OPERATIONS MANAGEMENT - EMBA II

Operations Strategy at
Galanz
Case Analysis
Ashish Singh, Dawa Sherpa, Krishna Baral, Mohit Maheswari (Group One)
2/8/2017

Submitted to: Mr. Rabindra Silwal

Galanz started out as a down feather products company in 1978. In early 90s, Liang
Qingde (Liang Senior) made a strategic decision to start electrical appliances business with the
introduction of microwave oven after eying the potential for growth. Microwave ovens, at that
time, were all imported at relatively high prices and were unaffordable to most Chinese. Liang
Senior sensed the growing Chinese economy and increasing purchasing power of its people. At
that time, only few foreign companies like Toshiba, LG and Whirlpool were the major player in
Chinese microwave oven market. However, they were not fully cognizant of the rapidly
expanding Chinese market economy. Liang Senior set out to make domestically produced low
cost microwave ovens and started the production in 1992. Soon, in 1995, Galanz became the
leading domestic manufacturer of microwave oven acquiring 25.1 percent of the market share.

Early Years
Operational Strategy: Low cost, low price through cheap labor, land and production
capacity expansion

With abundant supply of cheap labor and land, Galanz decided to acquire competitive
advantage with low-price strategy. This strategy along with production capacity expansion
helped Galanz with the success in the early years. Galanz continuously engaged in price wars by
cutting prices until it attained the leading position in both domestic and global market in 2003.
By aggressively expanding production capacity, Galanz achieved economies of scale for low-
cost production and pushed its sales team to market the additional inventory. Here, Galanzs
strategy of increasing production and piling up inventory might not have been the best one as we
know that inventory hides problem. Although, Galanz was able to drive the demand up, but as
we see later that future demand rides on low volume high variety model, Galanz strategy of low-
price mass production might be the problem although it was what drove Galanzs success in the
early years.

Growth Stage
Operational Strategy: Operational excellence and self sufficiency through adapting best
practices and investment in R&D

Along with the economies of scale came the problem of supply chain management crisis.
Galanz started to face the shortage of magnetron due to exploding demand and cut backs by its
suppliers. With the help of research and development (R&D) investment, Galanz was able to
make its own magnetron along with 90 percent of the microwave oven parts with improved
design and quality to match with its Japanese counterparts. This transformation from Original
Equipment Manufacturer (OEM) to Original Design Manufacturing (ODM) was a major
milestone for Galanz. With the investment of 3 percent of its annual revenue in R&D, Galanz
was able to uplift itself into the high-end market and soon started providing ODM services to
large OEM clients. Strong R&D enabled Galanz to localize design and target market through
continuous innovations. Later, with the effort of current CEO Liang Zhaoxian (Liang Junior),
Galanz looked into creating global brand awareness by adopting Original Brand Manufacturing
(OBM) strategy. Galanz had primary relied on low-price strategy. This however caused
international accusations such as product dumping with very low prices. Also, Galanz slowly
started to alienate its OEM customers by becoming a competition to them.

Future Success
Operational Strategy: Strategic alliances with retail behemoths like Wal-Mart and K-mart
in building brand awareness

The shift from World Factory to World Brand brought plethora of challenges for
Galanz. First of all, being OBM meant they had to bear the risk of poor forecasting and sales
which was totally avoidable in OEM business where the customer bore the risk. Previously,
Galanz achieved low-cost efficiency with low quality with less variety products. It always strived
to produce more than the forecasted demand and push the extra inventory in the market. With
OBM model, Galanz had to adapt to small and varied demand with high product variety. So the
company needed to be able to predict the demand accurately and produce the right products in
the right quantity at the right time to meet the needs of its customers. Galanz needed to use good
product design strategies by striking a balance between selling what the market needed and what
they could make. Making good product design meant Galanz had to be aware of factors such as
socio-economic and political changes in its target markets, continuously validating its
competitive advantage and adapting technological changes. Also, using Lean Principles and Just
In Time (JIT) Inventory strategy would have been more appropriate given how dynamic the
situation was. Also, following such strategies would dramatically reduce the cost of quality.

Challenges

Other major problem that Galanz started to face with adopting new models is with
synchronizing production with the R&D department which was exacerbated with small-scale
production of customized products. Most of these problems were attributed to inter-departmental
conflicts. Probably, using quality management tools such as Pareto Principle or laying the
problem out diagrammatically using tools such as Fishbone Diagram could have pinpointed the
major problems early on significantly reducing the synchronization problems. As a part of
manufacturing challenge, Galanz soon realized that workers technical and management skills,
work attitudes and efficiency was more important than low cost labor which it used as a
competitive advantage to drive its success in the early days.

