Strategic Management and choices in the microelectronics industry (case of ST Microelectronics) Essay

Strategic Management and choices in the microelectronics industry (case of ST Microelectronics) Essay

ST Microelectronics was formed by the merger of two companies in 1987 in order to become a global presence in the electronics industry. As a result of recent upheaval in this industry they have been forced to refocus their activities and have adopted total quality management as the basis of their operating strategy. This has enabled them to become more customer-oriented and retain technological excellence. The new company have pursued an aggressive growth strategy, investing heavily in R&D;, forging strategic alliances with blue-chip customers and academia, building up an integrated presence in major economic regions, and honing one of the worlds most efficient manufacturing operations.

Strategy is the long-term direction and planning that a company carries out in order to determine how it can best compete and succeed. Johnson and Scoles (2006) define strategy as “the direction and scope of an organisation over the long term which achieves advantage of the organisation through its configuration of resources within a changing environment to meet the needs of the market and shareholders expectations.” Grant describes how strategy has developed over the last 50 years from the initial budgetary planning and control favoured during the 1950s through to corporate planning, strategy and then in the 1980s and 1990s a greater emphasis on the “quest for competitive advantage and finding that advantage from within the firm” and “strategic innovation being the key for strategy development.” (Grant: 2002) He cites Porter who maintained that “competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value”.

Quinn puts forward that strategy is “the pattern or plan that integrates an organisations major goals, policies and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organisations resources into a unique and viable posture based on its internal competencies and shortcomings, anticipated changes in the environment and contingent moves by intelligent opponents.” (Mintzberg et al. 2003)

Most strategic writers agree that there are various ways in which organisations can develop their strategies, however, much will be dependent on the nature of the organisation, the culture and political landscape of the firm in addition to the external environment. Much debate (Mintzberg, Johnson and Scholes; Grant) has taken place between the planned and intended strategic direction and the actual emergent strategic direction that takes place. How well a firm realises its intended direction will often depend on how close the “strategic fit” of plans, resources, culture and the external environment.

Strategy is developed at three levels. Corporate level strategy is “concerned with the overall purpose and scope of an organisation and how value will be added to the different parts of the organisation” (Johnson and Scoles: 2006). Corporate level strategy will make decisions as to whether or not to adopt a global strategy, or whether to grow organically or by merger or acquisition. It was a corporate level strategy decision to develop globally by merging the two companies and in this case study.

The second level is concerned with the business development, i.e. how a company should compete in different markets, which products should be developed for which markets and how to achieve competitive advantage. By organising strategic business units (SBU) in each of their major markets, STM Electronics is hoping to achieve long-term profitability and growth of market share by being geographically close to its major markets.

The third level of strategic decision-making is at operational level. This is concerned with how “the component parts of an organisation deliver the strategies” (Johnson and Scoles: 2006), i.e. how they actually operate to meet the goals and objectives. Decisions regarding recruitment and selection policies would be one example of an operational level strategy. The decision to adopt total quality management can be seen as an operational level strategy.

What was the strategy of STM and why was it adopted?

It can be seen that initially STM had adopted a corporate level strategy of global development, following the merger of the two companies. This would enable them to pursue competitive strategies of cost reductions, resulting in an aim of a “better ability to meet customer needs and increase their competitive leverage”. (Johnson and Scoles: 2006) To achieve this strategic intent, STM adopted an operational strategy of reducing wasteful production in order to increase sales and market share. However, it has been seen that whilst cost reductions are important, it is also important to develop competitive advantage through achieving a unique proposition that is difficult for your competitors to achieve. STM may not have sufficiently understood the needs of their individual markets.

The strategy that STM is following after its review of focus is one which aims to be differentiated across several markets, both geographically and product based, and to achieve world-class dominance in their key markets. They have continued their corporate level global strategy and have developed SBUs encompassing production, development and marketing operations in each of the major microelectronics market in the world. De Wit and Meyer suggest that firms have to “achieve enough power to counterbalance the demands of suppliers and buyers, to outperform rival producers, to discourage new firms from entering the market and fend off threat of substitute products”. STM hopes to meet its objectives by having that power in each market and by being close to each major market enabling it to be responsive to their needs. In addition, STM has chosen to operate TQM “as the chosen route to becoming more customer orientated, whilst retaining technical excellence” (Case Study).

STM has chosen this strategy in response to the market demands in which it operates. The industry in which it operates is one upon which nearly all other industries depend due to advances in technology, and have stringent requirements for innovation and quality. They are at the beginning of the supply chain and are of strategic importance to their customers. Therefore, they realise the importance of a reliable and diverse source of supply to this industry; one which will work closely with its customers and one which has the capacity to be innovative in response to the constant changes; hence STMs mission statement. To offer strategic independence to our partners worldwide as a profitable and viable broad range semi-conductor supplier.

Against the backdrop of the microelectronics industry and a downturn in the competitive marketplace, could the strategy have been developed in other ways?

We have seen that there are other strategies that STM management could have developed; indeed, they initially developed a global strategy that was driven by cost advantages, convergence of production and technology knowledge across the two divisions. However, that alone was not sufficient to deal with the subsequent downturn in the market. De Wit and Meyer put forward that organisations ability to compete will “depend on the business systems, the way it conducts its business system needs to create superior value for buyers and it must be able to supply a product more closely fitted to client needs than any other rival. ” Creating a competitive advantage often comes from doing things differently.

Johnson and Scoles describe the different ways in which firms can achieve competitive advantage through the competitive strategy options; price based, differentiation based or focus strategies. These options are also described by other theorists “in selecting a competitive scope, firms can vary anywhere between being widely orientated and very tightly focussed” (De Wit and Meyer: 2002) they suggest strategy can be based on price, features, bundling, quality, availability, image, and relations. Firms have to determine what the buyers find important. Porter (cited in De Wit & Meyer) suggests that firms must chose between lower cost or differentiation. He says you cannot do both.

