International marketing

Week 11 lectureHierarchical modes of entry

Agenda

• 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

Hierarchical modes

• The firm completely owns and controls the foreign entry mode/ organization

• How many and which value chain function can be transferred to the market.

• According to definition needs to be owned 100% but in practice the company with 75% can have nearly full control

1-5

Introduction• As the firm goes through hierarchical modes, it chooses to

• decentralize more of its activities to foreign markets.

• As it moves further, it goes from one internationalization stage to another (Perlmutter, 1969):

• Ethnocentric orientation: • represented by the domestic-based sales representatives.

• Polycentric orientation: • represented by country subsidiaries.

• Regiocentric orientation: • represented by a region of the world.

• Geocentric orientation: • represented by the transnational organization.

12-6

Domestic-based sales representatives/ manufacturer’s own sales force

Domestic-based sales representative

• Resides in the home country of the manufacturer and travels abroad to perform the sales function

• Ethnocentric: extension of the marketing methods used in the home country to foreign markets

• Often used in industrial markets where there are only a few large customers that require close contact with suppliers

12-7

12-8

Domestic-based sales representatives

Advantages• Better control of sales• Close contact with customers• More control and feedback compared to agent or distributor

Disadvantages• High travel expenses• Too expensive for markets far from home

12-9

Resident sales representatives/sales subsidiary

Subsidiary

• Local company owned and operated by a foreign company under the laws and taxation of the host country

• Foreign branch: extension and a legal part of manufacturer where taxation of profits takes place in the home country.

12-10

Resident sales representatives/sales subsidiary• Greater customer commitment than using domestic based sales

representatives• Consider following factor in choosing between domestic sales

representatives or resident sales representatives• Order making/order taking• The nature of the product

Sales subsidiary

• Complete control of sales function• Central marketing function but sometime a local marketing function

can be included• All foreign order are channelled through the subsidiary, which then

sells to foreign buyers at wholesale or retail price

Sales subsidiary

• Reasons for choosing sales subsidiary• Transferring greater autonomy and responsibilities to subunits to become

close to customer

• Tax advantage: establishing subsidiaries in a countries with low business income taxes

12-14

Sales and production subsidiary

Sales and production subsidiary

• Sales subsidiary: taking money out of the country and contributing nothing of value to the host country

• Local demands for a manufacturing or production base• Firm involves in this only if they believe that the product have long

term market potential and the country is politically stable.

Sales and production subsidiary

• Require more time, commitment and money• Considerable risk:

• withdrawal from the market can be costly- financially and • also reputation in international and domestic market

12-17

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

12-18

Region center

Region Centres (regional headquarters)

12-20

Roles of regional headquarters

Coordination role is to ensure that1. One subsidiary does not harm another2. Synergies are identified and exploited

Stimulator role is 1. to facilitate the translation of global products into local country

strategies2. Supporting local subsidiaries in their development

12-21

The lead country concept

Lead country

• The choice of lead country is influenced by several factors:• Marketing competences of foreign subsidiary• Quality of human resources in the countries represented• Location of production• Legal restrictions of host countries

12-23

Summary of region centres

Advantages• Synergies on regional/global scale• Ability to leverage learning on cross-national scale

Disadvantages• Potential for increased bureaucracy• Limited national level responsiveness• Missing communication between head office and centre

Transnational organization

• An organization which has integrated and coordinated its operations across national boundaries in order to achieve synergies on a global scale

• Management view world as a series of interrelated markets• Common R&D and frequent geographical exchange of human resource across

borders• Goal is to achieve global competitiveness through recognizing cross-border

market similarities and differences and linking the capabilities of the organization across national boundaries

• e.g. Unilever

1-25

Transnational organization

• Managing a TO requires to understand:• When a global brand makes sense or when a local requirements should take

precendence• When to transfer innovation and expertise from one market to another• When a local idea has global potential• When to bring international teams together fast to focus on key opportunities

12-26

Methods of establishing a wholly-owned subsidiary

AcquisitionGreenfield investment

Acquisition

• Enables rapid entry• Provide a bridge to entry into the market• Advantageous for a firm with limited international management• It is feasible when the market is saturated: more competition, little

room for entry

12-27

Acquisition

• Acquisition takes many form• Horizontal- product lines and markets of the acquired and acquiring firms are

similar• Vertical- acquiring suppliers or customer• Concentric- acquired firm has same market but different technology or vice

versa• Conglomerate- acquired firm in different industry

Greenfield investment

• Establish operations from the scratch• Done when

• production logistics is a key industry success factor, • no appropriate acquisition targets are available, or • they are costly

12-30

Greenfield investment

Advantages• Optimum format possible• Optimum technology possible

Disadvantages• High investment cost• Slow entry of new markets

1-31

Foreign divestment: withdrawing from a foreign market