and were only discovered after they were shipped to the customers. This would affect the brand image as well as the prestige of the company.
Distribution and allocation of manufacturing facilities
The subcontractors of SCS Company are located in several Asian countries. They are South Korea, Malaysia, Taiwan, Hong Kong and Philippines. The subcontractors are responsible for productions of the semiconductors and storage systems. Most of the productions are allocated to the subcontractors in South Korea and Malaysia as they can offer lower production prices and shorter production cycle time.
Some of the countries or regions that the subcontractors of SCS located do have high technological elements to support the production, such as the equipment technologies, skilled labours and knowledge engineers in South Korea, Hong Kong and Malaysia. Taiwan is in the growth stage that it can be seen that more and more companies are invested in her.
Actually, some of the subcontractors are reaching the overloaded condition. One of them in South Korea has extended the production cycle time. This is not a healthy condition for SCS to operation in this mode. Instead, it is suggested that SCS should seek for new subcontractors outside those areas.
As of now, SCS Company does not have any business facilities located in the Mainland China, but it does have a small number of customers located there. Even though China is a developing country, she is a powerful country in the world. There is no doubt that she is having a number of rooms for business growth. It is an opportunity for SCS to invest in the Mainland China to look for potential growth, either the subcontractors or the customers.
Basically, numerous companies have been emerged to the China market regardless of the size of the organization. The population of China is more than ten billions. The China Government is working on educating the new generation. There are more and more professionals in China. Human Resource is a weapon of The Republic Of China. Moreover, SCS can gain the experience or knowledge of investing in China from other large companies that have been doing business with China for several years.
The production costs of operating in China are relatively cheaper than many countries. With lower production cost but same selling price, this means that the revenue is higher. On the other hand, in order to compete with the large companies, the lower production costs also allow SCS to have a room of lower the price. Especially when SCS is in the markets that it sells its semiconductor products are subject to severe price competition. However, despite China has several benefits to be invested in, there are still a lot of points to be considered, such as political and legal.
CONCLUSION:
The semiconductor industry is intensely competitive and characterized by constant technological changes, rapid product obsolescence, evolving industry standards and price erosion. Many of the competitors of SCS Company are larger, diversified companies with substantially greater financial resources. Some of these are also customers who have internal semiconductor design and manufacturing capacity. SCS also compete with smaller and emerging companies whose strategy is to sell products into specialized markets or to provide a portion of the products and services that SCS offers. As SCS is facing severe competitions in the current market place, it is necessary for SCS to ensure that its business strategies are well established and are capable for the existing markets. Therefore, SCS should evaluate its business strategies in the timely manner.
For this study, there are seven strategies in different aspects are being evaluated: Research & Development, Target Market, Operation Resources, Promotion Strategy, Alliance, Raw Materials and Manufacturing facilities. The SWOT analysis is used in analyzing the business strategies in these areas. It is able to provide a complete evaluation process to this study.
METHODOLOGY
This study uses the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis methodology. SWOT analysis is a widely used format for organizing and utilizing the information gained from the environmental analysis by an organization. It encompasses both the internal and external environments.
Internally, SWOT considers a firm’s strengths and weaknesses (positive or negative aspects of company performance) such as financial performance and resources, production facilities and capacity, market share, customer perceptions of product quality, price and product availability and organizational communications. Besides, the historical background of the organization – its sales and profit history should be considered.
Externally, SWOT considers opportunities and threats in terms of the customers, competitors, economic conditions, social trends, technology, government regulation and other environmental factors. A marketing opportunity is an area of buyer need in which a company can perform profitably. A marketing threat is a challenge posed by an unfavorable trend or development that would lead, in the absence of defensive marketing actions, to deterioration in sales or profit.
The internal environment is largely but not totally within the control of the firm. It external environment is independent of the firm, largely but not totally outside the control of the firm.
At the beginning of this study, a number of data regarding the SCS Company were collected. They were all meaningless at this point. By applying the SWOT analysis, the data were then categories into different fields. Those data would also be identified as strengths, weaknesses, opportunities and threats. When the data has been categories, they were used to evaluate the selected business strategies.
The SWOT Analysis was chosen because of these four benefits:
It is simple in that it requires no extensive training or technical skills to be used successfully, only an understanding of the nature of the company and the industry in which it operates.
It is flexible in that it can enhance the quality of an organization’s strategic planning even in the absence of extensive marketing information systems.
- Integration and synthesis
It allows the analyst to integrate and synthesize diverse information, both of a quantitative and qualitative nature.
It can foster collaboration between different functional areas.
SWOT analysis also provides a complete analysis for this study. It is found that more than one SWOT analysis could be used in this study and could provide a more comprehensive evaluation of the business strategies.
However, SWOT Analysis does not only have advantages, but also disadvantages. SWOT analysis does not provide enough information for the analyst to enact the strategic changes, but more information and analyses are needed. Moreover, the strengths mentioned in SWOT may not necessarily be lead to a competitive advantage of the company. In addition, the SWOT analysis has been built several years ago and may not able to notice the important changes of the environments.
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