Sunday, January 11, 2015

How 'Gongkai' Innovation Could Allow China To Leapfrog The West

Here is an personal example of an early "gongkai" situation:

In 1987 Shugart - a wholly owned subsidiary of Xerox and dominant manufacturers of floppy disks - subcontracted to a Chinese/Taiwanese firm the manufacture of disk-heads. These components were the keys to Shugart leadership.

Under pressure for quarterly profit Shugart outsourced disk-head capacity for a critical Shugart component. 

Manufacturing labor contributing margin for disk-heads was <15%. Contributing margin from R&D and engineering was >200%.

SUMMARY:

XEROX handed over "gonkai" capability instead of only outsourcing manufacturing labor. The decision to outsource was based on lower variable manufacturing costs, since Xerox management decisions were made by financial staff (drawn from Ford and IBM) who made decisions primarily on projected unit manufacturing costs. Labor was the single largest quantifiable expense. 

By 1995 the Chinese/Taiwanese gained sufficient market share that Shugart had to exit the floppy disk market. 

"Gonkai" takes place when US management hands over long range capacity for gaining market share.

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