Stan Shih’s “Smile” Curve

Profitability

High

Low

R&D
(Patenting, new technology origination, etc.) Product
Product
Conceptualization Design

Fabrication

Branding

(Manufacturing)

(Product definition)

Type of Production Activity

Marketing
&
Distribution

Customer
Service

Traditional Manufacturing: The Era of Pillar Industries and Industrial Conglomerates

Profitability

High

Low

Manufacturing
(linked to R&D, Design)
Type of Production Activity

Branding Marketing Customer
&
Service
Distribution

“Upward Commodification” by Chinese Firms

Original “smile” curve

Profitability

High

Chinese firms begin from a base in manufacturing, and then move left into product design and right into branding. The innovations they engage in to make these moves, however, often standardize and lower the value of what were once very profitable activities.
New “smile” curve after reverse engineering by
Chinese firm

Low

R&D
(Patenting, new technology origination, etc.) Product
Product
Conceptualization Design

Fabrication

Branding

(Manufacturing)

(Product definition)

Type of Production Activity

Marketing
&
Distribution

Customer
Service

Modular Innovation: Creating Value in Unexpected Places

Companies like Apple introduce software (i.e., iTunes), making the computer and other digital devices central to the way consumers purchase and listen to music. Profitability

High

Fabless semiconductor firm like
Broadcom designs “system on a chip” solutions embedded in various pieces of computer’s hardware, as well as in other devices. Highly specialized manufacturer like Intel makes money designing and fabricating the computer’s processor (customer no longer cares about brand of computer, but wants to see “Intel Inside”). In so doing, the component maker drives product cycle in computers. Original “smile” curve

Chinese manufacturer reduces assembly costs, commodifies