ACER Inc.

Case Study
Taiwan’s rampaging dragon

AASTHA YADAV(01)
ABHIRUP MUKHOPADHYAY(02)
ADITYA MOHAN(04)
ANIKET SINGH MAHRA(10)
DILEEP MACHA(31)
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EXECUTIVE SUMMARY
Acer is a company which has been laid down with very meager amount and very simple
principles. They gave a lot of emphasis to the workers who worked over there. Even though they
were not paid any handsome salaries yet they were fully committed to the company and their
jobs. The reason being the “family” culture that existed in the company. Stan Shih, the CEO and
founder of the company always advocated for a company where employees would always be
challenged to think and learn. He believed in not firing employees for their mistakes, instead he
always tried to learn from them. He went for the expansion of the company by having joint
ventures and acquisitions, both in home and abroad. Hence he could bring down the cost of
capital that was needed to expand the company. But when he saw that he was unable to remain
as the CEO of the company then he resigned from the post of President and bought in Leonard
Liu who made some bold and complex decisions in order to increase the revenue of the company
including acquisition of controversial minicomputer specialist, ALTOS and laying off employees
for the first time on a large scale in Acer. But when he saw that the “Commoner’s” culture of
Acer was lost, he made Liu resign and took over the reins of the company again. Also the RBU
and the SBU created to look after the business in a better way on a global perspective; he gave
them full independence to work and never questioned them about the way they work. Stan Shih
bought the fast food concept in the computer industry and thus saving a lot of money and time on
logistics and duties.

Acer America when developed the Aspire model of PC for the mid-level segment then there was
a major problem that how would company achieve economies of scale because as per the
organization culture that existed in Acer each SBU and RBU was free and independent to do
whatever they want to do and hence the cost structure that has been mooted by the management
wouldn’t be met.
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Economies of Scale in Computer Industry

Computer industry in whole is quite a lot dependent on the economies of scale but this is true if
there is mass customization of products and the same product is sold across various markets and
consumers. As in case of China’s rise we see that due to economies of scale and mass
customization of products, it has been able to become the largest exporter in the world today. But
as in the case of Acer, the free hand on customization of products that is given to the various
Regional Business Units (RBU’s) and the Strategic Business Units (SBU’s) is a major hurdle. In
such a scenario, each RBU and SBU will ask for different set of components and parts and hence
economies of scale can’t be reached. Giving independence of design to the RBU and SBU
located in the faraway places from the manufacturing units a big constraint to the economies of
scale. The situation demands that Shih should not allow the local customization of their product
Aspire by the RBU and the SBU because then the pricing that they have decided for the
computer would not be viable. As they plan to place the Aspire in the middle of high end
computers like IBM and low end computers like Packard Bell. The aim to price the Aspire
between $1999 and $2999 would not be met if economies of scale would not exist. Nowadays, as
in case with Apple we know that it sells the same Macbook and i-pad throughout the world in the
same configuration i.e. one would find the same Macbook and i-pad in Americas and Europe as
one would find in Asia and Africa. They are able to keep the cost of their products low because
of the mass customization of product. Same is the case with Sony i.e. one would find the same
Sony product everywhere in the world and can get it repaired at any Sony service centre in any
part of the world.

Shih could have advertised his product by saying that it can be serviced and repaired in any of
the Acer service centers across the world. By this Acer can achieve both mass economies of
Scale and Mass customization of products and also get a new advertisement tagline. In those
days in the mid 1990s the computer sales had just started to pick up and ordinary people started
showing interest in buying PC’s for their homes. And paying this much of amount for a mass
customized PC, that everyone across the world might create some problems. Economies of
Scales holds good nowadays for the computer industry but in those days it would have been very
tough to achieve. The option would have been to assemble the parts at different places by the
different RBUs and SBUs. Since the basic parts of a PC i.e. the mother board, RAM, Processor,
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SMPS, etc. remains the same hence Acer can achieve economies of scale by having the same
basic parts for all the Aspire computers and thus they can reduce their costs and keep the prices
to the levels that they desired for.

