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... e or more of the seven major semiconductor distributors that served the North American market. Whether an original equipment manufacturer dealt directly with Texas Instruments or bought from a distributor depended on the manufacturer's size. The largest original equipment manufacturers were able to negotiate better prices from semiconductor manufacturers than were distributors and therefore bought directly from the manufacturers. For smaller sized manufacturers, it was more efficiently to serve them through the distribution channel. Distributors were considered to be clearinghouses for the semiconductor industry.
Each distributor dealt with products from all the major semiconductor manufacturers. The distributors specialized in handling logistics, material flows, sales and servicing for electronics manufacturers who were either too small to negotiate directly with the major semiconductor manufacturers or lacked sufficient expertise in logistics management. The electronics distribution network had originally consisted of a large group of's miller companies. By 1995, industry consolidation had left almost 40 % of the distribution market in the hands of its two largest competitors, arrow Electronics and Avnet, with own together a market share of 39. 6 %. The seven largest distributors captured 58 % of sales in the market. This trend toward consolidation had had a major impact on the nature of the relationships among semiconductor manufacturers and the distributors through which they sold their products.
The competition, Texas Instruments is faced to in the semiconductor industry is very intensive. Companies in this industry compete mainly on prices and therefore cost reduction in the manufacturing, but as well increasing efficiency are essential for the success and to gain competitive advantage. Market share in the industry had been fiercely contested since the early 1990 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. Distributors in this industry have access to the prices of products from all the semiconductor manufacturers at any given time and some anywhere in the world, this further increases the competition on prices between the manufacturers. As a consequence, Texas Instruments is doing 10 % of their sales through price adjustments. On the other hand, at the same time, through negotiations with distributors, TI captures masses of data regarding the pricing levels of their competitors and the market performance of their different products. This process clarifies, how intense the competition in this market is and how well informed manufacturers are about competitor's prices.
Beside the increases in sales of Texas Instruments in the past period of time, Texas Instruments is nowadays a market follower behind companies like Motorola, Toshiba, NEC, and Intel which is the market leader. Only in the differentiated semiconductor business, Texas Instruments was the sole supplier. Because substitutes for these products were not available in the market place, differentiated products commanded higher margins than their standard counterparts and were receiving greater strategic emphasis on the part of Group management. But also in this segment, competitors started to produce differentiated semiconductor products, in order to reach higher premium prices and therefore competition will increase. Market Description (Customers, Size of the market, ... ) The semiconductor market can be divided into three tiers. Fifty percent of the sales in semiconductors go to the top tier of perhaps 100 large electronics manufacturers who deal directly with Texas Instruments.
The next 46 % of Texas Instruments's ales comes from 1, 400 medium sized companies at the next level, half of whom buy through distributors. The remaining 4 % of sales are to 150, 000 smaller companies at the bottom tier in the market, who deal only through distributors. As a consequence these distributors have a clearly defined role in servicing mid&# 64979; sized and small buyers. The biggest customers, and at the same time distributors of Texas Instruments are Avnet and Arrow Electronics. They cover about 40 % of the whole distribution market and are therefore essential for TI's turnover or sales. With sales of almost $ 4 billion in 1994, Arrow Electronics was the largest semiconductor distributor in North America, of which TI products accounted for approximately 14 %.
The market demand and buying behaviour are a lot dependent on the current market prices of semiconductor products and therefore customers are very price sensitive. This was also due to the fact, that distributors hold large inventories and purchased when the market price was lower. In fact, it is an endless circle in this market because, price is strongly related to supply and demand and in contrary demand is very dependent on the current market prices. Furthermore, due to the fact that the market is very price intensive, sales are very dependent on negotiating skills, price adjusting policies and customer relationship. As a consequence, profit margins are very low. Customers in this market purchase in large quantities, and as a consequence, a mistake in pricing can have enormous consequences for the market share and overall sales.
