Operating Models

The Operating Model Map

"Follow the money" is a well-known strategy in the financial world and it also works in the Semiconductor industry. The way a company spends money will often give a better strategic view of the corporation than listening to the CEO. We don't blame the CEO for wanting to present the company in the best possible light - it is the job of a CEO, but we want more. The way a company spends its money can be viewed in several dimensions. Where cash flow looks at the flow of money between different accounts the operational dimension looks at money spent as a fraction of the revenue generated.

Two major categories are R&D and SG&A spend:

The Research and Development budget is vital for the future of the company and can demonstrate how much the company is investing in the future. R&D spend can be reduced giving short-term fuel to the bottom line if a company is in trouble. Borrowing from the future is not a sound strategic choice and when companies start doing so it needs to be highlighted.

The SG&A budget is what a company spends operationally that is not related to R&D or the cost of manufacturing products and services. It consists of a relatively stable administration element and a more variable sales and marketing element. Changes in SG&A often reveals changes in strategy and need to be monitored if you are a stakeholder of the company.

Simplified, you can decide one of 3 P&L categories where your gross profit dollars go: R&D, SGA or Operating Profit. 

The operating model map is a way of understanding both financial parameters simultaneously and also a way of comparing the operating models of different companies. The corners of the model represent 4 different operating zones:

Ambition Zone: Companies that have high R&D budgets combined with high spend in sales and support structures are ambitious companies investing in the future.

Consolidation Zone: Companies that have low R&D and SG&A spend are typically trying to optimise the value that can be extracted from their assets. They are likely to be more interested in profit than revenue growth.

Development Zone: Some product groups like memory, require heavy investments in R&D but less in a customer support structure and in sales. It can also be a path out of the consolidation zone through investments.

Sales Zone: Companies can choose to focus on selling the products they already have rather than developing new products. The selling cost also includes customer support structures so this is also the zone for companies with high level of support like microcontroller companies and similar.

Operating Model Movement

At any given time a Semiconductor company can occupy a static point in the Operating Model Map that will provide insights into the business model deployed. More interestingly is it to follow the development of the operating model over time - here shown for Cypress. Also, the operating model map is great to compare different companies in the same market.