Drew CordellBPS 4305

BPS Capstone Project

Project Executive Summary

NVIDIA is a corporation which specializes in graphics processing units (GPUs), machine-learning, and self-driving cars. Its closest competitor, AMD, despite having a market cap 1/10th the size of NVIDIA’s, remains in close competition with NVIDIA within the GPU industry. This report analyzes NVIDIA on corporate and business levels, evaluates the competitive advantages, infrastructure, financial composition, and strategy of the firm. Based on my findings, NVIDIA should continue with its current strategy to dominate the GPU industry while exploring new business units (related to existing business units) with an increased R&D budget which can synergize with other segments of NVIDIA to create the most value and maximize long term revenue and growth of the corporation.

Financial Analysis

NVIDIA (NVDA) is a technology company known for inventing the graphics processing unit

(GPU) in 1999. GPUs are used for powering computer graphics, and can be used for a variety

of other practical applications in programming. Since the creation of the GPU, NVIDIA has

focused on researching and improving the power of their GPUs and have moved toward the AI,

supercomputing, and graphics-driven processes. As of January 2017, NVIDIA employees over

10,000 people, most of whom are engineers in one form or another given the extremely

technical nature of the industry.

PC graphics cards are primarily used by PC gamers to run impressive, beautiful-looking

games. NVIDIA has realized the power of GPU technology to power machine-learning and

visual recognition--two primary components of artificial intelligence. NVIDIA is in direct

competition with Advanced Micro Devices (AMD) which produces microprocessors in addition to

graphics cards. AMD has recently been closing the gap in terms of graphics card power, cost,

and popularity in the PC community. While AMD is in direct competition with NVIDIA, Intel

Corporation is also one of NVIDIA’s major competitors, though the two companies have been

known to work together on certain projects, especially in the creation of microprocessors that

are capable of running video and graphics in PCs without dedicated graphics cards.

NVIDIA is healthy and is rapidly growing and increasing in value. From 2016 to 2017,

NVIDIA experienced explosive growth of net income, going (in thousands) from $614,000 to

$1,666,000. This is a 171.34% increase, and represents an intense increase in value.

Furthermore, NVIDIA has financed this growth of assets needed to increase profit by a massive

shift to long term debt while still healthily increasing equity held in the firm. NVIDIA went from (in

thousands) $10,000 in long term debt to a $1,989,000, a staggering 19790% increase in long-

term debt. NVIDIA now holds most of this increased liability in the form of cash and cash

equivalents as the firm now holds 196.3% more than it did in 2016. NVIDIA has a history of

strength in its liquidity ratios, and none of the three main ratios (current, quick, and cash) are

below a 2.0, this is very good. Furthermore, NVIDIA has good ratios for total debt, debt-to-

equity, and the equity multiplier. All of these ratios are low enough and do not put up any red

flags in terms of risk of insolvency. From NVIDIA’s financials, the firm seems very able to pay

back debts, and has the net income and cash flows to support them as well. NVIDIA is also able

to quickly turn over its inventory with an average inventory turnover of only 30 days while AMD’s

ratio is over double at 64 days.

While AMD has become a lot stronger in 2017, my company comparison uses the year

of 2016 since AMD and NVIDIA use different business year dates for the purpose of releasing

yearly financial data. AMD did not have a good year in 2016, and has yet to close the gap with

NVIDIA who continues to perform exceptionally well. AMD lost money in 2016 while NVIDIA

generated a healthy profit. Unlike NVIDIA, all of AMD’s liquidity ratios are below a 2.00, and the

firm seems most healthy when it comes to cash with a cash ratio of only 0.94. Typically, cash is

the fastest way to repay debts, and while AMD’s quick ratio is 1.32, the firm is not quite as liquid

as NVIDIA. AMD also was not as solvent as it probably should have been in 2016. The

company was going through a restructure of capital, and had a debt-to-equity ratio of 6.98 and

an equity multiplier of 7.98 which are not healthy numbers.

2017 is a lot more interesting for both firms, so it is important to include in this report to

give a fair representation of both companies as they exist today and explain the changing

landscape they operate in. Both AMD and NVIDIA have been hugely successful in 2017 so far.

It is shaping up to be a year that defies the standard seasonal nature of the industry, and both

titans of graphics processing have experienced increased sales throughout the year. While

AMD and NVIDIA both focus on selling directly to consumers that are building their own PCs,

both companies also have business-driven revenue sources, and customers that are large

corporations themselves.

The GPU industry has grown steadily as more gamer customers (people who enjoy

playing high-end video games) switch over from playing games on consoles, to building or

buying their own high-end PCs with dedicated graphics cards made by AMD and NVIDIA.

Because both companies are directly competing with one another, they must release new

product lines each and every year to remain competitive and offer the innovation that is required

to improve the limits of what is possible with graphics processing and playing video games.

According to Jon Peddie Research, a financial analyst firm specializing in the GPU

industry, both AMD and NVIDIA have experienced a year-to-year total increase in GPU

shipments of 6.4% which consists of both laptops and desktop graphics cards. In addition to the

increased popularity of playing video games on PCs, cryptocurrencies such as Ethereum and

Bitcoin have driven graphics cards sales.

