Smiling curve

Basic definition

Introduction

A smiling curve is an illustration of value-adding potentials of different components of the value chain in an IT-related manufacturing industry. The concept was first proposed by Stan Shih, the founder of Acer, an IT company headquartered in Taiwan, around 1992. According to Shih's observation, in the personal computer industry, both ends of the value chain command higher values added to the product than the middle part of the value chain. If this phenomenon is presented in a graph with a Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a "smile".

Adoption of strategy

Based on this, ACER has adopted a business strategy to recreate itself from a manufacturer into a company that focuses on global marketing of brand-name PC-related products and services. Meanwhile, ACER also has invested aggressively in R&D to develop innovative technology. The concept later became widely cited to describe the distribution of value-adding potentials in various industries to justify business strategies aimed at higher value-adding activities.

Theory origins

Pursuing the new trend

Although the smile curve theory is very simple but it points out the future direction of Taiwan’s industrial efforts, the only way is moving and positioning towards high value-adding block through the guidance of value-adding concept, therefore, the industry can continue the development and sustainable management. Although the construction is one of the locomotive industry, but under a mature industrial trend, market saturation and traditional manufacturing which only concerned low value-adding area, has experienced a decade of economic downturn. Smiling curve theory can provide a new thinking direction.

Diagram illustration

Smiling Curve

The most lucrative value area focus on both ends of the value chain – R&D and marketing. The only thing can do is just agency or OEM without R&D capability, which earn a little money; Without marketing ability, the product will only be treated as rubbish over disposal period.

Realizing the fact

BYD's Wang once lamented that Chinese companies had only learned how to organize workers, but have not learned how to organize engineers, it can only make a living in the most inhospitable terrain area of the manufacturing. If it can use advanced methods to organize a large number of Chinese Engineers, then China is the entrepreneur's treasure. Typically, knowledge-intensive organizations can find ways to organize engineers. Management master Peter Drucker said: "The most important management in the 21st century is to manage those intelligent workers." Which is the most successful aspect that Huawei has done among the Chinese companies. Among those employees, technology research and developing staff accounted for 46%, marketing and service staff accounted for 33%, management and other personnel accounted for 9%, and the remaining 12% is workers. For 20 years, Huawei has maintained this ratio, human resource allocation shows “high developing and marketing on both sides" of the "smile curve."

Theory pressure

Stan Shih ‘s smiling curve is promoted in order to reproducing Acer. However, there must be some breed factors. Some of the factors behind the birth may exist as follows:

Competitive pressure of globalization

Under the trend of globalization of high-tech product markets, we can use the "chase, catch, run, jump, touch" five words to describe the competitive pressures of the industry. Competitive enterprises continue to catch up, ready to catch up with the leaders, and those leading companies continue to run forward in order to stay ahead of the distance, and finding methods to jump over the barriers. Therefore, the market becomes saturated, only head-on, make price competition, even bloody competition exist. This is the fate of global competition, only the fittest survive.

Pressure of product life period

High-tech products, unless mastering the key technologies or components, among the finished product market, because the fast speed of technology development, fashion also changes quickly, product life periods are changing rapidly, so-called niche products, sometimes become a few % of the profit gross during a few years, therefore generating tremendous pressure on enterprises.

Survival Pressure of enterprises

Under the pressure of the foregoing, if technology cannot always be upgraded, strategy cannot leading the market, then under the less profit situation, may turn into a loss, more seriously, even gradually affecting the survival of the enterprise.

Pressure of value-added

The value-added of an enterprise can be said that the potential for profit. Mature technology, low requirement to entry, and universalization of technology is easy to become so-called "low-profit" enterprise, also known as low-value-added industries. Normal manufacturing, assembly enterprise is called low-value-added industries, in order to survive, only to keep expanding production capacity to maintain profits. But as long as the market is shrinking, product prices is decreasing, product sales will no longer growing. Enterprise will face to risk immediately.

Theory factors

Trend of industries development

In order to overcome the pressure of low added value, enterprises only thinking is to move toward the block which high-value added industry trends. In the industry, mastering the key technology and key components is high added value; general manufacturing or OEM is low added value; product integration services, due to combine a lot of added value, therefore becoming another high-value-added block.

Needs of industrial developing environment

Among the blocks of high value-added, the key technologies and key components, may sold to various needs of world market; but integrated services, need to have an appropriate area, and entire industry in this region also has reached considerable development.

