Acer, Inc: Taiwan's Rampaging Dragon

Executive Summary: This report is an endeavour to analyse the case, Acer, Inc: Taiwan’s Rampaging Dragon from Human resource, Marketing, Operations and Finance point of view. We have first dealt with the business landscape that gives us a sneak peek through Acer’s timeline. We get an idea of how the idea of Acer was conceptualised and what are the challenges faced by Acer today. Later we have examined the Strengths, Weakness, Threats and Opportunities of Acer in the Hi-tech industry. Based on the weakness of Acer we have suggested some recommendations. These recommendations have been studied from the Human resource, Finance, Operations and Marketing perspective. In the later part there are analysis of Liu’s strategy with reference to pros and cons of his strategy. Also a similar analysis has been done for Shih’s strategies so that we can weigh the advantages and disadvantages of both the strategies. Then we have moved on to Industry analysis. Following this we have the main issue that Acer is facing and what are our recommendations which are based on elaborate logic and reasoning. At the end we have suggested the implementation plan to give some guidelines as to how Acer should go about its new product “Aspire”. And with this we have concluded. To enable better understanding of the report, especially the financial analysis we have attached an Appendix at the end of the document.

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Business Landscape: Originally Known as Multitech, the company was founded in Taiwan by Shih, his wife and three friends in the year 1976. They started the company with a paltry sum of $25,000/- with its CEO as Mr. Shih and his wife as the accountant and 11 employees. Multitech was capital constrained and so the CEO instituted a strong norm of frugality. He told his employees that customers came first, employees second and shareholders third. Shih delegated the powers to the employees and entrusted them to work for the best of the company. He didn’t believe in controlling them and encouraged a think and learn culture where the employees were faced with challenges everyday and came up with new solutions on their own. All those lead to the “commoner’s culture”. In 1978, when Shih tried to expand, he targeted the smaller neighbouring market. At first the response to the promotions was poor because no one believed that a Taiwanese company could produce such hi-tech products. Then they expanded through Latin America, Asia and Middle East. In

1981,

mutitech

introduced

its

first

mainstream

commercial

product,

Microprofessor. In 1983they began to manufacture IBM compatible PCs mainly as Original equipment manufacturer for other brands. In 1984 the sales reached $51 million. In 1986, the company went on to claim a stake in Europe. In several Asian countries, Multitech was already a solid player, e.g. Singapore- 25% market share. A US company registered as Multitech, reported that the Taiwanese company was infringing its right. So they changed the name to Acer. Acer went public to cater to its capital shortage. Also there were recruits from outside to have a 2

fresh look at Acer’s executive and mid level managerial posts. This stirred bitter feelings among the outsiders and the insiders. There was competition from Dell and Bell Packard and Acer’s gross margin began eroding. The organisation forgot the frugality principal and later to control costs there were layoffs and bell curve introduced. Acer wanted to go global. They tackled most of their problems like inventory control, holding costs etc, through innovation. There were two business units: SBU and RBU. Strategic Business unit took care of the production and engineering, and Regional Business Unit looked after the Sales and Marketing. In 1995 February, the Acer America Corporation has come up with a new product “Aspire” whose feasibility in the global markets is to be evaluated.

Key Issues: HR: 1. The issue between the paratroopers and the ground troops: Problem Statement: Over the next few years, he brought in an about a dozen top level executives and 100 middle managers. For many of the self styled “ground troops” these “paratroopers” were intruders who didn’t understand Acer’s culture or values but were attracted by the soaring stocks. Supporting Argument: Shih wanted to induct new outsiders in to the organisation who could bring in fresh and outsider’s perspective. But this only created barriers between the old employees and the new ones. There was a feeling of contempt between the two groups. They felt that the new comers are not committed to Acer; they have

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joined Acer only for the big bucks. And due to these differences between the two groups Acer for the first time saw a significant turnover. Recommendation: •

There has to be a briefing session for the existing employees so that there is no hostility between them and the new comers.

