Prof. Evert Gummesson, Stockholm University, Sweden “Global Marketing is an excellent international marketing book that i have been using in my teaching for years. it is very well written, informative and appeals to students with different cultural backgrounds. Highly recommended!” Prof. Samuel Rabino, Northeastern University, Boston, USA
Drawing on an incomparable breadth of international examples, Svend Hollensen not only demonstrates how global marketing works, but also how it relates to real decisions around the world.
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extensive coverage of hot topics such as: blue ocean strategy; celebrity branding; brand piracy; and viral marketing.
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all new video cases (featuring such firms as nike, Starbucks, bMW, Ford and McDonalds) accompany every chapter, and are available at www.pearsoned.co.uk/hollensen.
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also available to students on the web are multiple choice questions, web links, and an online glossary of global marketing terminology.
brand new case studies focusing on globally recognised brands and companies operating in a number of countries, including ikea, Philips, nokia, Guinness and Cereal Partners Worldwide.
“Managers and students need more than conventional international business and international Marketing concepts now. this convention remains the purview of most international business and marketing texts. i’ve chosen the Hollensen text and two past editions because it offers contemporary thinking in firm/ manager strategy development, making and validating the right strategic decisions, accepting trade-offs and building firm competitiveness in a rapidly changing global environment.” Greg Walton, School of Marketing and International Business, Victoria University of Wellington, New Zealand
Global MarketinG
“Hollensen’s book truly lives up to its title with its ample cases and examples from all over the world. the fourth edition brings in new and updated information about markets and explains conceptual developments. it is a rich, easy-to-read book. So what are you waiting for: read it!”
4th Edition
“this book is an invaluable source of knowledge for those who are working on their qualifications in the field of international marketing. it contains a variety of new, up-to-date examples and cases concerning not only european-based but also other international companies; these and other materials let one discuss and analyse thoroughly the concepts one is studying.”
4th Edition
Svend Hollensen
Global MarketinG
Dr Izabela Kowalik, Institute of International Management and Marketing, Warsaw School of Economics, Poland
Hollensen
“Hollensen offers not only an excellent text, but the pioneering electronic resources that support the book provide optional and additional value that can stimulate and motivate further student learning.” Prof. Bradley Barnes, Kent Business School, University of Kent, UK
About the author Svend Hollensen is an associate Professor at the University of Southern Denmark. His other Financial times Prentice Hall books include Marketing Management and Marketing Research: An International Approach (co-authored with Marcus Schmidt).
Cover image: © Getty Images
An imprint of
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Additional student support at www.pearsoned.co.uk/hollensen
www.pearson-books.com
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GLOBAL MARKETING Visit the Hollensen: Global Marketing, Fourth Edition Companion Website at www.pearsoned.co.uk/hollensen to find valuable student learning material including: l
Full versions of the video case studies at the end of each chapter
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Self-assessment multiple choice questions for each chapter
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Annotated links to relevant, specific sites on the web
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Searchable online glossary
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Flashcards to test your knowledge of key terms and definitions
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Classic extra case studies that help take your learning further
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An entire web-based chapter on global e-marketing, that helps keep you up-to-date in this fast-moving area
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Further reading for chapters 1–19
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We work with leading authors to develop the strongest educational materials in marketing, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk
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Fourth edition
GLOBAL MARKETING A decision-oriented approach Svend Hollensen
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Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk
First published 1998 by Prentice Hall Second edition published 2001 by Pearson Education Limited Third edition published 2004 Fourth edition published 2007 © Prentice Hall Europe 1998 © Pearson Education Limited 2001, 2004, 2007 The right of Svend Hollensen to be identified as author of this work has been asserted by the author in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 978-0-273-70678-6 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 10 9 8 7 6 5 10 09 08 07
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Typeset in 10.5/12.5 pt Minion by 35 Printed and bound by Mateu Cromo, Artes Graficas, Spain The publisher’s policy is to use paper manufactured from sustainable forests.
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Brief contents Preface to the fourth edition Guided tour Acknowledgements Publisher’s acknowledgements Abbreviations About the author
Part I THE DECISION TO INTERNATIONALIZE 1 Global marketing in the firm 2 Initiation of internationalization 3 Internationalization theories 4 Development of the firm’s international competitiveness Part I Case studies
xvi xxviii xxx xxxii xxxvi xxxix 3 5 41 60 96 125
Part II DECIDING WHICH MARKETS TO ENTER 5 Global marketing research 6 The political and economic environment 7 The sociocultural environment 8 The international market selection process Part II Case studies
151
Part III MARKET ENTRY STRATEGIES 9 Some approaches to the choice of entry mode 10 Export modes 11 Intermediate entry modes 12 Hierarchical modes 13 International sourcing decisions and the role of the subsupplier Part III Case studies
291
Part IV DESIGNING THE GLOBAL MARKETING PROGRAMME 14 Product decisions 15 Pricing decisions and the terms of doing business 16 Distribution decisions 17 Communication decisions (promotion strategies) Part IV Case studies
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Part V IMPLEMENTING AND COORDINATING THE GLOBAL MARKETING PROGRAMME 18 Cross-cultural sales negotiations 19 Organization and control of the global marketing programme Part V Case studies Index
153 185 216 243 274
295 310 329 356 372 394
421 474 507 541 586 613 615 642 679 699
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SUPPORTING RESOURCES Visit www.pearsoned.co.uk/hollensen to find valuable online resources: Companion website for students l
Full versions of the video case studies at the end of each chapter
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Self-assessment multiple choice questions for each chapter
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Annotated links to relevant, specific sites on the web
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Searchable online glossary
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Flashcards to test your knowledge of key terms and definitions
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Classic extra case studies that help take your learning further
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An entire web-based chapter on global e-marketing, that helps keep you up-to-date in this fast-moving area
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Further reading for chapters 1–19
For instructors l
Media-rich PowerPoint slides, including animated key figures from the book, video clips, audio and direct links to the web
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Extensive Instructor’s Manual, with sample answers for all the case study question material, including the extra case studies on the book’s website
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Answers to the questions in the book that accompany the video case studies integrated with the book
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A testbank (delivered in TestGen) of over 600 multiple choice questions
Also: The Companion Website provides the following features: l
Search tool to help locate specific items of content
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E-mail results and profile tools to send results of quizzes to instructors
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Online help and support to assist with website usage and troubleshooting
For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/hollensen
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Contents Preface to the fourth edition Guided tour Acknowledgements Publisher’s acknowledgements Abbreviations About the author
xvi xxviii xxx xxxii xxxvi xxxix
Part I 1
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THE DECISION WHETHER TO INTERNATIONALIZE
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Global marketing in the firm
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Learning objectives 1.1 Introduction 1.2 Development of the ‘global marketing’ concept 1.3 Comparison of the global marketing and management style of SMEs and LSEs 1.4 Forces for ‘global integration’ and ‘market responsiveness’ 1.5 The value chain as a framework for identifying international competitive advantage 1.6 Value shop and the ‘service value chain’ 1.7 Information business and the virtual value chain 1.8 Summary Case studies 1.1 Vermont Teddy Bear: Should Vermont Teddy Bear go abroad? 1.2 Arcor: A Latin American confectionary player is globalizing its business 1.3 Video case study: Nivea Questions for discussion References
5 5 7 9 17 19 27 31 33 34 38 39 39 39
Initiation of internationalization
41
Learning objectives 2.1 Introduction 2.2 Internationalization motives 2.3 Triggers of export initiation (change agents) 2.4 Internationalization barriers/risks 2.5 Summary Case studies 2.1 Blooming Clothing: A bumpy path to exports 2.2 Elvis Presley Enterprises Inc. (EPE): Internationalization of a ‘cult icon’ 2.3 Video case study: NIDEK Questions for discussion References
41 41 42 49 53 55 55 57 58 59 59
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Internationalization theories
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Learning objectives 3.1 Introduction 3.2 The Uppsala internationalization model 3.3 The transaction cost analysis (TCA) model 3.4 The network model 3.5 Internationalization of SMEs 3.6 Born globals 3.7 Internationalization of services 3.8 Summary Case studies 3.1 Cryos: They keep the stork busy around the world 3.2 Entertainment Rights: Internationalization of ‘Postman Pat’ 3.3 Video case study: Reebok Questions for discussion References
60 60 63 67 70 74 77 82 87
Development of the firm’s international competitiveness
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Learning objectives 4.1 Introduction 4.2 Analysis of national competitiveness (the Porter diamond) 4.3 Competition analysis in an industry 4.4 Value chain analysis 4.5 Blue ocean strategy and value innovation 4.6 Summary Case studies 4.1 Microsoft Xbox: The battle for gaming leadership against Nintendo’s Wii and Sony PlayStation 3 4.2 Senseo: Creating competitiveness through an international alliance 4.3 Video case study: Nike Questions for discussion References
96 96 98 101 106 115 118
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119 121 123 123 124
Part I Case studies I.1 I.2 I.3 I.4
Manchester United: Still trying to establish a global brand Bridgestone Tyres: European marketing strategy OneCafé: A ‘born global’ penetrates the coffee industry Cereal Partners Worldwide (CPW): The No. 2 world player is challenging the No. 1 – Kellogg
125 128 134 142
Part II 5
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DECIDING WHICH MARKETS TO ENTER
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Global marketing research
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Learning objectives 5.1 Introduction 5.2 The changing role of the international researcher
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5.3 Linking global marketing research to the decision-making process 5.4 Secondary research 5.5 Primary research 5.6 Online (internet) primary research methods 5.7 Other types of marketing research 5.8 Setting up an international MIS 5.9 Summary Case studies 5.1 Teepack Spezialmaschinen GmbH: Organizing a global survey of customer satisfaction 5.2 Tchibo: Expanding the coffee shops’ business system in the United Kingdom and the rest of Europe 5.3 Video case study: Burke Questions for discussion References
155 157 161 173 174 178 180
The political and economic environment
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Learning objectives 6.1 Introduction 6.2 The political/legal environment 6.3 The economic environment 6.4 The European Economic and Monetary Union and the euro 6.5 Summary Case studies 6.1 The World Bank and the IMF: What on earth is globalization about? Massive protests during a meeting in Prague 6.2 Sauer-Danfoss: Which political/economic factor would affect a manufacturer of hydraulic components? 6.3 Video case study: Debate on globalization Questions for discussion References
185 185 186 199 205 210
The sociocultural environment
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Learning objectives 7.1 Introduction 7.2 Layers of culture 7.3 High- and low-context cultures 7.4 Elements of culture 7.5 Hofstede’s original work on national cultures (the ‘4 + 1’ dimensions model) 7.6 The strengths and weaknesses of Hofstede’s model 7.7 Managing cultural differences 7.8 Convergence or divergence of the world’s cultures 7.9 The effects of cultural dimensions on ethical decision making 7.10 Social marketing 7.11 Summary Case studies 7.1 Lifan: A Chinese subsupplier and brand manufacturer of motorcycles is aiming at the global market 7.2 IKEA catalogue: Are there any cultural differences?
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7.3 Video case study: Communicating in the global world Questions for discussion References
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The international market selection process
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Learning objectives 8.1 Introduction 8.2 International market selection: SMEs versus LMEs 8.3 Building a model for international market selection 8.4 Market expansion strategies 8.5 The global product/market portfolio 8.6 Summary Case studies 8.1 Philips Lighting: Screening markets in the Middle East 8.2 Mac Baren Tobacco Company: Internationalizing the water pipe business 8.3 Video case study: Hasbro Questions for discussion References
243 243 244 245 260 264 267 267 269 272 272 273
Part II Case studies II.1 CarLovers Carwash: Serendipity as a factor in foreign market selection: the case of CarLovers from Australia II.2 The Female Health Company (FHC): The female condom is seeking a foothold in the world market for contraceptive products II.3 Tipperary Mineral Water Company: Market selection inside/outside Europe II.4 Skagen Designs: Becoming an international player in designed watches
274 277 280 284
Part III 9
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MARKET ENTRY STRATEGIES
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Some approaches to the choice of entry mode
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Learning objectives 9.1 Introduction 9.2 The transaction cost approach 9.3 Factors influencing the choice of entry mode 9.4 Summary Case studies 9.1 Jarlsberg: The king of Norwegian cheeses is seeking new markets 9.2 Ansell condoms: Is acquisition the right way for gaining market shares in the European condom market? 9.3 Video case study: Understanding entry modes into the Chinese market Questions for discussion References
295 295 296 297 304 305 306 309 309 309
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10 Export modes Learning objectives 10.1 Introduction 10.2 Indirect export modes 10.3 Direct export modes 10.4 Cooperative export modes/export marketing groups 10.5 Summary Case studies 10.1 Lysholm Linie Aquavit: International marketing of a Norwegian Aquavit brand 10.2 Parle Products: An Indian biscuit is seeking agents and cooperation partners in new export markets 10.3 Video case study: Honest Tea Questions for discussion References
11 Intermediate entry modes Learning objectives 11.1 Introduction 11.2 Contract manufacturing 11.3 Licensing 11.4 Franchising 11.5 Joint ventures/strategic alliances 11.6 Other intermediate entry modes 11.7 Summary Case studies 11.1 Ka-Boo-Ki: Licensing in the LEGO brand 11.2 Bayer and GlaxoSmithKline: Can the X-coalition and the product Levitra challenge Viagra’s market leader position? 11.3 Video case study: Mariott Questions for discussion References
12 Hierarchical modes Learning objectives 12.1 Introduction 12.2 Domestic-based sales representatives 12.3 Resident sales representatives/foreign sales branch/foreign sales subsidiary 12.4 Sales and production subsidiary 12.5 Region centres (regional headquarters) 12.6 Transnational organization 12.7 Establishing wholly owned subsidiaries: acquisition or Greenfield 12.8 Location/relocation of HQ 12.9 Foreign divestment: withdrawing from a foreign market 12.10 Summary Case studies 12.1 Durex condoms: SSL will sell Durex condoms in the Japanese market through its own organization
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12.2 The Fred Hollows Foundation: A non-profit organization establishes lens production factories in Nepal and Eritrea 12.3 Video case study: Starbucks Questions for discussion References
13 International sourcing decisions and the role of the subsupplier Learning objectives 13.1 Introduction 13.2 Reasons for international sourcing 13.3 A typology of subcontracting 13.4 Buyer–seller interaction 13.5 Development of a relationship 13.6 Reverse marketing: from seller to buyer initiative 13.7 Internationalization of subcontractors 13.8 Project export (turnkey contracts) 13.9 Summary Case studies 13.1 LM Glasfiber A/S: Following its customers’ international expansion in the wind turbine industry 13.2 Lear Corporation: A leading supplier of automotive interior systems 13.3 Video case study: Eaton Corporation Questions for discussion References
369 370 371 371
372 372 372 373 376 377 380 382 383 386 388
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Part III Case studies III.1 III.2 III.3 III.4
IKEA: Expanding through franchising to the South American market? Autoliv Air Bags: Transforming Autoliv into a global company IMAX Corporation: Globalization of the film business Heineken/Al Ahram Beverages Co.: Marketing of alcoholic and non-alcoholic drinks to Egypt and to other Muslim markets – does an acquisition help?
394 400 405
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Part IV DESIGNING THE GLOBAL MARKETING PROGRAMME 14 Product decisions Learning objectives 14.1 Introduction 14.2 The dimensions of the international product offer 14.3 Developing international service strategies 14.4 The product life cycle 14.5 New products for the international market 14.6 Product positioning 14.7 Brand equity 14.8 Branding decisions
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Sensory branding Celebrity branding Implications of the Internet for the collaboration with customers on product decisions 14.12 Green marketing strategies 14.13 Brand piracy and anti-counterfeiting strategies 14.14 Summary Case studies 14.1 Danish Klassic: Launch of a cream cheese in Saudi Arabia 14.2 Zippo Manufacturing Company: Has product diversification beyond the lighter gone too far? 14.3 Video case study: Swiss Army Questions for discussion References
15 Pricing decisions and terms of doing business Learning objectives 15.1 Introduction 15.2 International pricing strategies compared with domestic pricing strategies 15.3 Factors influencing international pricing decisions 15.4 International pricing strategies 15.5 Implications of the Internet for pricing across borders 15.6 Terms of sale/delivery terms 15.7 Terms of payment 15.8 Export financing 15.9 Summary Case studies 15.1 Harley-Davidson: Does the image justify the price level? 15.2 Gillette Co.: Is price standardization possible for razor blades? 15.3 Video case study: Ford Motor Company Questions for discussion References
16 Distribution decisions Learning objectives 16.1 Introduction 16.2 External determinants of channel decisions 16.3 The structure of the channel 16.4 Managing and controlling distribution channels 16.5 Managing logistics 16.6 Implications of the Internet for distribution decisions 16.7 Special issue 1: International retailing 16.8 Special issue 2: Grey marketing (parallel importing) 16.9 Summary Case studies 16.1 De Beers: Forward integration into the diamond industry value chain 16.2 Nokia: What is wrong in the US market for mobile phones – can Nokia recapture the no. 1 position from Motorola?
448 450 453 459 464 465 465 469 470 471 472
474 474 475 475 475 480 493 494 496 499 502 502 503 504 504 505
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16.3 Video case study: DHL Questions for discussion References
17 Communication decisions (promotion strategies) Learning objectives 17.1 Introduction 17.2 The communication process 17.3 Communication tools 17.4 Viral marketing 17.5 International advertising strategies in practice 17.6 Implications of the Internet for communication decisions 17.7 Summary Case studies 17.1 Helly Hansen: Sponsoring fashion clothes in the US market 17.2 Chevrolet: Helping to create a global brand via a European online (and CRM) strategy 17.3 Video case study: BMW Motorcycles Questions for discussion References
538 538 539 541 541 541 542 545 563 568 572 577 578 579 583 583 584
Part IV Case studies IV.1 IV.2 IV.3 IV.4
Absolut Vodka: Defending and attacking for a better position in the global vodka market Guinness: How can the iconic Irish beer brand compensate for declining sales in the home market? Dyson Vacuum Cleaner: Shifting from domestic to international marketing with the famous bagless vacuum cleaner Triumph Motorcycles Ltd: Rising from the ashes in the international motorcycle business
586 593 600 607
Part V IMPLEMENTING AND COORDINATING THE GLOBAL MARKETING PROGRAMME 18 Cross-cultural sales negotiations Learning objectives 18.1 Introduction 18.2 Cross-cultural negotiations 18.3 Intercultural preparation 18.4 Coping with expatriates 18.5 Knowledge management and learning across borders 18.6 Transnational bribery in cross-cultural negotiations 18.7 Summary Case studies 18.1 Mecca Cola: Marketing of a ‘Muslim’ cola to the European market
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18.2 TOTO: The Japanese toilet manufacturer seeks export opportunities for its high-tech brands in the United States 18.3 Video case study: Dunkin’ Donuts Questions for discussion References
19 Organization and control of the global marketing programme Learning objectives 19.1 Introduction 19.2 Organization of global marketing activities 19.3 The global management account (GAM) organization 19.4 Controlling the global marketing programme 19.5 The global marketing budget 19.6 The process of developing the global marketing plan 19.7 Summary Case studies 19.1 Mars Inc.: Merger of the European food, petcare and confectionary divisions 19.2 AGRAMKOW Fluid Systems: Reconsidering its global organization structure 19.3 Video case study: McDonald’s Questions for discussion References
638 639 640 640
642 642 642 643 648 659 666 669 669
674 675 676 677 677
Part V Case studies V.1 V.2 V.3 V.4
Index
Femilet: A SME is seeking a foothold in the European lingerie market Sony BMG: New worldwide organizational structure and the marketing, planning and budgeting of Dido’s new album Philips Shavers: Maintaining shaving leadership in the world market Vipp AS: A SME uses global branding to break into the international waste bin business
679 685 689 696 699
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Preface to the fourth edition Globalization is the growing interdependence of national economies – involving primarily customers, producers, suppliers and governments in different markets. Global marketing therefore reflects the trend of firms selling and distributing products and services in many countries around the world. It is associated with governments reducing trade and investment barriers, firms manufacturing in multiple countries and foreign firms increasingly competing in domestic markets. For many years the globalization of markets, caused by the convergence of tastes across borders, was thought to result in very large multinational enterprises, which could use their advantages in scale economies to introduce world-standardized products successfully. In his famous 1994 book, The Global Paradox, John Naisbitt has contradicted especially the last part of this myth:1 The mindset that in a huge global economy the multinationals dominate world business couldn’t have been more wrong. The bigger and more open the world economy becomes, the more small and middle sized companies will dominate. In one of the major turnarounds in my lifetime, we have moved from ‘economies of scale’ to ‘diseconomies of scale’; from bigger is better to bigger is inefficient, costly and wastefully bureaucratic, inflexible and, now, disastrous. And the paradox that has occurred is, as we move to the global context: The smaller and speedier players will prevail on a much expanded field.
When the largest corporations (e.g. IBM, ABB) downsize, they are seeking to emulate the entrepreneurial behaviour of successful SMEs (small and medium-sized enterprises) where the implementation phase plays a more important role than in large companies. Since the behaviours of smaller and (divisions of) larger firms (according to the above quotation) are convergent, the differences in the global marketing behaviour between SMEs and LSEs (large-scale enterprises) are slowly disappearing. What is happening is that the LSEs are downsizing and decentralizing their decision-making process. The result will be a more decision- and action-oriented approach to global marketing. This approach will also characterize this book. In light of their smaller size, most SMEs lack the capabilities, market power and other resources of traditional multinational LSEs. Compared with the resource-rich LSEs, the complexities of operating under globalization are considerably more difficult for the SME. The success of SMEs under globalization depends in large part on the decision and implementation of the right international marketing strategy. The primary role of marketing management, in any organization, is to design and execute effective marketing programmes that will pay off. Companies can do this in their home market or they can do it in one or more international markets. Going international is an enormously expensive exercise, in terms of both money and, especially, top management time and commitment. Due to the high cost, going international must generate added value for the company beyond extra sales. In other words, the company needs to gain a competitive advantage by going international. So, unless the company gains by going international, it should probably stay at home.
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Preface to the fourth edition
The task of global marketing management is complex enough when the company operates in one foreign national market. It is much more complex when the company starts operations in several countries. Marketing programmes must, in these situations, adapt to the needs and preferences of customers that have different levels of purchasing power as well as different climates, languages and cultures. Moreover, patterns of competition and methods of doing business differ between nations and sometimes also within regions of the same nation. In spite of the many differences, however, it is important to hold on to similarities across borders. Some coordination of international activities will be required, but at the same time the company will gain some synergy across borders, in the way that experience and learning acquired in one country can be transferred to another.
Objectives This book’s value chain offers the reader an analytic decision-oriented framework for the development and implementation of global marketing programmes. Consequently, the reader should be able to analyse, select and evaluate the appropriate conceptual frameworks for approaching the five main management decisions connected with the global marketing process: (1) whether to internationalize, (2) deciding which markets to enter, (3) deciding how to enter the foreign market, (4) designing the global marketing programme and (5) implementing and coordinating the global marketing programme. Having studied this book, the reader should be better equipped to understand how the firm can achieve global competitiveness through the design and implementation of market-responsive programmes.
Target audience This book is written for people who want to develop effective and decision-oriented global marketing programmes. It can be used as a textbook for undergraduate or graduate courses in global/international marketing. A second audience is the large group of people joining ‘global marketing’ or ‘export’ courses on non-university programmes. Finally, this book is of special interest to the manager who wishes to keep abreast of the most recent developments in the global marketing field.
Prerequisites An introductory course in marketing.
Special features This book has been written from the perspective of the firm competing in international markets, irrespective of its country of origin. It has the following key features: l l l
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coverage of global buyer–seller relationships; extensive coverage of born globals and global account management (GAM), as an extension of the traditional key account management (KAM); presents new interesting theories in marketing, for example, service value chain, value innovation, blue ocean strategy, social marketing, global account management, viral branding, and sensory and celebrity branding; aims to be a ‘true’ Global Marketing book, with cases and exhibits from all parts of the world, including Europe, the Middle East, Africa, the Far East, North and South America; provides a complete and concentrated overview of the total international marketing planning process; many new up-to-date exhibits and cases illustrate the theory by showing practical applications.
Outline As the book has a clear decision-oriented approach, it is structured according to the five main decisions that marketing people in companies face in connection with the global marketing process. The 20 chapters are divided into five parts. The schematic outline of the book in Figure 1 shows how the different parts fit together. Compared to the second edition, ‘global marketing research’ is now considered to be an integral part of the decision-making process, therefore it has been moved to Chapter 5, so as to use it as an important input to the decision about which markets to enter (the beginning of Part II). Examples of the practice of global marketing by actual companies are used throughout the book, in the form of exhibits. Furthermore, each chapter and part end with cases, which include questions for students. Figure 1 Structure of the book
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Questions for discussion allow students to probe further into important topics. Part cases studies – for each part there are five comprehensive case studies covering the themes met in the part. To reinforce learning, all case studies are accompanied by questions. Case studies are based on real-life companies. Further information about these companies can be found on the Internet. Company cases are derived from many different countries representing all parts of the world. Tables 1 and 2 present the chapter and part case studies. Multiple choice questions. Video library, including questions.
Table 1 Chapter case studies: overview (The video case studies can be downloaded at www.pearsoned.co.uk/hollensen) Chapter
Chapter 1 Global marketing in the firm
Case study title, subtitle and related websites
Case study 1.1 Vermont Teddy Bear Should Vermont Teddy Bear go abroad?
