Texas Instruments to Invest in R&D to Be Technology Leader

Case Type: improve profitability; reduce costs.
Consulting Firm: Siemens Management Consulting first round full time job interview.
Industry Coverage: electronics, semiconductors; manufacturing.

Case Interview Question #01107: Your client Texas Instruments Inc. (NASDAQ: TXN) is an international semiconductor company that designs and manufactures chips that are used in three industries: (1) consumer electronics, (2) healthcare and (3) automotive. Headquartered in Dallas, Texas, United States, Texas Instruments is one of the largest semiconductor companies worldwide, based on sales volume.

The CEO of Texas Instruments (TI) has witnessed decreasing profit over the last three years. The CEO has hired your consulting team to fix the decline in profit. What are the areas that they should look into to identify their problem? What corrective actions can be taken to improve their profitability?

Possible Answers:

1. Suggested Framework

The candidate should come up with a MECE (mutually exclusive and collectively exhaustive) framework that covers at least the following areas:
* industry trend
* product mix
* competitors
* revenue and cost (profitability).

2. Detailed Analysis

When the candidate tries to clarify whether it is a revenue problem or a cost problem, give the following information:

* 70% of the client’s revenue is from consumer electronics, 20% from healthcare and 10% from automotive.
* Revenue over the past three years have been stable.
* The profit margin for consumer electronics declined from 50% to 25%.
* The profit margin for healthcare increased from 50% to 70%.
* The profit margin for automotive declined from 100% to 80%.

At this point, the candidate should be able to identify consumer electronics is the client’s major problem.

Prompt #2: What are some of the reasons that caused profit decline in consumer electronics?

The candidate is expected to bring up the following costs with the value chain structure.

R&D –> Manufacturing –> Packaging –> Shipping –> Customers

Provide the following information when asked:
* The price of consumer electronics chips has decreased. The CEO mentioned that there are lots of players in consumer electronics industry, therefore Texas Instruments has high price pressure. They cannot increase the price for their current products.
* The volume sold has increased. But they need to be a price leader to get high volumes in the future.

At this point, the candidate should figure out the client needs to decrease cost.

Prompt #3: Texas Instruments has determined, with your help, that they need to decrease cost to increase their profits. They have determined that the best way to do this is by cutting the size of their chips down. If Texas Instruments wants to decrease the chip cost by 10%, by what percentage should the chip size be decreased?

Provide the following information to the candidate:
* The chip is cut from a wafer.
* The current dimension of the chip is 10mm x 10mm. Texas Instruments can get 10,000 chips from one wafer.
* The cost of wafer is $500.
* Packaging cost per chip is $0.08.
* The wafer test cost per chip is $0.02.
* The Final Test cost per chip is $0.02.
* The labor rate is $3.5 / hour. The labor time per chip is roughly 30 sec.
* Shipping cost per chip is 5% of total above cost.
* Overhead per chip is 15% of total above cost.
* Profit per chip is 30% of total above cost, or 25% including shipping and Overhead.

After calculations, the candidate should realize that:
* The wafer cost per chip is $0.05 ($500 / 10,000 chips = $0.05)
* The total cost per chip is $0.30 ($0.05 for wafer, $0.03 for labor, $0.12 for packaging and testing, $0.10 for shipping, Overhead & Profit).
* The total cost per chip after 10% cost reduction is $0.30 * 90% = $0.27
* Assume all cost reductions come from the wafer costs, thus the new wafer cost is $0.02 / chip
* Texas Instruments should decrease the chip size by 60%. (Which is very challenging)
* The number of chips per wafer is $500 / $0.02 = 25,000
* The chip size should be 10,000 * 100 / 25,000 = 40 (mm^2)

The detailed calculation is shown below:

Prompt #4: The CEO of Texas Instruments is walking in the room in 1 minute and he expects a summary, can you please summarize your recommendation?

The candidate should have a structured approach about the final recommendation:

* The client Texas Instruments should focus on consumer electronics since it accounts for 70% of the revenue.
* If they could decrease the chip size by 60%, their cost can be decreased by 10%, and this will increase their profits by roughly 4% (not big impact). They should not work on this as it is difficult to achieve and low cost impact.
* Texas Instruments should check if they can decrease the packaging cost since it is the key cost driver (around 27% of the total cost)
* To further increase profit in the long term, Texas Instruments should find methods to increase their price. For example, invest more in R&D to be technology leader and get a price premium.
* In the long term, the client should develop healthcare and automotive revenue sources.

3. Performance Evaluation

Expected:
* Provides a MECE framework, mentioning industry trend, product mix, revenue and cost
* Realizes that consumer electronics should be their major focus
* Correctly answers all questions

Good:
* Correctly provides the value chain structure and think logically of the reasons for profit declining
* Asks relevant clarify questions right after the prompts are given
* Performs all calculations with no errors and with little prompting

Excellent:
* Correctly and quickly performs all calculates in the case with no assistance from the interviewer
* Keeps the interviewer engaged during the calculations and brainstorm sessions, demonstrating strong communication skills.