國內專家學者出席國際學術會議報告
CASE ANALYSIS: K COMPANY
Company Introduction
K Company founded in 1953 in Taiwan with total capital 1.2 billion NT dollars and
1,400 employees in 2006. K Company is the largest traditional grinding wheel production
company in Taiwan, which produces over 100 thousand different products in terms of
functions and materials as well as serves more than 8,000 customers in Taiwan. Their grinding
wheel products are varied from the low-end ceramic grinding wheels to the high-end diamond
grinding wheels. K Company’s diamond disk has received good reputation from Taiwan
Semiconductor Manufacturing Corporation (TSMC), the largest semiconductor
manufacturing-only firm in the world since 2000. The annual sale growth rates of K Company
from 2001 to 2006 are 28%, 24%, 22%, 10%, and 58% respectively. In 2005, K Company
was initially public listed and traded in Taiwan’s stock market. K Company's core business is
the grinding wheel business. In the late 1990s, it started to diversify to diamond disk business
(1999), reclaimed wafer business (2003), and optical business (2005). By 2006, K Company
has four main business units, including traditional grinding wheel, diamond disk, wafer, and
optical business unit. All of them have their own R&D, manufacturing, and sales. The total
sales of K Company was NT$ 3.44 billion and its average gross profit was 37% in 2006.
Simultaneously, the global market share of K Company's diamond disk was 30%, which
exceeded Seasol (15%) and 3M (12%). In addition to four business units, K Company has two
research centers; diamond research center and research & development center. The former
carries out advanced diamond applications while the later carries out normal R&D activities,
such as product improvement and patent management. At the current stage, two research
centers still have some similar projects and share some resources with each other.
Traditional Grinding Wheel Business
Grinding wheel is a consumable product which is used to improve the precision of
machinery equipments and enhances the integration of the different work pieces. Since types
of customers are various such as machinery parts, hardware manufacturing, steel,
semi-conductor, glass, and electronic manufacturing, the material formulations are mainly
tailor-made. The compositions of material formulations directly affect the hardness of the
grinding wheels, which determine the duration of the grinding wheel and the durability of the
machine. Therefore, the core capability of the grinding wheel is the material formulations.
The main raw materials for grinding wheels include aluminum oxide and silicon carbide.
Different materials and formulas need to conduct different production methods. The main
production method is to mix grinding materials with bonding materials and then to heat and
press them to form a certain shape. Another important core capability of K Company is the
grinding and cutting capability. K Company can quickly adjust their production to meet the
requirement of wide range of customers. As a result, "material science capability" of grinding
material formulation and "precision technology capability" of grinding and cutting
technologies are two core competence of K Company’s grinding wheel business.
Insert Figure 2 about here
The value-added activities of the grinding wheel business, as shown in Figure 2, includes
raw materials, grinding materials, formulation, R&D, production, warehouse for raw
materials and products, distributions, branding, and after sales services. In the production
activities, there are several important procedures, including the mixing of grinding materials,
cold pressing, and heat pressing. These processes are different depended on the types of
mixed materials. For instance, some grinding materials may need heating up to 700oC, then,
the basic shapes of the grinding wheels are formed. The next step is to take the undressed
grinding wheels need the grinding and cutting process to make various shapes of grinding
wheels. Finally, quality control and internal testing are also important procedures since K
Company has to take the full responsibility for the damage incurred by any defected grinding
wheel products. Having understood the core capabilities and value-added activities of the
grinding wheel business, we use it as the focus business for comparing other businesses.