Country/area of company headquarters
Geographical target area
USA
USA, World
Argentina
World
3
Germany
World
3
Ireland
Europe
USA
World
Japan
USA
3
Denmark
World
3
UK
World
3
USA
World
3
Target market B2B
B2C
3
3
www.vtbear.com
Case study 1.2 Arcor A Latin American confectionary player is globalizing its business www.arcor.com.ar/eng/home.asp
Video case study 1.3 Nivea (8.56) www.nivea.com
Chapter 2 Initiation of internationalization
Case study 2.1 Blooming Clothing A bumpy path to exports
3
3
(no website available)
Case study 2.2 Elvis Presley Enterprises Inc. (EPE) Internationalization of a ‘cult’ icon
3
www.elvis.com
Video case study 2.3 NIDEK (9.01) www.nidek.com
Chapter 3 Internationalization theories
Case study 3.1 Cryos They keep the stork busy around the world
3
www.cryos.dk
Case study 3.2 Entertainment Rights The internationalization of ‘Postman Pat’ www.entertainmentrights.com
Video case study 3.3 Reebok (9.09) www.reebok.com and www.adidas-group.com
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Table 1 continued Chapter
Chapter 4 Development of the firm’s international competitiveness
Case study title, subtitle and related websites
Case study 4.1 Microsoft Xbox The battle for gaming leadership against Nintendo Wii and Sony PlayStation 3
Country/area of company headquarters
Geographical target area
Target market
USA
World
Japan, Sweden
World
USA
World
Germany
World
3
Germany
Germany
3
USA
USA, World
3
3
USA
World
3
3
Germany, Denmark, USA
World
3
USA
USA
3
3
China
World
3
3
Sweden, Holland
World
B2B
B2C
3
www.xbox.com www.microsoft.com/games
Case study 4.2 Senseo Creating competitiveness through an international alliance
3
3
www.senseo.com
Video case study 4.3 Nike (14.03)
3
www.nike.com
Chapter 5 Global marketing research
Case study 5.1 Teepack Spezialmaschinen GmbH Organizing a global survey of customer satisfaction www.teepack.com
Case study 5.2 Tchibo Expanding the coffee shops’ business system in the United Kingdom and the rest of Europe www.tchibo.com
Video case study 5.3 Burke www.burke.com
Chapter 6 The political and economic environment
Case study 6.1 The World Bank and the IMF What on earth is globalization about? Massive protests during a meeting in Hong Kong www.worldbank.org www.wto.org www.imf.org
Case study 6.2 Sauer-Danfoss Which political/economic factor would affect a manufacturer of hydraulic components? www.sauer-danfoss.com
Video case study 6.3 Debate on globalization (15.44) No website available
Chapter 7 The sociocultural environment
Case study 7.1 Lifan A Chinese subsupplier and brand manufacturer is aiming at the global market www.lifan.com/lifan
Case study 7.2 IKEA Catalogue Are there any cultural differences?
3
www.ikea.com
Video case study 7.3 Communicating in the global world
3
3
No website available
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Table 1 continued Chapter
Chapter 8 The international market selection process
Case study title, subtitle and related websites
Case study 8.1 Philips Lighting Screening markets in the Middle East
Country/area of company headquarters
Geographical target area
Holland
World
Denmark
World
USA
World
Norway
World
Australia
Europe, World
Target market B2B
B2C
3
www.philips.com
Case study 8.2 Mac Baren Tobacco Company Internationalizing the water pipe business
3
3
www.macbaren.com www.habibi.com.lb/mainpage.html
Video case study 8.3 Hasbro (9.42)
3
www.hasbro.com
Chapter 9 Some approaches to the choice of entry mode
Case study 9.1 Jarlsberg The king of Norwegian cheeses is seeking new markets
3
3
www.jarlsberg.com
Case study 9.2 Ansell condoms Is acquisition the right way for gaining market shares in the European market?
3
www.anselleurope.com
Video case study 9.3 Understanding entry modes into the Chinese market (16.33)
3
3
No website available
Chapter 10 Export modes
Case study 10.1 Lysholm Linie Aquavit International marketing of the Norwegian Aquavit brand
Norway
Germany, the rest of the World
3
3
India
World
3
3
USA
World, USA
Denmark
World
3
3
Germany, UK
World
3
3
USA
World
3
3
www.linie-aquavit.com
Case study 10.2 Parle Products An Indian biscuit brand is seeking agents and cooperation partners in new export markets www.parleproducts.com
Video case study 10.3 Honest Tea (8.25)
3
www.honesttea.com
Chapter 11 Intermediate entry modes
Case study 11.1 Ka-Boo-Ki Licensing in the LEGO brand www.kabooki.com
Case study 11.2 Bayer and GlaxoSmithKline Can the X-coalition and the product Levitra challenge Viagra’s market leader position? www.levitra.com
Video case study 11.3 Mariott (9.36) www.mariott.com
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Table 1 continued Chapter
Chapter 12 Hierarchical modes
Case study title, subtitle and related websites
Case study 12.1 Durex condoms SSL will sell Durex condoms in the Japanese market through its own organization
Country/area of company headquarters
Geographical target area
UK
Target market B2B
B2C
World
3
3
Australia
Less Developed Countries (LDCs)
3
USA
World
3
Denmark
World
3
USA
World
3
USA
World
3
Denmark
Saudi Arabia
3
USA
World
3
Switzerland
USA, World
3
USA
USA, Europe
3
USA
World
USA
USA, World
www.durex.com
Case study 12.2 The Fred Hollows Foundation A non-profit organization establishes lens production facilities in Nepal and Eritrea www.hollows.org
Video case study 12.3 Starbucks (13.04)
3
www.starbucks.com
Chapter 13 International sourcing decisions and the role of the subsupplier
Case study 13.1 LM Glasfiber A/S Following its customers’ international expansion in the wind turbine industry www.lmglasfiber.com
Case study 13.2 Lear Corporation A leading supplier of automotive interior systems www.lear.com
Video case study 13.3 Eaton Corporation (9.52) www.eaton.com
Chapter 14 Product decisions
Case study 14.1 Danish Klassic Launch of a cream cheese in Saudi Arabia
3
www.arla.com (regarding the Puck brand)
Case study 14.2 Zippo Manufacturing Company Has product diversification beyond the lighter gone too far? www.zippo.com
Video case study 14.3 Swiss Army (9.07) www.swissarmy.com
Chapter 15 Pricing decisions and the terms of doing business
Case study 15.1 Harley-Davidson Does the image justify the price level? www.harley-davidson.com
Case study 15.2 Gillette Co. Is price standardization possible for razor blades?
3
3
www.gillette.com
Video case study 15.3 Ford Motor Company
3
www.ford.com Four episodes from: www.fordboldmoves.com (episodes 9, 13, 21, 24) (total 14.34)
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Table 1 continued Chapter
Chapter 16 Distribution decisions
Case study title, subtitle and related websites
Case study 16.1 De Beers Forward integration into the diamond industry value chain
Country/area of company headquarters
Geographical target area
South Africa, UK
Target market B2B
B2C
Europe, World
3
3
Finland
USA
3
3
Germany
World
3
Norway
USA
3
3
Switzerland, USA
USA
3
3
Germany
USA, World
United Arab Emirates (UAE)
Europe
3
3
Japan
USA
3
3
USA
World
USA
World
3
Denmark
World
3
USA
World
3
www.debeers.com
Case study 16.2 Nokia What is wrong in the US market for mobile phones – can Nokia recapture the no. 1 position from Motorola? www.nokia.com
Video case study 16.3 DHL (10.53) www.dhl.com
Chapter 17 Communication decisions
Case study 17.1 Helly Hansen Sponsoring fashion clothes in the US market www.hellyhansen.com
Case study 17.2 Chevrolet Helping to create a global brand by a European online (and CRM) strategy www.chevroleteurope.com
Video case study 17.3 BMW Motorcycles (12.04)
3
www.bmwmotorcycle.com www.bmw.com
Chapter 18 Cross-cultural negotiations
Case study 18.1 Mecca Cola Marketing of a Muslim cola to the European market www.mecca-cola.com
Case study 18.2 Toto The Japanese toilet manufacturer seeks export opportunities for its high-tech brands in the United States www.toto.co.jp/en/
Video case study 18.3 Dunkin’ Donuts (10.30)
3
www.DunkinDonuts.com www.dunkinbrands.com
Chapter 19 Organization and control of the global marketing programme
Case study 19.1 Mars Inc. Merger of the European food, petcare and confectionary divisions www.mars.com
Case study 19.2 AGRAMKOW Fluid Systems Reconsidering its global organization structure www.agramkow.com
Video case study 19.3 McDonald’s (36.55) www.mcdonalds.com
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Table 2 Part case studies: overview Part
Part I The decision whether to internationalize
Case study title, subtitle and related websites
Case study I.1 Manchester United Still trying to establish a global brand
Country/area of company headquarters
Geographical target area
UK
Target market B2B
B2C
World, USA
3
3
Japan
Europe
3
3
Sweden
World
3
3
Switzerland, USA
World
3
Australia
World
3
USA
World (governmental organizations)
3
3
Ireland
Europe
3
3
USA (Denmark)
World
3
3
Sweden, Holland
South America (Brazil)
Sweden
World
3
Canada
World
3
www.manutd.com
Case study I.2 Bridgestone Tyres European Marketing Strategy www.bridgestone.com
Case study I.3 OneCafé A ‘Born Global’ penetrates the coffee industry www.onecafe.se
Case study I.4 Cereal Partners Worldwide (CPW) The No. 2 world player is challenging the No. 1 – Kellogg Company www.cerealpartners.co.uk
Part II Deciding which markets to enter
Case study II.1 CarLovers Carwash Serendipity as a factor in foreign market selection: the case study of CarLovers of Australia (no website available)
Case study II.2 Female Health Company The female condom, Femidom, is seeking a foothold in the world market for contraceptive products www.femalehealth.com
Case study II.3 Tipperary Mineral Water Company Market selection inside/outside Europe www.tipperary-water.ie
Case study II.4 Skagen Designs Becoming an international player in designed watches www.skagendesigns.com
Part III Market entry strategies
Case study III.1 IKEA Expanding through franchising to the South American market?
3
www.ikea.com
Case study III.2 Autoliv Air Bags Transforming Autoliv into a global company www.autoliv.com
Case study III.3 IMAX Corporation Globalization of the film business
3
www.imax.com
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Table 2 continued Part
Case study title, subtitle and related websites
Case study III.4 Heineken/AI Ahram Beverages Co. Marketing of alcoholic and non-alcoholic drinks to Egypt and other Muslim markets – does an acquisition help?
Country/area of company headquarters
Geographical target area
Target market
Holland, Egypt
Arabic world
Sweden
World, Eastern Europe
UK, Ireland
World
3
3
UK
USA, the rest of the World
3
3
UK
World
Denmark
Europe
Germany, USA
World, UK
Holland
World
Denmark
Europe
B2B
B2C
3
3
www.heineken.com www.alahrambeverages.com
Part IV Designing the global marketing programme
Case study IV.1 Absolut Vodka Defending and attacking for a better position in the global vodka market
3
www.absolut.com
Case study IV.2 Guinness How can the Irish iconic beer brand compensate for the declining sales in the home market? www.diageo.com
Case study IV.3 Dyson Vacuum Cleaner Shifting from domestic to international marketing with the famous bagless vacuum cleaner www.dyson.co.uk
Case study IV.4 Triumph Motorcycles Ltd Rising from the ashes in the international motorcycle business
3
www.triumph.co.uk
Part V Implementing and coordinating the global marketing programme
Case study V.1 Femilet An SME is seeking foothold in the European lingerie market
3
3
www.femilet.com
Case study V.2 Sony BMG New worldwide organizational structure and the marketing planning and budgeting of Dido’s new album
3
www.sonybmg.com
Case study V.3 Philips Shavers Maintaining shaving leadership in the world market
3
3
www.philips.com
Case study V.4 Vipp AS An SME uses global branding to break into the international waste bin business www.vipp.dk
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Table 3 Case studies on Internet: overview Chapter
Case study title, subtitle and related websites
Chapter 20 Global e-marketing (available only on Internet)
Case study 20.1 NTT DoCoMo Using a strong domestic position as a basis for international expansion
www.pearsoned. co.uk/hollensen
Case study 20.2 Sonic innovations A new US manufacturer of hearing aids is considering online sales in Europe
Country/area of company headquarters
Geographical target area
Target market
Japan
World
USA
Europe
USA
World
Australia, USA
World
3
3
Germany
World
3
3
Sweden
Japan
3
B2B
B2C
3
www.nttdocomo.com
3
3
www.sonici.com
Case study 20.3 Steinway & Sons Internationalizing the piano business Case study 20.4 Village Roadshow/AOL Time Warner Globalization of the theme park business
3
www.villageroadshow.com.au
Case study 20.5 3B Scientific World market leader in the niche of anatomical models www.3bscientific.com
Case study 20.6 SKF Roller Bearings The automative division is facing a big challenge in Japan www.skf.com
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Guided tour Flowcharts show how each part of the book fits into the five stages of the global marketing process.
Part I The decision whether to internationalize Chs 1–4
Part II Deciding which markets to enter Chs 5–8
An Overview outlines the topics, Case Studies, and learning objectives in each chapter, showcasing what you should expect to learn.
Part III Market entry strategies Chs 9–13
Part IV Designing the global marketing programme Chs 14–17
Part V Implementing and coordinating the global marketing programme Chs 18–19
Contents 1 Global marketing in the firm 2 Initiation of internationalization
1
3 Internationalization theories 4 Development of the firm’s international competitiveness
Global marketing in the firm
Part I Case studies I.1 Manchester United: Still trying to establish a global brand I.2 Bridgestone Tyres: European marketing strategy
Contents
I.3 OneCafé: A ‘born global’ penetrates the coffee industry
1.1 1.2 1.3 1.4 1.5
I.4 Cereal Partners Worldwide (CPW): The No. 2 world player is challenging the No.1 – Kellogg
1.6 1.7 1.8
Introduction Development of the ‘global marketing’ concept Comparison of the global marketing and management style of SMEs and LSEs Forces for ‘global integration’ and ‘market responsiveness’ The value chain as a framework for identifying international competitive advantage Value shop and ‘service value chain’ Information business and the virtual value chain Summary
Case studies 1.1 1.2 1.3
Vermont Teddy Bear Arcor Video case study: Nivea
Learning objectives After studying this chapter you should be able to do the following:
A wealth of longer Case Studies, drawn from a wide range of countries, products and industries, enhance the end of each part of the book. New and engaging Exhibits analyse and discuss specific companies to show how the theories in the chapter are used by well-known brands in the business world.
Reflects the trend of firms buying, selling and distributing products and services in most countries and regions of the world.
Internationalization Doing business in many countries of the world, but often limited to a certain region (e.g. Europe).
Characterize and compare the management style in SMEs (small and medium-sized enterprises) and LSEs (large-scale enterprises).
l
Identify drivers for ‘global integration’ and ‘market responsiveness’.
l
Explain the role of global marketing in the firm from a holistic perspective.
l
Describe and understand the concept of the value chain.
l
Identify and discuss different ways of internationalizing the value chain.
Introduction In the face of globalization and an increasingly interconnected world many firms attempt to expand their sales into foreign markets. International expansion provides new and potentially more profitable markets; helps increase the firm’s competitiveness; and facilitates access to new product ideas, manufacturing innovations and the latest technology. However, internationalization is unlikely to be successful unless the firm prepares in advance. Advance planning has often been regarded as important to the success of new international ventures (Knight, 2000). Solberg (1997) discusses the conditions under which the company should ‘stay at home’ or further ‘strengthen the global position’ as two extremes (see Figure 1.1). The framework in Figure 1.1 is based on the following two dimensions:
5
Marginal definitions highlight the key terms in each chapter. A full Glossary can be found at the end of the book and on the Global Marketing website at www.pearsoned.co.uk/hollensen.
Chapter 1 Global marketing in the firm
Exhibit 1.4 Pocoyo – upstream-downstream cooperation about globalization of an animated preschool series One of the most successful TV-programmes for preschool kids, Pocoyo, was created by Zinkia Entertainment and sold woldwide by Granada Ventures. It is now a global brand and has been sold to 95 countries since it was launched in late 2005. Produced with bright blocks of colour against a stark white background, Pocoyo has been designed to hold the attention of young children.
Pocoyo Pocoyo is a young boy with an array of qualities ready to capture the imagination of children, inspiring them to watch, listen and interact. He is a curious enthusiastic little boy in blue. As he explores his world through each story, Pocoyo gets help and on occasion hindrance from his friends Loula, Pato, Elly and Sleepy Bird. Pocoyo has at its core a fascinating concept – one of learning Source: Pocoyo TM & © 2005 Zinkia Entertainment S.L. through laughter. Clinical studies have shown that laughter not Licensed by Granada Ventures. only increases the enjoyment and engagement of children in the programme, but also is proven to increase learning by 15 per cent. By working closely with behavioural psychologists during programme development, Pocoyo uses simple and effective visual jokes that help children to discover magic and humour in the simplest of things. And far from painting an idealized version of childhood, Pocoyo is sometimes moody, noisy and miserable – just like a real pre-schooler.
The value chain of Pocoyo As illustrated in Pocoyo’s value chain (see Figure 1.12) Zinkia Entertainment is taking care of the development and production of the Pocoyo series (upstream functions) whereas Granada Ventures takes care of global licensing and publishing rights (downstream functions). Zinkia Entertainment is a company founded in 2001. Located in Madrid, Spain, its main focus is to create animated series for TV and games for mobile devices and for game platforms. The company has more than 100 employees and its series have been sold in more than 95 countries worldwide. It is a creative factory producing audiovisual content, focusing on animation and cinematic documentaries as well as interactive content for online communities, consoles and multi-player mobile games. Since the company was established, Zinkia’s projects include, among others, Pocoyo (52 × 7 minutes), a 3D animated pre-school series. In June 2006, Pocoyo was awarded the Cristal award for the ‘Best TV Series in the world’ at the 30th International Festival of Annecy. Zinkia Entertainment’s partner in the Pocoyo value chain is Granada Ventures, the merchandise, licensing and publishing division of the UK-based television channel ITV plc. Established in October 2003, following the merger of Granada and Carlton, the company’s remit is to drive secondary revenue streams for the corporation by moving brands beyond broadcast by selling them worldwide on a licensing basis, mainly to other TV channels. The company currently owns worldwide licensing and publishing rights of almost 1,000 products and 3,000 DVD title s in television, film and sports. This includes brands such as Pocoyo and Hell’s Kitchen as well as established brands such as ‘I’m A Celebrity . . . Get Me Out Of Here!’
Figure 1.12 The Pocoyo value chain
Ë 25
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Guided tour
Two insightful Case Studies conclude each chapter, providing a range of material for seminars and private study by illustrating the real life applications and implications of the topics covered in the chapter.
Chapter 1 Global marketing in the firm
Part I The decision whether to internationalize
CASE STUDY
1.2
Arcor: A Latin American confectionary player is globalizing its business
Arcor (www.arcor.com.ar/eng/) was founded in 1951 to produce sweets. However, in order to tell the company’s history fully we must go back to 1924, the year that Amos Pagani, a young Italian immigrant, decided to start up a bakery in the Province of Córdoba. In the 1970s and 1980s Arcor transformed itself into a vast industrial complex, showing the way for other companies in the country. The company continued to grow both in Argentina and in different countries in the region. In 1976 Arcor started operations in Paraguay, in 1979 in Uruguay, in 1981 in Brazil and in 1989 in Chile. In 1999 in Brazil Arcor opened the most advanced chocolate plant in the region, whose facilities also include the largest product distribution centre in that country. This was a start-up that put the company at the cutting edge of technology and production on the continent. It also permitted Arcor to consolidate its position in the very attractive Latin American market. In order to continue with its expansion process Arcor established itself in Barcelona in 2002. Arcor’s goal has always been to expand beyond the borders of its own country, and the opening of this new office allows the company to create closer bonds with customers from the European Economic Community, the Middle East and Africa. Today the Arcor Group has 35 plants in the region (27 in Argentina, four in Brazil, three in Chile, and one in Peru). ARCOR prepares more than 1,500 products in the four areas that make up its business focus: foods, confectionery, chocolates, and cookies and crackers. In all these segments the company has developed a very high degree of ‘know-how’ that has allowed it to become a true specialist in everything it produces. At present Arcor is well established in Latin America, but outside this area it is relatively weak.
Sonrisas, Merengadas, Criollitas, Rumba, Opera, Aymoré, Triunfo, Selts and more. In 2000 the Arcor Group launched www. arcorsales.com, the first food industry website in Latin America devoted to business-to-business (B2B) markets, a new trade channel for its products, to leverage those currently in use.
VIDEO CASE STUDY
1.3 download from www.pearsoned.co.uk/ hollensen
Questions 1 What would be the major obstacles to Arcor’s attempt to penetrate markets outside Latin America? 2 How could Arcor use the concept of the ‘virtual value chain’ to increase internationalization? 3 Where are Arcor’s competitive advantages in the value chain?
Nivea Nivea (www.nivea.com) is Beiersdorf’s (www.beiersdorf.com) largest brand in terms of sales, product and geographical reach. The brand is a market leader in a number of product areas, including skin care and sun care, especially in Europe. Questions 1 Which degree of ‘Market Responsiveness’ and ‘Global Coordination/Integration’ does Nivea represent? 2 Do you think that the Nivea Vital commercial (shown in the video) is able to cross borders without any adaptation? If not, which elements should be adapted?
Of the total sales in 2005 of US$1,500 million less than 5 per cent derived from outside Latin America. In the coming years, Arcor faces three big challenges within its ‘international expansion’ framework: becoming the No. 1 Latin American confectionary and chocolate company; continuing to grow and establish itself in high development potential markets outside Latin America, such as the emerging Asian markets; and strengthening product penetration in the most demanding markets in the world: the United States, Japan and the European Union. The group is an active participant in various strategic alliances (production and/or marketing agreements) with international players, such as Nestlé and Brach’s. The most recent example is the partnership with Danone Group (France) in the biscuits and cereal bar business in Argentina, Brazil, and Chile. In April 2004 the two companies merged their biscuit manufacturing activities into a single company, Bagley Latinoamérica SA, which resulted in the biggest biscuit company in South America. The joint venture company is owned 49 per cent by Danone SA (France) and 51 per cent by Arcor. This partnership includes highly recognized brands in local markets like Formis, Maná, Saladix, Hogareñas,
38
After reading the chapter, take your learning further by watching a Video Case Study from a leading international company on the Global Marketing Companion Website at www.pearsoned.co.uk/hollensen, and answer the questions.
3 Which marketing problems does Nivea anticipate, when penetrating the US market?
For further exercises and cases, see this book’s website at www.pearsoned.co.uk/hollensen
?
Questions for discussion 1 What is the reason for the ‘convergence of orientation’ in LSEs and SMEs? 2 How can an SME compensate for its lack of resources and expertise in global marketing when trying to enter export markets? 3 What are the main differences between global marketing and marketing in the domestic context? 4 Explain the main advantages of centralizing upstream activities and decentralizing downstream activities. 5 How is the ‘virtual value chain’ different from the ‘conventional value chain’?
References Asugman, G., Johnson, J.L. and McCullough, J. (1997) ‘The role of after-sales service in international marketing’, Journal of International Marketing, 5(4), pp. 11–28. Auguste, B.G., Harmon, E.P., Pandit, V. (2006) ‘The right service strategies for product companies’, McKinsey Quarterly, 1 March, pp. 10–15.
39
The References list sources – books, journal articles and websites – that will help develop your understanding and inspire independent learning.
Test yourself at the end of each chapter with a set of Questions for Discussion. Then try answering the self assessment Multiple Choice Questions that accompany each chapter on the Global Marketing Companion Website at www.pearsoned.co.uk/hollensen.
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Acknowledgements Writing any book is a long-term commitment and involves time-consuming effort. The successful completion of a book depends on the support and generosity of many people and the realization of this book is certainly no exception. I wish to thank the many scholars whose articles, books and other materials I have cited or quoted. However, it is not possible to acknowledge everyone by name. In particular I am deeply indebted to the following individuals and organizations. I thank you all for your help and contribution:
University of Southern Denmark l Management at University of Southern Denmark provided the best possible environment for writing and completing this project. l Colleagues provided encouragement and support during the writing process. l Charlotte Hansen took care of word processing of my drafts in a highly efficient manner. Furthermore she created many of the new figures in an imaginative way. l The Library at University of Southern Denmark provided articles and books from different worldwide sources. Reviewers l Reviewers provided suggestions which were useful in improving many parts of the text. l In the development of this text a number of reviewers have been involved, whom I would like to thank for their important and valuable contribution: Henrik Agndal, Jönköping International Business School; Grahame Fallon, University College Northampton; Ronald Salters, Fontys Eindhoven. l Professor Alkis Magdalinos, contributed with many necessary corrections and suggestions for improvement in different sections of the book. Case contributors l Edel Foley and Eibhlin Curley, Ireland for Case 2.1: Blooming Clothing. l Bill Merrilees and Dale Miller, Marketing Group, Department of Management, University of Newcastle, Australia for Case II.1: CarLovers Carwash. l Wim Wils, Fontys Eindhoven, for Case 8.1: Philips Lighting. l Sjoerd Drost, Product manager, Philips Shavers, for Case V.3: Philips Shavers. l Eric Wepiere, Manager CRM and Internet, Chevrolet Europe, for Case 14.2: Chevrolet. I also wish to acknowledge the help from the following firms whose managers have provided valuable material that has enabled me to write the following cases. I have been in direct personal contact with most of the following companies and thank the managers involved for their very useful comments. Chapter cases: l Cryos, Aarhus, Denmark for Case 3.1 on Cryos. l Entertainment Rights, London, UK for Case 3.2 on Postman Pat. l Teepack Spezialmaschinen GmbH, Düsseldorf, Germany for Case 5.1 on Teepack Spezialmaschinen. l IKEA, Sweden for Case 7.2 on the IKEA Catalogue. l Arcus AS, Oslo, Norway for Case 10.1 on Lysholm Linie Aquavit. l Ka-Boo-Ki, Ikast, Denmark for Case 11.1 on Ka-Boo-Ki.
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Acknowledgements l l
Chevrolet Europe, Switzerland, for Case 17.2 on Chevrolet. AGramkow, Sønderborg, Denmark for Case 19.2 on AGRAMKOW Fluid Systems.
Part cases: l Bridgestone/Firestone, Bruxelles, Belgium/Tokyo, Japan for Case I.2: Bridgestone Tyres l OneCafé International AB, Sweden for Case I.3: OneCafé l Skagen Designs, Reno, USA and Copenhagen, Denmark for Case II.4: Skagen Designs l Autoliv AB, Stockholm, Sweden for Case III.3: Autoliv Air Bags l IMAX Corporation, Toronto, Canada for Case III.4: Imax Corporation l The Absolut Company, a division of Vin & Sprit AB, Stockholm, Sweden for Case IV.1: Absolut Vodka l Femilet, Ikast, Denmark for Case V.1: Femilet l Sony BMG, New York, USA for Case V.2: Sony BMG l Philips Shavers, Eindhoven, Holland for Case V.3: Philips Shavers l Vipp A/S, Copenhagen, Denmark for Case V.4: Vipp. I would also like to thank Madame Tussaud Group, especially Global Marketing Director Nicky Marsh from London and Cathy Wong, External Affairs Consultant from Shanghai for their contribution to Exhibit 14.2. I am also grateful to the following international advertising agencies, which have provided me with examples of standardized and/or localized advertising campaigns: l
l
l
l
Tribal DDB who contributed with viral marketing picture material for Exhibit 18.8: ‘Quintippio’ viral ad campaign. J. Walter Thompson (JWT Europe), London who contributed with a European ad for LUX soap. Hindustan Thompson (HTA), Bombay, India who contributed with an ad for Kellogg’s Basmati Flakes in India and an ad for LUX soap in India. Ammirati Puris Lintas, Hamburg, Germany who contributed with an ad from the ‘Me and my Magnum’ campaign.