Strategic Models of IT Companies

Strategic decisions of a company are influenced by market conditions, degree of competition,

condition of economy, regulations affecting the industry, its own growth targets and the
interactions with its subsidiaries i.e., business units. However, the management of innovation for
the parent company is a challenge. There are two possible models:
In first model, the parent company acts as a central repository of innovation database
transferred from its subsidiaries. It is the responsibility of parent company then to transfer this
knowledge to its other subsidiaries.
In the second model processes are set up so that the individual subsidiaries share and transfer
their innovation knowledge among themselves It is interesting to note that companies employ
different set of strategies at different phases of the life cycle as illustrated in Figure I below.
 Initially the product idea comes from in-house innovation, and the company resources are
concentrated around development and marketing of the product.
 During growth phase, efforts are used in marketing to achieve high market share, revenues and
the innovation is heavily influenced by the market pull.
 Once a company has achieved “success”, competition sets in. Additionally, company has to
expand to retain its growth, and starts diversifying and expanding. With the competition growing
and limited resources (competencies), the company starts joint ventures and alliances setting up
subsidiaries and business units. The product innovation becomes very difficult to manage at that
point. Coordination of individual company activities to benefit the overall company becomes a
challenge
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Fig 1: Innovation and transfer of knowledge in IT companies

This is exactly the same what happened with Acer(Multitech). It has gone through the three stages of
the development starting from 1976 to 1994. And this is where it became entangled in its multiple
strategies viz. client server model, fast food business model etc.

PC industry characteristics
To understand the PC industry characteristics let us consider the rapid changes that were happening
in the market place during that time.
PC Industry
1976 Apple and Altos are founded
1981 IBM launches PC with MS-DOS
Compaq established
1982
Intel 80286 microprocessor
1985 Intel 80386 microprocessor
1986 Compaq's first 32-bit PC
1987 Microsoft Windows 2.0
1988 Intel 80386SX microprocessor
1990 Microsoft Windows 3.0
1994 Apple PowerMacs launched
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The above developments between 1976 and 1994,the very years when Acer was going through the
turmoils illustrated in the case,makes it very clear that Acer was competing in an industry which was
highly dynamic and risky and which had some unique characteristics of its own. Some of them are
illustrated below:
 High rate of technological obsolescenece : It’s said that the functional and processing
capabilities of PCs double every 6-7months. Thus its a risky proposition, and companies must
be constantly abreast of the latest developments of technology and developments
 It has long development period and relatively short period to recoup the cost before the next
version or upgradation comes in. So companies should have platforms that can be quickly
adapted for compatibility with the new systems
 A very good inventory monitoring system should be in place and the inventory turnover time
should be as less as possible to protect against any change in technology
 Rampant instances of piracy. Therefore companies should safeguard their technology and try
to
 Multiple channel of distribution including direct selling ,conventional retail based sale and
catalogue sell
 As the technology develops and becomes more advanced the price comes down continuously.
Thus companies must streamline its operations to maintain the margins
 There is a big difference in the technological level of development and PC penetration in
different countries. Thus the production base and the distribution network and strategic
planning to enter markets should be dependent on such parameters. Such factors also make it
imperative to have local responsiveness in different markets

PC industry general trends (in the 1990s)

 Increased frequency of the consumer upgrades
 Technological advances in inputs
 Productivity acceleration in manufacturing
 Powerful computers become cheaper
 Growing penetration of personal computers in consumer and
business markets
 Growing interest in the Internet
 Concentration rate in U.S. 34%
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SWOT analysis

STRENGTHS

 Strong Corporate Culture(after Shih came in)

 Strategic alliances for further expansion
 Building Brand name business.
 Employee empowerment
 Employee ownership, delegated accountability
 Encouraging employees’ ideas
 Taking corrective actions (reengineering)
 Strong financial position (except for 1990-1992)

