Question

Two leading design firms, Astro Studios of San Francisco and Hers Experimental Design Laboratory, Inc. of Osaka, Japan, worked with Microsoft to design the Xbox 360 video game console. IBM, ATI, and SiS designed the Xbox 360 's hardware. Three firms Flextronics, Wistron, and Celestica- manufactured the Xbox 360 at their plants in China and Taiwan. a. Why do you think Microsoft works with a large number of other firms, rather than performing all the required tasks itself? b. What are the roles of transactions costs, economics of scale, economies of scope, and economies of team production in the design, manufacture, and marketing of the Xbox?

Short answer

Collaborating with specialized firms allows Microsoft to reduce transaction costs, benefit from economics of scale and scope, and harness the efficiency of team production.

Step-by-step solution

Understanding the Involvement of Multiple Firms

Microsoft collaborates with multiple firms to leverage their specialized skills and expertise, enhancing the efficiency and quality of the final product. This strategy helps Microsoft focus on its core competencies while other firms handle areas where they have specialized knowledge and experience.

Analyzing Transaction Costs

Transaction costs involve the costs associated with negotiating, monitoring, and enforcing contracts. By outsourcing to firms like Astro Studios, Hers Experimental Design Laboratory, IBM, ATI, SiS, Flextronics, Wistron, and Celestica, Microsoft minimizes these costs through established relationships and predefined agreements.

Explaining Economics of Scale

Economics of scale refer to cost advantages that a business obtains due to the scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread over more units of output. Manufacturing firms like Flextronics, Wistron, and Celestica benefit from producing in large quantities, reducing costs for Microsoft.

Understanding Economies of Scope

Economies of scope occur when a company can reduce costs by producing a variety of products. Microsoft exploits economies of scope by collaborating with firms that have diverse capabilities, ensuring the efficient design, manufacture, and marketing of the Xbox 360.

Recognizing Economies of Team Production

Team production involves activities that require the coordinated efforts of multiple people or organizations. By working with various specialized firms, Microsoft benefits from the enhanced innovation and efficiency that comes from team production, ensuring high-quality outcomes in the design, manufacturing, and marketing processes.

Key concepts

Understanding Transaction Costs

Transaction costs involve expenses related to negotiating, monitoring, and enforcing agreements with other parties. Microsoft collaborates with firms like Astro Studios and IBM to reduce these costs.

By outsourcing, Microsoft avoids spending as much time and money managing each step of the process.

These partnerships mean that Microsoft can focus on what it does best.
Such costs can include:

• Negotiation fees
• Legal costs
• Monitoring expenses

By having established relationships and predefined agreements with their partners, Microsoft benefits from lower transaction costs.

Leveraging Economies of Scale

Economies of scale are cost savings that occur when a business produces goods in large volumes. Manufacturing firms like Flextronics or Wistron produce vast quantities of Xbox 360 units.

This high volume lowers the cost per unit, benefiting Microsoft through reduced production costs.

In simple terms:

• Producing more units = Lower cost per unit
• Sharing fixed costs over more units

For example, purchasing raw materials in bulk often costs less per item compared to smaller purchases. By leveraging economies of scale, Microsoft's overall production efficiency increases.

Benefitting from Economies of Scope

Economies of scope occur when a company can lower costs by producing a variety of products together. Microsoft collaborates with firms that have diverse skill sets, allowing them to efficiently design, manufacture, and market the Xbox 360.

For instance, a firm like Flextronics may handle both assembly and some aspects of hardware design.

Details include:

• Shared resources across different product lines
• Enhanced product development

This approach not only saves money but also leads to a more cohesive and well-integrated product.

Harnessing Specialization and Team Production

Specialization refers to focusing on a narrow area of expertise. Microsoft works with firms specializing in fields like design or hardware to create the best possible Xbox 360. Each firm's focus on their unique area increases overall quality and efficiency.

Team production involves combining these specialized efforts.

Advantages include:

• Higher innovation
• Better efficiency
• Superior end product

By blending the unique strengths of each partner, Microsoft ensures that all elements of the Xbox 360 - from design to production - benefit from top-tier expertise and coordination.