• Achieving Challenging Missions by Overcoming Constraints Confronting Subsidiary Companies: Fox-Electronic’s Rearrangement of Cost Structure and Capacity Acquisition

Abstract

An event that Fox-Electronic was forced by its parent company to take an order with projected net loss triggered George Yang, the general manager, to rethink Fox-Electronic’s business model. Fox-Electronic is constrained by strategies and EBIT targets set by Foxlink, the holding company of the Foxlink group. This loss generating order was projected to contribute to a half of Fox-Electronic’s annual sales that year. Thus, George faced an unsurmountable challenge. He was forced to create an innovative way to acquire production capacity and change cost structure such that Fox-Electronic would not only make a profit out of the order, but also create a new path of sustained growth and profitability in producing switching power supplies. After negotiating with the vice president of Foxlink group, the general manager got a green light to acquire capacity outside through outsourcing. Through this, Fox-Electronic substantially lowered manufacturing costs and enlarged its capacity. The effect of outsourcing was reflected on growth of gross margin and net profit. Based on this successful outsourcing move, George then tried to transform Fox-Electronic into a firm focusing on its core competence: switching power supply. This new business model changed the role of Fox-Electronic in the industry, i.e. from manufacturing-focused to R&D-focused. This case study combining practical and theoretic areas is analyzed from aspects of comparison of costs and risks, outsourcing and transaction cost economics.

Keywords: Cost Structure, Capacity Acquisition, Switching Power Supply, Outsourcing, Transaction Cost Economics.