WEAKNESSES

 Paratrooper managers who were not adapted

with Acer's culture
 Acer's limited capital resources
 Growing too fast while ignoring the evolution
of the PC industry
 Existing coordination problems
 Corporate cultural difference with merged
firms

OPPURTUNITIES

 Growing Industry
 Increasing trend to working at home in
US market
 Rapidly growing interest in the Internet
 Emerging global multimedia desktop
market
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 Enlargement of retail business

THREATS

 Periods of shrinking Demand

 New marketing and distribution
channels conceived by the competitors
 Fierce PC business competition

PEST analysis

POLITICAL FACTORS

The political factors have a huge influence upon the regulation of businesses, and the spending
power of consumers. The political condition of Taiwan is rather stable and the world situation
was peaceful and sound in recent years(1090s), which was good for Acer's development. 
The Taiwan government had many preferential policies for the development of the company
including tax advantages and government funding.

ECONOMIC FACTORS
The state of a trading economy in the short and long-terms is crucial to the growth of business.
This is especially true when planning for international marketing. Taiwan's per capita gross
national product (GNP) rose from $1100 in the 1950s to approximately $11,600 in the 1990s. 
The gross domestic product during the 1990s was $216.5 billion, with manufacturing accounting
for about 37 percent, and services make up the largest portion with about 60 percent. Taiwan will
likely become an upstream supplier for China's massive manufacturing production and gain more
economically by further integrating its economy with China via a "Greater China" free-trade area
(FTA) . It will further reduce the cost of vertical integration among manufacturing industries
across the Taiwan Strait and enable both China and Taiwan to become stronger competitors in
the global manufactured goods market."
SOCIAL FACTORS
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The social and cultural influences on business vary from country to country. It is very important
that such factors are considered. For a multinational company like Acer, cultural difference
influences the growth of the company greatly. For effective management it would been required
to have management structure and practices consistent with the social cultures of the operating
countries

TECHNOLOGICAL FACTORS
Technology is vital for competitive advantage, and is a major driver of globalization. It is
especially true for IT industry whose growth is by a large extend dependent on technology
innovation and advancement. And Acer's innovation strategy has a significant relationship with
cross-functional cooperation and new product developmen. Consumers might be confused by
the firm's too wide range of products.  Also the technology of Acer can be easily copied by
emerging competitors. Thus proper IPR and other safeguards should be in place
The global IT landscape is ever changing with new products and inventions being introduced
every day, the competition facing Acer are ever fierce. 

Organization Culture
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Right from its inception in 1976 to this date, the organisation culture has contributed a lot in
Acer’s success.

The firm’s culture under the leadership of Stan Shih, CEO of Acer Inc., had always been very
supportive and employee-friendly. For example, even in the initial days when Acer (then
Multitech) was financially constrained and the CEO had encouraged the philosophy of frugality,
key employees were offered equity giving them substantial ownership in subsidiary companies.

Shih had learnt a lesson from his past experiences that authoritarian or dictatorship culture
should not prevail in an organisation. As a result, he involved his employees in substantial
decision-making process and trusted their capabilities. In other words, he followed McGregor’s
theory Y in Acer to keep his employees motivated.

In 1960, Douglas McGregor proposed two theories of human motivation – Theory X and Theory
Y. Theory X assumes that an average dislikes work and attempts to avoid it, has no ambition and
wants no responsibility, is self-centred and therefore does not care about organisational goals.
Essentially, in this theory managers take a rather pessimistic view of their employees and resort
to authoritarian style of managing based on the threat of punishment.

