International sourcing decisions and the role of the subsupplier

Transcription

1 13 Internationa sourcing decisions and the roe of the subsuppier Contents 13.1 Introduction 13.2 Reasons for internationa sourcing 13.3 A typoogy of subcontracting 13.4 Buyer seer interaction 13.5 Deveopment of a reationship 13.6 Reverse marketing: from seer to buyer initiative 13.7 Internationaization of subcontractors 13.8 Project export (turnkey contracts) 13.9 Summary Case studies 13.1 LM Gasfiber A/S 13.2 Lear Corporation 13.3 Video case study: Eaton Corporation Learning objectives After studying this chapter you shoud be abe to do the foowing: Describe the roe of subcontractors in the vertica chain. Expore the reasons for internationa outsourcing. Expain the deveopment of a buyer seer reationship. Discuss aternative routes of subcontractor internationaization. Expain how turnkey contracts differ from conventiona subcontracting Introduction Recent studies of subcontracting and competitiveness have emphasized the importance of outsourcing: moving functions or activities out of an organization. Outsourcing is often more efficient, except in the case of the firm s core competences, which are considered centra to its success. Thus the issue is whether an organization shoud perform certain functions itsef ( make ) or source ( buy ) these activities from outside. If LSEs outsource an increasing number of vaue chain functions this provides business opportunities for SMEs as subcontractors to LSEs (main contractors). 372

2 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Figure 13.1 Subcontractor s position in the vertica chain Source: adapted from Lehtinen, 1991, p. 22. OEM Origina equipment manufacturer the customer of a subsuppier (e.g. Autoiv in case study III.2 is a subsuppier of air-bags for their OEMs the auto manufacturers ike VW or BMW). A subcontractor can be defined as a person or a firm that agrees to provide semifinished products or services needed by another party (main contractor) to perform another contract to which the subcontractor is not a party. According to this definition, the characteristics of subcontractors that distinguish them from other SMEs are as foows: Subcontractors products are usuay part of the end product, not the compete end product itsef. Subcontractors do not have direct contact with the end customers, because the main contractor is usuay responsibe to the customer. The position of subcontractors in the vertica production chain is shown in Figure In the OEM contract (where OEM stands for origina equipment manufacturer), the contractor is caed the OEM or sourcer, whereas the parts suppiers are regarded as manufacturers of OEM products (= subcontractors = subsuppiers). Typicay the OEM contracts are different from other buyer seer reationships because the OEMs (contractors) often have much stronger bargaining power than the subcontractors. However, in a partner-based buyer seer reationship the power baance wi be more equa. There are cases where a subcontractor improved its bargaining position and went on to become a major force in the market (Cho and Chu, 1994). The structure of the remainder of this chapter is shown in Figure Reasons for internationa sourcing More and more internationa firms are buying their parts, semi-finished components and other suppies from internationa subcontractors. Creating competitiveness through the subcontractor is based on the understanding that the suppier can be essentia to the buyer (contractor) for a number of reasons. 373

3 Part III Market entry strategies Figure 13.2 Structure of Chapter 13 Concentration on in-house core competences A contractor wishes to concentrate management time and effort on those core business activities that make the best use of in-house skis and resources. There may aso be specia difficuties in obtaining suitaby skied abour in-house. Lower product/production costs In this respect there are two underying reasons for outsourcing: 1 Economies of scae. In many cases the subcontractor produces simiar components for other customers, and by use of the experience curve the subcontractor can obtain ower production costs per unit. 2 Lower wage costs. The abour costs invoved in the domestic country can make the in-house operation uneconomic and motivate internationa sourcing. For exampe, 80 per cent of the abour cost of cothing manufacture is in the sewing stage. Short production runs of different sizes of cothes permit ony a ow degree of mechanization. Moreover, adjusting the tooing for each run is reativey abour intensive (Hibbert, 1993). Therefore a arge part of abour-intensive cothing production is moved to ow-wage countries in eastern Europe and the Far East. Genera cost efficiency If a firm pans to be more cost efficient than its competitors it has to minimize the tota costs towards the end (utimate) customer. Figure 13.3 shows a mode of the different cost eements, from the basic price of materias to the utimate customer cost. Each eement of the suppy chain is a potentia candidate for outsourcing. Quaity costs, inventory costs (not expicity mentioned in Figure 13.3) and buyer suppier transaction costs are exampes of costs that shoud be incuded in every cacuation. However, some of these costs are difficut to estimate and are consequenty easiy overooked when evauating a subcontractor. 374

4 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Figure 13.3 The tota cost/vaue hierarchy mode Source: Cavinato, For exampe, the quaity of a subcontractor s product or service is essentia to the buyer s quaity. However, it is not ony a question of the quaity of the product or service. The quaity of the deivery processes aso has a major impact on the buyer s performance. Uncertainties, as far as ead times are concerned, have an impact on the buyer s inventory investments and cost efficiency, and they may cause deays in the buyer s own deivery processes. Thus the buyer s own deivery times towards the end customers are determined by the subcontractors and their deivery. Another important fact is that the cost of components and parts is to a arge extent aready determined at the design stage. Thus, cose cooperation between buyer and seer at this stage can give rise to considerabe cost advantages in production and distribution. Increased potentia for innovation Ideas for innovation can be generated by the subcontractor due to its more in-depth understanding of the component. New ideas can aso be transferred from other customers of the subcontractor. Fuctuating demand If the main contractor is confronted with fuctuating demand eves, externa uncertainty and short product ife cyces, it may transfer some risk and stock management to the subcontractor, eading to better cost and budget contro. 375

5 Part III Market entry strategies Finay, it shoud be mentioned that, when buying from internationa sources, fuctuations in exchange rates become particuary important, especiay when there is a ag from the time the contract is signed to when payment is made. When the currency in the country of the main contractor is very strong against a particuar country this can be an incentive for the main contractor to buy from this country. In summary, price is a very important reason for (internationa) outsourcing, but the main contractors increasingy regard cooperation with critica subcontractors as advantageous to the buying firm s competitiveness and profitabiity A typoogy of subcontracting Traditionay, a subcontractor has been defined as a firm carrying out day-to-day production based on the specifications of another firm (the main contractor). The variety of subcontracting reationships that are appearing indicates a need for a more differentiated typoogy. Figure 13.4 dispays a typoogy of subcontractors based on differences in the contractor subcontractor reationship. The typoogy dispays the interpay between the degree of coordination needed and the compexity of the tasks to be soved. Standard subcontracting. Economies of scae often operate in the goba market with standardized products, in which case no adaptation to specific customers is needed. Simpe subcontracting. Information exchange is simpe since the contractor specifies criteria for contribution. The contractor s in-house capacity is often a major competitor. Expanded subcontracting. There is some mutua speciaization between the two parties and exit costs are higher for both parties. Therefore singe sourcing (one suppier for a product/component) may repace mutisourcing (more suppiers for a product/component). Figure 13.4 Typoogy of subcontracting Source: adapted from Benker and Christensen,

6 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Strategic deveopment subcontracting. This is very important to the contractor. Subcontractors possess a critica competence of vaue to the contractor. They are invoved in the contractor s ong-term panning, and activities are coordinated by diaogue. Partnership-based subcontracting. This is a reationship based on a strong mutua strategic vaue and dependency. The subcontractor is highy invoved in the R&D activities of the contractor. There is a certain overap between the different types of subcontractor and in a specific reationship it can be very difficut to pace a subcontractor in a certain typoogy. Depending primariy on the task compexity, a main contractor may have both standard subcontractors and partnership-based subcontractors. Aso a subcontractor may pay more than one roe in Figure 13.4, but ony one at a time Buyer seer interaction Figure 13.5 The buyer seer interaction Traditionay, subcontracting has been defined as the production activities that one firm carries out on the day-to-day specification of another firm. Outsourced activities increasingy incude R&D, design and other functions in the vaue chain. Thus what starts with simpe transactions (so-caed episodes) may, if repeated over time, evove into a reationship between buyer and seer. Interaction theory was deveoped by the Swedes but spread into France, the United Kingdom, Itay and Germany when a group of ike-minded researchers formed what became known as the IMP Group, basing their research on the interaction mode (Figure 13.5). Source: Turnbu and Vaa, Reprinted by permission of Thomson Pubishing Services. 377

7 Part III Market entry strategies The interaction mode has four basic eements: 1 The interaction process, which expresses the exchanges between the two organizations aong with their progress and evoution throughout time. 2 The participants in the interaction process, meaning the characteristics of the suppier and the customer invoved in the interaction process. 3 The atmosphere affecting and being affected by the interaction. 4 The environment within which interaction takes pace. Interaction process The interaction process can be anaysed in both a short-term and a ong-term perspective. Over time the reationship is deveoped by a sequence of episodes and events that tends to institutionaize or destabiize it, depending on the evauations made by the two firms in the interaction. These episodes may vary in terms of types of exchange: commercia transactions, periods of crisis caused by deivery, price disputes, new product deveopment stages, etc. Through socia exchange with the suppier the customer attempts to reduce decision-making uncertainty. Over time and with mutua adaptation a reationshipspecific mode of operation emerges and may act as a shock absorber in case of crisis. This mode of operation can take the form of specia procedures, mutua deveopments, communication stye between individuas, and more or ess impicit rues. These rues are modified through past exchanges and form the framework for future exchanges. Interacting parties The participants characteristics strongy infuence the way they interact. Three anaytica perspectives of buyer and seer, at different eves, may be taken into account. 1 The socia system perspective Dimensions such as cuture anguages, vaues and practices and the operating modes of the firm infuence the distance between actors that wi imit or encourage coaboration. 2 The organizationa perspective The reationship between buyer and seer is infuenced by three organizationa dimensions: 1 The characteristics of each firm s technoogy (i.e. products and production technoogy) strongy infuence the nature of the interaction between the two organizations. 2 The compexity of products sod, for exampe, conditions the very nature and the density of the interaction between suppier and customer. 3 Reationship characteristics: a suppier can choose to deveop a stabe reationship with a customer, or the suppier can regard the reationship as a pure transactionbased exchange where the suppier typicay makes one-shot business with a customer purey to increase saes voume and with no further invovement. 3 The individua perspective The individuas characteristics, their objectives and their experience wi infuence the way socia exchanges and socia contacts take pace, and subsequenty the deveopment of suppier customer interaction. 378

8 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Atmosphere of the reationship The atmosphere is the cimate that has deveoped between the two firms. This atmosphere can be described in terms of power dependence, cooperation confict and trust opportunism, and in terms of understanding and socia distance. The atmosphere concept is centra to the understanding of the suppier customer reationship. In the case of key account management, atmosphere pays a particuary important roe. As buyer and seer approach each other the marketing exchanges are changing from singe transactions to a reationship. The further characteristics of these two situations are described in Tabe 13.1 and Figure Tabe 13.1 Marketing exchange understanding Objective Customer understanding Marketers task and performance criteria Core aspects of exchange Transaction To make a sae (sae is end resut and measure of success). Customer needs satisfaction (customer buys vaues). Anonymous customer. Independent buyer and seer. Assessment on the basis of products and prices. Focus on gaining new customers. Focus on products. Sae as a conquest. Discrete event. Monoogue to aggregated broad customer segments. Reationship To create a customer (sae is beginning of reationship). Customer integration (interactive vaue generation). We-known customer. Interdependent buyer and seer. Assessment on the basis of probem-soving competence. Focus on vaue enhancing of existing customers. Focus on service. Sae as an agreement. Continuing process. Individuaized diaogue. Source: Jüttner and Wehri Pubished with permission of Emerad Pubishing Ltd. Figure 13.6 Market exchange understanding Source: Jüttner and Wehri Pubished with permission of Emerad Pubishing Ltd