Diamond Disk Business
Flattening the wafer surface is a very important production process for semiconductor
manufacturing. In order to stack wires on the surface of the wafers, the thickness and flatness
for the layers of each wafer is required. This flatten mechanism is called the Chemical
Mechanic Polish (CMP). When carrying out CMP to flatten the wafer, it needs a rotating
polishing pad and the slurry on the pad during the process. However, in the process of CMP, it
may produce the wafer debris on the rotating polishing pad. Therefore, a diamond disk dresser
(herein after as diamond disk) is required to shave the polishing pad periodically in order to
restore its polishing function and to extend its life of usage. As a result, the quality of
diamond disk may critically affect the production efficiency and yield rate of semiconductor
manufacturing. A few number of global diamond disk providers, such as Abrasive Technology
and 3M, provide the diamond disks but the quality of their diamond disk is various. Thus,
with the support by TSMC, in 1999, K Company started to develop and produce diamond
disks. In 2000, K Company successfully weld industrial diamond tightly on the hard stainless
steel alloys without separation by incorporating technologies of diamond shield for precision
molds and diamond grid layout for cutting tools. The diamond shield can effectively prevent
diamond disk from being corroded by chemical solutions during the CMP production process
while the invented layout of diamond grid can prevent falling off diamonds, increase dirt
removal, speed up the flow of polishing liquid, and maintain the stability of CMP production
process. K Company's diamond disks had passed TSMC's onsite testing by the end of 2000
and successfully replaced US and Japan’s suppliers as the main diamond disk supplier for
TSMC, United Microelectronics Corporation (UMC), and other Taiwan semi-conductor
companies in 2001. K Company also sold diamond disks to Japan's NEC, Korea's Samsung,
and Singapore's Charters, with the help of Rodel Company in US, the world's largest
semiconductor consumable supplier. The quality approval by semiconductor companies is
very important for diamond disk. Managing Director of K Company's diamond disk business,
Mr. Lee, stated that:
"The critical knowledge for diamond disk production is the material
science technology as well as cutting and grinding techniques which are
derived from our grinding wheel production. This experience is our
advantage compared to other competitors."
Based on above discussion, two core capabilities of the diamond disk business in K
Company can be concluded as the "material science technology capability" and the "precision
technology capability".
The value-added activities of diamond disk, as shown in Figure 2, it is highly similar
with the value-added activities of grinding wheel. Some of grinding wheel product and
diamond disk shares the same raw material - industrial diamond. The main R&D activities in
diamond disk business are mainly responsible for exploring the layout of diamond grid. As for
manufacturing activities, the production processes of diamond disks are similar with grinding
wheel production, including mixing, heat pressing, and dressing. Quality control is another
important activity for the diamond disk production since the damage caused by a flawed
diamond disk may cost 5,000 US Dollars per wafer. The remaining value-added activities of
the diamond disk business are similar to the grinding wheel business, including warehousing,
branding, and after sales service, except distribution which the diamond disk business has
foreign agent as the sale channel.
Reclaimed Wafer Business
Prior to producing wafers, semiconductor fabs need to test wafers (or dummy wafer) to
check the furnace tube temperature, metal layer, chemical contamination, and strained
thickness on the surface. After testing, the test wafers are normally discarded or recycled.
Traditionally, semiconductor manufacturers purchase wafers to produce the test wafers by
themselves. In recent years, in order to reduce cost, semiconductor manufacturers start to use
the reclaimed wafer as the test wafer through external contractors. The reclaimed wafer is
made by etching and polishing process to wipe away the particle and seed layer on the test
wafer. The core capabilities of K Company in reclaimed wafers or test wafers are etching and
polishing technologies, which are also originated from the grinding and cutting capabilities
accumulated by K Company’s grinding wheels business for decades. Moreover, parts of the
reclaimed wafer knowledge and capabilities are acquires from the strategic alliance with the
Industrial Technology Research Institute (ITRI). As for the value-added activities, the raw
materials of the reclaimed wafer business are the used test wafers from semiconductor
manufacturers. The R&D activity mainly focused on production process improvement. In
production activity, K Company etches and polishes the surface of each layer of used test
wafer to produce reclaimed wafers. The quality control activity is also important since it will
affect the quality of wafer production. As for distribution, the reclaimed wafers are sold via
their same sale teams in diamond disks while the after sale service is also highly demanded
due to its highly customer-oriented nature.
