C H A P T E R 1 2
Production strategy
Chapter objectives
2. Relate some of the most critical steps in generating goods and services, including global
3. Describe the nature and importance of international logistics in production strategy.
4. Review some of the major production strategies being used by MNEs including, strategic
alliances and acquisitions.
Chapter summary
1. Many of todays goods and services will be replaced during the millennium with faster,
2. The generation of goods and services entails a number of specific functions. One function is
obtaining materials or supplies. Many MNEs have found that global sourcing is the best
3. In the production of goods and services, MNEs focus on a number of key factors, including
cost, quality and well-designed production systems. While these three factors are often
4. International logistics is the designing and managing of a system to control the flow of
5. Depending on where the value-added of the company is (Research & Development
(R&D)/technology, manufacturing or marketing), firms develop different types of global
production systems. When the value-added is primarily R&D and technology, the firm will
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6. The MNEs are currently focusing on a number of areas in improving their production
strategies. Three approaches that have been receiving particular attention include the
following: (a) technology and design; (b) continuous improvement of operations and (c) the
use of strategic alliances and acquisitions. These approaches are helping multinationals to
meet new product and service challenges while keeping costs down and quality up.
Chapter outline
Introduction
Research, development and innovation
Speed-to-market
Generation of goods and services
Global sourcing
International logistics
Transportation
Packaging
Storage
Different kinds of global production systems
Strategic management and production strategy
Technology and production design
Continuous improvement
Alliances and acquisitions
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
Lecture outline
A. Introduction
2. Pressures from host-country governments or interest groups can affect a multinationals
decision making in these areas. For example, host governments criticize many resource-
based MNEs for backward, forward and horizontal integration. Backward integration,
which is the ownership of equity assets used earlier in the production cycle, such as an
B. Research, development and innovation
1. Production strategies do not begin with manufacturing. They start with the research and
development of new or innovative goods and services.
2. Innovation can be broadly divided into product/service development and process
development. The former refers to activities that support the creation of new products
3. Several key issues related to R&D are important in developing a strategy for organizing
production. Two of these are (a) how far products, services and the processes that create
4. One of the major manufacturing challenges facing MNEs is the speed with which they
5. The strategic emphasis is on increasing speed by developing time-to-market
accelerators, which are factors that help to reduce bottlenecks and errors and also ensure
6. Recent research shows that the best way to reduce defective products and to speedup
delivery is by placing the greatest attention on product design and planning of
7. Concurrent engineering is useful for two reasons. First, if the product is carefully
designed, fewer changes are needed later on and the good can be swiftly brought to
C. Generation of goods and services
1. Sometimes goods and/or services are provided directly by an MNE; at other times the
firm has an arrangement with outside firms or suppliers (some of them being direct
2. In recent years, some giant MNEs have taken equity positions in a number of different
suppliers. Japanese multinationals are an excellent example. These firms often have a
3. When MNEs turn to global sourcing, there is typically a hierarchical order of
consideration. The company gives first preference to internal sources. However, if a
5. Multinationals seek to control their costs by increasing the efficiency of their
production processes. Often this means using new, improved technology, such as new
6. For well over a decade, quality has been one of the major criteria for business success.
7. A production system is a group of related activities designed to create value. In the
8. Inventory control has received a great deal of attention in recent years, because a
well-designed inventory strategy can have dramatic effects on the bottom line. One of
9. The JIT concept is an important one that has been adopted by MNEs throughout the
10. One of the major problems with JIT is that its success rests heavily on the quality and
11. One of the most important things to remember about JIT is that it involves strong
12. Demand-FlowTM Technology (DFT) is a new production process that allows for flexible
changes in the middle stages of production.
