Case Study Operations Strategy at Galanz BACKGROUND On January 4, 2004, Liang Zhaoxian, the vice-chairman and chief executive officer (CEO) of Galanz Enterprises Group Co. Ltd. (Galanz), had just returned to his office after signing a contract to outsource part of the production of Galanz's designed and branded magnetrons1 to a Japanese manufacturer. Galanz had previously relied on the magnetrons designed and branded by its suppliers during its earlier years of development as a microwave oven manufacturer for many foreign brands. In the past, Galanz had purchased all its magnetrons (a core component of the microwave oven) from foreign suppliers such as Toshiba and Panasonic. But the rapid growth of Galanz's microwave oven business had threatened these magnetron suppliers, who were also in the microwave oven market. In an effort to restrain their competition, these suppliers decided to reduce the magnetron supply to Galanz. This decision prompted Galanz to initiate a major investment in magnetron R&D in 1997. Eventually, the company was able to design and produce its own magnetrons to support its microwave oven production in 2000. However, due to the tremendous growth in its microwave oven business, Galanz was still short of the component. By the end of 2003, its magnetron factory had an annual production capacity of 16 million units or 67 per cent of the total production requirement of 25 million units. Galanz found itself having to outsource part of the magnetron production to other OEM manufacturers since by then its customers had begun to insist that Galanz use its own branded magnetrons in Galanz-supplied microwave ovens. Although Liang was relieved that he had solved the problem of the magnetron supply for the company with the outsourcing agreement he signed with the Japanese manufacturer, he could not stop wondering what he should do to further guide the company to greater future success in the increasingly competitive market. Liang knew that this interesting dilemma was the result of the company's continuous growth and transformation. In the early days, Galanz only produced microwave ovens for the domestic (China) market with its own brand, while the production technology and key component parts were purchased from Japan. It then started its original equipment manufacturing (OEM) business when foreign brand owners outsourced production to Galanz due to its very low cost. When the company gradually mastered the design and production of magnetrons, Galanz transformed itself from an OEM to an original design manufacturing (ODM) firm. Since then, the company had operated in the original brand manufacturing (OBM) mode in the Chinese market and a combination of the OEM and ODM modes in the overseas market. In recent years, due to increasing recognition of its brand, its OBM business had begun to experience growth in the overseas market. Galanz's capability of producing microwave ovens at a low cost, combined with its enhanced R&D ability, had allowed it to compete successfully with major players such as Panasonic, Toshiba and LG in the global electrical appliance market. Galanz had gained a leading position with more than 50 per cent of the global market share in microwave ovens in 2007. Its brand name was well known in China and overseas. Products in both OEM and OBM versions were sold in the U.S., European, South American and African markets. The total sales volume of all types of Galanz microwave ovens climbed from two million units in 1997 to 22 million units in 2005. Its revenue increased from RMB2.96 billion in 1999 to RMB18 billion in 2006 (see Exhibits 1 and 2 for figures on production, sales, revenue and profit for Galanz microwave ovens). GALANZ Galanz, headquartered in Shunde, Guangdong province, was originally a township enterprise employing a few workers dealing in the trading of down feather products. It was founded in 1978 by Liang Zhaoxian's father, Liang Qingde (Liang Senior hereafter), the former deputy chairman of the Industrial and Transportation Office of Shunde County (19731978). The company's original name was Guizhou Down Product Factory. It produced down feather products for overseas clients to earn foreign exchange.2 At that time, companies were not permitted to export products without a quota. Since the company was jointly owned by the Foreign Trade Department of Guangdong province and the Shunde government, it was able to obtain the required quota and by 1992, its export volume was more than RMB 23 million. Page 435 EXHIBIT 1 Production and sales of Galanz microwave ovens (19922003). EXHIBIT 2 Revenue and profit of Galanz microwave ovens (20002003). Although the company continued to be profitable despite increasing competition, the global garment industry faced dramatic infrastructural changes that posed potential risks to its business in the late 1980s. The export quota also restricted the growth of the company. Even though the premier of the State Council, Zhao Ziyang, visited Liang Senior in 1988 and promised to strategically develop the industry by freeing it from further trading tariffs, the leader's proposal eventually proved ineffective and the industry's marginal profit continued to decline. Although Guizhou Down Product Factory enjoyed revenue of more than RMB 100 million at that time and was one of the best performers in Shunde, the profit growth had become stagnant and Liang Senior realized that his business could not go any further because of its projected weak future. Thus in 1991, Liang Senior made a strategic decision to search for new business opportunities with greater potential for growth. After analyzing the Chinese consumer market for a year, he made the decision to enter the electrical appliance market with the introduction of the microwave oven. Another reason for the transition of the company was the change in the institutional environment in the 1990s. For reasons of ideological acceptability, Liang Senior could only register the company as a collective enterprise3 jointly owned by the Foreign Trade Department of Guangdong province and the Shunde government, with himself as general manager. This gave the company the privilege to not only obtain an export quota but also to access public funds and thus resources for development. Later, the transformation of the centrally planned economic environment was further energized when