Smiling Curve

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Smiling Curve

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. More specifically, firms that specialize in the beginning part of the value chain (such as the R&D of core hardware or software such as CPU, DRAM, and operation systems) and the firms that focus their business on the final part of the value chain (such as marketing with brand names or providing customer service) normally enjoy much higher profit margins than those who operate the middle part of the value chain (such as manufacturing and assembling PCs). 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”. Based on this vision, 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.

[edit] 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.