The Innovator's Dilemma - Book Review

A friend recommended this book to me a few months back. I read it then but after the recent discussion about Dell, Acer and the netbook market decided to read it again. I also posted a review on Amazon.

The Innovator's Dilemma is a unique approach to understanding corporate failure. Christiansen's thesis is that well managed companies with all the best processes in place do fail. The failure is not due to inefficiency, bad management or bad processes but due to companies being responsible in terms of listening to their customers, investing in technologies that their customers' demand and rationally allocating resources to high-margin products. Christiansen argues that these investments are made on sustaining technologies as opposed to disruptive technologies. He reason's established sector leaders do this because the initial market for disruptive technologies is too small to justify the investment and sustain corporate growth. This provides new entrants with time and space to establish themselves in the emerging market and that when the performance of the disruptive technology intersects the needs placed on the traditional technologies in an industry, these disruptive technologies will start to take over from the traditional sector leaders. [Read Full Review]

I feel this book speaks directly to what is happening in the netbook market. Once again, this is not a prediction of the demise of Dell but netbooks are changing the way people percieve and view computers. The growth of this sector has obviously grown due to the economic crisis due to the low price of these devices but I still cannot help feeling that by not investing in these products, they are missing something. I may be wrong but this book (even the introduction) is a mirror of the current situation in this market and also surprisingly the rise of ARM processors.

So anyway rather than reading the review read the book and let me know what you think. It will be interesting.

Are PC Shipment Volumes Meaningful

Yesterday we wrote that Acer had taken the number 2 spot in terms of volume for PC shipments in Q3 this year (Acer Rises to No. 2 in Q3 2009 ). Tony Bradley comments on this data over at PC World:

The third quarter sales figures brought great news for the PC industry-- sales are up! Following declines in the first and second quarters, global sales of PC's are up 2 percent for the third quarter, seemingly signaling a light at the end of the recession and IT spending glut tunnel. However, the news isn't all good.

See, here's the thing about statistics and numbers: they say what you want them to say. Good news can be extracted by focusing on the total number of actual devices that were bought and sold during the quarter. However, that statistic does not tell the whole story.

Bradley's perspective is that the shipments are not a significant indicator of the health of the company or the industry. His thesis is that absolute volumes are not as important as say revenue or overall profit and that while the small marginal increase in sales and the growth of Acer is not unimportant. There are other issues that need to be addressed. When speaking about Dell, he quotes Michael Dell who said "If we [Dell] wanted [market share], we'd go and sell a whole bunch of netbooks." The point being that Dell are focusing on long term revenue growth, profitability and not looking at incremental market share as it changes each quarter (quarterly myopia is an obsession and has played its part in the economic downturn).

When reading his article a couple of things sprang to mind.

First, while I do agree with Bradly that it is good for companies to focus on "long-term strategy and profit" it is unfair to say (or imply) that Acer or the Taiwanese companies aren't doing that. Of course they are. Getting into the netbook game was a long term strategy for both Acer and Asus and right now they are reaping the rewards of their planning and the advantage they are gaining from their strategic foresight when they launched the netbooks a few years ago.

Second, what is is Dell's long term strategy? No doubt they have some plans but as we have commented here before some industry observers believe Dell's business model is struggling to survive . Admittedly I haven't kept up and a lot might have changed since 2008 when the article was first published, but still, have they managed to realign the organization and their entire business model to be able to drive growth?

Third, what about the share prices? YTD Acer's shares have climbed from NTD40 per share to NTD80 per share (that is a %100 climb) whereas Dell has gone from US$10.54 to US$15.43. Certainly Acer is seeing the reward for their growth strategies (and to think I was thinking of buying Acer at NTD25 way back when, DAMN!)

Fourth, netbooks are a disruptive technology. Both Acer and Asus are aware of this. In "The Innovator's Dilemma" Clayton Christensen has highlighted the way disruptive technologies can bring down market leaders very quickly if they do not invest in these technologies. Yes, right now Dell does have very strong relationships with businesses around the world, but when the push comes to the shove and the netbook computers are increasingly adopted by businesses accross the board, Dell won't be in the game.

To stress, I am not here suggesting that Dell will fail. The world of business is too uncertain for such radical proclamations. The point here is this: Dell can carry on running along the lines they are going but right now technology is moving towards flexible, mobile devices that can be easily moved around and connected anywhere. I dare suggest that although sitting and doing nothing may be a long term strategy, innovation right through the value chain, gaining new market share, and becoming dominant in new market spaces is a valuable long term strategy that will reap reawards later. The experience curve suggests that as Acer, Asus and the others continue to grow in the netbook space, their cost structures will decline and when and if Dell do decide to enter the market space, they will be blown away.

PC WORLD: PC Shipments on the Rise, But at What Cost?

Acer Rises to No. 2 in Q3 2009

In Acer Climbing to No. 2 we noted that IDC reported Acer was the second largest PC distributor behind HP with a market share of 18.5%. Today Reuters reports Acer has surpassed Dell in Q3 2009 as well. Reuters says:

Taiwan's Acer Inc (2353.TW) surpassed Dell Inc (DELL.O) to become the world's No. 2 PC maker in the third quarter as worldwide industry sales proved surprisingly strong, spurring hopes that demand is rebounding.