13. Many products have a service element associated with them. Sometimes this element is
more important than the product itself. Knowing whether to sell on the basis of product
D. International logistics
1. International logistics is the design and management of a system to control the flow of
materials and products throughout the firm. This includes the inflow of materials,
2. International firms can choose from a fairly wide variety of ocean carriers. The three
most common are conventional container ships, cargo vessels and roll-on-roll-off
(RORO) vessels. Container ships are used to carry standardized containers that can be
3. Most countries of the world have airports that can accommodate airfreight. The problem
with this mode of transportation is its high cost. So while international airfreight has
grown dramatically over the last 30 years, it still accounts for less than one percent of
4. In deciding on the best transportation mode to use, MNEs tend to focus their attention
5. Packaging is important in ensuring that products are shipped in safe containers and
arrive undamaged. Packaging is also important because of its direct effect on cost,
6. In some cases, goods that are shipped internationally have to be stored before being
moved to their final destinations. In the United States, public storage is widely
E. Different kinds of global production systems
1. Depending on where the value-added of the company is (R&D/technology,
manufacturing or marketing), firms develop different types of global production
F. Strategic management and production strategy
1. Now, MNEs are spending more money on R&D than they have in the past. A second
current trend is the use of concurrent engineering. Many MNEs are now realizing that a
team approach to product development, which combines the talents of research, design
2. Owing to the success of Japanese MNEs, the Japanese concept of kaizen (continuous
improvement) is being emulated by MNEs worldwide. No matter the good or service,
3. Another current strategic production trend is the development of alliances and
acquisitions. Many MNEs are finding that they cannot compete effectively without
entering into joint ventures or other alliances with MNEs that can complement their
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
Answers to review and discussion questions
1. Why are MNEs so interested in new product development? Why do they not simply
focus on improving their current offerings?
2. Why is speed-to-market such an important production strategy? Explain.
3. What are time-to-market accelerators? In what way is concurrent engineering one of
these accelerators?
4. Why do many MNEs use global sourcing? Why do they not produce all the parts and
materials in-house? Be complete in your answer.
There are a number of reasons why MNEs use global sourcing. A major reason is cost; it is
often less expensive to outsource than to produce the items in-house. A second reason is that
5. Why are world-class suppliers often located next to world-class manufacturers? What
forms of synergy often exist between the two groups?
6. How do MNEs try to cut production costs? Identify and describe three steps.
7. In what way is the continuous reduction cost method used by Japanese manufacturers
different from the periodic cost reduction method employed by many US firms?
Compare and contrast the two.
One of the ways in which the cost method used by Japanese manufacturers is different from that
8. Some MNEs use a production strategy that involves costing a portfolio of related goods
rather than just costing each individually. What is the logic behind this strategy?
9. How does kaizen help to bring about increased quality? Is this approach limited to
Japanese firms or are other MNEs using it as well?
10. What types of issues does an MNE confront when it seeks to improve its production
system? Identify and describe three.
11. How does JIT help an MNE control its inventory? Give two examples.
12. How is employee training an important factor in implementing JIT and DFT
production processes?
13. Why would an MNE want to determine the degree to which its primary business was
product dominated and service dominated? Explain.
14. Why are MNEs concerned with international logistics? How does this help the
companies increase their competitiveness?
15. In recent years, MNEs have been focusing on a number of areas in improving their
production strategies. What are two of these? Identify and describe each.
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Answers to real cases
Flextronics
1. Keeping in mind that Flextronics does not sell to end-customers, how does that change
your interpretation of the regional sales data presented in this case?
In 2010, Flextronics total revenue was US$24,110.7 million. It generated 48 percent of its sales
2. What effect does the emergence of electronic-manufacturing service providers
(EMSPs) have for new entrants into the electronics industry?
3. Why should OEMs be concerned about using EMSPs?
Nike
1. What is the key to Nikes production strategy? Explain.
2. What are the advantages of frequent design changes in Nikes sneakers?
3. Why was it important for Nike to clean up its labor practices in Asia? What more
should the company do?
Nikes labor practices have been the cause of much bad publicity for the company. While
Nikes market share has remained relatively high, it might have been even higher were it not for
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its reputation. Organized consumer boycotts, demonstrations outside stores and an international