Despite its growth and size, why is Inventec not very profitable? It can be concluded into 3 main factors : 1. Rivalry existed In the existing ODM industry, there are lots of competitors such as Quanta, Mitac and Compal. Because of the fierce competition, there is increase difficulty for completing differentiation. Moreover, client companies tend to limit ODM use to highly commoditized products commoditized products. There is also inherent risk associated with the need of frequent technology innovation.
Low switching costs also weaken the competitive advantage of Inventec since most of the PCs use Intel microprocessors. Moving to China was no longer consider as an advantage for Inventec since other rivalries will have the same cost structure. 2. New entrants threat Taiwan government did not impose high legal barriers to limit firm to invest in China. Consequently, major ODMS choose to open plants in China and new companies easily enter into the industries which increase the supply of quality goods.
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3. Increasing bargaining power Inventec has a high bargaining power due to the limited list of customers.
This disadvantage greatly weaken the ability to switch customers and negotiation power. Inventec has to accept client’s aggressive pricing strategies with a low profit margin or else facing client switching their business to competitors in a short period of time. Q2 What are the drivers of the average profitability of the ODM industry? The average profitability of the ODM industry is low which only ranging from 1% to 6%. The main reason for this is mainly driven by customer bargain power and high competition. In order to lead the industry, companies need to lower their cost.
Consequently, it reduce the reliance on a single partnership as there are 5 leading ODM and client negotiating strength become high. Moreover, china no longer consider as a low cost area which make firms difficult to find way to lower the costs. Q3 What are key factors that a company like Inventec needs to manage above average profits in this industry ? In order maintain the profit, the company should shift their production and production software from hardware production to software development and IT consulting and IT system integration services. For example, Inventec consider its software capability by be a major differentiation.
Corporation should also comply with customer requirement by using specialized personnel. Quality assurance and low operating cost is also important. The firm can achieved through using cost leadership and differentiation which enhance its bargaining power. Q4 Why is the Indian software industry, on average, so much more profitable than the Chinese ODM industry? First, India does not rely on cheap operating cost to survive but more focusing on custom application development and maintenance. This help them to create differentiated products which were specialized and high-end. Moreover, India also get many world- class engineers and technicians.
The Indian firms are competing through R& D rather price war since the industry has a very high growth rate of 30% Q5 What strategic advice will you give Inventec to improve its profitability? I will advise Inventec to move their company resources and expertise to a more software based market. For example, Inventec can start to offer software design with hardware manufacturing since it can help to add more value to OEMS. Hence, Inventec can enjoy high price premium and strong bargaining power. This kind of vertical integration can save a large amount of transaction and labor cost.