According to Reuters Acer now has a PC market share of 14% while HP leads with a market share of 20.2% and Dell at 8.4%. Are Dell in trouble? ASUS and Lenovo will be fighting for more market share and both those companies may start to attack Dell's position in the market. Only time will tell.

Reuters: Acer passes Dell as global PC shipments rise

Netbook Chip Demand Rises

An excellent article on The Street argues that while Intel are still dominant players in both the traditional PC/Notebook space and the netbook space, they are being challenged in both the notebook and netbook space. According to Robert Castellano at The Street:

....the Atom is propping up Intel's unit shipments in the mobile PC sector. It's (Intel) making little or no money on the Atom anyway. A more important issue is that it (Intel) may be losing market share in the notebook market. Why? Because Intel had to fill orders for netbooks in the fourth quarter of 2008 and the first quarter of 2009 and made Atoms instead of Penryns, resulting in lower margins on a $29 CPU. Once PC OEMs migrated to the AMD CPU, they stayed with it.

I've also forecast previously that while Intel's Atom will hold more than an 80% share of the 23.5-million netbooks sold in 2009, a movement is underway that will enable the processor from ARM Holdings (ARMH Quote) to gain a 55% market share in 2012.

What I find astonishing (not unbelievable mind you) is Castenallo's prediction that ARM processors will have a 55% market share of the netbook space in 2012. This would be a drastic inversion of the market share for both companies. I am assuming Castenello is making this assumption based on his knowledge of both the Intel and ARM roadmap (as far as he can see it anyway) and so this inversion must be troubling for Intel. Certainly ARM has been pressing them in the mobile phone space for many years and this does indeed seem to be the natural progression for them. It would be interesting to see if ARM in the future plans to move further along the product train and try (at some point) to compete with Intel in the notebook space.

In related news Electronics Weekly reports that ARM-based netbook chip orders are set to max out the 65 nm and 55 nm processing plants at both TSMC and UMC. According to Electronics Weekly:

According to the Commercial Times of Taiwan, both TSMC and UMC will be at 100% capacity utilisation for 65nm and 55nm processes by November, because of a flood of orders placed on them for ARM-based Netbook chips.

The orders are coming from Qualcomm, Texas Instruments, Freescale Semiconductor Via Technologies and Nvidia.

Freescale says it has three Netbook design-ins expected to go into production before the end of this year, while Qualcomm says it has half a dozen design-ins. If TI, Via and Nvidia have three or four each, then there could be 20 ARM-based Netbooks on sale before Christmas.

Both Paul Jacobs, CEO of Qualcomm and Rich Beyer, CEO of Freescale, point out that the new metric for measuring computing performance is going to be power efficiency rather than CPU speed. This massively favours ARM which has always designed for power efficiency as against Intel which has always designed for speed.

The Electronics Weekly article sheds further light on the growth of ARM chips on netbooks. Of course there is less visibility into the production of Atom chips as (although some of it apparently is being done at TSMC) most of it would still be in house anyway. ARM chips do seem to be making a big bang on the netbook stage and one wonders just how Intel are going to compete in the long term. Remember Intel are used to competing as the dominant market leader and not as one among equals so it will be interesting to see if they have the ability to alter their strategic approach to remain dominant and also to see if they adjust their business model to compete against ARM. One thing is for sure, many people around the world would prefer a weaker Intel.

Electronics Weekly: Netbook Chip-Set Orders To Max Out Capacity At TSMC & UMC
The Street: Intel's Grip on Notebooks, Netbooks Slips

IT Industry not Affected by Typhoon Morakot

More reports are floating in from the South of Taiwan of serious loss of life and damage to property. The BBC reports 'Hundreds lost' in Taiwan typhoon due to severe typhoon induced mudslides. Despite the massive loss of life and damage to property, Digitimes reports the IT industry has remained largely unaffected by the typhoon. Digitimes reports:

Taiwan's electronics industries appear to have seen limited affects from Typhoon Morakot which brought heavy rains over the weekend and caused seriously flooding in many areas in the southern and eastern parts of the island.

Many companies have already reported via filings with the Taiwan Stock Exchanged that their operations and businesses have seen little or no impact from Morakot.

Typhoons always are always dangerous and this one seems to be particularly dangerous. Hi Tech Taipei mourns with all Taiwanese people and with the families and friends of those lost and missing. Lets hope survivors can be found.

Digitimes: Taiwan IT industry not affected by typhoon flooding

TSMC vs. Global Foundries - Let the War Begin

Just caught up with an August 3 article on TG Daily where Morris Chang compares himself (oddly enough) to Joseph Stalin! Seriously. Ah well, its all related to the ground breaking of the new Global Foundries Fab (GF) in New York and the signing of ST Micro as a customer. According to TG Daily:

San Francisco (CA) - The Chairman of Taiwan Semiconductor Manufacturing (TSMC) recently told reporters that he expected to triumph in a protracted and bloody war with GlobalFoundries. The septuagenarian compared himself to Stalin.

