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Case 3

Apple outsources production to factories in China to benefit from lower costs, rapid design changes, and flexible scaling. However, this also faces criticisms of moving jobs overseas and potential privacy leaks. Specialized assets like manufacturing equipment help lower Apple's costs and differentiate its products. Apple protects these assets by restricting information sharing between teams, enforcing strict security protocols at factories like Foxconn, and including penalties in supplier contracts. Apple is more vertically integrated than competitors like Microsoft by directly investing in suppliers' production equipment and requiring exclusivity, which provides technological advantages that are difficult for others to match.

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1K views3 pages

Case 3

Apple outsources production to factories in China to benefit from lower costs, rapid design changes, and flexible scaling. However, this also faces criticisms of moving jobs overseas and potential privacy leaks. Specialized assets like manufacturing equipment help lower Apple's costs and differentiate its products. Apple protects these assets by restricting information sharing between teams, enforcing strict security protocols at factories like Foxconn, and including penalties in supplier contracts. Apple is more vertically integrated than competitors like Microsoft by directly investing in suppliers' production equipment and requiring exclusivity, which provides technological advantages that are difficult for others to match.

Uploaded by

Sheeba
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1 of 3

1) What are the advantages and disadvantages to Apple outsourcing its production to
factories in China?

Advantages to Apple outsourcing its production to factories in China are:

In Apple’s case, strategic outsourcing directed toward improving its competitive advantage and
profitability in its current business and industry. Apple found that using Foxconn factories in
China to assemble its iPhones enabled it to not only benefit by lower costs, but to also much
more rapidly incorporate design changes and scale up production. Moreover, China’s advantage
was not only in assembly; it offered advantages across the entire supply chain.
It also, helped Apple to be:
• more cost efficient,
• faster to market,
• and more flexible in scale.

Disadvantages to Apple outsourcing its production to factories in China are:


• Facing criticisms about failing to support employment in its home country.
• There could be possible leak of private information.
• Transaction costs: Possible opportunistic behavior after the investment is made [Holdup
Problem].
• Due to its production factories in China , Apple’s ethical position came under increased
scrutiny in 2010 when it was widely publicized that at Foxconn’s biggest factory in shenzhen,
which assembles apple’s iPhone, 11 workers had committed suicide by jumping off buildings
within a period of 12 months
2 of 3

2) Do specialized assets play a role here? If so, how does Apple protect its specialized
assets?

Yes, specialized assets play a role here. Companies like Apple does invest in specialized assets
because these assets allow them to lower their cost structure or to better differentiate their
products, which facilitates premium pricing. Apple invests in specialized equipment to lower
manufacturing costs or it might invest in an advanced technology that allows it to develop better-
quality products than its rivals. Thus, specialized assets can help a company achieve a
competitive advantage at the business level. Apple’s decision to invest in production
equipment for its suppliers is a prime example.

Apple protects its specialized assets by implementing the following rules:

• Apple has strict rules that prevent engineers from discussing the projects they are working
on with engineers from other units to prevent information flows between engineering units and
so protect product secrecy.
• Apple has also developed uncompromising rules that govern how its outsourcers should
protect product secrecy. To keep apple’s business, outsourcers like Foxconn go to extreme
lengths to follow Apple’s rules and follow stringent security guidelines in their manufacturing
plants to keep the details of aApple’s new products secret. For example, Apple dictates that the
final product should not be assembled until as late as possible to meet its launch date; so, while
workers learn how to assemble components, they have no idea what collection of components
will go into the final product. Also, Foxconn strictly controls its factories to make it easier to
enforce such rules.
• Apple’s contracts include a confidentiality clause with stiff penalties in the event of a
security breach .
3 of 3

3) Why is Apple more vertically integrated than its competitors?

Apple’s vertical integration moves give it a technological advantage that is difficult for its
competitors to match. It is more vertically integrated than its competitors like Microsoft
because it spends billions of dollars buying production equipment that is used to outfit new and
existing Asian factories that will be run by others (an example of quasi vertical integration), and
then requires those factories to commit to producing for Apple exclusively. By providing the
upfront investment, Apple removes most of the risk for its suppliers in investing in superior
technology or scale. Although Microsoft tried to imitate some of the individual integration
strategies of Apple, the success was far way because it lacks both the tightly woven ecosystem
that Apple has developed around those strategies, and its decades of experience in implementing
them.

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