I would also like to thank LEGO and Langnese (special thanks to Silke for her efforts to get the Magnum ad) for their contributions to different examples in the book. I am grateful to my publisher, Pearson Education. I would like to thank Acquisitions Editor David Cox (and former Acquisitions Editor Thomas Sigel), Editorial Assistant Andrew Harrison and Desk Editor Georgina Clark-Mazo for their help with this edition. I also extend my greatest gratitude to my colleagues at the University of Southern Denmark for their constant help and inspiration. Finally, I thank my family for their support through the revision process. I am pleased to dedicate this version to Jonna, Nanna and Julie. Svend Hollensen University of Southern Denmark, Sønderborg, Denmark January 2007
[email protected]
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Publisher’s acknowledgements We are grateful to the following for permission to reproduce copyright material: Figure 1.1 from A framework for analysis of strategy development in globalizing markets, Journal of International Marketing, Vol. 5 (1), reprinted by permission of American Marketing Association (Solberg, C.A. 1997); Figure 1.4 from The strategy concept I: five Ps for strategy, California Management Review, Vol. 30, No. 1, reprinted by permission of The Regents of the University of California (Mintzberg, H. 1987); Figure 1.5 from Rethinking incrementalism, Strategic Management Journal, Vol. 9, reprinted by permission of John Wiley & Sons Ltd (Johnson, G. 1988); Figure 1.8 from In Search of Excellence: Lessons from America’s Best Run Companies, reprinted by permission of HarperCollins Publishers Inc. (Peters, T.J. and Waterman, Jr, R.H. 1982); Figure 1.9 adapted from Competitive Advantage: Creating and Sustaining Superior Performance, reprinted by permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group (Porter, M.E. 1985); Table 2.1 adapted from International Marketing and Export Management, 2nd Edition, Addison-Wesley, reprinted by permission of Pearson Education Ltd (Albaum, G. et al. 1994); Figure 3.1 adapted from International føretagsekonomi, Norstedts, reprinted by permission of Mats Forsgren (Forsgren, M. and Johanson, J. 1975); Figures 3.2 and 3.3 from Internationalization: evolution of a concept, Journal of General Management, Vol. 14, No. 2, reprinted by permission of The Braybrooke Press Ltd (Welch, L.S. and Loustarinen, R. 1988); Figure 3.6 from Internationalization in industrial systems in Strategies in Global Competition edited by N. Hood and J.E. Vahlne, Croom Helm, reprinted by permission of Thomson Publishing Services (Johanson, J. and Mattson, L.G. 1988); Figure 3.7 adapted from Internationalization Handbook for the Software Business, reprinted by permission of Centre of Expertise for Software Product Business (Âijö, T. et al. 2005); Table 4.2 from Composite strategy: the combination of collaboration and competition, Journal of General Management, Vol. 21, No.1, reprinted by permission of The Braybrooke Press Ltd (Burton, J. 1995); Figure 4.4 adapted from Competitive advantage: merging marketing and competence-based perspective, Journal of Business and Industrial Marketing, Vol. 9, No. 4, reprinted by permission of Hans P. Wehrli (Jüttner, U.
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and Wehrli, H.P. 1994); Figure 4.5 from Exploiting the core competences of your organization, Long Range Planning, Vol. 27, No. 4, reprinted by permission of Elsevier (Tampoe, M. 1994); Figure 5.5 from Contemporary Marketing Research, 2nd Edition, Copyright © 1993, reprinted with permission of John Wiley & Sons, Inc. (McDaniel, Jr., C. and Gates, R. 1993); Figure 5.8 from Marketing Research: An International Approach, reprinted by permission of Pearson Education Ltd (Schmidt, M.I. and Hollensen, S. 2006); Table 6.1 from The Economist 25 March 2006, © The Economist Newspaper Ltd, London (25.3.06), reprinted by permission of The Economist Newspaper Ltd; Figure 6.3 from Global Marketing, 1st Edition, reprinted with permission of South-Western, a division of Thomson Learning (Czinkota, M.R. and Ronkainen, I.A. 1996); Table 7.2 adapted from International Marketing Strategy: Analysis, Development and Implementation, Thomson Learning, reprinted by permission of Thomson Publishing Services (Phillips, C. et al. 1994); Figure 7.3 from International Marketing: A Cultural Approach, reprinted by permission of Pearson Education Ltd (Usunier, J.-C. 2000); Table 7.4 from Going International, Random House, reprinted by permission The Sagalyn Agency (Copeland, L. and Griggs, L. 1985); Figures 8.6 and 8.7 reprinted by permission of Konica Minolta Printing Solutions Europe; Figure 8.8 from European Business: An Issue-Based Approach, 3rd Edition, Pitman, reprinted by permission of Pearson Education Ltd (Welford, R. and Prescott, K. 1996); Figure 8.11 from Global Marketing Management, Prentice Hall, reprinted by permission of Pearson Education, Inc. (Keegan, W.J. 1995); Figure 8.12 from International Marketing Strategy, 2nd Edition, Prentice Hall, reprinted by permission of Pearson Education Ltd (Bradley, F. 1995); Figure 8.13 from Market expansion strategies in multinational marketing, Journal of Marketing, Vol. 43, Spring, reprinted by permission of American Marketing Association (Ayal, I. And Zif, J. 1979); Table 10.1 from Entry Strategies for International Markets: Revised and Expanded Edition, reprinted by permission of John Wiley & Sons, Inc. (Root, F.R. 1994); Figure 11.4 adapted from Strategiske allianser i globale strategier, Norges Eksportråd, reprinted by permission of Index Publishing/Norwegian Trade Council (Lorange, P. and Roos, J. 1995); Figures 11.5
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and 11.6 from Strategies for Joint Ventures, reprinted by permission of K.R. Harrigan (Harrigan, K.R. 1985); Figure 12.2 from Oviatt, B.M. and McDougall, P.P., Toward a theory of international new ventures, Journal of International Business Studies, Vol. 25, No. 1, 1994, reproduced with permission of Palgrave Macmillan (Oviatt, B.M. and McDougall, P.P. 1994); Figure 12.3 from Organisational dimensions of global marketing, European Journal of Marketing, Vol. 23, No. 5, reprinted by permission of Emerald Publishing Ltd (Raffée, H. and Kreutzer, R. 1989); Figure 12.4 from Regional headquarters: the spearhead for Asian Pacific markets, Long Range Planning, Vol. 29, No. 1, reprinted by permission of Elsevier (Lasserre, P. 1996); Figure 12.5 from Why are subsidiaries divested? A conceptual framework, Working Paper No.3-93, reprinted by permission of Institute of International Economics and Management, Copenhagen Business School (Benito, G. 1996); Figure 13.1 adapted from Alihankintajarjestelma 1990-luvulla [Subcontracting System in the 1990s], Publications of SITRA, No. 114, reprinted by permission of Sitra (Lehtinen, U. 1991); Table 13.1 and Figure 13.6 from Relationship marketing from a value system perspective, International Journal of Service Industry Management, No. 5, reprinted by permission of Emerald Publishing Ltd (Jüttner, U. and Wehrli, H.P. 1994); Figure 13.3 from A total cost/value model for supply chain competitiveness, Journal of Business Logistics, Vol. 13, No. 2, reprinted by permission of Council of Logistics Management (Cavinato, J.L. 1992); Figure 13.4 adapted from Interactive strategies in supply chains: a doubleedged portfolio approach to SME, Subcontractors Positioning Paper presented at the 8th Nordic Conference on Small Business Research, reprinted by permission of Per Blenker (Blenker, P. and Christensen, P.R. 1994); Figure 13.5 from Strategies for International Industrial Marketing, Croom Helm, reprinted by permission of Thomson Publishing Services (Turnbull, P.W. and Valla, J.P. 1986); Part IV, Figure 3, p. 419, from Standardisation: an integrated approach to global marketing, European Journal of Marketing, Vol. 22, No. 10, reprinted by permission of Emerald Group Publishing Ltd (Kreutzer, R. 1988); Table 14.2 adapted from The international dimension of branding: strategic considerations and decisions, International Marketing Review, Vol. 6, No. 3, reprinted by permission of Emerald Publishing Ltd (Onkvisit, S. and Shaw, J.J. 1989); Table 14.3 from The future of consumer branding as seen from the picture today, Journal of Consumer Marketing, Vol. 12, No. 4, reprinted by permission of Emerald Group Publishing Ltd (Boze, B.V. and Patton, C.R. 1995); Figure 14.5 partly reprinted from Competitive analysis using matrix displays, Long Range Planning, Vol. 17, No. 3, reprinted by permission of
Elsevier (McNamee, P. 1984); Figure 14.6 from International Marketing: Analysis and Strategy, 2nd Edition, Macmillan, reprinted by permission of Sak Onkvisit (Onkvisit, S. and Shaw, J.J. 1993); Figures 14.8 and 14.9 from New products: cutting the time to market, Long Range Planning, Vol. 28, No. 2, reprinted by permission of Elsevier (Töpfer, A. 1995); Figure 14.12 adapted from International Marketing: Analysis and Strategy, 2nd Edition, Macmillan, reprinted by permission of Sak Onkvisit (Onkvisit, S. and Shaw, J.J. 1993); Figure 14.17 adapted from Environmentally responsible logistics systems, International Journal of Physical Distribution and Logistics Management, Vol. 25, No. 2, reprinted by permission of Emerald Group Publishing Ltd (Wu, H.J. and Dunn, S.C. 1995); Figure 15.5 from Pricing conditions in the European Common Market, European Management Journal, Vol. 12, No. 2, reprinted by permission of Elsevier (Diller, H. and Bukhari, I. 1994); Figure 15.7 from The European pricing bomb – and how to cope with it, Marketing and Research Today, February, reprinted by permission of ESOMAR (Simon, H. and Kucher, E. 1993); Figure 15.9 and Table 17.3 from International Marketing Strategy: Analysis, Development and Implementation, Thomson Learning, reprinted by permission of Thomson Publishing Services (Phillips, C. et al. 1994); Table 16.1 from Are you tough enough to manage your channels?, The McKinsey Quarterly, No. 1, reprinted by permission of McKinsey and Company (Bucklin, C.B. et al. 1996); Figure 16.2 from International Marketing, 8th Edition, Irwin, reprinted by permission of The McGraw-Hill Companies, Inc. (Cateora, P.R. 1993); Figure 16.3 from US-Japan distribution channel cost structures: is there a significant difference?, International Journal of Physical Distribution and Logistics Management, Vol. 27, No. 1, reprinted by permission of Emerald Group Publishing Ltd (Pirog III, S.F. and Lancioni, R. 1997); Figure 16.4 from Marketing Management: An Overview, The Dryden Press, reprinted by permission of Dale M. Lewison (Lewison, D.M. 1996); Figure 16.5 adapted from Marketing Management: An Overview, The Dryden Press, reprinted by permission of Dale M. Lewison (Lewison, D.M. 1996); Figure 16.8 from International Marketing Management, 5th Edition, reprinted by permission of South-Western, a division of Thomson Learning (Jain, S.C. 1996); Figures 16.9 and 16.10 from International Marketing and Export Management, 2nd Edition, reprinted by permission of Pearson Education Ltd (Albaum, G. et al. 1994); Figure 16.13 from International Marketing, Heinemann, reprinted by permission of Butterworth Heinemann Publishers, a division of Reed Educational & Professional Publishing Ltd (Paliwoda, S. 1993); Figure 17.5 adapted from Trade fairs as international
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marketing venues: a case study, paper presented at the 12th IMP Conference, University of Karlsruhe, reprinted by permission of P.J. Rosson (Rosson, P.J. and Seringhaus, F.H.R. 1996); Table 17.5 from Guidelines for managing an international sales force, Industrial Marketing Management, Vol. 24, reprinted by permission of Elsevier (Honeycutt, E.D. and Ford, J.B. 1995); Exhibit 17.8, p. 568, Figure from The Cutting Edge in The Economist, 16 March 2006, © The Economist Newspaper Limited, London (16.3.06), reprinted by permission of The Economist; Exhibit 19.1, p. 656, Figure Sauer-Danfoss Production Locations reprinted by permission of Sauer-Danfoss Inc.; Table 19.1 adapted from Principles and Practice of Marketing, 3rd Edition, pub McGraw-Hill, reproduced with the kind permission of the McGraw-Hill Publishing Company; Table 19.3 adapted from Marketing Management: Analysis, Planning, Implementation and Control, 9th Edition, Prentice Hall, reprinted by permission of Pearson Education, Inc. (Kotler, P. 1997); Figure 19.11 from Samli, A.C. et al., International Marketing: Planning and Practice, 1993, Macmillan, reproduced with permission of Palgrave Macmillan (Samli, A.C. et al. 1993). We are grateful to the following for permission to reproduce Case Study material: Case Study 2.2 screen shot from www.elvis.com, Elvis image used by permission, Elvis Presley Enterprises, Inc.; Case Study 3.1 screen shot from www.cryos.dk reprinted by permission of Cryos International Sperm Bank Ltd; Case Study 3.2 screen shot and image reprinted by permission of Entertainment Rights, London, UK; Case Study I.1 screen shot from www.ManUtd.com reprinted by permission of Manchester United Limited; Case Study 5.1 screen shot from www.teepack.com reprinted by permission of Teepack Spezialmaschinen GmbH & Co. KG; Case Study 5.2 reprinted by permission of Tchibo FrischRöst-Kaffee GmbH; Case Study 6.1 screen shot from www.worldbank.com republished with permission of The World Bank, from World Bank Online, 2003; permission conveyed through Copyright Clearance Center, Inc.; Case Study 6.2 screen shot from www.sauer-danfoss.com reprinted by permission of Sauer-Danfoss Inc.; Case Study 9.1 screen shot from www.norseland.com reprinted by permission of Norseland, Incorporated; Case Study 12.2 screen shot from www.hollows.org courtesy of The Fred Hollows Foundation/www.hollows.org; Case Study III.1 screen shot from www.ikea.com reprinted by permission of IKEA Ltd; Case Study III.2 screen shot from www.autoliv.com reprinted by permission of Autoliv Inc.; Case Study III.3 screen shot and image reprinted
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by permission of IMAX Corporation; Case Study III.4 screen shot from www.alahrambeverages.com reprinted by permission of Al Ahram Beverages Company; Case Study 14.2 screen shot from www.zippo.com reprinted by permission of Zippo Manufacturing Company; Case Study IV.1 screen shot from www.absolut.com reprinted by permission of V&S Vin & Sprit AB (publ); Case Study 18.1 screen shot from www.mecca-cola.com reprinted by permission of Mecca Cola World. We are grateful to the following for permission to reproduce pictures: Exhibit 1.3 images reprinted by permission of McDonald’s Corporation; Exhibit 1.4 image Pocoyo TM & © 2005 Zinkia Entertainment S.L. Licensed by Granada Ventures; Exhibit 2.2 image © Michael Reynolds/epa/Corbis; Exhibit 4.1 image Tony Souter, Copyright © Dorling Kindersley; Case Study 4.1 image reprinted by permission of Microsoft Corporation. Microsoft, Xbox and Xbox 360 are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries; Case Study 4.2 image Sjoerd Drost, Senior Consumer Marketing Manager, Philips; Case Study I.3 images reprinted by permission of OneCafé International AB; Case Study I.4 the ‘Cheerios’, ‘Nesquik’, ‘Shreddies’ or ‘Shredded Wheat’ name and image is reproduced with the kind permission of Société des Produits Nestlé S.A.; Exhibit 7.3 image reprinted by permission of Polaroid Corporation; Exhibit 7.4 screen shot from Pocari Sweat website reprinted by permission of Otsuka Pharmaceutical Co., Ltd; Case Study 7.2 images reprinted by permission of Inter IKEA Holding Services S.A.; Exhibit 8.2 image reprinted by permission of Sara Lee; Case Study 8.1 image reprinted by permission of Wim Wilms; Case Study 8.2 image reprinted by permission of Mac Baren Tobacco Company; Case Study II.2 image reprinted by permission of The Female Health Company and Mayer Laboratories, Inc. (www.mayerlabs.com), US distributor of the Female Condom; Case Study II.3 images reprinted by permission of Tipperary Mineral Water Company; Case Study II.4 images reprinted by permission of Skagen Designs; Case Study 9.2 image reprinted by permission of Ansell Healthcare Europe; Case Study 10.1 Linie Aquavit advertisement reprinted by permission of Arcus; Case Study 10.2 Parle-G advertisement reprinted by permission of Parle Products Pvt Ltd; Case Study 11.1 LEGO Kids Wear advertisement reprinted by permission of KA-BOO-KI A/S; Exhibit 14.2 image (left) reprinted by permission of Madame Tussauds London; Exhibit 14.2 image (right) reprinted by permission of Madame Tussauds Shanghai; Chapter 14, p. 449, image reprinted
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by permission of Orgasmic Chocolates; Exhibit 14.8 images reprinted by permission of Ducati; Case Study 14.1 Danish Klassic advertising material and Puck Cream Cheese advertisement reprinted by permission of Arla Foods amba; Case Study 14.1 image Hassan Ammar/AFP/Getty Images; Case Study 15.1 image Ann Heisenfelt/AP/EMPICS; Case Study 15.2 image reprinted by permission of Gillette, The Procter & Gamble Company; Exhibit 17.5 image reprinted by permission of Diageo; Exhibit 17.8 images reprinted by permission of Tribal DDB; Chapter 17, p. 571, Gammel Dansk advertisement reprinted by permission of Danisco Distillers Berlin GmbH; Chapter 17, p. 572, LEGO® FreeStyle in the Far East, © 1997 and LEGO® FreeStyle in Europe, © 1997 advertisements reprinted by permission of LEGO System A/S; Case Study 17.1 Helly Hansen advertisement reprinted by permission of A/S Helly Hansen; Case Study 17.2 image reprinted by permission of Nokia; Case Study IV.1 Absolut advertisements and images reprinted by permission of V&S Vin and Sprit AB (publ); Case Study IV.2 images reprinted by permission of Diageo; Case Study IV.3 image Matthew Fearn/PA/EMPICS; Case Study IV.4 Triumph motorcycle reprinted by permission of Triumph Motorcycles Ltd; Exhibit 18.2 image Copyright © Disney, reprinted by permission of
Euro Disney Associés S.C.A.; Case Study 18.2 images reprinted by permission of TOTO Ltd; Case Study 19.1 image Martin Keene/PA/EMPICS; Case Study V.1 images reprinted by permission of Femilet; Case Study V.2 image reprinted by permission of Sony BMG Music Entertainment (UK) Ltd; Case Study V.3 images reprinted by permission of Philips Shavers; Case Study V.4 Vipp advertisements and images reprinted by permission of Vipp AS. We are grateful to the following for permission to reproduce texts: Exhibit 13.1 from Network sourcing: A hybrid approach, International Journal of Purchasing and Materials Management, Vol. 31, No. 2, Spring, reprinted by permission of The National Association of Purchasing Management (Hines, P. 1995); Chapter 14, p. 425, extract from Developing global strategies for service businesses, California Management Review, Vol. 38, No. 2, reprinted by permission of The Regents of the University of California (Lovelock, C. and Yip, G.S. 1996). In some instances we have been unable to trace the owners of copyright material, and we would appreciate any information that would enable us to do so.
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Abbreviations ACs APEC ASEAN B2B B2C BDA BER BERI C2B C2C C&F CATI CEO CFR CIF CIP CPT CRM DAF DDP DDU DEQ DES DSS ECB ECO ECSC EDI EDLP EEA EEC EFTA EMC EMEA EMU EU EXW FAS FCA FDI FMCG FOB FSC GAM GATT GDP GNI GNP
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advanced countries Asia Pacific Economic Cooperation Association of South East Asian Nations business to business business to consumer before–during–after business environment risk best alternative to a negotiated agreement consumer to business consumer to consumer customs and freight computer-assisted telephone interviews chief executive officer cost and freight cost, insurance and freight carriage and insurance paid to carriage paid to customer relationship management delivered at frontier delivered duty paid delivered duty unpaid delivered ex-quay delivered ex-ship decision support system European Central Bank ecology European Coal and Steel Community electronic data interchange everyday low prices European Economic Area European Economic Community European Free Trade Area Export Management Company Europe, Middle East and Africa European Economic and Monetary Union European Union: title for the former EEC used since the ratification of the Maastricht Treaty in 1992 ex-works free alongside ship free carrier foreign direct investment: a market entry strategy in which a company invests in a subsidiary or partnership in a foreign market (joint venture) fast-moving consumer goods free on board: the seller quotes a price covering all expenses up to the point of shipment foreign sales corporation global account management General Agreement on Tarrifs and Trade gross domestic product gross national income gross national product: the total ‘gross value’ of all goods and services produced in the economy in one year
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Abbreviations
GPC GRP HQ IDR IMF IMS IPLC ISO ISP IT KAM L/C LDCs LSEs LTO M&A MIS MNCs MNE NAFTA NICs OE OECD
OEM OLI OPEC OTS PDA PEST PLC POS PPP PR QDF R&D RM RMC ROA ROI SBU SMEs SMS SRC TC TCA TF TQM URL USP VAT VER WAP WTO
global pricing contract gross rating point headquarters intermediation–disintermediation–reintermediation International Monetary Fund international market selection international product life cycle International Standards Organization internet service provider information technology key account management letter of credit less developed countries large-scale enterprises long-term orientation merger and acquisition marketing information system multinational corporations multi-national enterprise North American Free Trade Agreement: a free trade agreement to establish an open market between the United States, Canada and Mexico newly industrialised countries operational effectiveness Organization for Economic Cooperation and Development: a multinational forum that allows the major industrialised nations to discuss economic policies and events original equipment manufacturer (outsourcer) ownership-location-internalization Organization for Petroleum Exporting Countries opportunity to see personal digital assistant political/legal, economic, social/cultural, technological product life cycle: a theory that characterises the sales history of products as passing through four stages: introduction, growth, maturity, decline point of sale purchasing-power parity public relations quality deployment function research and development relationship management regional management centre return on assets return on investment strategic business unit: a single business or a collection of related businesses that can be planned separately from the rest of the company small and medium-sized enterprises short message service self-reference criterion transaction cost transactional cost analysis trade fair total quality management universal unique selling proposition value added tax voluntary export restraint wireless application protocol World Trade Organization (successor to GATT)
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About the author Svend Hollensen is an Associate Professor of International Marketing at University of Southern Denmark. He holds an MSc (Business Administration) from Aarhus Business School. He has practical experience from a job as International Marketing Coordinator in a large Danish multinational enterprise as well as from being International Marketing Manager in a company producing agricultural machinery. After working in industry Svend received his PhD in 1992 from Copenhagen Business School. He has published articles in journals and is the author of two case books that focus on general marketing and international marketing (published by Copenhagen Business School Press). With Pearson Education he has published Marketing Management – A Relationship Approach (a second edition is planned for 2008) as well as Marketing Research – An International Approach (May 2006), together with Marcus Schmidt. Svend has also worked as a business consultant for several multinational companies, as well as global organizations such as the World Bank. The author may be contacted via: University of Southern Denmark Alsion 2 DK-6400 Sønderborg Denmark e-mail:
[email protected]
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Part I The decision whether to internationalize Chs 1–4
Part II Deciding which markets to enter Chs 5–8
Part III Market entry strategies Chs 9–13
Part IV Designing the global marketing programme Chs 14–17
Part V Implementing and coordinating the global marketing programme Chs 18–19
Contents 1 Global marketing in the firm 2 Initiation of internationalization 3 Internationalization theories 4 Development of the firm’s international competitiveness
Part I Case studies I.1 Manchester United: Still trying to establish a global brand I.2 Bridgestone Tyres: European marketing strategy I.3 OneCafé: A ‘born global’ penetrates the coffee industry I.4 Cereal Partners Worldwide (CPW): The No. 2 world player is challenging the No.1 – Kellogg
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Part
I
THE DECISION WHETHER TO INTERNATIONALIZE Introduction to Part I It is often the case that a firm going into an export adventure should have stayed in the home market because it did not have the necessary competences to start exporting. Chapter 1 discusses competences and global marketing strategies from the value chain perspective. Chapter 2 discusses the major motivations of the firm to internationalize. Chapter 3 concentrates on some central theories that explain firms’ internationalization processes. Chapter 4 discusses the concept of ‘international competitiveness’ from a macro level to a micro level.
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1
Global marketing in the firm Contents 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Introduction Development of the ‘global marketing’ concept Comparison of the global marketing and management style of SMEs and LSEs Forces for ‘global integration’ and ‘market responsiveness’ The value chain as a framework for identifying international competitive advantage Value shop and ‘service value chain’ Information business and the virtual value chain Summary
Case studies 1.1 1.2 1.3
Vermont Teddy Bear Arcor Video case study: Nivea
Learning objectives After studying this chapter you should be able to do the following:
1.1 Globalization Reflects the trend of firms buying, selling and distributing products and services in most countries and regions of the world.
Internationalization Doing business in many countries of the world, but often limited to a certain region (e.g. Europe).
l
Characterize and compare the management style in SMEs (small and medium-sized enterprises) and LSEs (large-scale enterprises).
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Identify drivers for ‘global integration’ and ‘market responsiveness’.
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Explain the role of global marketing in the firm from a holistic perspective.
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Describe and understand the concept of the value chain.
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Identify and discuss different ways of internationalizing the value chain.