Cryptocurrencies are digital assets that can be transferred through a publically recorded

ledger known as the blockchain. When people use their computational power to help verify

transactions of a cryptocurrency network, they are rewarded through the generation of the

cryptocurrency they’re aiding (the process is called mining.) Different cryptocurrencies use

different underlying algorithms, and some of them cannot be mined using traditional SHA-256

hashes that are able to be processed with dedicated chipsets. For Ethereum, the only reliable

way to mine the cryptocurrency is with a graphics card. The more power the GPUs used to mine

have, the more opportunity there is to profit. As mining continues, the process becomes more

difficult for everyone, and expected returns on owning physical equipment used to mine

decrease. A lot of Ethereum miners have purchased large quantities of graphics cards from both

AMD and NVIDIA, producing a nice burst in sales for both companies. Unfortunately, this

sudden surge in sales did result in periods of shortages where both cryptocurrency miners and

customers wanting graphics cards for their PCs had extreme difficulty finding fairly priced

products to purchase.

Another analyst firm, Citron Research, published a report in June 2017 which compared

the value gains in NVIDIA’s common stock to a slot machine. The report was titled “The Moment

that Separates the Gamblers from the Investors NVDA to Trade back to $130”. Needless to say,

the report didn’t favor NVIDIA and encouraged investors with stock in the company to take their

profits, sell, and move to Google who continues to perform well. NVIDIA has been moving into

AI, data storage, and self-driving autonomous cars. Citron cites that Google has extensive

experience and the infrastructure in place to do all of these things better with the statement

“would you rather own the internet, or make chips for video game consoles?” The negative

article by Citron caught on, and both NVIDIA and AMD took hits in their common stock value as

a result.

General Environmental Analysis

Demographic

As mentioned above in the financial analysis section that explained a little about the

recent surge in the performance of both AMD and NVIDIA, PC gamers and cryptocurrency

miners represent NVIDIA and AMD’s main consumer customers. Acquiring demographic data

specific to PC gaming is difficult. Since many of the same games can be played on both PC and

gaming consoles, gamer data is almost always grouped together. These demographics are

taken from the 2016 Essential Facts about the Computer and Video Game Industry report.

The average gamer is 35 years old, and the average age of people who purchase video games

is 38. 60% of gamers are men while the remaining 40% are women.

Looking into the cryptocurrency space, data from research conducted by the University

of Illinois provides some insight on users who user Bitcoin and other cryptocurrencies and would

be likely to use NVIDIA or AMD products to support it.

Over 70% of Bitcoin users are between age 22 and 40. Surprisingly, only 1.76% of

Bitcoin’s user base are women. This is the most shocking trend about cryptocurrencies, and

while the number of women in cryptocurrency is on the rise, there is still a staggering separation

between gender when it comes to cryptocurrency.

Sociocultural

The number of women who play video games is increasing, and this represents the

opportunity for NVIDIA and AMD to sell more products to women who are getting into PC

gaming or cryptocurrency mining. Furthermore, graphics cards also have plenty of application

for rendering graphics, 3d modeling, and graphic design, an industry that has more parity

amongst men and women involved. The study on video game players shows that the average

US household has 1.7 gamers, and also shows that many people prefer to play video games

with their spouse.

Political/legal

Since AMD and NVIDIA are both so technical, the majority of their staff are engineers.

Both companies are corporations, and both are taxed as such. Since there is little danger in

GPU industry for consumers, there is very little regulation that negatively impacts these

companies and what they are able to sell to consumers. Since everything they sell is legal and

doesn’t contain illegal functions, AMD and NVIDIA do not have to worry about things a gun or

pharmaceutical manufacturer would. Since manufacturing of GPUs happens overseas, NVIDIA

and AMD would have to follow regulation on work visas when going to and from the US from

countries like China.

Technological

AMD and NVIDIA are both technology companies. Their business is dependent on

constantly innovating their proprietary technology and continually releasing new products that

improve what is possible on PCs. NVIDIA is working on AI, image recognition, self-driving cars,

and other potential groundbreaking applications of their tech. Both companies have huge R&D

budgets and continually innovate.

Economic

In regards to PC gaming, both NVIDIA and AMD’s products are very dependent on their

customer’s disposable income in the consumer segment. While both businesses are cyclical,

they also offer solutions for businesses and partner with popular computer manufacturers to

include their products on computers primarily used for business applications, thus mitigating

some of the cyclical nature of the consumer segment of their businesses. Like many other firms,

NVIDIA and AMD do well when the economy does well.

Global

NVIDIA and AMD are both dependent on global relationships and the

partnerships and business infrastructure they build overseas. In addition, both

companies sell their products internationally and are therefore exposed to currency

exchange rates, increased competition and desire to infiltrate the growing Indian and

Chinese markets, and trade agreements and laws which must be respected in order to

conduct business in other countries.

Porter’s Five Forces

Threat of new entrants

The threat of new entrants in this industry is low.

● This is an industry that requires immense resources and economies of scale to

accomplish positive financial results.

