XIME

ACER-The Rampaging Dragon

Case Analysis

11/19/2013

A. EXECUTIVE SUMMARY:
Acer is a multinational that began its operations in china and since then has expanded globally to become a truly multinational company. Acer has managed to position itself as an OEM supplier and a successful PC brand. Acer now aims to increase its market share in the personal computers market with the introduction of its new Aspire range of personal computers for the US market. If they decide to go ahead with the Aspire product range what effect will it have on the corporate structure that they have been trying to build. We recommend that Acer should try to retain its Manufacturing/production facilities to Taiwan where it will have larger benefit and may even attain economies of scales, while other parts of the value chain like Marketing and services should be implemented by the RBUs in their specific locations.

B. MACROECONOMIC AND INDUSTRY ANALYSIS

For the Industry analysis we decided to apply the Porters Five forces model to Computer industry:

PORTERS FIVE FORCES Threat of new entrants Threat of substitute products Bargaining power of customers Bargaining power of suppliers

DEGREE Low High Medium Low

REMARK Favourable Un-Favourable Favourable Favourable Un-favourable

Competitive rivalry within an High Industry

1|Page

I.

Interpretation:

1. Threat of new entrants: [LOW]

The entry barriers for new firms in the computer industry are as follows i. ii. iii. iv. v.
2.

Patents and Intellectual property rights Huge Marketing spending Economies of scale are not easily achievable. High Cost pressures Huge R&D budget

Threat of Substitute Products: [HIGH] i. Smaller product life cycle meant continuous innovation in the field which threatened the existence of any new product in the market. (in terms of substitution by a better product)

3. Bargaining power of suppliers: [Low] i. The Bargaining power of suppliers of raw materials and intermediate goods is not very high. ii. This is on account of vertical integration by Acer where it operates as an OEM.

4. Bargaining power of customers: [MEDIUM] i. Bargaining powers of consumers in the personal computer industry is High where they have a large number of brands to choose from like Packard bell, HewlettPackard, dell, IBM etc. ii. Switching costs in this field are a bit higher and one cannot simply change the PC at a whim which reduces the Bargaining power of the customers. 5. Industry rivalry: [HIGH] As per the market share details provided in the case study we have 10 major players in the PC manufacturing market with the following market share. Acer ranks 9th in terms of market share which shows the amount of competition in the market.

Company Compaq Apple Packard Bell IBM Gateway 2000

Market Share 12.6% 11.5% 11.4% 9.0% 5.2%

2|Page

Dell AST Toshiba Acer Hewlett Packard

4.2% 3.9% 3.6% 2.4% 2.4%

II.

Conclusion:

As per porters five forces model we have 3 Favourable conditions and 2 Unfavourable conditions depending on which we can say that any new venture in the US market could work positively.

C. COMPANY ANALYSIS:
I. Business Philosophy: 1) An assumption that human nature is essentially good. 2) A commitment to maintaining a fundamental pragmatism and accountability in all business affairs. 3) A belief in placing the customer first. 4) A norm of pooling effort and sharing knowledge. II. Product range: 1) MicroProfessor: was inexpensive and a simple computer that allowed the expansion of Multitech to Asia, Middle East and Latin America. 2) OEM: In 1983 Multitech began manufacturing IBM-Compatible PCs as an OEM for major brands and continued to manufacture under its own Multitech Brand as well. 3) 32 bit PC: Multitech introduced the 32 bit PC to the market which got the attention of major global players and winning Multitech OEM contracts and technology licensing agreements from Unisys, ICL and ITT. 4) CD ROMs: were developed by API and IPG that supplied CD ROMs to 70% of PCs made in Taiwan. III. Management: 1) Shih followed decentralized management approach that allowed employees the freedom to make decisions themselves hence harnessing the natural entrepreneurial spirit of the Taiwanese

3|Page

2) The family style of the business allowed for free sharing of ideas and teaching relationship between managers and subordinates, all of which contributed to the greater good of the company. 3) In 1985 Acer suffered from shortage of management, Shih looked outside the company for top executive positions in order to bring in fresh talent and new perspectives to Acer. This resulted in high turnover as the older employees saw this as employing people who did not understand the Acer culture. 4) Shih appointed Leonard Liu, a senior IBM executive who replaced him as the CEO of Acer and chairman of ACC North America. Liu focused on the management of Acer, due to the family style management approach most transfers and pricing were done as favours to employees and suppliers, hence costing the company heavily. 5) Liu introduced RBUs; the overseas subsidiaries and marketing companies that were responsible for the distribution channels and networks, dealer support, customers and establishing joint ventures in other markets. SBUs were responsible for the design, development and production of PC components and OEM products. The pressure on the RBUs and the SBUs increased substantially as they were made responsible for their own profits.