Introduction In the face of globalization and an increasingly interconnected world many firms attempt to expand their sales into foreign markets. International expansion provides new and potentially more profitable markets; helps increase the firm’s competitiveness; and facilitates access to new product ideas, manufacturing innovations and the latest technology. However, internationalization is unlikely to be successful unless the firm prepares in advance. Advance planning has often been regarded as important to the success of new international ventures (Knight, 2000). Solberg (1997) discusses the conditions under which the company should ‘stay at home’ or further ‘strengthen the global position’ as two extremes (see Figure 1.1). The framework in Figure 1.1 is based on the following two dimensions:
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Part I The decision whether to internationalize
Figure 1.1 The nine strategic windows
Source: Solberg, 1997, p. 11. Reprinted with kind permission. In the original article Solberg has used the concept ‘globality’ instead of ‘globalism’.
Industry globalism In principle, the firm cannot influence the degree of industry globalism, as it is mainly determined by the international marketing environment. Here the strategic behaviour of firms depends on the international competitive structure within an industry. In the case of a high degree of industry globalism there are many interdependencies between markets, customers and suppliers, and the industry is dominated by a few large powerful players (global), whereas the other end (local) represents a multidomestic market environment, where markets exist independently from one another. Examples of very global industries are PCs, IT (software), records (CDs), movies and aircrafts (the two dominant players being Boeing and Airbus). Examples of more local industries are the more culture-bounded industries, like hairdressing, foods and dairies (e.g. brown cheese in Norway).
Preparedness for internationalization This dimension is mainly determined by the firm. The degree of preparedness is dependent on the firm’s ability to carry out strategies in the international marketplace, i.e. the actual skills in international business operations. These skills or organizational capabilities may consist of personal skills (e.g. language, cultural sensitivity, etc.), the managers’ international experience or financial resources. The well-prepared company (mature) has a good basis for dominating the international markets and consequently it would gain higher market shares. In the global/international marketing literature the ‘staying at home’ alternative is not discussed thoroughly. However, Solberg (1997) argues that with limited international experience and a weak position in the home market there is little reason for a firm to engage in international markets. Instead the firm should try to improve its performance in its home market. This alternative is window number 1 in Figure 1.1. If the firm finds itself in a global industry as a dwarf among large multinational firms, then Solberg (1997) argues that it may seek ways to increase its net worth so as
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Chapter 1 Global marketing in the firm SMEs SME occurs commonly in the EU and in international organizations. The EU categorizes companies with fewer than 50 employees as ‘small’, and those with fewer than 250 as ‘medium’. In the EU, SMEs (250 employees and less) comprise approximately 99 per cent of all firms.
1.2
to attract partners for a future buyout bid. This alternative (window number 7 in Figure 1.1) may be relevant to SMEs selling advanced high-tech components (as subsuppliers) to large industrial companies with a global network. In situations with fluctuations in the global demand the SME (with limited financial resources) will often be financially vulnerable. If the firm has already acquired some competence in international business operations it can overcome some of its competitive disadvantages by going into alliances with firms representing complementary competences (window number 8). The other windows in Figure 1.1 are further discussed by Solberg (1997).
Development of the ‘global marketing’ concept Basically ‘global marketing’ consists of finding and satisfying global customer needs better than the competition, and of coordinating marketing activities within the constraints of the global environment. The form of the firm’s response to global market opportunities depends greatly on the management’s assumptions or beliefs, both conscious and unconscious, about the nature of doing business around the world. This worldview of a firm’s business activities can be described as the EPRG framework (Perlmutter, 1969; Chakravarthy and Perlmutter, 1985): its four orientations are summarized as follows: l
l
l
l
Ethnocentric: the home country is superior and the needs of the home country are most relevant. Essentially headquarters extends ways of doing business to its foreign affiliates. Controls are highly centralized and the organization and technology implemented in foreign locations will essentially be the same as in the home country. Polycentric (multidomestic): each country is unique and therefore should be targeted in a different way. The polycentric enterprise recognizes that there are different conditions of production and marketing in different locations and tries to adapt to those different conditions in order to maximize profits in each location. The control with affiliates is highly decentralized and communication between headquarters and affiliates is limited. Regiocentric: the world consists of regions (e.g. Europe, Asia, the Middle East). The firm tries to integrate and coordinate its marketing programme within regions, but not across them. Geocentric (global): the world is getting smaller and smaller. The firm may offer global product concepts but with local adaptation (‘think global, act local’).
The regio- and geocentric firm (in contrast to the ethnocentric and polycentric) seeks to organize and integrate production and marketing on a regional or global scale. Each international unit is an essential part of the overall multinational network, and communications and controls between headquarters and affiliates are less top-down than in the case of the ethnocentric firm. This leads us to a definition of global marketing: Global marketing is defined as the firm’s commitment to coordinate its marketing activities across national boundaries in order to find and satisfy global customer needs better than the competition. This implies that the firm is able to: l
develop a global marketing strategy, based on similarities and differences between markets;
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l
l
exploit the knowledge of the headquarters (home organization) through worldwide diffusion (learning) and adaptations; transfer knowledge and ‘best practices’ from any of its markets and use them in other international markets. There follows an explanation of some key terms:
l
l
l
l
Glocalization The development and selling of products or services intended for the global market, but adapted to suit local culture and behaviour. (Think globally, act locally.)
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.
The second part of the global marketing definition is also illustrated in Figure 1.2 and further commented on below. This global marketing strategy strives to achieve the slogan, ‘think globally but act locally’ (the so-called ‘glocalization’ framework), through dynamic interdependence between headquarters and subsidiaries. Organizations following such a strategy coordinate their efforts, ensuring local flexibility while exploiting the benefits of global integration and efficiencies, as well as ensuring worldwide diffusion of innovation. A key element in knowledge management is the continuous learning from experiences. In practical terms, the aim of knowledge management as a learning-focused activity across borders is to keep track of valuable capabilities used in one market that could be used elsewhere (in other geographic markets), so that firms can continually update their knowledge. This is also illustrated in Figure 1.2 with the transfer of knowledge and ‘best practices’ from market to market. However, knowledge developed and used in one cultural context is not always easily transferred to another. The lack of personal relationships, the absence of trust, and ‘cultural distance’, all conspire to create resistance, frictions and misunderstandings in cross-cultural knowledge management.
Figure 1.2 The principle of transferring knowledge and learning across borders
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With globalization becoming a centerpiece in the business strategy of many firms – be they engaged in product development or providing services – the ability to manage the ‘global knowledge engine’ to achieve a competitive edge in today’s knowledgeintensive economy is one of the keys to sustainable competitiveness. But in the context of global marketing the management of knowledge is de facto a cross-cultural activity, whose key task is to foster and continually upgrade collaborative cross-cultural learning (this will be further discussed in Chapter 19). Of course, the kind and/or type of knowledge that is strategic for an organization and which needs to be managed for competitiveness varies depending on the business context and the value of different types of knowledge associated with it.
1.3 LSEs According to the EU definition this is firms with more than 250 employees. Though LSEs account for less than 1 per cent of companies, almost one third of all jobs is provided by LSEs.
Comparison of the global marketing and management style of SMEs and LSEs In the Preface a change towards a ‘convergence of orientation’ in LSEs and SMEs was indicated. This ‘convergence’ is shown in Figure 1.3. The reason underlying this ‘convergence’ is that many large multinationals (such as IBM, Philips, GM and ABB) have begun downsizing operations, so in reality many LSEs act like a confederation of small, autonomous, entrepreneurial and actionoriented companies. One can always question the change in orientation of SMEs. Some studies (e.g. Bonaccorsi, 1992) have rejected the widely accepted proposition that firm size is positively related to export intensity. Furthermore, many researchers (e.g. Julien et al., 1997) have found that SMEs as exporters do not behave as a homogeneous group. Table 1.1 gives an overview of the main qualitative differences between management and marketing styles in SMEs and LSEs. We will discuss each of the headings in turn.
Resources l
Financial. A well-documented characteristic of SMEs is the lack of financial resources due to a limited equity base. The owners put only a limited amount of capital into the business, which quickly becomes exhausted.
Figure 1.3 The ‘convergence of orientation’ in LSEs and SMEs
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Table 1.1 The characteristics of LSEs and SMEs
Resources
LSEs
SMEs
Many resources
Limited resources
Internalization of resources
Externalization of resources (outsourcing of resources)
Coordination of – personnel – financing – market knowledge, etc. Deliberate strategy formation (Mintzberg, 1987; Mintzberg and Waters, 1985) (see Figure 1.4)
Emergent strategy formation (Mintzberg, 1987; Mintzberg and Waters, 1985) (see Figure 1.4)
Adaptive decision-making mode in small incremental steps (logical incrementalism) (e.g. each new product: small innovation for the LSE) (see Figure 1.5)
The entrepreneurial decisionmaking model (e.g. each new product: considerable innovation for the SME)
Formal/hierarchical
Informal
Independent of one person
The owner/entrepreneur usually has the power/charisma to inspire/control a total organization
Mainly risk averse
Sometimes risk taking/ sometimes risk averse
Focus on long-term opportunities
Focus on short-term opportunities
Flexibility
Low
High
Take advantage of economies of scale and economies of scope
Yes
Only limited
Use of information sources
Use of ‘advanced’ techniques: – databases – external consultancy – Internet
Information gathering in an informal manner and an inexpensive way: – internal sources – face-to-face communication
Formation of strategy/ decision-making processes
Organization
Risk taking
l
10
The owner/manager is directly and personally involved and will dominate all decision making throughout the enterprise
Business education/specialist expertise. Contrary to LSEs, a characteristic of SME managers is their limited formal business education. Traditionally, the SME owner/manager is a technical or craft expert, and is unlikely to be trained in any of the major business disciplines. Therefore specialist expertise is often a constraint because managers in small businesses tend to be generalists rather than specialists. In addition, global marketing expertise is often the last of the business disciplines to be acquired by an expanding SME. Finance and production experts usually precede the acquisition of a marketing counterpart. Therefore it is not unusual to see owners of SMEs closely involved in sales, distribution, price setting and, especially, product development.
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Figure 1.4 The intended and emergent strategy
Source: Mintzberg, 1987, p. 14. Copyright © 1987 by the Regents of the University of California. Reprinted from the California Management Review, Vol. 30, No. 1. By permission of the Regents.
Formation of strategy/decision-making processes As is seen in Figure 1.4, the realised strategy (the observable output of an organization’s activity) is a result of the mix between the intended (‘planned’) strategy and the emergent (‘not planned’) strategy. No companies form a purely deliberate or intended strategy. In practice, all enterprises will have some elements of both intended and emergent strategy. In the case of the deliberate (‘planned’) strategy (mainly LSEs), managers try to formulate their intentions as precisely as possible and then strive to implement these with a minimum of distortion. This planning approach ‘assumes a progressive series of steps of goal setting, analysis, evaluation, selection and planning of implementation to achieve an optimal longterm direction for the organization’ (Johnson, 1988). Another approach for the process of strategic management is so-called logical incrementalism (Quinn, 1980), where continual adjustments in strategy proceed flexibly and experimentally. If such small movements in strategy prove successful then further development of the strategy can take place. According to Johnson (1988) managers may well see themselves as managing incrementally, but this does not mean that they succeed in keeping pace with environmental change. Sometimes the incrementally adjusted strategic changes and the environmental market changes move apart and a strategic drift arises (see Figure 1.5). Exhibit 1.1 gives an example of strategic drift.
Exhibit 1.1 LEGO’S strategic drift The Danish family-owned LEGO group (www.lego.com) is today the world’s fifth largest toy producer after Mattel (known for the Barbie doll), Hasbro (known for Trivial Pursuit and Disney figures, via a licensing agreement with Disney), Nintendo (computer games) and SEGA (computer games). Until now LEGO has strongly believed that its unique concept was superior to other products, but today LEGO feels pressured into competing for children’s time. The famous LEGO bricks receive increasing competition from
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Exhibit 1.1 continued TV, videos, CD-ROM games and the Internet. It seems that in LEGO’s case a ‘strategic drift’ has arisen, where LEGO management’s blind faith in its unique and pedagogical toys has not been harmonized with the way in which the world has developed. Many working parents have less and less time to ‘control’ children’s play habits. Spectacular computer games win over ‘healthy’ and pedagogical toys that LEGO represents. This development has accelerated and has forced LEGO to re-evaluate its present strategy regarding product programmes and marketing. The company suffered heavy losses in 1998 and 2000 and was forced to shed jobs, but in 2002 LEGO again showed some solid profits. However in 2003 LEGO again showed a net loss of approximately A190 million. LEGO was trying to extend its traditional concepts and values into media products for children aged between two and 16. These new categories – including PC and console software, books, magazines, TV, film and music – aim to replicate the same feelings of confidence and trust already long established among children and their parents. LEGO kits came as themed playsets under licensing deals with Harry Potter, Bob the Builder, Star Wars and Disney’s Winnie the Pooh. It also went high-tech with products such as Mindstorms, and its popular Bionicles toys will appear in a full-length animated feature film. After the huge loss in 2003 (announced in the beginning of 2004) LEGO is now returning to LEGO’s former concept. In order to ensure increased focus on the core business, in the autumn of 2004 the LEGO Group decided to sell off the LEGOLAND Parks. It will focus more on building bricks as its main product, concentrating on small kids’ eagerness to assemble. This strategy paid off in 2005. The LEGO Group’s results before tax improved considerably from a loss of A227 million in 2004 to a profit of A702 million in 2005. With focus on the re-establishment of a strong core business with classic construction toys, and a high degree of production outsourcing the LEGO Group expects to maintain its market position in 2006 and coming years as a smaller, but financially stronger and more competitive toy company. Source: adapted from different public media.
Figure 1.5 Incremental change and strategic drift
Source: Johnson, G. (1988) ‘Rethinking incrementalism’, Strategic Management Journal, 9, pp. 75–91. Copyright 1988 © of John Wiley & Sons Ltd. Reproduced with permission.
On the other hand, the SME is characterized by the entrepreneurial decisionmaking model (Figure 1.6). Here more drastic changes in strategy are possible because decision making is intuitive, loose and unstructured. In Figure 1.6 the range of possible realized strategies is determined by an interval of possible outcomes. SME entrepreneurs are noted for their propensity to seek new opportunities. This natural propensity for change inherent in entrepreneurs can lead to considerable changes in
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Figure 1.6 The entrepreneurial decision-making model
the enterprise’s growth direction. Because the entrepreneur changes focus, this growth is not planned or coordinated and can therefore be characterized by sporadic decisions that have an impact on the overall direction in which the enterprise is going.
Organization Compared to LSEs the employees in SMEs are usually closer to the entrepreneur, and because of the entrepreneur’s influence these employees must conform to his or her personality and style characteristics if they are to remain employees.
Risk taking There are, of course, different degrees of risk. Normally the LSEs will be risk averse because of their use of a decision-making model that emphasizes small incremental steps with a focus on long-term opportunities. In SMEs risk taking depends on the circumstances. Risk taking can occur in situations where the survival of the enterprise may be under threat, or where a major competitor is undermining the activities of the enterprise. Entrepreneurs may also be taking risks when they have not gathered all the relevant information, and thus have ignored some important facts in the decision-making process. On the other hand there are, of course, some circumstances in which an SME will be risk averse. This can often occur when an enterprise has been damaged by previous risk taking and the entrepreneur is therefore reluctant to take any kind of risk until confidence returns.
Flexibility Because of the shorter communication lines between the enterprise and its customers, SMEs can react in a quicker and more flexible way to customer enquiries.
‘Economies of scale’ and ‘economies of scope’ Economies of scale Accumulated volume in production and sales will result in lower cost price per unit due to ‘experience curve effects’ and increased efficiency in production, marketing, etc. Building a global presence automatically expands a firm’s scale of operations, giving it
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Economies of scale Accumulated volume in production, resulting in lower cost price per unit.
larger production capacity and a larger asset base. However larger scale will create competitive advantage only if the company systematically converts scale into economies of scale. In principle, the benefits of economies of scale can appear in different ways (Gupta and Govindarajan, 2001): l
l
l
Reducing operating costs per unit and spreading fixed costs over larger volume due to ‘experience curve effects’. Pooling global purchasing gives the opportunity to concentrate global purchasing power over suppliers. This generally leads to volume discounts and lower transaction costs. A larger scale gives the global player the opportunity to build centres of excellence for development of specific technologies or products. In order to do this a company needs to focus a critical mass of talent in one location.
Because of size (bigger market share) and accumulated experience, the LSEs will normally take advantages of these factors (see Exhibit 1.2 about Nintendo’s Game Boy). SMEs tend to concentrate on lucrative, small, market segments. Such market segments are often too insignificant for LSEs to target, but can be substantial and viable in respect of the SME. However, they will only result in a very limited market share of a given industry.
Exhibit 1.2 Economies of scale with Nintendo Game Boy Having sold nearly 200 million Game Boys worldwide since 1989 until mid 2006, Nintendo dominates the handheld game market, even as it’s losing market share in console systems to Sony and Microsoft. Over the past 15 years, such companies as Sega, NEC, SNK and most recently cell phone giant Nokia have launched nine competing portable game systems without much success. The economies of scale primarily relate to the manufacturing of the hardware. In the software, economies of scale were limited. Many different types of game have to be offered and the popularity of most of them was short-lived. This is especially so in the case of software linked to a film: the popularity of the game diminished as the film ceased to be shown in cinemas.
Economies of scope Reusing a resource from one business/ country in additional business/countries.
14
Economies of scope Synergy effects and global scope can occur when the firm is serving several international markets. Global scope is not taking place if an international marketer is serving a customer that operates in just one country. The customer should purchase a bundle of identical products and services across a number of countries. This global customer could source these products and services either from a horde of local suppliers or from a single global supplier (international marketer) that is present in all of its markets. Compared with a horde of local suppliers, a single global supplier (marketer) can provide value for the global customer through greater consistency in the quality and features of products and services across countries, faster and smoother coordination across countries and lower transaction costs. The challenge in capturing the economies of scope at a global level lies in being responsive to the tension between two conflicting needs: the need for central coordination of most marketing mix elements, and the need for local autonomy in the actual delivery of products and services (Gupta and Govindarajan, 2001).
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The LSEs often serve many different markets (countries) on more continents and are thereby able to transfer experience acquired in one country to another. Typically, SMEs serve only a very limited number of international markets outside their home market. Sometimes the SME can make use of economies of scope when it goes into an alliance or a joint venture with a partner that has what the particular SME is missing in the international market in question: a complementary product programme or local market knowledge. Another example of economies of scale and scope can be found in the world car industry. Most car companies use similar engines and gearboxes across their entire product range so that the same engines or gearboxes may go into different models of cars. This generates enormous potential cost savings for such companies as Ford or Volkswagen. It provides both ‘economies of scale’ (decreased cost per unit of output) by producing a larger absolute volume of engines or gearboxes, and ‘economies of scope’ (reusing a resource from one business/country in additional businesses/countries). Therefore it is not surprising that the car industry has experienced a wave of mergers and acquisitions aimed at creating larger world car companies of sufficient size to benefit from these factors.
Use of information sources Typically, LSEs rely on commissioned market reports produced by well-reputed (and well-paid!) international consultancy firms as their source of vital global marketing information. SMEs usually gather information in an informal manner by use of face-to-face communication. The entrepreneur is able unconsciously to synthesize this information and use it to make decisions. The acquired information is mostly incomplete and fragmented, and evaluations are based on intuition and often guesswork. The whole process is dominated by the desire to find a circumstance that is ripe for exploitation. Furthermore, the demand for complex information grows as the SME selects a more and more explicit orientation towards the international market and as the firm evolves from a production-oriented (‘upstream’) to a more marketing-oriented (‘downstream’) firm (Cafferata and Mensi, 1995). As a reaction to pressures from international markets, both LSEs and SMEs evolve towards a globally integrated but market-responsive strategy. However, the starting points of the two firm types are different (see Figure 1.3 earlier). The huge global companies have traditionally based their strategy on taking advantage of ‘economies of scale’ by launching standardized products on a worldwide basis. These companies have realized that a higher degree of market responsiveness is necessary to maintain competitiveness in national markets. On the other side, SMEs have traditionally regarded national markets as independent of each other. But as international competences evolve they have begun to realize that there is interconnectedness between their different international markets. They recognize the benefits of coordinating the different national marketing strategies in order to utilize economies of scale in R&D, production and marketing. Exhibit 1.2 is an example of an LSE (McDonald’s) that has also moved from the left to the right in Figure 1.3, towards a higher degree of market responsiveness. Qualitative characteristics of SMEs and LSEs Despite the convergence of behaviour in SMEs and LSEs, there are still some differences as indicated in Table 1.1 on page 10.
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Exhibit 1.3 McDonald’s is moving towards a higher degree of market responsiveness McDonald’s (www.mcdonalds.com) has now expanded to about 30,000 restaurants in over 100 countries. Executives at the headquarters of the McDonald’s Corp. in Oak Brook, Illinois, have learned that despite the cost/savings inherent in standardization, success is often about being able to adapt to the local environment. Here are some examples.
Japan McDonald’s first restaurant in Japan opened during 1971. At that time fast food here was either a bowl of noodles or miso soup. With its first mover advantage, McDonald’s kept its lead in Japan. By 1997 McDonald’s had over 1,000 outlets across that nation, and these sold more food in Japan than any other restaurant company. This includes an annual 500 million burgers. Among the offerings of McDonald’s Co. (Japan) Ltd are chicken tatsuta, teriyaki chicken, and the Teriyaki McBurger. Burgers are garnished with a fried egg. Beverages include iced coffee and corn soup. McDonald’s in Japan imports about 70 per cent of its food needs, including pickles from the United States and beef patties from Australia. High volumes facilitate bargaining with suppliers, in order to guarantee sourcing at a low cost.
Japan Tamagoburger
India McDonald’s, which now has seven restaurants in India, was launched there in 1996. It has had to deal with a market that is 40 per cent vegetarian; with an aversion to either beef or pork among meateaters; with a hostility to frozen meat and fish; and with the general Indian fondness for spice with everything. The Big Mac was replaced by the Maharaja Mac, made from mutton, and also on offer were vegetarian rice-patties flavoured with vegetables and spice.
Other countries In tropical markets, guava juice was added to the McDonald’s product line. Riceburger In Germany, McDonald’s did well selling beer as well as McCroissants. Bananafruit pies became popular in Latin America and McSpaghetti noodles became a favourite in the Philippines. In Thailand, McDonald’s introduced the Samurai Pork Burger with sweet sauce. Meanwhile, McDonald’s in New Zealand launched the Kiwiburger served with beetroot sauce and optional apricot pie. In Singapore, where fries came to be served with chilli sauce, the Kiasuburger chicken breakfast became a bestseller. Singapore was among the first markets in which McDonald’s introduced delivery service. As indicated, McDonald’s has achieved ‘economies of scale’ and cost savings through standardization and in its packaging. In 2003, McDonald’s announced that all its restaurants – 30,000 in over 100 countries – would soon be adopting the same brand packaging for menu items. According to a company press release, the new packaging Vegimcurry would feature photographs of real people doing things they enjoy, such as listening to music, playing soccer, and reading to their children. McDonald’s global chief marketing officer was quoted as saying, ‘It is the first time in our history that a single set of brand packaging, with a single brand message, will be used concurrently around the world.’ Two years later, in 2005, the company had to pull back when it announced plans to localize its packages (Frost 2006). Source: adapted from a variety of public media.
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1.4
Global integration Recognizing the similarities between international markets and integrating them into the overall global strategy.
Market responsiveness Responding to each market’s needs and wants.
Forces for ‘global integration’ and ‘market responsiveness’ In Figure 1.3 it is assumed that SMEs and LSEs are learning from each other. The consequence of both movements may be an action-oriented approach, where firms use the strengths of both orientations. The following section will discuss the differences in the starting points of LSEs and SMEs in Figure 1.3. The rest of the book will concentrate on a common ‘action/decision-oriented’ approach. The result of the convergence movement of LSEs and SMEs into the upper-right corner can be illustrated by Figure 1.7. The terms ‘glocal strategy’ and ‘glocalization’ have been introduced to reflect and combine the two dimensions in Figure 1.7: ‘Globalization’ (y-axis) and ‘Localization’ (x-axis). The glocal strategy approach reflects the aspirations of a global integrated strategy, while recognizing the importance of local adaptations/market responsiveness. In this way ‘glocalization’ tries to optimise the ‘balance’ between standardization and adaptation of the firm’s international marketing activities (Svensson, 2001; Svensson, 2002). First let us try to explain the underlying forces for global coordination/global integration and market responsiveness in Figure 1.7:
Forces for ‘global coordination/integration’ In the shift towards integrated global marketing, greater importance will be attached to transnational similarities for target markets across national borders and less on cross-national differences. The major drivers for this shift are as follows (Sheth and Parvatiyar, 2001; Segal-Horn, 2002): l
Removal of trade barriers (deregulation). Removal of historic barriers, both tariff (such as import taxes) and non-tariff (such as safety regulations), which have constituted barriers to trade across national boundaries. Deregulation has occurred at all levels: national, regional (within national trading blocs) and international. Thus
Figure 1.7 The global integration/market responsiveness grid: the future orientation of LSEs and SMEs
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deregulation has an impact on globalization since it reduces the time, costs and complexity involved in trading across boundaries. Global accounts/customers. As customers become global and rationalize their procurement activities they demand suppliers provide them with global services to meet their unique global needs. Often this may consist of global delivery of products, assured supply and service systems, uniform characteristics and global pricing. Several LSEs such as IBM, Boeing, IKEA, Siemens and ABB have such ‘global’ demands towards their smaller suppliers, typical SMEs. For these SMEs managing such global accounts requires cross-functional customer teams, in order to deploy quality consistency across all functional units. This issue is further discussed in Chapter 20 (section 20.3). Relationship management/network organization. As we move towards global markets it is becoming increasingly necessary to rely on a network of relationships with external organizations, for example, customer and supplier relationships to preempt competition. The firm may also have to work with internal units (e.g. sales subsidiaries) located in many and various parts of the world. Business alliances and network relationships help to reduce market uncertainties, particularly in the context of rapidly converging technologies and the need for higher amounts of resources to cover global markets. However, networked organizations need more coordination and communication. Standardized worldwide technology. Earlier differences in world market demand were due to the fact that advanced technological products were primarily developed for the defence and government sectors before being scaled down for consumer applications. However, today the desire for gaining scale and scope in production is so high that worldwide availability of products and services should escalate. As a consequence we may witness more homogeneity in the demand and usage of consumer electronics across nations. Worldwide markets. The concept of ‘diffusions of innovations’ from the home country to the rest of the world tend to be replaced by the concept of worldwide markets. Worldwide markets are likely to develop because they can rely on world demographics. For example, if a marketer targets its products or services to the teenagers of the world, it is relatively easy to develop a worldwide strategy for that segment and draw up operational plans to provide target market coverage on a global basis. This is becoming increasingly evident in soft drinks, clothing and sports shoes, especially in the Internet economy. ‘Global village’. The term ‘global village’ refers to the phenomenon in which the world’s population shares commonly recognized cultural symbols. The business consequence of this is that similar products and similar services can be sold to similar groups of customers in almost any country in the world. Cultural homogenization therefore implies the potential for the worldwide convergence of markets and the emergence of a global marketplace, in which brands such as Coke, Nike and Levi’s are universally aspired to. Worldwide communication. New Internet-based ‘low-cost’ communication methods (e-mailing, e-commerce, etc.) ease communication and trade across different parts of the world. As a result customers within national markets are able to buy similar products and similar services across parts of the world. Global cost drivers: Categorized as ‘economies of scale’ and ‘economies of scope’, these were discussed in section 1.3.