● Product differentiation is low in this industry. AMD and NVIDIA continue to release

products with identical technical specifications (Same amount of video ram, processing

power, etc.) The only differentiation is in the products themselves and the other brands

of computer components that they integrate with which does differ between the brands.

● Capital requirements for a business like this are extreme to say the least. This is a very

technical industry that requires a huge R&D budget and the ability to manufacture highly

technological products in bulk.

● Switching costs for consumers switching between AMD and NVIDIA are moderate since

these are high-end products which typically run from $400-700 for the most up to date

versions of the graphics cards.

● For new entrants, securing strong distribution channels would be a challenge since

strong relationships with manufacturers and shippers in China would need to be

established just to get products to the US.

● No cost advantages could be easily established when compared to NVIDIA and AMD.

Both companies have impressive infrastructure in place already, and manufacturing and

developing similar products cheaper than them would be extremely challenging.

The Bargaining power of buyers

The bargaining power of buyers in this industry is low.

● Buyers are typically a single consumer, and those consumers purchase these products

one at a time. The lifespan of a single graphics card can be upwards of 5 years.

● Like a lot of other businesses, both AMD and NVIDIA rely on retailers to sell their

products in addition to offering them directly from the company. Both companies partner

with multiple retail outlets and have set pricing rules which retailers must follow for a

certain time in order to sell their products to buyers.

● Switching costs for buyers are moderate to low. In addition, graphics cards typically have

high resale value and a large secondary market which makes it easier for buyers to

switch. This is an advantage for buyers.

● Backward integration is near impossible for buyers unless they have the money to buy

NVIDIA or AMD, both valued in billions of dollars.

● NVIDIA and AMD have charged similar prices for their products and buyers pay it.

Buyers are not extremely price sensitive when it comes to purchasing these products

and continue to do so regularly as they upgrade their PCs.

The bargaining power of suppliers

The bargaining power of suppliers in this industry is moderate to high.

● In terms of the chip manufacturers, there are only a few that meet the needs of NVIDIA

and AMD, increasing the strength of these suppliers.

● Graphics cards require very specific chip sets which have been meticulously designed.

There is no substituting these chips in the production of graphics cards.

● Suppliers of these chip sets typically do not manufacture anything else and stick to these

chip sets.

● The supplier’s products are extremely important for NVIDIA and AMD, without them, the

graphics cards they produce will not function.

● Since NVIDIA and AMD do their own R&D, they could technically switch manufacturers

at a lower cost, but the issue of finding a manufacturer with the technical capacity to

build such an intricate chip set remains.

● Forward integration would be very difficult for suppliers. NVIDIA and AMD generate most

of their value through R&D and continued innovation. Chip set manufacturers often

manufacture chips for other technology industries, but do not have the resources in play

to do what AMD or NVIDIA does easily.

Threat of substitute products and services

The threat of substitute products and services is high.

● While PCs provide the most sophisticated gaming experience around, it is easy for

gamers to substitute a high-end graphics card for a gaming console like the Xbox One or

PS4 which might actually cost less than the graphics card itself.

● Other substitutes can be anything done for entertainment or used in the customer’s free

time. Because of this, the number of substitutes for entertainment is practically limitless.

● In terms of gaming alone, PCs still represent the best performance for the price and can

be easily upgraded over time to stay up to date. Consoles cannot be upgraded and

therefore have higher upgrade costs since a new console must be purchased rather than

just a new component for a PC.

Intensity of rivalry among competitors

The intensity of rivalry in the GPU industry is high.

● Both AMD and NVIDIA continue to release new products with more or less the same

specifications. Both companies are in active competition to secure an exclusive

partnership with Intel which could be a very great opportunity for growth.

● Industry growth in the GPU space is very high at the moment. AMD and NVIDIA are both

experiencing great growth as the cryptocurrency and PC gaming markets flourish. The

market continues to welcome both companies, and there isn’t an intense ‘grind’ between

the two companies for market share, though they are constantly working to develop a

superior product and effectively steal market share from the other.

● Both companies outsource the majority of their manufacturing, but have significant

investments in fixed assets required to generate quality R&D and lead to the creation of

new products and software.

● Both AMD and NVIDIA would have a difficult time switching industries at this time,

because of this, both companies are more or less locked in. Switching to a different

industry would be expensive. In addition, both companies’ products are limited in terms

of differentiation.

● Both companies have a dependence on economies of scale and partner with large

manufacturers in China to produce their products. As mentioned in the financial analysis

section, NVIDIA is able to turnover their inventory at a quicker rate than AMD, and

therefore could afford to carry more inventory for longer periods of time, thus generating

better economies of scale when compared to AMD, in theory.

● As mentioned, both companies are more or less locked in and it would be difficult for

them to exit the industry without selling to the other (likely at a loss). It should be noted

that NVIDIA’s market cap is about ten times the value of AMD’s at the moment, therefore

NVIDIA would have a harder time exiting the industry than AMD.

●

Strength/Weakness Analysis

One of NVIDIA’s greatest resources is its value chain. NVIDIA is more efficient than AMD and because of that, the firm has nearly ten times the market share as its main competitor despite the fact that AMD has diversified its firm to offer its own line of microprocessors in addition to graphics cards which are more or less able to hold up against NVIDIA’s products. While NVIDIA has historically performed better than AMD, the firm does still have weaknesses which need to be mentioned.