•

Also there should be proper training given to the ground troops and groomed to take up more responsible managerial positions.

•

There should be a proper mix of new comers and existing employees while recruiting for higher posts like mid managers or top level executives.

•

There should be proper co-ordination and communication system.

•

The insiders should be made to understand the importance of the paratroopers and asked to support the move.

•

Also there should be respect and tolerance towards each other’s cultures and paratroopers should be allowed the time to settle down in the organisation so that they can display their commitment.

•

Introduce some rewards and recognition to ensure retention as the only expected consequence of new recruits from outside can be high turnover, as the existing employees are not very happy with the situation.

2. Drift from the frugal culture and lavish spending Problem Statement: Shih was urging the free spending Altos management to adopt the more frugal Acer norms and even began preaching his “Duck egg pricing” norm. But demand was dropping. Liu implemented tight controls and began layoffs. In 1991, 300 of the bottom “thirty percent” were terminated- Acers first major lay off. Supporting Argument: 4

Acer was no more like the old organisation with frugal spending. That was their main objective, to keep the costs low and use fewer resources. But Altos was overspending and to prevent any further losses Liu had to resort to extreme measures like Lay off. He also introduced the bell curve based on employee’s performance which led to the layoff of 300 workers. Recommendation: •

Stick to the knitting- try and communicate your culture and shared value of the organisation to each and every employee and so also the new comers to the organisation.

•

Time and again have reminders in the form of charts or posters in the work area so that the values are ingrained in the employees.

•

Introduction of bell curve is no solution. There has to be competency mapping and performance appraisal.

•

Bell curve leads to a stereotype culture with little scope for innovation, thus it’s not advisable.

•

Also the 30% low or non performers should be given training and not laid off.

•

Also incentives should be tied to the competency.

Operations: Problem Statement: 1. Difficulty in developing product configurations suited to the diverse global demands which are communicated to the SBUs by the RBUs. Supporting Argument:

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AAC and other RBUs were concerned that Taiwan based SBUs were too distant to develop product configurations that would appeal to the local markets. Recommendations: 1. In case of markets in Asia, the SBUs in Taiwan can be used for product development, design and production but in distant foreign markets like US it should opt for a joint venture with a local manufacturer. This would help it gain flexibility to adapt the product as per the latest trends and also help save enormous set up costs. A joint venture will help Acer retain high amount of control over quality and cost of its products. Marketing: Key Issue: Acer had been successful in OEM sales, which was considered to be their core competency. But, the Aspire project, where Acer would be catering directly to customers with stand alone computers has its marketing implications. Supporting argument: The critics were unsure of whether RBUs with their limited resources be able to develop the concept to an end product. The critics were also unsure of how Acer would brand Aspire, as RBUs were becoming independent. And if all the RBUs started coming up with such products how will Acer achieve scale of economies. Recommendation: Since, Acer has been projecting itself as a global brand for a long time. It should continue with this strategy. In such a case, it will be able to build products that cater to the generic needs that are common, irrespective of the geographical factor. The Aspire project is a perfect example of that. Therefore, Acer should continue to brand it as a global product and promote it by stating how it will help users in their everyday life.

Finance: 6

1. Financial Analysis of Acer:

Acer showed an increasing trend in profits from 1983 to 1988 however changing dynamics in the PC market, continuing problems at counterpoint and service intelligence and Acer’s loss making acquisition of Altos resulted in declining trend in profits from 1989 to 1992 (tenure of Leonard Liu in Acer). From 1993, Acer’s profitability grew as Shih rejoined and implemented strategies like “Global brand, Local Touch”, “Client server organisation model” and “The fast food business concept” which improved their financial health.

2. Financial Analysis of AAC:

From the year 1990- 1993, Acer’s RBU AAC acted as a huge burden on Acer’s profitability. Even in the year 1994 AAC made a profit of $15 million (largely on the basis of its OEM sales which accounted for 50% of the revenue) however percentage contribution of AAC’s profit was just 5% to the total profits of Acer.

