Seven growth opportunities for chip industry during market upturn

Scott Grant, Accenture

USA: The semiconductor industry survived the recent rough recession. In fact, the industry finally learned from past mistakes by turning off the supply spigot faster and more aggressively than in previous downturns as demand plummeted. This was the good news.

The bad news is that many companies in the industry continue to struggle with a wide range of issues including excessively narrow focus on engineering chips rather than deeply understanding end markets now and going forward, inefficient global operations, and insufficient innovation.

To overcome these hurdles, capitalize on the market upturn and build momentum and growth, what should industry leaders do now? This article tackles that question head on.

Drawing upon several of Accenture’s industry research initiatives and associated analysis and insights, as well as deep industry experience meeting with executives throughout the industry constantly, this report recommends nine growth opportunities that will help semiconductor companies accelerate towards high performance.
Seven Growth Opportunities

One: Focus on End Markets
In traditional semiconductor end markets, growth depends on winning the “fight for sockets” and gaining a greater share of the silicon in specific end market devices. Critical to winning this battle is having a much stronger understanding than now resides in most semiconductor companies of customers’ reference designs including innovation channels, consumer behavior, and usability and form factor revolutionary modifications for future new products.

Chip firms need to use this understanding to provide chips that meet future needs. This, in turn, depends on having effective relationships with direct customers, as well as distributors to gain better customer intelligence and a rich understanding of where innovation is headed in a three-to-five-year time frame.

In this pursuit, chip firms need to gather insights into the end market to understand the specific economics, the cyclical nature of demand, and the unique nuances of the market. Two areas are critical. First is understanding end market usage models via data analytics.

This means grasping how usage and movement of technology, such as smartphones and e-tablets as a convergence of key forms and functions, is progressing within a specific market.

Second is comprehending end market value chains, meaning what additional insights and expertise are required to succeed in developed and emerging end markets that result in added-value to direct and indirect customers. The goal is for chip firms to become value-add design partners versus volume component chip manufacturers.

Two: Focus on Profitable Sales and Operational Planning
Sales and operations planning processes have historically focused on aligning supply and demand from only a unit and volume perspective. Thus, they have been more narrow in scope and more conservative in their aims. Under this model, chip companies have typically considered capacity and inventory constraints along with price elasticity to determine optimal price points.

Going forward, they need to focus on achieving profitable sales and operational planning. To do this they need to balance their financial performance with their demand, supply and market realities.

Profitable sales and operations planning delivers probabilistic scenario modeling in profitability, pricing, product/channel mix and capacity allocation. The way to achieve this is by performing responsive supply analytics to improve visibility in forecasting by geography, market channel cost adjustment, and inventory.

Transitioning from traditional sales and operational planning to profitable sales and operational planning will allow chip firms to better leverage enhanced resource planning, customer relationship management, and product lifecycle management investments with data integration and common planning processes.

Three: Focus on the IP Design Chain Management
The chip industry continues to contend with intense pressures on product development costs and demands for faster deliveries of such products to market. This situation has heightened the importance of chip intellectual property (IP) and design chain management stemming from the convergence of chip manufacturing and IP within early stages of research and development.

To achieve growth during the upturn, chip firms need to drive several initiatives including integrating management of IP and decisions about IP product portfolios. Such integration enables more effective collaborations on customer chip designs, lower chip development costs, faster validation of chip designs, reduced IP loss, increased IP reuse and licensing fees, and improved use of engineering capacity.

Four: Focus on Talent Management
With the market in recovery mode more career opportunities are materializing for semiconductor professionals in various fields such as chip design and field application and technical sales engineers. Leading and retaining this talent is key for chip firms to seize growth. Many of these engineers have endured considerable hardship and excessive workloads during the recession as staffs have been trimmed.

It’s of paramount importance that semiconductor companies focus on how to retain knowledge, how to foster healthy organizations and positive corporate cultures, how to care for a group of engineers who feel overworked and are looking for better, less stressful and more stable career opportunities.

To address these challenges, chip companies need to focus on succession planning and job ladder redesign. Firms with formal succession planning equip themselves to better weather market upturns by retaining key resources especially people.

