Strategy for high-growth markets


Strategy for high-growth markets

A remora is a fish which holds onto a larger marine host using a sucker, and benefiting from protection and dropped food from the host. And the Remora strategy is one often used by suppliers, linking very tightly to their customers and being very responsive to their needs. Linking to a fast-growing customer is a common way for small organisations to grow. There is risk and opportunity in the Remora strategy: the customer requires its suppliers to lock in very tightly. When the customer flourishes, there is potential for linked suppliers to flourish too. But when the customer struggles, there is risk for its suppliers.

But beyond specific customers, choice of sector or market can be even more significant in strategic terms. In a high growth market there can be plenty for everyone, and even a small company can grow fast and make good margins. Strategically, choice of sector is a key decision. Get it right, and you have the potential to grow as the sector grows.

So to an example. Company A was founded in 1978, and in 1990 formed a Remora relationship with a very fast-growing customer. In the same sector and similar markets, Company I was founded in 1985, and in 2008 formed a Remora relationship with the same very fast-growing customer, and the customer bought a small stake in Company I. In the following years, both Company A and Company I diversified. But in 2016, while Company A was acquired for a massive £24Bn, Company I was issuing profit warnings and allegedly in talks regarding a takeover by its customer. Company A was acquired for its actual and potential value, and Company I was a potential consolidation target for economies of scale.

The customer in question is Apple, and competition in the smartphone industry as well as a slowdown in the industry overall have had an impact on Apple. Company I and Company A are both are microchip designers and both used a Remora strategy with Apple as a customer, growing on the back of Apple’s prolonged period of growth.

Company I is Imagination Technologies which licences its microchip designs to others for manufacture, a third-party licensing model. At one stage, Imagination gained about 30% of its revenues from the iPad and iPhone, with Imagination designs for the microchips driving parts of the graphics. But profits from graphics were reinvested in other areas, such as connecting devices to the internet, radio, and delivering high-definition TV to smartphones. This changed the nature of the business, as it diversified away from its core market in microchips and also diversifying from its historic B2B business model (Imagination to Apple) to include B2C. Overall the R&D investment has not shown sufficient commercial return to excite investors.

Company A is ARM Holdings, a microchip designer bought earlier in the year by Softbank, and ARM also benefited from a Remora relationship with Apple. Despite a recent slowdown in the semiconductor market, ARM has continued to post good results, including growth in sales and a rise in profits. Where Imagination diversified into different technology areas, ARM stayed close to its core in microchip design, and retained and built its expertise and excellence, achieving a dominant position. It focused on high-end chip designs, initially only included in high-end devices but now included in half the smartphones sold.

In terms of the future, they are working on placing chips to their designs in a new wave of devices, creating the processors for the next generation of electronics. There are two main areas: one is the use of technology in cars, and the increasing computerisation of these. Commercially this is attractive as the semiconductor opportunity per car is high. The other is the Internet of Things, which need ultra-low-power chips for their sensors, and ARM Holdings already produce low-power chips.

Imagination’s choice of moving to new products in new sectors, or the timing of their entry into those sectors, appears to have been flawed, and it failed to deliver shareholder returns. ARM Holdings has kept to its heartland of chip design and looked for alternative uses for their deep expertise in new, high-growth rate markets. And their reward is the price tag which SoftBank paid.