9 Part III Market entry strategies Interaction environment Suppier customer reationships evove in a genera macroenvironment that can infuence their very nature. The foowing anaytica dimensions are traditionay considered: poitica and economic context, cutura and socia context, market structure, market internationaization and market dynamism (growth, innovation rate) Deveopment of a reationship The marriage metaphor The process of reducing the psychic distance + increasing dependence between buyer and seer = shared vaues and joint investments in the reationship. A reationship between two firms begins, grows and deveops or fais in ways simiar to reationships between peope. The deveopment of a reationship has been mapped out in a five-phase mode: awareness, exporation, expansion, commitment and dissoution. The five phases are shown in Figure Figure 13.7 shows, the initia psychic distance 1 between a buyer and a seer (both from different countries and cutures) and it is infuenced by the psychoogica characteristics of the buyer and the seer, the firm s organizationa cuture, and the nationa and industry cuture to which the firm beongs. Figure 13.7 aso shows that the initia psychic distance 1 at the beginning of the reationship is reduced to physica distance 2 through the interaction process of the two partners. However, reationships do not aways ast forever. The partners may move from each other and the psychic may increase to distance 3. If the probems in the reationship are not soved, it may resut in a divorce. Within such a framework one might easiy characterize a marketing reationship as a marriage between a seer and a buyer (the dissoution phase being a divorce ). The use of the marriage metaphor emphasizes the compexity as we as some affective determinants of the quaity of the reationship. Dwyer et a. (1987) ca the first phase in a reationship awareness, which means that the partners recognize each other as potentia partners. In other words, in their mode the decisions made about cooperating and choosing the partner are combined. Both types of decision making can exist at the beginning of cooperation, but it is difficut to state any definite chronoogica order between them. In SMEs it is ikey that the decision-making process is reactive, in the way that the SME probaby first reaizes the existence of a potentia partner (maybe ove at first sight ) and then decides to cooperate. The seection process may, however, be better if companies ook for three key criteria (Kanter, 1994): 1 Sef-anaysis. Reationships get off to a good start when partners know themseves and their industry, when they have assessed changing industry conditions and decided to seek an aiance. It aso heps if executives have experience in evauating potentia partners. They wi not be easiy attracted by the first good-ooking prospect that comes aong. 2 Chemistry. To highight the persona side of business reationships is not to deny the importance of sound financia and strategic anaysis. But successfu reations often depend on the creation and maintenance of a comfortabe persona reationship between senior executives. This wi incude persona and socia interests. Signs of managers interests, commitment and respect are especiay important in highcontext countries. In China, as we as in Chinese-dominated businesses throughout Asia, the top manager of the western company shoud show honour and respect to the potentia partner s decision by investing his or her persona time. 3 Compatibiity. The courtship period tests compatibiity on broad historica, phiosophica and strategic grounds: common experiences, vaues and principes, and 380

10 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier hopes for the future. Whie anaysts examine financia viabiity, managers can assess the ess tangibe aspects of compatibiity. What starts out as persona rapport, phiosophica and strategic compatibiity, and shared vision between two companies top executives must eventuay be institutionaized and made pubic ( getting engaged ). Other stakehoders get invoved, and the reationship begins to become depersonaized. But success in the engagement phase of a new aiance sti depends on maintaining a carefu baance between the persona and the institutiona. In Figure 13.7 s exporation phase tria purchases may take pace and the exchange outcomes provide a test of the other s abiity and wiingness to deiver satisfaction. Figure 13.7 The five-phase reationship mode 381

11 Part III Market entry strategies Dissoution phase Divorce : termination of the reationship. It can make the assets dedicated to the reationship obsoete. Reverse marketing The buyer (and not the seer ike in traditiona marketing) takes the initiatives for searching a suppier that is abe to fufi his/her needs. In addition, eectronic data interchange can be used to reduce the costy paperwork associated with purchase orders, production schedue reeases, invoices and so on. At the end of the exporation phase it is time to meet the famiy. The reations between a handfu of eaders from the two firms must be suppemented with approva, forma or informa, by other peope in the firms and by stake hoders. Each partner has other outside reationships that may need to approve the new reationship. When a party (as is the case in the expansion phase) fufis perceived exchange obigations in an exempary fashion, the party s attractiveness to the other increases. Hence motivation to maintain the reationship increases, especiay because high-eve outcomes reduce the number of aternatives that an exchange partner might use as a repacement. The romance of courtship quicky gives way to day-to-day reaity as the partners begin to ive together ( setting up house ). In the commitment phase the two partners can achieve a eve of satisfaction from the exchange process that actuay precudes other primary exchange partners (suppiers) that coud provide simiar benefits. The buyer has not ceased attending other aternative suppiers, but maintains awareness of aternatives without constant and frequent testing. During the description of the reationship deveopment, the possibiity of a withdrawa has been impicit. The dissoution phase may be caused by the foowing probems: Operationa and cutura differences emerge after coaboration is under way. They often come as a surprise to those who created the aiance. Differences in authority, reporting and decision-making styes become noticeabe at this stage. Peope in other positions may not experience the same attraction as the chief executives. The executives spend a ot of time together both informay and formay. Other empoyees have not been in touch with one another, however, and in some cases have to be pushed to work with their overseas counterparts. Empoyees at other eves in the organization may be ess visionary and cosmopoitan than top managers and ess experienced in working with peope from different cutures. They may ack knowedge of the strategic context in which the reationship makes sense and see ony the operationa ways in which it does not. Peope just one or two tiers from the top might oppose the reationship and fight to undermine it. This is especiay true in organizations that have strong independent business units. Termination of persona reationships, because managers eave their positions in the companies, is a potentia danger to the partnership. Firms have to be aware of these potentia probems before they go into a reationship, because ony in that way can they take action to prevent the dissoution phase. By jointy anaysing the extent and importance of the attenuating factors, the partners wi become more aware of the reasons for continuing the reationship, in spite of the troube they are aready in. Moreover, this awareness increases the parties wiingness to engage in restorative actions, thus trying to save the reationship from dissoution (Tähtinen and Vaaand, 2006) 13.6 Reverse marketing: from seer to buyer initiative Reverse marketing describes how purchasing activey identifies potentia subcontractors and offers suitabe partners a proposa for ong-term cooperation. Simiar terms are proactive procurement and buyer initiative (Ottesen, 1995). In recent years 382

12 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Figure 13.8 Suppier deveopment strategies the buyer seer reationship has changed consideraby. The traditiona reationship, in which a seer takes the initiative by offering a product, is increasingy being repaced by one in which the buyer activey searches for a suppier that is abe to fufi its needs. Today, many changes are taking pace in the utiization of the purchasing function: Reduction in the number of subcontractors. Shorter product ife cyces, which increase the pressure to reduce the time to market (just in time). Upgraded demands on subcontractors (zero defects). In addition, firms are demanding that their suppiers become certified. Those that do not compy may be removed from the approved suppier ist. Purchasing that no onger just serves the purpose of getting ower prices. The traditiona arm s-ength reationships are increasingy being repaced by ong-term partnerships with mutua trust, interdependence and mutua benefits. Impementing a reverse marketing strategy starts with fundamenta market research and with an evauation of reverse marketing options (i.e. possibe suppiers). Before choosing suppiers the firm may incude both present and potentia suppiers in the anaysis as we as current and desired activities (Figure 13.8). Based on this anaysis the firm may seect a number of suitabe partners as suppiers and rank them in order of preference Internationaization of subcontractors In Chapter 3 the internationaization process was described as a earning process (the Uppsaa schoo). Generay speaking it is something that can be described as a gradua internationaization. According to this view the internationa deveopment of the firm is accompanied by an accumuation of knowedge in the hands of management and by growing capabiities and propensities to manage internationa affairs. The main consequence of this way of thinking is that firms tend to increase their commitment towards foreign markets as their experience grows. The number of adherents to this theory has grown, but there has aso been much criticism of it. The main probem with the mode is that it seems to suggest the presence of a deterministic and mechanistic path that firms impementing their internationaization strategy must foow. Sometimes it happens that firms eapfrog one or more stages in 383

13 Part III Market entry strategies the estabishment chain; at other times firms stop their internationaization atogether (Wech and Luostarinen, 1988). Concerning internationaization among contractors and subcontractors, there is a centra difference. The internationaization of subcontractors is cosey reated to their customers. The concept of subcontractor indicates that the strategies of such a firm, incuding its internationaization strategy, cannot be seen in isoation from the strategies of its partner, the contractor. Therefore the internationaization of subcontractors may show irreguar paths, such as eapfrogging. Andersen et a. (1995) introduce four basic routes of internationaization (note that sometimes there is an overap between the different routes, e.g. between routes 2 and 3). Route 1: Foowing domestic customers If a contractor is internationaizing and estabishing a production unit in a foreign market some subcontractors (standard or simpe in Figure 13.4) may be repaced with oca suppiers, because they might be abe to offer the standard components at cheaper prices. However, subcontractors in the upper part of Figure 13.4 and with a strategic vaue to the contractor wi be maintained if they commit themseves to foreign direct investment: caims for direct deivery to the foreign production unit or caims for aftersaes service on deivered components may resut in the estabishment of a oca saes and/or production subsidiary by the subcontractor. In most cases such a direct foreign investment reated directy to a specific contractor is based on a guarantee of procurement over some years (unti the payback period has passed). When the furniture chain IKEA estabished itsef in the North American market it took aong some strategicay important Scandinavian subcontractors, some of which aso estabished subsidiaries in North America. Other exampes are the Japanese car manufacturers that estabished production units in the United States and pued aong a ot of Japanese subcontractors to estabish subsidiaries there. This route is simiar to the ate starters in the mode of Johanson and Mattson (1988) in Figure 3.6. Route 2: Internationaization through the suppy chain of an mutinationa corporation Deiveries to one division of a mutinationa corporation may ead to deiveries to other divisions, or to parts of its network. One case is when mergers and acquisitions take pace between firms, and create new business opportunities for dynamic subcontractors. The strategic aiance between the French car manufacturer Renaut and the Swedish Vovo is one exampe, where Swedish subcontractors have become invoved in the subcontracting system of Renaut, and French subcontractors have opportunities to get into the subcontracting system of Vovo (Christensen and Lindmark, 1993). Route 3: Internationaization in cooperation with domestic or foreign system suppiers In coaboration with other speciaized subcontractors, system suppiers may be invoved in internationa system suppies by taking over the management of whoe suppies of subsystems (see Figure 13.9). Systems suppies resut in the deveopment of a new ayer of subcontractors (second-tier subcontractors). Through the interaction between a system suppier and a domestic main contractor the system suppier can get access to the network of a 384

14 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Figure 13.9 Possibe internationaization of system suppiers goba contractor (the dotted ine in Figure 13.9) because of the network/contract between the contractor and the goba contractor. For exampe, a Japanese car seat suppier suppies the Japanese Toyota factory (domestic main contractor). This can eventuay give the suppier access to other Toyota factories around the word (goba contractors) and their goba networks. In many cases the coaboration between the subcontractors wi be characterized by exchange of tacit, not easiy transferabe, knowedge. The reason for this is that the compete subsystem is frequenty based on severa fieds of competence, which have to be coordinated by use of tacit knowedge and communication. In the case of the Japanese car seat suppier, the system suppier shoud have a tight reationship with the subcontractors (suppiers of eather head rests, etc.) in order to adapt the car seat to the individua car modes. (See aso Exhibit 13.1.) Route 4: Independent internationaization The need to gain economies of scae in production forces the standard contractor, in particuar, to use the route of independent internationaization. In other cases it cannot be recommended that sma subcontractors foow the independent route. The barriers of independent internationaization are too high for sma firms with imited resources. For these firms, route 3 (coaboration with other subcontractors) seems to be a more reaistic way to internationaize. Exhibit 13.1 An exampe of Japanese network sourcing: the Mazda seat-sourcing case Mazda adopts a poicy of spitting its seat purchases between two suppiers, Deta Kogyo and the Toyo Seat Company. The present division is approximatey 60 per cent to Deta and 40 per cent to Toyo. Each of these companies is responsibe for different modes of seats. Note that each individua item, such as a seat for the Mazda 626, is singe sourced for the product ife cyce of typicay three to five years, but seat production in genera is, in effect, dua sourced. Both Deta Kogyo and the Toyo Seat Company are informay assured of a certain percentage of the Mazda seat business at any one time. This percentage is approximatey one-third of the tota Mazda seat purchases. Thus Ë 385

