Inventec’s lackluster performance in the past several years can be attributed to a number of different factors. The (1) dynamic nature of the industry they are in, (2) intense competition, (3) unstable, fluid relationships with clients, (4) plant underutilization, (5) flattening gross margins, (6) lack of brand identity, and (7) the commoditization of the notebook industry all played roles in the company’s performance.
Inventec is positioned in an industry in which gross margins have been flattening over recent years, largely due to the downward price pressure applied by increasingly intense competition and by clients who hold bargaining power over their suppliers. The driving force behind Inventec’s business model (84% of net sales in 2004) is Notebook computers but recent commoditization resulted in high output volume but low margins. This commoditization has opened up the doors to competition and price wars among Original Design Manufacturers (ODM) and Electronics Manufacturing Services (EMS) leading the once stable relationships between production companies and clients to become fluid. Original Equipment Manufacturers (OEM) are diversifying by spreading their business among several ODMs, which provides them with enough bargaining power to essentially dictate contract terms. Also, the OEMs themselves are facing high competition in their respective markets, causing them to continuously apply downward price pressure on manufacturers and, ultimately, lower margins.
The case mentions that, relative to its competitors, Inventec is operating on a smaller scale which causes their margins to be comparatively lower. Yet, they have recently invested substantial amounts of capital into new plants that are currently underutilized. Those two factors must be cutting into their profit margins considerably.
Inventec is not taking full advantage of their chief comparative advantage in the industry, which is their software expertise. The bulk of their software is...
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