In strategic analysis there are three popular ways of looking at issues:
1. THE GROWTH MATRIX
The Boston Consulting group developed a way of segmenting businesses
in the 1970s that looked at dividing businesses by their growth
potential and cash consumption. It's how we have come to know whether
a business is a "star," a "dog", a "question mark" or a "cash cow."
Boston Consulting Group Matrix
This sense of segmenting businesses and getting in the important
measure of market share was further developed by McKinsey and General
Electric later in the 1970s. It led to profit-in-market share (PIMS)
studies and ultimately to the theories expressed by Michael Porter:
2. ENVIRONMENTAL ANALYSIS
An assessment of a company's
strengths/weaknesses/opportunities/threats is one way to look at the
environment to determine what strategic actions should be taken. It's
a good analytical way to examine competition and the changing business
climate. However, in practice it usually requires going down several
levels into operational units to determine what's really valued by
customers; where the organization is performing at world-class
standards (and where it's not):
"SWOT Analysis" (Dec. 10, 2001)
3. PORTER'S 5 FORCES MODEL
Harvard's Michael Porter wrote this book in 1980 to attempt to explain
how businesses compete. Of course the 5 forces that determine
intensity of competition are: supplier power; barriers to entry; buyer
power; threat of substitution; and finally the degree of rivalry.
But even further, Porter explains that there are three basic
strategies that work in response to the 5 forces of competition:
lowest cost, differentiation, and focus.
Porter's 5 forces model:
WHAT APPLIES TO STUFF, INC.?
We really don't know enough about Stuff, Inc.'s business to pursue a
good analysis of the GE/McKinsey type: we don't have growth rates or
profitability data. Inasmuch as all businesses are a portfolio of
investment opportunities, we could use the Indochina joint venture as
a separate business in a growth matrix analysis -- but Stuff, Inc. has
no history of operating outside the U.S., making any market share,
profitability, growth rate and other predictions highly suspect.
Note that the absence of trend data makes it difficult to answer the
question: "Why should Stuff, Inc. need to do anything different?"
While growing a business is often considered an imperative by
managers, it's really only important insofar as it leads to market
share and profitability.
Business risk comes from the unknown; opportunity comes from taking
the unknown and making it known. The largest issues here can be
looked at in a SWOT analysis and Porter's ideas provide a way of
looking at key issues.
WHAT'S THE ENVIRONMENT?
There are at least four aspects to the overall commercial environment
that apply to a joint venture in Indochina. For a company that's a
novice in the international environment, there may be others -- such
as management skills of the current team or even export restrictions
on key technologies, but these factors require assessment:
1. proximity to customers
2. labor costs
3. intellectual property protection
4. infrastructure, including labor
A. CUSTOMER BASE
The International Finance Corporation (a World Bank investment arm)
released a study done with Booz, Allen in June which indicated that
computer manufacturing will explode in China over the next 5 years.
China will capture 77% of the growth in electronics assembly, with 72%
of that number going to computers:
International Finance Corporation (World Bank)
"Electronics Industry in Emerging Markets" (June 3, 2003)
An indication of the speed with which that's occurring is in this
recent press release from Infineon, a German memory manufacturer,
which predicts 30% annual growth in the China market. Importantly,
Infineon is partnering with another company to build a 12"
semiconductor fabrication facility in Beijing. Semiconductor fabs are
at least as complex as Stuff, Inc.'s plant -- and 12" wafers are the
leading edge of semiconductor production:
"Taiwan Vital to Infineon's Growth Targets" (Nov. 28, 2003)
Being positioned somewhere in Southeast Asia for production makes
sense -- but where?
B. LOCATION AND INFRASTRUCTURE
A major issue for the joint venture will be proximity to the
customer's factories. Working with Computers R Us may make sense, but
only if freight costs to other potential customers are reasonable.
