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Example research essay topic: Vast Majority Integrated Circuits - 1,790 words

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Global Pricing in the Semiconductor Industry The major issue of the case is dealing with the question, if a global pricing strategy would be adequate to pursue in the semiconductor industry. So far, semiconductors had been bought and sold at different price levels in different countries to reflect the various cost structures of the countries in which they were produced. Semiconductors made in European countries were usually more expensive than those made in Asia or North America, simply because it cost manufacturers more to operate in Europe than in the other two regions. Despite these differences, large distributors and some original equipment manufacturers were becoming insistent on buying their semiconductors at one worldwide price, and were pressuring vendors to negotiate global pricing terms. As a consequence, and due to the fact that the semiconductor industry is very price competitive and price sensitive, the manufacturers of semiconductors are faced with the issue whether they can offer global prices for the same products and therefore are able to develop a cohesive pricing strategy. A further question would be how Texas Instruments could reorganize themselves in order to make global pricing a realistic option and what implications would a global pricing strategy have in relationship to other international customers.

To solve this issue would be enormously important for Texas Instruments, since the vast majority of semiconductors were considered commodity products, the buying decisions of distributors were based entirely on price. Texas Instruments Incorporated was established in 1951 as an electronics company serving the American defence industry. Although Texas Instruments was often considered the pioneer of the American electronics industry&# 64979; it was one of the first companies to manufacture transistors and developed the first semiconductor integrated circuit in 1958. Jack Kilby was the Texas Instruments engineer who developed the first integrated circuit, a pivotal innovation in the electronics industry. Only a few years after Kilby's invention, electronics manufacturers were demanding these integrated circuits, or chips, in smaller sizes and at lower costs, a move that led to unprecedented innovation in the electronics industry. Soon chips became a commodity, and chip manufacturers relied on high&# 64979; volume, low&# 64979; cost production of reliable chips for success.

After receiving market attention with its development of such innovative consumer products as the pocket calculator and the electronic wrist watch, Texas Instruments lost its business in both markets to cheap Asian imports. Meanwhile, it struggled to keep up with orders for its mainstay business in semiconductors through the 1970 's, only to see demand for its pioneer semiconductors shrink during the recession of the early 1980 s. Nevertheless, Texas Instruments struggled to maintain its position in the electronics industry through the intense competition of the 1980 s. Faced with heavy losses in many of its core areas, Texas Instruments reorganized its business to foster and embarked on a program of cost&# 64979; cutting.

By the year 1985, the company had refocused its efforts on its strengths in semiconductors, relinquishing market dominance in favour of greater margins. Over the period of time, Texas Instruments continued to remain powerful in the semiconductor industry, in part because it was the only American company that continued to manufacture dynamic random access memory chips in the face of fierce Japanese competition in the 1980 s. The company had manufacturing sites spread throughout North America, Asia, and Europe, and was pursuing its strategy of increasing manufacturing capacity and developing manufacturing excellence. 1994 's performance was record breaking for Texas Instruments. It marked the first time the company exceeded sales of $ 10 billion and over $ 1 billion in profit, and followed a history of volatile financial results. Finally, by the year 1995, Texas Instruments had developed a strong position in the electronics industry, despite its reputation as a technological leader rather than a skilled marketer of its products. By the year 1995, Texas Instruments was a leading manufacturer of semiconductors, defense electronics, software, personal productivity products and materials, and controls.

The Semiconductor Group divided its business into two segments: standard products and differentiated products. Standard semiconductors, which accounted for 90 % of the Group's sales, included products which could be substituted by competitors. Standard semiconductors performed in the market much like other products for which substitutes were readily available. The remaining 10 % of the company's semiconductor business came from differentiated products, of which Texas Instruments was the sole supplier.

Because substitutes for these products were not available in the marketplace, differentiated products commanded higher margins than their standard counterparts and were receiving greater strategic emphasis on the part of Group management. Semiconductors were silicon chips which transmitted heat, light, and electrical charges and performed critical functions in virtually all electronic devices. They were a core technology in industrial robots, computers, office equipment, consumer electronics, the aerospace industry, telecommunications, the military, and the automobile industry. The majority of semiconductors consisted of integrated circuits made from mono crystalline silicon imprinted with complex electronic components and their interconnections. The remainder of semiconductors were simpler discrete components that performed single functions. As I already mentioned above, prices for semiconductor products differ a lot in the various countries they are produced.