Conclusion

Enterprises

Enterprise’s products and services need to have sustained value-added (earnings), so that can be able to survive.

Products

The direction and services of high value-added products is only way to have a high potential for profit, therefore to ensure business continuity.

Applications Inspiration

The success of products

Smile curve theory has basically proved that the success of products is inextricably related to concept, research, brand spreading and marketing. Those factors require the company hire and retain highly skilled, intelligent, professionals. Typically, those professionals will be highly paid, so that countries with high smile curve slope will get more profits, therefore generating growing gaps between countries.

Compare with developing and development countries

Like United States and other developed countries, they have maintained highly slope of the smile curve, however, developing countries such as India and China confined to low-level employing and manufacturing. Therefore, if developing countries want to achieve to highly slope of the smile curve, they need more professional analysts, researchers and brand developers to reach higher levels of economic growth. In other words, if developing countries want to compete with developed countries equally, they must require a highly skilled and knowledge team in order to achieve these, government needs to invest heavily and support on basic education and higher education. In the long-term development, manufacturing country in the world will hardly to sustain the level of economic growth. Developing countries need to let the smiling curve more smile, therefore there will be a fair competition with developed countries.

Related to industry

Developing countries

Some developing countries have begun the development of trade and investment liberalization, and the company's internal production network has become globalized. Depending on the strengths of each country, manufacturing form of the developing countries are generally labor-intensive, which means that they only provided low-wage to workers, but those high-tech jobs, such as research and development, are to be borne by the developed countries.

Horizontal division of labor

The current situation is that between developed and developing countries, there are lots of flowing products and intermediate goods. This phenomenon which cooperating among the same industry is known as horizontal division of labor. However, the more accurate name is called vertical division of labor. However, because there are various ways of processes between developed and developing countries, developed countries always focus on high-value process while developing countries always focus on low-value-added processes.

Traditional manufacturing

Fareed Zakaria's writings mentioned, the significance of China and their traditional manufacturing dominance, China's manufacturing industry is in the middle stages, so that means production, plus some spare parts supply and engineering design. However, developed countries such as the United States has two complete form, so that is generated smiley curve, the curve shows the value added profits at every stage, and brand and product concepts at high point, the manufacturing industry is located below, values in the retail and service phases rise again. With the end of the Cold War and the former socialist countries into the global economy, there was more and more cheap labor, while developing countries have been watching their profits decline, then resulting in fierce competition. Therefore, increasing the slope of the smile curve.

Theory phenomenon

Smile curve assumes a phenomenon, in the middle of the process of value-added profits or assembly-type manufacturing value chain is assembled, these processes have a downward trend, which increases at both ends of these processes of the value chain, are the raw material at one end of chain and at the other sales service. This assumption has caused an intense global competition which increasing in the assembly of standardized and modular components.

Use of report

Report examines the assembly-type manufacturing value chain and the formation of the smile curve. Because it use the ratio of the profit as a performance indicator. All the sources of products produced broader concept in industrial processes. Input-output tables and each firm's annual financial statements were used to calculate total assets and operating surplus.

Analyze six sectors

The assembly-type manufacturing industry also can be analyzed from:

1. household electronic appliances,
2. household electric appliances,
3. electronic computing equipment and accessory devices,
4. communications equipment,
5. passenger motor cars,
6. trucks, buses and other vehicles.

In this research, the smile curve explained the household electronic appliances, computer equipment and ancillary equipment, as well as the three sectors trucks, buses and other vehicles. However, the smile curve cannot explain the other three sectors, and assembly-type manufacturing industry as a whole.

Successful example

‘Clockwise’ company is one of the smiling curve practitioners, founded in 1991. Turning occurred in 2004, this year, the ‘Clockwise’ pay all attention on cotton underwear industry, formed a strategic alliance with Colored Cotton Group, controlled famous brand cotton "Choi days” upstream resources, meanwhile use media to publish brand. ‘Clockwise’ business total sales breakthrough billion yuan, became the industry leader.

References

• “Acer's Stan Shih: Empowering Technology – Making Your Life Easier”, Dedrick
• Jason, Kenneth L. Kraemer, and Tony Tsai. ACER: an IT Company Learning to Use Information Technology to Compete, Center for Research on Information Technology and Organization, University of California, Irvine October, 1999.

See also

• Smiley face curve, in professional audio, a graphic equalizer setting that reduces midrange tones