NVIDIA’s Strengths● NVIDIA is strong in that it has a very quick inventory turnover ratio of just 30 days when

compared to AMD’s 64 days to do a full turnover of inventory despite the fact that AMD is dealing with smaller values of inventory than NVIDIA.

● NVIDIA has a strong value-driven supply chain which leads to the efficient use of third-party manufacturers to quickly adapt and bring NVIDIA’s designs to life. NVIDIA works very well with key partners to manufacture and distribute their graphics cards globally.

● NVIDIA has a strong entrepreneurial spirit from within which continues to drive innovation of existing product lines as well as lead to the creation of new business-driven applications for their technology.

NVIDIA’s Weaknesses

● While NVIDIA does save money and increase efficiency by partnering with third-party manufacturers, the chip sets they produce are very specialized and if a factory were to go down, NVIDIA would be hard pressed to find a new manufacturer with the technological capability of manufacturing the required components for their products.

● NVIDIA’s revenue is dependent on what has historically been known as a cyclical economic cycle. Graphics cards for PC gaming are a luxury product which depend heavily on a consumer’s disposable income.

● Revenue is partially dependent on the available game offerings available from other companies. If potential customers don’t like any of the games available to play, then they will be less incentivized to purchase a high-end graphics card for a PC.

Value Chain AnalysisGathering insight on NVIDIA’s value chain involves analyzing the primary activities which contribute to the creation of products, sale and transfer, and after-sale service. It also involves the support activities, which add value themselves or create value through synergistic relationships with other primary and/or support activities. Primary activities consist of inbound

logistics, operations, outbound logistics, marketing and sales, and service. Support activities consist of procurement, technology development, human resource management, and general administration. Unfortunately, because companies depend on their value chains to generate value for their businesses, many of their established processes are kept as a close secret to prevent competitors from replicating methods which have proven successful. Because of this, portions of NVIDIA’s value chain have to be approximated and generalized through supporting articles and news since the information is not publically available through the company’s website in its entirety. Overall, NVIDIA’s value chain is very healthy as analyzed below. The company relies heavily on third-party networks for manufacturing and sales, allowing the company to focus on continued innovation, managing key partnerships overseas, and generating new applications of their existing technology.

Inbound Logistics

NVIDIA’s outsourcing of manufacturing removes the need to procure raw resources for manufacturing and creates an advantage where NVIDIA is able to free up resources and foux on what they are good at: designing and innovating new products and the software to power them.

● Material handling: NVIDIA does all of their manufacturing through third-party

partnerships in China. This means that NVIDIA is responsible for sourcing very few, if

any materials for their manufacturing. Still, NVIDIA needs to employ personnel with

knowledge on manufacturing and material requirements for creating new, better

performing products. These new products likely require very specific raw materials and

specialized manufacturing processes.

● Warehousing: NVIDIA is not responsible for storing inputs needed to manufacture their

products, they only need to ensure their key partners are able to get what is needed to

reliably make their products.

● Inventory Control: NVIDIA works closely with making sure their partnered

manufacturers can keep up with demand and work on a flexible schedule to produce

units in set batches. Because of this, needed inputs need to be purchased ahead of time

so manufacturing is more efficient.

● Vehicle Scheduling: While they help with inventory control, NVIDIA relies on partnering

manufacturers to schedule the shipping of needed inputs with their suppliers.

● Returns to suppliers: With higher-end products, it is common for companies to attempt

to service defective products prior to replacing them to keep costs down. NVIDIA offers a

3-year warranty on their graphics cards which provides repair from factory defect or

replacement if a repair is not possible. Repair and maintenance is likely done in the

country where the graphics card was sold to keep costs down.

Outbound Logistics

While NVIDIA does handle some of their sales themselves, the majority of their sales come from third party distributors which distribute NVIDIA’s products to retail outlets all over the world. Because of this and the way NVIDIA manufacturers, the firm has less control over their inventory and can run into delays with ocean freight which is a slow process.

● Finished Goods: Finished goods are assembled and held in China until ready for

distribution.

● Warehousing: Since NVIDIA manufacturers in China, much of their inventory is held in

warehouses in China until it is ready to be shipped. NVIDIA partners with over 20 global

distributors which each have their own warehouse systems in place to store NVIDIA’s

products before distribution to retail outlets. Furthermore, NVIDIA offers their products

online and sells directly to consumers, this means that regional NVIDIA offices must also

have some warehousing function in order to fulfill orders since NVIDIA does not have

any dedicated warehouses of their own.

● Inventory Control: NVIDIA has a good inventory turnover ratio and likely encourages

distributors of their products to place their orders ahead of time, allowing NVIDIA to more

reliably gauge product demand and minimize costly freight from China to distribution

centers around the globe. Like many other companies in manufacturing, NVIDIA likely

optimizes manufacturing runs to balance cost per product with the cost of holding

additional inventory if they produce too many products which then need to be held in

warehouses until existing products in stores are sold.

● Delivery Vehicle Scheduling: NVIDIA uses third-party distributors to ship their products

which means a reduction of scheduling on their part.