What will be important is that the firms buyers needs are being met more closely than by any other firm.

In order to fully understand the choices faced by STM it would be necessary to undertake an analysis of the forces within that industry, relating to the strength of suppliers and buyers, the possibility of exit and entry to the market and the relative competitiveness of the microelectronics industry and an analysis of the various trends relating to the specific markets, such as political, economic and social factors.

The microelectronics industry is one which has experienced rapid growth due to increasing advances in technology and the growth in new markets such as in China. The industry is one which is very reliant on the consumer market and technology upgrades and developments. “while IT products would continue to be the largest market sector for semi conductors, consumer products would be the major growth drivers” (Electronic Engineering Times: 2006). Other recent trends in the industry are that there is much more collaboration and vertical integration across the industry, enabling manufacturers to share some of the constant development costs. (5 Top Trends in the electronics industry: 2004).

This reliance on consumer markets increases the levels of risk and uncertainty for this market. In addition, it can be seen that there is a drive for organisations to develop leverage and power in order to compete on a global basis and cope with the demands of the market. Companies that develop quality models to ensure TQM and more effectively meet their customers needs are more likely to be able to succeed than those that attempt to compete with cost-reducing strategies alone.

Where does TQM/Business Excellence and policy deployment fit within the process of strategy development, i.e. planning, command, incrementalism, cultural, political, and enforced?

It has been seen that strategy is developed at three levels: corporate, business and operational level. The decision to adopt TQM and the Business Excellence Model is part of the operational level strategy, in order that STM can meet the strategic objectives of being a world-class manufacture and leader in key markets.

Johnson and Scoles suggest that strategy often remains unchanged or changes only incrementally unless a firm enters a period of turbulence or change. This can often result in a fundamental change in strategic direction. They suggest that “transformational change often occurs at times when performance has declined significantly.” It can be seen that this is indeed the case at STM. It has experienced a downturn in its profitability and is having to rethink the way that the organisation is managed.

In this study, it has been seen that the knee-jerk reaction to the downturn in the market has had an adverse effect on the company and that management did need to rethink their planning processes; Johnson and Scholes state that “if strategy is regarded as the long term direction of the organisation which develops over time, then it can be seen as the outcome of cultural and political processes”. By introducing TQM they have to consider the changes to the culture of the firm. This may result in the planned strategy not being realised.

Total quality management (TQM) is a technique that can be pursued by firms to ensure that they meet their customers needs. “This is why quality and its management and the associated continuous improvement are looked upon by many organisations as the means by which they can survive.” (Dale: 2004)

Lockamy and Khurana (1995: Quality function deployment: total quality management for new product design) put forward that TQM “can be defined as the applications of quality principles for the integration of all functions and processes within the organisation.” And that “to ensure long term satisfaction, organisations must continually improve their functions and processes based on market requirements”. They also feel that TQM must begin at “product conception and continue throughout its entire life cycle. Mechanisms are required which allow organisations to integrate TQM into all of their activities”.

In his study of TQM and its impact in different cultural settings, Largrossen (2003) suggests that “if implementing TQM in an organisation actually implies a cultural transformation there must be an interesting relation between the problems and opportunities of this implementation and the cultural context in which this transformation is supposed to take place.” He also suggests that “this problem is notably poignant for multinational firms. As they conduct their operations in many different countries with varying cultures, a completely uniform approach to TQM may be less successful” and that companies may need to manage their strategies differently for implementing TQM to the cultural situation in the different countries in which they work. These cultural factors are ones that STM had to consider very carefully when implemented TQM across the organisation.

Conclusion

STM faced difficulties in meeting the needs of its customers and therefore had to find a way “to enable its customers to gain access to the innovations and be supported and satisfied in the process.” By adopting TQM as the basis for self-assessment against world-class principles, STM has developed strategies that have enabled it to become one of the foremost world semi-conductor industries (www.st.com/stonline ) and a world leader in the sub-micron era. The market position of STM is that “it has market leadership that is spread across many fields. For example, according to the latest industry data, ST is the worlds fifth largest semiconductor company and has leading positions in sales of Analog Products, Analog Application Specific Integrated Circuits and Analog Application Specific Standard Products. ST is also number one in camera modules for mobile phones, number two in discretes and analog, and number three in NOR Flash, as well as in the application segments of Automotive, Industrial, and Wireless. ST is also the leading supplier of semiconductors for set-top boxes and power management devices. Furthermore, ST was the 3rd biggest semiconductor supplier in China in 2005.”

References
Dale, B.G. 2004: Managing Quality 4th Edition McGraw Hill, Oxford
De Wit, B and Meyer, R: 2004: Strategy: Process, Content, Context 3rd Edition Thomson
Grant, R. 2002: Contemporary Strategy Analysis 4th Edition Blackwell Publishers, Oxford
Johnson, G. and Scholes, K. 2006: Exploring Corporate Strategy 7th Edition Prentice Hall, Europe
Mintzberg, H ; Lampel, J ; Quinn, J B & Ghoshal, S: 2003: The Strategy Process 4th Edition Prentice Hall, New Jersey
Mintzberg, H: 2000: The Rise and Fall of Strategic Planning Prentice Hall, London
Journals Lagrossen, S: 2003: Exploring the impact of culture on quality management. International Journal of Quality and Reliability Management Vol. 20 No. 4 Accessed via Emerald full text 10.10.06
Lockamy, A and Khurana, A 1995: Quality function deployment: total quality management for new product design. International Journal of Quality and Reliability Management Vol. 12: NO. 6 accessed via Emerald full text 10.10.06

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