xbox case final markidis-40997938

MGMT S-5033 Supply Chain Management Panagiotis Markidis Case Study Assignment # 1 07/21/2015

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!!Harvard!Summer!School!Programmes!!

Assignment!Cover!Sheet!!!Submitted!by:!! ! Panagiotis!Markidis!!Date!Sent:!! ! ! 07/21/2015!!Module!Title:!! ! Supply!Chain!Management!!Instructor:!! !!!!!!!!!!!!!!!!!!! Zal!Phiroz!!Date/Year!of!Module:!! 2014/2015!!Submission!Deadline:!! 07/21/2015!!Word!Count:! ! 3402!!Number!of!Pages:! ! 20!!Question:!Evolution!of!the!XBOX!Supply!Chain!!

1.! In!studying!Microsoft!as!a!company,!what!challenges!did!selling!a!product!like!XBOX!present!to!their!existing!and!established!Supply!Chain?!

!2.! In!understanding!the!video!game!market!at!the!time,!what!(if!any)!innovative!solutions!

did! Microsoft! use! in! establishing! their! supply! chain! operation! when! XBOX! was!introduced?!!How!were!these!strategies!implemented?!

!3.! Why!do!you!believe!Microsoft!chose! the!demographic!supply!chain!and!distribution!

strategy!which!was!implemented?!!

4.! From!a!supply!chain!perspective,!do!you!believe! that! the! introduction!of!XBOX!360!came!at!an!appropriate!time?!!Why?!

!“This! is! to! certify! that! the! work! I! am! submitting! is! my! own.! All! external! references! and!sources! are! clearly! acknowledged! and! identified! within! the! contents.! I! am! aware! of! the!University!of!Warwick!regulation!concerning!plagiarism!and!collusion.!No!substantial!part(s)!of! the!work!submitted!here!has!also!been!submitted!by!me! in!other!assessments!for!accredited!courses!of!study,!and!I!acknowledge!that!if!this!has!been!done!an!appropriate!reduction!in!the!mark!I!might!otherwise!have!received!will!be!made.”!


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CONTENTS Question 1: In studying Microsoft as a company, what challenges did selling a product like XBOX present to their existing and established Supply Chain…………………………….…………….p.3-6 Question 2: In understanding the video game market at the time, what (if any) innovative solutions did Microsoft use in establishing their supply chain operation when XBOX was introduced? How were these strategies implemented?.......................................................…..……………………..p.7-12 Question 3:Why do you believe Microsoft chose the demographic supply chain and distribution strategy which was implemented?..................................................................................................p.13-15 Question4: From a supply chain perspective, do you believe that the introduction of XBOX 360 came at an appropriate time? Why?...............................................................................................p.15-17 Reference List ……………………………………………………………………………….... p.17-20

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Question! 1:! In! studying! Microsoft! as! a! company,! what! challenges! did! selling! a!

product!like!XBOX!present!to!their!existing!and!established!Supply!Chain?!

!

While!studying!Microsoft’s!attempt!to!penetrate!into!a!new!competitive!and!capital!intensive!

industry,! it! can! be! easily! inferred! that! it! faced! a! lot! of! significant! challenges.! These!

challenges!involved!both!the!existing!and!the!newly!established!supply!chain.!

High!competition!

By! trying! to! enter! to! the! highly! competitive! gaming! sector! Microsoft! entered! uncharted!

territories.! Even! though! Microsoft! correctly! translated! the! drop! of! consoles! sales! as! the!

beginning!of!a!new!industry!circle(~10y)!and!foresaw!the!opportunity!to!enter!the!market,!it!

had! to!overcome!some!major! difficulties.!The!gaming! industry! through!out! the! years!has!

been!an!oligopoly!of!2H3!companies.!The!first!2!were!the!main!competitors!that!dominated!

the!industry!and!the!3rd!was!a!second!tier!competitor!that!just!completed!the!market.!In!the!

beginning!of!the!millennium!Microsoft!decided!to!fill!the!gap!that!Sega!has!left!and!become!

the!third!player!in!the!gaming!industry!(Nintendo,!Sony).!