15 Part III Market entry strategies Exhibit 13.1 continued each firm has an assured ong-term share of Mazda s seat business. Indeed, when asked about the ength of reationship that Mazda has with its suppiers, Mr Nakamichi of Mazda s marketing division noted that reationships with a suppiers, whether they are affiiates, subcontractors or common part suppiers, were estabished for an indefinite period of time. In addition, the ast third of the seat business was avaiabe to whichever of the suppiers had performed the best over the ife cyce of previous car modes. The two seat makers rey on Mazda for a very high percentage of their business. In the case of Deta Kogyo, Mazda business represents around two-thirds of its tota saes. In addition, both suppiers are members of Mazda s keiretsu (network) and hence come into direct contact with each other on a reguar basis. Additionay, since they are direct competitors for ony a third of Mazda s seat business, there is a significant degree of openness between the two firms. This openness in some instances takes the form of cooperation in soving mutua or individua probems, because the other seat suppier is often in a better position to give advice than Mazda itsef. However, competition for the remaining third of the Mazda seat business is very intense, since both firms know that they have ony one chance to gain the orders for a new car mode every three to five years. The most interesting aspect of this competition is that it is based primariy on performance since the ast contract was awarded. The areas of competition incude design abiities, management strength, cost-reduction progress, quaity record and, perhaps surprisingy, the amount of assistance that the suppier has given to its direct competitor either within the auspices of the keiretsu or on separate occasions. Thus either firm can obtain new business as ong as the other does not fa beow 33 per cent of Mazda s tota seat purchases. A situation has been created in which there is creative tension between cooperation and competition. Indeed, when one of the suppiers approaches the ower imit of its 33 per cent suppy Mazda typicay uses its own engineers, and possiby those of the suppy competitor, to hep the weaker suppier in terms of a joint vaue anaysis/vaue engineering programme. Because neither suppier wants to be forced into this situation both wi work diigenty to avoid this fate and at the same time to enhance their own competitiveness. Mazda is carefu to ensure that neither suppier is forced into a situation of unprofitabiity, since this woud obviousy mean that Mazda woud suffer in the ong term. This is not to say that either suppier is aowed to make excessive profits. Indeed profit as a percentage of saes is roughy equaized throughout the suppy network, incuding the Mazda organization itsef. During recessionary periods Mazda and its network of suppiers woud make no more than about 2 per cent profit on saes. Thus members of the suppy network stand or fa together, increasing the shared bonds and the wiingness to hep any member of the network. Source: Reproduced with permission from the pubisher, the Nationa Association of Purchasing Management, Network Sourcing: A Hybrid Approach, The Internationa Journa of Purchasing and Materias Management, by Peter Hines, Spring 1995, 31(2), pp Project export (turnkey contracts) Project export Combination of hardware (e.g. buidings and infrastructure) and software (technoogy and project know-how), e.g. in the form of a factory for ice cream production. This chapter has deat mainy with sourcing (subcontracting) in the industria market. Athough marketing of subsuppies to internationa projects has a number of simiarities with subsuppies in the industria market in genera, it aso has the characteristics of the specia marketing situation in the project market: for exampe, the ong and often very bureaucratic seection of subsuppiers for ad hoc suppies. The subsuppier market in project export, however, is aso very internationaized, and the main part of marketing shoud be conducted in those centres or countries where the main contractor is domicied. For exampe, London is the domicie of a number of buiding contracting businesses, which work in those countries that used to be in the British Empire. Project export is a very compex internationa activity, invoving many market payers. The preconditions for project export are a technoogy gap between the exporting and importing countries and that the exporter possesses the specific product and technoogy know-how that is being demanded in the importing country. 386

16 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Project export invoves suppies or deiveries that contain a combination of hardware and software. When the deivery is concuded it wi constitute an integrated system that is abe to produce the products and/or the services, which the buyer requires. An exampe of this type of project is the construction of a dairy in a deveoping country. Hardware is the banket term for the tangibe, materia or physica contribution of the project suppy. Hardware is composed of buidings, machines, inventory, transport equipment, etc., and is specified in the quotation and contract between buyer and seer in the form of drawings, unit ists, descriptions and so on. Software is the banket term for the intangibe contributions in a project suppy. Software incudes know-how and service. There are three types of know-how: 1 technoogy know-how, comprising product, process and hardware know-how; 2 project know-how, comprising project management, assemby and environmenta know-how; 3 management know-how, which in genera terms invoves tactica and operationa management, and specificay incudes marketing and administrative systems. Service incudes advisory services and assistance in connection with various appications and approvas (environmenta approva, financing of the project, panning permission, etc.). The marketing of projects is different from the marketing of products in the foowing respects: Decision of purchase, apart from oca business interests, often invoves decision processes in nationa and internationa deveopment organizations. This impies the participation of a arge number of peope and a heaviy bureaucratic system. The product is designed and created during the negotiation process, where the requirements are put forward. It often takes years from the discosure of needs to the purchase decision being taken. Therefore tota marketing costs are very arge. When the project is taken over by the project buyer, the buyer seer reations cease. However, by cutivating these reations before, during and after the project, a seeping reationship can be woken again in connection with a new project (Hadjikhani, 1996). Financing a project is a key probem for the seer as we as the buyer. The project s size and the time used for panning and impementation resut in financia demands that make it necessary to use externa sources of finance. In this connection the foowing main segments can be distinguished. The segments arise from differences in the source of financing for the projects: Projects where mutiatera organizations, such as the Word Bank or regiona deveopment banks, are a primary source of finance. Projects where biatera organizations are a primary or essentia source of finance. Projects where a government institution acts as buyer. This was norma in the command economies, where government companies acted as buyers. However, it can aso be found in ibera economies: for exampe, in connection with the deveopment of socia infrastructure or the buiding of a bridge. Projects where a private person or firm acts as buyer, as when Uniever buids a factory in Vietnam for the production of ice cream. For arge-scae projects, ike a new airport, there may be many partners forming a consortium, where we wi have the concept of a eader firm, but each partner woud undertake financing, organization, supervision and/or construction etc., of a part of the project on the basis of their specific expertise. 387

17 Part III Market entry strategies Organizing export projects invoves estabishing an interaction between different firms from the West on the one side, and firms and authorities typicay from deveoping countries on the other. Creating or adapting an organization that is abe to function under these conditions is a precondition of project marketing Summary This chapter has anaysed the buyer seer reationship from different anges in the internationaized environment. The advantages and disadvantages for the contractor and subcontractor of going into a reationship are summarized in Tabe The project export situation differs from the norma buyer seer reationship in the foowing ways: The buying decision process often invoves nationa and internationa deveopment organizations. This often resuts in very bureaucratic seection of subcontractors. Financing of the project is a key probem. Tabe 13.2 Advantages and disadvantages of buyer seer reationships for contractor and subcontractor Contractor (buyer) Subcontractor (seer) Advantages The contractor is fexibe by not investing in manufacturing faciities. The subcontractor can source the products more cheapy (because of e.g. cheaper abour costs) than by own production. The contractor can concentrate on in-house core competences. Compement of the contractor s product range. New ideas for product innovation can be carried over from the subcontractor. Access to new export markets because of the internationaization of the contractor (especiay reevant for the so-caed ate starters). Expoits scae economies (ower cost per unit) through better capacity utiization. Learns product technoogy of the contractor. Learns marketing practices of the contractor. Disadvantages The avaiabiity of suitabe manufacturers (subcontractors) cannot be assumed. Outsourcing tends to be reativey ess stabe than in-house operations. The contractor has ess contro over the activities of the subcontractor. Subcontractors can deveop into competitors. Quaity probems of outsourced products can harm the business of the contractor. Assistance to the subcontractor may increase the costs of the whoe operation. Risk of becoming dependent on the contractor because of expanding production capacity and concurrent overseas expansion of saes and marketing activities in order to meet the demands of the contractor. CASE STUDY 13.1 LM Gasfiber A/S: Foowing its customers internationa expansion in the wind turbine industry LM Gasfiber A/S is the word s eading suppier of rotor bades for wind turbines. Its headquarters are ocated in Lunderskov, Denmark and it has 14 manufacturing bases in ten Danish towns, with more than 1,700 empoyees in modern production areas covering some 100,000 m 2. The company is internationay represented, with manufacturing faciities and saes offices in 388

18 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Germany, the Netherands, Spain, the United States, India and China. Its customers are thus guaranteed prompt and punctua deivery with a high eve of service wordwide. LM Gasfiber s estabishment in India is expained and iustrated in Figure Typicay, rotor bades represent approximatey 20 per cent of a wind turbine s vaue (excuding mounting, instaation etc.). Figure shows the phases that LM Gasfiber (as subsuppier) went through in order to gobaize via the buyers /wind turbine manufacturers network, especiay Micon s network. The 1 in the figure indicates that LM Gasfiber has very arge deiveries of rotor bades to the Danish network of wind turbine manufacturers ( domestic contracts ), the argest being NEG Micon (in 1999), Vestas (wind systems), Bonus (energy), and Nordex. Even though the tota Danish network covers more than 50 per cent of the word market for wind turbines it shoud be remembered that competition between the companies in the internationa market is very keen. Having exceeding cose reations with and deiveries to the Danish Wind Turbine Manufacturers Association, LM Gasfiber aso cooperates very cosey with the research environment within wind turbine technoogy by way of reations with the Ris Nationa Laboratory. Source: Copyright LM Gasfiber A/S. Figure LM Gasfiber s gobaization through the network of the customer Ë 389

19 Part III Market entry strategies This exampe is based on LM Gasfiber s reations with Micon in the mid 1990s at the time the second-biggest wind turbine manufacturer in the word (Micon merged with Vestas in May, 2004). As regards subsuppiers Micon s strategy has been to outsource the biggest part of its rotor bade production. However, Micon has aways aimed at having an adequate share of interna subsuppiers of rotor bades, in order for the company to have the necessary technoogica preparedness compared to competitors and externa subsuppiers. This fexibe sourcing concept is an essentia precondition for Micon s continued gobaization process. The 2 shows Micon s estabishment of a saes and manufacturing company in India at the beginning of the 1990s. India is an attractive market for wind turbines, as India s power suppy is poor, especiay in the countryside. The Indian government has therefore supported the mounting of wind turbines that can contribute to stabiizing the power suppy (often in cooperation with foreign deveopment aid organizations). LM Gasfiber reaized that it had to start manufacturing rotor bades in India to continue being one of India s subsuppies. The 3 shows the 1994 estabishment of LM Gasfiber India Ltd. a joint venture between LM Gasfiber A/S, the Industriaization Fund for Deveoping Countries, and the Indian wind turbine manufacturer NEPC. The 4 therefore shows the oca deiveries of rotor bades and the back-up service that LM Gasfiber India can provide by being a oca company. As a consequence of the partnership with NEPC, LM Gasfiber has now (via the oca joint venture) gained access to NEPC s network, which incudes severa markets in Asia. Finay the 5 shows that LM Gasfiber has been abe to use its reationship with NEPC as a springboard to other markets in Asia. At the start of 2007 LM Gasfiber has convinced three or four of its major suppiers to foow it to India. Consequenty, these subsuppiers have aso estabished oca production in order to be cose to their major customer, LM Gasfiber. Questions 1 Are there any threats to LM Gasfiber s strategy in foowing its key customer abroad? 2 How does this case reate to the network mode in Chapter 3? CASE STUDY 13.2 Lear Corporation: A eading suppier of automotive interior systems Lear Corporation ( is one of the ten argest independent automotive suppiers in the word. The company is aso the eading suppier of automotive interior systems in the goba automotive interior market and the third argest suppier in the goba automotive eectrica distribution systems market. In 2006 Lear empoyed approximatey 115,000 peope wordwide, incuding about 29,000 in the United States and Canada, 40,000 in Mexico and Centra America, 33,000 in Europe and 13,000 in other regions of the word. The company has estabished in-house capabiities in three segments of the automotive interior market: seating systems; eectronic and eectrica; and interior products. The company is the argest suppier in the goba seat systems market (with tota net saes in 2005 of $17.1 biion). In North America it is one of the two argest suppiers in each of the other principa automotive interior markets, with the exception of the instrument panes market, in which it is the fourth argest. The company is aso one of the eading goba suppiers of automotive eectrica distribution systems. Lear s objective is to strengthen and expand its position as a eading automotive suppier to the goba automotive industry by focusing on customer needs. Lear suppies tota soutions to major automotive manufacturers around the word, incuding Genera Motors, Ford, DaimerChryser, BMW, PSA, Vokswagen, Fiat, Renaut-Nissan, Hyundai, Mazda, Subaru and Toyota. In order to reaize substantia cost savings and improved product quaity and consistency, automotive manufacturers are requiring their suppiers to manufacture products in mutipe geographic markets. In recent years, Lear has expanded its operations significanty 390

20 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier The tota turnover of Lear and its three main segments Source: in Europe, Centra America, South Africa and Asia. Lear s automotive customers face continuing competitive pressures to improve quaity and functionaity at a ower cost and to reduce time to market and capita needs. These trends have resuted in automotive manufacturers seeking fewer independent suppiers to provide automotive interior systems and components. The company beieves that the criteria for seection of automotive interior systems suppiers are cost, quaity, technoogy, deivery and service. A wordwide presence is necessary to satisfy these criteria. Lear emphasizes the deveopment of strong reationships with its customers by focusing on customer service, quaity and costs, aiming to turn customers into partners. It beieves that strong reationships with its customers aows it to identify business opportunities and anticipate the needs of customers in the eary stages of vehice design. Working cosey with customers in the eary stages of designing and engineering automotive interior systems gives Lear a competitive advantage in securing new business with existing customers or in securing competey new customers. In the oca manufacturing process (e.g. at the seating faciities) Lear generay uses just-in-time manufacturing techniques, and products are deivered to the automotive manufacturers on a just-intime basis. These faciities are typicay ocated near customers manufacturing and assemby sites. Seating faciities utiize a variety of methods whereby foam and fabric are affixed to an underying seat frame. Raw materias used in seat systems, incuding stee, auminium and foam chemicas, are generay avaiabe and obtained from mutipe suppiers under various types of suppy agreements. Leather, fabric and certain components are aso purchased from mutipe suppiers under various types of suppy agreements. The majority of stee purchases are comprised of engineered parts that are integrated into a seat system, such as seat frames, mechanisms and mechanica components. Lear is increasingy using ong-term, fixed-price suppy agreements to purchase key components from its suppiers. The company generay retains the right to terminate these agreements if its suppier does not remain competitive in terms of cost, quaity, deivery, technoogy or customer support. One exampe of a growth market, China The Chinese automotive market is expanding rapidy, with an estimated 5 miion units produced in Lear seeks to partner with automotive manufacturers in China through joint venture arrangements and is we-positioned to take advantage of China s emerging growth. Currenty the company has 12 joint ventures in China, where the majority of its production is for the oca market. In addition, Lear has estabished two whoy-owned subsidiaries in China to suppy seats to the joint venture between First Automobie Works Group and Vokswagen and that between Shanghai Automotive Industry Corp. and Genera Motors Corporation. Lear aso sees opportunities for growth with customers in Korea, India and esewhere in Asia. Questions 1 Draw a figure showing the tota suppy chain (Figure 13.1) for Lear s seat systems? 2 How can Lear Corporation be characterized as a subsuppier? 3 Describe the reationships that the company has with its customers. 4 How woud you consider the internationa competitiveness of the company compared with its Japanese customers? 391