IV.

Long Range Business Objectives:

1) Dragon Dreams: In 1980s Multitech had high level of sales which were projected to how an increasing teren in the future. Shihs plan for the next 10 years was described as the Dragon Dream, where the sales in 1996 were projected to be $5 Billion. This figure was questioned by critics but Multitech saw huge potential in overseas growth through acquisitions and partnerships with foreign partners and distributors. Shihs goal of reaching $5 Billion by 1996 proves to be sound as there was in increasing sales trend. Acer had 25% market share in Singapore in 1986 and a market share of 2.4% in 1994. Shihs goal was achieved in 1995 when the company earned $5.54 Billion through its global sales. 2) Global Brand, Local Touch: Shih wanted Acer to evolve from a traditional Taiwanise company to a global organization with Taiwanese roots. With this Objective in mind Acer offered distributors an equity partnership in the RBU they served. Acer entered into joint ventures with Computech in Mexico which was responsible for Acers sales in Latin America. Acer computers international also planned an IPO in Singapore that was

4|Page

responsible for the sales in Southeast Asia. Shih articulated an Objective of 21 in 21 which is a vision of 21 Acer public companies which had local ownership by the 21st century. It was a form of globalization that created mutual trust and interdependence. Shih described this strategy as the 4th way.

V.

ACER Strategies:
1) Frugality: Multitech had only a few offices just enough to meet its needs in the market. Hence saving infrastructure and labour cost. 2) Duck Egg Strategy: High tech products were priced with lower margins to ensure turnover. Thereby receiving cash payments quickly and avoiding the use of debt. 3) Commoners Culture: The early growth strategy of Multitech was referred to as the Commoners Culture. Multitech focused on the smaller markets that were less appealing the global giants. This strategy proved to benefit Multitech as there were a large number of smaller markets in Asia which were ignored by the global players. Multitech leveraged this opportunity and expanded their business in these markets. 4) Global Expansion: Multitech established partnerships with dealers and distributors in Indonesia, Malaysia, Singapore and Thailand. Through joint ventures, Multitech understood the regional needs if the market thereby increasing sales without the need for further investment. 5) Client Server Organization Model: The Taiwan Headquarters was described as the Server that used its resources to support the client business units that controlled the key operating activities. The business units were allowed to work on their own business ideas with the help of the respective RBUs and SBUs without the having to go through the corporate centre. This model led to the development of the CD ROMs API and IPG that supplied CD ROMs to 70% of PCs made in Taiwan. Shih urged that at least half of all Acers products and components be sold outside the Acer group to ensure internal competitiveness. And RBU was allowed to source externally and the affected SBU could then find an alternative distributor in the RBUs region. This was considered the nuclear option but was rarely implemented.

5|Page

This model gave the RBUs more freedom to implement business ideas as oppose to other companies that require business units to have the headquarters approve new ideas prior to their implementation. 6) Fast Food Business Concept: The ability to assemble products close to the consumer is described as the fast food business model. The smaller expensive components with fast changing technology that represented 50%-80% of the total cost were air shipped directly from the SBUs in Taiwan to the RBUs. On the other hand the less volatile items were shipped via sea. Hence saving higher transport and inventory costs. The high local labour costs to assemble the products represented less than 1% of the cost of the product and were offset by the logistics savings.

STRENGTHS
1) Design, Development, Manufacturing process. 2) Revenue from OEM business 3) Encouraged employee idea generation. 4) Transfer of information between managers and employees and promoted learning. 5) Sense of trust among employees. Decisions were made by employees for the greater good of the company.

WEAKNESSES
1) AAC was made losses from 1990 to 1993. 2) Shih urged free spending. 3) SBUs and RBUs were responsible for own profits, creating pressure on the units and challenged the traditional culture 4)"Acer" required huge capital investments 5)Taiwan SBUs were too distant to develop components that would be globally appealing.

SWOT
OPPORTUNITIES
1) Rapidly growing PC industry. 2) Growth of the internet presented a number of opportunities for Acer. 3) Bigger companies ignored smaller markets which Acer caters to. 4) The number of people working at home increased from 26 million to 29 million in. 5) Developments in the audio, telecom, video and telecom technologies.

THREATS
1) Competition from IBM, Dell, Packard Bell and Compaq. 2) Change in Packard Bell and Dell distribution strategies caused drop in PC price. 3) Shorter product life cycle of PC. 4) Compaq announced 30% price reduction. 5) Hewlett and Packard were ahead of Acer in developing the multimedia systems.