● Order Processing: While partnering with many distributors, NVIDIA processes a lot of

its own orders, shipping primarily in the United States and fulfilling orders from its

regional offices via UPS or FEDEX through contracts which give NVIDIA better rates and

shipping terms when sending their graphics cards to customers.

● Scheduling and Distribution: NVIDIA must work with partnering distributors and

schedule shipments from their partnered manufacturers in China, arranging the ocean

freight from China to various ports where pallets of product are then freighted to

distributor warehouses for transit through their own systems.

Operations

NVIDIA’s third-party manufacturing partnerships allow them to outsource every operation activity which involves transforming inputs into final products, keeping costs down and letting the company focus on innovation and product design which is where they generate the value needed to grow their company.

● Machining: NVIDIA’s partnering manufacturers control the needed manufacturing

equipment needed to tool and manufacture chipsets and other hardware needed for the

assembly of graphics cards.

● Packaging: NVIDIA’s partnering manufacturers create packaging for products and send

those materials to the other manufacturing buildings where the products themselves are

manufactured.

● Assembly: Assembly combines the chipsets and integrated electronic boards with the

non-electrical components of the graphics cards such as the shells. This process is

extremely important because it involves putting everything together into a usable

product.

● Testing or Quality Control: Quality control is extremely important for electronic

products like this, especially since they are priced so high and maintenance or repair

needs to be minimized to keep costs down.

● Printing: Printing is also outsourced. The majority of printing goes into making the

printed materials that accompany final products as well as the boxes and packaging that

houses the products when they are delivered to customers.

● Facility Operations: Facility operations are covered by manufacturing partners that

work with NVIDIA and manufacture their products.

Marketing and Sales

NVIDIA uses a strong network of distributors to drive sales to smaller retailers. The firm also advertises and promotes their products regularly in order to maintain strong sales and bring in new customers. NVIDIA does not have a traditional sales force, instead, they focus on selling through events, community outreach, and partnerships with game studios.

● Advertising: NVIDIA spends a lot of money advertising their products while still enjoying nice word-of-mouth sales from the PC building community. NVIDIA advertises via web, through print magazines which focus on gaming, and through other outlets such as Youtube and sponsored videos.

● Promotion: NVIDIA promotes their products by offering a free game(s) with the purchase of a new graphics card. Most of these titles are newer games with a price of at least $60 on their own, thus creating additional value for people who buy graphics cards from NVIDIA. The company’s main competitor, AMD, uses similar promotion strategies to appeal to customers.

● Sales force management: Though NVIDIA does have a large support team, they do not have an active sales team which makes cold calls to try to generate leads. Nor do they actively go out and try to find new clients. Sales staff work on finding new ways to advertise, attend trade shows and large gaming events, and connect with the PC gaming community through outreach events.

● Pricing & price quoting: NVIDIA offers standardized pricing through an MSRP and sets a price floor which retailers must follow in order to sell NVIDIA products. NVIDIA does offer volume discounts for businesses buying for non-retail purposes, but does not offer quoting to customers buying for personal use in small quantities.

● Channel selection: NVIDIA sells to distributors which then further distribute their products. This means distributors are able to choose who they sell to and NVIDIA does not have to manage a large complex network of channels in which their products are sold. Retailers and buyers report to distributors if there is a problem and then distributors go directly to NVIDIA if it cannot be solved easily.

● Channel relations: NVIDIA’s main responsibility is maintaining their relationships with distributors which act as the gatekeepers for their respective sales networks, removing the need for NVIDIA to micro-manage relationships with retailers.

ServicesNVIDIA’s service segment of their value chain centers around the generous 3-year warranty they offer on their products.

● Installation: The end-user is responsible for taking the finished graphics card and installing it into a new or existing computer. NVIDIA doesn’t offer their graphics cards pre-installed on computers, however, some third-party companies that build and sell PCs do.

● Repair: NVIDIA has a 3-year warranty on all of their graphics cards in which they will repair or replace any faulty graphics card with manufacturing defects.

● Training: Repair staff are trained to quickly analyze defects and repair them if possible. If not possible, technicians will send a replacement graphics card to the customer.

● Parts supply: NVIDIA graphics cards are covered under warranty. Tampering with or disassembling graphics cards voids the warranty. Because of this, NVIDIA does not offer replacement parts for their graphics cards.

● Product adjustment: Graphics cards can be adjusted with software on PCs, giving control on the overclock in which processing power can be increased for better performance, or reduced for better cooling or lower energy costs.

Procurement

● As mentioned above, NVIDIA limits procurement of inputs for manufacturing since they don’t do their own manufacturing. NVIDIA’s procurement focuses more on identifying new and better avenues to advertise, and locations of real estate to purchase for new buildings.

Technology Development

● A massive portion of NVIDIA’s yearly budget goes to R&D. Furthermore, 70% of employees at NVIDIA are engineers, the majority of which are responsible for innovating new technology and products and expanding the functions of NVIDIA’s existing technological infrastructure.

● NVIDIA releases a new line of graphics cards every year, and releases multiple new software drivers throughout the year which service existing products. NVIDIA is also currently working on new applications for their software including AI, self-driving cars, and other new, innovative industries.