Optical Glass Business
In 2003, due to increasing demand for glass lens from digital cameras and mobile phones
with photo function, K Company considered to develop non-spherical mode glass lens. The
main reason for entering lens business is that this product requires 20% of optical knowledge
and 80% of mechanical capabilities, which is highly related to K Company’s core competence,
mechanical capabilities. In 2005, they invested 500 million NT Dollars, including 300 million
NT Dollars of equipments, to establish a new factory near the Hsinchu Science Based
Industrial Park in Northern Taiwan and 13 researchers from the K Company. Moreover, the K
Company also invited a Japanese technical consultant team to help them developing the skills
on pressing and processing glass lens. There are two major stages to shape glass lenses. The
first stage is to transform the glass rod into the glass ball by using the fine precision molding
tools while the second stage is the shaping process by using the grinding wheel and other
materials. K Company has better skills and knowledge to produce the fine precision molding
tools. However, K Company is unfamiliar with the optical knowledge and its industrial
network. Since the non-spherical mold glass lens is mainly used in the camera and mobile
phone, it needs to be designed in some components with the close relationship with clients.
The marketing knowledge and sale forces from other K Company’s businesses can hardly
help the optical business unit due to different targeting customers. Furthermore, in order to
solve the problem in washing process, the K Company’s reclaimed wafer business unit sent
their technicians or engineers to the optical business unit frequently but still could not help
much as expected. This is because the non-spherical mold glass lens requires more
complicated and precise washing procedure. More importantly, the existing grinding and
cutting capabilities of K Company were found difficult to improve the yield rate of the
non-spherical mold glass lens.
As regard to the value-added activities of the optical business, the main raw material is
glass rods and the purpose of the R&D activity is reducing the defect rate. The main
production activities are transforming glass rods into glass balls and shaping non-spherical
mold glass lenses. As for distribution channel, since glass lenses must be embedded in camera
lens as well as integrated with software system, it must be certified by camera lens companies
and software companies. Therefore, the main strategy of the optical business unit is to acquire
certifications from the system companies whereas developing own brand is less important in
the non-spherical mold glass lens. Figure 2 shows the main value-added activities of the K
Company's optical business.
DISCUSSIONS
Based on the above discussions, we found that the diamond disk business has high
similarity in both core capabilities and value-added activities with the grinding wheel business.
Both business units are dependent on "material science technology capability" and "grinding
and cutting capability". Moreover, the similarity of value-added activities between the two
business units is also high due to higher number of similar activities as shown in Figure 2.
Figure 3 shows the positioning of the K Company's grinding wheel business and diamond
disk business on the capability/value-added-activity matrix. Since two business units have
higher similarity in core capabilities and value-added activities, then the diamond disk
business and the grinding wheel business in K Company are defined as highly related
diversified businesses in our framework.
Insert Figure 3 about here
Similarly, we would like to examine the similarity of both capabilities and value-added
activities between grinding wheel business and wafer business. As for the capabilities, both
two business units require similar capabilities in grinding and cutting techniques. However,
wafer business need additional knowledge as regard to satisfy the semiconductor production.
This implies that the similarity of capabilities between these two businesses is medium to high.
As for value-added activities, both businesses are different (as shown in Figure 2). For
instance, as for the raw material procurement, the suppliers of the reclaimed wafer business
are semiconductor companies, which are different from the suppliers of the grinding wheel
business. Particularly in the production activity, reclaimed wafer production should be carried
out in the clean room while grinding wheel production dose not. Finally, brand is more
important for grinding wheel products than reclaimed wafer products. In short, the similarity
of value-added activities between grinding wheel business and wafer business is medium to
low. Therefore, we conclude that the similarity of capabilities between grinding wheel
business and wafer business are relatively high but the similarity of value-added activities is
relatively low. Figure 3 provides the positioning analysis based on our matrix framework.
Since two businesses have relatively high similarity in the capabilities but relatively low
similarity in the value-added activities, K Company's wafer business is defined as
capability-related diversified business.