Providing competitive level of service to a large pool of end customers with diverse
needs and expectations was yet another challenge faced by Galanz with its OBM positioning.
Sales supports like after-sales services, repair and maintenance, warranty claims became
particularly cumbersome as Galanz had to train qualified staff and establish a communication
platform to handle end-users requests.
 One of the major challenges faced by Galanz is aligning its competitive strategy with
current operations configurations characterized by the combination of OEM, OBM and ODM.
Although OEM and ODM virtually kept Galanz immune to the risks of market forecasts and low
inventory turnover rate, it was important for the company to invest in OBM in order to keep up
with Liang Juniors strategy of global brand awareness. As a result, Galanz increased its ratio of
OBM to OEM in between 1997 and 2003 from 1:9 to 3:7. However, increase in OBM seemed to
inadvertently affect its OEM business as its customers started to get offensive of the competition.
Using good product design strategies to effectively allocate its resources amongst different
business strategies could be crucial for Galanzs strategic positioning. Also, as we saw, the
pervasive low-cost strategy might not be the best option as the global market was driven by
variety of different product configurations and smaller quantities. Finally, investing in more
qualified and skillful human resource and much decentralized management with adequate room
for employee empowerment would be absolutely necessary if Galanz is looking to thrive and be
relevant in the future as well.

Porters Five Forces Analysis

1. Threat of New Entrants Prior to 1990s, foreign companies like Toshiba, LG and
Whirlpool had to no intention to expand and dominate the Chinese microwave oven
market as they had not yet sensed the market potential. As Galanz capitalized on this
situation by building low-cost low-price strategy and later investing on R&D to design
and build its own components, this particularly created a huge barrier to entry for new
entrants.

2. Threat of Substitute Microwave oven technology, introduced in the 50s, has little
changed. In order words, this market has been more or less commoditized. In todays fast
paced world, people rely on equipments like microwave oven to quickly heat up and
prepare their meal. So, it would be safe to say that there is little or no threat of
substitution for this commodity.

3. Bargaining Power of Buyers - As per Liang Senior The main objective of the price war
is to destroy our competitors confidence to compete with us when they realized that
market bore little investment value. The price war has been last line of defense. Galanz
was offering microwave oven at a price less than 300 RMB where as other competitors
were offering at 3000 RMB, this reduces the bargaining power of its buyers in OBM
model in the domestic market of China. And as they were focusing on low cost in OEM
model of their business, they were offering at a very cheap price that there buyers cum
competitors could not refuse.

4. Bargaining Power of Suppliers - Galanz has more than 3000 suppliers all around the
world to supply the company with necessary resources at the required time. Having a
large number of suppliers reduces their bargaining power.
 5. Industry Rivalry - Galanz was successful to destroy the confidence of its competitors by
entering in the price war and focusing on mass production and following low cost
strategy. And by the end of 2002 Galanz occupied 70% of market share which led to
decrease in rivalry within the Industry.

Recommendations

I. As Liang Junior is looking to transform Galanz from OEM/ODM to OBM, it should shift
its strategy from Cost Leadership to Differentiation and Focus. This entails more
investment in supply and distribution network and after sales infrastructures. As Galanz is
still new to OBM business, it is advisable that it execute a joint venture with more
established brands like LG or Toshiba and share the resources and value chain activities
for competitive advantage.

II. Deciding the ratio of OBM to OEM should be based on the fact that risk factor with
forecasting that is higher with OBM than OEM. Also, Galanz should take in the factors
such as core competencies it has developed through R&D investments and possibility of
alienating its OEM customers by venturing into OBM model.

III. Building brand awareness entails serious investment in Total Quality Management
(TQM). Galanz can look into differentiation and customization through focusing into
specific market segment in order to demand premium prices. This is only possible
through TQM concepts such as continuous improvement, employee empowerment and
using various TQM tools such as Pareto Principle, Fishbone Diagram and Statistical
Process Control.

IV. Galanz should invest on quality of labor rather that its cost, and decentralize its
management style in order to empower its employees with more decision making
capacity.

V. Producing the right products in the right quantity at the right time to meet the needs of the
customers is the ultimate mantra Galanz need to practice to be relevant and successful in
the future. For this, it needs to invest in process and capacity design in order to strike a
right balance between the market demand and its supply capacity. This can be done with
in-depth study and analysis of socio-economic and political conditions and changes,
technological breakthroughs and being aware of its own competitive advantage and life-
cycle of products. In other words, conducting a SWOT analysis(refer to annex A) might
help Galanz to strike that balance.
Annexes

A. SWOT Analysis

STRENGTHS WEAKNESS
Large market shares both in domestic Nascent marketing, sales & service
and global market. infrastructure.
Mass production capacity. Demand forecasting & production
planning almost non-existent.
Own R&D facility.
Inflexible production lines.
Developed own magnetron.
R&D issues causing delay in new
90% vertically integrated.
launches.
Closely located suppliers. Working with large number of suppliers
for very small share of outsourcing.
Poor brand awareness.
Narrow margins, 4.75%.

OPPORTUNITIES THREATS
Build brand and improve margins Other low cost player can poach its
domestic market.
Sustain relationship with existing
OEM/OBM customers. Other brand players may launch
products with support from other
Move to international markets
Chinese low cost players.
Other international brands may poach
market share, as focus shift to
international market.