Internal Code: MAS5678
When Microsoft decided to enter the videogame market with its Xbox gaming console, it faced a crucial strategic decision: should it manufacture the Xbox or outsource manufacturing to a third party; and if it chose outsourcing, to whom? Although Microsoft is primarily known as a software company, it has long had a small but important hardware business selling computer mice, keyboards and joysticks under the Microsoft brand name. However, Xbox was different. This wasn’t a simple computer peripheral; it was a fully functional specialised computer, with multiple components including microprocessors, memory chips, graphics chips and an internal hard drive. Microsoft quickly decided that it lacked the manufacturing and logistics capabilities to make the Xbox itself and manage a global supply chain. After reviewing
potential suppliers, it decided to outsource assembly and significant logistics functions to Flextronics, a Singapore-based contract manufacturer. Flextronics has global sales in excess of US$13 billion and more than 100 000 employees. In addition to Microsoft, its customers include Dell, Ericsson Telecom AB, Hewlett-Packard Company, Siemens AG, Sony-Ericsson and Xerox Corporation. The company manufactures products for these companies in 28 countries. Its largest concentration of activities is in China, where it has 35 000 employees.
Microsoft had already contracted out the manufacture of computer mice to Flextronics, so it knew something about how the company operated and was happy with the cost and quality of Flextronics products. In looking for a supplier, Microsoft wanted a partner that could manufacture the Xbox at a low cost, maintain very high product quality, respond quickly to shifts in demand, and share detailed information on production schedules, product quality and inventory with Microsoft on a real-time basis. Flextronics seemed to fit the bill for a number of reasons.
a. What was the strategic advantage to Microsoft of outsourcing Xbox production to Flextronics?
b. What were the risks associated with outsourcing to Flextronics? Did Microsoft mitigate these risks? Do you think Microsoft would have been better off making the Xbox itself?
c. How did Flextronics’ industrial park strategy enable the company to respond to national changes in relative factor costs?
d. How important are web-based information systems to the relationship between Microsoft and Flextronics? What are the economic advantages of real-time information flows between Microsoft, Flextronics and Flextronics’ own subcontractor?
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