Post on 02-Apr-2015
CASE STUDY:INVENTEC
CORPORATION
Fiona Chia Wei Lin .Frank Poh .Jiang XinYan .Neo Li Yun Yvonne.Ng Ee Huang Yvonne. Ng Yi Hui Kyna
AGENDA1. Introduction2. Drivers of profitability of ODM Industry 3. Factors accounting for Inventec low
profitability4. Key factors for above-average profits5. India software VS China ODM6. Strategic advice
Introduction
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
DEFINITIONS
Original Equipment Manufacturer (OEM) – Brand firms, the original manufacturers prior to outsourcingE.g. Hewlett-Packard, Dell, Apple Original Design Manufacturing (ODM) – The designing and manufacturing of electronic products for client companies (OEMs) that market them under their own brand
Electronics Manufacturing Services (EMS) – Manufacturing of electronic products based on clients’ designs
ODM firms usually own the intellectual property rights to their designs.
Introduction
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
1975 Began as contract
manufacturer of
telephones &
calculators
1991Began shifting some
operations to China
1996IPO on
Taiwan’s stock
exchange
1999Established
4 subsidiaries
to specialise in various industries
2004Nearly 27,000
employees worldwide,
revenue exceeding
$6 billion
Introduction
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Summary of the Case
• Inventec is part of the ODM industry that started with the proliferation of motherboard companies in Taiwan during the 1980s.
• Over time, manufacturers added design staff so they could add more value and increase margins.
• Eventually they were designing entire computers, then computer peripherals (servers, cameras, mobile phones, PDAs, MP3 players)
• Since the 2001 easing of Taiwan government restrictions of high tech investment in China, all major ODM firms had shifted some of their operations to China due to lower operating costs.
• In 2005, in at least 10 Taiwanese PC factories in and around Shanghai, thousands of PCs were produced daily.
Introduction
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Problems Inventec faced• Fierce competition in a saturated industry• Increasing labour costs due to higher demand for Chinese
engineers• Notebook PCs became the mainstay of Inventec since 1995, but
gross margins had dropped below 4% by 2004• Inventec was excessively reliant on HP-Compaq’s business, which
accounted for 75% of Inventec’s notebook production in 2004
LOW PROFIT MARGINS
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
What are the drivers of the average profitability of the Original Design and
Manufacturing (ODM) industry?
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
ODM Industry Profitability
Bargaining Power of Buyers
Rivalry Among Existing Firms
Threat of New Entrants
Threat of Substitute Products
Bargaining Power of Suppliers
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Rivalry Among Existing Firms : High
• High competition as existing firms compete for the same client pool, which often awards contracts on a split basis
• Industry is fragmented and firms engage in serious price competition• Contract only lasts for the product life cycle which makes the switching cost
for clients low
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Threat of New Entrants : Medium
• Low due to high barriers of entry from exploitation of large economies of scale and the low profit margin within the industry does not serve as an attractive incentive for new entrants
• However, EMS firms are making their transition into the ODM market and do have the necessary knowledge to leverage on
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Threat of Substitute Products : N.A.
• Irrelevant to the ODM industry
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Bargaining Power of Buyers : High
• Generally low switching cost for OEMs as technology only lasts for that particular life cycle
• Price sensitive as PC industry had matured and end consumers are less brand-influenced
• Consolidation among OEMs and reduced reliance through multiple partnerships have increased their bargaining power
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Bargaining Power of Suppliers : High
• Labour and component parts are the major costs for an ODM firm• More and more organizations (including ODM firms) have shifted operations
into China, leading to substantial increase in demand for engineers• Microsoft and Intel had almost exclusive share of the operating system and
the processor industry, ODM firms have little bargaining power
ODM Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
ODM Industry
Profitability
Bargaining Power of Buyers
*HIGH*
Rivalry Among Existing Firms
*HIGH*
Threat of New Entrants
*MEDIUM*Threat of Substitute ProductsBargaining
Power of Suppliers*HIGH*
Inventec’s Low Profitabilty
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Despite its growth and size, why is Inventec not very profitable?
Inventec’s Low Profitabilty
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Industry-related Factors
Competitive nature of ODM industry• Players have to constantly underbid each other to win design and
manufacturing contracts from a handful of PC firms• EMS firms are also competing for the same client base.
OEMs reticent about their ODM use• Some OEMs fear that too much outsourcing can risk their reputations• Fear of losing control over intellectual property• Fear of ODM firms becoming direct competitors (BenQ and Motorola)
Inventec’s Low Profitabilty
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Industry-related FactorsClients of Inventec are in extremely competitive industries• Notebook computers, the single largest ODM product, had poor profit margins of 3-4%
in 2001, and below 1% for second tier ODMs• Louis Woo, senior advisor for Inventec, “Our customers have been squeezed left and
right. The only way they can do business is to squeeze us.”