Recommendation: Given the delicate financial position of AAC, it should not stake its future on extremely expensive and highly competitive branded consumer products rather it focus on its core. 7

Strategies Initiated by Leonard Liu 1. Strategy - Altos generated losses of $3 million & $5 million in previous two years however Leonard Liu with his IBM-oriented style felt that its $30 million in cash reserves & $20 million in real estate made it an attractive acquisition. Analysis –High amount of cash reserves is good however no indicator of future profitability of the firm. Moreover the decision to acquire Altos was taken despite continuing problems at Counterpoint & Service Intelligence. Huge losses at Counterpoint which was also a minicomputer specialist & dramatic decline in market for minicomputers should have acted as a deterrent to the acquisition, however the desire & greed to generate $5 billion in sales by 1996 led to ignoring of such material facts. Even if they wanted to go ahead with the acquisition the idea should have been for Acer to participate as an investor or look for joint-investors which would have kept the option for other investments open - however Leonard Liu opted to own Altos 100%. Result - After the acquisition took place, the trend of the computer industry started to move in favour of personal computers rather than minicomputers. Moreover, former Altos employees still had the notion of "low volume and high margin," which was no longer viable following the business transitions in the computer industry. It was now a heavy burden to maintain the operation cost for the high-paid individuals. Therefore, big losses occurred simultaneously in Acer Europe and the U.S. which added further operational difficulties for Taiwan headquarters. 2. Strategy – Shift to some of IBM’s professional management structures, practices & systems. Analysis – Prior to Liu’s tenure Acer was frugal and hard working but with little organizational structure or procedure based administration. During his tenure as Acer Inc's president, Leonard put in considerable effort, picked out candidates for the second-generation executives, and made a great contribution to Acer's 8

renaissance. Introduction of regional & strategic business units with full profit responsibility increased accountability, however due to fast changes in the industry; successful decision logic that used to work in large corporations was no longer viable. Result – Liu's iron fisted managerial style along with his ‘by the numbers’ management

model

was

in

complete

contrast

with

Shih's

traditionally

progressive corporate culture which proved grating. His tendency to spend lavishly on top accounting and law firms and hire people who stayed in first class hotels was out of step with Acer’s commoner’s culture. Leonard's departure established a role model for Acer's system of responsibilities management. His attitude brought profound impact to the independent operation of each division as well as the sense of responsibility for each manager however he tried to centralize control of Acer and his off putting approach eventually led to his management exodus. Learning’s – To compete globally is no easy thing. Proper global strategies and a sufficient consideration of cultural differences are crucial for the survival of multinational companies like Acer.

Analysis of Shih’s Strategies 1) Strategy: Offer any service related to Microprocessor Industry. Analysis: Multitech (Acer) founded in 1976, initially adopted the strategy of offering wide array of services to customers like publishing trade journals, importing electronic components. Result: This helped Multitech initially, when it was trying to enter the market and to find its core competency. It also helped Shih to lay the foundation of the business. 2) Strategy: Sign Joint Ventures with small neighbouring companies.

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Analysis: Acer tried to increase sales and compete with big multinationals by going for joint ventures with small companies, distributors and entrepreneurs in the neighbouring markets which would be of lesser importance to multinationals. This

strategy

was

adopted;

expecting

the

combination

of

these

small

uncompleted markets would become big in the future. Result: Acer was able to capture partners’ knowledge in neighbouring markets. It was also able to establish partnerships with dealers and distributors in many countries

like

Indonesia,

Malaysia

etc.