The electronics industry is already so well-developed in portions of
Indochina and Southeast Asia that computer disk drives, which are
sophisticated storage devices requiring clean-room assembly, are 15%
of Singapore's GNP. Similarly, Malaysia and Thailand enjoy robust
electronics export businesses:
ASEAN Free Trade Online
Electronics -- Region (1996)
However, several factors are working from those three countries that
may or may not work in a Computers R Us joint-venture. Singapore,
Malaysia or Thailand would rate relatively well on any of these
attributes; Myannmar, Laos and Vietnam would rate poorly. Even China,
which is becoming the center for large amounts of computer
manufacturing, is still dealing with port, road and telecommunications
? excellent transportation infrastructure, providing fast water and air freight
? protection of patents and copyrights
? skilled labor
However, if the skilled labor can be acquired in the host country of
the joint venture -- or brought in as part of the management team,
there is significant opportunity for labor cost savings. Here are the
average earnings and literacy rate (in parentheses) in each country in
the region compared to U.S. labor:
U.S.: $37,600 (97+%)
China: $4,400 (86%)
Vietnam: $2,250 (94%)
Malaysia: $9,300 (89%)
Singapore: $24,000 (93%)
Thailand: $6,900 (96%)
C. AND THEN CAME IP
Protection of intellectual property (IP) -- specifically process
patents, design patents and copyrights -- was such a critical issue
that even Taiwan suffered from lack of computer investment until the
1990s. This article from Electronic Engineering Times, a leading
trade journal, describes briefly how electronics manufacturers moved a
step at a time to increase IP protection during the 1990s:
"China IP Rights Enforcement Faulted" (Sept. 16, 2003)
China's protection of IP, which is important to a company with complex
process technologies like Stuff, Inc., can only be described as
stop-and-start. As the CIA Factbook notes, China has "a complex
amalgam of custom and statute, largely criminal law; rudimentary civil
code in effect since 1 January 1987" though "continuing efforts are
being made to improve civil, administrative, criminal, and commercial
As noted by the presence of Infineon and others, this hasn't stopped
semiconductor manufacturers with similar problems from investing in
Taiwan suffered from many of these same legal problems in the early
1990s, yet had a domestic semiconductor firm -- Taiwan Semiconductor
Manufacturing Ltd. (NYSE: TSM) -- emerge as a significant player in
the industry. Part of the reason that TSM grew from NT$19.3 million
in 1994 to NT$144.1 in 2004 was its "first mover advantage," which
allowed it to construct a unique business plan (serving as the factory
for design companies with engineering specializations, such as
"First Mover Advantage"
For Stuff, Inc. it is important to ensure that key process and product
technologies are protected in the joint venture; from competitors; and
STUFF, INC. STRENGTHS
The company has been highly profitable in the past, giving it a strong
balance sheet that can be used to raise additional debt or equity.
Customers are also solidly profitable, even #3 player, Computers R Us.
This strengthens the cash flow to Stuff, Inc., as its customers will
pay bills faster than others.
It is one of the top three companies in a highly-consolidated market.
And the U.S. market for computer manufacturers leads the world in
The business has significant barriers to entry, as witnessed by the
large amount of capital needed to enter and the presence of only 3
A process-driven technology such as the company's also will have
significant intellectual property, even if in process patents (as
opposed to design patents for components).
STUFF, INC. WEAKNESSES
But baseball writer Bill James says "Every form of strength is also a
form of weakness."
And Stuff, Inc. is narrowly confined in one segment of a world market.
It is one of three competitors in the U.S. plastic molding market
sharing 90% of the available U.S. market.
Studies as early as 1975 ("Market Share - A Key to Profitability,"
Buzzell, Gale & Sultan, Harvard Business Review) show not just that
market share is key but that the leader in market share gets the
lion's share of the profits -- and number 3 in the market IS likely to
be struggling to break even.
Harvard Business Online
"Market Share - A Key to Profitability," Jan. 1, 1975
As Chinese output of computers increases, U.S. production MAY be lucky
enough to remain stable, but market share will decline -- and it can
be expected that volumes will also decrease. If domestic plastic
component vendors don't act, the following will happen:
? potential emergence of a Chinese or other offshore vendor in the U.S. market
? increased price competition among the three U.S. suppliers, who as
Porter would predict, have exit barriers from being so capital
intense. And industry shrinkage (resulting from computer assembly in
China) would increase pricing competition among the Big Three plastic
molders -- certainly forcing at least one major vendor from the market
? potential vertical integration by computer vendors, further reducing
Thus, today's strength can also be viewed as a strategic weakness for Stuff, Inc.
Though the joint venture with Computers R Us is potentially attractive
because it would probably be the fastest way to build sales; would
share the risk, presumably add technical competence from the original
equipment manufacturer (OEM) side, and assure a customer, the
management of Stuff, Inc. has to ask itself how it wants to get to be
the largest GLOBAL competitor. Michael Porter's (and Stuff, Inc.'s)
* lowest cost producer?