On the other hand Theory Y assumes that employees are ambitious, self-motivated, anxious to
accept greater responsibility, and exercise self-control, self-direction, autonomy and
empowerment. It is believed that employees enjoy their mental and physical work duties. A
Theory Y manager will try to remove the barriers that prevent workers from fully actualizing
themselves. Thus, creativity is encouraged.
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Management style of Stan

The firm’s culture under the leadership of Stan Shih had always been very supportive. He
involved his employees in substantial decision-making process and trusted them to act in the best
interest of the firm. Shih was committed to employee education in his organisation and
developed a strong pupil-teacher relationship between the employees and their supervisors. In
fact, he had decided on grooming of one’s subordinates as a criterion for promotion of the
supervisors. He hoped to create a company where employees would be constantly challenged to
‘think and learn’. In this way, he developed a closely-linked culture at Acer, where co-workers
shared a family-like bond with each other.

Pros

Such an employee-friendly culture is very conducive to provide the employees with a relaxed
environment where they can perform without any stress. The employees were considered assets
by Shih and as a result

 They were given liberty to make their own decisions as long as they took responsibility
for their actions.
 If the employees are allowed to make mistakes and learn from them, they tend to be
more creative in their ideas and more expressive of their concerns (which, if timely
tackled, can lead to positive results like retention and goodwill).
 Moreover, the existence of a mentoring attitude of the managers towards their
subordinates leads to personal development and growth of the individual, which in turn
leads to more productivity and dedication in the workplace.

Cons

The prevalence of such a liberal environment may be misunderstood as one without any
discipline or a proper code of conduct.

 The company under the leadership of Shih lacked a clear organisational structure or
procedure-based administration.
 Employees might become so used to working in a relaxed environment that it might be
very difficult for them to deal with stressful job conditions even in case of emergencies.
 Employees might not be performing upto their capabilities due to the absence of stern
performance yardsticks.

Management style of Liu

The circumstances in which Leonard Liu entered Acer group were such that he was compelled to
resort to sterner measures of tackling rising costs and management issues. As a result, he
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transformed the structure into that of a lean organisation by reducing the number of management
layers. This was done in an attempt to increase accountability at the company. Moreover, he
established channels for intra-company communication. He also introduced productivity
measurement and performance evaluation systems. Furthermore, he launched a drive to carry out
massive layoffs under an initiative, named ‘Metamorphosis’ wherein bottom 30% of the lowest
performers were sacked.

Pros

A few of the obvious benefits of such an ‘iron-fisted’ style of management are:

 Due to lesser number of management layers, it would be easier for a manager to keep a
direct check on his/her staff’s performance; which in turn, would improve the
performance of the employees.
 The existence of established intra-company communication channels makes sure that the
various departments within the company are well coordinated with one another. Proper
coordination between the departments of a firm is quite necessary from the strategic
perspective.
 The fear of being sacked compels underperformers to work on their jobs with more
seriousness and dedication.

Cons

On the flip side, there are a few loopholes to such a system. Some of them being as follows:

 It is not possible for employees to work for long durations under such stressful
conditions. Consequently, either their performance levels would drop (resulting in their
being asked to leave), or they themselves would seek better options elsewhere.
 Such radical changes in a firm’s structure and system give an indication to the outside
world that AAC was incurring huge losses.

Change Drivers
Due to the fact that Acer being a very large organization which went through many makeovers in
strategy development and its implementation, hence it had many change drivers over a period of
time.

The first one was when the company started giving its key and high performing employees
substantial equity holding in the company instead of giving them high salaries because of which
Acer was able to cut down the costs and came up with a term “moonlighting” at second jobs.
Another change driver for Acer was the strategy implemented by Stan Shih which he called
“hands off” style. In this strategy he trusted the employees to act in the best interest of the firm
and as a result Acer became one of the most attractive places to work for the bright and young
engineers. Another policy adopted by Stan Shih to expand sales and revenue was forming joint
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ventures with other companies and as a result the company could expand without having any risk
of hiring more people or capital risk. Another major strategy that acted a change driver and
revenue earner for Acer was expanding into small markets like that of Asia, Latin America and
Middle East which were not largely tapped by the other big companies. Also they started as an
Other Equipment Manufacturer (OEM) for other major brands which helped in manifold rise in
revenues. When Acer went to more competitive and demanding markets of Europe and North
America they used offshore acquisitions, setting up of offshore companies and foreign
collaborations. All these strategies helped the Acer to become truly a Dragon.

