ARM, the British microprocessors company whose disruptive business model is based on targeting emerging markets and licensing its IPs to partners rather than manufacturing its own devices, has disrupted the classical approach to this business established more than 30 years ago by Intel and other microprocessor manufacturers.

This article will briefly examine the implications, for both ARM and its main competitor, Intel, of such a disruptive business model.

ARM History

ARM Ltd. was founded in 1990 as a joint venture among Apple (the Cupertino’s firm was interested in a low-power microprocessor for its new Newton “Personal Digital Assistant”), Acorn (the manufacturer of computers that had previously developed the ARM IP core) and VSLI Technology (company that provided the design tools).

When the Apple’s Newton Personal Digital Assistant venture failed, ARM’s CEO decided to grow the business by licensing the ARM processor to semiconductor companies for an upfront fee and then royalties on production. In this way, ARM started to feed an ecosystem of partners (most of them System on Chip, SoC, manufacturers) interested in providing processing capabilities to their SoCs, but without the time, knowledge and capital needed to develop their own microprocessors.

On the other hand, ARM also started to work with third party suppliers in order to provide the tools and software (such as operating systems, assemblers, compilers, debuggers, development platforms, etc.) that are necessary to support the ARM architecture.

This was the seed of an ecosystem, based on an affordable, flexible, simple and low-power processor, which fostered the development of emerging markets such as the smartphone market or the Internet of the Things (IoT).

“The Ecosystem Company” of the IoT Era

In the same way that Intel, with the collaboration of IBM and Microsoft, established the foundations of the PC ecosystem in the 80s, today ARM has become one of the key pieces of the Smart Devices ecosystem. However, whereas in the PC ecosystem Intel and Microsoft exerted their power as central players over smaller firms in order not only to assure alignment and coordination within the PC ecosystem, but also to get higher margins acting as effective monopolistic firms (the “Wintel” duopoly), ARM leads an ecosystem where both capital investment and profits are shared more equally among all the players [Moore].

According to the framework proposed by Prof. Cusumano in “Staying Power” [Cusumano], the strengths of the ARM strategy are based on the following points:

• ARM platform. As stated before, ARM has created an ecosystem around its IPs: SoC manufacturers, smart-devices companies, software companies, tool providers, and individual programmers and engineers comprise this multisided ecosystem, creating and capturing value in new markets (today, the ARM ecosystem account for more than 90% of the smartphone market share [Moore]). Moreover, due to the network effects and the switching costs, it would be difficult for a potential competitor to enter any of these markets.
• ARM provides not just IPs but also associated services such as support and maintenance.
• ARM, unlike Intel, is an unusual semiconductor company: It is based not on physical assets such as state-of-the-art foundries, but on the capabilities of its R&D team. This fact provides an important advantage to ARM in terms of flexibility. Whereas Intel has to focus on massive production for mature markets, such as PCs, in order to amortize the cost of its foundries, ARM can easier explore emerging markets by taking advantage of the modularity of its designs and its network of partners (for example, the IoT market, also dominated by ARM, is thought to grow exponentially, while the PC market is stagnant).

The Advantages of Being a Small Firm: Judo Strategy

ARM is not comparable to its main competitor, Intel, neither in terms of market capitalization nor in terms of profits. This makes sense with the ARM strategy: ARM, unlike Intel, is an IP provider, not a semiconductor manufacturer, and do not have to invest heavily in very expensive plants. However, this fact also has implications in the profits of each company: Whereas ARM has to share the created value with its partners (those who integrate ARM cores in their SoCs and manufacture the final semiconductor), Intel is more vertically integrated, being able to capture a bigger piece of the created value. According to the framework provided by the Prof. David Yoffie and Mary Kwak in their book “Judo Strategy” [Yoffie], such a strategic positioning of ARM can be explained in the following terms:

• By leveraging its disruptive business model based on licensing rather than on manufacturing its own devices, it is possible for ARM to exploit emerging markets that, because of their still reduced size, are not suitable for the Intel business model. Any movement of Intel to enter these markets could led the firm to an unbalanced position (using judo terminology). In addition, ARM business model allows for a faster reaction to new business opportunities.
• By keeping itself within such emerging markets, ARM is not threatening directly the current Intel market (although is occupying new markets and gaining momentum to hit its opponent in the future).

Intel: The Inertia of a Big Player

In the ARM versus Intel discussion, it is very important to consider the historical strategic position and the culture of Intel. Led currently by Brian Krzanich, a manufacturing expert inside the company, Intel is committed to leverage its technical and scientific expertise to create cutting-edge technologies (such as the 3D transistors) to further improve the speed and integration of its semiconductors, and its state-of-the-art foundries to produce third parties chips.

Using some of “the innovator’s dilemma” [Christensen] concepts, Intel’s internal structure, resource allocation and current customers’ focus make difficult for the firm to successfully address new business opportunities in emerging markets. In this regards, Intel has failed to implement the two possible options available for an established company to face the competition of a new entrant like ARM [Markides]:

• Become the innovator. It is difficult to experiment successfully with new and disruptive technologies others than those traditionally explored by firm, while making incremental improvements to the existing positioning. Such was the case of the ultra-low-power Intel Atom processor, which lost the battle with its ARM’s counterpart.
• Intel has also failed to exploit someone else’s innovations in order to face the ARM competition in the emerging markets.

References

1. Cusumano, Michael A. (2010). Staying Power: Six Enduring Principles for Managing Strategy and innovation in an Uncertain World (Oxford University Press).
2. Yoffie, David B., Kwak, Mary (2001). Judo Strategy: Turning Your Competitors’ Strength to your Advantage (Boston, MA. HBS Publishing).
3. Markides, CC. (2013). “A Dynamic View of Strategy.” Sloan Management Review.
4. Christensen, Clayton M. (1997). The Innovator’s Dilemma (Boston, MA. Harvard Business Review Press)
5. Moore, James F. (2013). “Shared Purpose: A Thousand Business Ecosystems, a Worldwide Connected Community and the Future” (www.arm.com).

(Image from the ARM’s Google+ page)