Difficulty in establishing product differentiation for notebook PCs• Technology of PCs was in the processor and OS (Intel and Microsoft)• ODM firms were unable to produce any meaningful differentiation, and forced to rely
on low costs to attract customers
Inventec’s Low Profitabilty
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Company-related FactorsOver-reliance on HPQ• Until 2002, Compaq had been Inventec’s only notebook client• In 2004, HP-Compaq still accounted for 75% of Inventec’s notebook production• But, HPQ distributed its manufacture of notebooks amongst 4 ODMs (Arima, Asustek, Compal, Inventec)• HPQ relied on aggressive pricing strategies
Failure in building up meaningful relationships with its OEM clients• In 2004, initial exclusive production of iPods spread out to 3 ODM firms• Loss of Cisco’s phone business to a competing ODM• Inventec did not fare well in establishing and maintaining meaningful relationships with its OEM clients, thus resulting in low switching costs for them
Inventec’s Low Profitabilty
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Company-related FactorsFailure in capitalising on its strengths• Inventec executive C.W. Lin, “Software is our strength. The core of our product is
the software that provides differentiation.”• However, Inventec seems to have failed to fully capitalise on its software
expertise to differentiate itself
Failing to develop a low cost strategy that is sustainable• With the 2001 easing of Taiwan govt restrictions, ODM firms moved into China• All firms adopted the same cost structure
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Key Factors
What are the key factors that a company like Inventec needs to manage to earn above-average
profits in this industry?
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Key FactorsCost
Enjoy higher margins
Price elastic demand – increase sales volume
Might trigger price war
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Why is the Indian software industry, on average, so much more profitable than the
Chinese ODM industry?
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Started Mid-20th Century World's top 5 Software Supplier, second only
to U.S. Fastest-growing software industry
According to rankings by the World Bank, Size of India's software exports, Quality and Cost composite index – Ranked First in the world
India Software Industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Indian Software Industry
Bargaining Power of Buyers
Rivalry Among Existing Firms
Threat of New EntrantsThreat of
Substitute Products
Bargaining Power of Suppliers
India Software Industry
Rivalry Among Existing Firms : Medium
• Industry is concentrated, with a few publicly listed firms leading the industry
• Less head-on competition as services are customer-specific Software is designed to suit client requirements
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Threat of New Entrants : Medium
• High capital outlay Lowers threat
• Government policies encourage growth of industry Increases threat• However, high abnormal earning profits together with government efforts to
develop the industry increases its attractiveness of the industry
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Threat of Substitute Products : N.A.
• Generally not applicable
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Bargaining Power of Buyers : Low
• Quality Assurance and ISO9000 authentication• High switching cost for buyers as they require customised applications and
maintenance Lowers buyer power• Less price sensitive as product is unique to the requirements of the buyer
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software Industry
Bargaining Power of Suppliers : Medium
• Labour forms the major cost for the Software Industry• India Education system focuses on Communication & Math Skills – essential
for software industry
• Abundance of highly-skilled engineers Lower supplier power
• But talented engineers are non-substitutable Increase supplier power
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
India Software v.s. ODM Industry
ODM Industry Profitabi
lity
Bargaining Power of
Buyers*HIGH*
Rivalry Among Existing
Firms*HIGH*
Threat of New
Entrants*MEDIUM*
Threat of Substitute Products
Bargaining Power of Suppliers*HIGH*
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Indian Software Industry
Bargaining Power of
Buyers*LOW*
Rivalry Among Existing
Firms*MEDIUM*
Threat of New
Entrants*MEDIUM*
Threat of Substitute Products
Bargaining Power of Suppliers
*MEDIUM*
Strategic Advice
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
What strategic advice will you give Inventec to improve its profitability?
Strategic Advise
Introduction Q2: Drivers of average profitability
Q1: Factors accounting for Inventec’s low profitability
Q4: Indian SoftwareIndustry
Q3: Key factors to be managed
Q5: Strategic advice
Enter new PC Market• Target Rural China (80% of the population)• Untapped Market
Build up Brand for Non-PC/Laptop products• Inventec’s best seller in local market – Electronic dictionary• Inventec software focused on multimedia educational programs specializing in language
training
Provide Consulting services• Help companies create Customised Software Solutions• Design Information System & Manage IT operations and resources• E.g. IBM
Focus on Software development• Separate its proprietary software from hardware products• Provide customised software that is designed to meet clients' needs
Cost Benefit
Sell at Lower price Bigger market size
Lower Profit Margin Greater quantity
Risk Brand dilution Increase brand awarenessCost BenefitMarketing Cost Less risky compared to increasing
proportion of branded sales which may risk alienating its own clients
May incur additional R&D cost Build on its strength in Multimedia educational programs
Less Demand for electronic dictionary compared to Demand for PC
Avoid competition with Lenovo, Toshiba or HP-Compaq in the saturated PC market
Cost Benefit
Marketing cost Alternative source of revenue
Additional Labour cost Has the Expertise and labour to provide such services
Cost Benefit
Additional R&D cost for developing or personalizing new Software
Experience in developing software solutions for over 2 decades
Faced stiff competition from Indian IT firms
Able to go after a larger Software-centered market
Change of Focus – Majority of its Software is embedded in its Hardware products
Software has higher profit margin compared to Hardware
THANK YOU!
Q & A