21 Part III Market entry strategies VIDEO CASE STUDY 13.3 downoad from hoensen Eaton Corporation Eaton Corporation ( is a diversified industria manufacturer with products from car vaves to circuit breakers. The company operates primariy in the US and Europe. Its headquarters are in Ceveand, Ohio and it empoys 59,000 peope. Eaton operates through four business divisions: automotive, eectrica, fuid power, and truck, but it is facing stiff competition across its market segments. As the US market makes up two thirds of its tota revenues one of Eaton s future tasks is to focus more on non-us growth markets. Questions 1 What are Eaton s key chaenges in estabishing ong-term reationships with its new goba OEM-customers? 2 Why is the fast-changing marketing environment so crucia to Eaton s internationa marketing pan? 3 What makes Eaton s channe management chaenging? Why does the company continue to se through mutipe goba channes? For further exercises and cases, see this book s website at Questions for discussion 1 What are the reasons for the increasing eve of outsourcing to internationa subcontractors? 2 Describe the typoogy of subcontractors based on the differences in the contractor/ subcontractor reationship. 3 Expain the shift from seer to buyer initiative in subcontracting. 4 Expain the main differences between the US and the Japanese subsuppier systems. 5 How are project exports/turnkey projects different from genera subcontracting in the industria market? 6 Project export is often characterized by a compex and time-consuming decisionmaking process. What are the marketing impications of this for the potentia subcontractor? References Andersen, P.H., Benker, P. and Christensen, P.R. (1995) Internationaization of Subcontractors: In search of a theoretica framework, The Southern Denmark Business Schoo, Koding. Benker, P. and Christensen, P.R. (1994) Interactive strategies in suppy chains: a doube-edged portfoio approach to SME, Subcontractors Positioning Paper presented at the 8th Nordic Conference on Sma Business Research. Cavinato, J.L. (1992) A tota cost/vaue mode for suppy chain competitiveness, Journa of Business Logistics, 13(2), pp Cho, Dong-Sung and Chu, Wujin (1994) Determinants of bargaining power in OEM negotiations, Industria Marketing Management, 23, pp

22 Chapter 13 Internationa sourcing decisions and the roe of the subsuppier Christensen, P.R. and Lindmark, L. (1993) Location and internationaization of sma firms, in Lindquist, L. and Persson, L.O. (eds), Visions and Strategies in European Integration, Springer Verag, Berin/Heideberg. Dwyer, R.F., Schurr, P.H. and Oh, S. (1987) Deveoping buyer seer reationships, Journa of Marketing, 51, Apri, pp Hadjikhani, A. (1996) Project marketing and the management of discontinuity, Internationa Business Review, 5(3), pp Hibbert, E.P. (1993) Goba make or buy decisions, Industria Marketing Management, 22, pp Hines, P. (1995) Network sourcing: a hybrid approach, Internationa Journa of Purchasing and Materias Management, Spring, 13(2), pp Johanson, J. and Mattson, L.G. (1988) Internationaization in industria systems, in Hood, N. and Vahne, J.E. (eds), Strategies in Goba Competition, Croom Hem, Beckenham. Jüttner, U. and Wehri, H.P. (1994) Reationship marketing from a vaue system perspective, Internationa Journa of Service Industry Management, 5, pp Kanter, R.M. (1994) Coaborative advantage, Harvard Business Review, Juy August, pp Lehtinen, U. (1991) Aihankintajarjestema 1990-uvua [Subcontracting system in the 1990s], Pubications of SITRA, 114, Hesinki. Ottesen, O. (1995) Buyer initiative: ignored, but imperative for marketing theory, Working Paper, Department of Business Administration, Stavanger Coege, Norway. Tähtinen, J. and Vaaand, T. (2006) Business reationships facing the end: why restore them?, Journa of Business & Industria Marketing, 21(1), pp Turnbu, P.W. and Vaa, J.P. (1986) Strategies for Internationa Industria Marketing, Croom Hem, London. Wech, L.S. and Luostarinen, R. (1988) Internationaization: evoution of a concept, Journa of Genera Management, 14(2), pp CASE STUDYII.1 393

23 CASE STUDY III.1 IKEA: Expanding through franchising to the South American market? At the beginning of 2007 Ingvar Kamprad, founder of the Swedish furniture retaiing giant IKEA, is concerned his firm may be growing too quicky. He used to be in favour of rapid expansion, but he has now become worried that the firm may be forced to cose stores in the event of a sustained economic downturn. Athough IKEA is one of Sweden s best-known exports, it has not in a strict ega sense been Swedish since the eary 1980s. The store has made its name by suppying Scandinavian designs at Asian prices. It has managed its internationa expansion without stumbing. Indeed, its brand which stands for cean, green and attractive design and vaue for money is as potent today as it has been at any time in more than 50 years in business. The parent of a IKEA companies the operator of 207 of the 235 wordwide IKEA stores is Ingka Hoding, a private Dutch-registered company. Ingka Hoding (which is named after the first and ast name of the founder) beongs entirey to Stichting Ingka Foundation. This is a Dutch-registered, tax-exempt, non-profit-making ega entity, which was given the shares of Ingvar Kamprad in Stichtingen, or foundations, are the most common form of not-for-profit organisation in the Netherands; tens of thousands of them are registered. Most Dutch stichtingen are tiny, but if Stichting Ingka Foundation were isted it woud be one of the Netherands ten argest companies by market vaue. Its main asset is the Ingka Hoding group, which is conservativey financed and highy profitabe. Vauing the Ingka Hoding Group is awkward, because IKEA has no direct competitors that operate gobay. Shares in Target, a arge, successfu chain of stores in the United States that makes a fifth of its saes from home furnishings, are priced at 20 times the store s atest fu-year earnings. Using that price/earnings ratio, the Ingka Hoding Group is worth a28 biion ($36 biion). Now Ingvar Kamprad has heard that the top management of the IKEA Group pans to make a further internationa expansion, into South America, because of the growth opportunities there. Kamprad is very sceptica about these pans and his persona assistant has asked you, as an internationa marketing speciaist, to get an expert opinion about the pans... IKEA the story IKEA Svenska AB, founded in 1943, is the word s argest furniture retaier and speciaizes in styish but inexpensive Scandinavian designed furniture. Brief timeine 1943 The founder of IKEA, Ingvar Kamprad from Agunnaryd, Sweden, registers the name IKEA. The name was formed from the founder s initias (IK) pus the first etters of Emtaryd and Agunnaryd, the farm and viage where he grew up Furniture enters the IKEA product range for the first time The first IKEA cataogue is pubished The first IKEA furniture showroom is opened in Ämhut, Sweden, to better dispay the products quaity IKEA begins to design its own furniture IKEA introduces sef-assemby furniture in fat packs The first IKEA store opens in Ämhut, Sweden The second IKEA store is opened in Oso, Norway. 394

24 Case III.1 IKEA 1965 The IKEA Stockhom store opens. The sefservice, open warehouse is introduced The first IKEA store in Denmark opens The first store outside Scandinavia is opened in Spreitenbach, Switzerand The first IKEA store opens in Germany, in Munich The first IKEA store in Austraia The first IKEA store in Canada The first IKEA store in Austria The first IKEA store in Singapore The first IKEA store in the Netherands The first IKEA store in the Canary Isands The first IKEA stores in France and Iceand The first IKEA store in Saudi Arabia The first IKEA stores in Begium and Kuwait The first IKEA store in the United States The first IKEA stores in the United Kingdom and Hong Kong The first IKEA store in Itay The first IKEA stores in Hungary and Poand The first IKEA stores in the Czech Repubic and the United Arab Emirates The first IKEA stores in Maorca and Sovakia The first IKEA store in Taiwan The first IKEA stores in Finand, Maaysia and mainand Spain IKEA appears on the Internet with the Word Wide Living Room website The first IKEA store in mainand China First IKEA store opens in Russia (Moscow) First stores in Israe (Netanya) and Greece (Thessaoniki) First stores in Portuga (Lisbon) First stores in Turkey (Istanbu) First stores in Ireand (Dubin) First stores in Romania (Bucharest). About corporate IKEA IKEA has grown into the word s argest furniture retaier, with 237 stores in 35 countries (2007) and a workforce of some 90,000 peope since its first outet opened in Ämhut in The firm is noted for its rapid internationa expansion and has recenty set up stores in Eastern Europe and Russia. IKEA s success in the retai industry can be attributed to its vast experience in the retai market, product differentiation and cost eadership. The company is one of the word s most successfu mutinationa retaiing firms, operating as a goba organization, with its unique concept that its furniture is sod in kits that are assembed by the customer at home. The firm, which remains in private ownership, racked up saes of neary a15 biion in There are about 12,000 products in the tota IKEA product range. Each store carries a seection of these 12,000 products depending on store size. The core range is the same wordwide. IKEA accounts for just 5 per cent to 10 per cent of the furniture market in each country in which it operates. More important is that the awareness of the IKEA brand is much bigger than the size of the company because IKEA is far more than a furniture merchant. It ses a Scandinavian ifestye that customers around the word embrace. The IKEA business idea is to offer a wide range of home furnishing items of good design and function, exceent quaity and durabiity, at prices so ow that the majority of peope can afford them. The company targets the customer who is ooking for vaue and is wiing to do a itte bit of work serving themseves, transporting the items home and assembing the furniture. The typica IKEA customer is a young ow- to midde-income famiy. As mentioned, IKEA s retaiing, is based on a franchise system. Inter IKEA Systems B.V., ocated in Deft (the Netherands), is the owner and franchisor of the IKEA concept. The IKEA Group is a private group of companies owned by a charitabe foundation in the Netherands. It is active in deveoping, purchasing, distributing and seing IKEA products. The IKEA experience is more than just products, however, it is a retai concept. For the concept to work a aspects must be in pace. IKEA products are therefore sod ony in IKEA stores franchised by Inter IKEA Systems B.V. However, most of the goba product poicy (incuding product deveopment) and the goba marketing is centraized to the Swedish part of the company, IKEA of Sweden. Product deveopment The team behind each product consists of designers, product deveopers and purchasers who get together to discuss design, materias and suitabe suppiers. Everyone contributes with their speciaist knowedge. Purchasers, for exampe, use their contacts with suppiers a over the word via IKEA Trading Service Offices. Who can make this product of the best quaity for the right price at the right time? Products are often deveoped in cose cooperation with suppiers and often ony one suppier is appointed to suppy a the stores around the word. 395

