How AMD is Faring 2 Years Into Its Turnaround

Faced with the daunting prospect of competing with Intel and ARM, new AMD CEO Rory Read followed the standard operating procedure for a successful tech company turnaround: Hire dedicated, loyal executives and build a business strategy that makes other firms depend on you. So far, so good--but can AMD keep it up?

Corporate turnaround efforts are interesting to watch; those that succeed usually take five to seven years to complete, but firms follow very different paths to get there. BMC, BlackBerry, Nokia, Hewlett-Packard, Dell and AMD are currently in different phases of turnaround paths. Dell—and now, it appears, BlackBerry—are following BMC's example to going private to facilitate their turnaround efforts. AMD, Nokia and HP are following Apple and IBM by remaining public companies.

This has been a tough market to try a turnaround, as huge shifts in the tech scene are happening. At the back end, on-premises services are shifting to the cloud. On the client side, the emergence of both smartphones and tablets as PC alternatives make users increasingly dependent on those cloud services.

AMD is one company tied tightly to the way things were—and we're coming up on Rory Read's two-year anniversary as AMD's turnaround CEO.

The economic improvements that indicate a company's turnaround unfortunately come at the end of the process. The turnaround efforts that enable this improvement have to come first. Few corporate leaders are trained to be CEOs, let along CEOs of a company that needs turning around, so it's worth looking at AMD's progress in the last two years.

News: AMD Continues Move Toward Profitability

There are two critical steps of any turnaround: Building a team and setting a strategy. Both present a real cart-and-horse issue. Until you have a strategy, you really don't know who you want on the team—and until you have a team, you don't know for sure what you can execute. You therefore have to be flexible and build both at the same time. That's what Rory Read did at AMD.

How to Build a Turnaround Team

Turnaround CEOs typically replace most top executives because they want people who are both loyal and, if the new strategy dictates, willing to make major changes. Long-time employees, no matter how talented, tend to resist change and fall back on things they know. That can severely hamper the effort. The successful turnaround CEO's selection process favors also loyal people over superstars, who often obtained their star status by stepping on their peers, not collaborating with them.

Read replaced virtually all of his senior staff. Lisa Su, senior vice president and general manager of global business units, was recognized as one of the most capable women at IBM, a firm that aggressive helps women advance in a male-dominated field and is currently run by a woman, Ginni Rometty, who rose through IBM's ranks. Su was a cornerstone hire, well-regarded and incredibly competent, and an excellent early choice.

Marketing was another critical role to fill. AMD's image would need to be remade while the company recovered&mash;or else the turnaround would become excessively lengthy. Read hired Colette LaForce as AMD CMO and senior vice president. She came from Dell, which is even more aggressive than IBM at enabling women in technology and has a female entrepreneur in residence who runs a directed effort to grow women-owned businesses. LaForce was one of the most powerful and capable executives at Dell; her skills, plus her Dell contacts, make her a solid AMD asset.

Commentary: How the Women of Dell Are Humanizing the Tech Giant

Also: How Human Resources Is Driving HP's Turnaround

Senior vice president and CTO Mark Papermaster followed an interesting career path. He came from Cisco and, before that, Apple and IBM. Tim Cook hired him at Apple, but Steve Jobs fired him, largely in a move to reestablish Jobs' authority and because Jobs despised the IBM career path. That said, Papermaster had a solid reputation at IBM, while his limited time at Apple likely game him consumer tech market insight, which is key for a CTO.

Finally, AMD's turnaround architect, Senior vice president and chief strategy officer Rajan Naik came from McKinsey, where the work of its mergers and acquisitions practice is nearly identical to a corporate turnaround—if not even more complex. Naik appears to have the expertise a turnaround would require.

Many of these top hires were ex-IBMers, as was Read himself. This was intentional, as it told him they could execute and be loyal to his leadership. Both characteristics are critical to the turnaround process.

Strategy: Develop x86-ARM Blend to Compete With Intel

For AMD, continuing as an ever weaker alternative to Intel, particularly when Intel was facing a potentially more powerful No. 2 in ARM, was a losing proposition. Reed and his team needed to develop and execute a strategy that would fundamentally change the company and its product set. In short, AMD, as a smaller player, had to change the rules. As things were, the market was going to be divided between Intel and ARM, leaving AMD out in the cold.

AMD had two potential paths. One was to come up with something completely different and try to build an ecosystem around it. Both Digital and Transmeta tried this and failed miserably, though, and AMD developers were already too thinly spread to take on yet another platform.

Instead, AMD created a blend of x86 and ARM to see if it could find unique synergies between the two technologies. Its first step here was the acquisition of SeaMicro, a former Intel partner working on the next generation of high-bandwidth micro-servers.

Commentary: AMD and SeaMicro on the Edge of Glory

Analysis: AMD Reboots Server Strategy with First ARM Chips

The move effectively put Intel on the defensive and allowed AMD to develop a flexible platform that could use ARM and X86 technology interchangeably, based on the performance needed or the code set being run.

With virtualization—a relatively new way to deal with different hardware architectures—AMD could create a hybrid product more flexible than either ARM or Intel could be alone. The first test will be a product code-named Kyoto, a key component of HPs new halo server program code-named Moonshot.

Related: HP Looks to Moonshot for Data Center of the Future

Also: AMD hopes to bridge gap between Xbox, PlayStation and PCs

Finally, AMD chips will be in all three next-generation game consoles, potentially lowering development costs for both the manufacturers of those consoles and the folks who develop on them. Owning this segment can be powerful. Plus, given that Microsoft's game platform is connected solidly to Windows and that Redmond is exploring both ARM-based servers and tablets, this could give AMD a much stronger strategic position with Microsoft.

AMD Turnaround Off to Powerful Start, But Only Time Will Tell

AMD remains overmatched; it lacks the resources Intel can bring to the table. Such a problem is a given, and it's outside any CEO's capability to fix. Finding a way around Intel is a viable strategy, however, and Read appears to be executing well.

We're still early in AMD's turnaround—two years into a five- to seven-year effort—but much of what I've highlighted here is consistent with best practices. Realize that turnarounds are difficult, though, and that neither the soft market nor Intel's undiminished power make this effort any easier.

Overall, if you set aside revenue growth—which, as stated, won't get appreciably better until the end of the turnaround—Read has impressed in his first two years on the job. He has a strong team, a viable strategy and can point to some significant product development progress.

As tech company turnarounds go this, AMD's is one of the better ones. That just shows how difficult they are to pull off.

Rob Enderle is president and principal analyst of the Enderle Group. Previously, he was the Senior Research Fellow for Forrester Research and the Giga Information Group. Prior to that he worked for IBM and held positions in Internal Audit, Competitive Analysis, Marketing, Finance and Security. Currently, Enderle writes on emerging technology, security and Linux for a variety of publications and appears on national news TV shows that include CNBC, FOX, Bloomberg and NPR.

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