Another major change driver for Acer was the selfless attitude of Stan Shih. When the company
was going public, at that time his stake in the company was 50% and afterwards his stake came
down to less than 25%. To increase the turnover of the company he bought in my middle level
managers and top level executives who had the expertise but did not have the knowledge of the
company culture and hence the company was able to make significant increment in its revenues
because of these so called “Paratroopers”. To meet the increasing market competition Stan Shih
bought in Leonard Liu and stepped down as the president of Acer group and giving him the
reigns of the company.

Liu had a different mindset than that of Stan Shih. He introduced RBU and SBU in Acer at
various places in the world and they had the complete responsibility of giving profits to the
company. Also he bought a number of companies in North America to increase the profits of the
company, but when these takeovers didn’t give profits then he went for layoffs. Hence first ever
major layoffs took place in Acer’s history. Since it was considered a family-oriented company
which didn’t believe in massive layoffs and attrition, hence this move inculcated a sense of fear
in the minds of the employees. Due to this the “Commoner’s” culture of Acer was lost and hence
Liu has to resign and Stan Shih had to come back as the CEO of the company.

When Shih came back in the operations of the company he advocated a Global Brand, Local
Touch philosophy. He started offering equity partnership to local established distributors in the
RBU’s so that they work with more efficiency. Also he took a “No Nuisance” philosophy and
asked all those people to be fired who did mistakes knowingly or intentionally. Another change
that he bought in the organization was a Client Server Organization Model because of which he
was able to connect to the various SBU’s and RBU’s more efficiently. Also he gave full
independence to the SBU and RBU heads. Also he bought in the fast food industry concept in the
company because of which the inventory costs which is most of the times considered to be a
waste were bought down. This model helped him in choosing that which was needed for early
and fast dispatchment and which for a later time and hence saving a lot in logistics and duties.

Hence these were the changes or the change drivers that helped Multitech, a small company
which was started with an investment of $25000, become a multinational conglomerate with
operations in all the continents acrosss the globe and become a top PC manufacturer in the
world.
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Financial Analysis of Acer:

A closer look into the financials of Acer shows us that even though the sales of the company is
increasing steadily the cost of sales as a percentage of sales is increasing fast. With this
phenomenon even though there are revenues they might not turn into good profits for the
company. It is shown with the help of fig-1:

Cost as % of sales
82%

80%

78%

76%

74%

72%

70%

68%
1988 1989 1990 1991 1992 1993 1994

Fig-1
In the years 1990, 1991 and 1992 Acer saw losses which was unprecedented, this is mainly
because of the acquisition of the Altos, a networking company. Mr. Leonard Liu thought that it
will be a successful venture but as alternative means of multi user networking came into
existence acquisition of Altos looked like a big blunder.
This can be observed in the balance sheet as the sales remained constant where as the cost of
sales and other expenses increased.

One good thing that can be noticed about Acer is that, even after lot of ups and downs in the
recent years the company is maintaining good current ratio. It is always above one, which is a
good sign.
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Current Ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1 2 3 4 5 6 7

Fig-2
If R&D as percentage of sales is observed for Acer company as a whole and AAC separately we
can see that R&D for the subsidiary is very less. In 1994 it was around 0.5% of the sales.

R&D as % of sales Chart Title

6.0% 4.0%
3.5%
5.0%
3.0%
4.0%
2.5%
3.0% 2.0%
1.5%
2.0%
1.0%
1.0%
0.5%
0.0% 0.0%
1988 1989 1990 1991 1992 1993 1994 1990 1991 1992 1993 1994

Fig-3 Fig-4
From the graphs it is clear that more resources should be allocated to the R&D of SBU’s as well
as RBU’s as PC market is highly dynamic and there should be lot of innovations to keep up with
the competition in the market.