The

strategy

also

aided

in

commercialization of its products in different countries and vice versa. 3) Strategy: Acer’s decision to go public to meet its internal financing issues. Analysis: After its successful launch of 32 bit PC, Acer, needed to maintain its technological advantage and to build a brand which needed heavy investment, which at that time was not available. That is when Acer decided to go public. Results: Through IPO, it was able to raise $88 million and the share prices also went up initially. It also helped employees of the organisation to own shares. However, this diluted Shih’s stake in the company (reduced to 25%). 4) Failed Strategic Joint Venture: In 1987, Acer’s Joint Venture with Counterpoint in manufacturing mini-computers is an example of a strategic decision which had failed and generated loss. Post May 1992, after Leonard Liu resigned and Shih again became the CEO. 5) Strategy: “Global brand, Local touch.” Analysis: Acer wanted to evolve from a Taiwanese company to a global organisation. Becoming a global brand with a local touch, was what the philosophy meant. This move, however, did not yield immediate results but rather it led to the occurrence of series of events. Results: Acer distributors were offered equity partnerships in the corresponding RBU’s they served. Acer also acquired 19% stake in Computec, which later on 10

was named ACLA. The objective of ‘21 in 21’, which meant that Shih expected 21 companies to become public by 21st century so that Acer is viewed as a truly global company. 6) Strategy: Client- Server organisational model. Analysis: The Client-Server organisational model, states that every RBU and SBU can make its own decisions without any consultation from the management in the Taiwan headquarters. However, there were other policies, which encouraged SBUs to find distributors in local RBUs’ region. This resulted in lack of clarity in the roles of SBUs and RBUs. Results: Policies were framed such that SBUs could find alternative distributors i.e. other than RBUs, thereby not aiding both the units to co-exist. Later, under the Fast-Food business model when assembling was done by RBUs in the local markets, the SBUs were against this as they felt that their role became minimal. But however, it helped two SBU’s which entered into supplying of CD-ROMs to 70% of PCs in Taiwan. 7) Strategy: The Fast-Food Business model. Analysis: The Fast-Food business concept was another strategic decision, which aimed air shipping small, expensive components to RBUs and shipping the other parts and finally assembling the products in the local markets. Result: It helped Acer to save logistics cost, inventory cost, import duties and local labour cost. But it further intensified the rift between the RBUs and SBUs as the SBUs felt that power and control was being shifted to the RBUs.

Acer-Aspire Project: Main Issues Faced by Stan Shih: 1. Should he support the Aspire project? And what implications would his decisions have for the new corporate model he had been building?

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2. Since AAC was had been one of the problematic overseas units, and had been losing money for 5 years, can it be trusted for Acer’s next growth initiative? 3. Could such a new product succeed in the highly competitive US PC market? 4. Did the RBU have the resources and capabilities to lead the development of this important new product and even its global roll out? 5. With company’s SBUs located in Taiwan, how can they coordinate the development and delivery of the new product? Recommendations: Yes, Stan Shih should go ahead with the Aspire Project. The development of a new product by a RBU clearly showed the successful application of the ‘Client Server System’ which Stan Shih had propagated. Supporting this decision would not only motivate the management and staff of AAC but also would be a motivation for other RBUs. A lot a factors were favourable to the launch of the Aspire project. They are as listed below: 1. AAC had started making profit which meant that the ‘Uniload system’ was working well. 2. It had a 2.4% market share with sale of its PC called ‘Acros’ which meant that Acer was a known name in the US market. 3. Though there was tough competition in the US market, Acer was in the top 10 (Exhibit 8 of the case study) ahead of big companies like HP which increased its brand value and helped portray itself as a prominent player. 4. Two of Acer’s SBU’s Acer Peripherals (API) and Information products (IPG) were supplying CD-ROMs to almost 70% of PCs made in Taiwan and were one of the leading sources of OEM and branded PCs. This fact again helped in reinforcing Acer as leading company in the computer industry. 5. New opportunities in home computing was indicated by increasing trend to working at home- from 26 million people in 1993 to a projected 29 million in 1994. 6. Rapidly growing interest in the internet. 12

