ACCT3610 - Week 2 Case Study - Inventec Case Study

Case study overview

Customers
OEM - original equipment manufacturer (HP, Apple, Samsung, Lenovo)

Suppliers
ODM - original design manufacturer
EMS - equipment manufacturer servicer

Porters five forces for ODM industry
1. Buyers - high
Switching costs are very low for clients
ODMs can only differentiate themselves by price
Limited OEMs but large number of ODMs
2. Suppliers
NA
3. Rivalry - high
Too many competitors but very few buyers
Industry is stagnant
Fragmented industry, they cant command prices
Fixed to variable scales - have to invest a lot in their equipment
Exit capacity, exit barriers - high because they have a lot of specialised assets, cannot
sell them to somebody else
4. Substitutes
NA
5. Threat of new entrance - low to medium
Depends on regulatory environment (Chinese government makes it easier for
companies to start) - low
Economies of scale - high
Legal barriers - low

Therefore there is a lot of competition in the industry, and the profit margins would be
smaller.

Porters five forces for software industry
1. Rivalry - medium
Industry is growing very quickly
Large number of software companies
2. Substitutes
Highly differentiated software
o Have different software package categories
Similar functions but switching costs (learning costs) would be higher
3. Barriers to entry
Need qualified engineers (need innovation and talent)
4. Customer bargaining power - medium
Although there are a few companies to choose from, they
5. Supplier bargaining power - low
Large number of engineers in India
No union in the country

1. Despite its growth and size, why is Inventec not very profitable?

Although Inventec is one of the leading ODMs in Taiwan, it is not very profitable for several
reasons:

1. Low margins
a. 80% of Inventecs revenue is driven by sales of NB PCs (Exhibit 5)
however they only contribute below 5% margins
2. High buyer bargaining power
a. Inventec is heavily reliant on its clients. If one were to drop the company
as a supplier, it may not be able to recoup its losses. Hence the buyers
have high bargaining power. This is also further exacerbated by the fact
that there are relatively low switching costs for buyers (there are a lot of
suppliers in the market competing for client contracts).
i. Ex. Before Inventec won a contract to build high-end notebooks
for Toshiba, Compaq had been Inventecs only notebook buyer
ii. Buyers are very price sensitive - likely to expend the resources
necessary to shop for a lower-cost alternative
iii. Relatively low switching costs - there are a lot of suppliers in the
market competing for client contracts
3. High rivalry among existing organisation
a. As the industry is stagnant and is not moving very quickly, the only way
firms can increase their client base is by taking from other firms.
Therefore Inventec is at high risk of diminishing profits if it loses clients.
i. Ex. Apple split iPod orders amongst Inventec and its competitors

2. What are the drivers of the average profitability of the original Design and
Manufacturing industry?

Drivers of profitability are the number of hardware contracts, type of hardware and length of
hardware contracts.

3. What are the key factors that a company like Inventec needs to manage to earn
above-average profits in this industry?

According to the Porters five forces framework, the intensity of competition determines the
potential for creating abnormal profits by the organisations in an industry (rivalry between
existing organisations, threat of entry of new organisations, threat of substitute products or
services).

Whether or not the potential profits are kept by the industry is determined by the relative
bargaining power of the organisations in the industry and their customers and suppliers.

The only factors that Inventec can manage are the relative bargaining power between itself
and its customers. The optimal situation for Inventec is for it to have high bargaining power
(bargaining power of suppliers) and for its customers to have lower bargaining power
(bargaining power of buyers).

Factors to increase bargaining power of suppliers (Inventec)
Degree of differentiation
o Focus on providing
Products costs and quality
o
o
o
o Try and diversify the number

4. Why is the Indian software industry, on average, so much more profitable than
the Chinese ODM industry?

The Indian software industry is more profitable because the companies can command higher
margins and have lower operating costs.

1. Higher margins
a. Software offered by these companies is tailored to business process needs.
They can command higher margins because their needs are unmet by
packaged software. In addition, custom application development (which is a
product of a technological education) is harder to imitate compared to
hardware machinery.
2. Lower operating costs
a. Salaries in China are rising, especially in bigger cities such as Beijing and
Shanghai. China is becoming less competitive.
b. ODMs create hardware; they take on extra risk because they require
operating space, manufacturing plants and storage place. In comparison,
software development requires less warehouse space.

5. What strategic advice will you give Inventec to improve its profitability?

There are two main sources of competitive advantage, cost leadership or differentiation.
Sustaining these strategies successfully can allow a company to build a sustainable
competitive advantage. However straddling between these two strategies, and not effectively
implementing either of them, as Inventec has done, is not a very optimal strategy.

Cost leadership enables an organisation to supply the same product or service offered by its
competitors at a lower cost and differentiation is the provision of a product that is distinct and
the customers are willing to pay a price premium.

Inventec is thinking of pursuing two different types of strategies
1. Brand development
2. Software Development

Brand development doesnt seem like a very good idea because Inventec is at risk of
alienating its own clients when it promotes its branded sales. This happened to BenQ, who
lost several large clients when it started making its branded products. This was despite BenQ
making its branded products clearly different from those supplied to OEMs.

Inventec already has the resources and capability to pursue a differentiation strategy. Its
already sold two successful programs (Dr. Eye translation and One Touch XP). Additionally,
it can command higher margins based on the fact that software is hard to imitate.