Microsoft - Outsourcing Xbox
Microsoft, from its inception, has been known for its software, especially its Windows platform. It has changed the way we operate computers and through its software, has made the computer user-friendly and very efficient. Microsoft, however, does not want to only specialize in the software department. They have thus expanded their excellence in other departments such as gaming, music and hardware.
When Microsoft entered the video game console market, they were faced with a dilemma: whether to manufacture the Xbox themselves or outsource it to a third company. Microsoft ultimately chose to outsource the production to Flextronics. Flextronics’ 'industrial park' strategy is what allowed it to manage its supply chain, making the production of Xbox more efficient and cost effective. They also had factories around the world, which were all under the centralized information system, s they could shift the production from one country to another if necessary for optimal profitability.
1. What is the strategic advantage to Microsoft of outsourcing Xbox production to Flextronics?
Microsoft has a lot to gain from outsourcing the Xbox production to Flextronics. Microsoft’s core competency is producing software, not hardware. So by the Law of Comparative Advantage, it is best for Microsoft to let someone, who is good at producing hardware, produce the Xbox. Flextronics not only offers their expertise in hardware, but also their network of connections worldwide which reduces production costs, thus making the market value of Xbox lower and more affordable. Because of Microsoft’s web-based information system, they are able to share information with Flextronics real-time and therefore Flextronics can manage the amount of Xbox production, according to Microsoft’s demand.
2. What are the risks associated with outsourcing to Flextronics? Has Microsoft mitigated these risks? Do you think Microsoft would be better off making Xbox itself?
The risk Microsoft has when outsourcing via Flextronics is their sharing of pertinent and “secretive” information about their products. Sharing vital information like that can result in creating a competitor out of Flextronics rather than maintaining a partnership. They have mitigated these risks by patenting their products and forcing Flextronics into an agreement that allows Microsoft to handle the overall management of some 40 suppliers for the Xbox, while Flextronics only handles the supply of commodities. With Flextronics’ expertise, Microsoft would not be better trying to produce Xbox themselves. ...