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Forces for ‘market responsiveness’ These are as follows: l
l
Deglobalization
l
Moving away from the globalization trends and regarding each market as special, with its own economy, culture and religion.
Cultural differences. Despite the ‘global village’ cultural diversity clearly continues. Cultural differences often pose major difficulties in international negotiations and marketing management. These cultural differences reflect differences in personal values and in the assumptions people make about how business is organized. Every culture has its opposing values. Markets are people, not products. There may be global products, but there are not global people. Regionalism/protectionism. Regionalism is the grouping of countries into regional clusters based on geographic proximity. These regional clusters (such as the European Union or NAFTA) have formed regional trading blocs, which may represent a significant blockage to globalization, since regional trade is often seen as incompatible with global trade. In this case, trade barriers that are removed from individual countries are simply reproduced for a region and a set of countries. Thus all trading blocs create outsiders as well as insiders. Therefore one may argue that regionalism results in a situation where protectionism reappears around regions rather than individual countries. Deglobalization trend. More than 2,500 years ago the Greek historian Herodotus (based on observations) claimed that everyone believes their native customs and religion are the best. Current movements in Arab countries, or the big demonstrations accompanying conferences such as the World Economic Forum in Davos, or the World Trade Organization (WTO) meetings show that there could be a return to old values, promoting barriers to the further success of globalization. Rhetorical words such as ‘McDonaldisation’ and ‘Coca-Colonization’ describe in a simple way fears of US cultural imperialism.
Whether or not 11 September 2001 means that globalization will continue is debatable. Quelch (2002) argues that it will, because 11 September is motivating greater cross-border cooperation among national governments on security matters, and this cooperation will reinforce interaction in other areas.
1.5
Value chain A categorization of the firm’s activities providing value for the customers and profit for the company.
The value chain as a framework for identifying international competitive advantage The 7-S framework shown in Figure 1.8 can be regarded as the roots from which the firm’s different activities come. In particular, shared values should be a main determinant of the configuration of the value chain.
The concept of the value chain The value chain shown in Figure 1.9 provides a systematic means of displaying and categorizing activities. The activities performed by a firm in any industry can be grouped into the nine generic categories shown. At each stage of the value chain there exists an opportunity to contribute positively to the firm’s competitive strategy by performing some activity or process in a way that is better and/or different than the competitors’ offer, and so provide some uniqueness or advantage. If a firm attains such a competitive advantage, which is sustainable, defensible, profitable and valued by the market, then it may earn high rates of return,
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Figure 1.8 The 7-S framework
Source: ‘McKinsey 7S Framework’ from In Search of Excellence: Lessons from America’s Best Run Companies by Thomas J. Peters and Robert H. Waterman, Jr. Copyright © 1982 by Thomas J. Peters and Robert H. Waterman, Jr. Reprinted by permission of HarperCollins Publishers, Inc.
Figure 1.9 The value chain
Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 Michael E. Porter.
even though the industry structure may be unfavourable and the average profitability of the industry modest. In competitive terms, value is the amount that buyers are willing to pay for what a firm provides them with (perceived value). A firm is profitable if the value it commands exceeds the costs involved in creating the product. Creating value for buyers
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that exceeds the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used in analysing competitive position, since firms often deliberately raise their costs in order to command a premium price via differentiation. The concept of buyers’ perceived value will be discussed further in Chapter 4. The value chain displays total value and consists of value activities and margin. Value activities are the physically and technologically distinct activities that a firm performs. These are the building blocks by which a firm creates a product valuable to its buyers. Margin is the difference between total value (price) and the collective cost of performing the value activities. Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (lower cost), or performing activities at comparable cost but in unique ways that create more customer value than the competitors are able to offer and, hence, command a premium price (differentiation). The firm might be able to identify elements of the value chain that are not worth the costs. These can then be unbundled and produced outside the firm (outsourced) at a lower price. Value activities can be divided into two broad types, primary activities and support activities. Primary activities, listed along the bottom of Figure 1.9, are the activities involved in the physical creation of the product, its sale and transfer to the buyer, as well as after-sales assistance. In any firm, primary activities can be divided into the five generic categories shown in the figure. Support activities support the primary activities and each other by providing purchased inputs, technology, human resources and various firm-wide functions. The dotted lines reflect the fact that procurement, technology development and human resource management can be associated with specific primary activities as well as supporting the entire chain. Firm infrastructure is not associated with particular primary activities, but supports the entire chain. Primary activities The primary activities of the organization are grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service as, as follows: l
l
l
l
l
Inbound logistics. The activities concerned with receiving, storing and distributing the inputs to the product/service. These include materials, handling, stock control, transport, etc. Operations. The transformation of these various inputs into the final product or service: machining, packaging, assembly, testing, etc. Outbound logistics. The collection, storage and distribution of the product to customers. For tangible products this would involve warehousing, material handling, transport, etc.; in the case of services it may be more concerned with arrangements for bringing customers to the service if it is in a fixed location (e.g. sports events). Marketing and sales. These provide the means whereby consumers/users are made aware of the product/service and are able to purchase it. This would include sales administration, advertising, selling, etc. In public services, communication networks that help users access a particular service are often important. Services. All the activities that enhance or maintain the value of a product/service. Asugman et al. (1997) have defined after-sales service as ‘those activities in which a firm engages after purchase of its product that minimize potential problems related to product use, and maximize the value of the consumption experience’. After-sales service consists of the following: the installation and start-up of the purchased product, the provision of spare parts for products, the provision of repair services, technical advice regarding the product, and the provision and support of warranties. Each of these groups of primary activities is linked to support activities.
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Support activities These can be divided into four areas: l
l
l
l
Procurement. This refers to the process of acquiring the various resource inputs to the primary activities (not to the resources themselves). As such, it occurs in many parts of the organization. Technology development. All value activities have a ‘technology’, even if it is simply ‘know-how’. The key technologies may be concerned directly with the product (e.g. R&D, product design) or with processes (e.g. process development) or with a particular resource (e.g. raw material improvements). Human resource management. This is a particularly important area that transcends all primary activities. It is concerned with the activities involved in recruiting, training, developing and rewarding people within the organization. Infrastructure. The systems of planning, finance, quality control, etc., are crucially important to an organization’s strategic capability in all primary activities. Infrastructure also consists of the structures and routines of the organization that sustain its culture.
As indicated in Figure 1.9, a distinction is also made between the productionoriented,‘upstream’ activities and the more marketing-oriented,‘downstream’ activities. Having looked at Porter’s original value chain model, a simplified version will be used in most parts of this book (Figure 1.10). This simplified version is characterized by the fact that it contains only the primary activities of the firm. Although value activities are the building blocks of competitive advantage, the value chain is not a collection of independent activities, but a system of interdependent activities. Value activity is related by horizontal linkages within the value chain. Linkages are relationships between the way in which one value activity is dependent on the performance of another.
Figure 1.10 A ‘simplified’ version of the value chain
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Furthermore, the chronological order of the activities in the value chain is not always as illustrated in Figure 1.10. In companies where orders are placed before production of the final product (build-to-order, e.g. seen at Dell) the sales and marketing function takes place before production. In understanding the competitive advantage of an organization the strategic importance of the following types of linkage should be analysed in order to assess how they contribute to cost reduction or value added. There are two kinds of linkage: l
l
internal linkages between activities within the same value chain, but perhaps on different planning levels within the firm; external linkages between different value chains ‘owned’ by the different actors in the total value system.
Internal linkages There may be important links between the primary activities. In particular, choices will have been made about these relationships and how they influence value creation and strategic capability. For example, a decision to hold high levels of finished stock might ease production scheduling problems and provide a faster response time to the customer. However, it will probably add to the overall cost of operations. An assessment needs to be made of whether the added value of ‘stocking’ is greater than the added cost. Suboptimization of the single value chain activities should be avoided. It is easy to miss this point in an analysis if, for example, the marketing activities and operations are assessed separately. The operations may look good because they are geared to highvolume, low-variety, low-unit-cost production. However, at the same time the marketing team may be selling quickness, flexibility and variety to the customers. When put together these two potential strengths are weaknesses because they are not in harmony, which is what a value chain requires. The link between a primary activity and a support activity may be the basis of competitive advantage. For example, an organization may have a unique system for procuring materials. Many international hotels and travel companies use their computer systems to provide immediate ‘real-time’ quotations and bookings worldwide from local access points. As a supplement to comments about the linkages between the different activities, it is also relevant to regard the value chain (illustrated in Figure 1.10 in a simplified form) as a thoroughgoing model on all three planning levels in the organization. In purely conceptual terms, a firm can be described as a pyramid as illustrated in Figure 1.11. It consists of an intricate conglomeration of decision and activity levels, having three distinct levels, but the main value chain activities are connected to all three strategic levels in the firm: l
l
l
The strategic level is responsible for formulation of the firm’s mission statement, determining objectives, identifying the resources that will be required if the firm is to attain its objectives, and selecting the most appropriate corporate strategy for the firm to pursue. The managerial level has the task of translating corporate objectives into functional and/or unit objectives and ensuring that resources placed at its disposal (e.g. in the marketing department) are used effectively in the pursuit of those activities that will make the achievement of the firm’s goals possible. The operational level is responsible for the effective performance of the tasks that underlie the achievement of unit/functional objectives. The achievement of operational objectives is what enables the firm to achieve its managerial and strategic aims. All three levels are interdependent, and clarity of purpose from the top enables everybody in the firm to work in an integrated fashion towards a common aim.
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Figure 1.11 The value chain in relation to the strategic pyramid
External linkages One of the key features of most industries is that a single organization rarely undertakes all value activities from product design to distribution to the final consumer. There is usually a specialization of roles, and any single organization usually participates in the wider value system that creates a product or service. In understanding how value is created it is not enough to look at the firm’s internal value chain alone. Much of the value creation will occur in the supply and distribution chains, and this whole process needs to be analysed and understood. Suppliers have value chains that create and deliver the purchased inputs used in a firm’s chain (the upstream part of the value chain). Suppliers not only deliver a product, but can also influence a firm’s performance in many other ways. For example Benetton, the Italian fashion company, managed to sustain an elaborate networks of suppliers, agents and independent retail outlets as the basis of its rapid and successful international development during the 1970s and 1980s. In addition, products pass through the value chain channels on their way to the buyer. Channels perform additional activities that affect the buyer and influence the firm’s own activities. A firm’s product eventually becomes part of its buyer’s value chain. The ultimate basis for differentiation is a firm and its product’s role in the buyer’s value chain, which is determined by buyer needs. Gaining and sustaining competitive advantage depends on understanding not only a firm’s value chain, but how the firm fits into the overall value system. There are often circumstances where the overall cost can be reduced (or the value increased) by collaborative arrangements between different organizations in the value system. It will be seen in Chapter 11 that this is often the rationale behind downstream collaborative arrangements, such as joint ventures, subcontracting and outsourcing between different organizations (e.g. sharing technology in the international motor manufacture and electronics industries).
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Exhibit 1.4 Pocoyo – upstream-downstream cooperation about globalization of an animated preschool series One of the most successful TV-programmes for preschool kids, Pocoyo, was created by Zinkia Entertainment and sold woldwide by Granada Ventures. It is now a global brand and has been sold to 95 countries since it was launched in late 2005. Produced with bright blocks of colour against a stark white background, Pocoyo has been designed to hold the attention of young children.
Pocoyo Pocoyo is a young boy with an array of qualities ready to capture the imagination of children, inspiring them to watch, listen and interact. He is a curious enthusiastic little boy in blue. As he explores his world through each story, Pocoyo gets help and on occasion hindrance from his friends Loula, Pato, Elly and Sleepy Bird. Pocoyo has at its core a fascinating concept – one of learning Source: Pocoyo TM & © 2005 Zinkia Entertainment S.L. through laughter. Clinical studies have shown that laughter not Licensed by Granada Ventures. only increases the enjoyment and engagement of children in the programme, but also is proven to increase learning by 15 per cent. By working closely with behavioural psychologists during programme development, Pocoyo uses simple and effective visual jokes that help children to discover magic and humour in the simplest of things. And far from painting an idealized version of childhood, Pocoyo is sometimes moody, noisy and miserable – just like a real pre-schooler.
The value chain of Pocoyo As illustrated in Pocoyo’s value chain (see Figure 1.12) Zinkia Entertainment is taking care of the development and production of the Pocoyo series (upstream functions) whereas Granada Ventures takes care of global licensing and publishing rights (downstream functions). Zinkia Entertainment is a company founded in 2001. Located in Madrid, Spain, its main focus is to create animated series for TV and games for mobile devices and for game platforms. The company has more than 100 employees and its series have been sold in more than 95 countries worldwide. It is a creative factory producing audiovisual content, focusing on animation and cinematic documentaries as well as interactive content for online communities, consoles and multi-player mobile games. Since the company was established, Zinkia’s projects include, among others, Pocoyo (52 × 7 minutes), a 3D animated pre-school series. In June 2006, Pocoyo was awarded the Cristal award for the ‘Best TV Series in the world’ at the 30th International Festival of Annecy. Zinkia Entertainment’s partner in the Pocoyo value chain is Granada Ventures, the merchandise, licensing and publishing division of the UK-based television channel ITV plc. Established in October 2003, following the merger of Granada and Carlton, the company’s remit is to drive secondary revenue streams for the corporation by moving brands beyond broadcast by selling them worldwide on a licensing basis, mainly to other TV channels. The company currently owns worldwide licensing and publishing rights of almost 1,000 products and 3,000 DVD titles in television, film and sports. This includes brands such as Pocoyo and Hell’s Kitchen as well as established brands such as ‘I’m A Celebrity . . . Get Me Out Of Here!’
Figure 1.12 The Pocoyo value chain
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Exhibit 1.4 continued Cultural issues in the globalization of Pocoyo Normally global branding is comprehensive and the cultural demands of the market are difficult to define. However it seems that the core themes of Pocoyo – learning, gentle humour, visual stimulus and play – cross all national borders. Pocoyo was developed in Spain, with a great deal of input from the UK. In the original rushes, Pocoyo was often seen with a dummy in his mouth, which caused a few alarm bells to ring in Britain. The Madrid team had not even begun to consider that this might be the cause of any controversy, but in line with current cultural queries on the parental right and wrongs of using a ‘pacifier’ in other parts of the globe, the dummy had to go.
Worldwide brand extensions Brand extensions into merchandise are equally important for ensuring Pocoyo’s world success and longevity. Granada Ventures has been able to give Pocoyo a life off-screen with books, bath toys and clothing. Children can play with the character, along with their parents and peers, around the clock. This creates a virtuous brand circle, increasing loyalty and affection. Sources: Donohoe, G. (2006) ‘How to reach children in every nation’, Brand Strategy, June, p. 10; www.zinkia.com/; www.granadaventures.co.uk/.
Internationalizing the value chain International configuration and coordination of activities All internationally oriented firms must consider an eventual internationalization of the value chain’s functions. The firm must decide whether the responsibility for the single value chain function is to be moved to the export markets or is best handled centrally from head office. Principally, the value chain function should be carried out where there is the highest competence (and the most cost effectiveness), and this is not necessarily at head office. A distinction immediately arises between the activities labelled downstream on Figure 1.10 and those labelled upstream activities. The location of downstream activities, those more related to the buyer, is usually tied to where the buyer is located. If a firm is going to sell in Australia, for example, it must usually provide service in Australia, and it must have salespeople stationed in Australia. In some industries it is possible to have a single sales force that travels to the buyer’s country and back again; other specific downstream activities, such as the production of advertising copy, can sometimes also be performed centrally. More typically, however, the firm must locate the capability to perform downstream activities in each of the countries in which it operates. In contrast, upstream activities and support activities are more independent of where the buyer is located (Figure 1.13). However, if the export markets are culturally close to the home market, it may be relevant to control the entire value chain from head office (home market). This distinction carries some interesting implications. First, downstream activities create competitive advantages that are largely country specific: a firm’s reputation, brand name and service network in a country grow largely out of its activities and create entry/mobility barriers largely in that country alone. Competitive advantage in upstream and support activities often grows more out of the entire system of countries in which a firm competes than from its position in any single country. Second, in industries where downstream activities or other buyer-tied activities are vital to competitive advantage, there tends to be a more multidomestic pattern of international competition. In many service industries, for example, not only downstream activities but frequently upstream activities are tied to buyer location, and global strategies are comparatively less common. In industries where upstream and
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Figure 1.13 Centralizing the upstream activities and decentralizing the downstream activities
support activities such as technology development and operations are crucial to competitive advantage, global competition is more common. For example, there may be a large need in firms to centralize and coordinate the production function worldwide to be able to create rational production units that are able to exploit economies of scale. Furthermore, as customers increasingly join regional cooperative buying organizations, it is becoming more and more difficult to sustain a price differentiation across markets. This will put pressure on the firm to coordinate a European price policy. This will be discussed further in Chapter 16. The distinctive issues of international strategies, in contrast to domestic, can be summarized in two key dimensions of how a firm competes internationally. The first is called the configuration of a firm’s worldwide activities, or the location in the world where each activity in the value chain is performed, including the number of places. The second dimension is called coordination, which refers to how identical or linked activities performed in different countries are coordinated with each other (Porter, 1986).
1.6 Value shops (service value chain) A model for solving problems in a service environment. Similar to workshops. Value is created by mobilizing resources and deploying them to solve a specific customer problem.
Value network The formation of several firms’ value chains into a network, where each company contributes a small part to the total value chain.
Value shop and the ‘service value chain’ Michael Porter’s value-chain model claims to identify the sequence of key generic activities that businesses perform in order to generate value for customers. Since its introduction in 1985, this model has dominated the thinking of business executives. Yet a growing number of services businesses, including banks, hospitals, insurance companies, business consulting services and telecommunications companies, have found that the traditional value-chain model does not fit the reality of their service industry sectors. Stabell and Fjeldstad (1998) identified two new models of value creation – value shops and value networks. Fjeldstad and Stabell argue that the value chain is a model for making products, while the value shop is a model for solving customer or client problems in a service environment. The value network is a model for mediating exchanges between customers. Each model utilizes a different set of core activities to create and deliver distinct forms of value to customers.
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The main differences between the two types of value chains are illustrated in Table 1.2. Value shops (as in workshops, not retail stores) create value by mobilizing resources (e.g. people, knowledge and skills) and deploying them to solve specific problems such as curing an illness, delivering airline services to the passengers or delivering a solution to a business problem. Shops are organized around making and executing decisions – identifying and assessing problems or opportunities, developing alternative solutions or approaches, choosing one, executing it and evaluating the results. This model applies to most service-oriented organizations such as building contractors, consultancies and legal organizations. However, it also applies to organizations that are primarily configured to identify and exploit specific market opportunities, such as developing a new drug, drilling a potential oilfield, or designing a new aircraft. Table 1.2 The traditional value chain versus the service value chain Traditional value chain model
Service value chain (‘value shop’) model
Value creation through transformation of inputs (raw material and components) to products.
Value creation through customer problem solving. Value is created by mobilizing resources and activities to resolve a particular and unique customer problem. Customer value is not related to the solution itself but to the value of solving the problem.
Sequential process (‘first we develop the product, then we produce it, and finally we sell it’).
Cyclical and iterative process.
The traditional value chain consists of primary and support activities: Primary activities are directly involved in creating and bringing value to customers: Upstream (product development and production) and downstream activities (marketing and sales and service). Support activities that enable and improve the performance of the primary activities are procurement, technology development, human resource management and firm infrastructure.
The primary activities of a value shop are: 1 Problem finding: Activities associated with the recording, reviewing and formulating of the problem to be solved and choosing the overall approach to solving the problem. 2 Problem solving: Activities associated with generating and evaluating alternative solutions. 3 Choice: Activities associated with choosing among alternative problem solutions. 4 Execution: Activities associated with communicating, organizing, and implementing the chosen solution. 5 Control and evaluation: Activities associated with measuring and evaluating to what extent implementation has solved the initial statement.
Examples: Production and sales of furniture, consumer food products, electronic products and other mass products.
Examples: Banks, hospitals, insurance companies, business consulting services and telecommunications companies.
Source: Based on Stabell and Fjeldstad (1998).
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Different parts of a typical business may exhibit characteristics of different configurations. For example, production and distribution may resemble a value chain; research and development a value shop. Value shops make use of specialized knowledge-based systems to support the task of creating solutions to problems. However, the challenge is to provide an integrated set of applications that enable seamless execution across the entire problem-solving or opportunity-exploitation process. Several key technologies and applications are emerging in value shops – many focus on utilizing people and knowledge better. Groupware, intranets, desktop videoconferencing and shared electronic workspaces enhance communication and collaboration between people, essential to mobilizing people and knowledge across value shops. Integrating project planning with execution is proving crucial, for example, in pharmaceutical development, where bringing a new drug through the long, complex approval process a few months early can mean millions of dollars in revenue. Technologies such as inference engines and neural networks can help to make knowledge about problems and the process for solving them explicit and accessible. The term ‘value network’ is widely used but imprecisely defined. It often refers to a group of companies, each specializing in one piece of the value chain, and linked together in some virtual way to create and deliver products and services. Stabell and Fjelstad (1998) define value networks quite differently – not as networks of affiliated companies, but as a business model for a single company that mediates interactions and exchanges across a network of its customers. This model clearly applies best to telecommunications companies, but also to insurance companies and banks, whose business, essentially, is mediating between customers with different financial needs – some saving, some borrowing, for example. Key activities include operating the customer-connecting infrastructure, promoting the network, managing contracts and relationships, and providing services. Some of the most IT-intensive businesses in the world are value networks – banks, airlines and telecommunications companies, for instance. Most of their technology provides the basic infrastructure of the ‘network’ to mediate exchanges between customers. But the competitive landscape is now shifting beyond automation and efficient transaction processing to monitoring and exploiting information about customer behaviour. The aim is to add more value to customer exchanges through better understanding of usage patterns, exchange opportunities, shared interests and so on. Data mining and visualization tools, for example, can be used to identify both positive and negative connections between customers. Competitive success often depends on more than simply performing your primary model well. It may also require the delivery of additional kinds of complementary value. Adopting attributes of a second value configuration model can be a powerful way to differentiate your value proposition or defend it against competitors pursuing a value model different to your own. It is essential, however, to pursue another model only in ways that leverage the primary model. For example, Harley-Davidson’s primary model is the chain – it makes and sells products. Forming the Harley Owners Group (HOG) – a network of customers – added value to the primary model by reinforcing the brand identity, building loyalty, and providing valuable information and feedback about customers’ behaviours and preferences. Amazon.com is a value chain like other book distributors, and initially used technology to make the process vastly more efficient. Now, with its book recommendations and special interest groups, it is adding the characteristics of a value network. Our research suggests that the value network in particular offers opportunities for many existing businesses to add more value to their
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customers, and for new entrants to capture market share from those who offer less value to their customers.
Combining the ‘product value chain’ and the ‘service value chain’ Blomstermo et al. (2006) make a distinction between hard and soft services. Hard services are those where production and consumption can be decoupled. For example software services can be transferred into a CD, or some other tangible medium, which can be mass-produced, making standardization possible. With soft services, where production and consumption occur simultaneously, the customer acts as a coproducer, and decoupling is not viable. The soft-service provider must be present abroad from its first day of foreign operations. Figure 1.14 is mainly valid for soft services, but at the same time in more and more industries we see that physical products and services are combined (see Figure 1.14). Most product companies offer services to protect or enhance the value of their product businesses. Cisco, for instance, built its installation, maintenance, and network-design service business to ensure high-quality product support and to strengthen relationships with enterprise and telecom customers. A company may also find itself drawn into services when it realizes that competitors use its products to offer services of value. If it does nothing, it risks not only the commoditization of its own products – something that is occurring in most product markets, irrespective of the services on offer – but also the loss of customer relationships. To make existing service
Figure 1.14 Combining the ‘product value chain’ and the ‘service value chain’
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groups profitable – or to succeed in launching a new embedded service business – executives of product companies must decide whether the primary focus of service units should be to support existing product businesses or to grow as a new and independent platform. When a company chooses a business design for delivering embedded services to customers, it should remember that its strategic intent affects which elements of the delivery life cycle are most important. If the aim is to protect or enhance the value of a product, the company should integrate the system for delivering it and the associated services in order to promote the development of product designs that simplify the task of service (e.g. by using fewer subsystems or integrating diagnostic software). This approach involves minimizing the footprint of service delivery and incorporating support into the product whenever possible. If the company wants the service business to be an independent growth platform, however, it should focus most of its delivery efforts on constantly reducing unit costs and making the services more productive (Auguste et al., 2006). In the ‘moment of truth’ (e.g. in a consultancy service situation), the seller represents all the functions of the focal company’s ‘product’ and ‘service’ value chain – at the same time. The seller (the product and service provider) and the buyer create a service in an interaction process: ‘The service is being created and consumed as it is produced’. Good representatives on the seller’s side are vital to service brands’ successes, being ultimately responsible for delivering the seller’s promise. As such a shared understanding of the service brand’s values needs to be anchored in their minds and hearts to encourage brand-supporting behaviour. This internal brand-building process becomes more challenging as service brands expand internationally drawing on workers from different global domains. Figure 1.14 also shows the cyclic nature of the service interaction (‘moment of truth’) where the post-evaluation of the service value chain gives input for the possible re-design of the ‘product value chain’. The interaction shown in Figure 1.14 could also be an illustration or a snapshot of a negotiation process between seller and buyer, where the seller represents a branded company, which is selling its projects as a combination of ‘hardware’ (physical products) and ‘software’ (services). Anyway, one of the purposes with the ‘learning nature’ of the overall decision cycle in Figure 1.14, is to pick up the ‘best practices’ among different kinds of international buyer–seller interactions. This would lead to implications for a better set-up of: l l l
1.7
the ‘service value chain’ (value shop) the ‘product value chain’ the combination of the service and product value chain.