Microsoft! had! to! face! some! fierce! competition.! Sony! had! a! huge! competitive! advantage!

having! released! its! first! gaming!console(PS1)!back! in! the!1994.!Apart! from! the!huge! fan!

base!and!the!variety!of!gaming!titles!available!for!the!Playstation!console,!Microsoft!had!to!

face! the!challenge!of! launching! its!product!one!year!after! its! immediate!competitor! (Sony!

PS2).! This! competitive! environment! forced! Microsoft! to! implement! a! fusion! of! market!

penetration!strategies!consisting!of!diversification!(Ansoff,!1957)!and!product!development!

strategies!(Krishnan!&!Ulrich,2001).!!


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Launch!Date!

The!main!objective!was!to!create!a!gaming!console!with!drastically!superior!performance.!

Moreover,! in!order! to!avoid! further! loss!of! the! competitive!advantage! it!was!essential! for!

Microsoft!to!launch!XBOX!before!Game!Cube(Nintendo)!and!establish!its!market!presence!

before!Christmas!holidays! (when!most! people!buy!games!and! consoles,! boost! of! sales).!

Thus,!in!order!to!be!ready!to!launch!before!Christmas,!Microsoft!had!to!face!the!challenge!

of!really!high!rump!up!costs!(it!needed!100.000!units).!!

Threats!to!the!old!supply!chain!

The!new!supply!chain!established!could!be!characterized!as!a!push!supply!chain!strategy!

with! an! extended! supply! chain! (Chopra! &! Meindl,! 2013).! Potential! failure! to! receive! a!

market!share!could!have!a!great! impact! in!Microsofts!brand!name!and!profit!margin.!The!

effects!could!be!imminent!even!to!the!traditional!software!supply!chain.!!

Another! challenge! that! Microsoft! faced! was! the! risk! of! entering! the! hardware! industry!

without! prior! experience! and! competencies.! This! risk! was! mitigated! by! outsourcing! the!

production!to!a!contract!manufacturing!partner(Flextronics).!

Moreover,!by!creating!a!high!performance!and!affordable!console!the!traditional!home!PC!

business! could! be! jeopardized,! threatening! the! existing! supply! chain.!But! soon!Microsoft!

realized! that! the! business! model! of! game! consoles! is! not! the! same! with! the! computer!

business!model!and!does!not!pause!a!direct!threat!to!the!PC!industry.!The!game!console!

model!is!based!on!driving!the!cost!down!and!raising!game!sales.!

High!complexity,!problem!with!logistics!

The!high!complexity!of! the!components!(over!1000parts)!along!with! the!dependencies!on!


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one! supplier! for! some! key! components! created! a! huge! logistical! problem.! The! logistics!

involve! “the! timeHrelated!positioning!or! resource,!or! the!strategic!management!of! the! total!

supply”! (Chaffey,! 2002,! p.! 345).! Taking! these! logistical! issues! into! account! Microsoft!

introduced!the!2!industrial!parks!in!Hungary!and!Mexico!in!order!to!reduce!shipping!costs!to!

the!2!main!markets!(Europe,!North!America).!

Coordination!

The! high! complexity! of! the! manufacturing! process(1000components)! and! the! high!

dependencies! on! key! suppliers! highlight! the! need! for! an! information! system! that! would!

coordinate!the!supply!chain.!This!IS!(ERP,!Intranet,!etc)!would!include!the!!

“combined*use*of*information*and*communications*technology*through*electronic*means*to*

enhance*external* and* internal* purchasing*and* supply*management* processes”.* (Chaffey,!

2002,!p.!383).!The!use!of!such!a!system!played!a!key!role!in!the!improvement!of!the!supply!

chain!of!XBOX!360.! It!allowed! the! real! time!communication!and!data! transfer!among! the!

main!stakeholders!of!the!supply!chain!and!streamlined!the!production!process.!

Knowledge!transfer!

The! inefficiency! of! the! system! used! in! XBOX! supply! chain! did! not! facilitate! knowledge!

transfer!among! the!different!parts!of! the!supply!chain! that!were!spread!around! the!world.!

Knowledge!is!a!key!resource!for!the!supply!chain!management.!