25 Part III Market entry strategies IKEA does not have its own manufacturing faciities but uses subcontracted manufacturers a over the word. In order to keep costs ow, IKEA shoppers are pro-sumers haf producers and haf consumers. In other words, they have to assembe the products themseves. To faciitate shopping, IKEA provides cataogues, tape measures, shopping ists and an internet website to hep the consumer with fitting the furniture into the room. Car roof racks are avaiabe for purchase at cost and IKEA pick-up vans/mini-trucks are avaiabe to rent. IKEA s success is based on the reativey simpe idea of keeping the cost between manufacturers and customers down. Costs are kept under contro starting at the design eve of the vaue-added chain. IKEA aso keeps costs down by packing items compacty in fat standardized packaging and stacking them as high as possibe to reduce storage space during and after distribution. Effective marketing through cataogues is what usuay attracts the customer first; what keeps customers coming back is good service. IKEA beieves that a strong in-stock position, in which the most popuar stye and design trends are correcty anticipated, is crucia to keep customers satisfied. For that IKEA depends on eadingedge technoogy and the company has deveoped its own goba distribution network. By utiizing contro points in the distribution cyce the firm is abe to insure timey deivery of products to retai stores a over the word. IKEA thinks that consumer tastes are merging gobay. To take one exampe, IKEA, which has been exporting the streamined and contemporary Scandinavian stye to the United States since 1985, found severa opportunities to export US stye to Europe, as Europeans picked up on some US furnishing concepts. To respond to this new demand IKEA now markets American-stye furnishings in Europe. Bureaucracy is fought at a eves in the organization. Kamprad beieves that simpicity and common sense shoud characterize panning and strategic direction. In addition, the cuture emphasizes efficiency and ow cost, which is not to be achieved at the expense of quaity or service. Symboic poicies, such as ony fying economy cass and stay at economica hotes, empoying young executives and sponsoring university programmes, have been integrated into the corporate cuture and have further inspired the spirit of entrepreneurship in the organization. For instance, a design teams enjoy compete autonomy in their work, but are expected to design new and appeaing products reguary. IKEA has improved its vaue chain by a cooperative focus on suppiers and customers. The firm emphasizes centraized contro and standardization of the product mix. In order to maintain cost eadership in the market, interna production efficiencies must be greater than those of competitors. Under IKEA s goba strategy suppiers are usuay ocated in ow-cost nations, with cose proximity to raw materias and reiabe access to distribution channes. These suppiers produce highy standardized products intended for the goba market, which size provides the firm with the opportunity to take advantage of economies of scae. IKEA s roe is not ony to gobay integrate operations and centray design products, but aso to find an effective combination of ow cost, standardization, technoogy and quaity. In the case of IKEA, a standardized product strategy does not mean compete cutura insensitivity. The company is, rather, responding to gobay emerging consumer tastes and preferences. Retai outets a over the word carry the basic product range, which is universay accepted, but aso pace great emphasis on the product ines that appea to oca customer preferences. IKEA has modified the vaue chain approach by integrating the customer into the process and introducing a two-way vaue system between customers, suppiers and IKEA s headquarters. In this goba sourcing strategy the customer is a suppier of time, abour, information, knowedge and transport. On the other hand, the suppiers are customers, receiving technica assistance from IKEA s corporate technica headquarters through various business services. The company wants customers to understand that their roe is not to consume vaue, but rather to create it. IKEA s roe in the vaue chain is to mobiize suppiers and customers to hep them further add vaue to the system. Customers are ceary informed in the cataogues of what the firm s business systems provide, and what they are expected to add to the fina process. In order to furnish the customer with good quaity products at a ow cost, the firm must be abe to find suppiers that can deiver high-quaity items at ow cost per unit. The company s headquarters provides carefuy seected suppiers with technica assistance, eased equipment and the necessary skis needed to produce high-quaity items. This ong-term suppier reationship not ony produces superior products, but aso adds interna vaue to the suppiers. In addition, this vaue chain modification differentiates IKEA from its competitors. Directy inked to its mission statement, IKEA has buit its cost eadership position on these processes. It furnishes the customer with a quaity product with components derived from a over the word utiizing muti-eve competitive advantages, ow cost ogistics, and arge simpe retai outets in suburban areas. Furthermore, cost eadership has been effectivey incorporated into the organization s cuture through symbos 396

26 Case III.1 IKEA and efficient processes. In return for high saes voumes IKEA accepts ow profit margins. In addition, IKEA s marketing emphasis on budget prices and good vaue ceary communicates cost eadership to customers. IKEA s strategy demonstrates that the perception that cost eadership equas poor quaity in products and services is incorrect. High quaity is associated with input and process variabes. Cost reduction, on the other hand, does not mean reducing the quaity of these variabes, but rather doing things better, and more efficienty. Cost eadership is a part of the management process and cuture. From this discussion it is possibe to concude that IKEA effectivey aigns its cost eadership patform, focusing on the needs of its target market segment. Differentiation, as indicated in the modification of the vaue chain, aso focuses on this particuar segment. The internationaization of IKEA IKEA has appied a conservative poicy to internationaization. As a genera rue, the firm does not enter a new potentia market by opening a retai outet. Instead, a suppier ink with the host nation is estabished. This is a strategic, risk-reducing approach in which oca suppiers can provide vauabe input on poitica and ega, cutura, financia and other issues that provide opportunities and/or threats to the IKEA concept. In the 1970s and 1980s IKEA concentrated its internationa expansion in Europe and in North America mainy through company-owned subsidiaries. On the other hand, over the past 20 years franchising has been extensivey utiized in expanding to other areas of the word. Expansion by franchising IKEA approaches unknown, reativey sma and high risk markets by franchising. Franchises are granted by Inter IKEA Systems B.V. as part of a detaied internationa expansion pan. Serious appicants are carefuy researched and evauated and franchises are granted ony to companies and/or individuas with strong financia backing and a proven record in retai. Franchisees have to carry basic items, but have the freedom to design the rest of the product mix to fit oca market needs. The basic core items number approximatey 12,000 simpe and functiona products. The centraized head office is activey invoved in the seection processes and provides advice. In addition, a products have to be purchased from IKEA s product ines. In order to maintain service, quaity and ogistic standards, individua franchisees are periodicay audited and compared to overa corporate performance. Extensive training and operationa support is provided from headquarters. A franchisees pay franchise fees to IKEA Hodings. A cataogues and promotiona advertising is the responsibiity of headquarters. Franchising has been used as a vehice for the company s generic focus strategy. Baance of autonomy and strategic direction As IKEA continues to expand overseas the significance of centraized strategic direction wi increase. Naturay rapid internationaization wi trigger a range of chaenges imposed on the headquarters, such as the foowing: The compexity of the ogistics system wi increase. It wi be more difficut to respond to nationa needs and cutura sensitivity issues. Franchisees may demand more contro over operations. Emerging demographic trends wi force the organization to broaden its focus strategy to respond to varying nation-eve consumer groups. With a these chaenges emerging it might be very difficut to maintain a centra organizationa structure. The best way to meet these chaenges is to find the proper baance between country eve autonomy and centraized intervention. With reference to IKEA s ong-term reationship and contro over its suppiers in exchange for quaity assurance, technoogy transfers and economies of scae factors may trigger potentia suppiers to integrate forward and produce competitive products for IKEA s oca competitors. With ogistics compications and ong ead times IKEA is forced to maintain high contro eves over its suppiers. For instance, if the suppier responsibe for the screws component to a tabe cannot deiver on time, the suppier of the tabe-top has to adapt its production to the new scenario. Without IKEA s centraized ogistics system this exampe coud ead to severe store shortages, eading to osses in saes. The Braziian market for furniture According to the Braziian Association of Furniture Manufacturers (ABIMOVEL), the Braziian furniture market was estimated at approximatey $3.6 biion in 2000, of which about $111 miion were imports. The market can be broken down into three main categories: residentia (60 per cent), office (25 per cent), and institutiona organizations, such as schoos, hospitas and hotes (15 per cent). Brazi has 4.6 miion hectares of panted forests, amost a of which is ocated in the south of the country. Wood from such forests is mainy used in the production of furniture, pup and paper. The main furniture production centres, as we as the most important markets, are aso ocated in southern Brazi. 397

27 Part III Market entry strategies The production of particeboard, which was 494,000 m 3 in 1990, jumped to 1.3 miion m 3 in 1998, an annua growth rate of 13 per cent. This pattern is expected to continue in the near future. Approximatey 80 per cent of Brazi s particeboard production is consumed by the furniture sector. A smaer voume is marketed by reseers and destined for sma furniture manufacturers. As the Braziian furniture market continues to reap more and more of its profits from exports, production is increasingy taiored to satisfy market niches that demand differentiated products. To meet this need the Braziian industry is investing more in design and deveopment, athough investments are smaer in comparison to investments made in the United States, Itay and Germany. Brazi is aso importing state-of-the-art equipment to address quaity issues mandated by foreign markets, e.g. the US, Itaian and German ones. Today the segment requires import of equipment such as wood-drying machinery, finishing machinery and toos. According to the Braziian Furniture Association there are approximatey 13,500 Braziian furniture manufacturers, most of which are sma. These firms are typicay famiy-owned companies whose capita is excusivey Braziian. Historicay, the greater proportion of Braziian manufacturers have been concentrated in areas of arge popuation density in southern Brazi. The process of trade iberaization initiated in 1990 introduced significant changes in Brazi s trade regime, resuting in a more open and competitive economy. The Braziian economy was deepy affected by the crises in the Asian and Russian markets. As a consequence the currency suffered deepy from the devauation in January Braziian imports of furniture were aso seriousy affected by this devauation, and the industry is currenty suffering from the unfavourabe (for Braziians) rea doar exchange rate. US exports of furniture to Brazi reached $43 miion in 2000 (39 per cent of tota Braziian furniture imports) and are expected to decrease to $36 miion in US exports to Brazi were particuary strong in the area of seats, new-design office furniture, and high-end, high-vaue-added residentia furniture. Market anaysts estimate that in the next three to four years imports of institutiona furniture, such as that used in hospitas and hotes, wi increase consideraby, mainy imports from the United States. Imports Braziian furniture imports totaed $111 miion in 2000, and decreased to $96 miion in This represents 3 per cent of the tota furniture market in Brazi. The USA hods 39 per cent of the imported furniture market, foowed by Germany with 36 per cent, Itay with 10 per cent, and other countries with 15 per cent. End-user anaysis Different industry segments, such as automotive, aviation and furniture (residentia, commercia and institutiona) make up the Braziian market. Each of those areas has its own purchasing approach. For exampe, the automotive industry may import directy from its headquarters and, in the case of the furniture industry, the end user might be an importer or a store chain. It is important to mention that there are no major distributor chains in Brazi. Most furniture imports are made through direct importers and, in a smaer proportion, oca manufacturers wishing to compement their product ine. High-end furniture and mattresses are commony imported into Brazi by direct importers or furniture stores. Interior decorators and architects are aso considered decision makers, since they are the ones who recommend brands and styes to their fina cients. Import cimate Brazi has a tariff-based import system and has simpified the process for obtaining import icences. Import tariffs are evied ad vaorem on the CIF vaue of the imports. Import tax (IPI See beow) for furniture varies from 5 15 per cent. The industria products tax (IPI) is a federa tax evied on most domestic and imported manufactured products. It is assessed at the point of sae by the manufacturer or processor in the case of domesticay produced goods, and at the point of customs cearance in the case of imports. The tax rate varies by product and is based on the product s CIF vaue pus duties. Interest rates in Brazi are high (estimated at 18.3 per cent per year in June 2001) and discourage demand for bank oans. The few sources of funds avaiabe for ongterm financing are provided by the Nationa Bank for Economic and Socia Deveopment (BNDES), through easing operations and by foreign government export agencies. Distribution and business practices Major end users of furniture wi ony purchase from we-known and reiabe suppiers. Athough arge end users may import directy from foreign suppiers, they are aways concerned with after-saes service. Technica assistance and avaiabiity of repacement parts are considered important factors in the purchasing decision. In some segments, such as commercia and institutiona, this factor may determine from whom the end user wi purchase. A physica presence in the market, either through an agent or a manufacturing pant, increases the end user s trust in the suppier s commitment to this market and faciitates the sae. 398

28 Case III.1 IKEA The retai scene in Brazi For many years the popuar wisdom in Brazi was that shopping mas were ony for rich peope. The 1984 opening of Center Norte ma in São Pauo changed a that. It is strategicay paced next to a subway and a bus termina. Proximity to mass transit is essentia, since many ow-income consumers do not own cars. Center Norte was foowed by other shopping mas in other cities, such as Rio de Janeiro and Beo Horizonte. Economic instabiity, difficuties in obtaining financing at reasonabe interest rates and customs barriers for certain imports have sowed down the the entry of foreign retaiers to Brazi. Among the internationa chains that have been attracted by Brazi s 80 miion consumers are JC Penney, Zara and the Dutch chain C&A, that eads the fashion sector in Brazi. Internationa franchisors such as Benetton, Lacoste, Hugo Boss, Poo Raph Lauren and McDonad s operate in Braziian shopping centres, some on a arge scae. Those who have set up shops in Brazi have varied resuts directy reated to their abiity to adapt to oca conditions. Sears, for exampe, had extremey negative resuts, due to the centraization of decision making in Chicago. Simiary, Zara tried to bring to Brazi its European management poicy and market approach and is now facing poor financia resuts. The contrast is the exceent performance of C&A, whose poicies and procedures were defined in Brazi for the oca market. JC Penney acquired a oca chain (Renner) and acceerated its expansion with good resuts (ICSC Wordwide Commission, 2000). Sources: IKEA Annua Report 2002 (preiminary resuts); BBC News (2003), news.bbc.co.uk, IKEA founder worried over growth, 3 January; ICSC Wordwide Commission (2000), Shopping centres: a word of opportunities, Questions 1 Unti now IKEA internationa marketing strategy has been tighty and centray controed by corporate headquarters. However, high oca pressures emerging due to demographic and cutura differences might force the oca IKEA shops to take strategic initiatives to respond to oca market needs. In this connection discuss the regiona headquarters and transnationa organization (presented in Chapter 12) as hierarchica entry mode aternatives to the very centraized strategy emanating from IKEA s headquarters. 2 IKEA has not yet expored joint venture and strategic aiances strategies. Evauate the pros and cons regarding these two entry strategies versus the traditiona IKEA entry mode of franchising. 3 Shoud IKEA penetrate the South American market by estabishing a shop in Brazi? 4 In the ight of the poitica and economic situation in South America, outine the sourcing concept that shoud be impemented in the South American market. 399

