Boeing 787 production network

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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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Chapter 8 Internalization

• Keith Head
• Sauder School of Business

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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 (arms 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.

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Internalization decision tree
Equity Ownership
(in)Corporation
Foreign Direct Investment
Control
Visible Hand
Long-term Contracts
Network
Licensing, Franchising, Sub-contractingoutsourc
ing
Markets
Spot Transactions
Invisible Hand
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The Case for Markets

• Range of choice (variety of options)
• Speed of choice (no up-front costs)
• Flexibility of choice (option to change)
• Adam Smiths (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

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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

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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 (McDonalds 400-page
  operating manual)

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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

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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

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Why not just internalize?

• Financing costs of ownership
• Risks of ownership
• Inflexibility
• Firm-level comparative advantage
• Spanning costs (diluted attention)
• Incompetence costs