“Of!all!possible!resources! that!a! firm!might!possess,! its!knowledge!base!has!perhaps!the!

greatest! ability! to! serve! as! a! source! of! sustainable! differentiation! hence! competitive!

advantage”!(Gupta!&!Govindarajan,!p.!473,!2000).!The!documentation!of!the!knowledge!is!


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equally! important,!so! that! it!can!be!easily!shared!and! transferred1.!Creating!and!retaining!

knowledge!is!a!rather!puzzling!process.!When!it!comes!to!transferring!that!key!resource!a!

lot! of! potential! challenges! could! arise.! Despite! the! attempts! of! the! company! to! transfer!

knowledge!to!the!subsidiary!(Gupta!&!Govindarajan,!1991),!still!many!difficulties!may!need!

to! be! overcame.! For! example,! the! training! of! the! Hungarian! employees! required! human!

interaction! and! written! competency! manuals.! Another! challenge! faced! during! the!

documentation! process! was! the! language! barrier! (Sarker! &! Sahay,2003)! because! the!

manuals!had!not!only! to!be!written!down,!but!also! translated! into!Hungarian.!Things! that!

seem!simple!but!posed!serious!challenges!to!efficiency!of!XBOXs!supply!chain.!!

Cultural!differences!

Finally,! the! diversity! of! the! local! contexts! (Von! Hippel,! 1994)! along! with! the! different!

organizational!cultures!that!existed!in!the!locations/industrial!parks!may!have!hindered!the!

efficiency!of!the!value!chain.!

At!this!point!I!would!like!to!mention!that!Microsoft!had!little!time!to!adapt!to!the!new!supply!

chain!strategy.!The!push!supply!chain!strategy!was!not!efficient!and!the!cost!reduction!was!

not!achieved.!Even!though!the!primary!goal!of!Microsoft!was!to!create!a!console!that!would!

beat! the! sales! of! PS2,! in!my! opinion! the!main! objective! of! XBOX!was! to! help!Microsoft!

penetrate!the!gaming!industry,!establish!its!presence!in!the!market!and!prepare!the!ground!

for!the!next!generation!console(XBOX360).!!

!

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1 Knowledge transfer in organizations is the process through which one unit (e.g., group, department, or division) is affected by the experience of another" (Argote & Ingram, 2000).


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Question! 2:! In! understanding! the! video! game! market! at! the! time,! what! (if! any)!

innovative! solutions! did!Microsoft! use! in! establishing! their! supply! chain! operation!

when!XBOX!was!introduced?!!How!were!these!strategies!implemented?!

!

At! the! time!Sony!was!already!an!established!brand! in! the!gaming! industry.! It!had!a!huge!

customerHgamers!base!along!with!a!big!variety!of!game!titles.!Microsoft!was!not!only!a!new!

comer!to!the!gaming!industry!(Sony!entered!the!market!with!PS1!back!in!1994)!!but!had!to!

overcome!the!disadvantage!of!launching!a!competitive!to!the!PS2!product,!a!year!later!than!

PS2.!But!Microsoft!had!realized!the!industry!circle!(~10y)!and!the!drop!in!console!sales!in!

2000!and!foresaw!the!opportunity!to!enter!the!market.!

In! order! to! establish! their! position! in! the!market! and! gain! a! big! portion! of! the! sales! pie,!

Microsoft! introduced!various!supply!&! innovations! for! the!production!of!XBOX.!As!Robbie!

Bach2!mentioned,!the!company’s!ambition!was!to!change!the!way!people!think!about!video!

games.!The!main!way!of!achieving!this!goal!was!creating!a!gaming!console!with!drastically!

superior!performance.!This!constant!urge!for!delivering!high!performing!consoles!reflected!

in!the!manufacturing!process.!It!seems!like!that!Microsoft!preferred!an!alternative!strategy!

than! the! usual! one! of! cost! reduction.! In! particular,! reliability! and! available! capacity!were!

preferred!upon!cost!and!were! the!main!criteria!used! for! the!selection!process!of! the! two!

basic!components,!the!microprocessor!and!the!graphics!chip.!Microsoft!selected!Intel!as!a!

