Svend Hollensen

GLOBAL MARKETING4th Edition

Hierarchical modes and international sourcing decisions

Lecture by Ewa Baranowska-Prokop, Ph.D.

Hollensen, Global Marketing 4e, © Pearson Education 2008

Learning objectives (1)

Describe the main hierarchical modesCompare and contrast the two investment

alternatives: acquisition versus greenfieldExplain the different determinants that

influence the decision to withdraw investments from a foreign market

Hollensen, Global Marketing 4e, © Pearson Education 2008

What is this?

The entry modes by which the firm completely owns and controls the foreign entry mode are called ______.

Hierarchical modes

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Hierarchical modes

Domestic-based representatives

Resident sales representatives

Foreign sales subsidiary

Sales and production subsidiary

Region centres

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What is this?

What type of sales representative resides in the home country of the manufacturer and travels abroad to perform the sales function?

Domestic-based sales representative

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Figure 12.1 Domestic-based sales representatives/

manufacturer’s own sales force

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Figure 12.1 Residentsales representatives/

sales subsidiary

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What is this?

What term is used to refer to a local company owned and operated by a foreign company under the laws and taxation of the host country?

Subsidiary

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Figure 12.1 Sales and production subsidiary

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Reasons for establishing local production facilities

To defend existing businessTo gain new businessTo save costsTo avoid government restrictions

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Figure 12.1 Region centre

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Roles of regional headquarters

Coordination role is to ensure that

country and business strategies are mutually coherent

One subsidiary does not harm another

Synergies are identified and exploited

Stimulator role is to facilitate the

translation of global products into local country strategies

the development of local subsidiaries

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Figure 12.3 The lead country concept

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What is this?

What term is used to refer to an organization which has integrated and coordinated its operations across national boundaries in order to achieve synergies on a global scale?

Transnational organization

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Methods of establishing a wholly-owned subsidiary

AcquisitionGreenfield investment

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Site selection criteria (1)

Corporate tax advantages

Investment incentives

Investment climate

Company law

Operational costs

Workforce considerations

Quality of living

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Site selection criteria (2)

Infrastructure in place

Business services available

Sufficient office space

Presence of other companies

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Strategic motives driving the location decision

Mergers and acquisitions

Internationalizationof leadership and ownership

Strategic renewal

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Summary of domestic-based sales representatives

AdvantagesBetter control of salesClose contact with

customers

DisadvantagesHigh travel expensesToo expensive for

markets far from home

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Summary of foreign sales, sales and production subsidiary

AdvantagesFull control of

operationMarket accessMarket knowledgeReduced transport

costsAccess to raw

materials

DisadvantagesHigh initial capital

investmentLoss of flexibilityHigh riskTaxation problems

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Summary of region centres

AdvantagesSynergies on

regional/global scaleScale efficiencyAbility to leverage

learning on cross-national scale

DisadvantagesPotential for

increased bureaucracy

Limited national level responsiveness

Missing communication between head office and centre

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Summary of acquisition

AdvantagesQuick access to

Distribution channelsLabour forceManagement

experienceLocal knowledgeLocal contactsEstablished brand

names

DisadvantagesExpensive optionHigh riskIntegration concerns

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Summary of greenfield investment

AdvantagesOptimum format

possibleOptimum technology

possible

DisadvantagesHigh investment costSlow entry of new

markets

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For discussion (1)

Is the establishment of wholly-owned subsidiaries abroad an appropriate international market development mode for SMEs?

Why is acquisition often the preferred way to establish wholly-owned operations abroad? What are limitations of acquisition as an entry method?

What are the key problems associated with profit repatriation from subsidiaries?

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Subcontractors

A person or firm that agrees to provide semi-finished products or services needed by another party to perform another contract to which the subcontractor is not a party

Subcontractors differ from other SMEs in thatProducts are usually part of the end product, but not

the complete productThey do not have contact with end customers

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Figure 13.1 Subcontractor’s position in the vertical chain

Refined materials

Raw materials

Components

End products

Markets for end products Customers

Main contractors

Sub-contractors

Material suppliers

Source: Source: adapted from Lehtinen, 1991, p. 22.

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What is this?

An original equipment manufacturer (OEM) is the _____ of a _____.

Customer of a subsupplier

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Reasons for international sourcing

Concentration on in-house core competences

Lower product/production costs

General cost efficiency

Increased potential for innovation

Fluctuating demand

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Figure 13.4 Typology of subcontracting

Standard subcontracting

High

DegreeofCoordination

Low

Low Task Complexity High

Simplesubcontracting

Expanded subcontracting

Strategicdevelopment

subcontracting

Partnership-based

subcontracting

Source:Source: adapted from Blenker and Christensen, 1994.

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Organizational dimensions which influence the relationship

between buyer and seller

Characteristics of

each firm’s technology

Complexity of

products sold

Relationshipcharacteristics

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Relationship development phases

Awareness

Exploration

Expansion

Commitment

Dissolution

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Figure 13.7 The five-phase relationship model

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Causes of Dissolution

Operational and cultural differencesIncompatibility among other employeesLack of capacity among other employeesOpposition from people in power below

CEOsTermination of personal relations

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What is this?

What term is used to describe action on the part of the buyer to search for a supplier that is able to fulfill his or her needs?

Reverse marketing

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Changes in the purchasing function

Reduction in the number of subcontractorsShorter product life cyclesUpgraded demands on subcontractorsPurchase that no longer just serves the

purpose of getting lower prices

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Routes of internationalization

Route 1: Follow domestic customers

Route 2: Internationalization through supply chain of MNC

Route 3: Internationalization in cooperation with domestic or foreign suppliers

Route 4: Independent internationalization

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Mazda splits its seat purchases between

Delta Kogyo and Toyo Seat Company

Source: http://www.deltakogyo.co.jp/english/index.html

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What is this?

What term refers to the complex international activity involving supplies or deliveries that contain a combination of hardware and software, which upon delivery, will constitute an integrated system that is able to produce the products the buyer requires?

Project export

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Software in project exports

Software includes know-how and service.

Three types of know-how:TechnologyProjectManagement

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Possible buyers in project exports

Multilateral organizations

Bilateralorganizations

Governmentinstitutions

Private persons or firms

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Buyer-seller relationships, contractor perspective

Advantages Flexibility Cheaper sources Focus on in-house

competences Complement to product

range New ideas for product

innovation

Disadvantages Questionable availability

of suitable subcontractors Less stable than in-house

production Less control Potential to prepare

competition Quality concerns

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Buyer-seller relationships, subcontractor perspective

AdvantagesAccess to new export

marketsExploit economies of

scaleLearn product

technologyLearn marketing

practices

DisadvantagesRisk of dependence

on contractor

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Eaton: A case study

What are Eaton’s key challenges in establishing long-term relationships with its new global OEM-customers?

Why is the fast-changing marketing environment so crucial to Eaton’s international marketing plan?

What makes Eaton’s channel management challenging? Why does the company continue to sell through multiple global channels?

Requires web access

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For discussion (1)

What are the reasons for the increasing level of outsourcing to international subcontractors?

Explain the shift from seller to buyer initiative in subcontracting.

Hollensen, Global Marketing 4e, © Pearson Education 2008 13-45

For discussion (2)

Explain the main differences between the US and the Japanese subsupplier systems.

How are project exports/turnkey projects different from general subcontracting in the industrial market?

Project export is often characterized by a complex and time-consuming decision-making process. What are the marketing implications of this for the potential sub-contractor?