"We consider GlobalFoundries to be a formidable competitor," said Morris Chang, who was quoted by PC World. "I really think the battle will be a high casualty one. My job is to minimize the casualties on my side."

According to Chang, the construction of GF's 4.2 billion Fab 2 chip factory in upstate NY indicated a strategy of "total" committment. The opinionated Chang also compared GF's strategy to German attempts to hold the line at Stalingrad after being surrounded by Russian troops.

"Like Stalin, I have no doubt of the outcome," boasted General Chang.

GlobalFoundries spokesperson Jon Carvill responded to Chang's questionable analogy by reiterating GF's "total" commitment to fair competition.

"The groundbreaking in NY and the announcement of our newest customer, STMicro, were huge milestone for us and represents a long-term commitment to delivering the world's most advanced technologies in high-volume to the market," Carvill told TG Daily.

However, Carvill did concede that TSMC was a "strong" and "well established leader" in the foundry industry.

"We look forward to competing with them and offering a true alternative for those companies looking for the world's most advanced technology and manufacturing capabilitities," added Carvill.

Well well, we have talked about GF a bit in the past (see Global Foundries Challenges TSMC and Globalfoundries Getting in on the Game).

This fight will be an interesting one and one that TSMC has not really had in the past. They have dominated the foundry industry for a long time and have been the clear leaders. Although there are other competitors, it would seem that TSMC are way in the lead. This might be a bruising battle and one which the GF execs have had a lot of experience with. After all, they did challenge Intel (and lost a brutal price war) and now they are challenging the behemoth in the foundry industry.

Of course, GF does not have the experience in the pure play foundry industry and while they may have the manufacturing expertise (and a lot of money), and while the industries are related, they will still have to climb the curve. There is no escape. Their advantage (I would imagine) would be that many of TSMCs customers would love to reduce the supplier power that TSMC currently has in the market and for this reason alone, may outsource some of their production to GF. However, although TSMC does stand to lose a lot, I think the bigger fallout will come for the other (smaller players) in the foundry industry.

Time will tell but I still think Chang's Stalin analogy is odd! Why didn't he use Churchill?

TG Daily: "Intel's" TSMC declares war on "AMD's" Globalfoundries

Semiconductor CAPEX Down - TSMC Capex Increases

The number of semiconductor companies spending more the one billion US dollars in 2009 on capital expenditures (CAPEX) has declined from eight in 2008 to just three in 2009. Fabtech cites an IC Insights reports. According to Fabtech:

The elite of the elite as far as semiconductor capital spending is concerned are in desperate need of new members, otherwise the ‘Billion-Dollar Club’ is in danger of closing its doors. According to IC Insights, only three companies, Intel, Samsung, and TSMC, are planning CapEx of over US$1.0 billion in 2009, down from eight companies in that club in 2008, and 16 companies in 2007.

Intel still sits at the head of the table with spending plans of US$4.7 billion, Samsung with US$4.5 billion and TSMC with its revised upward plans for US$2.3 billion spending in 2009. Compared to spending in 2008, Intel is spending 10% less, Samsung by as much as 33% less and TSMC is the only one increasing spending by 23%.

Capital spending as a percent of semiconductor sales will barely top 12% in 2009. Considering that it reached a record low of 16% in 2008, there is little joy for equipment suppliers.

However, the good news is that IC Insights believes this will lead to much stronger IC average selling prices (ASPs) beginning in 2010 and extending through 2012. Thus generating the profit margins required for greater capital spending.

Fabtech gets it right when it says this provides serious issues for equipment suppliers but this is nothing new and they were probably expecting the decline. Last year in August in Chip Manufacturing Orders Down we quoted a CNET article that anitcipated this decline. So really it is nothing new or surprising. Most companies have struggled in the past year and planning expensive capital projects is difficult to do when orders are not coming in. One would imagine it would take a longer period of time for these equipmenet manufacturers to recover. I assume the manufacturing companies will first need to develop a solid forecast of future sales before they start to invest.

There are some encouraging signs though. Earlier in the week we saw PC Demand is Climbing and other reports out of Taiwan suggest some parts of the chip design sector are in recovery mode with EDN reporting Top 20 semiconductor companies saw 21% sales surge in Q2, Reuters reporting Chip packager ASE sees higher Q3 shipments and the Wall Street Journal (WSJ) reporting MediaTek 2Q Net Profit Jumps 80%; Sees Stronger 3Q.

There does seem to be some sort of recovery in the semiconductor sector. Of course this will be driven by the consumer, enterprise and organizational spending on products and equipment that will largely be driven from demand and perception among users at the end of the value chain. From the consumer perspective, lower average selling prices on chips will make products cheaper so it does make products more appealing to consumers.

As for CAPEX spending by the big guns, well it might take a longer time and cycle for this to increase and enable the equipment manufacturers to increase their sales.

FabTech: Billion-Dollar Club’ members depleted