7. Developments in audio, video, telecom and computing technologies were leading to the generation of a new kind of multimedia PC. 8. The global multimedia desktop market was estimated at 10.4 million units and was growing more than 20% annually, primarily in Europe and Asia. As seen from Exhibit 3b of the case study, Acer already had a strong presence in these locations which meant that it could take advantage of the well established distribution network to exploit the opportunities in these markets. 9. Apart from Apple not many companies were developing a multimedia home PC so Acer could gain an early advantage and set the standards in the home PC category. 10.Acros was introduced in the US market around 1994. With the life cycle of computers decreasing, it was nearing the end of its life cycle and Acer needed a new product to replace Acros. Challenges involved in the project: 1. US was a very competitive market and there was a possibility that the major players might launch their multimedia PCs before Acer. 2. Keeping the price of the multimedia PC such that it is affordable yet be looked upon as a premium product. 3. The success of the Aspire PC depended on the market research done by AAC which till now was running into losses. 4. Radical enhancements and new hardware designs were required in product design. 5. Co-ordination between the RBU, located in America, and the SBU, located in Taiwan, for the product development and eventual roll out was critical for the success of the project.

Implementation Plan: We suggest that Stan Shih should use the option of Contract Manufacturing implement the project in USA. Acer should use AAC’s Palo Alto plant site for assembling the PCs and also outsource the task of assembling its computers to a 13

local manufacturing unit with parts being imported from different SBUs. By using their own facility and transferring key personnel from Taiwan to America for the project will also reduce the difficulty in coordination between the RBU and SBU. This strategy will give them the following advantages: 1. Reduced Financial risk Without investing in capital intensive production facilities, Acer can take advantage of the local production units available in America to assemble their products. Also by transferring some engineers from their Taiwan SBU they can maintain control over quality as well. In case of reduction of demand in the future the contract with the local manufacturer can be discontinued and production reduced accordingly. 2. Strategic Flexibility Stan Shih can use the ‘Uniload’ production concept to save costs on logistics. All the different components can be imported from the SBUs, located in Taiwan, as per the market demand and assembled in US. 3. Lower Costs The type and quantity of parts ordered can be varied as per the fluctuations in the consumer demand and inventory costs can be lowered. This would help them to keep their prices in the $1,199 to $2,999 range as planned so that the product is looked upon as affordable yet with premium features. 4. Reduction in time from Design phase to Market AAC’s Palo Alto plant had already reduced delivery time to 45 days. This will help Acer to introduce their products faster than its competitors.

Marketing aspect: Home computing, provides an opportunity for the first-mover in the market to gain advantage. Being a niche market, at that time, it becomes important to brand it such that it appeals as a user friendly multimedia home PC to the potential customers. Statistics clearly states that there is a segment of 29 million 14

users who show an interest in working at home. AAC also needs to position it as an innovative product for less than premium price (Value Pricing). For such PCs, users usually expect set of tools that help them to finish their tasks at a lesser time if manually or otherwise done (Basic needs). Apart from these basic tools, the users will also expect certain tools which are innovative in nature (Aspirational needs). Being a niche segment and competitors already coming up with their versions of multimedia PCs, the promotional campaigns should clearly address the following issues, •

Differentiation with office PC’s with usage of bright coloured PCs.

•

Discussing different instances where users can use the PCs (creating new needs and wants).

•

Highlighting on the unique feature which is not present in competitive PCs (competitive advantage).

•

Justify value pricing strategy.

•

Ease of use of User Interface.

AAC should concentrate on capturing and sustaining the market share. For this, they need to include certain complex designs in PCs thereby providing more features for the user at the same value price. Once the users get adapted to a particular UI (user interface) it would be difficult for them to shift to other PCs. Microsoft’s high market share throughout the world is basically because of the fact that most of the people in the world grow up using Windows OS. Though the concept of UI is technical in nature, projecting it as an easy to use PC through effective advertising will help AAC serve its purpose. Alternative Strategies: 1. Exporting directly from SBUs in Taiwan. 2. Joint Venture with a company in America. 3. Acquisition of a PC manufacturing firm in America. 4. Greenfield subsidiary. 15

