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Boeing 787 production network

Boeing 787 production network. Titanium forgings (Russia). Landing gear (Messier, France). Wings (MHI, Japan). Final Assembly Boeing Everett,WA. Horiz. Stabil. (Alenia, Italy). Fuselage (Spirit AS, Kansas). Tail fins (Boeing, Frederickson, WA). Flaps (Boeing Australia).

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Boeing 787 production network

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  1. Boeing 787 production network Titanium forgings (Russia) Landing gear (Messier, France) Wings (MHI, Japan) Final Assembly Boeing Everett,WA Horiz. Stabil. (Alenia, Italy) Fuselage (Spirit AS, Kansas) Tail fins (Boeing, Frederickson, WA) Flaps (Boeing Australia)

  2. Chapter 8: Internalization Keith Head Sauder School of Business

  3. The “take-away” for chapter 8 • Firms must decide what things they will do themselves, and what they will “outsource” to/from other firms • Business can be carried out through • Short-term (arm’s length, “spot”) transactions • Long-term contractual arrangements • Internalization through ownership • Each option has its own problems so there is no “one-size-fits all” solution.

  4. Internalization decision tree Equity Ownership (in)Corporation Foreign Direct Investment Control Visible Hand Network Long-term Contracts Licensing, Franchising, Sub-contracting=“outsourcing” Markets Spot Transactions Invisible Hand

  5. The Case for Markets • Range of choice (variety of options) • Speed of choice (no up-front costs) • Flexibility of choice (option to change) • Adam Smith’s (1776) invisible hand: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”

  6. Where spot markets can fail • Relationship-specific investment (RSI), • ex post bilateral monopoly • The hold-up problem. • Vertical incentive conflict (CC in France) • Over-pricing • Under-promotion • Information-transfer transactions • Reputation-transfer transactions

  7. Contractual solutions • Long-term, contractually-specified prices • Two-part tariffs (e.g. $175K franchise fee to operate a McDonalds restaurant) • Intellectual property law (patents & trademarks) • Non-compete clauses • Franchising agreements (McDonald’s 400-page operating manual)

  8. When contracts fail • Lack of enforcement • Punishing firms that breach contracts • Problems in “Verifiability” • Courts must decide if breach has occurred • Unforeseen contingencies • Contracts must cover all the important things that might happen

  9. Examples of Contract-based International Business • Labatt & Anheuser-Busch • IKEA • Benetton • Boeing & Rolls-Royce • Nike and its “sub-contractors” • Coca-Cola and its’ bottler-distributors • McDonalds and its restaurant franchises • OEMs/EMS (e.g. Flextronics) and VARs

  10. Why not just internalize? • Financing costs of ownership • Risks of ownership • Inflexibility • Firm-level comparative advantage • “Spanning” costs (diluted attention) • “Incompetence” costs

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