the retired Communist Party leader Deng Xiaoping made his rounds to southern China in 1992, emphasizing the further economic construction of the country by first opening up Guangdong and Shanghai as industrialized areas. Consequently, individual entrepreneurs were free from state control. Since then, the Shunde local government had begun to offer more legal recognition and freedom to privately owned Page 436enterprises by protecting the property rights of production assets, innovation and capital, and attracting foreign investments and industrial manufacturing development in the area. These private ownership rights enabled the company to grow in a stable institutional environment. At this juncture, Liang Senior embarked upon his new business of microwave ovens in 1992. In 1994, a rare flood engulfed the Pearl River Delta, and Guangdong became the most serious disaster area. The flood submerged the entire production factory and Liang Senior seized the opportunity to buy all the shares from the two government shareholders. After allocating a portion of the shares to his comrades, Liang Senior then became the major shareholder of the company. In 1999, Liang Senior closed his down product factory, thus marking the completion of Galanz's transition to the microwave oven industry. WHY MICROWAVE OVENS? On a visit to Japan in 1991, Liang Senior identified the microwave oven as a product with great potential in China. During that time, microwave ovens were all imported and sold at relatively high prices that made them unaffordable to most Chinese households. Liang Senior observed that the rise of the Chinese economy would stimulate purchasing power and the demand for a wide range of modern commodities in the country. China's modernization process was changing the living styles and habits of the Chinese people and attracting them to time-saving conveniences, including new ways of cooking and food preparation, so that microwave ovens had the potential to become popular and indispensible in modern cities in China. Liang Senior recognized that if he could produce and sell them at an affordable price, this would be an excellent business opportunity. From the perspective of the competitive environment, the microwave oven market in the 1980s was in its infancy in China, where competition and demand size were small. Only a few foreign brands such as Toshiba, LG and Whirlpool were in the market and they had no clear intention to expand and dominate because they had not yet sensed the market potential, due in part to their lack of familiarity with the rapidly evolving Chinese market environment. Besides, the high price of their microwave ovens was unaffordable to most Chinese consumers. On the technology side, it was less risky to invest in the technology associated with microwave ovens because this technology had been mature and stable since Americans first invented the microwave oven in the 1950s. Though Japan, a new player in microwave ovens, later advanced the production of the magnetron tube and power supply in the subsequent decade, resulting in a tremendous cost reduction,4 the overall technology of microwave ovens did not differ much from that of its original design. THE START-UP Despite the technical ease of producing microwave ovens, starting a microwave oven production business in China was not without obstacles due to the lack of associated technology and technical expertise at home. While many Chinese entrepreneurs at the time saw the market opportunity in microwave oven production in China, only Liang Senior had the determination to work to overcome the business challenges. Liang Senior understood that Galanz had to import equipment and technology from overseas. Thus, in the early 1990s, he purchased the microwave oven production blueprint for USD$300,000 from Toshiba, then the world leader in microwave oven production equipment and technology. He also searched for engineering professionals throughout the country to set up the factory. At last, he found a group of engineers from Shanghai No. 8 Radio Factory who were knowledgeable of microwave oven technologies to help him. These engineers were still working with Galanz after 25 years, serving in senior positions in the technical supervision of microwave oven production. In 1992, Galanz produced its first microwave oven, the factory opened and the company officially changed its name to Guangdong Galanz Enterprises Group Co. Ltd. In 1993, the first batch of 10,000 microwave ovens was produced. In 1995, Galanz sold 250,000 microwave ovens in China, representing 25.1 per cent of the domestic microwave oven market, and overcame Shell Electric (later acquired by Whirlpool) as the leading domestic microwave oven manufacturer. Exhibit 3 lists the course of development of Galanz's microwave oven business. EARLY SUCCESS At the start, Galanz did not have any competitive edge in production technology but only an abundant supply of cheap labor5 and land.6 Offering a low price was thus the only way to compete in the market. From 1996, Galanz adopted a low-price strategy by repeatedly implementing cycles of price cutting and production capacity expansion. In 2003, the annual market demand for microwave ovens surged to 25 million. This remarkable achievement was built upon Galanz's persistence with its low-cost strategy, which relied on two tactics (explained below) by which Galanz was able to occupy the market-dominating position for years. In fact, the strategy was so successful that its production demand for microwave ovens grew faster than its magnetron production capacity (see Exhibit 3). The internal production capacity of magnetrons was limited to 16 million units but the annual demand was 25 million units in 2003. The company therefore decided to outsource the magnetron production to a Japanese supplier for the balance of nine million units.

Questions

1. What are the major problems being faced by Eastern Gear, Inc.? List each and write a one-paragraph explanation of the problem. Paraphrase and explain your perspective, do not quote the problem exactly from the case.
2. What action should Rhodes take to solve his problems?
3. How can this case be related to operations strategy and process design concepts? Be specific. Demonstrate that you have read and understood the assigned reading. Include citations from your textbook in APA format.