Information business and the virtual value chain Most business managers would agree that we have recently entered a new era, ‘the information age’, which differs markedly from the industrial age. What have been the driving forces for these changes? The consensus has shifted over time. To begin with it was thought to be the automation power of computers and computation. Then it was the ability to collapse time and space through telecommunications. More recently it has been seen as the valuecreating power of information, a resource that can be reused, shared, distributed or exchanged without any inevitable loss of value; indeed value is sometimes multiplied.
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Figure 1.15 The virtual value chain as a supplement to the physical value chain
Virtual value chain An extension of the conventional value chain, where the information processing itself can create value for customers.
Today’s fascination with competing on invisible assets means that people now see knowledge and its relationship with intellectual capital as the critical resource, because it underpins innovation and renewal. One way of understanding the strategic opportunities and threats of information is to consider the virtual value chain as a supplement to the physical value chain (Figure 1.15). By introducing the virtual value chain Rayport and Sviokla (1996) have made an extension of the conventional value chain model, which treats information as a supporting element in the value-adding process. Rayport and Sviokla (1996) show how information in itself can be used to create value. 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
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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. Every company pursues some combination of the above strategies. In relation to Figure 1.15 each of the physical value-chain activities might make use of one or all four information-processing stages of the virtual value chain, in order to create extra value for the customer. That is the reason for the horizontal double arrows (in Figure 1.15) between the different physical and virtual value-chain activities. In this way information can be captured at all stages of the physical value chain. Obviously such information can be used to improve performance at each stage of the physical value chain and to coordinate across it. However, it can also be analysed and repackaged to build content-based products or to create new lines of businesses. A company can use its information to reach out to other companies’ customers or operations, thereby rearranging the value system of an industry. The result might be that traditional industry sector boundaries disappear. The CEO of Amazon.com, Bezos, clearly sees his business as not in the book-selling business but in the informationbroker business.
1.8
Summary Global marketing is defined as the firm’s commitment to coordinate its marketing activities across national boundaries in order to find and satisfy global customer needs better than the competition does. This implies that the firm is able to: l
l
l
develop a global marketing strategy, based on similarities and differences between markets; exploit the knowledge of the headquarters (home organization) through worldwide diffusion (learning) and adaptations; transfer knowledge and ‘best practices’ from any of its markets and use them in other international markets.
SMEs are often characterized by an entrepreneurial and action-oriented decisionmaking model, where drastic changes in strategy are possible because decision making is intuitive, sporadic and unstructured. On the other hand SMEs are more flexible than LSEs and are able to react more quickly to sudden changes in the international environment. However, as a consequence of LSEs often acting as a confederation of SMEs, there seems to be a convergence of the marketing behaviour in SMEs and LSEs towards a market-responsiveness approach. On the basis of the 7-S framework, a simplified version of Porter’s original value chain model was introduced as a framework model for major parts of this book. In understanding how value is created it is not enough to look at the firm’s internal value chain alone. In most cases the supply and distribution value chains are interconnected, and this whole process needs to be analysed and understood before considering an eventual internationalization of value chain activities. This also involves decisions about configuration and coordination of the worldwide value-chain activities. As a supplement to the traditional (Porter) value chain, the service value chain (based on the so-called ‘value shop’ concept) has been introduced. Value shops create value by mobilising resources (people, knowledge and skills,) and deploying them
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to solve specific problems. Value shops are organized around making and executing decisions in the specific service interaction situation with a customer – identifying and assessing service problems or opportunities, developing alternative solutions or approaches, choosing one, executing it and evaluating the results. This model applies to most service-oriented organizations. Many product companies want to succeed with embedded services: as competitive pressures increasingly commoditize product markets, services will become the main differentiator of value creation in coming years. However, companies will need a clearer understanding of the strategic rules of this new game – and will have to integrate the rules into their operations – to realize the promise of these fast-growing businesses. At the end of this chapter the ‘virtual value chain’ was introduced as a supplement to the ‘physical value chain’, thus using information to create further business value.
CASE STUDY
1.1
Vermont Teddy Bear: Should Vermont Teddy Bear go abroad?
As Elisabeth B. Robert, CEO of The Vermont Teddy Bear Company (www.vtbear.com), wakes up on 30 June 2006 (the day where the 2005 financial results are published) she can look back on one of the most eventful years in the history of the company: On 16 May 2005 Vermont Teddy Bear announced the signing of a definitive agreement that enabled the company to be taken private by an investment group led by The Mustang Group, a Boston-based private equity firm. The main motive for taking this step has been stated by Elisabeth B. Robert: ‘As a private company, Vermont Teddy Bear will no longer face the challenges of a small company trying to comply with increasingly complex and costly public company requirements. We will have more time and resources to devote to growing our business’. The key financial figures for 2005 were: 2005 Net revenue: Net profit:
$39.0 million $2.5 million
The number of employees at the end of 2005 was 352. But Elisabeth has further ambitions for the company: My longer-term vision for the company is to leverage our marketing and operational strengths with a sound brand strategy to grow our company with teddy bears and other products in the gift delivery service industry. Unlike other Internet companies, we have proven our ability to profitably market a gift
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delivery service using radio and the Internet. Unlike other Internet companies, we have an established, state-of-the-art, cost-effective fulfilment operation with integrated systems to customize, personalize, pick, pack, and ship, and provide superior customer service. And, the people of The Vermont Teddy Bear Company are not only persistent and smart, they have become over the past several years extremely good at what they do. Why shouldn’t we aspire to be one of the premier gift delivery services in the world?’ Source: Vermont Teddy Bear Annual Report.
The company Vermont Teddy Bear’s principal activity is direct marketing in the gift delivery industry. Founded in 1981 in Vermont (on the east coast of the United States) Vermont Teddy Bear expanded very quickly. In 1992 Inc. Magazine recognized The Vermont Teddy Bear Company as the 80th fastest growing private company in the United States. The same year, Vermont Teddy Bear went on the stock exchange in New York to finance further expansion. Building on its success with its bear delivery services, Vermont Teddy Bear began a new business segment in fiscal 2001, with its SendAMERICA subsidiary selling handicrafts and foodstuffs made by US artisans and growers. Vermont Teddy Bear launched PajamaGram in April 2002. Vermont Teddy Bear (VTB) has six operating segments:
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1 The Bear-Gram service segment involves sending personalized teddy bears directly to recipients for special occasions such as birthdays, anniversaries, weddings, and new babies, as well as holidays such as Valentine’s Day, Christmas, and Mother’s Day. VTB positions its BearGram gift delivery service as a ‘creative alternative to flowers’. 2 The PajamaGram service segment provides customers with a convenient gift that includes an item from a broad assortment of pajamas, gowns, robes and spa products delivered with a free gift card, lavender bath tea, and a ‘do not disturb’ sign, all in a keepsake hatbox. PajamaGram gifts are ordered online at pajamagram.com or via a toll free telephone number. The service is targeted to appeal to female customers in order to broaden VTB’s predominately male customer base. In 2005 women purchased approximately 48 per cent of PajamaGram gifts, versus only 30 per cent of BearGram gifts. VTB also uses direct response radio advertising to market the PajamaGram service, driving visitors to both the toll free number and the website. Many of the same radio stations and syndicated radio networks air both BearGram and PajamaGram ads. In addition, VTB uses cable television and print, with emphasis on targeting woman. As the customer base for PajamaGram gifts expands, VTB has also added catalogue to its marketing mix for this segment. 3 The TastyGram Service. Through this business segment, the company markets and sells a variety of regional food specialties such as NY Carnegie Deli Cheesecake and Gino’s Chicago Deep Dish Pizza. Using proprietary technology, customer orders are processed and forwarded electronically via the Internet to the ‘food’ supplier. The supplier prints a personalized card, picking instructions, and a prepared shipping label from the order information received. The suppliers prepare their unique products for shipping with packaging that incorporates TastyGram labelling. The company coordinates pickup of the gift item at the supplier’s location by Federal Express for delivery. 4 Calyx & Corolla. On 29 August 2003, the company completed the acquisition of certain assets and the business model of Calyx & Corolla. This new business segment (which accounts for 26 per cent of the total VTB sales) is also a wholly-owned subsidiary of the company. It direct markets premium direct-from-the-grower flowers, plants and preserved floral items. The company has arrangements with 17 growers most of which are located
in Florida and California. Certain varieties of fresh cut flowers are flown in from farms in Ecuador, Colombia, Thailand and Holland to the growers’ import warehouses in the United States. Prepared shipping labels, also transmitted electronically, are applied to the colourful gift boxes that are shipped directly from the grower’s warehouse to the receiver. 5 The retail operation segment involves two retail locations and family tours of the teddy bear factory and store. 6 The wholesale/corporate segment proactively develops opportunities in the corporate affinity market and certain wholesale markets. In 2005 the Bear-Gram service accounted for 46 per cent of revenue; the PajamaGram service for 22 per cent; TastyGram for 1 per cent; Calyx & Corolla 26 per cent; retail operations for 4 per cent; and corporate/wholesale (including licensing) for 1 per cent. Because the Company positions itself primarily in the gift market, its distribution is highly seasonal, with Valentine’s Day, Mother’s Day and Christmas representing approximately 28 per cent, 21 per cent, and 16 per cent of the company’s annual sales, respectively. The B-t-B – ‘Bears-to-Business’ The B-t-B, or ‘Bears-to-Business’, programme offers promotional products and corporate gifts for mainly large companies. One example of the ‘Bears-toBusiness’ programme took place in late 1999 when the company had a copromotion with Seagram’s Ginger Ale. Across the country, 20 million litre bottles of Seagram’s Ginger Ale were labelled with a chance to win a Vermont Teddy Bear and carried a
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coupon for a 20 per cent discount on any of the Vermont-made bears offered through the BearGram gift delivery service. Another example of a corporate customer is BMW of North America, which regularly uses the Bear-Gram gift delivery service to congratulate and thank both employees and clients for their dedication and service. Among Vermont Teddy Bear’s corporate customers are Johnson & Johnson, Kraft Foods, Marriott International and Pepsi Cola. Market communication VTB’s marketing and selling expenses are immense. Of VTB’s total sales of $66 million, 37 per cent is used for this purpose. The company developed the BearGram segment using predominantly direct response radio for marketing and distribution in combination with a toll free telephone number and subsequently its website vermontteddybear.com. Most of the radio advertisements are read ‘live’ by local radio personalities in major metropolitan areas. In 2005 the company used local radio stations across the country to advertise its BearGram and PajamaGram services. Many of the stations and personalities air advertisements for both segments. In the early 1990s the Company produced several television commercials that were aired on a small scale on cable networks. These TV initiatives were not considered successful at the time. In 2003 VTB again tested a small-scale television ad campaign for the BearGram segment at Valentine’s Day and for both the BearGram and PajamaGram segments at Mother’s Day. Encouraged by the results of these campaigns, the company in 2004 engaged a Los Angeles agency to produce commercials and increased its spending on cable networks. The company intends to continue expanding television as a means of direct response marketing and distribution particularly for the BearGram and PajamaGram segments in the holidays. Based on the results during 2005, the company intends to continue developing TV as a advertising medium for all its segments. VTB has periodically tested direct response print advertisements in a variety of magazines and newspapers. These early efforts were deemed only marginally successful. More recently, VTB’s brands have gained greater awareness in markets nationally and as it embraced the ‘art’ of multi-channel marketing, the company has again begun to test a variety of print advertising opportunities for all of its gift segments.
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For the 2005 Fall/holiday season, the company mailed a 48-page catalogue to approximately 4 million names including both its customer list and prospects. The company believes that it has significant opportunity to grow the segment through catalogue marketing in addition to direct response radio distribution. VTB has also initiated an online affiliate-marketing programme for its delivery service. The company has worked with affiliate partners, including opt-in list aggregators, news and entertainment websites, existing radio stations and charities to advertise to new prospects via e-mail, and paid these partners a percentage of sales generated. The company has also been successful in acquiring certain keywords and phrases used on these Internet search sites and pays these partners on a ‘cost per click’ basis. Affiliate websites are pre-qualified based on criteria established by the company and signed up and monitored by a third-party service provider. Under this system, the company pays its partners a percentage of revenues generated through links from their websites. Online ordering As the company began to clarify its identity as a gift delivery service as opposed to a toy manufacturer, customer service increasingly became the focus of its efforts to differentiate its brand. Focusing on customer service, including last-minute gift delivery and personalization, the company expanded its contact centre, invested in the technology infrastructure to support online orders and built a new distribution facility with state of the art fulfillment, personalization and shipping capability. Orders, including personalization in the form of artwork or embroidery, eventually could be taken as late as 5 p.m. for delivery the next day. On the day prior to certain key holidays, the company set up its own remote fulfillment operation near the carrier distribution hub to receive and process orders until midnight for next day delivery. The company began taking orders on its website in March 1997, recognising that the website provided visual support of the company’s radio advertising campaign across the country and was a convenient way for customers to place orders. In December 1997 online orders represented 7 per cent of total Bear-Gram orders. In April 2000 approximately 35 per cent of the Bear-Gram orders were received via the Company’s website, triple the level of the prior year. In 2005 nearly 60 per cent of the orders were received via the Internet.
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Competition Competition in the gift market is very intense. Many of its competitors sell similar products at lower price points and have greater financial, selling and marketing resources than the company. The Company, however, believes that its brand strength, its customer relationships and its last-minute personalization and fulfillment capabilities position it to compete effectively with its current and future competitors in each of the gift service categories. Barriers to entry into the company’s markets are low, however, and increased competition based on price or other considerations could result in decreased revenues, increased marketing and selling expenditures and lower profit margins. The VTB’s BearGram service competes with a number of sellers of flowers, balloons, confectionery, cakes and other gift items, which can be ordered by telephone and over the Internet for special occasions and are delivered by express service in a manner similar to Bear-Gram gifts. The company also competes to a lesser degree with a number of companies that sell teddy bears in the United States, including but not limited to Steiff of Germany, Dakin, North American Bear, Gund and Build-A-Bear Workshop. The company also competes with businesses that market and sell teddy bears and other stuffed animals in a manner similar to BearGrams, including ‘Pooh-Grams’ marketed by certain subsidiaries of Disney Enterprises, Inc. With its PajamaGram gift delivery service the company competes against virtually all apparel retailers selling pajamas and related sleepwear and spa products, including Lands End, L.L. Bean, GAP and Victoria’s Secret, that can deliver their products via express service. The company competes by providing its customers with a convenient service and reliable, expedited delivery options. It also competes by providing its customers with a ‘complete’ gift with the added value of a free personalized greeting card and a free add-on such as lavender tub tea, packaged in a decorative box and delivered in a colourful shipping container. With its TastyGram service, the company competes with other specialty retailers that sell food items and deliver them via express services, including Harry and David, Omaha Steaks and Hickory Farms. Again, the company competes by providing convenient customer service and offering a gift presentation of the item with a free personalized card in a colourful gift box. With the Calyx & Corolla business segment the
company competes with other direct-from-thegrower floral retailers such as 1-800-Flowers, FTD and ProFlowers and with local retail florists throughout the country and ‘wire services’ companies such as TeleFlora, 1-800-Flowers and FTD that distribute orders to delivering florists. It also competes by providing high-end designs for its bouquets, fresh cut varieties less commonly available and exclusive containers for bouquets and plants. Finally, it competes by providing a convenient service that includes support to receivers in caring for their flowers and plants. In a broader sense VTB also competes with other ‘bricks and mortar’ retailers. There can be no assurance that additional companies will not seek to compete directly with VTB, including those with greater resources. VTB keeps its production in Vermont because it is convinced that its identity as an American brand manufacturer (with production in Vermont, USA) is a key element of its market positioning for the VTB brand. Approximately 350,000 bears are assembled per year. Only a relatively small per cent of this production is outsourced to overseas manufacturers, mainly in Asia. However, the management is exploring some opportunities in other parts of the world. As Elisabeth Robert says: Gift giving is a deeply rooted tradition in many foreign cultures. Using common carriers such as FedEx and taking orders on the Internet, we avoid setting up an international distribution infrastructure. Handling an order from Tokyo is now no different than handling one from Chicago. Source: Vermont Teddy Bear Annual Report.
However, until now the company has only been selling to US customers, primarily in the big cities on the east coast such as New York, Boston and Philadelphia. Questions 1 What kind of difficulties would Vermont Teddy Bear meet if it were to internationalize its business? 2 In what part of the world should the company start its internationalization? 3 How should the company penetrate the foreign markets: (a) by Internet? (b) by physical stores? (c) by a combination of the two? (d) by other means? 4 How would the communication mix in the chosen countries differ from the US market?
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CASE STUDY
1.2
Arcor: A Latin American confectionary player is globalizing its business
Arcor (www.arcor.com.ar/eng/) was founded in 1951 to produce sweets. However, in order to tell the company’s history fully we must go back to 1924, the year that Amos Pagani, a young Italian immigrant, decided to start up a bakery in the Province of Córdoba. In the 1970s and 1980s Arcor transformed itself into a vast industrial complex, showing the way for other companies in the country. The company continued to grow both in Argentina and in different countries in the region. In 1976 Arcor started operations in Paraguay, in 1979 in Uruguay, in 1981 in Brazil and in 1989 in Chile. In 1999 in Brazil Arcor opened the most advanced chocolate plant in the region, whose facilities also include the largest product distribution centre in that country. This was a start-up that put the company at the cutting edge of technology and production on the continent. It also permitted Arcor to consolidate its position in the very attractive Latin American market. In order to continue with its expansion process Arcor established itself in Barcelona in 2002. Arcor’s goal has always been to expand beyond the borders of its own country, and the opening of this new office allows the company to create closer bonds with customers from the European Economic Community, the Middle East and Africa. Today the Arcor Group has 35 plants in the region (27 in Argentina, four in Brazil, three in Chile, and one in Peru). ARCOR prepares more than 1,500 products in the four areas that make up its business focus: foods, confectionery, chocolates, and cookies and crackers. In all these segments the company has developed a very high degree of ‘know-how’ that has allowed it to become a true specialist in everything it produces. At present Arcor is well established in Latin America, but outside this area it is relatively weak.
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Of the total sales in 2005 of US$1,500 million less than 5 per cent derived from outside Latin America. In the coming years, Arcor faces three big challenges within its ‘international expansion’ framework: becoming the No. 1 Latin American confectionary and chocolate company; continuing to grow and establish itself in high development potential markets outside Latin America, such as the emerging Asian markets; and strengthening product penetration in the most demanding markets in the world: the United States, Japan and the European Union. The group is an active participant in various strategic alliances (production and/or marketing agreements) with international players, such as Nestlé and Brach’s. The most recent example is the partnership with Danone Group (France) in the biscuits and cereal bar business in Argentina, Brazil, and Chile. In April 2004 the two companies merged their biscuit manufacturing activities into a single company, Bagley Latinoamérica SA, which resulted in the biggest biscuit company in South America. The joint venture company is owned 49 per cent by Danone SA (France) and 51 per cent by Arcor. This partnership includes highly recognized brands in local markets like Formis, Maná, Saladix, Hogareñas,
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Sonrisas, Merengadas, Criollitas, Rumba, Opera, Aymoré, Triunfo, Selts and more. In 2000 the Arcor Group launched www. arcorsales.com, the first food industry website in Latin America devoted to business-to-business (B2B) markets, a new trade channel for its products, to leverage those currently in use.
VIDEO CASE STUDY
1.3 download from www.pearsoned.co.uk/ hollensen
Questions 1 What would be the major obstacles to Arcor’s attempt to penetrate markets outside Latin America? 2 How could Arcor use the concept of the ‘virtual value chain’ to increase internationalization? 3 Where are Arcor’s competitive advantages in the value chain?
Nivea Nivea (www.nivea.com) is Beiersdorf’s (www.beiersdorf.com) largest brand in terms of sales, product and geographical reach. The brand is a market leader in a number of product areas, including skin care and sun care, especially in Europe. Questions 1 Which degree of ‘Market Responsiveness’ and ‘Global Coordination/Integration’ does Nivea represent? 2 Do you think that the Nivea Vital commercial (shown in the video) is able to cross borders without any adaptation? If not, which elements should be adapted? 3 Which marketing problems does Nivea anticipate, when penetrating the US market?
For further exercises and cases, see this book’s website at www.pearsoned.co.uk/hollensen
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Questions for discussion 1 What is the reason for the ‘convergence of orientation’ in LSEs and SMEs? 2 How can an SME compensate for its lack of resources and expertise in global marketing when trying to enter export markets? 3 What are the main differences between global marketing and marketing in the domestic context? 4 Explain the main advantages of centralizing upstream activities and decentralizing downstream activities. 5 How is the ‘virtual value chain’ different from the ‘conventional value chain’?
References Asugman, G., Johnson, J.L. and McCullough, J. (1997) ‘The role of after-sales service in international marketing’, Journal of International Marketing, 5(4), pp. 11–28. Auguste, B.G., Harmon, E.P., Pandit, V. (2006) ‘The right service strategies for product companies’, McKinsey Quarterly, 1 March, pp. 10–15.
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Bonaccorsi, A. (1992) ‘On the relationship between firm size and export intensity’, Journal of International Business Studies, fourth quarter, pp. 605–635. Blomstermo, A., Sharma, D.D. and Sallis, J. (2006) ‘Choice of foreign market entry mode in service firms’, International Marketing Review, 23(2), pp. 211–229. Cafferata, R. and Mensi, R. (1995) ‘The role of information in the internationalization of SMEs: a typological approach’, International Small Business Journal, 13(3), pp. 35–46. Chakravarthy, B.S., and H.V. Perlmutter (1985) ‘Strategic Planning for a Global Business’, Columbia Journal of World Business, 20(2), pp. 3–10. Frost, R. (2006) ‘Global Packaging: What’s the difference?’, www.Brandchannel.com, 16 January 2006. Gupta, A.K. and Govindarajan, V. (2001) ‘Converting global presence into global competitive advantage’, Academy of Management Executive, 15(2), pp. 45–56. Johnson, G. (1988) ‘Rethinking incrementalism’, Strategic Management Journal, 9, pp. 75–91. Julien, P.E., Joyal, A., Deshaies, L. and Ramangalahy, C. (1997) ‘A typology of strategic behaviour among small and medium-sized exporting businesses: a case study’, International Small Business Journal, 15(2), pp. 33–49. Knight, G. (2000) ‘Entrepreneurship and marketing strategy: the SME under globalization’, Journal of International Marketing, 8(2), pp. 12–32. Marchand, D.A. (1999) ‘Hard IM choices for senior managers’, Part 10 of ‘Your guide to mastering information management’, Financial Times, 5 April. Mintzberg, H. (1987) ‘The strategy concept I: five Ps for strategy’, California Management Review, 30(1), pp. 11–24. Mintzberg, H. and Waters, A. (1985) ‘Of strategies, deliberate and emergent’, Strategic Management Journal, 6, pp. 257–272. Perlmutter, H.V. (1969) ‘The tortuous evolution of the multinational corporation’, Columbia Journal of World Business, 9 (January–February), pp. 9–18. Peters, T.J. and Waterman, R.H. (1982) In Search of Excellence, Harper & Row, New York. Porter, M.E. (1985) Competitive Advantage, The Free Press, New York. Porter, M.E. (1986) ‘Competition in global industries: a conceptual framework’, in Porter, M.E. (ed.), Competition in Global Industries, Harvard Business School Press, Boston, MA. Quelch, J.A. (2002) ‘Does globalization have staying power?’, Marketing Management, March/April, pp. 18 –23. Quinn, J.B. (1980) ‘Strategies for change: logical incrementalism’, Sloan Management Review, 20(1), pp. 7–21. Rayport, J.F. and Sviokla, J.J. (1996) ‘Exploiting the virtual value chain’, McKinsey Quarterly, 1, pp. 21–36. Segal-Horn, S. (2002) ‘Global firms: heroes or villains? How and why companies globalize’, European Business Journal, 14(1), pp. 8–19. Sheth, J.N. and Parvatiyar, A. (2001) ‘The antecedents and consequences of integrated global marketing’, International Marketing Review, 18(1), pp. 16–29. Solberg, C.A. (1997) ‘A framework for analysis of strategy development in globalizing markets’, Journal of International Marketing, 5(1), pp. 9–30. Stabell, C.B. and Fjeldstad, Ø.B. (1998) ‘Configuring value for competetive advantage: on chains, shops, and networks’, Strategic Management Journal, 19, pp. 413–437. Svensson, G. (2001) ‘ “Glocalization” of business activities: a “glocal strategy” approach’, Management Decision, 39(1), pp. 6–18. Svensson, G. (2002) ‘Beyond global marketing and the globalization of marketing activities’, Management Decision, 40(6), pp. 574–583.
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2
Initiation of internationalization Contents 2.1 2.2 2.3 2.4 2.5
Introduction Internationalization motives Triggers of export initiation (change agents) Internationalization barriers/risks Summary
Case studies 2.1 2.2 2.3
Blooming Clothing Elvis Presley Enterprises Inc. (EPE) Video case study: NIDEK
Learning objectives After studying this chapter you should be able to do the following:
2.1
l
Discuss the reason (motives) why firms go international.
l
Explain the difference between proactive and reactive motives.
l
Analyse the triggers of export initiation.
l
Explain the difference between internal and external triggers of export initiation.
l
Describe different factors hindering export initiation.
l
Discuss the critical barriers in the process of exporting.
Introduction Internationalization occurs when the firm expands its R&D, production, selling and other business activities into international markets. In many larger firms internationalization may occur in a relatively continuous fashion, with the firm undertaking various internationalization stages on various foreign expansion projects simultaneously, in incremental steps, over a period of time. However, for SMEs, internationalization is often a relatively discrete process; that is, one in which management regards each internationalization venture as distinct and individual. In the pre-internationalization stages SME managers use information to achieve enough relevant knowledge to initiate internationalization (Freeman, 2002). Figure 2.1 illustrates the different stages in pre-internationalization, and the rest of this chapter refers to the stages in Figure 2.1.
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Figure 2.1 Pre-internationalization: initiation of SME internationalization
2.2
Internationalization motives The fundamental reasons – proactive and reactive – for internationalization.