Human Resource Management

● While the majority of NVIDIA’s employees are engineers, there are employees for each segment of the value chain which contribute to the overall health of the organization in different ways. NVIDIA offers a variety of benefits to their employees and incentive packages for all employees.

General Administration

● NVIDIA’s General Administration must continually negotiate trade deals with Chinese manufacturers, making sure the numbers add up and value is generated. Furthermore, freight, deals with distributors and retailers, and capital management must be successful for the company to remain in good health. So far, NVIDIA has done a fantastic job at managing their company and negotiating powerful deals which continue to give them competitive advantage over AMD.

● Since NVIDIA is so dependent on relations in China, is important for them to understand and account for cultural differences between the two countries and how they conduct business. For example, there is a lengthy period of time in celebration of the Chinese New Year in which almost every factory in the country is closed. NVIDIA must account for these types of things, as well as the currency exchange rate, to effectively leverage third-party partnerships which allow NVIDIA to focus on everything else.

VRIN Analysis

Looking at NVIDIA’s internal resources allows us to evaluate the firm’s ability to generate sustainable competitive advantage. Looking at strategic resources, we need to analyze if they are valuable, rare, imitable, and non-substitutable.

NVIDIA’s main strategic resource is their ability to quickly innovate and develop new products with limited setbacks along the way. Partnership with essential, very specific manufacturers further contributes to the value of this resource in quickly turning around high-quality products year after year. For analyzing NVIDIA’s strategic resources, we will look at various aspects of their business and analyze them in a matrix, summarizing the core findings below.

NVIDIA’s CUDA GPU engine, the fundamental technology that powers NVIDIA graphics card creates a sustainable competitive advantage because after years, it still remains ahead of AMD’s own proprietary engine because AMD has yet to imitate it in a way that can match its power. The CUDA engine is substitutable with AMD’s engine, and newer AMD graphics cards will beat out older NVIDIA cards every time. The same is true for newer NVIDIA cards against older AMD cards.

AMD uses 3rd party manufacturers as well, sourcing only ones with the technical capability to assemble graphics cards. Because of this, both companies have parity with one another, but each also has temporary competitive advantage in that the other company could not easily replicate the other’s products or manufacturing methods.

NVIDIA’s distributor network is almost identical to AMD’s at this point. There is competitive parity here.

NVIDIA’s AI development NVIDIA’s main point of differentiation is the work they have done on creating a visual-based AI system that is extremely powerful and shows potential for a lot of different applications. The competitive advantage is sustainable here.

NVIDIA’s self-driving cars NVIDIA’s self-driving cars can be imitated with difficulty, but they are only substitutable by Google’s cars and a few other companies trying to do the same thing. Either way, self-driving cars need powerful GPUs, and NVIDIA’s competitors have to buy their graphics cards from NVIDIA or AMD to get their own proprietary tech to work. This is a temporary competitive advantage.

NVIDIA’s low-end GPUs NVIDIA’s low-end cards will always be beaten by AMD’s newer graphics cards and vice versa. Because of this, both companies continue to innovate and push out new products which more or less match each other each year. This creates partial competitive disadvantage in regards to the fact that both companies are forced to release new products to remain competitive, but as long as both companies release new products, then there is competitive parity.

Competitor Strategy Analysis

NVIDIA and AMD are using very similar strategies to run their businesses and continually innovate and release competing products. The general business model for both corporations is to develop new graphics cards, create new drivers to improve existing graphics cards--free of cost to the consumer, and develop new products and services in different market segments where there is less direct competition. This serves as a differentiation strategy, and both companies use a variation of it so their newer projects don't directly compete with one another like their graphics cards do.

Both companies also use a focus strategy where they create targeted, narrow product lines which appeal to a small segment of the overall PC enthusiast community, offering products which can handle extreme work and play conditions and give users a lot of raw computational power.

AMD Business-level Strategy (a focus on GPUs)

● Like NVIDIA, AMD continues to release new graphics cards each year, improving on the performance with each new release and continuing to support existing graphics cards. AMD has been working on its own AI-like infrastructure which will enable machine-

learning, but the technological structure of it is different than what NVIDIA is building. AMD doesn’t pursue a focus strategy as heavily as NVIDIA, in fact, they are more focused on differentiation and have a product line of microprocessors with power that beats most of intel’s current offering, although the price point is much higher than intel’s products.

● AMD is in a good position at the moment. The company has lost money the past two years, but the growth in the GPU industry in 2017 has led to significant profits for both AMD and NVIDIA, and AMD recently completed and launched their new line of CPUs which beats out Intel’s offerings. AMD is now in the position where they can use their additional net income to grow the business and further advertise their new and existing products.

AMD Corporate-Level Strategy

● AMD is branching out into the CPU industry in addition to the GPU industry. This is a completely new, but complementary market which should give AMD more flexibility in grouping their products together in completed PCs to sell to PC enthusiasts who might not want to put together their own PCs. As mentioned in the first milestone of the project, AMD’s market cap is ten times smaller than NVIDIA’s, but both companies are experiencing continual growth and AMD is well positioned to grow quickly, especially since the company committed so many resources to develop their new CPU line, which as of now, is selling extremely well.

