Outsourcing in Ericsson
Questions for analysis
a) What are the pros and cons of outsourcing relative to keeping production inhouse ?
Answer:
The pros and cons of outsourcing relative to keeping production in-house are as
follows:
Pros
Cons
1. It can concentrate more on the 2
other business segments: network
operations & service providers, and
enterprise solutions, especially that
it used to focus more network
infrastructure devices, not consumer
products.
2. It'll get rid of the significant profit
pressure & the loss incurred because of
the consumer products division; as
stated the losses were substantial in
2000 that sales declined by 17%.
1. By announcing the alliance with
Flextronics, its stock fell 13% due in
part to the market disappointment.
2. Selling the equipment in several its
existing facilities at book value; this
equipment is a significant part of its
fixed assets & selling it means
reducing its investments in the
market, especially it is sold at the
book value with no profit gained.
3. 4200 of its employees were
transferred to Flextronics & 6800
made redundant, that's another loss
of its human capital.
3. It seems that the high risk in the
mobile handset industry is permanent,
not temporary, as mentioned the market
was in a slowdown by 2001 due to 3
market factors: product saturation, a
longer replacement cycle, and delayed
introduction of products with next
generation technologies. Those issues
are difficult to be resolved neither in the
short run, nor in the long run. Moreover,
with the industry maturating, price
pressure was expected to intensify.
4. Its management believed the 4. All previous points badly affect its
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agreement would allow the business position & reputation in the market
return to profitability by the end of
2001, although some analysts don't
agree with them.
5. Being responsible only for product
design, marketing and R & D might
help it be more focused to be able to
study consumer needs & meet them.
That might help it in providing
customers with highly differentiated
product designs and by that, it can
maintain its market share or even
increase as the key to success in a
monopolistic competition market is
differentiation.
6. Saving $ 1.5 billion annually starting
from 2002
On the other hand, keeping production in-house although it will keep its
reputation & position to some extent in the market and will keep its equipment
(fixed assets) & staff (human capital), yet it will continue to incur great losses in
the consumer product division.
b) What are the pros and cons of outsourcing relative to exiting the business
altogether ?
Answer
The pros & cons of outsourcing relative to exiting the business altogether are as
follows:
Pros
Cons
1. It stops incurring losses, and there is
a probability of making good profits,
in case of exiting the business, it will
not make neither losses nor profits,
yet it will incur the total fixed costs.
2. It will surly affect its reputation &
position badly in the market, but exiting
the business will be even worse.
1. By announcing the alliance with
Flextronics, its stock fell 13% due in
part to the market disappointment.
2. Selling the equipment in several its
existing facilities at book value; in case
of exiting the business, it might have
been able to make a better deal to sell
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the equipment with profit that can be
invested.
3. I will keep its mobile phone market 3. It is still bothered with how to make
share even if it will fall from 10 to 7%, a breakthrough in design to keep its
yet better than 0% market share in case market share spending a lot on
of exiting the business.
market research and R& D, instead
exiting the business will allow it to
devote all its resources, human &
financial, to its other business
segments
4. It still utilizes its know-how &
experience in product design &
marketing mobile handset products.
5. Transferring 4200 of its employees to
Flextronics
&
making
6800
redundant are still better than laying
off all employees in case of exiting
the business.
c) Does Flextronics’s role pose a long- term risk to Ericsson ?
Answer
Yes, especially if Flextronics were able to work on R & D and develop similar
designs to or even better designs than those of Ericsson, taking into account that
now it owns its equipment and a good number of its human capital. Yet, there is
one case in which Ericsson can protect itself from this risk; it is to develop new
technology or make a breakthrough in product design that Flextronics can't copy
or compete with as in a monopolistic competition market, it is differentiation that
guarantees a business existence in the market & is the key to its success. In this
case, it won't pose a risk to Ericsson & will comply with current deal.
d) Although Ericsson’s arrangement with Flextronics is the most ambitious to
date, others in the industry are also turning to outsourcing . Why do you think
they are doing so now, rather than earlier in the “Lifecycle” of wireless phones?
Answer
In the normal product life cycle, there are five phases:
1. Development: where businesses spend a lot on R & D
2. Introduction: where businesses spend a lot on marketing & manufacturing the
product
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3. Growth: where businesses reach the breakeven point
4. Maturity: where businesses make profits
5. Decline: Businesses' profits start to decline due to number of reasons,
including: market saturation, rise of another better product/substitute,
appearance of new technology, etc.
The mobile handset market has reached maturity & even started to decline; so
businesses are expected to incur losses and they are trying their best to reduce
these losses. So, it is normal that some businesses will exit the market, others will
outsource, and few others will do their best to continue. In this condition, the
market isn't encouraging new entrants. With no entrants & the exit of some
businesses, the supply will be reduced leading to a rise again in prices till existing
businesses can make normal profit.
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