Arab Open University

Faculty of Business Studies

 Section: 209
 1. Question 1 :
High quality isn’t enough anymore! Nowadays customers became increasingly demanding, this
has stimulated worldwide companies to compete with high quality and low cost simultaneously
to maintain their performance. Hon Hai precision industry that operates nationally under the
Foxconn name has managed to compete effectively by moving production to china, using an
austere headquarters and increasing its economies of scale.
In the first place, moving its manufacturing to low-cost areas has contributed to Hon Hai’s low-
cost strategy. In china the labor flexibility offers producers high levels of numerical, pay and
working time flexibility. The labor wages are low about 2$/hour so it employs about 1.2 million
workers there. Also, it employs thousands of migrants that are forced to live in dormitories
supplied by the factories because of the hukou household system. They are supposed to work
for excessive hours and are given rare days off. 
Secondly, having a five-storey factory as its headquarters have decreased the administration
costs. Instead of renting a luxurious building they decided to hold up their annual meeting in the
canteen of a factory in Taiwan which allows them to save some money. Its R&D department is
concentrated in Taiwan mainly where the costs are relatively low. Moreover, it tends to deliver
directly to customers based on demand instead of stocking products in inventories which adds
up to the cutting-costs strategy.
Finally, not selling finalized products under their own name aided in cutting costs. Hon Hai
only sells components to top tier brands as apple thus it saves expenditure on branding and
marketing. In addition, it has the capacity to supply considerable components quickly and the
ability to negotiate lower prices from suppliers so it wins mass assembly contracts. This latter
fact leads to an increase in its economies of scale where the prices are reduced per unit.
At last, Hon Hai precision industry has managed to maintain its low costs by changing the
locations of manufacturing to low-cost areas, reducing the administration costs and increasing
its economies of scale. The main concern remains in whether this strategy is enough to maintain
its growth.
 2. Question 2:
Would any competitor be able to duplicate Hon Hai’s business strategy? Hon Hai has managed
to cover the sources of any waste of money. Targeting the top brands as potential customers,
adopting the joint design and coping with new challenges are the key competencies that obstruct
copying its strategy.
First of all, Hon Hai goes after top brands that are leading in their industry. Their strategy of
cutting costs depends on these brands to be accomplished. This level of connections and trust
between Hon Hai and these brands needs years of hard work to be reached. Even if these brands
started working with competitors to it, but still they aren’t reliable.
Secondly, Hon Hai was seeking joint design to develop its R&D function rather than trying to
conduct it on its own. This fact has made it capable of perceiving its strategy as for the client is
responsible for the R&D costs while other electronic companies tend to conduct the R&D on
their own.
Finally, the diversification plan adopted by Hon Hai is maintaining its rank. Terry Gou is trying
to enter new fields building on his existing expertise. Whenever Hon Hai senses that a certain
company isn’t capable of doing something, it directly capitalizes the situation even if this means
buying the company. Having the capacity to succeed in several domains without increasing the
costs of training staff is something other companies fail to do.
To sum up, Hon Hai’s competencies has made it difficult for competitors to copy its strategy.
The attempt done by this company to diversify its mode of action distinguishes it from its
competitors
3. Question 3:
How would a company compete effectively? This is what operation management is about. It
offers the company the ability to differentiate itself from its competitors based on five key
objectives: quality, speed, flexibility, dependability and cost.

First, quality is about doing things right and meeting the specifications to satisfy customers’
needs. The customer evaluates the product based on its ability to perform as it is expected to.
So, the company should follow the quality method management to compete effectively. In this
way it tends to control its costs by managing the sources of waste. Starting with prevention
costs of prohibiting the occurrence of problems in the first place. The appraisal costs in terms of
inspecting samples and controlling waste of time. The external and internal failure costs as
redesigning, repairing problems and loss of customers.

Secondly, the speed refers to the reasonable time of supplying customers’ needs. Customers set
time expected to be served within from the instant they order a product. The waste of time can
result in increasing the fixed cost due to low productivity. Moreover, low speed manufacturing
can cause the company to stock its products which will increase the costs of inventory. In
addition, customer dissatisfaction will affect the demand rate and thus it will not be able to
achieve economies of scale. (https://laserphotonics.com/app/speed_FT.html)

Third, the flexibility is about facing new situations efficiently in case anything went wrong. It
falls within two categories: machines’ flexibility and routing flexibility. The lack of this
characteristic can increase the production costs, reduce the quality, lessens production rate and
increase the labor costs. Also flexibility can affect dependability, therefore it might cause an
increase in the costs of production in terms of increasing the cost per unit.
(https://en.wikipedia.org/wiki/Flexible_manufacturing_system)

Fourth, dependability resembles the ability of the company to meet deadlines while meeting
customers’ needs. When operators lack the sufficient information about changes occurring in
terms of plan and asset changes their productivity level decreases. Moreover, not repairing
equipment results in poor performance so the production’s capacity decreases. The company
will lose its customers and another costs will appear as prevention costs, maintenance cost and
internal failure costs.

At last, the cost points out the ability of the company to supply its customers with what they
consider a good deal of money. This objective not only affects the company’s profitability but
also improves the productivity of the company by controlling the use of inputs in a way that
cuts out the overall waste of the operations. Furthermore the cost is influenced by the four V’s
(variety, volume, variation and visibility) which can aid in the cutting costs strategy if managed
properly.
1. References:

 China News
https://www.chinatechnews.com/2008/12/30/8369-hon-hai-to-cut-costs-with-
employee-relocation-in-china
(17-3-2017)
 Chiang, M., 2014, A Study of the Strategies of Hon Hai Precision Industry Co.,
Ltd., Deepknowledge
 Emerson Process Management
http://www.emersonprocess.cn/siteadmincenter/PM%20Central%20Web
%20Documents/EAMREF_BusB.pdf
(21-3-2017)
 Facing Finance
http://www.facing-finance.org/en/database/cases/working-conditions-in-foxconn-
factories-in-china/
(17-3-2017)
 Foxconn Group
http://www.foxconn.com/GroupProfile_En/VisionandStrategy.html
(18-3-2017)
 Harbert, T., 2017, Hon Hai concerned with its own success, Electronics360
(https://www.electronics360.globalspec.com)
 Johnston, R., and Slack, N., 2003, Operations Management, 8 th Edition, Pearson
Education Limited, Harlow, UK, Ch2 p:36-66
 Laser Photonics
https://laserphotonics.com/app/speed_FT.html
(20-3-2017)
 Van Agtmael, A., 2008, The Emerging Markets Century: How a New Breed of
World-Class Companies Is Overtaking the World, Simon and Schuster, 384 pages
 Van Liemt, G., March 2016, Flexible workforces and low profit margins:
electronics assembly between Europe and China, ETUI, Brussels, Chapter 2, p:45-
66
 Wikipedia
https://en.wikipedia.org/wiki/Flexible_manufacturing_system
(20-3-2017)
 Wordpress
https://ehsalem.wordpress.com/2014/05/29/operation-management-objectives/
(21-3-2017)
 Yeung, H., 22 April, 2016, Strategic coupling, Cornell University Press, Ithaca and
London, chapter 4, p:84-94