2 President of the Microsoft Entertainment and Devices Division


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microprocessor! provider! instead! of! AMD! due! to! the! fast! replenishment! options! Intel!

provided.!Furthermore,!Nvidia!was!selected!even!though!it!was!an!expensive!option!for!its’!

high!quality!graphic!chips!and!the!recognition!received!from!the!gaming!community.!

It! is! important! to! mention! that! Microsoft! established! a! very! innovative! relationship! with!

Flextronics!(contract!manufacturer)!which!will!be!analyzed!later!on.!

Manufacturing!&!Distribution!

The! major! innovation! that! Microsoft! has! introduced! in! its! supply! &! chain! was! the!

introduction!of!industrial!parks!and!the!location!selection.!The!recent!advent!of!globalization!

has!lead!many!organizations!to!offshore!or!outsource!some!of!their!operations!in!order!to!

achieve!cost! reduction,! standardization,!productivity! rise!and!operational! efficiency!boost.!

Selecting! the! right! location! is! a! rather! challenging! process! that! has! to! be! given! more!

consideration! than! perceived! (Osrhi! et! al.! 2009).! That! is! because! a! reHlocation! of! a!

business!function!or!the!creation!of!a!captive!center!might!not!only!influence!the!cost!and!

the!overall!effectiveness!of! the!business,!but!also!propose!some!organizational!changesH

amendments! (Mclvor,! 2000).!However,! during! the! decision!making! process,! the! decision!

makers! consider! the! attractiveness! of! the! location! according! to! some! criteria! while!

examining!the!potential!vendor!capabilities!(Feeny!at!al.!2005).!Companies!can!benefit!from!

the! connections,! the! external! expertise! and! the! technological! capabilities! of! a! potential!

vendor!(Niccolls,!2015).!

Various! academic! and! professional! frameworks! exist! that! can! be! used! to! determine! the!

offshoring! location.!Some!of! them!are!more! simple! like! the!A.T.!Kearney!Global!Service!

Location!Index!(2007)!that!consists!only!of!3!criteria,!whereas!others!are!more!complicated!

like!Carmel!(2003)!which!consists!of!8!factors!and!Farrell’s(2006)!which!includes!6!factors.!

(Oshri!et!al,!2009).!Most!of!them!involve!factors!such!as!cost,!availability!of!skills,!quality!of!


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infrastructures,!risks,!market!potential,!environment!and!vendor!capabilities.!

In!the!case!of!XBOX,!Microsoft!didn’t!rely!mainly!on!the!cost!reduction!strategies.!This!fact!

can! be! inferred! from! the! rejection! of! Flextronics! proposal! to!move! production! to! China3.!

Instead,! Microsoft! preferred! to! improve! the! responsiveness! of! the! supply! &! chain! and!

ensured!quick!supply!replenishment!by!introducing!2!industrial!parks!(Mexico,!Hungary,).!At!

the!time!it!seemed!the!best!strategic!fit!for!the!company’s!goals!(Chopra!&!Meindl,!2013).!

The!main! objective! of! the! selection!of! these! location!was! the!quick! replenishment! of! the!

supply.!The!Hungarian!facility!supplied!the!European!market!and!the!Mexican!supplied!the!

American!market.!In!this!way!distribution!to!all!the!major!gaming!markets!was!facilitated.!In!

order! to! meet! the! high! volume! requirements,! the! facilities! worked! 24/7.! Furthermore,! in!

order! to! improve! efficiency! and! streamline! the! supply! chain,! Flextronics! invited! selected!

vendors!to!locate!their!facilities!within!the!industrial!parks.!This!coHlocation!strategy!resulted!

in! lowering! the!shipping!costs,! the!overall!costs!due! to!economies!of!scale!and! resolving!

partially! the! problem! of! knowledge! loss! as! information! could! easily! flow! from! and! to! the!

vendors.!