29 CASE STUDY III.2 Autoiv Air Bags: Transforming Autoiv into a goba company Chief executive officer of Autoiv Inc., Lars Westerberg, is in the midde of a board of directors meeting in Stockhom in September 2006, discussing how it is possibe to further gobaize Autoiv. He takes out a situation report for the business area of air bags. As there are a coupe of new members on the board Lars takes the opportunity to give a broader introduction to the business area than he usuay does. The foowing is Lars Westerberg s status report. Situation report for the business area of air bags Business concept Autoiv Inc., which is a Fortune 500 company, is the word s argest automotive safety suppier with saes to a the eading car manufacturers in the word. Autoiv s shares are isted on the New York Stock Exchange and on the Stockhom Stock Exchange. The company deveops, markets and manufactures airbags, seat bets, safety eectronics, steering whees, anti-whipash systems, seat components and chid seats. Autoiv has 80 subsidiaries (production pants) and joint ventures in 30 vehice-producing countries, with over 40,000 empoyees. In addition, Autoiv has technica centres in nine countries with 20 crash test tracks more than any other automotive safety suppier. Autoiv aims to deveop, manufacture and market systems and components wordwide for persona safety in automobies. This incudes the mitigation of injuries to autombie occupants and pedestrians and the avoidance of accidents. In this aspect, Autoiv wants to be the systems suppier and the deveopment partner to car producers that satisfy a the needs in the area of persona safety. To fufi its business concept Autoiv has strong product ines: fronta and side-impact airbags (incuding a key components such as infators with initiators, textie cushions, eectronics with sensors and software, stee and pastic parts); seat bets (incuding a key components such as webbing, retractors and buckes); seat bet features (incuding pretensioners, oad imiters, height adjusters and bet grabbers); seat SubSystems (incuding anti-whipash systems); steering whees (incuding integrated driver airbags); ro-over protection (incuding sensors, pretensioners and airbag curtains). In 2006 the penetration rate of curtain airbags in new cars was 50 per cent in Europe, 35 per cent in North America, 20 per cent in Japan and 10 per cent in the rest of the word. The foowing concentrates on the business area of air bags. Production strategy Autoiv has fina assemby of restraint systems, ocated cose to major customers pants for just-in-time suppy (see Figure 1). Most of the component production (texties and stamped meta components, etc.) has been outsourced during the past five years. Since major automobie manufacturers are continuay expanding production into more countries, it is aso Autoiv s strategy to have manufacturing capacity where the major vehice manufacturers have or are ikey to set up production faciities. As a consequence Autoiv has more pants for automotive safety products in more countries than any other suppier. 400

30 Case III.2 Autoiv Air Bags The product: the air bag Even the best bet designs cannot prevent a head and chest injuries in serious head-on crashes. This is where air bags hep, by creating an energy-absorbing cushion between an occupant s upper body and the steering whee, instrument pane or windshied. Independent research has shown that driver deaths in head-on crashes are about 20 per cent ower in cars with fronta air bags than in simiar cars with bets ony. In a kinds of crash deaths are down by about 15 per cent over and above ives aready being saved by bets. Athough air bags may seem compicated they are in fact reativey simpe. In moderate and severe head-on crashes sensors signa infators to fi the bags with harmess gas. The bags fi in a fraction of a second and begin defating the instant they cushion peope, but in the United States a few occupants have died of broken necks. Peak infation is in ess than 1 / 20 th of a second, faster than the bink of an eye. The speed and force of air bag infation may occasionay cause injuries, mosty minor abrasions or bruises, but in the United States some occupants have died of broken necks caused by air bags that infated with great force. Those at the greatest risk of injury caused by an air bag are those who drive or ride unbeted, sma chidren, short or obese aduts, and certain disabed peope. Injury risk from the bag itsef can be reduced by choosing a driving or passenger position that does not put your face or chest cose to the steering whee or instrument pane. The combination of seat bet and air bag provides maximum protection in a kinds of crash. Together with Vovo Autoiv has aso deveoped the first side air bags to protect drivers and front-seat passengers in side-impact crashes. These bags are typicay smaer than fronta air bags and they infate more quicky. Vovo was the first manufacturer to offer side air bags in its 850 mode in Vovo s bag is mounted on the outside of driver and front-seat passenger seat backs. Since 1996 side bags have been standard in a Vovo modes. The history of air bags goes back to the eary 1950s. The product idea was patented in 1951 by Water Linderer from Munich. It was in the United States, however, that the concept came into existence, driven by the North Americans reuctance to use seat bets and hindered by the car manufacturers, which initiay ridicued the idea. In 1981 ony 2,636 air bag systems were produced. However, in ate 1989 automatic restraint systems became compusory in a passenger cars in the United States on the driver s side and, whie this incuded automaticay fastening seat bets, it seemed that the air bag had at ast arrived. By 1992, 10 miion air-bagequipped cars had been deivered to the United States. In 1993 came the requirement that a new ight vehices of mode year 1999 produced in the United States had to be fitted with fronta air bags for the driver and the front-seat occupant. The next stage wi be the compusory fitting of air bags to both the driver and front passenger sides. Autoiv introduced its first air bag system in It was designed to meet US requirements, where not a states have aws on wearing seat bets. The air bag therefore had to be reativey arge. Autoiv has deveoped a specia system (the Eurobag system) for markets where wearing a seat bet is compusory. In this system the air bags have ess voume (but they are sti effective) and therefore the price can be kept at a ower eve than some of the competitors. In the Eurobag system the air bags are itres on the driver s side and itres on the passenger s side. Furthermore, the Eurobag system is ighter and ess buky. An air bag system consists of an eectronic contro unit and an air bag modue. The eectronic contro unit contains (among other things) a sensor, whie the modue essentiay consists of a gas generator, a nyon bag and a cover for the steering whee centre or the instrument pane, depending on where the air bag modue is paced. Autoiv typicay suppies entire systems adapted to individua car modes. Organization In France, Germany, Spain, Sweden, the United Kingdom and the United States, oca management is regionay responsibe for Autoiv s operations in countries other than their own. As a resut the main customers have the advantage of deaing with Autoiv both in their home market and when they have or are going to estabish production in other markets. Together with two regiona coordination offices this organization contributes to ow corporate overheads and short response times for the customers. (Autoiv s goba headquarters has ony 40 empoyees.) Autoiv s business directors and their organizations coordinate a activities with major customers on a goba basis. The word market for air bags With its successfu growth strategy, Autoiv has become the goba eader in the $20 biion automobie occupant restraint market. Airbags account for just over 50 per cent of that market, seat bets for amost 30 per cent and eectronics for neary 20 per cent. The goba steering whee market, which Autoiv entered in 1995 to promote the integration of driver air bags into steering whees, amounts to over $1.5 biion. The word market for air bags was an area of spectacuar growth during the 1990s. In 2005 the number of fronta air bag units was amost 125 miion and the number of side-impact air bags neary 50 miion. 401

31 Part III Market entry strategies Figure 1 Autoiv s corporate structure In the United States fronta air bags both on the driver and the passenger side are compusory under federa aw in a new ight vehices sod after 1 September The US market for fronta air bags therefore fuctuates with the car production cyce, but saes of side air bags are now about to take off. Their penetration rate was ess than 20 per cent among new US ight vehices in Both Ford and Genera Motors have announced aggressive pans for curtain side air bags such as Autoiv s Infatabe Curtain. In addition, new reguations in the United States wi require vehice manufacturers to phase in more vauabe advanced air bags during a three-year period starting on 1 September In Europe, Autoiv estimates that more or ess a new vehices have dua airbags. Instaations of side impact air bags began in 1994, but in 2001 two-thirds of a new vehices in Europe had such systems for chest protection. In addition, 25 per cent had a separate side impact air bag for head protection (such as the infatabe curtain). In Japan, where deveopment started ater than in Europe, penetration rates for fronta air bags are neary as high as in Europe, whie the penetration rate for side air bags is ceary beow the eve in Europe. In the rest of the word, penetration rates vary greaty from country to country, but the average is sti ess than 50 per cent for both driver and passenger air bags (see Tabe 1). Instaations of side air bags has just started. The potentia market for side air bags is difficut to assess. This is because side impact air bags wi be optiona accessories in many cars at east initiay unti the car producers have had time to evauate the reaction from the market. Autoiv estimates that it currenty has approximatey onethird of the goba market for car occupant restraint products and that it has a somewhat arger goba market share for air bags than for seat bets. For side air bags, which were invented by Autoiv and introduced in 1994, Autoiv s goba market share is sti more than 40 per cent (see aso Tabe 2). For other recent safety improvements, such as seat bet pretensioners and oad imiters, Autoiv s goba market position is strong. In North America, Autoiv estimates that in 2001 it accounted for a itte ess than one-third the air bag products market and the same for the seat bet market compared with just over 10 per cent in (Autoiv did not se seat bets in the United Tabe 1 The word market for fronta air bags, 2005 Production Percentage Tota market of ight of vehices for fronta air vehices equipped with bags (driver (miions) air bags (dua + passenger) air bags, both (miions) driver and passenger) Europe 44 East 6 West % with dua bags USA % with dua bags 36 Asia Japan 11 China 5 70% with driver s air bag 34 South Korea 4 50% with dua air bags Others 10 50% with driver s air bag 11 30% with dua air bags Tota Source: Autoiv Financia Report 2005; Autoiv PowerPoint presentations. 402

32 Case III.2 Autoiv Air Bags Tabe 2 Autoiv s goba market shares (%) in main product categories, 2005 Product North America Europe Japan Goba Seat bets Fronta airbags Side airbags States unti 1993.) Autoiv made its big entry into the North American market in 1996 when it acquired Morton Automotive Safety Products, which at that time was North America s argest air bag producer. The air bag business has given Autoiv an opportunity to expand its seat bet business now as compete systems sourcing takes pace. In 2000 Autoiv acquired the North American seat bet business of NSK. Autoiv s market share for seat bets aso increased as a resut of new contracts, and the increasing number of new United States vehices with seat bet pretensioners. Steering whee saes in the United States commenced in Based on orders received so far, Autoiv expects its steering whee market share to approach 10 per cent in just a coupe of years. In Europe, Autoiv estimates its market share to be about 50 per cent with a somewhat higher market share for seat bets than for air bags. The market share for steering whees is approximatey 15 per cent. In Asia, Autoiv s market share is not more than approximatey 10 per cent for fronta air bags. In Japan, Autoiv has a strong position in the air bag infator market and rapidy growing saes of air bag modues. Loca assemby of air bag modues began in In 2000 Autoiv acquired the second argest Japanese steering whee company with a market share exceeding 20 per cent, and 40 per cent of NSK s Asian seat bet operations with the option to acquire the remaining shares in two steps in 2002 and Incuding NSK s saes, Autoiv accounts for approximatey a fifth of the Japanese seat bet market. In other countries, such as Argentina, Austraia, China, India, Maaysia, New Zeaand, South Africa and Turkey, where Autoiv estabished production eary, the company has achieved strong market positions in severa paces. Competitors In the ate 1990s the number of major suppiers of occupant restraint systems was reduced from nine to four. As a resut of the consoidation among producers of ight vehices the new entities that have been formed require suppiers to be cost efficient and have the capabiity to deiver the same products to a the companies pants wordwide. The four eading car occupant restraint suppiers now account for approximatey 80 per cent of the word market (worth $16 biion) as opposed to 50 per cent five years ago. During this period Autoiv has increased its share to sighty more than 30 per cent and has repaced TRW (a US pubicay traded company) as the market eader. Another important auto safety suppier is Takata (a privatey owned Japanese company). Both TRW and Takata have about 25 per cent market share. Dephi (the word s argest automotive components suppier) and Key Safety Systems, formery Breed (a US company that in 2000 emerged from bankruptcy) have ess than 5 per cent each. Customers Severa of the word s argest car producers are among Autoiv s customers (see Tabe 3). Autoiv typicay accounts for between 25 and 75 per cent of customers purchases of seat bets and air bags. Autoiv suppies a major car makers in the word and most car brands. In the deveopment of a new car mode, a process that takes severa years, Autoiv in many cases functions as a deveopment partner for the car manufacturer. This typicay means that Autoiv gives advice on new safetyenhancing products and assists in adaptation and conduct testing (incuding fu-scae crash tests with the vehice) of the safety systems. No customer accounts for more than 21 per cent of Autoiv s saes. Most of these car makers can be characterized as Autoiv s goba accounts (GAs) see aso Chapter 20. The contracts are generay divided among a car maker s different car modes, with each contract usuay running for the ife of the car mode. No contract accounts for more than 5 per cent of consoidated Tabe 3 Autoiv s customer mix, 2005 Car manufacturer Share of Share of goba vehice Autoiv s production tota saes (70 miion ($6.2 biion) vehices) (%) (%) Genera Motors Renaut/Nissan 9 14 Ford Daimer/Chryser 7 7 PSA (Citroën and Peugeot) 6 9 VW 8 9 Toyota 15 7 BMW 2 4 Hyundai 6 4 Honda 6 6 Others 15 6 Tota