* differentiation by innovation?
* by focus (On geography? On sales/marketing? On product/process refinements?)
Stuff, Inc., thanks to an excellent balance sheet, has the luxury of a
wide range of options:
? establishing production in Asia by itself
? expanding direct sales presence outside the U.S.
? licensing of technology to vendors in markets where it doesn't
compete (Europe, Japan)
? joint ventures with other component vendors or computer manufacturers
? sale of the company to a computer manufacturer
? sale of the company to another component vendor
THE IMPACT OF THE JV
By forming a joint venture (JV), Computers R Us also reduces its risk
-- this time in building complex process equipment for its plastic
parts. It cuts the investment necessary in the business by 50%;
speeds the process; and gains access to key technology. Obviously,
like Stuff, Inc., it will be lowering unit costs because of the lower
Computers R Us may also be gaining other advantages in the JV which
are NOT in Stuff, Inc.'s best interest:
* access to knowledge about competitive shipments from revenues at the JV
* access to patents on process design and other proprietary information
* positioning the JV so that it has a cost or other advantage over competition
The value of the technology position can't be underestimated,
particularly as computer companies have treated their patent positions
as a portfolio for trading technology, ala the Dell-IBM agreement in
Industrial Heating Journal
"Strategic Assets" (Ashby, Jan. 9, 2002)
CRITICAL ISSUES FOR STUFF, INC.
The most-critical questions in judging the potential JV might not even
be considered strategic:
1. what do existing customers think of the JV?
2. what do potential customers think of the JV?
It is quite possible that the largest two computer manufacturers would
be extremely upset about an investment by their competitor in a key
supplier. Despite assurances of a "Chinese wall" to protect
information, Computers R Us as a major investor would have access to
more information about competition.
CRITICAL STRATEGIC ISSUES
Size of company in the marketplace matters, for all of the reasons
cited by Porter. Again, the critical issue for Stuff, Inc. is what
competitive strategy it wants to use WORLDWIDE to be the dominant
? low cost
When Stuff, Inc. chooses to move, it will also want to consider the
environmental factors mentioned above: location of customers;
infrastructure; protection of its technology.
What is clear is that Stuff, Inc. has to move: it's profitability
today is historical and owes itself to the development of the computer
industry in the United States. But that industry's given us a global
economy, so the sands on which its computer business is built are
In cases like this it's always helpful to look at what companies in
the real world are doing. Sometimes there are enormous surprises.
Having been involved in the PC industry, I can really only think of a
couple of companies that come close to a Stuff, Inc. profile in the
real world: ITW (Illinois Tool Works), which supplies dozens of
custom-designed plastic parts; and Hutchinson Technologies, a supplier
of etched metal parts to the disk drive industry:
ITW was very successful providing keyboards and other components to
the computer industry until about 1985. Its Licon/Corton units built
mechanical-switch keyboards known for high reliability but eventually
were swamped by new entries outside the U.S. using low-cost membrane
keyboards. OEM keyboards today sell for about 25% of their prices in
Yet ITW has been a very successful company, with more than 600
business units and literally thousands of patents on product designs.
A suggestion would be to read the management discussions from 2002 and
1999 to see the strategy from two different time periods:
The other company is Hutchinson Technologies (OTC: HTCH). They are
unusual among U.S. component vendors in the concentration of their
customer base among disk drive vendors (and 5 key customers). The
company literally did start in a chicken coop:
Again, you may find reading the management discussion in the annual
report interesting. HTCH at one point in the 1980s began a dramatic
expansion of its U.S., then overseas facilities. Unable to supply
products everywhere at once, the company decided to license technology
to Dai Nippon in Japan, a potential competitor. The 2000-2002 annual
reports are here:
Another way of getting a perspective on these two companies (or other
component suppliers) would be to read Wall Street analysts' reports.
They are available via Investext, an online service that many
libraries -- and certainly business school libraries -- have
available. The analysts' reports are typically very good at dealing
with global issues in the electronics and computer industries.
Google search strategy:
stars + "cash cows" + "strategic analysis"
"intellectual property" + China
"disk drives" + Singapore
"profit in market share"
Dell + IBM + cross-license
I also used Google News searches in an attempt to highlight some real,
contemporary aspects of this case: