Hierarchical modes

Hollensen, S. (2007). Global marketing: A

decision-oriented approach. Pearson
education

The firm completely owns and control foreign market entry mode
Allocation of responsibility and competence between head office and
subsidiaries:
1.
2.
3.
4.
5.

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

Resident sales representatives/sales subsidiary/sales branch
Sales and production subsidiary
Region centre
Transnational organization(globally integrated)

1. Domestic-based sales representative

Type of sales representative resides in the home country of the
manufacturer and travels abroad to perform the sales function

2. Resident sales representatives/foreign sales branch/foreign

sales subsidiary

The sales representative resides in the home country of the

manufacturer and travels abroad to perform the sales function.
Advantages of company employee use:
Better control of sales activities
Commitment to the customer

2. Resident sales representatives/foreign sales branch/foreign

sales subsidiary
Foreign branch: An extension of and a legal part of the
manufacturer. Taxation of profits takes place in the
manufacturers country.
Subsidiary: A local company owned and operated by a foreign
company under the laws and taxation of the host country.
The actual sales function if transferred to the foreign market.

3. Sales and production subsidiary

With a long-term market potential, the firm will choose to have
a full ownership of sales and production.
Requires great investment in terms of management time,
commitment and money.
Risky; withdrawal from the market can be extremely costly.
Why establishing local production?
To defend existing business
To gain new business
To save costs
To avoid government restrictions

4. Region centres
The formation of region centres implies creation of a regional
headquarters or appointment of a lead country, which will
usually play the role of coordinator and stimulator with reference
to a single homogeneous product group

Region centres - The regional HQ (lead country) will usually play the role
of coordinating and stimulating sales in the whole region.
Look back at the illustration The rst variant shows that the downstream functions have been
transferred to the region. In the second variant even greater commitment
is shown to the region because here all the value chain activities are
moved to the region, whereby the rm has become a fully edged insider
in the region. At this stage the rm has all the necessary functions in the
region to compete effectively against local and regional competitors. At
the same time, the rm can respond to regional customer needs

5. Transnational organization
Transnational organization - Integration and coordination of
operations (R&D, production, marketing, and sales and services)
across national boundaries in order to achieve synergies on a
global scale.

5. Transnational organization

Common R&D and frequent geographical exchange of human

resources across borders are among the characteristics of a
transnational organization. Its overall goal will be to achieve
global competitiveness through recognizing cross-border market
similarities and differences, and linking the capabilities of the
organization across national boundaries. One of the relatively few
international companies that have reached this stage is Unilever

5. Transnational organization

In summary, managing a transnational organization requires the

sensitivity to understand:
1. when a global brand makes sense or when local requirements
should take precedence;
2. when to transfer innovation and expertise from one market to
another;
3. when a local idea has global potential;
4. when to bring international teams together fast to focus on
key opportunities.

All the hierarchical modes presented in this chapter (except

domestic-based sales representatives) involve investment in
foreign-based facilities. In deciding to establish wholly owned
operations in a country a rm can either acquire an existing
company or build its own operations from scratch (greeneld
investment)
A firm can establish a wholly owned subsidiary in a country by
building a subsidiary from the ground up, the so-called greenfield
strategy, or by acquiring an enterprise in the target market.

Environmental stability
Attractiveness of
current operations
Strategic fit

Incentives to
exit

Governance issues
Figure 12.5

Divestment of foreign operation: a framework

Source: Benito (1996, Figure 2)

Probability
of
exit

Summary of domestic-based
sales representatives
Advantages
Better control of sales
Close contact with
customers

Table 12.1

Disadvantages
High travel expenses
Too expensive for
markets far from home

Advantages and disadvantages of different hierarchical entry modes

Summary of foreign sales,

sales and production subsidiary
Advantages
Full control of operation
Market access
Market knowledge
Reduced transport costs
Access to raw materials

Disadvantages
High initial capital investment
Loss of flexibility
High risk
Taxation problems

Advantages and disadvantages of different hierarchical entry modes

(Continued)
Table 12.1

Summary of region centres /

Transnational organization
Advantages
Synergies on regional/global scale
Scale efficiency
Ability to leverage learning on
cross-national scale

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

Advantages and disadvantages of different hierarchical entry modes

(Continued)
Table 12.1

Summary of acquisition
Advantages
Quick access to
Distribution channels
Labour force
Management experience
Local knowledge
Local contacts
Established brand names

Disadvantages
Expensive option
High risk
Integration concerns

Advantages and disadvantages of different hierarchical entry modes

(Continued)
Table 12.1

Summary of
greenfield investment
Advantages
Optimum format
possible
Optimum technology
possible

Disadvantages
High investment cost
Slow entry of new
markets

Advantages and disadvantages of different hierarchical entry modes

(Continued)
Table 12.1