Job ladders, which traditionally have been a system for tracking various leadership levels of the chip industry’s organizational hierarchy, should be reevaluated to provide these people with multiple and widely diverse growth tracks and career paths. Such diverse offerings will result in more competitive firms.

Too often, chip companies become so focused on delivering a product to market on time that they don’t spend enough time managing their talent effectively by helping their teams stay connected with strategic and personal objectives.

Five: Focus on Global Operations
Given the requirements of adapting to evolving markets, most semiconductor companies don’t have the operational capabilities and rigor needed to be successful. Many have begun the process of transforming operations but find it more challenging than they expected.

In many cases, firms are transforming multiple areas of the business, yet the capabilities needed in each area are incomplete. Other companies have basic functions in place in areas such as customer relationship management (CRM), product lifecycle management (PLM), supply chain management (SCM) and enterprise resource planning (ERP). But they fall short in having the cross-functional collaboration, end-to-end visibility and process convergence needed to be truly responsive to end markets.

As serious as these problems are, they don’t end there. New Accenture research has found that some key operational problems are global in scale. The research, summarized in a report titled “Optimizing Global Operations in the Electronics & High-Tech Industry,” found that widespread deficiencies in talent recruitment and information technology have left the vast majority of electronics and high-tech firms poorly positioned for global expansion.

Yet, the research also found that virtually all survey respondents said they have sufficient capital to execute their global expansion plans. These shortcomings need to be addressed quickly as the battle for highly skilled talent and innovative IT intensifies worldwide.

These operations are changing fundamentally as the market turnaround continues. Cost cutting is being superseded by the need to understand customers better and work more closely with them, Accenture’s research found.

Chip firms need to consider fine-tuning their global operations by reviewing their competitive essence—what makes them distinctive and differentiated. They may then use this competitive essence as a compass to guide their operational decisions, win the next phase of competition, and achieve high performance.

Six: Focus on Innovation
Innovation modeling is vital. This is the convergence of the firm’s external consortiums, such as university research organizations, with the firm’s internal research and development labs.

The ability of chip firms to manage the early concept research phase across partners increases the likelihood that that concept will be converted to a marketable product. Leading chip firms need to effectively tie their points of innovation into key product portfolio decisions.

To rev this innovation engine further, chip firms should develop clear innovation cycles, reward innovative ideas and acknowledge educated risk taking while investigating beyond the obvious and what has always been done. Traditional industry practices may not be growth drivers anymore. The industry has been stuck in many cases with the inability to see things in a different way, and this needs to change.

Accenture has done extensive research with executives about innovation. The research, summarized in a report titled “Companies Makes Innovation a Priority for Growth,” revealed that approximately 60 percent of respondents said their organization has become more risk averse regarding new ideas. And, 73 percent agree that their company tends to pursue product line extensions rather than new, groundbreaking products or services. Furthermore, 53 percent say their companies fail to learn from past mistakes.

A growth opportunity for chip firms is how they handle failure. The research found that the best innovators know how to reward failure as an opportunity for growth. Chip companies also need to improve the quality of ideas by breaking down organizational silos.

Accenture’s research discovered that too many companies are compartmentalized into discrete, insular groups that don’t cooperate with each other. Too often there is little if any cross-pollinating of ideas between different depart ments. As a result, the company as a whole doesn’t benefit from all of the best ideas from all members of the company.

Seven: Focus on Embedded Software
Collaborating with various players in semiconductor end market is one of most important growth opportunities for this industry. Those include companies that develop software for use in the same devices that house semiconductors such as smartphones, media devices, set-top boxes and gaming consoles.

The more chip firms collaborate with developers of embedded software to improve smartphone applications, for example, the more robust the opportunities will be to sell more semiconductor chips now and as the smartphone market continues to evolve. Differenti ation in the smartphone market is more important and potentially lucrative in embedded software than chips.

Chip companies need to get more knowledgeable of embedded software and more collaborative with embedded software providers. This growth opportunity is potentially huge.

Scott Grant is a MD with Accenture's Semiconductor Business. He can be reached at scott.grant[at]accenture.com!