33 Part III Market entry strategies Tabe 4 Three years of economic deveopment at Autoiv Inc. Key figures Saes ($miion) 6,205 6,144 5,301 Pre-tax profit ($miion) saes. Of the 2005 tota saes in Tabe 4, Europe accounts for 54 per cent, North America 26 per cent, Japan 9 per cent and the rest of the word 11 per cent. The tota number of empoyees (whoe Autoiv Group, incuding subsidiaries) in December 2005 was about 40,0000. With this positive news Lars Westerberg finishes his presentation of Autoiv s position in the air bags market. He woud ike a discussion of the foowing, to which you are asked to contribute. Questions 1 Describe Autoiv s roe as a subsuppier for arge auto manufacturers in a market that is characterized by consoidation. 2 Which car manufacturer shoud Autoiv target to strengthen its goba competitive position? 3 What strategic aternative does Autoiv have to strengthen its competitive position outside Europe? 404

34 CASE STUDY III.3 IMAX Corporation: Gobaization of the fim business Back in 1997 the CEO of IMAX, Richard L. Gefond, was a bit sceptica about buiding a story with Hoywood movie stars into the big screen format. At that time his answer to the criticism of IMAX fims missing story was: It is too expensive and risky for us to put a our eggs in one basket and hire a major movie star. However, in 2003 new technoogica achievements have made it possibe to show, for exampe, Matrix Reoaded on the huge screen format. This is not just the projection of the standard theatrica print on an IMAX screen the fim wi undergo the patented IMAX DMR (digita re-mastering) process, which enhances the quaity of the image and soundtrack to the huge IMAX 15/70 format. The same has happened to Apoo 13, featuring Oscar -winning actor Tom Hanks. So though IMAX have been through financia tough times the company now seems to be ooking towards a brighter future. The IMAX Corporation The IMAX Corporation is invoved in a wide variety of out-of-home entertainment business activities. It designs and manufactures projection and sound systems for giant-screen theatres based on a patented technoogy. The IMAX Corporation is the word s argest producer and distributor of fims for giant-screen theatres. The IMAX Corporation, together with its whoyowned subsidiaries, is one of the word s eading entertainment technoogy companies whose principa activities are the foowing: the design, manufacture, marketing and easing of proprietary projection and sound systems for Imax theatres principay owned and operated by institutiona and commercia customers in more than 36 countries (1 September 2003); the deveopment, production, digita re-mastering, post-production and distribution of certain fims shown in the IMAX theatre network; the operation of certain IMAX theatres ocated primariy in the United States and Canada; and the provision of other services to the IMAX theatre network incuding designing and manufacturing IMAX camera equipment for renta to fim-makers and providing ongoing maintenance services for the IMAX projection and sound systems. The IMAX theatre network is the most extensive arge-format network in the word, with 239 theatres operating in more than 36 countries. Of these, 115 are in institutiona ocations and 102 in commercia ocations. Whie IMAX s roots are in the institutiona market, it beieves that the commercia market is potentiay arger. To increase the demand for IMAX theatre systems, it is currenty working to position the network as a new window for Hoywood event fims. To this end IMAX has both deveoped a technoogy that aows standard 35 mm movies to be converted to its format and is aso working to buid strong reationships with Hoywood studios and commercia exhibition companies. IMAX theatre systems combine advanced, high-resoution projection systems, sound systems and screens as much as eight storeys high (approximatey 80 feet) that extend to the edge of a viewer s periphera vision to create the audio-visua experience. As a resut audiences fee as if they are a part of the on-screen action in a way that is more intense and exciting than in traditiona theatres. In addition, IMAX s 3D theatre systems combine the same projection and sound systems and up to eight storey screens with 3D images that further increase the audience s feeing of immersion 405

35 Part III Market entry strategies in the fim. IMAX beieves that its network of 3D theatres is the argest out-of-home, 3D distribution network in the word. History The IMAX system has its roots in EXPO 67 in Montrea, Canada, where mutiscreen fims were the hit at the fair. A sma group of Canadian fim-makers/ entrepreneurs (Graeme Ferguson, Roman Kroitor and Robert Kerr), who had made some of those popuar fims, decided to design a new system using a singe powerfu projector rather than the cumbersome mutipe projectors used at that time. The resut was the IMAX motion picture projection system, which woud revoutionize giant-screen theatre. As the IMAX screen is about ten times the size of a conventiona movie screen picture quaity has to be very good. The camera required is aso much bigger than a conventiona movie camera, but for anyone with fim experience it is not hard to earn to use. The much accaimed Fires of Kuwait was nominated for an Academy Award in the Feature Documentary category in Since the premiere in 1970 more than 700 miion peope have enjoyed the IMAX Experience. In 1977, IMAX was awarded the soe Oscar for Scientific and Technica Achievement by the Academy of Motion Picture Arts and Sciences. The award recognized IMAX s innovation in creating the word s best fim capture and projection system as we as IMAX s acceptance as part of the entertainment mainstream. IMAX Ridefim: entry and departure Historicay, another part of the corporation was the IMAX Simuation Ride System, which combined giant-screen technoogy with aspects of an amusement park ride. One of Ridefim Corporation s new state-of-the-art projects became reaity in Back to the Future The Ride, directed by Dougas Trumbu, premiered in June at Universa Studios, Hoywood. This high-tech attraction was considered by entertainment industry experts to be the paradigm for the fim experience of the future. The Ridefim concept consisted of 18-person projection rooms in which the seats are equipped with seat bets and move with the action on the screen. The fim is projected on a 180-degree screen, with digita surround sound. IMAX never succeeded in becoming profitabe in the ridefim business. One of the reasons for that might be that it never reached the critica mass of about 100 cinemas needed in order to support the three or four ridefims that must be made each year to make the business profitabe. In fisca 1999 IMAX was forced to write off Ridefim s assets, resuting in a charge of $13.6 miion. IMAX s business today Generay speaking IMAX does not own its theatres, but eases its projection and sound systems and icenses the use of its trade marks. IMAX derives revenue principay from theatre system ease agreements, maintenance agreements, fim production agreements and distribution of fims. In 2002, Imax introduced a technoogy that can convert ive-action 35mm fims to its 15/70-format at a modest incrementa cost, whie meeting IMAX s high standards of image and sound quaity. IMAX beieves that this proprietary system, known as IMAX DMR (Digita Re-Mastering), has positioned IMAX theatres as a new reease window or distribution patform, for Hoywood biggest event fims. As of 31 December 2005, IMAX, aong with its studio partners, had reeased 11 IMAX DMR fims. In 2005, IMAX reeased four fims converted through the IMAX DMR process contemporaneous with the reeases of the fims to conventiona 35mm theatres, rereeased one IMAX DMR fim that had previousy been reeased in 2004, and reeased one fim made specificay for IMAX theatres. In March 2003, IMAX introduced IMAX MPX, a new theatre projection system designed specificay for use by commercia mutipex operators. The IMAX MPX system, which is highy automated, was designed to reduce the capita and operating costs required to run an IMAX theatre whie sti offering consumers the image and sound quaity of the trademarked experience viewers derive from IMAX theatres known as The IMAX Experience. During 2005, IMAX signed agreements for 31 MPX theatre systems from North American and internationa commercia theatre exhibitors. Theatre system eases IMAX s system eases generay have year initia terms and are typicay renewabe by the customer for one or more additiona ten-year terms. As part of the ease agreement IMAX advises the customer on theatre design and custom assembies and supervises the instaation of the system; provides training in using the equipment to theatre personne; and for a separate fee provides ongoing maintenance of the system. Prospective theatre owners are responsibe for providing the ocation, the design and construction of the buiding, the instaation of the system and any other necessary improvements. Under the terms of the typica ease agreement the tite to a theatre system equipment 406

36 Case III.3 IMAX Corporation (incuding the projection screen, the projector and the sound system) remains IMAX s. IMAX has the right to remove the equipment for non-payment or other defauts by the customer. The contracts are generay not canceabe by the customer uness IMAX fais to perform its obigations. The contracts are generay denominated in US doars, except in Canada and Japan, where contracts are generay denominated in Canadian doars and Japanese yen, respectivey. The typica ease agreement provides for three major sources of revenue: (i) initia renta fees, (ii) ongoing additiona renta payments and (iii) ongoing maintenance fees. Renta payments and maintenance fees are generay received over the ife of the contract and are usuay adjusted annuay based on changes in the oca consumer price index. The terms of each ease agreement vary according to the system technoogy provided and the geographic ocation of the customer. IMAX fims IMAX produces fims that are financed internay and through third parties. With respect to the atter, IMAX generay receives a fim production fee in exchange for producing the fims and is appointed the excusive distributor of the fim. When IMAX produces fims it typicay hires production taent and speciaists on a project-by-project basis, aowing IMAX to retain creative and quaity contro without the burden of significant ongoing overhead expenses. Typicay the ownership rights to fims produced for third parties are hed by the fim sponsors, the fim investors and IMAX. IMAX is a significant distributor of 15/70 format fims, with distribution rights to more of these fims than any competing distributor. IMAX generay distributes fims that it produces and it has acquired distribution rights to fims produced by independent producers. As a distributor, IMAX generay receives a percentage of box office receipts. Tabe 1 IMAX Breakdown of instaations by geographic segment as at 31 December Instaed base 2004 Instaed base Canada United States Europe Japan Rest of Word Tota Tabe 2 IMAX Revenue by geographic area Revenue and net income ($1,000) Canada 7,027 9,616 5,224 United States 73,711 68,411 66,808 Europe 26,700 26,144 26,805 Asia 22,024 18,769 9,989 Rest of word 15,468 13,040 10,434 Tota 144, , ,260 Net income 16,598 10, Internationa marketing IMAX markets its theatre systems through a direct saes force and marketing staff ocated in offices in Canada, the United States, Europe, China and Japan. In addition, IMAX has agreements with consutants, business brokers and rea estate professionas to find potentia customers and theatre sites for IMAX on a commission basis. IMAX has experienced an increase in the number of commercia theatre and internationa signings since The commercia theatre segment of IMAX s network is now its argest, with a tota of 120 theatres opened. As at 31 December 2002, 38.0 per cent of a theatres are outside North America. IMAX s institutiona customers incude science and natura history museums, zoos, aquaria and other educationa and cutura centres. IMAX aso eases its systems to theme parks, tourist destination sites, fairs and expositions. See Tabe 1 for an outine of IMAX s operations by area. For information on revenue breakdown by geographic area see Tabe 2 (revenue by geographic area is based on the ocation of the theatre). Tabe 2 aso shows that IMAX has been in a positive financia deveopment during the ast three years. No one customer represents more than 3 per cent of IMAX s instaed base of theatres. IMAX has no dependence upon a singe customer, or a few customers, the oss of any one or more of which woud have a materia adverse effect on IMAX. As of 31 December 2005 IMAX had 376 empoyees, excuding houry empoyees at company-owned and operated theatres. IMAX enters the Chinese market The first IMAX projection system in a theatre in China was instaed in December 2001 and 13 additiona IMAX theatre systems are schedued to be instaed in China by China is now IMAX s second argest and fastest growing market. However, the geopoitica instabiity of the region comprising China, Taiwan, North Korea and South Korea coud resut in some economic risks. 407

