Ranbir Pratik Pradhan, 1811041 Flextronics International, Ltd.

Technology and Operations Strategy

Setting the context

1990s saw expansion of OEMs, especially in the electronics industry. This was coupled with
increase in propensity of outsourcing by OEMs which led to the growth of EMS. By 2000,
39.1% of communications market and 47.5% of computer electronics market was
outsourced.
The assets of top six contract manufacturing firms increased by 368.63% from 1997 to 2000
through acquisition and purchase of manufacturing assets of independent companies.
Further, inexpensive and abundant labour in emerging countries like China, growth of
mobile handset industry, decreasing margins for OEMs, also contributed to EMS’ growth.
Flextronics’ Performance
Flextronics’ market share among the top six contract manufacturing firms increased from
4.61% to 14.91% in the period 1997-2000 (Exhibit 2). Its sales and net income growth were
also above the industry average (Exhibit 1). Flextronics’ assets grew by many folds in the late
1990s referring to its strong expansion strategy.

What are the most important operational issues that Flextronics must consider as it
moves into product design?
Product Architecture
 IPR and licencing of components – Flextronics and not OEMs are now responsible
for buying copyrights and patents on different components used in the products. It
doesn’t have the benefit of cross-licensing like OEMs. Flextronics must choose
between GSM, which is more reliable but has potential copyright-infringement
issues and CDMA, which is a less mature technology, but is owned by only
Qualcomm.
 Responsibility of market analysis – Flextronics must undertake market analysis to
come up with right products, selecting the right preferences and pricing. This is
going to be a challenge for Flextronics as it has no prior experience in understanding
customers’ preferences and choices.
Process Architecture
 Efficient and responsive supply chain – Apart from risks in manufacturing processes,
Flextronics must mitigate the risks of product market failures. Customer feedbacks
need to be inculcated in the processes aimed for standardization. Processes for
platform projects need to be developed for changing consumer choices.
 Congestion in product development – Due to process variability, the lead time for
introducing product into market increases. Multiple iterations and re-works in
product designs leads to overutilization of human resources.
Organizational Structure
 Hiring Talents – Apart from other ODMs, Flextronics also need to compete with
OEMs to hire the right product designers.
 Avoiding information asymmetry – A matrix organisation is requisite for fostering an
environment for innovation. A knowledge repository can be created for better access
to information.

Do you believe that moving into product design is a good idea for Flextronics? If yes,
explain your rationale and decide whether you would grant an exclusive relationship for
Phone 4. If not, what alternate strategy would you recommend?

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Ranbir Pratik Pradhan, 1811041 Flextronics International, Ltd.
Technology and Operations Strategy

Flextronics core competency is in manufacturing at low cost. Hence, its strategy should be
directed towards obtaining cost leadership.
 Higher Profit Margin – ODM provides the highest profit margin at 11.54% as
compared to CDM (10%) and CM (6.25%) (Exhibit 3) because ODM’s product
component and manufacturing costs are relatively lower.
 Pressure to lower manufacturing costs – Flextronics lost the PDA business of Palm
Technologies to an ODM because of its inability to further reduce product cost.
 Allowing OEMs to focus on new technological development – While the low-cost
products or commodities are designed and manufactured by Flextronics, OEMs can
use their expertise for development of cutting-edge technology. As both the product
categories are different, this strategy will help prevent cannibalisation in Flextronics’
business and avoid its competition with customers.
 Shift in market trends to ODM – ODMs’ market share is estimated to grow at higher
rate as compared to CDM’s (7% in ‘02 to 18% in ’05). Moreover, it is also inferred
from the case that Flextronics’ main competitor Solectron is also adopting the ODM
model.
Thus, venturing into product design is in-line with its cost-leadership advantage.
The global handset industry is competitive in nature. An exclusive access to a low-cost
product will help the vendor create a competitive advantage. Flextronics can leverage upon
such negotiations to charge a higher price from the buyers, establish long-term contracts
etc. Further, there are already established ODMs in the market such as Hon Hai and Quanta.
An exclusivity clause can differentiate Flextronics from other competitors and help it gain
a larger market share with the vendors. But, the exclusivity deal should be conditional in
nature. For instance, selective-exclusivity in place of industry-wide exclusivity, time-bound
agreements and region-based exclusivity etc.

If you are an OEM, would you accept an offer from Flextronics for an ODM phone?  What
are the opportunities and risks for an OEM as it does business with Flextronics at each
stage?
The OEMs should keep the design and development in-house and outsource the fast-paced,
low-cost volume-based products. However, if Flextronics, through its low labour cost and a
shorter lead time for design engineering can manufacture a better-priced product, then it
should be welcomed by the OEMs. Moreover, it is better to form collaborations and
partnerships than to create a new competitor. Further, OEMs can then concentrate on
development of high margin products which require considerable investment in R&D. Thus,
the OEMs can create a cost leadership based competitive advantage by leveraging on the
core competencies of the ODMs and differentiation based competitive advantage through
in-house development of cutting-edge technologies. To avoid future competition from
ODMs, OEMs can build stronger relationships with customers and distributors.
RISKS OPPORTUNITIES

R&D Frees up resources of the OEM to let it focus on its core

competencies i.e. intensive R&D designing, sales & marketing etc.
Production Reduces direct costs through economies of scale even at low
volume
Flexible manufacturing systems for a more responsive supply chain
Improve productivity ratios of OEMs by downsizing their workforce
R&D Copyright infringement issues on the part of ODM
Production Vertical integration of OEM by Flextronics

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Ranbir Pratik Pradhan, 1811041 Flextronics International, Ltd.
Technology and Operations Strategy

Marketing Distributors and Retailers can directly engage with ODMs

ODMs can use their production prowess to create a brand identity
of their own and directly claim the market of the OEMs
EXHIBITS
Exhibit 1:
Growth Rate from 1997 - 2000
Net
Company Sales COGS Income Assets
282.67
Solectron % 293.81% 214.48% 452.95%
987.35 1002.82 1050.58
Flextronics % % 1264.61% %
387.08
Sanmina SCI Corp. % 412.58% 289.69% 557.56%
SCI Systems 44.77% - 74.55% 79.23%
385.99
Celestica % 385.50% - 340.73%
263.80
Jabil Circuit Inc. % 273.29% 177.44% 397.21%
Industry (top 6 236.06
firms) % 382.27% 270.25% 368.63%

Exhibit 2:

Market Share in Sales - 1997

7%

14% 27%

5%

6%

42%

Solectron Flextronics Sanmina SCI Corp.

SCI Systems Celestica Jabil Circuit Inc.

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Ranbir Pratik Pradhan, 1811041 Flextronics International, Ltd.
Technology and Operations Strategy

Market Share in Sales - 2000

8%

30%
21%

18% 15%
8%

Solectron Flextronics Sanmina SCI Corp.

SCI Systems Celestica Jabil Circuit Inc.

Exhibit 3:

Contract Design Original Design

Contract and and
Variables Manufacturing Manufacturing Manufacturing
Revenue/uni
t 80 80 78
Cost/unit 75 72 69
Profit Margin 6.25% 10.00% 11.54%