Semiconductors had been bought and sold at different price levels in different countries to reflect the various cost structures of the countries in which they are produced. Semiconductors made in European countries for example, were usually more expensive than those made in Asia or North America, simply because it cost manufacturers more to operate in Europe than in the other two regions. Since the vast majority of semiconductors were considered commodity products, the buying decisions of distributors were based almost entirely on price. Furthermore, semiconductor prices were notoriously volatile. The Semiconductor Group at Texas Instruments combined the practices of forward pricing and continuous price negotiations to set prices with its distributors.

Forward pricing: The cost of semiconductor manufacturing followed a generally predictable learning curve. By increasing the volume of production, the cost of production would decrease and the percentage of functioning chips would increase. This percentage, termed 'yield' in the industry, and the standard learning curve of semiconductor manufacturing together had a large impact on the prices semiconductor manufacturers set for their products. Managers could predict with considerable accuracy the production cost decreases and yield improvements they would experience as their production volumes increased. These predictions are the basis of the forward prices they set with both, original equipment manufacturers and distributors. Continuous Price Adjustments: Production costs and yield rates were not the only contributing factors to price levels for standard semiconductors: market supply and demand played also a powerful role in establishing prices.

As a result of volatile prices caused by shifts in supply and demand, distributors often held inventories of semiconductors that did not accurately reflect current market rates. To protect distributors from price fluctuations. most semiconductor manufacturers offered to reimburse distributors for their overvalued inventories. Due to the fact, that distributors had access to the prices of products from all the semiconductor manufacturers at any given time, and some any where in the world, pricing decisions were very critical because making one mistake in pricing could lead to a lost in market share in a day, that can take them three months to recapture. Due to the fact, that the distribution network consolidated into a small number of powerful companies, Texas Instruments had begun to notice that his price negotiations were increasingly focused not only on beating the competition in North America, but on beating prices available around the world, including those of TI in other regions.

Due to different distribution channels everywhere in the world, costs and calculation models differ accordingly. For example, Europeans include freight in their prices, what North America doesn't. Furthermore, the cost of producing semiconductors varies by country. Europe tends to be more expensive than North America or Asia, because their infrastructure is more costly. Texas Instrument's sales and net profit have steadily grown over the past period of time and the Semiconductor Group, a part of the Components Division, had total sales of $ 2 billion in 1994, the third consecutive year in which Texas Instruments semiconductor revenues grew faster than the industry. The company's return to financial success in the early 1990 's was based on its strong performance in semiconductor sales and profits, both which were at record levels in 1994.

Management in the company expected semiconductor sales to continue to grow strongly and was planning heavy capital expenditures on new or expanded plants in the United States, Malaysia, and Italy to increase the company's capacity. Texas Instrument's 1994 sales of $ 10. 3 billion, a 21 % increase from the previous year, was split among components ($ 6. 8 billion), defense electronics ($ 1. 7 billion), digital products ($ 1. 66 billion) and metallurgical materials ($ 177 million). 1994 's profits of over $ 1 billion came almost entirely from its components business. Components made a profit of $ 1. 1 billion, while defense electronics made $ 172 million. 1994 's performance was record&# 64979; breaking for Texas Instruments. It marked the first time the company exceeded sales of $ 10 billion and over $ 1 billion in profit, and followed a history of volatile financial results. The pervasiveness of semiconductors in electronics resulted in rapidly growing sales and intense competition in the semiconductor industry. Market share in the industry had been fiercely contested since the early 1980 s, when the once&# 64979; dominant U.

S. semiconductor industry lost its leadership position to Japanese manufacturers. There followed a series of trade battles in which American manufacturers charged their Japanese competitors with dumping and accused foreign markets of excessive protectionism. By 1994, after investing heavily in the semiconductor industry and embarking on programs to increase manufacturing efficiency and decrease production costs, American companies once again captured a dominant share of the market. In 1994, total shipments of semiconductors reached $ 99. 9 billion, with market share divided among North America (33 %), Japan (30 / 0), Europe (18 %), and Asia/Pacific (18 %). The industry was expected to reach sales of $ 130 billion in 1995, and $ 200 billion by the year 2000.

To capture growing demand in the industry, many semiconductor manufacturers were investing heavily in increased manufacturing capacity, although most industry analysts expected expanding capacity to reach rather than surpass demand. Combined with record low inventories in the industry and reduced cycle times and lead times, a balancing of supply and demand was causing semiconductor prices to be characteristically stable. Texas Instruments sold its semiconductors through two channels: directly to original equipment manufacturers and through a network of electronics distributors. Approximately 70 % of the Group's U. S. customers dealt directly with Texas Instruments.

The remainder bought their semiconductors through on...


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