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Diel Report™ on Texas Instruments: How TI Achieves Superior Profitability
Venture-q(R), LLC, Oct 2008, Pages: 86
TI provides the most comprehensive and extensive coverage of the analog-digital integration spectrum. This attribute not only enables TI to implement a broad range of business strategies adaptable to given market environments, but to also command a superior profitability.
In fact TI’s FY07 revenue level of $13.8B does not significantly differ from its FY94 revenue level of $10.3B. What has significantly changed is the composition of TI’s revenue, reflecting a stream of business transformations. The company achieves its current revenue level at a significantly higher profitability with almost twice less headcount. TI is a company of perpetual change where the emphasis on growth is driven by the company’s transformation processes, which typically have significant implications for its competitors.
To posses TI’s comprehensive coverage of the analog-digital integration spectrum requires comprehensive manufacturing and design capabilities. In addition to its highly specialized analog design expertise, TI has developed an efficient design factory upon its substantial manufacturing foundation. This design factory is mainly used for development of customized DSP/MCU and mixed-signal products, i.e. differentiated silicon. It incorporates the company’s prior expansive range of ASIC business technologies and intellectual property.
Design factory’s customization/ASIC backplane is capable of fast system-level integration including mixed-signal SoC (System-on-chip). It is capable of producing 15-20 new DSP model products per year, which is a critical capability for participating in the consumer electronics marketplace.
We estimate that TI’s current ASIC business is around $1B. It is mainly derived from hard disk drive applications that draw a strong parallel with wireless handset applications in terms of their system-level functionality. This is a well established and historic TI business that was reinforced in 1996 with the acquisition of Silicon Systems. TI’s manufacturing foundation consists of an extensive range of specialized and advanced deep submicron digital fabrication processes.
It provides TI with a distinct competitive advantage in cost effectively redeploying its manufacturing assets according to the shifts in its business model and strategy. Instead of selling its digital fabrication facilities at heavy discounts, TI has an option to redeploy them for its analog business with relatively small capital expenditures. This flexibility enables TI to optimally migrate its manufacturing infrastructure along its business units’ product domains.
- For the digital nucleus it uses advanced state-of-the-art digital process technologies with about 50% internal and 50% external foundries (2 years transitions)
- For the mixed-signal buffer it migrates factories from external foundries to internal fabs (3 years transitions)
- For the high-performance analog shell it migrates equipment among the internal fabs (5 years transitions)
A comprehensive coverage of the analog-digital integration spectrum also requires an extensive product arsenal featuring a broad range of diverse product portfolios. TI’s product arsenal features close to 20,000 model analog-mixed signal products derived from nearly 7,000 generic products. TI typically introduces one new generic product per calendar day and generates nearly 9,000 new customers per year. Around 90 percent of new products introduced in the first half of 2008 represent analog products dominated by power management, data converter, and interface product classes.
TI covers the digital processing segment of the analog-digital spectrum with a continuum of processors addressing all major analog signal processing and control aspects of end-equipment applications as well as application processors (OMAP family). Analog signal processing is addressed with a broad range of standard and application-specific DSPs. Analog signal control is addressed with an even broader range of digital signal controllers and microcontrollers.
The company’s comprehensive products coverage combined with its extensive system know-how and customization capabilities enable TI to effectively apply the S(solutions)-factor strategy to product development and selling.
In this regard TI has a distinct competitive advantage. We estimate that TI’s revenue and profit S-factor values range between one to four depending on application and customer.
TI’s top down approach encompasses the entire target board system, which could include a significant number of components. Furthermore, TI develops products to meet the requirements of this top down strategy and organizes its business structure for its execution.
TI emphasizes selling of its entire product arsenal rather than individual products, i.e. winning more chips per board. The net result is enhanced revenue growth and profitability. TI uses this strategy to counter the more volatile revenue stream derived from wireless handset applications. Hence, the business strategy shift from DSP processors to analog and embedded processing.
TI has repeatedly executed timely business transformations in response to changing market conditions representing the company’s key competitive differentiator and strength.
Key catalysts of these transformations are a well harnessed modus operandi and a stable organization that has not significantly changed over the past ten years. TI’s current transformation is a strategy shift to capture product content of analog signal processing boards. This requires a high ratio of a board’s analog versus digital signal processing products—in the 100 to one range. Therefore, the focus of the company’s current shift is in the analog products direction.
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