Svend Hollensen

GLOBAL MARKETING
4th Edition

Lecture by Ali Agha MBA., MSc., MIET., MMAP.

Hierarchical modes and international sourcing decisions

Learning objectives (1)

Describe the main hierarchical modes Compare and contrast the two investment alternatives: acquisition versus greenfield Explain 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

Hollensen, Global Marketing 4e, Pearson Education 2008

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/ manufacturers own sales force

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Figure 12.1 Resident sales 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 business To gain new business To save costs To 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

Acquisition

Greenfield 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 Internationalization of leadership and ownership

Strategic renewal

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Summary of domestic-based sales representatives

Advantages Better control of sales Close contact with customers Disadvantages High travel expenses Too expensive for markets far from home

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Summary of foreign sales, sales and production subsidiary

Advantages Full control of operation Market access Market knowledge Reduced transport costs Access to raw materials Disadvantages High initial capital investment Loss of flexibility High risk Taxation problems

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Summary of region centres

Advantages Synergies on regional/global scale Scale efficiency Ability to leverage learning on crossnational scale Disadvantages Potential for increased bureaucracy Limited national level responsiveness Missing communication between head office and centre
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Summary of acquisition
Advantages Quick access to
Distribution channels Labour force Management experience Local knowledge Local contacts Established brand names

Disadvantages Expensive option High risk Integration concerns

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Summary of greenfield investment

Advantages Optimum format possible Optimum technology possible Disadvantages High investment cost Slow 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 that Products are usually part of the end product, but not the complete product They do not have contact with end customers

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Figure 13.1 Subcontractors position in the vertical chain

Markets for end products
End products Customers

Main contractors

Components

Sub-contractors

Refined materials Material suppliers Raw materials

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 inhouse 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
High

Partnershipbased subcontracting Strategic development subcontracting

Degree of Coordination

Expanded subcontracting
Simple subcontracting

Low

Standard subcontracting
Low
Source:Source: adapted from Blenker and Christensen, 1994.

Task Complexity

High

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Organizational dimensions which influence the relationship between buyer and seller

Characteristics of each firms technology

Complexity of products sold

Relationship characteristics

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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 differences Incompatibility among other employees Lack of capacity among other employees Opposition from people in power below CEOs Termination 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 subcontractors Shorter product life cycles Upgraded demands on subcontractors Purchase 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: Technology Project Management

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Possible buyers in project exports

Multilateral organizations Bilateral organizations Private persons or firms

Government institutions

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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

Advantages Access to new export markets Exploit economies of scale Learn product technology Learn marketing practices
Disadvantages Risk of dependence on contractor

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Eaton: A case study

What are Eatons key challenges in establishing long-term relationships with its new global OEM-customers? Why is the fast-changing marketing environment so crucial to Eatons international marketing plan? What makes Eatons 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.

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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?
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