6|Page

D. KEY CHANGE DRIVERS:

I. External factors
i. Competition

In the late 1980s the competition dynamics of the PC market changed rapidly. The increased competition led to price pressures. competition that existed in the industry were The major players were able to offer price reductions leading to overall reduction in PC prices .This led to the erosion of Acers Gross profit margins. Threat of Technological obsolescence required players to innovate continuously Product life cycle had shortened to about six to nine months Expectations in the industry was such that the Marginal players would be phased out Acer needed a product that would help it survive the competition as well as achieve a share of the global market. ii. Needs of the market Some of the features of the

Aspire was developed based on the needs of the market Mike Culver who was given the responsibility of product development identified the emerging opportunities in the market . He commissioned focus groups to further understand the customers. Some trends and needs he identified were Increasing trend of people working from home Growing interest in the internet Developments in audio, video ,telecom and other computing technologies Increasing importance given by the consumer to design and aesthetics Based on ACCs assessment of needs of the customer the new product (Aspire) was developed incorporating new design aesthetics, enhanced hardware designs, ease of use and multimedia capabilities and other innovations.

II.

Internal factors
Change in Organisational structure

7|Page

Under Leonard Liu the concept of RBU s and SBU s were introduced. In 1993 the Client server organisation model was introduced to improve competitive position through speed and flexibility. Under this system any SBU/RBU could leverage its ideas through other RBUs and SBUs without going through the corporate centre. At the same time external sourcing by a business unit was allowed. These changes at the organisational level over the years were instrumental in the development of ACER by ACC as The increased independence given to RBUs under the client server system gave the American RBU the freedom to develop its own product. Features like the voice recognition software were introduced by working closely with Development group in Taiwan In order to bring in aesthetic designing ACC worked with an external company Frog design This was further supported by the philosophy of Global Brand , Local Touch which aimed at making Acer a truly global company.

E. MANAGEMENT ISSUES:
I. Management Objectives:
Dragon Dream(1986) to achieve $5 bn sales in 1996 through overseas expansion. Already in 1986, after few years of international operations, overseas sales accounted for half of the total through new products Vision to build a global brand - Global brand, Local Touch to evolve from a Taiwanese company with offshore sales to a truly global organization with deeply planted local roots. 21 in 21: Vision of building the Acer group as a federation of 21 public companies by the 21st century

II.

Supporting Management Organization, Procedures and Systems:

Acers organization structure consists of the production-and-engineering-focused SBUs in Taiwan (IPG, API, TI-Acer, Acer Labs) and the sales-and-marketing oriented RBUs (Acer Sertek, Acer Europe, AAC, ACI, ACLA) across the globe.

8|Page

21 in 21 - SBUs and RBUs going public with considerable local ownership this strategy of globalization (the fourth way) relies in mutual interest and voluntary cooperation of a network of interdependent companies

Client server organization model: Under this concept of the company as a network, business units could leverage their own ideas or initiatives directly through other RBUs or SBUs without having to go through the corporate centre which is there to help and mediate, not dictate and control. The role of the Taiwan headquarters is to act as a server that uses its resources (finance, people, intellectual property) to support client business units. This concept in spite of being intriguing is a long way from Acers operating reality: Managers are not clear about the roles and relationships between SBU and RBUs and the full implications of the model on their day-to-day responsibilities.

Lord of the castle philosophy managers are accountable for the profitability of their business units RBUs feel that Acers Taiwan-based SBUs are too distant to develop product configurations that would appeal to diverse consumer and competitive situations around the globe This concern will be taken care of if the global brand, local touch philosophy and the client-server organization model supporting it, is put to work.

Despite of the long established philosophy of decentralization and laissez-faire, the idea of giving independence to the RBUs is not acceptable across the organization with much opposition from the Taiwan-based SBUs.

The fast-food business model and the Uniload production system brought back the profitability of the Acer group reducing logistics costs, inventory carrying costs and import duties on assembled products by assembling the products close to the customer. Also the efforts of AACs CEO, Ronald Chwang following the changes initiated in Taiwan, enabled AAC to break even in 1994 after 5 years of losses.

III.

Management Issues Events and developments that have the potential to influence
the organizations current or future strategy - AAC and the Aspire: Aspire is the new innovative multimedia home PC developed by Acers North American subsidiary, AAC. It features a unique design, voice recognition, ease-ofuse, and cutting-edge multimedia capabilities. It represents the client-server system at work: It could become the first product designed and developed by an RBU, in response to a locally sensed market opportunity.

9|Page

It could even become Acers first global blockbuster product. The Aspire product concept is the result of well-conducted market research by Mike Culver, Director of Product Management, ACC. This new innovative multimedia home PC has the potential to substantially improve Acers US share and also to capture a larger share of the global multimedia desktop market (estimated at 10.4 m units and growing at more than 20% annually), primarily in Europe and Asia.