But!apart!from!the!innovative!strategies,!the!selection!of!these!locations!was!advantageous!

for!the!conventional!reasons!too.!Flextronics!and!Microsoft!took!into!consideration!the!lower!

labor! cost! in!Mexico! and!Hungary,! as!wages! in!Hungary! for! example! can! be! even! 80%!

lower! than! the! European! averageOECD,2015).! Companies! are! usually!motivated! by! the!

possibility! to! profit! from! lower! wage! standards! of! foreign! countries! (Stringfellow! et! al.,!

2008).!As!a!result!of!the!relatively!low!level!of!wages,!production!cost!was!smaller!in!these!

areas.! Moreover,! in! Hungary! corporate! taxes! are! inferior! and! certain! tax! breaks! and!

3 It is important to mention that penetration to the Chinese market was not achieved until the end of 2013 because the Chinese government had banned the use of gaming consoles that were not produced from Chinese companies.


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incentives!are!provided! to! the!businesses.!Cost!savings! from! local!sourcing!opportunities!

(industrial! parks! with! vendors)! were! achieved.! Finally,! real! estate! costs! (50%lower! in!

Hungary)! and! other! costs! such! as! electricity,! telecommunication,! training,! internet! costs,!

even! though! are! not! clearly! stated! in! the! case,! are! lower! in!Hungary! (OECD,2015).Cost!

motives!also!led!Flextronics!to!move!the!volume!production!from!Hungary!to!China.!

The! accessibility! was! an! important! factor! in! the! location! selection! process.! Logistical!

considerations!were!critical.!That! is!why!apart! from!concentrating!most!parts!of! the!chain!

within! the!parks,! the!areas!selected!where!characterized!by!high! level! infrastructures!and!

proximity!to!airports!and!highways.!Finally,!the!fact!that!other!western!companies,!such!as!

Audi!and!Coloplast!in!Hungary,!were!located!in!the!selected!areas!played!an!important!role!

in!the!decision,!as!companies!tend!to!mimic!the!practices!of!other!highly!visible!firms.!

The! agreement! with! Wistron! Corp.! in! 2002! was! made! in! order! to! take! off! part! of! the!

manufacturing!dependencies!to!Flextronics.!

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Procurement!

Microsoft!and!Flextronics!adopted!a!very!innovative!procurement!strategy.!They!divided!the!

processes!into!3!categories.!The!first!involved!the!commodity!parts!which!were!purchased!

in! high! volumes! directly! from! Flextronics! (used! many! of! these! parts! for! other! OEM!

products).!The!second!involved!custom!made!parts,!such!as!the!controllers.!In!these!cases,!

Microsoft!signed!the!contract!with!the!vendors!and!Flextronics!placed!the!order.!Finally,!the!

third! included! essential! parts! such! as! microprocessors! and! graphic! chips! that! were!

purchased!by!Microsoft!and!send!to!Flextronics.!

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Distribution,!warehousing!&!After!sales!

The!distribution!of!the!hardware!was!not!something!innovative!apart!from!the!fact!that!the!

industrial! parks! were! created! in! order! to! lower! shipping! costs! and! that! the! parks! were!

located!close!to!target!markets.!There!was!a!goal!for!product!launch!during!the!Christmas!

holidays!(2001)!before!the!boost!of!sales.!Also!for!the!hardware!the!retailers!network!used!

was!the!usual!(Walmart,!Best!Buy,!Toy!R!US!!etc)!and!!the!warehousing!was!facilitated!by!

the! industrial!parks.! In!2001!another!essential!part!of! the!value!chain!was!added!with! the!

Solectron!agreement!(after!sales!support!that!improved!CRM).!

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Games/software!supply!chain!

Creating!games!for!the!consoles!was!an!essential!part!of!the!overall!business!strategy!that!

Microsoft! adopted! for! XBOX.! The! two!most! important! factors! for! the! profitability! were! a)!

driving!costs!down!and!b)!selling!more!games!while!maintaining!the!high!quality!hardware!

(games!have!a!bigger!profit!margin).!

Regarding! the! overall! supply! chain,! Microsoft! identified! the! differences! between! the!

computer!business!model!which!is!about!maintaining!a!relative!stable!cost!even!though!the!

performance!is!improved!whereas!in!the!games!console!business!model,!as!the!production!

line!matures!the!overall!cost!drops.!