● With their additional resources, AMD is in a good spot to grow their machine-learning infrastructure and start developing business applications for the software which could lead to additional sources of revenue for the company. As far as differentiation with NVIDIA goes, both companies are building a different type of AI, and these likely won’t compete with one another for some time, if ever.

Rationale

● AMD’s rationale is solid. The company has struggled significantly for two years and has lost money due to committing resources they could not necessarily afford to the development of their Threadripper CPUs. The company did take substantial risk in developing this new product line, but it seems to be paying off quite well, and AMD’s new CPU’s are well received by the PC community at the moment. Even more remarkable is the fact that they are beating the performance of Intel’s I9 processor which is very hard and expensive to acquire. AMD has the potential to create very high-end PC build combinations which will synergize very well together, giving a more powerful PC. It is important to note that NVIDIA GPUs can be used in the same computer even if it is using the Ryzen Threadripper CPU.

● AMD’s gambit of expanding their product line and moving into an additional market seems to have paid off, and 2017 is set to be a great year for the company in terms of

financial comeback and generating value for investors. Because AMD uses a different business year than NVIDIA, their final financials for 2017 are not yet available, but they have experienced the same growth as NVIDIA due to active participation in the GPU industry.

Pros and Cons of AMD’s Strategy

Pros

● Ryzen Threadripper CPUs create a new market segment for AMD to compete in and

offer the opportunity to cross-sell products to increase company profits.

● Ryzen Threadripper CPUs will help establish AMD’s brand and give more credibility in

the industry since they are performing so well.

● AMD’s graphics card engine is closing the gap on NVIDIA’s CUDA GPU engine, making

AMD products more popular with the PC gaming community.

● AMD will require less R&D expenses in 2017, allowing for higher net income and growth

of company value amidst large growth in GPU industry.

● AMD’s machine learning platform will continues to grow and might create opportunities

for new business segment development within the company.

Cons

● AMD’s growth was stilted by excessive R&D spending, decreasing potential growth of

the company over the past two years. AMD’s market cap has not grown significantly and

the company has lost money over the last two years.

● AMD’s machine-learning platform will likely have less application’s than NVIDIA’s AI

which is more sophisticated if executed properly. If not done properly, AMD won’t be

able to compete with NVIDIA in this regard.

● AMD’s differentiation strategy is more limited in scope than NVIDIA’s, producing a more

narrow corporate-level strategy.

● Despite the excellent growth of the industry, AMD continues to compete against a

company with significantly more resources and will need to move quickly in new markets

to prevent NVIDIA from seizing new opportunities.

● Despite the excellent performance of Ryzen processors, AMD is now competing with

Intel in one of their market segments, an industry titan which is significantly larger than

AMD.

NVIDIA Business-level Strategy (A focus on GPUs)

● NVIDIA’s business-level strategy is to differentiate themselves against AMD by trying to be the superior graphics card supplier. There is a level of cost parity between both companies as they release their new products, and both companies try to balance releasing new products sooner while making sure new users who adopt them quickly will not experience negative performance issues caused by rushing out a product.

● NVIDIA attempts to provide more value to customers by continuing to improve the graphics cards users already purchased through new, more efficient driver software which power them. Through the product’s lifespan, performance actually increases and users will find they are able to use the same graphics card to play new video games for years after their initial purchase.

● NVIDIA also pursues a focus strategy which offers graphics cards with both absurd power and absurd cost. For example, NVIDIA offers graphics cards which in most situations would be overkill. These graphics cards are able to support the newest games in 4k resolution, something not widespread in PC gaming yet. Unfortunately, these graphics cards alone cost upwards of $1,000 a piece, and most PC build which strive to get this level of performance need two of them. Full PC builds which can run 4k games reliably at high frame rates can cost upwards of $6,000, making them highly inaccessible to the masses at the moment. NVIDIA is still happy to provide customers with this performance if they desire it, but at great cost to the consumer.

NVIDIA Corporate-level Strategy

● NVIDIA does make most of its money from graphics cards, however, it has also expanded into self-driving cars and the construction of a powerful AI system using visual GPU-based learning systems. NVIDIA’s diversification allows the company to move into

new market segments which were previously unexplored. New sources of revenue with less grinding competition like they experience with their graphics cards could allow the company to grow at a faster rate despite the explosive growth the GPU industry is currently experiencing. Still, as discussed in the former parts of this project, it will be extremely difficult for new companies to get into the market due to the costs and need for a global network to accomplish this type of business. With the additional growth of revenue, both NVIDIA and AMD have the opportunity to expand their portfolios with the creation of new business-level strategies to help the corporate bottom line.

● NVIDIA’S AI is growing quite sophisticated, and it is expected to have a number of business applications as well as the potential to create entirely new products and services altogether. As NVIDIA continues to develop this, there is the potential to either spin it in or out as a separate company with a majority of shares held by NVIDIA. NVIDIA has a huge opportunity with their AI and self-driving cars since that technology is dependent on high-end graphics cards and the CUDA GPU engine.

