A Profitability Management System for Semiconductor Business

Abstract

Many executives in the semiconductor business frequently question whether traditional product costing information is useful for product strategy formulation, particularly in deciding “real profitability” of the products. Semiconductor product cost (full cost) would dynamically decline when a synergy effect of the two unique factors is expected; huge potential demand with high price elasticity, and micro process manufacturing technology that would reduce the chip size. Therefore, no matter how precisely the product cost is calculated, it would not be relevant to deciding the product strategy and a future profitability of the product. From a product strategy point of view, it is very important to understand the dynamics of product profitability structures and, therefore, establish management systems which provide such information. This paper first reveals the mechanisms of how semiconductor product cost would dramatically decline with its unique characteristics. Then discussion turns toward the development of a profitability management system which supports formulation of product strategy by understanding the behavior of short-term and long-term profitability structures. The new system provides strategic decision support information including estimated changes in product costs and optimized price setting for each strategy alternative, product mix that will maximize long-term profit, and economies of the new product line investment.