1. Hierarchical modes and international sourcing decisions
Lecture by Ewa Baranowska-Prokop, Ph.D.
Hierarchical modes and international sourcing decisions

2. 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

3. What is this? Hierarchical modes
The entry modes by which the firm completely owns and controls the foreign entry mode are called ______.
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Hierarchical modes

4. Hierarchical modes Domestic-based representatives
Resident sales representatives
Foreign sales subsidiary
Sales and production subsidiary
Fundamentally, there are four ways of using information to create business value
(Marchand, 1999):
1 Managing risks. In the twentieth century the evolution of risk management stimulated the growth of functions and professions such as finance, accounting, auditing and controlling. These information-intensive functions tend to be major consumers of IT resources and people’s time.
2 Reducing costs. Here the focus is on using information as efficiently as possible to achieve the outputs required from business processes and transactions. This process view of information management is closely linked with the re-engineering and continuous improvement movements of the 1990s. The common elements are focused on eliminating unnecessary and wasteful steps and activities, especially paperwork and information movements, and then simplifying and, if possible, automating the remaining processes.
3 Offering products and services. Here the focus is on knowing one’s customers, and sharing information with partners and suppliers to enhance customer satisfaction. Many service and manufacturing companies focus on building relationships with customers and on demand management as ways of using information. Such strategies have led companies to invest in point-of-sale systems, account management, customer profiling and service management systems.
4 Inventing new products. Finally, companies can use information to innovate – to invent new products, provide different services and use emerging technologies. Companies such as Intel and Microsoft are learning to operate in ‘continuous discovery mode’, inventing new products more quickly and using market intelligence to retain a competitive edge. Here, information management is about mobilizing people and collaborative work processes to share information and promote discovery throughout the company.
Region centres

5. What is this? Domestic-based sales representative
What type of sales representative resides in the home country of the manufacturer and travels abroad to perform the sales function?
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Domestic-based sales representative

6. Figure 12.1 Domestic-based sales representatives/ manufacturer’s own sales force

7. Figure 12.1 Resident sales representatives/ sales subsidiary

8. What is this? Subsidiary
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?
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Subsidiary

9. Figure 12.1 Sales and production subsidiary

10. Reasons for establishing local production facilities
To defend existing business
To gain new business
To save costs
To avoid government restrictions

11. Figure 12.1 Region centre

12. 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

13. Figure 12.3 The lead country concept

14. What is this? Transnational organization
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?
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Transnational organization

15. Methods of establishing a wholly-owned subsidiary
Acquisition
Greenfield
investment

16. Site selection criteria (1)
Corporate tax advantages
Investment incentives
Investment climate
Company law
Operational costs
Workforce considerations
Quality of living

17. Site selection criteria (2)
Infrastructure in place
Business services available
Sufficient office space
Presence of other companies

18. Strategic motives driving the location decision
Mergers
and acquisitions
Internationalization
of leadership and ownership
Strategic renewal

19. 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

20. 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

21. Summary of region centres
Advantages
Synergies on regional/global scale
Scale efficiency
Ability to leverage learning on cross-national scale
Disadvantages
Potential for increased bureaucracy
Limited national level responsiveness
Missing communication between head office and centre

22. 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

23. Summary of greenfield investment
Advantages
Optimum format possible
Optimum technology possible
Disadvantages
High investment cost
Slow entry of new markets

24. 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?

25. 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

26. Figure 13.1 Subcontractor’s position in the vertical chain
Markets for end products
Customers
End products
Main contractors
Components
Sub-contractors
Refined materials
Material suppliers
Raw materials
Source: Source: adapted from Lehtinen, 1991, p. 22.

27. What is this? Customer of a subsupplier
An original equipment manufacturer (OEM) is the _____ of a _____.
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Customer of a subsupplier

28. Reasons for international sourcing
Concentration on in-house core competences
Lower product/production costs
General cost efficiency
Increased potential for innovation
Fluctuating demand

29. Figure 13.4 Typology of subcontracting
Partnership-
based
subcontracting
High
Degree of
Coordination
Low
Strategic
development
subcontracting
Expanded
subcontracting
Simple
subcontracting
Standard
subcontracting
Low Task Complexity High
Source:Source: adapted from Blenker and Christensen, 1994.