Rationale

● NVIDIA does pursue business opportunities that build on its core competencies, utilizing its extensive network of engineers in-house and encouraging collaboration through products and an intrapreneurial spirit in which innovation is encouraged from within the company. NVIDIA is pursuing business opportunities which enable it to take advantage of economies of scope—the direct reduction of R&D expenses by sharing technology between its AI initiative and GPU development cycle, NVIDIA is able to cut costs in both sectors and enjoy increased productivity by reducing the time needed for R&D for each individual business within NVIDIA. NVIDIA is also able to enjoy economies of scope by utilizing its own GPUs in its self-driving cars that the company is working on.

● NVIDIA will enjoy market power with its machine-learning AI initiative, but cannot afford to drastically raise prices on their GPUs since AMD is in such close competition all the time. PC gaming remains NVIDIA’s strongest opportunity, and drastic restructuring of the company is not likely anytime soon.

● While NVIDIA isn’t going anywhere and won’t stop manufacturing new graphics cards for the massive PC gaming market which continues to grow, the company does have a lot of opportunity to expand and diversify the corporate portfolio with its current projects which would have new applications in new markets with less saturated competition. NVIDIA is smart to put some of their profits from the great performance they have had these past two years into expanding their company and the creation of new market segments which would be free of competition. From a business and corporate level view, NVIDIA is very strong right now as a company.

Pros and Cons

Pros

● By pursuing a hybrid strategy of differentiation and focus, NVIDIA can expect to outperform businesses utilizing only one form of competitive advantage.

● Through differentiation of their products and service, NVIDIA is able to distinguish themselves from AMD and establish strong brand loyalty among customers who are then much more likely to only make future purchases from NVIDIA instead of AMD.

● NVIDIA’s strong customer loyalty provides an additional barrier of entry for new entrants in the GPU industry. This also works to reduce buyer power and threat of substitutes.

● Firms attempting to match NVIDIA’s ultra high-end products will struggle to match performance. From these hyper-focused niches within the GPU industry, NVIDIA weakens buyer power and generates better margins to provide additional revenue to the corporation. This focused niche is substantially less vulnerable to substitutes.

● NVIDIA’s margins help deal with supplier power when outsourcing their manufacturing efforts to third parties.

Cons● While NVIDIA’s differentiation is not easily imitated, it does experience some dilution of

brand through low-priced product lines which while providing suitable performance, are not representative of typical NVIDIA products. This is especially a problem in the secondary market where people buy old, used GPUs which may have problems from wear/misuse that NVIDIA might not be responsible for.

● NVIDIA’s focused ultra high end products are used by only a small percentage of hardcore PC gamers and standardized graphics cards continue to excel and provide incredible performance in the newest of games with the heaviest graphic power requirements.

● NVIDIA needs to be careful not to underestimate the challenges and expenses associated with an extended value chain while attempting to leverage economies of scope between its different business units.

● NVIDIA needs to be careful with its focused line of products. Too much focus and they could overextend into the niche and lose appeal with this select group of customers.

Recommendations

Increase R&D spending on AI developmentBy increasing R&D spending on AI development, NVIDIA can fast-track their way to market with the most powerful machine-learning AI on the market. NVIDIA’s AI has potential to serve in multiple industries and has many business applications which can be sold or licensed out to increase revenue. By taking a risk and leveraging additional revenue into R&D, NVIDIA could experience growth and profit by taking over a new industry which is sure to grow in popularity as the age of AI begins.

Attempt to buyout AMD and establish market dominanceThis option entails the most financial risk out of the three. While purchasing AMD (a company with approximately 1/10th of NVIDIA’s market cap) NVIDIA would remove its only real competition in the industry and could grow profits. The downside is that most acquisitions and mergers result in loss of stock value and there is a lot of financial risk to consider. In addition, if the GPU industry stops performing so well, NVIDIA would have higher barriers to exit and a greater risk of loss.

Continue forwardNVIDIA’s current strategy has grown the value of the company significantly over the past two years. They are wise to diversify and establish new business units which synergize well with the core competencies and available resources of the corporation. By continuing with their current strategy, NVIDIA enjoys the benefits of being part of the GPU industry while developing new businesses which might bring substantial growth for the corporation in the coming years.

While this is my recommendation, it does not come without suggested changes. NVIDIA should continue to capitalize on the explosive growth of the GPU industry while continuing to expand into related industries which NVIDIA can utilize its existing infrastructure, resources, and talent. NVIDIA should strive to develop synergies between its business units and link aspects of its expanded value chain while being mindful of the challenges of doing so. I believe this is the best recommendation because NVIDIA can continue to excel, develop new, unique businesses without competition, and grow the corporation as a whole while continuing to remain ahead in the GPU industry.

While pursuing this option provides the greatest future value and long-term growth of corporate revenue, NVIDIA needs to be mindful of R&D spending when it could be using profits somewhere else. R&D is expensive, and it won’t always generate new products or services that will be rare or value, thus resulting in things that will not be effective sources of revenue for the corporation. NVIDIA’s alternative solution to mitigate this risk is to actively manage and evaluate the results of its R&D and the products and services that are generated through the additional intellectual property and assets generated through the corporation’s initiatives.