Appendix Industry Analysis: Porter’s five forces analysis of the PC industry:

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1. Degree of Rivalry: High With many established players like Compaq, Apple, IBM etc the competition faced by Acer is intense. Hence Acer will have to counter its rivals by improving product differentiation, creatively using channels of distribution, achieving cost advantage etc. 2. Threat of Substitutes : Low Not many products are available outside the industry to substitute the multimedia PCs. So Acer has to concentrate only on its competitors to gain market share. 3. Buyer power : High Since the customers have a lot of choices of companies to buy computers from, Acer will have to provide innovative features at affordable prices to attract customers. 4. Supplier power: High Since a lot of established players are present in the market, there is tough competition to get the required raw materials, skilled labour etc and PC industries are highly dependent on these factors for their success. Acer has to procure skilled labour and raw material at cheap costs to obtain substantial cost advantage. 5. Threat of new entrants : Low Since entry into PC manufacturing industry requires substantial capital investment and technical expertise the threat of new entrants is low.

Firm Analysis Analysis of internal environment Strengths: •

It offered key employees equity, often giving them substantial ownership position in subsidiary companies.

•

Acer 1-2-3 principle which means customers first, employees second and shareholders third. 17

•

Shih instituted a strong norm Frugality where Acer had priced High-Tech products with a low margin to ensure high turnover and quick receipts of cash payments.

•

Company had a reputation as a very attractive place for bright young engineers because Shih had trust in his employees and he used to delegate them the responsibility of substantial decision making.

•

Company had a close-knit culture where co-workers treated each other like family.

•

Early expansion strategy: Strategy of targeting smaller neighbouring markets that was of lesser interests to the global giants. These smaller markets had huge potential.

•

Rapid expansion in overseas markets like Europe, America and Asia.

•

Commitments of the promoter, Shih to make Acer a globally recognised brand.

•

In several Asian countries Multitech was already a major player: in Singapore, for example, it had a 25% market share by 1986.

•

Acer became the second company in the world to develop and launch 32 bit-PC, even beating IBM to market which attracted the attention of companies like Unisys, ICL and ITT for OEM supply and technology licensing agreements.

•

Adept at business model reengineering and experimenting for e.g. Fast food business concept and client server organization model.

•

Use of ‘Uniload’ manufacturing concept which gave them substantial savings in logistics and inventory costs and flexibility to respond faster to customer demands.

Weaknesses: •

Acer’s North American subsidiary, AAC was making loss from 1990 to 1993 in American markets which are perceived to be the hub of technology and PC market.

•

Shih urged free spending without taking profit and loss into consideration. 18

•

In 1989, Shih brought Liu in Acer from IBM. Liu brought IBM’s practices and made all SBUs and RBUs full responsible for profits and loss which increased the pressure on these units and challenged Acer’s traditional Commoner’s culture.

•

Though company was growing rapidly, it had an acute shortage of management in 1980s. So Acer had brought in some top level executives and middle managers who later had problems in understanding Acer’s culture and values.

•

When company was renamed as Acer, its investment requirements exceeded the internal financing which caused financial constraints for Acer.

•

Though Acer had been acquiring other businesses in Taiwan and other places in 1980s but because of cultural differences Acer was facing financial constraints owing to a thin bottom line.

Analysis of external environment Opportunities: •

One of the fastest growing sectors.

•

Emerging global multimedia market and fast growing interest in internet presents tremendous growth opportunities.

•

Overseas market had huge potential as sales from these markets accounted for half of the total profits of the company within in a few years of international expansion.

Threats: •

There is an intense competition in US in its PC market from players like Packard Bell, Dell, Compaq etc.

•

Short life cycle of technological products is a major threat. As the company made huge losses because of dramatic decline in the market for minicomputers late 1980s. 19

•

International market dominance of hi tech companies like IBM in compatible PCs segment.

•

Compaq had announced a 30% reduction in across the board reduction in prices which resulted in price war and decreased gross margins.

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