As of 1994 Acer is in 9th position both world wide and in US market, with HP catching up fast.
Only with influx of resources into the R&D department, Acer can come up with products like
Aspire (which may or may not be a success) to retain the market share.
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RBU’s like AAC have high growth capacity and there success is largely dependent on newer
technology, so it is best to have R&D facilities at such RBU’s so that development of newer
products will be faster.
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Should RBUs be given R&D capabilities to design and deliver product like
Aspire or it should be taken back to Taiwan? If the capabilities are given will
it affect the economy of scale of Acer and the client server model?
In our opinion there has to be proper R&D facility available in RBUs if the target market size is
substantial. The server and client model was based on Transnational strategy that was focusing
on fulfilling local needs with maintaining scope for economy of scale and global quality.

The organization in due course of time during the term of Leonard Liu faced a lot of losses due
to failed acquisitions and deviated from its original competitive strategy model. But as the global
expansion of present became huge the old strategies of client server can’t be fitted in exactly the
same way it used to be.

In due course of time the globalization of Acer started as exporter which presently own subsidies
in various markets across the globe. Thus contradicting to the old “Stan’s Smiling curve model”
the value adding activities like R&D can not only happen at SBU but also at RBU to tap the
potential ideas which may be part of location advantages or market needs.

This will allow the business to grow at a faster pace and faster generation of ideas in different
RBUs. The design of Aspire was an outcome of the market needs in US which gave out a great
model which perhaps could have not been generated in Taiwan SBUs.

Taking a step ahead it will allow the SBUs to retrieve new ideas from RBUs and distributed
throughout the world. Thus earn a greater return by leveraging any valuable skill, idea & product
developed due to foreign operations and transferring them to other entities within the firm’s
global network of operations.

But not all RBUs should be supported with such type of facility but only those where location
economies can be realized effectively and efficiently.

The SBUs should be indulge in other value adding activities such as global monitoring and
logistics which will help in maintaining global control at centre.

More over in many RBUs (example Beijing having 40 R&D centres for MNCs) developed a
strong entrepreneurial culture that creates highly motivated engineers who are eager to learn new
knowledge from abroad. And cultural difference in the environment helps in blending local
engineering with the centralised R&D practices.
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Recommendations:
Looking at the potential to develop new products in RBUs (such as of US) we believe that
Mr.Shih would have supported the project Aspire. As USA is supposed to be ahead of the whole
globe in computer technology there can be a benefit in product life cycle or in other words the
innovation in computers developed in American environment is generally taken as a global trend.

USA is taken generally twelve months ahead in product life cycle in case of IT and computers
hence this advancement can help in creating higher product standards around the globe. More
over working collaboratively with the software giants of US will provide future vision of
software and IT that will help in better planning and forecasting.

US market being a very competitive will help in understanding in global trends while competing
with many MNCs and a research unit at US RBU will help in fast innovation to be a part of the
race.

Thus to apply this strategy of local innovation capability a new corporate model can be formed
that can be blended with the traditional server and client model giving more autonomy at RBU.
The fast food model in today’s world also allows customization of product and not merely
depends upon the raw material. There has to be a system to support the transfer of expertise and
innovation between SBUs and RBUs.

Centralised distribution may be important for some essential and important parts so as to enjoy
economy of scale, but there should be a transfer of dependency from SBUs to local market to
enjoy location economies such as local engineering and cost reduction with high responsiveness
in logistics.

Moreover SBUs should be concentrating not only on R&D but majorly in assisting the RBUs so
as to have a good control and reliability. The SBU should not only assist in research in global
subsidies but also help in transfer of technology from RBUs to Taiwan SBUs and then further
utilise it at all global operational and production centres so as

 to increase pace of innovation

 to reduce dependency solemnly on Taiwan’s SBUs
 and to save cost in R&D at central level alone

Hence the Aspire model should be taken ahead with collaboration of central R&D facilities and
local expertise, more over Acer should try to establish R&D base in potential market RBUs.