Internationalization motives The fundamental reason for exporting, in most firms, is to make money. But, as in most business activities, one factor alone rarely accounts for any given action. Usually a mixture of factors results in firms taking steps in a given direction. Table 2.1 provides an overview of the major internationalization motives. They are differentiated into proactive and reactive motives. Proactive motives represent stimuli to attempt strategy change, based on the firm’s interest in exploiting unique competences (e.g. a special technological knowledge) or market possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markets and adjusts passively to them by changing its activities over time. Let us take a closer look at each export motive.
Table 2.1 Major motives for starting export Proactive motives l l l l l l
Profit and growth goals Managerial urge Technology competence/unique product Foreign market opportunities/market information Economies of scale Tax benefits
Source: adapted from Albaum et al., 1994, p. 31.
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Reactive motives l l l l l l
Competitive pressures Domestic market: small and saturated Overproduction/excess capacity Unsolicited foreign orders Extend sales of seasonal products Proximity to international customers/psychological distance
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Proactive motives Profit and growth goals The desire for short-term profit is especially important to SMEs that are at a stage of initial interest in exporting. The motivation for growth may also be of particular importance for the firm’s export start. Over time, the firm’s attitude towards growth will be influenced by the type of feedback received from past efforts. For example, the profitability of exporting may determine management’s attitude towards it. Of course the perceived profitability, when planning to enter international markets, is often quite different from profitability actually attained. Initial profitability may be quite low, particularly in international start-up operations. The gap between perception and reality may be particularly large when the firm has not previously engaged in international market activities. Despite thorough planning, sudden influences often shift the profit picture substantially. For example, a sudden shift in exchange rates may drastically alter profit forecasts even though they were based on careful market evaluation. The stronger the firm’s motivation to grow, the greater will be the activities it generates, including search activity for new possibilities, in order to find means of fulfilling growth and profit ambitions.
Managerial urge Managers’ motivation that reflects the desire and enthusiasm to drive internationalization forward.
Managerial urge Managerial urge is a motivation that reflects the desire, drive and enthusiasm of management towards global marketing activities. This enthusiasm can exist simply because managers like to be part of a firm that operates internationally. Further, it can often provide a good reason for international travel. Often, however, the managerial urge to internationalize is simply a reflection of general entrepreneurial motivation – of a desire for continuous growth and market expansion. Managerial attitudes play a critical role in determining the exporting activities of the firm. In SMEs export decisions may be the province of a single decision maker; in LSEs they can be made by a decision-making unit. Irrespective of the number of people involved in the export decision-making process, the choice of a foreign market entry strategy is still dependent on the decision maker’s perceptions of foreign markets, expectations concerning these markets and the company’s capability of entering them. The internationalization process may also be encouraged by the cultural socialization of the managers. Managers who either were born or have the experience of living or travelling abroad may be expected to be more internationally minded than other managers. Prior occupation in exporting companies, or membership in trade and professional associations, may also reinforce key decision makers’ perceptions and evaluations of foreign environments. Technology competence/unique product A firm may produce goods or services that are not widely available from international competitors or may have made technological advances in a specialized field. Again, real and perceived advantages should be differentiated. Many firms believe that theirs are unique products or services, even though this may not be the case in the international market. If products or technology are unique, however, they can certainly provide a sustainable competitive edge and result in major business success abroad. One issue to consider is how long such a technological or product advantage will continue. Historically, a firm with a competitive edge could count on being the sole supplier to foreign markets for years to come. This type of advantage, however, has shrunk
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dramatically because of competing technologies and a frequent lack of international patent protection. However, a firm producing superior products is more likely to receive enquiries from foreign markets because of the perceived competence of its offerings. Several dimensions in the product offering affect the probability that a potential buyer will be exposed to export stimuli. Furthermore, if a company has developed unique competences in its domestic market, the possibilities of spreading unique assets to overseas markets may be very high because the opportunity costs of exploiting these assets in other markets will be very low. Foreign market opportunities/market information It is evident that market opportunities act as stimuli only if the firm has or is capable of securing those resources necessary to respond to the opportunities. In general, decision makers are likely to consider a rather limited number of foreign market opportunities in planning their foreign entry. Moreover, such decision makers are likely to explore first those overseas market opportunities perceived as having some similarity with the opportunities in their home market. From time to time certain overseas markets grow spectacularly, providing tempting opportunities for expansion-minded firms. The attraction of the south-east Asian markets is based on their economic successes, while the attraction of the eastern European markets is rooted in their new-found political freedoms and desire to develop trade and economic relationships with countries in western Europe, North America and Japan. Other countries that are likely to increase in market attractiveness as key internal changes occur include the People’s Republic of China and South Africa. Specialised marketing knowledge or access to information can distinguish an exporting firm from its competitors. This includes knowledge about foreign customers, marketplaces or market situations that is not widely shared by other firms. Such special knowledge may result from particular insights based on a firm’s international research, special contacts a firm may have, or simply being in the right place at the right time (e.g. recognizing a good business situation during a vacation trip). Past marketing success can be a strong motivator for future marketing behaviour (‘logical incrementalism’ – see discussion in section 1.3). Competence in one or more of the major marketing activities will often be a sufficient catalyst for a company to begin or expand exports. Economies of scale – learning curve Becoming a participant in global marketing activities may enable the firm to increase its output and therefore climb more rapidly on the learning curve. Ever since the Boston Consulting Group showed that a doubling of output can reduce production costs by up to 30 per cent this effect has been very much sought. Increased production for the international market can therefore also help in reducing the cost of production for domestic sales and make the firm more competitive domestically as well. This effect often results in seeking market share as a primary objective of firms. (See Exhibits 1.2 and 2.1 as examples of this.) At an initial level of internationalization it may mean an increased search for export markets; later on it can result in opening foreign subsidiaries and foreign production facilities.
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Exhibit 2.1 Global marketing and economics of scale in Japanese firms Japanese firms exploit foreign market opportunities by using a penetration pricing strategy – a low-entry price to build up market share and establish a long-term dominant market position. They do accept losses in the early years, as they view it as an investment in long-term market development. This can be achieved because much of Japanese industry (especially the keiretsu type of organization) is supported or owned by banks or other financial institutions with a much lower cost of capital. Furthermore, because of the lifetime employment system, labour cost is regarded as a fixed expense, not a variable as it is in the West. Since all marginal labour cost will be at the entry salary level, raising volume is the only way to increase productivity rapidly. As a result market share, not profitability, is the primary concept in Japanese firms, where scale of operation and experience allow economies of scale, which also help to reduce distribution costs. The international trading companies typically take care of international sales and marketing, allowing the Japanese firm to concentrate on economies of scale, resulting in lower cost per unit. Source: Genestre et al., 1995.
Through exporting, fixed costs arising from administration, facilities, equipment, staff work and R&D can be spread over more units. For some companies a condition for exploiting scale effects on foreign markets to the fullest extent is the possibility of standardizing the marketing mix internationally. For others, however, standardized marketing is not necessary for scale economies. Tax benefits Tax benefits can also play a major motivating role. In the United States a tax mechanism called the Foreign Sales Corporation (FSC) has been instituted to assist exporters. It is in conformity with international agreements and provides firms with certain tax deferrals. Tax benefits allow the firm either to offer its products at a lower cost in foreign markets or to accumulate a higher profit. This may therefore tie in closely with the profit motivation. However, antidumping laws enforced by WTO (the World Trade Organization) punish foreign producers for selling their products on local markets at very low prices in order to protect local producers. This is the law that every country that has signed the WTO agreement (and most countries have signed this agreement) must abide by.
Reactive motives Competitive pressures A prime form of reactive motivation is reaction to competitive pressures. A firm may fear losing domestic market share to competing firms that have benefited from economies of scale gained by global marketing activities. Further, it may fear losing foreign markets permanently to domestic competitors that decide to focus on these markets, knowing that market share is most easily retained by the firm that obtains it initially. Quick entry may result in similarly quick withdrawal once the firm recognizes that its preparations have been insufficient. In addition to this, knowing that other firms, particularly competitors, are internationalizing provides a strong incentive to internationalize. Competitors are an important external factor stimulating internationalization. Coca-Cola became international much earlier than Pepsi did, but there is no doubt whatever that Coca-Cola’s move into overseas markets influenced Pepsi to move in the same direction.
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Domestic market: small and saturated A company may be pushed into exporting because of a small home market potential. For some firms, domestic markets may be unable to sustain sufficient economies of scale and scope, and these companies automatically include export markets as part of their market entry strategy. This type of behaviour is likely for industrial products that have few, easily identified customers located throughout the world, or for producers of specialized consumer goods with small national segments in many countries. A saturated domestic market, whether measured in sales volume or market share, has a similar motivating effect. Products marketed domestically by the firm may be at the declining stage of the product life cycle. Instead of attempting a push-back of the life cycle process, or in addition to such an effort, firms may opt to prolong the product life cycle by expanding the market. In the past such efforts were often met with success as customers in many developing countries only gradually reached a level of need and sophistication already attained by customers in industrialized nations. Some developing nations are still often in need of products for which the demand in the industrialized world is already on the decline. In this way firms can use the international market to prolong the life cycle of their product. (See also section 15.4, ‘The product life cycle’, for further discussion.) Many US appliance and car manufacturers initially entered international markets because of what they viewed as near-saturated domestic markets. US producers of asbestos products found the domestic market legally closed to them, but because some overseas markets had more lenient consumer protection laws they continued to produce for overseas markets. Another perspective on market saturation is also relevant for understanding why firms may expand overseas. Home market saturation suggests that unused productive resources (such as production and managerial slack) exist within the firm. Production slack is a stimulus for securing new market opportunities, and managerial slack can provide those knowledge resources required for collecting, interpreting and using market information. Overproduction/excess capacity If a firm’s domestic sales of a product are below expectation the inventory can be above desired levels. This situation can be the trigger for starting export sales via short-term price cuts on inventory products. As soon as the domestic market demand returns to previous levels global marketing activities are curtailed or even terminated. Firms that have used such a strategy may encounter difficulties when trying to employ it again because many foreign customers are not interested in temporary or sporadic business relationships. This reaction from abroad may well lead to a decrease in the importance of this motivation over time. In some situations, however, excess capacity can be a powerful motivation. If equipment for production is not fully utilized firms may see expansion into the international market as an ideal possibility for achieving broader distribution of fixed costs. Alternatively, if all fixed costs are assigned to domestic production, the firm can penetrate international markets with a pricing scheme that focuses mainly on variable costs. Although such a strategy may be useful in the short term it may result in the offering of products abroad at a lower cost than at home, which in turn may stimulate parallel importing. In the long run, fixed costs have to be recovered to ensure replacement of production equipment. A market penetration strategy based on variable cost alone is therefore not feasible over the long term.
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Sometimes excess production capacity arises because of changing demand in the domestic market. As domestic markets switch to new and substitute products companies making older product versions develop excess capacity and look for overseas market opportunities. Unsolicited foreign orders Many small companies have become aware of opportunities in export markets because their products generated enquiries from overseas. These enquiries can result from advertising in trade journals that have a worldwide circulation, through exhibitions and by other means. As a result a large percentage of exporting firms’ initial orders were unsolicited. Extend sales of seasonal products Seasonality in demand conditions may be different in the domestic market from other international markets. This can act as a persistent stimulus for foreign market exploration that may result in a more stable demand over the year. A producer of agricultural machinery in Europe had demand from its domestic market primarily in the spring months of the year. In an attempt to achieve a more stable demand over the year it directed its market orientation towards the southern hemisphere (e.g. Australia, South Africa), where it is summer when the northern hemisphere has winter and vice versa. Proximity to international customers/psychological distance Physical and psychological closeness to the international market can often play a major role in the export activities of a firm. For example, German firms established near the Austrian border may not even perceive their market activities in Austria as global marketing. Rather, they are simply an extension of domestic activities, without any particular attention being paid to the fact that some of the products go abroad. Unlike US firms, most European firms automatically become international marketers simply because their neighbours are so close. As an example, a European firm operating in Belgium needs to go only 100 km to be in multiple foreign markets. Geographic closeness to foreign markets may not necessarily translate into real or perceived closeness to the foreign customer. Sometimes cultural variables, legal factors and other societal norms make a foreign market that is geographically close seem psychologically distant. For example, research has shown that US firms perceive Canada as psychologically much closer than Mexico. Even England, mainly because of similarity in language, is perceived by many US firms as much closer than Mexico or other Latin American countries, despite the geographic distances. Also the recent extensive expansion of many Greek firms (especially banks) to the Balkans is an example of proximity to international customers. In a study of small UK firms’ motives for going abroad, Westhead et al. (2002) found the following main reasons for starting exporting of their products/services: l l l l l
being contacted by foreign customers that place orders; one-off order (no continuous exporting); the availability of foreign market information; part of growth objective of the firm; export markets actively targeted by key founder/owner/manager.
The results in the Westhead et al. (2002) study also showed that the bigger the firm the more likely that it would have cited proactive stimuli/motives.
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Exhibit 2.2 Internationalization of Haier – proactive and reactive motives The Chinese manufacturer of home appliances (e.g. refrigerators), Haier Group, was near bankruptcy when Mr Zhang Ruimin was appointed plant director in 1984, the fourth one that year. It is Zhang Ruimin who has led the company to stand up and grow to the world’s sixth largest home appliance manufacturer.
Proactive motives Zhang Ruimin had an internationalization mindset for the initial stage of Haier’s development. In 1984, soon after having joined the plant, he introduced technology and equipment from Liebherr, a German company, to produce several popular refrigerator brands in China. At the same time China, consumer goods production, Haier he actively expanded cooperation with Liebherr © Mike Reynolds/epa/Corbis. by manufacturing refrigerators based on its standards which were then sold to Liebherr, as a way of entering the German market. In 1986 the value of Haier’s exports reached US$3 million for the first time. Zhang Ruimin later commented on this strategy: ‘Exporting to earn foreign exchange was necessary at that time’. When Haier invested in a plant in the United States, Zhang Ruimin thought it gained location advantage by setting up plants overseas to avoid tariffs and reduce transportation costs. Internalization advantage had been attained through controlling services and marketing/distribution, and ownership advantage had been achieved by developing design and R&D capabilities through utilizing high-quality local human resources.
Reactive motives The entry of global home appliance manufacturers into the Chinese market forced Haier to seek international expansion. In particular, since China joined the WTO almost every international competitor has invested in China, establishing wholly-owned companies. The best defensive strategy for Haier would be to have a presence in its competitors’ home markets. The saturation of the Chinese home appliance market, with intensifying competition, has been a major motive. After the mid-1990s price wars broke out one after another in various categories of the market. At the end of 2000, Haier’s market shares in China of refrigerators, freezers, air conditioners and washing machines had reached 33, 42, 31 and 31 per cent, respectively. The potential for further development in the domestic market was therefore limited. One of the important external triggers for the internationalization of Haier has been the Chinese government. Being an international player, Haier gained some special conditions that other Chinese companies could not obtain. For instance, Haier had already been approved to establish a financial company, to be the majority shareholder of a regional commercial bank, and to form a joint venture with a US insurance company. Without its active pursuit of internationalization as well as a dominant position in home appliance sectors it would normally be impossible for a manufacturer to get approval to enter the financial sector. Source: adapted from Liu and Li, 2002.
The results of Suárez-Ortega and Alamo-Vera (2005) suggest that the main driving forces motivating internationalization are found within the firm, and therefore they are based on the management’s strengths and weaknesses. They conclude that it is not the external environment that mainly influence the internationalization activities, but the pool of resources and capabilities within the firm that might be appropriately combined to succeed in international markets. Consequently, the speed and intensity of internationalization can be emphasized through programmes aimed at enhancing managers’ skills and capabilities. Also export promotion programmes aiming to get more non-exporters to become interested in exporting should emphasize activities that increase managers’ awareness of export advantages. 48
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2.3
Internationalization triggers Internal or external events taking place to initiate internationalization.
Triggers of export initiation (change agents) For internationalization to take place someone or something within or outside the firm (so-called change agents) must initiate the process and carry it through to implementation (see Table 2.2). These are known as internationalization triggers.
Internal triggers Perceptive management Perceptive managements gain early awareness of developing opportunities in overseas markets. They make it their business to become knowledgeable about these markets, and maintain a sense of open-mindedness about where and when their companies should expand overseas. Perceptive managements include many cosmopolites in their ranks. A trigger factor is frequently foreign travel, during which new business opportunities are discovered or information received which makes management believe that such opportunities exist. Managers who have lived abroad, have learned foreign languages or are particularly interested in foreign cultures are likely, sooner rather than later, to investigate whether global marketing opportunities would be appropriate for their firm. Often managers enter a firm having already had some global marketing experience in previous jobs and try to use this experience to further the business activities of their new firm. In developing their goals in the new job managers frequently consider an entirely new set of options, one of which may be global marketing activities. Specific internal event A significant event can be another major change agent. A new employee who firmly believes that the firm should undertake global marketing may find ways to motivate management. Overproduction or a reduction in domestic market size can serve as such an event, as can the receipt of new information about current product uses. For instance, a company’s research activity may develop a by-product suitable for sale overseas, as happened with a food-processing firm that discovered a low-cost protein ideal for helping to relieve food shortages in some parts of Africa. Research has shown that in SMEs the initial decision to export is usually made by the president, with substantial input provided by the marketing department. The carrying out of the decision – that is, the initiation of actual global marketing activities and the implementation of these activities – is then primarily the responsibility of marketing personnel. Only in the final decision stage of evaluating global marketing activities does the major emphasis rest again with the president of the firm. In order to influence a firm internally, it therefore appears that the major emphasis should be placed first on convincing the president to enter the international marketplace and
Table 2.2 Triggers of export initiation Internal triggers
External triggers
l Perceptive management l Specific internal event l Importing as inward internationalization
l l l l
Market demand Competing firms Trade associations Outside experts
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then on convincing the marketing department that global marketing is an important activity. Conversely, the marketing department is a good place to be if one wants to become active in international business. In a recent study of internationalization behaviour in Finnish SMEs, Forsman et al. (2002) found that the three most important triggers for starting up operations internationally were as follows: l l l
management’s interest in internationalization; foreign enquiries about the company’s products/services; inadequate demand in the home market.
In this study it is interesting to notice that companies do not regard contacts from Chambers of Commerce or other support organizations as important for getting their international activities going. However, Chambers of Commerce are often used for obtaining further information about a foreign country after an initial trigger has led to the consideration of going international.
Inward/outward internationalization Imports as a preceding activity for the later market entries in foreign markets.
Inward/outward internationalization Internationalization has traditionally been regarded as an outward flow and most internationalization models have not dealt explicitly with how earlier inward activities, and thereby gained knowledge, can influence later outward activities. A natural way of internationalizing would be first to get involved in inward activities (imports) and thereafter in outward activities (exports). Relationships and knowledge gathered from import activities could thus be used when the firm engages in export activities (Welch et al., 2001). Welch and Loustarinen (1993) claim that inward internationalization (importing) may precede and influence outward internationalization (international market entry and marketing activities) – see Figure 2.2. A direct relationship exists between inward and outward internationalization in the way that effective inward activities can determine the success of outward activities, especially in the early stages of internationalization. The inward internationalization may be initiated by one of the following: l
l
the buyer: active international search of different foreign sources (buyer initiative = reverse marketing); or the seller: initiation by the foreign supplier (traditional seller perspective).
During the process from inward to outward internationalization the buyer’s role (in country A) shifts to that of seller, both to domestic customers (in country A) and to foreign customers. Through interaction with the foreign supplier the buyer (importer) gets access to the network of the supplier, so that at some later time there may be an outward export to members of this network. Inward international operations thus usually cover a variety of different forms used to strengthen a firm’s resources. Of course inward flows imply importing products needed for the production process, such as raw materials and machinery. But inward operations can also include finances and technology through different operational forms, such as franchising, direct investments and alliances (Forsman et al., 2002). In some cases inward foreign licensing may be followed by outward technology sales. According to Fletcher (2001) and Freeman (2002), inward and outward activities and the links between them can develop in different ways. The links are most tangible in counter-trade arrangements (where the focal firm initiates exporting to the same market from which importing takes place), but they can also be found in the networks of relationships between subunits within a multinational enterprise and in strategic alliances.
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Figure 2.2 Inward/outward internationalization: a network example
External triggers Market demand Growth in international markets also causes the demand for the products of some companies also to grow, pushing the makers of these products into internationalization. Many pharmaceutical companies entered international markets when growth in the international demand for their products was first getting under way. The USbased company Squibb entered the Turkish market before it was large enough to be profitable; but the market was growing rapidly, which encouraged Squibb to internationalize further. Competing firms Information that an executive in a competing firm considers certain international markets to be valuable and worthwhile developing captures the attention of management. Such statements not only have source credibility but are also viewed with a certain amount of fear because the competitor may eventually infringe on the firm’s business. Trade associations Formal and informal meetings among managers from different firms at trade association meetings, conventions or business round tables often serve as a major change agent. It has even been suggested that the decision to export may be made by small firms on the basis of the collective experience of the group of firms to which they belong.
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Outside experts Several outside experts encourage internationalization. Among them are export agents, governments, Chambers of Commerce and banks. l
l
l
l
Export agents Export agents as well as export trading companies and export management firms generally qualify as experts in global marketing. They are already dealing internationally with other products, have overseas contacts and are set up to handle other exportable products. Many of these trade intermediaries approach prospective exporters directly if they think that their products have potential markets overseas. Governments In nearly all countries governments try to stimulate international business through providing global marketing expertise (export assistance programmes). For example, government stimulation measures can have a positive influence not only in terms of any direct financial effects that they may have, but also in relation to the provision of information. Chambers of Commerce Chambers of Commerce and similar export production organizations are interested in stimulating international business, both exports and imports. These organizations seek to motivate individual companies to get involved in global marketing and provide incentives for them to do so. These incentives include putting the prospective exporter or importer in touch with overseas business, providing overseas market information, and referring the prospective exporter or importer to financial institutions capable of financing global marketing activity. Banks Banks and other financial institutions are often instrumental in getting companies to internationalize. They alert their domestic clients to international opportunities and help them to capitalize on these opportunities. Of course, they look forward to their services being used more extensively as domestic clients expand internationally.
Information search and translation Of all resources, information and knowledge are perhaps the most critical factor in the initiation of the internationalization process in the SME (see also Figure 2.1 earlier). Because each international opportunity constitutes a potential innovation for the SME the management must acquire appropriate information. This is especially important to SMEs, which typically lack the resources to internationalize in the manner of LSEs. Consequently the management launches an information search and aquires relevant information from a number of sources, such as internal written reports, government agencies, trade associations, personal contacts or the Internet, relevant to the intended internationalization project. In the information translation stage the internationalization information is transformed by managers into knowledge within the firm. It is through the information search and translation into knowledge that management becomes informed on internationalization. At this stage the firm has entered a cycle of continuous search and translation into internationalization knowledge. This cycle continues until management is satisfied that it has sufficiently reduced the uncertainty associated with the internationalization project to ensure a relatively high probability of success. Once sufficient information has been acquired and translated into usable knowledge the firm leaves the cycle, becoming internationalization ready. It is here that the firm proceeds to action, that is, internationalization trial. ‘Action’ refers to behaviours and activities that management executes based on the knowledge that it has acquired. At this stage the firm could be said to have an embedded internationalization culture, where even the most challenging foreign markets can be overcome, leading to further internationalization and ‘storage’ of actual internationalization knowledge in
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the heads of the managers. The above description represents the firm more or less in isolation. However, the network theory recognizes the importance of the firm’s membership in a constellation of firms and organizations. By interacting within such a constellation the firm derives advantages well beyond what it could obtain in isolation. At the most fine-grained level, knowledge is created by individuals. Individuals acquire explicit knowledge via specific means and tacit knowledge through ‘hands-on’ experience (experiential learning). The nature of the pre-internationalization process (illustrated in Figure 2.1) will be unique in each firm because of several factors at the organization and individual levels within the firm (Knight and Liesch, 2002). Throughout the process depicted in Figure 2.1 the firm may exit from the preinternationalization process at any time, as a result of the barriers hindering internationalization. The manager may decide to ‘do nothing’, an outcome that implies exiting from pre-internationalization.
2.4
Internationalization barriers/risks A wide variety of barriers to successful export operations can be identified. Some problems mainly affect the export start; others are encountered in the process of exporting.
Barriers hindering export initiation Critical factors hindering internationalization initiation include the following (mainly internal) barriers: l l l l l l l l l
insufficient finances; insufficient knowledge; lack of foreign market connections; lack of export commitment; lack of capital to finance expansion into foreign markets; lack of productive capacity to dedicate to foreign markets; lack of foreign channels of distribution; management emphasis on developing domestic markets; cost escalation due to high export manufacturing, distribution and financing expenditures.
Inadequate information on potential foreign customers, competition and foreign business practices are key barriers facing active and prospective exporters. Obtaining adequate representation for overseas distribution and service, ensuring payment, import tariffs and quotas, and difficulties in communicating with foreign distributors and customers are also major concerns. Serious problems can also arise from production disruptions resulting from a requirement for non-standard export products. This will increase the cost of manufacturing and distribution. In a study of craft micro-enterprises (less than ten employees) in the United Kingdom and Ireland, Fillis (2002) found that having sufficient business in the domestic market was the major factor in the decision not to export. Other reasons of aboveaverage importance were: lack of export inquiries, relating to the reactive approach to business; complicated exporting procedures; poor levels of exporting assistance; and limited government incentives. Similar results were supported by a study by Westhead
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et al. (2002), who found that for small firms ‘focus on local market’ was the main reason for not exporting any of their products.
Barriers hindering the process of internationalization Critical barriers in the process of internationalization may be divided into three groups: general market risks, commercial risks and political risks. General market risks General market risks include the following: l l l l l l l
comparative market distance; competition from other firms in foreign markets; differences in product usage in foreign markets; language and cultural differences; difficulties in finding the right distributor in the foreign market; differences in product specifications in foreign markets; complexity of shipping services to overseas buyers.
Commercial risks The following fall into the commercial risks group: l l
l l
exchange rate fluctuations when contracts are made in a foreign currency; failure of export customers to pay due to contract dispute, bankruptcy, refusal to accept the product or fraud; delays and/or damage in the export shipment and distribution process; difficulties in obtaining export financing.