Launching the product at the right time before the established competitors launch their own products is challenging for AAC given its limited development resources. Also because of AACs delicate profit position, investing for this extremely expensive and highly competitive branded consumer products business is risky. The profit in 1994 was largely based on its solid OEM sales, which accounted for almost 50% of revenues.

Aspires less-than-premium pricing owning to its innovativeness is contradicting the duck egg pricing philosophy propagated by Shih. Also AACs move to capture the US market share with an innovative product challenging the major players in the US PC market, is against Acers early expansion strategies following the commoners culture and playing from the corner with least resources, by-passing the multinationals markets.

In a situation where the US PC market is undergoing price-war, Aspires pricing has to be reconsidered. Aspire project team believed that while the Acer Group based in Taiwan probably had the engineering capability to develop the products new technical features, they equally felt the need to outsource the products designing. Design aesthetics of Aspire is set to compete with Apples design.

The enhanced product features of Aspire required a new hardware design and configuration that was a radical innovation for Acer, requiring significant design and tooling changes.

10 | P a g e

F. Theoretical Models and Framework

DIFFERENTIATION

ASPIRE

COST LEADERSHIP Aspires was to be positioned between the two PC segments Upper tier IBM and lower tire Packard Bell. This was done by offering a high quality innovative product at a less than premium price. The basic product was priced at $1999 and the highest end system with monitor was priced at $2999. In the current market Acers pricing strategy can be compared to Toyota where it was neither a pure cost leader nor a differentiator but tried to position itself in between and succeeded. With this product Acer is expected to be subject to high cost pressures as well as High pressures for local responsiveness in terms of the needs of the different markets if it decides to go global with the product. Due to both high cost pressures and local responsiveness pressure that Acer is subject to they should follow the Internationalization strategy.

G. Alternatives
The alternatives which exist according to us in lieu of Acer Aspire are as follows: 1. Not going ahead with Acer Aspire It is not a viable option as: 11 | P a g e

Lose out on a customer need which has not yet been met Competitive scenario is such that other companies are ahead in terms of innovation and product roll outs US market is the biggest market for PCs and as the research is US focussed, and if Aspire is not implemented the current market demand will be lost out on Aspire has the capability of becoming the first global blockbuster product, not leveraging that will go against Acers mission of becoming a Global Brand.

2. Put Acer Aspire on hold It is not a viable option as: Competitors will roll out and try to capture the demand; time shortage Technology might become obsolete by the time implementation is done Market demand is extremely volatile, the entire research of consumer needs might have to be conducted again 3. Implementing the Acer Aspire project The implementation can be done in a number of ways which are analysed according to a few criteria below: Criteria for measuring the alternatives

US (entire value Criteria chain), Sell products globally

US (entire value chain),Sell products only in US

Taiwan (entire value chain)

Taiwan (only Production activities), US(remaining value chain)

Implications on Corporate structure

Other RBUs resistant, want to redesign

Other RBUs resistant, want to redesign

Support from all RBUs

Some resistance from other RBUs

Implications on Profitability (OEM)

Risk of AAC profitability getting affected

Risk of AAC profitability getting affected

No Risk of AAC profitability getting

Risk of AAC profitability getting affected

12 | P a g e

affected Manufacturing costs Production capabilities Obsolete in US market Market research Feasibility in terms of Global product has been done only in US, might not cater Market research has been done only in US, might not cater N.A N.A. High probability Can check feasibility overall using resources and capabilities Competition launching their product Low probability Less probability High probability Low probability Market research has been done only in US, might not cater to global markets Less Probability High labour wages Have to create High labour wages Have to create Low labour wages existing Existing Low labour wages

H. Recommended Strategy and its Implementation:

Our recommendation is to implement the Acer Aspire project such that the manufacturing/production capabilities are limited to Taiwan and the remaining value chain is implemented in USA (by AAC). PRIMARY ACTIVITIES In AAC, US being the major market, customer demand can be tracked easily. the innovative idea R&D was the brainchild of AAC, so the R&D capabilities should be retained for Aspire in US

In Taiwan, centralised production will help Production achieve economies of scale and design can be varied to meet the local needs of the globalised product

Marketing

Should be done by AAC, US; as research has been conducted in US and market share in US is maximum.

13 | P a g e

Initially we focus on US market roll out only- so Customer Services services will be located in AAC only. when targetting other countries, each will have its own service capabilities

SUPPORTING ACTIVITIES Shipping of components from Taiwan to USA. Materials Management Assembly of products in USA. High labour cost offset by low transport costs.

HR Infrastructure

Labour has a higher learning curve in Taiwan Taiwan has established manufacturing and production facilities.

IT

USA has better IT facilities that encourage development and design of new products.

14 | P a g e