So! the! parallel! supply! chain! of! games,! which! worked! as! complementary! of! the! overall!

supply!chain!of!XBOX,!had!to!be!extremely!efficient! in!order!to!cover!the!loss!(~100$!per!

unit)of!the!hardware.!

Since!creating!games!was!the!profit!generating!process,!Microsoft!combined!the!inHhouse!


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capabilities!that!it!had!from!the!PC!gaming!development!with!the!licensing!strategy!of!thirdH

party!games!that!would!pay!royalties!per!unit.!In!particular,!Microsoft!encouraged!third!party!

developers! to!work!on!XBOX! titles!and!was! initially!considering! to!wipe!out! the! royalties.!

Also!in!order!to!further!facilitate!the!software!development!XBOX!was!running!Windows!NT!

kernel,!an!operating!system!similar! to! the!one!most!computer!programmers!were!working!

on(Windows)(Glassmeyer,n.p.).! Moreover,! Microsoft! recruited! a! number! of! game!

developers!and!took!over!other!game!companies!(Bungie!Software!Products!Corp.!&!Digital!

Anvil!etc).!

The! typical! value! chain! created! was:! publishersHgame! developersHconsole!manufacturerH

distributorHretailer.!

!

The! important! innovation! though! in! the!software!supply! chain!was! the! introduction!of! the!

“XBOX!live”!web!service!which!allowed!the!online!purchase!of!games!and!created!a!digital!

distribution!network.!That!was!the!starting!point!of!the!digital!business!strategy!that!would!

eventually! lead! to! the! XBOX! 360! online! communities.! It! is! important! to! take! into!

consideration! that! this! service! could! not! rich! at! the! time! being! its! full! potential! since!

broadband!internet!was!not!available!to!most!parts!of!the!world!back!in!2002.!

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!

Question!3:!Why!do!you!believe!Microsoft!chose!the!demographic!supply!chain!and!

distribution!strategy!which!was!implemented?!!

!

The!selection!of!this!particular!demographic!was!not!a!result!of!a!random!choice!but!more!

likely! a! strategic!move.! Traditionally! the! target! group! of! the! gaming! sector! has! been! the!

youth!and!in!particular!the!ages!of!8H14y.!This!was!a!result!of!the!limited!supply!of!gaming!

titles!along!with!the!low!quality!of!the!graphics!and!gaming!experience!provided.!!

Microsoft!very! insightfully!understood! the!potential.!There!was!a!huge!pool!of!people! that!

have!been!nurtured! through! the!use!of! technology!and! through!gaming.!The!youth!of! the!

80s!and! the!90s!are!now!young!adults! that!can!potentially!be!gamers.!By!providing!high!

performance!gaming!consoles!and!high!quality!games!with!vivid!graphic!interface!Microsoft!

achieved! to! retain! a! new! demographic! segment! of! consumers.! The! users! receive! an!

enhanced!gaming!experience.!As! it!has!become!evident! the!consumer!base!has!matured!


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and!the!average!gamer!is!not!anymore!a!child!but!a!young!adult.!The!age!of!the!average!

gamer! is! approximately! 28! years! and! as! a! result! has! more! disposable! income.! The!

generation!X!teenagers!of!the!90s!are!now!young!professionals!which!are!able!and!willing!

to! purchase! the! new! consoles! and! games.! The! table! above! provides! evidence! of! the!

immense!customer!pool!of!young!adult!gamers.!According!to!the!2001!report!of!the!Bank!of!

American! securities! there! are! around! 30million! gamers! between! the! ages! of! 25! to! 30!

accounting!more!than!all!the!other!segments!combined.!!

!

Microsoft! identified! this! particular! target! audience! and! tried! to! catch! the! attention! of! this!

demographic!by!providing!the!best!gaming!experience!with!vivid!graphics!and!of!course!by!

leveraging!its!success!through!the!exploitation!of!the!well!established!brand!name!it!had!in!

the!software!industry.!Eventually,!with!this!strategy!Microsoft!achieved!to!gain!a!very!large!

percentage!of! the!mass!market! that! is!willing! to!spend!much!money!on!games,!compete!

directly!with!Sony!in!that!market!and!force!Nintendo!to!engage!with!games!destined!to!the!

children!demographic!group.!