Market description: Please see also Industry Texas Instruments had developed a strong position in the electronics industry and is known as a technological leader, also due to the fact of foster innovation and embarking cost&# 64979; cutting in the semiconductor business Furthermore, IT was the only American company that continued producing dynamic random access memory chips and therefore captures also market share of the differentiated semiconductor market which bring them also higher profit margins The company has manufacturing sites spread throughout North America, Asia, and Europe, and was pursuing its strategy of increasing manufacturing capacity and developing manufacturing excellence. As a consequence, they are able to serve the world market and have enough capacity for their production, also in order to reach economies of scale Also the brand name, which they reached over the period of time through product improvements and new technologies which had the consequence of good customer relationships could be also seen as a strengths. Texas Instruments is rather not well known as a skilled marketer of their products, which is also evidenced by the fact that they lost their market leadership between the 1980 's and today Manufacturing facilities for their semiconductor products in several western countries have the consequence of higher production costs and this makes it very often difficult for the company to compete on price. Texas Instruments is also very dependent on their large distributors like Avnet and Arrow electronics which are able to put a lot of pressure on the company concerning the prices. Texas Instruments has the opportunity to reorganize themselves, in order to make global pricing policies possible, and not to loose market share to competitors like Motorola which already started to follow this strategy Another possibility is to further build up good customer relationships in order make more sales with them (fair practices) Putting more effort towards their differentiated semiconductor business, which guarantees them higher prices and therefore higher profit margins. In fact, here Texas Instruments have the best opportunity to reach a strong position in the market and to defend it in the future Creating products which are unique in the market would allow them to be ahead oh customers and the only supplier which offers this technology.
If the do not implement a global pricing strategy they can be faced to the danger of loosing their major distributor and one of their biggest customers, which would have the consequence of loosing market share to competitors and decreases in sales. Furthermore, I would see Texas Instruments also as a candidate for a taking over of another company like Intel, which is momentarily the market leader Another threat could be that due to competitor's pricing policies, prices in the semiconductor market escalate and TI couldn't adapt to the price adjustments anymore and therefore wouldn't be competitive anymore. Also other companies could come up with a new technology, which would replace semiconductors and therefore a huge part of Texas Instrument's business would disappear One solution for Texas Instruments would be to follow a pricing strategy as before and to serve the small and medium sized manufacturers themselves. This would have the consequence, that they might loose their largest distributor but they would have the opportunity to catch up sales by serving smaller companies directly Another solution would be to reorganize their production facilities in order to stay price competitive. This means, to produce their semiconductor products only in countries with lower production costs in order to reach a cohesive pricing strategy. This policy would also make Texas Instrument's daily business easier, because they would no longer have to continue their price adjustment negotiations and therefore save a lot of costs for staffing the negotiations team.
On the other hand, the possibility of gathering information about competitors' prices and product performance would be taken away. A further solution would be focus more on the differentiated semiconductor business and to become a market leader in this segment. First of all, it would allow Texas Instruments to request premium prices, and secondly to achieve higher profit margins. Therefore, by developing more successful differentiated semiconductor products, Texas Instruments would achieve higher returns on development and manufacturing investments. I personally think, that by following or implementing a global pricing strategy, which Motorola is rumored to be already preparing for, it wouldn't be assured that after the implementation, Texas Instruments would then be totally price competitive. Furthermore, the cohesive pricing would have the consequence that Texas Instruments would have totally to restructure their organization.
This is combined with a large investments and consequently a drastically increase in costs. Due to the fact, that Texas Instrument's are 'only' a market follower in the industry, and might still have problems after implementing a global pricing strategy to compete, they should more focus on differentiated products, where they can reach higher returns on investment of development and manufacturing. Therefore I would suggest, that Texas Instruments should focus on their differentiated semiconductor sector by developing new technologies and by creation of new usage. Furthermore, to implement their own distribution channels to catch up sales which they might loose when not implementing the global pricing strategy.
As a consequence they would be still price competitive by serving small and medium sized manufacturers directly, because the margins, Arrow electronics takes for servicing and distribution wouldn't exist anymore. Nevertheless, in order to protect themselves against competition in the differentiated semiconductor market, Texas Instrument should still focus and reorganize their company, in order to combine technological improvements and their good reputation as the technological leader, with cost reductions, especially for the production intensive parts. Due to improvements of their distribution channels, which would make it more efficiently to serve also small and medium sized customers directly and due to technological improvements and further efforts in the differentiated semiconductor segment, higher returns can be achieved and the company wouldn't be anymore so dependent on prices. Bibliography:
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