Finally, the critical capabilities for the non-spherical mold glass lens are mechanical
capabilities and optical knowledge. Although K Company can apply its mechanical
capabilities to cut and grind glass rod into glass ball, but such techniques can not be fully
integrated. Moreover, K Company needs to acquire optical knowledge externally, such as
controlling the thickness of the glass lens and capturing the right angle of image, and also to
produce high-quality glass lens at minimal costs. This implies the similarity of capabilities
between the optical business and the grinding wheel business is relatively low. As for
value-added activities, both businesses are quite different (as shown in Figure 2). For instance,
the raw material suppliers of grinding wheel business are different from the suppliers of
optical business. The production process of optical business is also different comparing to
grinding wheel business since it requires more optical knowledge and technical skills.
Furthermore, the glass lenses are components of the end-products, so its distribution is
different from grinding wheel business and branding activities is less important. Thus, the
value-added activity similarity between the grinding wheel business and the optical business
is also relatively low. Figure 3 provides the positioning of K Company's optical business
against grinding wheel business. Since the lower similarity in both capabilities and
value-added activities between two businesses, the optical business is defined as non-related
diversification compared to the grinding wheel business.
Based on the above analysis on our framework, the capabilities/value-added activities
diversified strategy matrix, we found three diversified strategy adopted by K Company: the
highly related diversification strategy for the diamond disk business, the capability-related
diversification strategy for the reclaimed wafer business, and finally the non-related
diversification strategy for the optical business.
CONCLUSION
From our case analysis, the determinants of K Company’s diversification strategy to
diamond disk business, reclaimed wafer business, and optical business is whether they have
relatively similar capabilities and knowledge. Unlike considering diversification from
products, markets, or, industries suggested by the previous studies (Rumelt, 1974; Berry, 1975;
Jacquemin and Berry, 1979; Christensen and Montgomery, 1981; Palepu, 1985), K company’s
diversification depends on their capabilities. In addition to capabilities, the similarity of
value-added activities also determines a firm’s diversification strategy. The higher similarity
of two businesses’ value-added activities can create higher synergy for each value-added
activity. Hence, we can derive the following propositions from our case analysis:
Proposition 1: Higher capability similarity leads to higher synergy between
diversified businesses.
Proposition 2: Higher value-added activity similarity leads to higher synergy
between diversified businesses.
Proposition 3: Firms are more likely to diversify to these businesses with higher
capability similarity than to businesses with higher value-added
activity similarity.
The main contribution of this study is to provide a conceptual framework of
capability/value activity diversified strategic matrix to analyze the firm diversification
strategy. Four types of diversification strategies can be developed, including the highly related
diversification, capability-related diversification, value-activity-related diversification, and
non-related diversification. While using the traditional diversification classification based on
products or industries, the relationship of K Company’s grinding wheels and diamond disk,
reclaimed wafer, or optical glass lens is low related diversification or non-related
diversification. It is difficult to figure out the true relationship between these businesses.
However, our case explain why K Company diversifies to diamond disk business and wafer
business, which can not be explained by the traditional product/industry classification. By
introducing the two constructs, capability similarity and value-added activity similarity, a
firm’s diversification strategy can be interpreted more appropriately. Furthermore, by using
these two constructs, we can explore how the synergy can be created via existing capabilities
and value-added activities between businesses. For instance, K Company uses its capability
on material technology as well as cutting and grinding technology, which are accumulated via
traditional grinding wheel business, to produce the diamond disks, reclaimed wafers, or
optical non-spherical mold glass lens. Our framework can shed the insight for reasons of firm
diversification, which is unable to be explained by the traditional diversification classification.
Moreover, the implication for management from our research is that a firm should consider
starting its diversification via highly related diversification strategy, which starts with the
business in the highly capability similarity and highly value-added activity similarity from the
existing business.
Nevertheless, our study also suffers some limitations. First, due to the case study method,
the measurement of two constructs, the capability similarity and value-added activity
similarity, is based on the informants’ opinions, which may be subjective. Therefore, future
studies are suggested to use objective indicators to measure these two constructs. Second, the
case of K Company only explains three types of diversification strategy in our framework. No
case for the value-added-activity-related diversification strategy was observed in this research.
Future research is encouraged to identify and to examine this type of diversification.
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