Political risks Among the political risks resulting from intervention by home and host country governments are the following: l l l
l l l l l l l l
foreign government restrictions; national export policy; foreign exchange controls imposed by host governments that limit the opportunities for foreign customers to make payment; lack of governmental assistance in overcoming export barriers; lack of tax incentives for companies that export; high value of the domestic currency relative to those in export markets; high foreign tariffs on imported products; confusing foreign import regulations and procedures; complexity of trade documentation; enforcement of national legal codes regulating exports; civil strife, revolution and wars disrupting foreign markets.
The importance of these risks must not be overemphasised, and various riskmanagement strategies are open to exporters. These include the following: l l
l l
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Avoid exporting to high-risk markets. Diversify overseas markets and ensure that the firm is not overdependent on any single country. Insure risks when possible. Government schemes are particularly attractive. Structure export business so that the buyer bears most of the risk. For example, price in a hard currency and demand cash in advance.
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In Fillis (2002) over one-third of the exporting craft firms indicated that they encountered problems once they entered export markets. The most common problem was connected with the choice of a reliable distributor, followed by difficulties in promoting the product and matching competitors’ prices.
2.5
Summary This chapter has provided an overview of the pre-internationalization process. The chapter opened with the major motives for firms to internationalize. These were differentiated into proactive and reactive motives. Proactive motives represent internal stimuli to attempt strategy change, based on the firm’s interest in exploiting unique competences or market possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markets and adjusts passively to them. For internationalization to take place someone or something (‘triggers’) inside or outside the firm must initiate it and carry it through. To succeed in global marketing the firm has to overcome export barriers. Some barriers mainly affect the export initiation and others are encountered in the process of exporting.
CASE STUDY
Blooming Clothing: A bumpy path to exports
2.1 It was 9 o’clock on a misty morning in February 1995. Martha O’Byrne cycled down the narrow avenue to the clothing factory of which she was managing director and the main shareholder. Wheeling her bicycle into her small office, she wondered if Janet Evans had called yet. Janet, the chief buyer with the Mothercare chain of stores in the United Kingdom, had promised to phone her that morning, to let her know if she would be placing a further order with Martha’s company. Listening to the messages on her answering machine, Martha remembered the path she had taken to establish her own enterprise. Blooming Clothing, the small company that Martha O’Byrne owns and manages, is situated in the Liberties, an old and historic part of Dublin, Ireland. Established in 1985, the firm employs 70 people manufacturing maternity wear for the Irish and export markets. Martha O’Byrne had come to this business by an unusual route. Having established herself as a successful merchant banker, she had been considering setting up her own business for some time. ‘Women, I think, can have a mid-life crisis at the menopause,
A model in materinity wear from Blooming Clothing
Ë 55
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but I got mine when I was 28,’ she recalls. In 1984 a shopping trip with her pregnant sister-in-law revealed that the maternity wear available on the Irish market was dowdy and depressing. In that moment the idea for Blooming Clothing was conceived. Martha resigned from her position at the investment bank in 1985 and set up in business with two partners as a retailer of maternity wear. Her shop, called ‘Blooming’, was located on South Leinster Street, on the fringes of Dublin’s most prestigous shopping district. It quickly won recognition and sales for its more modern clothes, which proved particularly popular with working women. ‘There was a need for a new, more vibrant look,’ comments Martha, ‘while still retaining the femininity and mystique of the pregnant woman.’ The emphasis of the ‘Blooming’ label is on softly tailored separates – jackets, trousers, skirts and dresses – for office wear and special occasions. Having experienced problems with outsourcing garments Martha and her team started to manufacture their own lines in 1986. By 1987 Blooming Clothing had a turnover of IR£250,000. The company built up further sales in Ireland through concession outlets in department stores and through a range of independent outlets. The break into exporting also came in 1987. Martha, herself six months pregnant at the time, made a presentation to a buyer from Harrods, the well-known department store in London. The store agreed to carry the Blooming label in its maternity wear section, and has been a good customer since. Arising out of this success Blooming appointed an agent, Favoro & Co., to build up further business in the United Kingdom. By 1992 the firm had a turnover of IR£1.1 million and had moved manufacturing to the current premises at Carman’s Hall, Francis Street. It had established a good sales base in Ireland and was selling in the United Kingdom to such prestigious retailers, in addition to Harrods, as John Lewis and Selfridges. The firm depended heavily on a personal approach to secure orders. It did not have a full-time salesperson as such or attend trade fairs. Would-be buyers would receive a presentation on the Blooming range from Martha O’Byrne herself or from Barbara Connolly, the firm’s part owner and chief designer. However, 1992 saw the UK economy go into deep recession, and clothing was one of the first industries to feel the pinch. As if this was not enough, 1992/93 also saw the development of a major currency crisis for the Irish pound vis-à-vis the pound sterling. The
56
Irish pound, which had been trading at a rate of 96–98 pence to the pound sterling, rapidly appreciated in value, eventually trading at IR£1.10 to £1 sterling. Irish exporters, for whom the United Kingdom is the single most important market, found their prices increased and their customers falling away. Blooming Clothing was not alone in experiencing these trends, and along with other companies received financial assistance from a state-funded scheme designed to help exporters through this crisis. In the meantime cash flow was squeezed and the aftermath was felt for two years. The management of Blooming spent 1993 trying to generate orders to make up for the business it had lost. Martha remained optimistic. ‘There may be peaks and troughs in a business, but there are always opportunities in any market if you look,’ she remarked. In 1994 Blooming appointed an agent in Belgium. The agreement was signed just at the onset of a recession, and sales did not materialise. A foray into the Swedish market also proved disappointing. The agent selected by the firm did not generate worthwhile orders and the relationship gradually faded away. The year 1995 marked a new departure. The firm began to build up increased sales through the appointment of new retail outlets. The British chain store Mothercare, part of the Storehouse group, agreed to stock a range of Blooming lines. Mothercare stores offer a range of nursery goods, children’s clothes and associated items, through a network of over 330 outlets in the United Kingdom and international franchise operations in 25 countries with nearly 130 outlets. The order, worth £100,000 initially, would give both parties a chance to evaluate the success of the label and the fit with Mothercare’s existing range of maternity wear. If the Blooming range was a success a partnership with Mothercare would allow Blooming the opportunity to penetrate the European market, with access to a broad range of outlets. Martha gazed out of the window of her office and, as she waited in anticipation for a telephone call, she wondered what the future held for Blooming and more particularly for the company’s export sales. Questions 1 What could be the motives behind the start-up of exporting activities? 2 What do you think have been the main triggers for Blooming Clothing’s export initiation?
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3 The telephone rings. Janet Evans from Mothercare is on the line. What do you think is the outcome of the call?
International activities From start-up, management at Blooming was aware of the need to seek new markets, and the relatively small size of the Irish market was also a strong impetus to move abroad. Like most other Irish companies, Blooming initially looked at the United Kingdom market, and in addition to England was actively seeking agents in Scotland and Northern Ireland to develop its business there. The United Kingdom’s non-participation in the euro currency was however causing problems in price negotiations and profit forecasts for that market. Blooming had searched for further international business. In 1995 orders were filled from a Japanese agent, but there were major differences in sizing that took some time to sort out. The slide in the value of the yen made the market unattractive, and Blooming did not pursue further business there. In January 1999 the company took a stand at a specialist European clothing trade fair in Cologne. It had two objectives: to generate orders and to take a look at the European competition. En route to the trade fair, disaster struck, with half of the collection being stolen. Undeterred, the company exhibited at the show and came away with a strong positive feeling that its designs could match any of the European competitors regarding style and design. Increasing international competition in the Irish market During spring 2000 Martha saw that Blooming Clothing had increasing difficulties in keeping up
CASE STUDY
2.2
sales of maternity wear in the Irish market. Chain stores from the United Kingdom and mainland Europe had made significant inroads in the Irish market. The Irish department stores and boutiques, which some years ago would have stocked only the Blooming brand as their range of maternity wear, were now stocking two or three European labels alongside it. These European chains usually locate their purchasing function in their home country offices. They rely on global sourcing and large volumes to keep prices down. For Irish suppliers such as Blooming Clothing access to these buying centres, and low-cost production capacity, is very difficult. Also the day-to-day management of operations gave rise to several difficulties. The issues involved in keeping the Blooming factory going – sourcing supplies, filling orders and dealing with customers – took up a lot of Martha’s time. The necessity to travel and be away from her desk for a couple of days at a stretch meant that, on her return, there was a list of problems pressing for Martha’s attention. During the first months of 2000 she established contact with some low-cost production places in Eastern Europe. Blooming had earlier turned down offers to produce private label lines for other retailers and manufacturers, but maybe it was time to do something about it now. Source: prepared by Edel Foley and Eibhlin Curley, College of Marketing and Design, Dublin Institute of Technology, Ireland. Information from company interviews and C. Flynn, ‘A 40-something crisis’, Irish Independent, 5 October 1995. The updating of the case to Spring 2000 is based on different sources.
Question 4 Evaluate the business situation regarding Blooming Clothing in spring 2000 and make recommendations for Martha O’Byrne to pursue.
Elvis Presley Enterprises Inc. (EPE): Internationalization of a ‘cult icon’
Even more than 25 years after his death Elvis Presley has one of the most lucrative entertainment franchises in the world. Despite the sorry state of his affairs in 1977 the empire of Elvis has thrived due in large part to the efforts of the people who handled
his estate after his grandmother died in 1980, including his ex-wife Priscilla Beaulieu Presley, his daughter Lisa Marie and Jack Soden, the CEO of Elvis Presley Enterprises Inc. (www.elvis.com), the company that handles all the official Elvis properties.
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Priscilla Presley was involved in the master-stroke decision to open Elvis’s mansion, Graceland, to the public in 1982. Graceland gets more than 600,000 visitors per year, according to EPE’s website. Over half of Graceland’s visitors are under the age of 35. While visitors come from all parts of the world the majority still come from different parts of the United States. The Graceland tour costs US$25, which means that EPE makes US$15 million on those tickets alone, plus what it receives from photographs, hotel guests, meals and souvenirs. EPE’s other revenue streams include a theme restaurant called Elvis Presley’s Memphis; a hotel, down at the end of Lonely Street, called Heartbreak Hotel; licensing of Elvis-related products, the development of Elvis-related music, film, video, TV and stage productions; and more. Ironically, EPE gets very little money from Elvis’s actual songs, thanks to a deal Elvis’s infamous former manager, Colonel Tom Parker, made with RCA in 1973, whereby Elvis traded the rights for all future royalties from the songs he had recorded up to that point for a measly $5.4 million – half of which he had to give to Parker. In 2000, the 25th anniversary was an international spectacle. A remix of the 1968 Elvis song ‘A little less conversation’ became a global hit single. Furthermore the CD ‘Elvis: 30 #1 Hits’ went triple platinum. In mid-2004, to commemorate the 50th anniversary of Presley’s first professional recording, ‘That’s All Right’ was re-released, and made the charts around the world, including the top three in the United Kingdom and top 40 in Australia. In mid-October 2005, Variety named the top 100 entertainment icons of the twentieth century,
VIDEO CASE STUDY
2.3 download from www.pearsoned.co.uk/ hollensen
© Elvis Presley Enterprises, Inc. Used by permission.
with Presley landing in the top ten, along with the Beatles, Marilyn Monroe, Lucille Ball, Marlon Brando, Humphrey Bogart, Louis Armstrong, Charlie Chaplin, James Dean and Mickey Mouse. By the end of October 2005, Forbes magazine named Elvis Presley, for the fifth straight year, the top-earning dead celebrity, grossing US$45 million for the Elvis Presley Estate during the period from October 2004 to October 2005. Source: money.cnn.com/2002/08/15/news/elvis.
Questions 1 What are the main motives for the internationalization of EPE? 2 What can EPE do to maintain a steady income stream from abroad? 3 What are the most obvious assets for further internationalization of EPE?
NIDEK Founded in 1971, NIDEK (www.nidek.com) has grown into the world’s leading supplier of surgical and diagnostic products for vision care (for example, machines for laser operations of eyes). In 1982, NIDEK established its first overseas base in Silicon Valley, California, USA; it later expanded into France and Italy. NIDEK focuses on the local market for R&D, sales, and production. Questions 1 What have been the key barriers in the early days of internationalization, for example, when entering the US market? 2 What have been the driving forces (motives) for the early internationalization?
For further exercises and cases, see this book’s website at www.pearsoned.co.uk/hollensen
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?
Questions for discussion 1 Export motives can be classified as reactive or proactive. Give examples of each group of export motives. How would you prioritise these motives? Can you think of motives other than those mentioned in the chapter? What are they? 2 What is meant by ‘change agents’ in global marketing? Give examples of different types of change agent. 3 Discuss the most critical barriers to the process of exporting. 4 What were the most important change agents in the internationalization of Haier (Exhibit 2.2)? 5 What were the most important export motives in Japanese firms (Exhibit 2.1)?
References Albaum, G., Strandskov, J., Duerr, E. and Dowd, L. (1994) International Marketing and Export Management (2nd edn), Addison-Wesley, Reading, MA. Fillis, I. (2002) ‘Barriers to internationalization: an investigation of the craft microenterprises’, European Journal of Marketing, (7–8), pp. 912–927. Fletcher, R. (2001) ‘A holistic approach to internationalization’, International Business Review, 10, pp. 25–49. Forsman, M., Hinttu, S. and Kock, S. (2002) ‘Internationalization from an SME perspective’, Paper presented at the 18th Annual IMP Conference, September, Lyon, pp. 1–12. Freeman, S. (2002) ‘A comprehensive model of the process of small firm internationalization: a network perspective’, Paper presented at the 18th Annual IMP Conference, September, Dijon, pp. 1–22. Genestre, A., Herbig, D. and Shao, A.T. (1995) ‘What does marketing really mean to the Japanese?’, Marketing Intelligence and Planning, 13(9), pp. 16–27. Knight, G.A. and Liesch, P.W. (2002) ‘Information internalization in internationalizing the firm’, Journal of Business Research, 55, pp. 981–995. Liu, H. and Li, K. (2002) ‘Strategic implications of emerging Chinese multinationals: the Haier case study’, European Management Journal, 20(6), pp. 699–706. Suárez-Ortega, S.M. and Àlamo-Vera, F.R. (2005) ‘SMES’ internationalization: firms and managerial factors’, International Journal of Entrepreneurial Behavior & Research, 11(4), pp. 258–279. Welch, L.S., Benito, G.R.G., Silseth, P.R. and Karlsen, T. (2001) ‘Exploring inward–outward linkages in firms’ internationalization: a knowledge and network perspective’, Paper presented at the 17th Annual IMP Conference, September, Oslo, pp. 1–26. Welch, L.S. and Loustarinen, R.K. (1993) ‘Inward–outward connections in internationalization’, Journal of International Marketing, 1(1), pp. 44–56. Westhead P., Wright, M. and Ucbasaran, D. (2002) ‘International market selection strategies selected by “micro” and “small” firms’, Omega – The International Journal of Management Science, 30, pp. 51–68.
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3
Internationalization theories Contents 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8
Introduction The Uppsala internationalization model The transaction cost analysis (TCA) model The network model Internationalization of SMEs Born globals Internationalization of services Summary
Case studies 3.1 3.2 3.3
Cryos Entertainment rights Video case study: Reebok
Learning objectives After studying this chapter you should be able to do the following:
3.1
l
Analyse and compare the three theories explaining a firm’s internationalization process: – the Uppsala internationalization model; – the transaction cost theory; and – the network model.
l
Explain the most important determinants for the internationalization process of SMEs.
l
Discuss the different factors which influence internationalization of services.
l
Explain and discuss the relevance of the network model for an SME serving as a subcontractor.
l
Explain the term ‘Born Global’ and its connection to Internet marketing.
Introduction Having discussed the barriers to starting internationalization in Chapter 2, we will begin this chapter by presenting the different theoretical approaches to international marketing and then we will choose three models for further discussion in sections 3.2, 3.3 and 3.4.
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Historical development of internationalization Much of the early literature on internationalization was inspired by general marketing theories. Later on, internationalization dealt with the choice between exporting and FDI (foreign direct investment). During the past 10–15 years there has been much focus on internationalization in networks, by which the firm has different relationships not only with customers but also with other actors in the environment. The traditional marketing approach The Penrosian tradition (Penrose, 1959; Prahalad and Hamel, 1990) reflects the traditional marketing focus on the firm’s core competences combined with opportunities in the foreign environment. The cost-based view of this tradition suggested that the firm must possess a ‘compensating advantage’ in order to overcome the ‘cost of foreignness’ (Kindleberger, 1969; Hymer, 1976). This led to the identification of technological and marketing skills as the key elements in successful foreign entry. ‘Life cycle’ concept for international trade Sequential modes of internationalization were introduced by Vernon’s ‘product cycle hypothesis’ (1966), in which firms go through an exporting phase before switching first to market-seeking FDI, and then to cost-oriented FDI. Technology and marketing factors combine to explain standardization, which drives location decisions. Vernon’s hypothesis is that producers in advanced countries (ACs) are ‘closer’ to the markets than producers elsewhere; consequently the first production facilities for these products will be in the ACs. As demand expands a certain degree of standardization usually takes place. ‘Economies of scale’, through mass production, become more important. Concern about production cost replaces concern about product adaptations. With standardized products the less developed countries (LDCs) may offer competitive advantages as production locations. One example of this is the movement of production locations for personal computers from ACs to LDCs. The ‘life cycle’ concept is illustrated in Figure 15.3, later in this book. The Uppsala Internationalization model
Uppsala Internationalization model Additional market commitments are made in small incremental steps: choosing additional geographic markets with small psychic distances, combined with choosing entry modes with few additional risks.
The Scandinavian ‘stages’ models of entry suggest a sequential pattern of entry into successive foreign markets, coupled with a progressive deepening of commitment to each market. Increasing commitment is particularly important in the thinking of the Uppsala School (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). The main consequence of this Uppsala Internationalization model is that firms tend to intensify their commitment towards foreign markets as their experience grows. See also Section 3.2. The internationalization/transaction cost approach In the early 1970s intermediate forms of internationalization such as licensing were not considered interesting. Buckley and Casson (1976) expanded the choice to include licensing as a means of reaching customers abroad. But in their perspective the multinational firm would usually prefer to ‘internalize’ transactions via direct equity investment rather than license its capability. Joint ventures were not explicitly considered to be in the spectrum of governance choices until the mid-1980s (Contractor and Lorange, 1988; Kogut, 1988).
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Buckley and Casson’s focus on market-based (externalization) versus firm-based (internalization) solutions highlighted the strategic significance of licensing in market entry. Internationalization involves two interdependent decisions regarding location and mode of control. The internalization perspective is closely related to the transaction cost (TC) theory (Williamson, 1975). The paradigmatic question in internalization theory is that, upon deciding to enter a foreign market, should a firm do so through internalization within its own boundaries (a subsidiary) or through some form of collaboration with an external partner (externalization)? The internalization and TC perspectives are both concerned with the minimization of TC and the conditions underlying market failure. The intention is to analyse the characteristics of a transaction in order to decide on the most efficient, i.e. TC minimizing, governance mode. The internalization theory can be considered the TC theory of the multinational corporation (Rugman, 1986; Madhok, 1998). Dunning’s eclectic approach In his eclectic Ownership-Location-internalization (OLI) framework Dunning (1988) discussed the importance of locational variables in foreign investment decisions. The word ‘eclectic’ represents the idea that a full explanation of the transnational activities of firms needs to draw on several strands of economic theory. According to Dunning the propensity of a firm to engage itself in international production increases if the following three conditions are being satisfied: 1 Ownership advantages: A firm that owns foreign production facilities has bigger ownership advantages compared to firms of other nationalities. These ‘advantages’ may consist of intangible assets, such as know-how. 2 Locational advantages: It must be profitable for the firm to continue these assets with factor endowments (labour, energy, materials, components, transport and communication channels) in the foreign markets. If not, the foreign markets would be served by exports. 3 Internalization advantages: It must be more profitable for the firm to use its advantages rather than selling them, or the right to use them, to a foreign firm. The network approach The basic assumption in the network approach is that the international firm cannot be analysed as an isolated actor but has to be viewed in relation to other actors in the international environment. Thus the individual firm is dependent on resources controlled by others. The relationships of a firm within a domestic network can be used as connections to other networks in other countries (Johanson and Mattson, 1988). In the following three sections (sections 3.2 to 3.4) we will concentrate on three of the approaches presented above.
Psychic distance Differences in language, culture and political system, which disturb the flow between the firm and the market.
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The difference between ‘cultural distance’ and ‘psychic distance’ Cultural distance (used in Chapter 7) refers to the (macro) cultural level of a country and is defined as the degree to which (factual) cultural values in one country are different from those in another country, i.e. ‘distance’ between countries. Psychic distance (used in this chapter) can be defined as the individual manager’s perception of the differences between the home and the foreign market and it is a highly subjective interpretation of reality. Therefore, psychic distance cannot be measured with factual indicators, such as publicly available statistics on level of education, religion, language and so forth. The distinction between the two concepts is important for managers. By assessing psychic distance at the individual level, it is possible to take
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appropriate steps to reduce the manager’s psychic distance towards foreign markets (Sousa and Bradley, 2005, 2006).
3.2
The Uppsala internationalization model The stage model During the 1970s a number of Swedish researchers at the University of Uppsala (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) focused their interest on the internationalization process. Studying the internationalization of Swedish manufacturing firms, they developed a model of the firm’s choice of market and form of entry when going abroad. Their work was influenced by Aharoni’s seminal (1966) study. With these basic assumptions in mind, the Uppsala researchers interpreted the patterns in the internationalization process they had observed in Swedish manufacturing firms. They had noted, first of all, that companies appeared to begin their operations abroad in fairly nearby markets and only gradually penetrated more far-flung markets. Second, it appeared that companies entered new markets through exports. It was very rare for companies to enter new markets with sales organizations or manufacturing subsidiaries of their own. Wholly-owned or majority-owned operations were established only after several years of exports to the same market. Johanson and Wiedersheim-Paul (1975) distinguish between four different modes of entering an international market, where the successive stages represent higher degrees of international involvement/market commitment: l l l l
Stage 1: No regular export activities (sporadic export). Stage 2: Export via independent representatives (export modes). Stage 3: Establishment of a foreign sales subsidiary. Stage 4: Foreign production/manufacturing units.
The assumption that the internationalization of a firm develops step by step was originally supported by evidence from a case study of four Swedish firms. The sequence of stages was restricted to a specific country market. This market commitment dimension is shown in Figure 3.1. The concept of market commitment is assumed to contain two factors – the amount of resources committed and the degree of commitment. The amount of resources could be operationalized to the size of investment in the market (marketing, organization, personnel, etc.), while the degree of commitment refers to the difficulty of finding an alternative use for the resources and transferring them to the alternative use. International activities require both general knowledge and market-specific knowledge. Market-specific knowledge is assumed to be gained mainly through experience in the market, whereas knowledge of the operations can be transferred from one country to another; the latter will thus facilitate the geographic diversification in Figure 3.1. A direct relation between market knowledge and market commitment is postulated: knowledge can be considered as a dimension of human resources. Consequently, the better knowledge about a market, the more valuable are the resources and the stronger the commitment to the market. Figure 3.1 implies that additional market commitment as a rule will be made in small incremental steps, both in the market commitment dimension and in the geographical dimension. There are, however, three exceptions. First, firms that have large
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Figure 3.1 Internationalization of the firm: an incremental (organic) approach
Source: adapted from Forsgren and Johanson, 1975, p. 16.
Psychic distance The perceived degree of similarity or difference between two markets, according to cultural and business issues.
resources experience small consequences of their commitments and can take larger internationalization steps. Second, when market conditions are stable and homogeneous, relevant market knowledge can be gained in ways other than experience. Third, when the firm has considerable experience from markets with similar conditions, it may be able to generalize this experience to any specific market (Johanson and Vahlne, 1990). The geographical dimension in Figure 3.1 shows that firms enter new markets with successively greater psychic distance. Psychic distance is defined in terms of factors such as differences in language, culture and political systems, which disturb the flow of information between the firm and the market. Thus firms start internationalization by going to those markets they can most easily understand. There they will see opportunities, and there the perceived market uncertainty is low. The original stage model has been extended by Welch and Loustarinen (1988), who operate with six dimensions of internationalization (see Figure 3.2): l l
l
l l
l
sales objects (what?): goods, services, know-how and systems; operations methods (how?): agents, subsidiaries, licensing, franchising management contracts; markets (where?): political/cultural/psychic/physical distance differences between markets; organizational structure: export department, international division; finance: availability of international finance sources to support the international activities; personnel: international skills, experience and training.
Critical views of the original Uppsala model Various criticisms of the Uppsala model have been put forward. One criticism is that the model is too deterministic (Reid, 1983; Turnbull, 1987).
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Figure 3.2 Dimensions of internationalization
Source: Welch and Loustarinen, 1988. Reproduced with permission from The Braybrooke Press Ltd.
It has also been argued that the model does not take into account interdependencies between different country markets (Johanson and Mattson, 1986). It seems reasonable to consider a firm more internationalized if it views and handles different country markets as interdependent than if it views them as completely separate entities. Studies have shown that the internationalization process model is not valid for service industries. In research into the internationalization of Swedish technical consultants – a typical service industry – it has been demonstrated that the cumulative reinforcement of foreign commitments implied by the process model is absent (Sharma and Johanson, 1987). The criticism has been supported by the fact that the internationalization process of new entrants in certain industries has recently become more spectacular. Firms have lately seemed prone to leapfrog stages in the establishment chain, entering ‘distant’ markets in terms of psychic distance at an early stage, and the pace of the internationalization process generally seems to have speeded up. Nordström’s preliminary (1990) results seem to confirm this argument. The United Kingdom, Germany and the United States have become a more common target for the very first establishment of sales subsidiaries by Swedish firms than their Scandinavian neighbours. The leapfrogging tendency not only involves entering distant markets. We can also expect a company to leapfrog some intermediate entry modes (foreign operation methods) in order to move away from the sequentialist pattern and more directly to some kind of foreign investment (Figure 3.3). In market No. 1 the firm follows the mainstream evolutionary pattern, but in market No. 6 the firm has learned from the use of different operation methods in previous
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Figure 3.3 Internationalization pattern of the firm as a sum of target country patterns
Source: Welch and Loustarinen, 1988. Reproduced with permission from The Braybrooke Press Ltd.
markets, and therefore c