30. Organizational dimensions which influence the relationship between buyer and seller
Characteristics of
each firm’s
technology
Complexity of
products sold
Relationship
characteristics

31. Relationship development phases
Awareness
Exploration
Expansion
Commitment
Fundamentally, there are four ways of using information to create business value
(Marchand, 1999):
1 Managing risks. In the twentieth century the evolution of risk management stimulated the growth of functions and professions such as finance, accounting, auditing and controlling. These information-intensive functions tend to be major consumers of IT resources and people’s time.
2 Reducing costs. Here the focus is on using information as efficiently as possible to achieve the outputs required from business processes and transactions. This process view of information management is closely linked with the re-engineering and continuous improvement movements of the 1990s. The common elements are focused on eliminating unnecessary and wasteful steps and activities, especially paperwork and information movements, and then simplifying and, if possible, automating the remaining processes.
3 Offering products and services. Here the focus is on knowing one’s customers, and sharing information with partners and suppliers to enhance customer satisfaction. Many service and manufacturing companies focus on building relationships with customers and on demand management as ways of using information. Such strategies have led companies to invest in point-of-sale systems, account management, customer profiling and service management systems.
4 Inventing new products. Finally, companies can use information to innovate – to invent new products, provide different services and use emerging technologies. Companies such as Intel and Microsoft are learning to operate in ‘continuous discovery mode’, inventing new products more quickly and using market intelligence to retain a competitive edge. Here, information management is about mobilizing people and collaborative work processes to share information and promote discovery throughout the company.
Dissolution

32. Figure 13.7 The five-phase relationship model

33. 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

34. What is this? Reverse marketing
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?
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Reverse marketing

35. 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

36. 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
Fundamentally, there are four ways of using information to create business value
(Marchand, 1999):
1 Managing risks. In the twentieth century the evolution of risk management stimulated the growth of functions and professions such as finance, accounting, auditing and controlling. These information-intensive functions tend to be major consumers of IT resources and people’s time.
2 Reducing costs. Here the focus is on using information as efficiently as possible to achieve the outputs required from business processes and transactions. This process view of information management is closely linked with the re-engineering and continuous improvement movements of the 1990s. The common elements are focused on eliminating unnecessary and wasteful steps and activities, especially paperwork and information movements, and then simplifying and, if possible, automating the remaining processes.
3 Offering products and services. Here the focus is on knowing one’s customers, and sharing information with partners and suppliers to enhance customer satisfaction. Many service and manufacturing companies focus on building relationships with customers and on demand management as ways of using information. Such strategies have led companies to invest in point-of-sale systems, account management, customer profiling and service management systems.
4 Inventing new products. Finally, companies can use information to innovate – to invent new products, provide different services and use emerging technologies. Companies such as Intel and Microsoft are learning to operate in ‘continuous discovery mode’, inventing new products more quickly and using market intelligence to retain a competitive edge. Here, information management is about mobilizing people and collaborative work processes to share information and promote discovery throughout the company.
Route 4: Independent internationalization

37. Mazda splits its seat purchases between Delta Kogyo and Toyo Seat Company
Source:

38. What is this? Project export
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?
There follows an explanation of some key terms:
Coordinate its marketing activities: coordinating and integrating marketing strategies and implementing them across global markets, which involves centralization, delegation, standardization and local responsiveness.
Find global customer needs: this involves carrying out international marketing research and analysing market segments, as well as seeking to understand similarities and differences in customer groups across countries.
Satisfy global customers: adapting products, services and elements of the marketing mix to satisfy different customer needs across countries and regions.
Being better than the competition: assessing, monitoring and responding to global competition by offering better value, low prices, high quality, superior distribution, great advertising strategies or superior brand image.
Project export

39. Software in project exports
Software includes know-how and service.
Three types of know-how:
Technology
Project
Management

40. Possible buyers in project exports
Multilateral
organizations
Bilateral
organizations
Government
institutions
Private
persons
or firms

41. Buyer-seller relationships, contractor perspective
Disadvantages
Questionable availability of suitable subcontractors
Less stable than in-house production
Less control
Potential to prepare competition
Quality concerns
Advantages
Flexibility
Cheaper sources
Focus on in-house competences
Complement to product range
New ideas for product innovation

42. Buyer-seller relationships, subcontractor perspective
Disadvantages
Risk of dependence on contractor
Advantages
Access to new export markets
Exploit economies of scale
Learn product technology
Learn marketing practices

43. 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

44. 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.

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?