37 Part III Market entry strategies Audience watching Apoo 13 in a IMAX theatre Competition in the industry The out-of-home entertainment industry is very competitive, and IMAX faces a number of chaenges. IMAX competes with other arge-format fim projection system manufacturers as we as, indirecty, conventiona motion picture exhibitors. Imax competes with a number of manufacturers of arge-format fim projection systems, most of which utiize smaer fim formats, incuding eight-perforation fim frame, 70 mm and ten-perforation fim frame, 70 mm formats, which IMAX beieves deiver an image that is inferior to the IMAX experience. As aready mentioned, the IMAX theatre network and the number of 15/70 format fims to which IMAX has distribution rights are substantiay arger than those of its competitors, and IMAX DMR fims are avaiabe excusivey to the IMAX network. IMAX s customers generay consider a number of criteria when seecting a arge-format theatre, incuding quaity, reputation, brand name recognition, type of system, features, price and service. IMAX beieves that its competitive strengths incude the vaue of the IMAX brand name, the quaity and historic up-time of IMAX cinema systems, the number and quaity of 15/70 format fims that it distributes, the quaity of the sound system in the IMAX theater, the potentia avaiabiity of Hoywood event fims to IMAX cinemas through IMAX DMR technoogy and the eve of IMAX s service and maintenance efforts. Neary a of the best performing arge-format theatres in the word are IMAX s. In addition to existing competitors, IMAX may aso face competition in the future from companies in the entertainment industry with new technoogies and/or substantiay greater capita resources. IMAX faces competition from a number of aternative motion picture distribution channes such as home video, pay-per-view, video-ondemand, DVD, and syndicated and broadcast teevision. IMAX competes for the pubic s eisure time and disposabe income with other forms of entertainment, incuding sporting events, concerts, ive theatre and restaurants. Furthermore, the out-of-home entertainment industry in genera is undergoing significant changes. Primariy due to technoogica deveopments and changing consumer tastes, numerous companies are deveoping, and are expected to continue to deveop, new entertainment products for the out-ofhome entertainment industry, which may compete directy with IMAX s products. The motion picture exhibition industry is in the eary stages of conversion from fim-based media to eectronic based media. IMAX is simiary in the very eary stages of deveoping a digita projection system that can be utiized in IMAX theatres. Such risks coud incude the need for Imax to raise additiona capita to finance remanufacturing of theatre systems and associated conversion costs, which capita may not be avaiabe to IMAX on attractive terms. The commercia success of IMAX s products is utimatey dependent on consumer preferences. The out-of-home entertainment industry in genera continues to go through significant changes, primariy due to technoogica deveopments and changing consumer tastes. Numerous companies are deveoping new entertainment products for the out-of-home entertainment industry and there are no guarantees that some of these new products wi not be competitive with, superior to or more cost effective than IMAX s products. Sources: Imax press reeases; Questions 1 Discuss the statement back in 1997: It is too expensive and risky for us to put a our eggs in one basket and hire a major movie star. 408

38 Case III.3 IMAX Corporation 2 What are the main reasons for the faiure of Imax Ridefim? 3 Can IMAX s core competences be transferred to the marketing of high voume commercia products? Which types of product coud these be? 4 What are possibiities of growing the IMAX business with the new IMAX MPX system combined with their new IMAX DMR technoogy, which enabes Hoywood studios to digitay remaster their fims into IMAX s 15/70? 409

39 CASE STUDY III.4 Heineken/A Ahram Beverages Co.: Marketing of acohoic and non-acohoic drinks to Egypt and to other Musim markets does an acquisition hep? Heineken/A Ahram Beverages Co. is eyeing the growing Isamic market with an ambitious pan to use its vast distribution network for a ine of non-acohoic, fruitfavoured beers. As a first step Heineken, one of the word s argest brewers, paid $287 miion in October 2002 to buy A Ahram Beverages Co. (ABC) of Cairo, the biggest financia dea in Egypt s history. A Ahram uses a specia brewing process that yieds no acoho, thus aowing its mat beverages to be certified fit for consumption by Musims, whose reigion prohibits drinking acoho. Background Modern Egyptian beer-brewing officiay began 100 years ago. On 15 May 1897 the Crown Brewery Company (ABC s odest forerunner) registered itsef in the Kingdom of Begium home of the we-known Stea Artois beer to start operations in Aexandria. Two years ater a different group of entrepreneurs from Brusses and Antwerp opened a brewery in Cairo, which came to be known as Pyramids Brewery. In Juy 1953 the Cairo brewery became known as A Ahram (the pyramids) Beer Company. Ten years ater a companies traded on the Cairo and Aexandria stock exchanges were either nationaized or sequestered. A Ahram Beer Company was first sequestered in 1961, then nationaized in 1963 when it was forciby merged with the Crown Brewery Company of Aexandria. This was the beginning of a state-run economy. Athough contracts with the West sowed to a tricke and revenues were drying up under new pubic sector financia systems, A Ahram Beer Company kept brewing beer and introducing new products incuding the Stea Export brand in 1967, created for foreign tastes. Beginning in the 1970s the popuation of Egypt began to expode, and tourism became increasingy important. Demand for Stea beer grew with the crowds, foreigners and Egyptians aike, despite a rise in anti-secuar sentiment throughout the Nie Vaey. In an attempt to counter these socia trends and appease genera sentiment A Ahram Beverages (the company s new name as of May 1985) diversified its production ine and aunched severa non-acohoic drinks incuding the non-acohoic beer Bire, and Fayrouz, a mat-based appe/emon-favoured beverage. These new drinks compemented Stea beer in an increasingy diverse and competitive market. The introduction of two more soft drinks, Yusfino (mandarin) in 1993 and Citrino (emon ime) in 1994 further varied the company s innovative product ine. Acohoic drinks in Egypt The acohoic beverages market in Egypt, despite the arge growth in vaues and voumes across a sectors and improvements in the quaity of products avaiabe, is sti characterized by unsatisfied demand. Unike most other consumer markets, there are severe restrictions that thwart the deveopment of this market in Egypt. Egypt is a Musim country, with 85 per cent of the popuation practising Musims. Isam condemns acoho consumption and considers it a very serious sin. Even the Christian popuation, infuenced by the genera Isamic atmosphere, considers drinking acoho a very bad habit, athough they are not bound by reigious aw regarding consumption. Shariaa Law prohibits the manufacture and sae of acohoic beverages or even being in the same physica space as those drinking acoho. A reguar drinker in 410

40 Case III.4 Heineken/A Ahram Beverages Co. Egypt is seen as untrustworthy and particuary weak in terms of their desires. Hence, despite the significant number of drinkers, consumption usuay takes pace outside the famiy except in rare cases. Parents who drink tend not to drink in front of their chidren and chidren woud consider it disrespectfu to drink in front of their parents. So there is a great dea of discretion, sometimes amounting to secrecy, surrounding the buying and drinking of acoho in Egypt. Discretion is paramount when retaiing acoho. Most off-trade outets operate in arge open shopping mas or areas where the poice are present. In fact some stores have poice outside the front doors. This caution is due to the tension that fares up between Isamic groups and the government, the former tending to target such outets as expressions of western infuence on Egyptian society. Discretion is aso used in order to avoid offending the arge number of Egyptian Musims who do not want to see acoho being sod. Retaiers in more remote areas do not have access to the same eve of security as their urban counterparts and tend to be very discrete about seing acohoic beverages. These outets usuay se such products ony to known customers. If the owner does not know the person asking for acoho, for exampe, they wi deny that acoho is sod in the store. This is because Isamic groups are known to attack shops seing acoho. The Egyptian government paces its egitimacy on being a Musim state, which derives its egisation from the Shariaa. However, it has never tried to prohibit the drinking of acoho as it is a very ucrative business and has been a cash cow for the government. Duties on imports of acohoic beverages are very high, at 300 per cent for beer and 3,000 per cent for wine and other spirits, making it amost impossibe for someone to pay this duty. The tourism sector, however, which accounts for more than 30 per cent of nationa foreign currency earnings, is the main reason behind the government s attitude and the overa socia compromise regarding acohoic beverages. It is beieved that Egypt s competitiveness in terms of tourism woud be harmed if acoho was banned. Thus the state imposes these very high duties to prevent ocas from buying acohoic drinks, reserving them amost excusivey for tourists, who have access to duty free quotas of acohoic beverages. The oca popuation is denied access to such privieges, and this encourages back market trading, as high demand from those who do drink far outstrips suppy. Current suppy is hampered by imited oca production and the imited suppy of acoho from duty free shops, and as such this market has huge gaps that have yet to be fied. As a resut it certainy represents an opportunity for new payers. Dominant position in beer and wine Loca production has aways dominated beer and wine saes in Egypt. The presence of prohibitive tariffs mean that off-trade purchases of such items are rather sma compared to on-trade saes in tourist compounds and high-cass restaurants. The genera trend has been towards the monopoy of these particuar products. In February 2001 ABC bought its ony riva in beer and wine saes, E-Gouna Beverages Co., which accounted for 15 per cent and 40 per cent of beer and wine saes respectivey. Thus ABC became the main producer of beer and wine in Egypt, accounting for around 98 per cent and 60 per cent of oca production respectivey. ABC has an absoute monopoy of wine and beer saes in the absence of oca rivas. The state aso heps prevent foreign competitors from gaining a foothod as it imposes extremey high import duties on acohoic drinks. Hence beer and wine account for the argest proportion of the tota acohoic beverages market in both voume and vaue terms. In addition, Egyptian consumers prefer ow-acoho percentage beverages to very high percentage products. This makes them preferabe due to Egypt s very hot cimate. In voume terms, beer accounted for 96 per cent of the tota market whie wine accounted for 3.3 per cent. The rest was mainy accounted for by spirits, as neither favoured acohoic drinks or cider/perry demonstrated significant saes. Saes of these products were imited to the extent that they remained negigibe. Market expansion potentia Led by ABC s monopoy, the market is expanding rapidy. Fueed by the boom in tourism, which is growing by 11 per cent per annum on average, the market has a renewabe source of consumers with high purchasing power. Most tourists drink acoho in Egypt and they tend to drink rather heaviy whie on hoiday. The year 2001 saw rapid deveopment in this market. New products are being aunched, and expansion of production faciities has aso been rapid in response to the high unsatisfied demand. Expansion of outets has aso been increasing. Over the past three years more than 150 outets were opened or reopened by ABC. The company aso operates a teesaes system, which provides consumers with the discretion and convenience necessary in imageconscious Egypt, where many peope do not want others to know that they are buying acohoic beverages. The introduction of teesaes has greaty boosted saes. Beer saes are expected to grow by an average approaching 24 per cent per annum over the forecast period, whie wine is expected to see average annua growth of more than 33 per cent. This wi mainy occur as a resut of growth in production, as demand is sti 411

41 Part III Market entry strategies higher than the production capacity of the singe company in this business. Foreign imports have no chance of penetrating the market due to the duties imposed on them, which pace their products beyond the reach of Egyptian consumers. ABC aso dominates distribution Retai outets are undeveoped in Egypt. The majority are very od, owned by either Coptic or Greek famiies who have ived in Egypt for a ong time. ABC is the ony company to have reay deveoped a sophisticated distribution network of speciaized off-icence shops in Egypt. In fact ABC distribution network has been so successfu that it accounted for the majority of off-trade saes over ABC expanded its outets after privatization in ate 1997 to reach a tota of 150 outets by Outets are present throughout the country but are sti restricted to the big cities. Their ocations are we panned and the shops themseves are remarkaby cean, unike the od speciaist shops, which tend to be very dusty and unpeasant. Lega restriction on saes Egyptian aw is rather tough on drinking in genera. It is a vioation of the aw to drink in pubic, and it is aso iega to be drunk in pubic. However, the poice in Egypt are rather ax in the appication of these aws with regard to the weathy, and certainy do not appy them to tourists. Lower casses are usuay the target of these aws. A Ahram Beverages Co. ABC s Pisener beer brand Stea is amost synonymous with beer in Egypt. With a voume of 620,000 hectoitres of non-acohoic mat beverages, particuary the promising mat-based drink Fayrouz, ABC is aso the market eader in this segment. In addition ABC has wineries producing the brands Gianacis and Obéisque that account for 85 per cent of domestic consumption. The market share of the spirits division is around 35 per cent whie its soft drinks operations have a market share of 3 per cent. In 2001 ABC derived 52 per cent of its saes from beer, 29 per cent from non-acohoic mat beverages, 11 per cent from spirits and wine and 8 per cent from soft drinks. Tota net turnover in 2001 amounted to $105 miion, operating profit to $30.8 miion and net profit to $22.8 miion. ABC empoys 3,860 peope. in nationa history coud be the thrust that stokes western investors interest in Egypt, which has been bady on the wane of ate. On 25 September 2002 Netherands-based brewer Heineken bought up A Ahram Beverages Co., whose sharehoders agreed to se 98 per cent of the oca company at the $14 share price offered by the Dutch giant. This brings the tota acquisition price to $280 miion. Heineken Heineken has the widest goba presence of a the internationa brewing groups, operating in over 170 countries and empoying 40,000 peope. In 2001 Heineken brewed a tota of 105 miion hectoitres of beer at over 110 breweries in more than 60 countries. In 2002 Heineken reached a turnover of approximatey a10.3 biion. The net profits were a800 miion. The company s main internationa brands are Heineken and Amste. Amste hods strong positions in a number of European and African markets and is as a rue positioned as a mainstream beer. In the United States Amste Light profits from its good taste and the success of the ight beer segment, which makes up more than 44 per cent of the US beer market. In order to remain one of the top goba brewers, Heineken focuses on a combined portfoio of oca brands and internationa brands, first their fagship Heineken, but aso Amste and speciaity beers such as Desperados and Murphy s. This combination has enabed Heineken to achieve strong market positions and an efficient cost structure in many countries. Heineken s overa beer market share in the European Union is 14 per cent, in Europe 12 per cent, and gobay it is 6 per cent. Heineken s growth strategy in the Midde East ABC had ong been considered the daring of the Egyptian privatization drive a shining exampe of an uncompetitive, state-owned dinosaur turned into a star in the private sector. Heineken aquires A Ahram Beverages Co. It is no secret that the oca Egyptian economy is thirsty for foreign investment. Now, the biggest private sector acquisition 412