Memo 06: The Smile Curve
Smile - your margins might thank you.
I worked with a manufacturing business that, for years, had struggled to generate a genuine cashflow profit. They had great product design, invested heavily in R&D, sold exceptionally well, and had a two-year waitlist for their bespoke products.
So why weren’t they profitable?
Put simply, they were lousy at manufacturing. They’d never managed to run an efficient plant, had failed to achieve economies of scale, and were trapped in a cycle of cash-flow strain and production inefficiency. In fact, the more they sold, the more money they lost!
We encouraged them to outsource manufacturing - outsource it to specialist manufacturers who excel at it and become a lean, virtual manufacturing company. The idea was to leverage their true strengths: product design, brand recognition, sales, and after-sales service, while shedding the unprofitable, capital-intensive part of the business. They are in the process of doing this and have not only reduced their total costs, they have significantly de-leveraged the financial risks in the business.
This is exactly what the Smile Curve is about: moving away from the low-margin middle and concentrating on the high-value ends.
The Smile Curve, in plain English
Although we intuitively knew it, the Smile Curve as a formal concept was recently introduced to us by a successful business owner [1]. Stan Shih, founder of Acer, first sketched the curve in the early 1990s to explain why industrial ecosystems were evolving toward differential value capture. [2]
Put simply, it’s about focusing on the activities your customers value most and outsourcing those they value least. Picture a smile-shaped curve: at the two high ends sit the tasks that create the greatest value - innovation, design, branding, customer relationships. In the dip of the smile are the routine, lower-margin activities - production, administration, logistics. The insight is to invest time and capital where you deliver unique value, and partner or automate the rest.
Part of the chain Typical activities Relative value
Up-stream (left arc) R&D • design • patents • advanced engineering High
Mid-stream (trough) Procurement • mass production • assembly Low
Down-stream (right arc) Branding • distribution • service • ESG storytelling High
Putting the Smile Curve to Work
It’s one thing to admire the theory, another to make it shape your decisions.
First - lighten the effort in the middle. The trough is where good ideas get stuck in operational gravity. Start by finding lean partners - contract manufacturers or service providers who already run efficient, high-mix lines. They’ve spent years perfecting the process, so you don’t have to. And they will likely have economies of scale you don’t.
Then - double down on the ends. This is where the benefits accrue: the high-value arcs of your Smile Curve.
Design & Innovation: Your ideas are the attractor. Keep R&D close, protect your IP, and never outsource the thinking.
Brand & Marketing: Story, scarcity, identity - that’s where pricing power lives.
After-Sales Service: The sale isn’t the end; it’s the beginning of a relationship. Maintenance, upgrades, and support turn one-time buyers into lifelong customers.
ESG Narrative: Sustainability isn’t a compliance line anymore, it’s part of the brand story. When it’s genuine, it differentiates.
Spend your time and money here, on the upward arcs of the Smile Curve, and you’ll notice something simple but powerful: margins thicken where meaning does.
This concept isn’t just theoretical. It’s playing out in boardrooms every day.
When companies get the Smile Curve right, they stop trying to do everything themselves and instead double down on the parts of the business customers truly value - design, innovation, and brand experience - while handing off the low-margin, scale-dependent activities to trusted partners.
Dyson: Designing the Smile Curve
In the early 2000s, Dyson faced a decision that tested its engineering-first DNA. The company’s vacuum cleaners had become global icons of design and performance, but manufacturing in the UK was expensive and slow to scale.
So, in 2002, Dyson shifted production to Malaysia, a move that reportedly cut costs by around 30%. The headlines at the time focused on “offshoring,” but the real story was strategic focus. Dyson didn’t abandon Britain; it re-centred there, keeping design, R&D, and IP in-house while letting contract manufacturing partners handle volume.
That pivot turned out to be a masterclass in the Smile Curve: exit the low-margin trough, invest in the ends: design, brand, and customer obsession. It’s a playbook that has allowed Dyson to keep innovating across vacuums, fans, and now haircare, without diluting its premium positioning.
Breville: From Factory Floor to Design Powerhouse
Closer to home, Breville tells a similar story, one rooted in Australian design and global ambition. Once known mainly for its local appliance manufacturing, Breville quietly reinvented itself as a design-led global company. Today, its products are imagined in Sydney studios and built through a network of manufacturing partners across Asia, Mexico, and Southeast Asia.
The shift wasn’t about cutting costs for their own sake; it was about moving up the Smile Curve. By focusing on innovation, product experience, and supply-chain orchestration, Breville has turned what used to be a hardware business into a lifestyle brand. In FY25, revenue climbed roughly 10% to A$997.5 million, while net profit rose about 16%, showing the compounding power of high-value activities.
Breville’s annual reports now read like a design manifesto: a company that knows its edge isn’t in making metal boxes, it’s in making people love them.
How to Diagnose Your Smile Curve.
If you’re deciding what to keep and what to let go, here’s a simple way to think about it.
Step 1: Map your world- Sketch your entire value chain - every activity from idea to customer support. Don’t overthink it; just get it down.
Step 2: Score each one. Ask yourself, where do we actually make margin? Where do we genuinely stand out? What do our customers value about us?
Step 3: Spot your trough. Every business has one. The essential but commoditised work that adds little perceived value. That’s your opportunity to outsource, automate, or redesign.
Step 4: Reinvest the savings. Don’t just cut costs; redeploy them into design, brand, and customer experience - the activities that stretch the smile upward again.
And this applies to services too. Whether you’re in law, accounting, or consulting, your smile ends are thought leadership, client relationships, and reputation. The trough? Routine compliance, document prep, the work that scales better through process than people.
The goal isn’t to shrink your business, it’s to bend your own Smile Curve upward, so more of your time and margin sit where customers actually feel the value.
Your Personal Smile Curve
And it applies to individuals too. For many of us it is helpful to examine our own days. Which parts create real strategic value, and which parts just move papers (or pixels)? For most professionals - partners, founders, entrepreneurs - the real shift from working in the business to working on it happens when we start designing your week like a Smile Curve.
The Smile Curve is more than an operational framework - it’s a map for value creation. For investors, it clarifies why some businesses compound faster: they sit at the high-value edges of their curve and outsource the middle.
The same principle applies to portfolio construction and professional life alike. Alpha is harvested when we concentrate time, capital, and talent on the parts of the system that customers, markets, and people actually value.
In every cycle, the winners are those who know where the real smile lies and align their capital accordingly.
[1] With thanks to Dave at Apollo Engineering.
[2] Shih, S. (1994). Measuring the Value Added Along the Smile Curve. Acer Group Strategy Papers.