Page 283 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes the norm. If prices are under pressure, the only way Boeing can continue to make a profit
is if it also drives down its cost structure. With this in mind, in the early part of the 1990s,
Boeing undertook a companywide review of its make or buy decisions. The objective was
to identify activities that could be outsourced to subcontractors, both in the United States
and abroad to drive down its production costs.
While making these decisions, Boeing applied a number of criteria. First, Boeing looked
at the basic economics of the outsourcing decision. The issue here was whether an activity
could be performed more cost-effectively by an outside manufacturer or by Boeing.
Secondly, Boeing considered the strategic risk associated with outsourcing an activity.
Boeing decided that it would not outsource any activity that it deemed to be part of its
long-term competitive advantage. For example, the company decided not to outsource the
production of wings because it believed that doing so might give away valuable technology
to potential competitors. Thirdly, Boeing looked at the operational risk associated with
outsourcing an activity. The basic objective was to make sure that Boeing did not become
too dependent on a single outside supplier for critical components. Boeing’s philosophy
is to hedge operational risk by purchasing from two or more suppliers. Finally, Boeing
considered whether it made sense to outsource certain activities to a supplier in a given
country to help secure orders for commercial jet aircraft from that country. This practice
known as offsetting is common in many industries. For example, Boeing decided to
outsource the production of certain components to China. This decision was influenced
by the fact that current forecasts suggest that the Chinese will purchase over $100 billion
worth of commercial jets over the next 20 years. Boeing’s hope is that pushing some
subcontracting work in China’s way will help it gain a larger share of this market than its
global competitor, Airbus.
One of the first decisions to come put of this process was the decision to outsource the
production of insulation blankets for 737 and 757 aircraft to suppliers in Mexico. Insulation
blankets are wrapped around the inside of the fuselage of an aircraft to keep the interior
warm at high altitudes, Boeing has traditionally made these blankets in-house, but it found
that it can save $50 million per year by outsourcing production to a Mexican supplier.
In total, Boeing reckons that outsourcing cut its cost structure by $500 million per year
between 1994 and 1997. By the time the outsourcing is complete, the amount of an aircraft
that Boeing builds will have been reduced from 52 per cent to 48 per cent.
Questions
1. What are the main problems Boeing has been facing due to intense competition
during 1990s?
2. What was the objective of Boeing to review its make or buy decision during 1990s?
3. What were the major considerations in making outsourcing decision by Boeing?
4. Why Boeing decided to outsource the production of certain components to China
and Mexico?
5. What are the implications of outsourcing policy of Boeing?

Source: Charles W L Hill, International Business, p.517.

14.6 summary

This unit attempts to give an overview of the functions in as simple manner as possible.
l z A firm’s strategy can be defined as the actions that mangers take to attain the goals of
the firm. For most firms, the pre-eminent goal is to maximize long-term profitability.
Maximizing profitability requires firms to focus on value creation.

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