15

!

!

!

Question!4:!From!a!supply!chain!perspective,!do!you!believe!that!the!introduction!of!

XBOX!360!came!at!an!appropriate!time?!!Why?!

!

!

After! 2001! the! game! industry! changed! radically.! The! industry! has! grown! due! to! various!

factors!but!the!hardware!income!has!been!constantly!declining.!Microsoft!seemed!to!have!

adapted!to!the!new!conditions!and!seized!the!opportunity!to!further!develop.!Back!in!2001!it!

was!a!company!trying!to!penetrate!the!market!with!a!high!quality!product!and!without!a!lot!

of!cost!concerns.!Now!Microsoft!launched!a!product!well!in!advance!of!the!competitor.!The!

momentum!was!appropriate!because!this!time!it!had!already!been!established!and!enjoying!

a!big!market!share.! It!had!a!better!understanding!of! the!market!needs!and!had!already!a!

solid!network!of!retailers!and!vendors!around!the!globe.!

!Technology!

The! technological! evolution! has! played! an! important! role! to! the! supply! chain! of! the!

XBOX360.!The!broadband!internet!was!now!available!and!it!unlocked!immense!capabilities!

for! online! gaming! allowing! gaming! to! become! a! “big! part! of! the! home! entertainment!

culture”.!

Strategic!shift!

The!rise!of!the!online!gaming!allowed!Microsoft!to!focus!on!its!core!capability,!the!software!

development(games).!The!software!sales! incrementally! increased! from!2001! to!2005!and!

Microsoft!tried!to!benefit!from!this!rise.!The!new!strategy!involved!cost!considerations!that!


16

resulted!in!the!relocation!of!the!manufacturing!process!to!China.!The!supply!chain!strategy!

was! not! anymore! responsive! but! more! efficient.! Also! by! adding! one! more! EMS!

supplies(Celestica)! it! further! reduced!dependencies! in! the!supply!chain.!Finally,!Microsoft!

feeling!comfortable!with! its!prior!experience! implemented!a!global!strategy!and!planned!a!

global!launch!of!the!new!console.!

Digital!Business!Strategy!

!

Furthermore,!Microsoft!benefited!from!the!rise!of!the!online!gaming!culture!and!the!maturity!

of! the!consumer!base!and!found!a!chance!to! implement! its!new!digital!business!strategy.!

This! involved! the! creation!of! different! online! subscription! packages! that! allowed!users! to!

play! online! games! and! purchase! games! from! the! XBOX! live! platform.! One! other! major!

innovation!that!Microsoft!introduced!was!the!freemium!business!strategy.!This!involved!the!

free!download!of!the!game!which!has!inHapp!purchases!that!led!to!surprisingly!high!profits.!!

Information!Systems!&!Risk!management!

!

!As! it! became! evident,! Microsoft! needed! to! consider! organizational! restructuring,!

standardization,!documentation!and!the!integration!of!an!IT!management!platform!in!order!

to!avoid!knowledge! loss!before!starting! the!production!of!XBOX!360.!Actually! in!order! to!

mitigate!these!risks!sourcing!and!knowledge!strategies!should!be!combined!(Quinn,!1999)!

and!outsourcers!should!enable!the!creation!and!exploitation!of!intellectual!capital!(Willcocks!

et! al,! 2004)! from! all! the! members! of! the! value! chain! (vendors,! manufacturing! plants,!

distribution! centers! etc).! It! seems! like! that! for! the! new! XBOX!Microsoft! used! some! risk!

management! software! as! PMbok! in! order! to! “to! identify! potential! risks! in! a! range! of!


17

situations!and!then!take!actions!to!minimize!risk”!(Chaffey,!2002,!p.599).!

Moreover,! a! new! ERP! system(Rosetta! Net)! was! used! that! streamlined! the! production!

process! and! the! supply! chain! and! improved! the! coordination! issues! that! the! previous!

supply!chain!had.!Its!success!was!based!on!the!constant!exchange!of!information!in!a!real!

time!between!the!parts!of!the!value!chain.!!

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