Texas Instruments Case Study
1.) What are the reasons the semiconductor is global? Why is it so difficult to create an
FSA or CSA? Are there any different advantages?
The global economy is in the technology age and we use electronics for any and all
reasons on a daily basis. The easiest, most cost-effective, and efficient manner in which to make
these technologically savvy electronics is with advanced semiconductors. These integrated
circuit parts were created by Jack Kilby of Texas Instruments, in 1958, allowing for easier to use,
smaller electronics. Basics industry wide: if the parts are smaller, then the overall product is
smaller.
The semiconductor is global because every piece of electronic hardware uses some type
of integrated circuit in order to pass electrical information between different components. Our
textbook states that, “About 80% of semiconductor consists of integrated circuits made from
monocrystalline silicon imprinted with complex electronic components.” With this knowledge
about circuits, we understand that having a semiconductor allows these circuits to perform their
basics in highly effective manner. Knowing all the uses for the semiconductor it is easy to see
why it is, and has always been, global.
The Semiconductor Group made Texas Instrument $2 billion in 1994. That year being the
third year of grow higher than that of the industry’s. These profits are mainly due to their
standard semiconductor making up 90% of Texas Instruments’ revenue. At the time they had the
only differentiated semiconductor offered in the industry. With the growth achieved between
1990 and 1994 (90% of it due to their standard competitive product and 10% from a product that
no one else had) Texas Instruments had Firm –Specific Advantage in any country’s small
electronics market. Having large parts of Texas Instruments’ capital expenditures going towards
building plants in Malaysia and Italy, we can conclude that these two countries were just a few of
Texas Instruments’ predominate international markets.
There are few other major advantages to semiconductors and Texas Instruments’ firmspecific advantage, outside of high profits and the ability to do business internationally in
markets that possess high demand for the product
2.) What drives the need for global pricing? Is there any risk of gray markets? Are there
any options apart from global pricing?
Mainstream semiconductors are thought of as a commodity product, and are centered
around their price. Semiconductors are bought and sold at various prices in different countries
depending on the diverse cost structure of the different countries in which they were produced.
Distributors predict the demand for the semiconductors, discuss and settle on a price with
vendors. The prices negotiated between the vendors and distributors are so unpredictable, yet
these prices are so valuable to the profitability of the distributors. Distributors and some large
equipment manufacturers were adamant on purchasing their semiconductors for one global price.
Texas Instrument (TI) would need to transform themselves to make global pricing a sensible
option and figure out what suggestions global pricing would have on different international
customers.
Texas Instruments focuses on using forward pricing and continuous price negotiations to
set prices with its distributors. With the use of forward pricing, as the manufacturer increases the
volume of the products produced, it decreases the price of production. TI also used continuous
price adjustments based on the market supply and demand of semiconductors. Because the prices
of semiconductors are so instable, distributors often accumulated stocks of semiconductors that
affected the current market rates. Price is strongly influenced by supply and demand, conflicting
with the fact that demand is very reliant on the current market prices. These price negotiations
were not only focused on overcoming competition in that one country, but also beating their
competitor’s prices throughout the world. TI does face a risk with gray trading in gray markets.
If TI happened to move into trade areas where trade barriers had been recently destroyed and
exchange rates vary, this could be very risky for their company and may encounter severe
problems.
Texas Instrument can consider a few other options besides creating a global pricing
system. TI can maintain their current pricing system that they have already established and do
not conform to the pressures of the distributors such as Arrow. They can also differentiate
themselves from their competitors within the semiconductor industry while servicing small and
medium businesses directly. In order for TI to protect themselves within the semiconductor
industry, they should still reorganize their company, while make technological improvements
and retaining their good reputation as the technological leader.
3) Who has most power in the value chain from manufacturers through distributers to
customers?
Texas Instruments has sold its semiconductors through two types of channels: directly with the
equipment companies or through a group of electronic distributors. Seventy percent of their U.S.
customers deal directly with Texas Instruments, itself. The remaining thirty percent of the
customers used one of the seven major semiconductor distributors that deal with the North
American market. With the semiconductor market broken up into these two channels, the
manufactures control the most power in the value chain.
The manufacturer’s size controls whether they deal directly with Texas Instruments or
use a distributor. The larger equipment manufactures were able to receive better prices from the
semiconductor producers than from the distributors, which led to the direct purchases from the
manufactures. While the smaller equipment producers are more dispersed and more difficult to
deal with, they are better suited to be served through the distribution channel.
The semiconductor market is broken up into three levels. The top level is made up of 100
large electronic manufactures, which make up the top fifty percent of sales. The middle level
contains the forty-six percent of sales that is made up of 1,400 medium-sized companies; half of
these buy directly from Texas Instruments and the other half buy from distributors. While the
bottom level, which is the last four percent, deal strictly with distributors.
Distributors play an important role in the semiconductor industry by acting as a
clearinghouse. The distributors focus on sales, logistics, material flows, and small electronic
manufactures. Originally, a large group of small businesses made up the distribution network,
but by 1995, the industry had become consolidated. This consolidation left forty percent of the
distribution market to the two biggest companies, Arrow Electronics and Avnet. This movement
towards consolidation forever changed the relationship of semiconductor manufactures and the
distributors through which they sold their merchandise.
4.) How would you try to manage the global pricing process- by formalization of the pricing
process, economic controls, centralization, or informal persuasion? Are there any other options?
Thirty years ago the semiconductor distribution market contained nearly 30 firms that
competed for TI’s revolutionary chip. These days those 30 firms have now narrowed down to
only 7 or 8. Market share between those few firms is also highly staggered with nearly 50%
occupied by only two firms. These factors have changed the producer-distributor relationship in
an important way. When there were many distribution firms in the industry these firms faced
more competition from each other and they had little price control. On the producer side there
has been an increase in the number of competing firms as a result of Texas Instruments
proprietary technology becoming a commonality. As a result of a few powerful distributors and
an increase in the numbers of producer, there has been a shift in power between TI and its
distributors. More specifically, Arrow electronics has been able to push TI for a price discount
when previously they were unable to. Arrow has used this price negotiation power to argue for a
unified global price from TI. The problem with this is obvious for TI considering that the cost of
production is different all over the global market. Finding themselves at such an impasse, TI
used economic controls in order to maintain different prices for the same semiconductor in
different markets. In their contract with each distributor TI demanded that these distributors only
sell those chips in their respective markets. In this situation I personally would have chosen the
same tactic. This form of price control is best because it offers another less obvious benefit. TI
obviously recognizes that certain concessions have to be made in place of global pricing in order
to appease their distributors. These concessions are made in the form of continuous price
adjustments. When a firm such as Arrow looks to purchase semiconductors, they shop between
all of the producing firms in the industry and leverage offers against each one. This is a benefit to
TI because they are told by each distributor what the price is offered by other firms every time
they do business. In addition to price negotiating every deal, TI also offers reimbursements to
distributors for the erratic supply and demand of their chips. If the price of semiconductors
decreases soon after Arrow purchases an order, then TI will reimburse them the money lost when
their inventory suddenly takes a hit. This offers another valuable opportunity for TI that global
pricing does not. By offering this insurance, TI can monitor closely how their chips are
performing in the market. TI stands to lose all of this market visibility if they cannot control their
prices through these economic controls. TI is in a unique position in that they don’t know if their
distributors need them more or if they need them more than ever. These economic controls are
crucial for TI if they don’t