Inventec Corporation Case Study
Q1: Despite its growth and size, why is Inventec not very profitable?
Inventec Corporation specializes in designing and manufacturing electronic devices, which lies in the
ODM industry. Even though the firm has a rapid growth of market share and a huge production
scale, the profitability of corporation does not perform well. There are several factors may cause to
low profit margin.
Firstly, the intensity of rivalry among existing firms. There are many firms with almost the same
service such as Compal, Quanta, Mitac etc. which lie in ODM industry therefore the completion
among there corporations is ferocious. Secondly, a threat of new entrants is high in Taiwan. A
company which interests in the ODM industry can step into this field without any difficulty owning
to less government restrictions. Thirdly, the bargaining power of buyers is high and the power of
sellers is low. From the perspective of buyers, Inventec Corporation has a limited customers list and
this could give more power to buyers. To be more precise, the major portion of its sale is accounted
by the HP and Toshiba. Therefore, the Inventec cannot switch customers easily. Then, from the
perspective of Inventec, the corporation has no choice but to accept aggressive pricing strategies
from the principal customers which forces their profit margin to drop below 4%.
To sum up, the ODM industry is a competitive market so the Inventec faces a huge amount of
pressure from internal and external environment. Despite the excellent performance of its growth and
size, the pressure from customers and rivalries leads to low profit margin.
Q2: What are the drivers of the average profitability of the Original Design and
Manufacturing industry?
There are several drivers which contribute to the average profit margin of the ODM industry. To
begin with, one of factors is the cost related to the process of manufacturing products. The process of
designing goods provide customers the high end services ,which can save a huge amount of money
in research and development budget for clients, and the process of manufacturing could lead to the
economies of scale and scope for corporations. Overall, corporations could achieve the cost
reduction. Then, the low-cost distribution is a major factor which could reach a competitive
advantage. Since the majority of ODM firms moves to China, every company in the ODM almost
has the same cost structure. The lower labor cost is not enough to deal with industry competition.
Therefore, the supply chain and logistic system play a crucial role which can provide quick response
to clients becomes a key element to make profit.
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Q3: What are the key factors that a company like Inventec needs to manage to earn above-
average profits in this industry?
There are several factors that Inventec should consider to make profit above-average margin. First of
all, the corporation should comply with the product standard that customers require. This process
could be accomplished by specialized and hard-work personnel. More importantly, quality assurance
is a key factor which customers consider the most. Secondly, Inventec should lower its operating
costs to enhance their profitability and providing services or products at relatively competitive lower
prices. Thirdly, the firm could reach competitive advantages by the cost leadership and the
differentiation. Maintaining the low cost base by cost leadership is a key element owning to the serve
competition. Then, the differentiation could offer the firm a chance to stand out existing firms and
enhance its bargaining power.
Q4: Why is the Indian software industry, on average, so much more profitable than the
Chinese ODM industry?
The software industry in India is much more profitable than the ODM industry in Chinese owning to
the higher bargaining power of buyers and sellers in the Indian software industry. More importantly,
the global IT outsourcing market is served by these Indian firms and these businesses mostly come
from US. The Indian software industry provides world-class and highly-skilled engineers and
widespread English skills among these knowledgeable workers. Therefore, all these factors could
facilitate the industry growth. Moreover, the competition among this industry in India is not as fierce
as the ODM industry in China. Nevertheless, it is much easier to gain higher profit margin.
Q5: What strategic advice will you give Inventec to improve its profitability?
One way to improve its profitability is to shift the massive operation from the notebook
manufacturing sector which is most of revenue come from, to software development which includes
IT integration and consulting services. This provides an opportunity for the firm to develop a
competitive advantage based on differentiation which could give itself a unique position in the
industry. Furthermore, the development of software is adding more value to OEM firms which is
also strength of Inventec. Inventec could gain the higher price premium and the more powerful
bargaining ability by taking advantages of differentiation on the software development.
Overall, the process of vertical integration could save a huge amount of transaction costs and labor
costs as well. It could enhance the firm’s utilization of capital too.
